Problem - Hobart, Evans, and Nix is a small law firm that employs 10 partners and 12 support persons. The firm uses 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 year, the firm's management made the following estimates for the year:
|
|
Department
|
|
|
Research and Documents
|
Litigation
|
|
Research-hours
|
24,000
|
-
|
|
Direct attorney-hours
|
9,000
|
18,000
|
|
Legal forms and supplies
|
$16,000
|
$5,000
|
|
Direct attorney cost
|
$450,000
|
$900,000
|
|
Departmental overhead cost
|
$840,000
|
$360,000
|
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 attorney cost.
The costs charged to each client are made up of three elements: legal forms 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 418-3 was initiated on February 23 and completed on May 16. During this period, the following costs and time were recorded on the case:
Requirement 1: Compute the predetermined overhead rate used during the year in the Research and Documents Department. Compute the rate used in the Litigation Department.
Requirement 2: Using the rates you computed in Requirement 1 above, compute the total overhead cost applied to Case 418-3.
Requirement 3: What would be the total cost charged to Case 418-3?
Requirement 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
|
26,000
|
-
|
|
Direct attorney-hours
|
8,000
|
15,000
|
|
Legal forms and supplies
|
$19,000
|
$6,000
|
|
Direct attorney cost
|
$400,000
|
$750,000
|
|
Departmental overhead cost
|
$870,000
|
$315,000
|
Determine the amount of underapplied or overapplied overhead cost in each department for the year.