Reference no: EM131879988
Problem - Walters and Witt, a law firm, is analyzing the profitability of its cases. During the year, the firm represented the Umberg Company in numerous routine legal issues, for which it charged a monthly retainer fee of $2,500. Budget information for the firm follows:
|
Professional labor:
|
|
|
Partners
|
$ 500,000
|
|
Associates
|
900,000
|
|
Paralegals
|
600,000
|
|
Total
|
$2,000,000
|
|
Overhead:
|
|
|
Secretarial salaries
|
$ 900,000
|
|
Depreciation of office equipment
|
300,000
|
|
Fringe benefits
|
400,000
|
|
Lease expense
|
200,000
|
|
Utilities
|
300,000
|
|
Communication expenses
|
250,000
|
|
Office supplies
|
150,000
|
|
Total
|
$2,500,000
|
Partner, associates and paralegal hourly salary rates are $100, $60 and $20, respectively.
Actual time spent for the Umberg cases follows:
| |
Actual
|
|
Partners
|
23 hours
|
|
Associates
|
42 hours
|
|
Paralegals
|
72 hours
|
In addition, the firm incurred $875 in travel costs related to Umberg, but the firm had budgeted for $1,000 of direct costs.
Walters and Witt uses activity-based costing to determine the cost of its cases. With a consultant's help, the firm has developed the following information about cost pools:
|
Cost Pool
|
Expenses Included
|
Cost Allocation Base
|
|
Secretarial support
|
Secretarial salaries
|
Partner labor hours
|
|
Fringe benefits
|
Fringe benefits
|
Professional labor dollars
|
|
Office support
|
Depreciation, lease, utilities, communications and supplies
|
Professional labor hours
|
(a) Compute the budgeted rate per unit of cost driver for each cost pool.
(b) Using activity-based costing, compute the cost of the Umberg work this year.
(c) Compute the profit that Walters and Witt had on the Umberg work this year.