Job costing with single direct cost category, single indirect cost pool, law firm.

VVigan 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. Offidh complained about the price Wigan charged for some conveyancing (drawing up property documents) legal work done for Widnes Coal. He requested a breakdown of the charges. He also indicated to Hanley that a competing law firm, Hull and Kingston, was seeking more business with Widnes Coal < d that he was going to ask them to bid for a conveyancing job next month. Offiah ended t ie phone call by saying that if Wigan bid a price similar to the one charged last month, Wigai ould not be hired for next month's job.

Hanley is dismayed by the phor.< all. He is also puzzled, as he believes that conveyancing is an area where Wigan Assoc, s has much expertise and is highly efficient. The Widnes Coal phone call is the bad news or .' e week. The good news is that yesterday Hanley received a phone call from its only other client (St. Helens Glass) saying it was very pleased with both the quality of the work (primarily litigation) and the price charged on its most recent case.
Hanley decides to collect data on the Widnes Coal and St. Helens Glass cases. Wigan Associates uses a cost-based approach to pricing (billing) each legal case. Currently it uses a single direct cost category (for professional labor time) and a single indirect cost pool (general support). Indirect costs are allocated to cases on the basis of professional labor-hours per case. The case files show the following:
Widnes Coal St. Helens Glass Professional labor time 104 hours 96 hours Wigan Associates bills clients for professional labor at $70 an hour. Indirect costs are allocated to cases at $105 an hour. Total indirect costs in the most recent period were 521,000. An operating income component for the partnership is built into the $70 per professional labor-hour billing rate.
Required 1. Whv is it important for Wigan Associates to understand the costs associated with indi- vidual cases in their pricing decisions?
2. Present an overview diagram of the existing job costing system.
3. Compute the amount Wigan Associates billed Widnes Coal and St. Helens Glass.