Question

A large firm of solicitors uses a job costing system to identify costs with individual clients. Hours worked by professional staff are used as the basis for charging overhead costs to client services. A predetermined rate is used, derived from budgets drawn up at the beginning of each year commencing on 1 April. In the year to 31 March 2012 the overheads of the solicitors practice, which were absorbed at a rate of £7.50 per hour of professional staff, were over absorbed by £4760. Actual overheads incurred were £742 600. Professional hours worked were 1360 over budget. The solicitors practice has decided to refine its overhead charging system by differentiating between the hours of senior and junior professional staff, respectively. A premium of 40 per cent is to be applied to the hourly overhead rate for senior staff compared with junior staff. Budgets for the year to 31 March 2013 are as follows: Senior professional staff hours 21 600 Junior professional staff hours 79 300 Practice overheads £784 000

Required: (a) Calculate for the year ended 31 March 2012: (i) budgeted professional staff hours (ii) budgeted overhead expenditure (5 marks)

(b) Calculate, for the year ended 31 March 2013, the overhead absorption rates (to three decimal places of a £) to be applied to: (i) senior professional staff hours (ii) junior professional staff hours (4 marks)

(c) How is the change in method of charging overheads likely to improve the firm s job costing syst

Answer 1

a) (i)

For the Year 2012

Overhead absorption rate per hour

£                    7.50

Actual Overheads

£       742,600.00

Amount by which overheads were over absorbed

£            4,760.00

Total Amount Absorbed

£       747,360.00

Actual overheads + amount over absorbed

Actual Professional Staff Hours =

99,648.00

Amount absorbed / Budgeted overhead rate per hour

Professional hours which are over budget

1,360.00

Budgeted Professional Staff Hours =

98,288.00

Actual hours less hours above budget

a) (ii)

Budgeted overheads =

Budgeted Professional Staff Hours =

£         98,288.00

Overhead absorption rate per hour

£                    7.50

Budgeted overheads

£       737,160.00

Budgeted hours*budgeted rate per hour

b)

Senior professional staff hours

21,600.00

Junior professional staff hours

79,300.00

Practice overheads

£       784,000.00

Overhead absorption rates for Senior staff is 40% above Junior staff. Hence overheads rates for Junior staff =

Practice overheads / (Senior hours*1.40+Junior Hours) =

=784000/(21600*1.4+79300)

(ii)

£          7.157

Per hour for Junior Staff hours

(i)

£        10.020

Per hour for Senior Staff Hours i.e. 1.40*7.157

c)

Overheads that would have been applied if a blanket staff hours rate was used instead of differential rates for Junior and Senior Staff =

Senior professional staff hours

21,600.00

Junior professional staff hours

79,300.00

Total Professional staff hours

100,900.00

Practice overheads

£       784,000.00

Overheads rates per hour

£                  7.770

As we can see, if earlier method was applied, a blanket rate of GBP 7.77 per hour would have been used. As depending on the complexity of the

task, the involvement of senior staff would have been different on different on tasks, hence new method would help allocate the overheads cost

allocation method would ensure correct costing of the jobs based on actual hours spent by Junior and Senior staff.