Refer to question 3.41 above.

Required

(a) Draw a diagram of the costing system currently used by Hawk and Eagle Co.

(b) Draw a diagram to show the proposed changes to the costing system under each of the three methods outlined.

(c) Briefly comment on how the costing system has changed in the systems identified in (b) above.

Question 3.41 above.

Hawk and Eagle Co., a law firm, had the following costs last year:

Direct professional labour ......... $15 000 000
Overhead ....................................... 21 000 000
Total costs .................................... $36 000 000

The following costs were included in overhead:

Fringe benefits for direct professional labour ................. $5 000 000
Paralegal costs ....................................................................... 2 700 000
Telephone call time with clients (estimated but
not tabulated) ............................................................................ 600 000
Computer time ....................................................................... 1 800 000
Photocopying ............................................................................. 900 000
Total overhead .................................................................... $11 000 000

The firm recently improved its ability to document and trace costs to individual cases. Revised bookkeeping procedures now allow the firm to trace fringe benefit costs for direct professional labour, paralegal costs, telephone charges, computer time and photocopying costs to each case individually. The managing partner needs to decide whether additional costs other than direct professional labour should be traced directly to jobs to allow the firm to better justify billings to clients. During the last year, more costs were traced to client engagements. Two of the case records showed the following.

Three methods are being considered for allocating overhead this year:
• Method 1: Allocate overhead based on direct professional labour cost. Calculate the allocation rate using last year’s direct professional labour costs of $15 million and overhead costs of $21 million.

• Method 2: Allocate overhead based on direct professional labour cost. Calculate the allocation rate using last year’s direct professional labour costs of $15 million and overhead costs of $10 million ($21 million less $11 million in direct costs that are traced this year).

• Method 3: Allocate the $10 million overhead based on total direct costs. Calculate the allocation rate using last year’s direct costs (professional labour of $15 million plus other direct costs of $11 million).

Transcribed Image Text:

Client cases 875 876 $20 000 $20 000 Direct professional labour Fringe benefits for direct labour 3000 3 000 Secretarial costs 2 000 6 000 Telephone call time with clients Computer time Photocopying 1 000 2 000 2 000 4 000 1 000 $29 000 2 000 Total costs $37 000