Question: Job costing with multiple direct-cost categories, single indirect-cost pool, law firm. 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:
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.
1. Calculate the revised indirect-cost allocation rate per professional labor-hour for Wharton Associates when total indirect costs are $200,000.
2. Compute the costs of the Steger Enterprises and Bluestone Inc. jobs if Wharton Associates had used its refined costing system with multiple direct-cost categories and one indirect-cost pool.
3. Compare the costs of Steger Enterprises and Bluestone Inc. jobs in requirement 2 with those in requirement 2 of Problem. Comment on the results.
Problem: Job costing with single direct-cost category, single indirect-cost pool, law firm. Wharton Associates is a recently formed law partnership. Denise Peyton, the managing partner of Wharton Associates, has just finished a tense phone call with Gus Steger, president of Steger Enterprises. Gus strongly complained about the price Wharton charged for some legal work done for his company. Peyton also received a phone call from its only other client, Bluestone, Inc., which was very pleased with both the quality of the work and the price charged on its most recent job. Wharton Associates operates at capacity and uses a cost-based approach to pricing (billing) each job. 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 Bradley 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.
1. Why is it important for Bradley Associates to understand the costs associated with individual jobs?
2. Compute the costs of the Steger Enterprises and Bluestone Inc. jobs using Bradley's simple costing system.