Compare and discuss the costs assigned under each method, explaining why they differ. What changes do you recommend in how the firm operates, if it wishes to maximize profits? Compare alternatives.

Silver Law Firm - Case Study Silver Law firm provides litigation and mediation services to a variety of clients. Attorneys keep track of the time they spend on each case, which is used to charge fees to clients at a rate of $300 per hour. A management advisor commented that activity-based costing might prove useful in evaluating the costs of its legal services, and the firm has decided to evaluate its fee structure by comparing ABC to its alternative cost allocations. The following data relate to a typical month at the firm. During a typical month the firm handles seven mediation cases and three litigation cases. Activity Driver Billable hours Consumption by Service Type Total Litigation Mediation Activity Amount Cost 200 125 $30.000 Documents Billable hours Billable hours 14 125 125 $4,000 1.200 350 Providing legal advice Overhead costs Internal support departments Preparing documents Occupying office space Heating and lighting of office External support departments Registering court documents Retaining consultants (investigators, psychiatrists) Using contract services (couriers, security guards) Total overhead costs Documents 30 0 16 5 14 1 1.250 10,000 Court dates Court dates 1 $5.000 $21,800 Required A. Calculations 1. Determine the cost of each type of case using a single plantwide rate for nonattorney costs based on billable hours. 14 Documents Billable hours Billable hours $4,000 1.200 125 350 Documents 14 1.250 Preparing documents Occupying office space Heating and lighting of office External support departments Registering court documents Retaining consultants investigators, psychiatrists) Using contract services (couriers, security guards) Total overhead costs Court dates 1 10,000 Court dates 1 $5.000 $21,800 Required A. Calculations 1. Determine the cost of each type of case using a single plantwide rate for nonattorney costs based on billable hours. 2. Determine the cost of each type of case using separate departmental overhead rates for the internal support department (based on number of documents) and external support department (based on billable hours). 3. Determine the cost of providing legal services to each type of case using activity-based costing (ABC). B. Analysis 4. Compare and discuss the costs assigned under each method, explaining why they differ. 5. What changes do you recommend in how the firm operates, if it wishes to maximize profits? Compare alternatives. 75 $1.75/Hr S131.25 $41.66/Doc S666.56 Heating & Billable Lighting Hours Registering Doc Court Doc Retaining Court Consultant Date Using Court Contract Services $1666.66/Date $8333.3 $833.33/Date S4166.65 Date TOTAL COST $27,131.04(Approx) MITIGATION ACTIVITY TOTAL COST DRIVER CONSUMPTION ACTIVITY RATE Billable 125 $ 150/Hour Hours $18,750 14 $133.33/H $1,866.62 125 S6/Hr $750 Billable Billable Hours $1.75/Hr $218.75 Providing Legal Advice Preparing Doc Occupying Office Space Heating & Lighting Registering Court Doc Retaining Consultant Using Contract Services TOTAL COST Billable | 125 Hours Doc $41.66/Doc $583.24 $ 1666.66/Date $1,666.66 Court Date Court Date $833.33/Date $833.33 $24,668.6(Approx) External Support Department = Total External Support Overhead Costs/Total Billable Hours = ($1250 + $10,000+ $5,000)/200 Hours = $81.25/Hour Total External Support Overhead Cost (Litigation) = $81.25 * 75hours = $6,093.75 Total External Support Overhead Cost (Mediation) = $81.25 125hours = $10,156.25 ACTIVITY LITIGATION MEDIATION DIRECT COST $11,250 $18,750 Internal OvHead | External OvHead $2,960 $6093.75 $2,590 $10156.25 TOTAL COST $20,303.75 $31,496.25 3. ACTIVITY BASED COSTING (ABC) Under activity-based costing, an activity rate must be determined for each activity pool: ACTIVITY ACTIVITY BASE | ACTIVITY RATE ACTIVITY COST POOL BUDGET $4000 $1200 30 Doc 200 Hours $133.33/DOC $6/Hr $350 200 Hours $1.75/Hr Preparing Doc Occupying Office Space Heating & Lighting of office Registering Court Doc Retaining Consultants Using Contract Service $1250 $10000 $5000 30 Doc 6 Court DATES 6 Court DATES $41.66/DOC $1666.66/Date $833.33/Date Activity Based Costing LITIGATION ACTIVITY TOTAL COST DRIVER CONSUMPTION ACTIVITY RATE Billable | 75 $150/Ilour Hours $11,250 Providing Legal Advice Doc 16 $133.33/Hr S2133.28 Preparing Doc Occupying Office Space 75 $6/Hr $450 Billable Hours Answer 1. Single Plantwide Overhead Rate = Total Overhead Costs/Total Direct Billable Hours Total Non Attorney /Overhead Costs = $21,800 Total Direct Billable Hours = Total Hours for providing legal advice = 200 hours Single Plantwide Overhead Rate = $21,800/200hours = $ 109/Hour Cost of each type of case Billable Hours OVERHEAD COST ACTIVITY LITIGATION MEDIATION DIRECT COST $11,250 $18,750 $8,175 $13,625 TOTAL COST $19,425 $32,375 125 Litigation Direct Cost = $30,000 * 75/200 = $11,250 Mediation Direct Cost = $30,000 * 125/200 = $18,750 Litigation Overhead Cost = 75 hours * $ 109/Hour = $8,175 Mediation Overhead Cost = 125hours * $109/hour = $13,625 2. Separate Departmental Overhead Rates Internal Support Department = Total Internal Support Overhead Costs/Total Documents = ($4,000+ $1,200 + $350)/30 = $185/Document Total Internal Support Overhead Cost (Litigation) = $185 16Doc = $2,960 Total Internal Support Overhead Cost (Mediation) = $185 * 14Doc = $2,590