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:

	Department
	Research and Documents			Litigation
Research-hours		20,500			—
Direct lawyer-hours		9,250			16,500
Materials and supplies	$	19,000		$	5,500
Direct lawyer cost	$	434,750		$	825,000
Departmental overhead cost	$	717,500		$	330,000

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:

	Department
	Research and Documents			Litigation
Research-hours		23			—
Direct lawyer-hours		14			47
Materials and supplies	$	60		$	35
Direct lawyer cost	$	630		$	2,350

Required:

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

	Predetermined Overhead Rate Research & Documents department per hour Litigation department %

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

	Total overhead cost

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

	Department Research & Documents Litigation Total Materials and supplies Direct attorney cost Overhead cost applied Total cost

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		23,400			—
Direct lawyer-hours		8,300			15,450
Materials and supplies	$	19,900		$	6,400
Direct lawyer cost	$	415,000		$	746,750
Departmental overhead cost	$	783,900		$	309,000

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

Research & Documents department
Litigation department

Answer 1

1) Research and development is allocated based on research hour

= Total cost / total research hours

=$717,500/20,500

=$35 per research hour

Litigation = Total cost/lawyer cost

=$330,000/$825,000

=40%

Predetermined Overhead Rate Research & Documents department $35 per hour Litigation department % 40%

2) Overhead cost applied

R&D =$805 ($35 per hour*23)

Litigation =$940 (Lawyer cost*40%)($2,350*40%)

_________________________

Total overhead cost = $1,745

3) Total cost

.

	Department Research & Documents Litigation Total Materials and supplies $60 $35 $95 Direct attorney cost $630 $2,350 $2,980 Overhead cost applied $805 $940 $1,745 Totalcost $1,495 $3,325 $4,820

4)

Department
	Research and Documents	Litigation
Research-hours	23,400	—
Direct lawyer-hours	8,300	15,450
Materials and supplies	19,900	6,400		$
Direct lawyer cost	415,000	746,750		$
Departmental overhead cost	783,900	309,000		$

Overhead applied

R & D = Departmental research hours*research hour OH rate as calulcated in 1 above

= $35*23,400

=$819,000

Liigation = $746,750*40%

=$298,700

Overhead applied = Actual OH -OH applied

R & D

=$783,900-$819,000

=$35,100 overapplied (as the actual cost< applied cost, OH is Overapplied)

Litigation

=$309,000-$298,700

=$10,300 under applied( As the actual cost> applied cost , OH is underapplied)

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