Problem:
In past years, the overhead application rate has been calculated by allocating the projected overhead expenses divided by the billable hours of the four partners. Typically, partners work 2,000 hours a year and charge 80% of their time to clients. The rest of their time is associated with professional development seminars, community presentations, and charity work.
First task is to develop the overhead application rate currently used to bill a client. The firm currently has five very large clients and several smaller clients. Use traditional job-order costing to determine the costs associated with five of the law firm's biggest clients.
The firm tracks the following direct costs:
1. Professional partner compensation - partners are paid $500 an hour and are billed to the client at $800 per hour. The four partners work 2,000 hours a year and are able to charge 80% of their time to clients. Thus, some of the professional labor costs are assigned to overhead. Currently, the firm's accounting system only treats professional hours as direct.
2. Paralegal compensation- paralegals paid $40 per hour and are billed to the client at $200 per hour.
3. The firm treats all of the following as indirect costs:
1. General office support, the office
2. Library and research support
3. Travel expenses
4. Telephone for making appointments and responding to clients
5. Photocopying
6. Rent, heat, property taxes, insurance, and accounting services
Currently, the firm's accounting system only treats professional hours as direct. All other costs, such as the paralegal costs are treated as overhead. Determine the overhead rate per professional direct labor hour. All of the paralegal labor is considered overhead.
Excel File:
Exhibit 1 (tab 1)
Calculate the overhead application rate using the traditional method, using the Exhibit 1 Budget sheet #1 "traditional overhead rate" columns.
Exhibit 4 (tab 2)
A) Show the total costs charged to each of the five clients for the month of January using the traditional cost allocation method
B) Use the overhead application rate you calculated in step 2. Then determine the amount of revenue billed to each client.
C) Determine the profitability by client for the month of January using the traditional cost allocation method.
Attachment:- Excel File.rar