Winder, Knotter, and Nale is a small law firm that has 10 partners and 10 suppor

Question

Winder, Knotter, and Nale is a small law firm that has 10 partners and 10 support people. The firm employs a job-order costing system to accumulate costs chargeable to each client, and it is organized into two departments—the Research and Documents Department and the Litigation Department. The firm uses predetermined overhead rates to charge the costs of these departments to its clients. At the beginning of the current year, the firm’s management made the following estimates for the year:

    

The predetermined overhead rate in the Research and Documents Department is based on research-hours, and the rate in the Litigation Department is based on direct lawyer cost.

     The costs charged to each client are made up of three elements: materials and supplies used, direct lawyer costs incurred, and an applied amount of overhead from each department in which work is performed on the case.

     Case 618-3 was initiated on February 10 and completed on June 30. During this period, the following costs and time were recorded on the case:

Compute the predetermined overhead rate used during the year in the Research and Documents Department. Compute the rate used in the Litigation Department.

           

Compute the total overhead cost applied to Case 618-3.

       

What is the total cost charged to Case 618-3? Show computations by department and in total for the case.

         

At the end of the year, the firm’s records revealed the following actual cost and operating data for all cases handled during the year:

  

  

Determine the amount of underapplied or overapplied overhead cost in each department for the year.

  

Department Research and
Documents Litigation   Research-hours 22,000 —   Direct lawyer-hours 10,000 18,000   Materials and supplies $ 22,000 $ 7,000   Direct lawyer cost $ 470,000 $ 900,000   Departmental overhead cost $ 748,000 $ 270,000

Explanation / Answer

1

Calculation of predetermined overhead rate:

For Research and Documents Department:

Departmental overhead cost (A)

$                 748,000

Research-hours (RH) (B)

22000

Predetermined overhead rate = A/B =

$                            34

Per RH

For Litigation Department:

Departmental overhead cost (A)

$                 270,000

Direct lawyer cost (DLC) (B)

900000

Predetermined overhead rate = A/B =

$                        0.30

Per $ of DLC

2

Calculation of total overhead cost applied to Case 618-3:

Research and
Documents (38 RH * $34)

$                      1,292

Litigation ($3100 DLC *$0.30)

$                          930

Total overhead cost applied to Case 618-3:

$                      2,222

3

Caculation of total cost charged to Case 618-3:

Research and
Documents

Litigation

Total

Materials and supplies

$                            90

$                                        50

$     140

Direct lawyer cost

$                      1,305

$                                  3,100

$ 4,405

Applied amount of overhead

$                      1,292

$                                      930

$ 2,222

Total cost charged to Case 618-3

$                      2,687

$                                  4,080

$ 6,767

4

Calculation of amount of under applied or over applied overhead cost in each department for the year:

Research and
Documents

Litigation

Applied amount of overhead (A)

$                 846,600

$                             243,600

(24900 RH * $34)

($ 812000 DLC * $0.30)

Actual Overhead (B)

$                 809,250

$                             251,700

Over applied overhead (A-B)

$                    37,350

Underpplied overhead (B-A)

$                                  8,100

1

Calculation of predetermined overhead rate:

For Research and Documents Department:

Departmental overhead cost (A)

$                 748,000

Research-hours (RH) (B)

22000

Predetermined overhead rate = A/B =

$                            34

Per RH

For Litigation Department:

Departmental overhead cost (A)

$                 270,000

Direct lawyer cost (DLC) (B)

900000

Predetermined overhead rate = A/B =

$                        0.30

Per $ of DLC

2

Calculation of total overhead cost applied to Case 618-3:

Research and
Documents (38 RH * $34)

$                      1,292

Litigation ($3100 DLC *$0.30)

$                          930

Total overhead cost applied to Case 618-3:

$                      2,222

3

Caculation of total cost charged to Case 618-3:

Research and
Documents

Litigation

Total

Materials and supplies

$                            90

$                                        50

$     140

Direct lawyer cost

$                      1,305

$                                  3,100

$ 4,405

Applied amount of overhead

$                      1,292

$                                      930

$ 2,222

Total cost charged to Case 618-3

$                      2,687

$                                  4,080

$ 6,767

4

Calculation of amount of under applied or over applied overhead cost in each department for the year:

Research and
Documents

Litigation

Applied amount of overhead (A)

$                 846,600

$                             243,600

(24900 RH * $34)

($ 812000 DLC * $0.30)

Actual Overhead (B)

$                 809,250

$                             251,700

Over applied overhead (A-B)

$                    37,350

Underpplied overhead (B-A)

$                                  8,100

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