Chapter 9, Problem 8E

To determine

Compute the cost of the Person JA’s job using simplified costing system, ascertain the difference between it and job cost, and discuss the reasons for the difference.

Explanation of Solution

Budgeted overhead allocation rate: The budgeted overhead allocation rate is the rate at which the overhead is allocated. This is calculated by dividing the total fixed and variable overheads cost by the base of the allocation.

Compute the cost of the Person JA’s job using simplified costing system.

Professional labor (6)	$2,555.00
Professional support (7)	2,362.50
Total job cost	$4,917.50

Working Note (6):

Computed the cost of professional labor.

$\begin{array}{c}\left(\begin{array}{l}\text{Cost of professional }\\ \text{labor}\end{array}\right)\text{=}\left[\left(\begin{array}{l}\text{Partner labor hours}\\ \text{+Professional associate hours}\end{array}\right)\times \left(\begin{array}{l}\text{Professional labor }\\ \text{wage rate per hour}\end{array}\right)\right]\\ \text{=}\left(\text{10 hours+25 hours}\right)\times \text{\$73}\\ \text{=\$2,555}\text{.00}\end{array}$

Working Note (7):

Computed the cost of professional support.

$\begin{array}{c}\left(\begin{array}{l}\text{Cost of professional }\\ \text{support}\end{array}\right)\text{=}\left[\left(\begin{array}{l}\text{Partner labor hours}\\ \text{+Professional associate hours}\end{array}\right)\times \left(\begin{array}{l}\text{Overhead rate per }\\ \text{professional}\\ \text{support labor hour}\end{array}\right)\right]\\ \text{=}\left(\text{10 hours+25 hours}\right)\times \text{\$67}\text{.50}\\ \text{=\$2,362}\text{.50}\end{array}$

Compute the cost of the Person JA’s job using ABC costing system.

Partners’ time (2)	$1,250.00
Associates’ time fringe benefits (3)	1,500.00
Fringe benefits $\left[.3082\times \left(\$1,250+\$1,500\right)\right]$	847.55
Paralegal support (4)	625.00
Research support (5)	1,137.50
Total job cost	$5,360.05

Working Note (1):

Computed the budgeted overhead rates.

Cost Pool	Budgeted Costs (a)	Budgeted Cost Drivers (b)	Budgeted Rate (c) = (a)/(b)
Fringe benefits	$450,000	$1,460,000	30.82% of professional labor dollars
Paralegal support	$250,000	4,000 hours	$62.50 per partner labor hours
Research support	$650,000	20,000 hours	$32.50 per professional labor hour

Working Note (2):

Computed the cost of partners’ time.

$\begin{array}{c}\text{Cost of partners' time=Partner labor hours}\times \text{Partner payment per hour}\\ \text{=10 hours}\times \text{\$125}\\ \text{=\$1,250}\end{array}$

Working Note (3):

Computed the cost of associates’ time.

$\begin{array}{c}\text{Cost of associates' time=Associates' labor hours}\times \text{Associate payment per hour}\\ \text{=25 hours}\times \text{\$60}\\ \text{=\$1,500}\end{array}$

Working Note (4):

Computed the cost of partners’ paralegal support cost.

$\begin{array}{c}\left(\begin{array}{l}\text{Cost of partners' }\\ \text{paralegal support}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Partner labor hours}\times \text{Budgeted rate }\\ \text{per partner labor hour}\left(1\right)\end{array}\right)\\ \text{=10 hours}\times \text{\$62}\text{.50}\\ \text{=\$625}\end{array}$

Working Note (5):

Computed the cost of associates’ research support.

$\begin{array}{c}\left(\begin{array}{l}\text{Cost of associates' }\\ \text{research support}\end{array}\right)\text{=}\left(\begin{array}{l}\left(\begin{array}{l}\text{Partners' labor hours+}\\ \text{Associates' labor hours}\end{array}\right)\times \text{Budgeted rate }\\ \text{per professional labor hour}\left(1\right)\end{array}\right)\\ \text{=}\left(\text{10 hours+25 hours}\right)\times \text{\$32}\text{.50}\\ \text{=\$1,137}\text{.50}\end{array}$

Calculate the difference between the total cost and job cost:

Job cost – ABC costing	$5,360.05
Job cost – Simplified costing	$4,917.50
Difference	$442.55

When compared to the 20% rate of partner hours relative to associate hours, built into the overhead rate and the average billing rate, 40% rate used by Person JA is a higher percentage. This difference is recognized by the ABC costing system, and when using ABC, the resulting job costs are $442.55 more.