Question

Winkle, Kotter, and Zale is a small law firm that contains 10 partners and 12 support persons. 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:

     

	Department
	Research and Documents				Litigation
Research-hours		20,000				-
Direct attorney-hours		9,400				15,800
Materials and supplies	$	17,900			$	5,000
Direct attorney cost	$	430,500			$	799,000
Departmental overhead cost	$	700,000			$	319,600

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 attorney cost.

The costs charged to each client are made up of three elements: materials and supplies used, direct attorney 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:

    

	Department
	Research and Documents				Litigation
Research-hours		19				-
Direct attorney-hours		11				42
Materials and supplies	$	52			$	29
Direct attorney cost	$	420			$	1,800

Required:   

1-a. Compute the predetermined overhead rate used during the year in the Research and Documents Department.

1-b. Compute the predetermined overhead rate used during the year in the Litigation Department.

2. Using the rates you computed in (1) above, compute the total overhead cost applied to Case 618–3.

   

3. What would be the total cost charged to Case 618–3? Show computations by department and in total for the case.

4. 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:

     

	Department
	Research and Documents				Litigation
Research-hours		22,600				-
Direct attorney-hours		8,100				15,500
Materials and supplies	$	18,500			$	5,300
Direct attorney cost	$	399,100			$	725,500
Departmental overhead cost	$	769,500			$	300,900

    

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

Answer 1

Solution 1a:

Predetemined overhead rate - Research and documents department = Estimated overhead / Estimated research hours

= $700,000 / 20000 = $35 per hour

Solution 1b:

Predetemined overhead rate - Litigation department = Estimated overhead / Estimated direct attorney cost

= $319,600 / 799000 = 40% of direct attorney cost

Solution 2:

Computation of Overhead applied to Case 618-3
Particulars	Amount
Overhead applied:
Research and documents department (19*$35)	$665.00
Litigation department ($1,800*40%)	$540.00
Total overhead cost applied to case 618-3	$1,205.00

Solution 3:

Computation of Cost charged to Case 618-3
Particulars	Research and documents	Litigation	Total
Materials and supplies	$52.00	$29.00	$81.00
Direct Attorney Cost	$420.00	$1,800.00	$2,220.00
Overhead cost applied	$665.00	$540.00	$1,205.00
Total Cost	$1,137.00	$2,369.00	$3,506.00

Solution 4:

Computation of Underapplied (Overapplied) Overhead
Particulars	Research and documents	Litigation
Overhead incurred	$769,500.00	$300,900.00
Overhead applied: Research and documents - 22600*$35 Litigation - $725,500*40%	$791,000.00	$290,200.00
Underapplied (Overapplied) overhead	-$21,500.00	$10,700.00