Exercise 9-8 Comparisons of a Simplified Costing System with an Activity-Based S

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...........$?
Job cost-simplified costing....?
Difference..............................$?

(The answers below are incorrect:

Job Cost ABC Costing

$           4,650

Job Cost Simplified Costing

$           3,513

Difference

$           1,137)

Job Cost ABC Costing

$           4,650

Job Cost Simplified Costing

$           3,513

Difference

$           1,137)

Explanation / Answer

Here, Professional Labour hours means aggregate of hours worked by partners and Associates. Therefore, Professional Labour cost is aggregate of Labour cost of partners worked and Associates work. Job Costing under Simplified Costing System for Client Jim Adams: Total Professional labour hours worked: Partners labour hours 10 Associated Labour hours 25 Total Professional Labour hours 35 Direct labour cost(35 professional labour hours@ 73 per hour) 2555 Add: Professional Support Overheads(35 hours @ 67.50) 2362.5 Total Cost under Simplified cosyting System 4917.5 Activity Rate ACTIVITIES COST DRIVER TOTAL COST ANNUAL COST DRIVER ACTIVITY RATE (Total Cost/Annual Cost driver) Fringe Benefits Professional Labour cost 450,000 1460000 $0.31 per professional labour cost ParaLegal Support Partner Labour hours 250,000 4000 $62.50 per partner labour hour Research Support Professional Labour hours 650,000 20000 $32.50 Per professional Labour hours Job Costing under Activity Based Costing System for Client Jim Adams: Total Professional labour hours worked: Partners labour hours 10 Associated Labour hours 25 Total Professional Labour hours 35 Direct labour cost: Partner Labour cost(10 hours@ 125) 1250 Associates Labour cost(25 hours@ 60) 1500 Toptal Professional Labour cost 2750 Add: Overheads based on Activity: Fringe Benefits(@0.31 per professional labour cost) 852.5 (2750*.31) ParaLegal Support(@62.50 per partner labour hour) 625 (10 hrs *62.50) Research Support(@32.50 per professional labour hour) 1137.5 (35 hours*32.50) Total Cost under Activity based costing 5365 Job Cost under ABC $5,365.00 Job Cost under Simplified Costing $4,917.50 Difference $447.50

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