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		20,600			—
Direct lawyer-hours		9,300			16,600
Materials and supplies	$	19,200		$	5,600
Direct lawyer cost	$	437,100		$	830,000
Departmental overhead cost	$	721,000		$	332,000

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		24			—
Direct lawyer-hours		15			48
Materials and supplies	$	62		$	36
Direct lawyer cost	$	675		$	2,400

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.

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

3. What is 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		23,500			—
Direct lawyer-hours		8,360			15,540
Materials and supplies	$	20,100		$	6,500
Direct lawyer cost	$	418,000		$	751,100
Departmental overhead cost	$	787,250		$	310,800

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

Answer 1

1)		Predetermined Overhead Rate
	Research and Documents	35	per hour
	Litigation Department	40	%
	Workings :-
	Predetermined Overhead Rate =	Estimated Total Manufacturing Overhead/Estimated Total Amount of Allocation Base
	Research and Documents =	721000/20600
	Research and Documents =	35 per hour
	Litigation Department =	332000/830000
	Litigation Department =	40 % direct lawyer cost
2)	The total overhead cost applied to Case 618-3
	Research and Documents
	(24 research hours * 35 per hr)	840
	Litigation Department
	(2400 * 40%)	960
	Total overhead cost applied	1800
3)
		Department
		Research and Documents	Litigation
	Materials and supplies	62	36
	Direct lawyer cost	675	2,400
	Overhead cost applied	840	960
	Total Cost	1,577	3,396
4)	Research and Documents	35,250	Overapplied
	Litigation Department	-10,360	Underapplied
	Workings
		Department
	Research and Documents	Litigation
	Ovehead Applied (Predetermined Overhead Rate * Allocation Base)	822,500	300,440
		(Predetermined Overhead Rate * Research Hours) ( 35 *23500)	(Predetermined Overhead Rate * Research Hours) ( 40% *751100)
	Actual Over head Cost	787,250	310,800
	Variance	35,250	-10,360
		Overapplied	Underapplied