Problem - Hicks and Greene, a CPA firm that uses job order costing, is analyzing the profitability of its audits. During the year, the firm audited the Esterline Company, for which it charged $20,000. Budget information for the firm follows:
Direct labor:
Partners $ 1,500,000
Managers 2,900,000
Staff accountants 5,600,000
Total $10,000,000
Overhead:
Secretarial support $ 2,500,000
Fringe benefits 2,400,000
Utilities 800,000
Depreciation of office equipment 700,000
Communication expenses 500,000
Lease expense 300,000
Office supplies 300,000
Total $ 7,500,000
Partner, associates and paralegal hourly salary rates are $100, $60 and $20, respectively.
Budgeted and actual time for the Esterline audit follows:
Budget Actual
Partners 15 hours 18 hours
Associates 45 hours 43 hours
Paralegals 100 hours 108 hours
In addition, the firm incurred $2,320 in travel costs related to Esterline, but the firm had budgeted for $2,500 of direct costs.
(a) Assuming that Hicks and Greene allocates overhead to jobs using direct labor cost as the cost driver, compute the predetermined overhead rate.
(b) Compute the cost of the Esterline audit.
(c) Prepare a cost performance report for the Esterline audit.
(d) Compute the profit that Hicks and Greene had on the Esterline audit.