Problem:
Job costing with single direct-cost category, single indirect-cost pool, law firm. Wigan Associates is a recently formed law partnership. Ellery Hanley, the managing partner of Wigan Associates, has just finished a tense phone call with Martin Offiah, president of Widnes Coal. Offiah strongly complained about the price Wigan charged for some legal work done for Widnes Coal. Hanley also received a phone call from its only other client (St. Helen's Glass), which was very pleased with both the quality of the work and the price charged on its most recent job. Wigan 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:
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Widnes Coal
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St. Helen's Glass
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Professional labor
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104 hours
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96 hours
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Professional labor costs at Wigan Associates are $70 an hour. Indirect costs are allocated to cases at $105 an hour. Total indirect costs in the most recent period were $21,000.
1. Why is it important for Wigan Associates to understand the costs associated with individual jobs?
2. Compute the costs of the Widnes Coal and St. Helen's Glass jobs using Wigan's simple costing system.