Question

Wharton Associates is a recently formed law partnership. Wharton Associates operates at capacity and uses a  cost-based approach to pricing  (billing) each job.  Wharton currently uses a simple costing system.

Currently it uses a simple costing system with a single  direct-cost category (professional labor-hours) and a single  indirect-cost pool  (general support). Indirect costs are allocated to cases on the basis of professional  labor-hours per case. The job files show the  following:

	Steger Enterprises	Bluestone Inc.
Professional labor	3,000 hours	2,000 hours

Professional labor costs at Wharton Associates are $ 160 an hour. Indirect costs are allocated to cases at $ 100 an hour. Total indirect costs in the most recent period were $500,000.

Denise Peyton, the managing partner of Wharton Associates, decided to try and further refine the costing system.

Peyton asks her assistant to collect details on those costs included in the $500,000 indirect-cost pool that can be traced to each individual job. After  analysis, Wharton is able to reclassify $300,000 of the $500,000 as direct  costs:

Other Direct Costs	Steger Enterprises		Bluestone Inc.
Research support labor	$36,000		$77,000
Computer time	8,000		32,000
Travel and allowances	14,000		84,000
Telephones/faxes	5,000		24,000
Photocopying	6,000		14,000
Total	$69,000		$231,000

Peyton decides to calculate the costs of each job as if Wharton had used six direct cost-pools and a single  indirect-cost pool. The single  indirect-cost pool would have $200,000 of costs and would be allocated to each case using the professional labor-hours base.

Wharton has two classifications of professional  staff: partners and associates. Peyton asks her assistant to examine the relative use of partners and associates on the recent Steger Enterprises and Bluestone Inc. jobs. The Steger Enterprises job used 1,000 partner-hours and 2,000 associate-hours. The Bluestone Inc. job used 1,500 partner-hours and 500 associate-hours. Therefore, totals of the two jobs together were 2,500 partner-hours and 2,500 associate-hours. Peyton decides to examine how using separate  direct-cost rates for partners and associates and using separate  indirect-cost pools for partners and associates would have affected the costs of the Steger Enterprises and Bluestone Inc. jobs. Indirect costs in each  indirect-cost pool would be allocated on the basis of total hours of that category of professional labor. From the total indirect cost-pool of $200,000, $120,000 is attributable to the activities of partners and $80,000 is attributable to the activities of associates. The rates per category of professional labor are as  follows:

Category of Professional Labor	Direct Cost per Hour	Indirect Cost per Hour
Partner	$200	$120,000	/	2,500 hours	=	$48
Associate	$120	$80,000	/	2,500 hours	=	$32

1.	Compute the costs of the Steger Enterprises and Bluestone Inc.'s jobs using Wharton further refined  system, with multiple  direct-cost categories and multiple  indirect-cost pools.
2.	For what decisions might Wharton Associates find it more useful to use this job-costing approach rather than the approaches of a simple costing system or a refined costing system with multiple  direct-cost categories and one indirect-cost pool?

Requirement 1. Compute the costs of the  

Steger Enterprises and Bluestone Inc.'s cases using Wharton 's further refined  system, with multiple  direct-cost categories and multiple  indirect-cost pools.

Begin by determining the formulas you will use to calculate the direct partner cost of the job and the direct associate cost of the job.

	x		=	Partner direct costs of job
	x		=	Associate direct costs of job

Now determine the formulas you will use to calculate the indirect costs for partners and the indirect costs for associates.

	x		=	Partner indirect costs of job
	x		=	Associate indirect costs of job

Now compute the total costs of each job using the multiple  direct-cost categories and multiple  indirect-cost pools.  (Round your answers to the nearest whole  dollar.)

	Steger	Bluestone
	Enterprises	Inc.
Direct costs:
Partner professional labor
Associate professional labor
Research support labor
Computer time
Travel and allowances
Telephones/faxes
Photocopying
Total direct costs
Indirect costs to be allocated:
Indirect costs for partners
Indirect costs for associates
Total indirect costs
Total costs of job		Requirement 2. For what decisions might Wharton Associates find it more useful to use this  job-costing approach rather than the approaches of a simple costing system or a refined costing system with multiple  direct-cost categories and one  indirect-cost pool? Better client relationships since it will provide a better  "road map" for clients to understand how costs are accumulated at Wharton Associates. Better decisions are made on pricing and product since it will reduce the likelihood of Wharton Associates losing cases on which it would have made money. Better employee work ethic on case projects because Wharton Associates will be able to staff employees in assignments they prefer to work on. Better managers on client budgets since Wharton Associates can now cut out the  middle-man work product and efficiently do the work themselves. Better cost control based on individual cost areas of direct and indirect cost categories which allows Wharton Associates to effectively manage the categories.

Answer 1

		Steger Enterprises			Bluestone Inc.
	Hours	Direct Labour rate/ Hour	Total Direct Labour Cost	Hours	Direct Labour rate/ Hour	Total Direct Labour Cost
Partner	1000	200	200,000	1500	200	300,000
Associate	2000	120	240,000	500	120	60,000
Total			440,000			360,000
Hours	Rate per hour	Indirect Labour cost/ Hour	Total Indirect Labour Cost	Rate per hour	Indirect Labour cost/ Hour	Total Indirect Labour Cost
Partner	1000	48	48,000	1500	48	72,000
Associate	2000	32	64,000	500	32	16,000
Total			112,000			88,000
		Steger	Bluestone
		Enterprises	Inc
Direct Costs
Partner Professional Labour		200,000	300,000
Associate Professional labour		240,000	60,000
Research support labor		36000	77000
Computer time		8000	32000
Travel and allowances		14000	84000
Telephones/faxes		5000	24000
Photocopying		6000	14000
Total direct costs		509,000	591,000
Indirect costs to be allocated:
Indirect costs for partners		48,000	72,000
Indirect costs for associates		64,000	16,000
Total indirect costs		112,000	88,000
Total costs of job		621,000	679,000