Comparisons of a simplified costing system with an activity-based system (continuation of E9-6 and E9-7)
Prior to instituting an activity-based costing system, O’Reilly and Shriberg, the attorneys in E9-6 and E9-7, utilized a simplified costing system with one direct cost category, professional labor, and one indirect cost category, professional support. The average wage rate for professional labor was $75 per hour, and the overhead rate for professional support was $67.50 per professional labor hour.
Compute the job cost for Shirlee James, the client in E9-7, using the simplified costing system, and determine the difference between it and the job cost using activity-based costing in E9-7 and discuss the reasons for the difference.
Reference: E9-7
Job cost for a client (continuation of E9-6)
A client, Shirlee James, requires 10 partner labor hours and 25 professional associate hours from O’Reilly and Shriberg, the law firm in E9-6. Partners are paid $125 per hour, and associates make $60 per hour.
Compute the job cost of servicing Shirlee James.
Reference: E9- 6
Computing activity-based costing rates
The partners of O’Reilly and Shriberg, attorneys-at-law, decide to implement an activity-based costing system for their firm. They identify the following three cost pools and budgeted amounts for each for the coming year: fringe benefits, $450,000; paralegal support, $250,000; and research support, $650,000. It is determined that the best cost driver for fringe benefits is professional labor dollars ($1,500,000); paralegal support is partner labor hours (4,000); and research support is professional labor hours (20,000).
Compute the budgeted overhead rates for each of the three cost pools.
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