Exercise 9-8 Comparisons of a Simplified Costing System with an Activity-Based S
ID: 2585183 • Letter: E
Question
Exercise 9-8
Comparisons of a Simplified Costing System with an Activity-Based System
The partners of Mason and Hutton, 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 ($1,460,000); paralegal support is partner labor hours (4,000); and research support is professional labor hours (20,000).
A client, Jim Adams, requires 10 partner labor hours and 25 professional associate hours from Mason and Hutton, the law firm. Partners are paid $125 per hour, and associates make $60 per hour.
Prior to instituting an activity-based costing system, Mason and Hutton, the attorneys, 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 $73 per hour, and the overhead rate for professional support was $67.50 per professional labor hour.
Compute the job cost for Jim Adams, the client, using the simplified costing system, and determine the difference between it and the job cost using activity-based costing. Round your interim calculations to two decimal places and your final answer to the nearest cent.
Job cost-ABC costing...........$?
Job cost-simplified costing....?
Difference..............................$?
Explanation / Answer
Job Cost to Jim Adams
Partner Labour Hours
10
Professional Associate Hours
25
Simplified Costing Method
Per Hour
Total
Wages
$ 73
$ 1,825
Overhead Cost
$ 68
$ 1,688
Total Job Cost
$ 3,513
Activity based costing
Activity
Per Hour
Total
Partner Wages
$ 125
$ 1,250
Professional Associate Wages
$ 60
$ 1,500
Overhead Cost
Fringe Benefits
Professional Labour Dollars
= 450,000 / 1,460,000
$ 462
Paralegal Support
Partner Labour Hours
= 250,000 / 4000
$ 625
Research Support
Professional Associate Hours
= 650,000 / 20,000
$ 813
Total Job Cost
$ 4,650
Job Cost ABC Costing
$ 4,650
Job Cost Simplified Costing
$ 3,513
Difference
$ 1,137
Job Cost to Jim Adams
Partner Labour Hours
10
Professional Associate Hours
25
Simplified Costing Method
Per Hour
Total
Wages
$ 73
$ 1,825
Overhead Cost
$ 68
$ 1,688
Total Job Cost
$ 3,513
Activity based costing
Activity
Per Hour
Total
Partner Wages
$ 125
$ 1,250
Professional Associate Wages
$ 60
$ 1,500
Overhead Cost
Fringe Benefits
Professional Labour Dollars
= 450,000 / 1,460,000
$ 462
Paralegal Support
Partner Labour Hours
= 250,000 / 4000
$ 625
Research Support
Professional Associate Hours
= 650,000 / 20,000
$ 813
Total Job Cost
$ 4,650
Job Cost ABC Costing
$ 4,650
Job Cost Simplified Costing
$ 3,513
Difference
$ 1,137
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