Exercise 9-8 Comparisons of a Simplified Costing System with an Activity-Based System

The partners of Mason and Hutton, attorneys-at-law, decide to implement an activity-based costing system for their firm. They identify the following three cost pools and budgeted amounts for each for the coming year: fringe benefits, $450,000; paralegal support, $250,000; and research support, $650,000. It is determined that the best cost driver for fringe benefits is professional labor dollars ($1,460,000); paralegal support is partner labor hours (4,000); and research support is professional labor hours (20,000).

A client, Jim Adams, requires 10 partner labor hours and 25 professional associate hours from Mason and Hutton, the law firm. Partners are paid $125 per hour, and associates make $60 per hour.

Prior to instituting an activity-based costing system, Mason and Hutton, the attorneys, utilized a simplified costing system with one direct cost category, professional labor, and one indirect cost category, professional support. The average wage rate for professional labor was $73 per hour, and the overhead rate for professional support was $67.50 per professional labor hour.

Compute the job cost for Jim Adams, the client, using the simplified costing system, and determine the difference between it and the job cost using activity-based costing. Round your interim calculations to two decimal places and your final answer to the nearest cent.

Job cost-ABC costing...........$? Job cost-simplified costing....? Difference..............................$?

(The answers below are incorrect:

Job Cost ABC Costing	$ 4,650
Job Cost Simplified Costing	$ 3,513
Difference	$ 1,137)