Hansen, Kotter, and Zales is a law firm that contains two departments (Litigation and Consulting). The firm employs a job-order costing system to accumulate costs chargeable to each client. The firm uses actual costing to assign overhead. General overhead costs can be allocated based on either direct attorney hours or the number of employees, depending on managers' choice. At the end of the year, the records revealed the actual general overhead costs are $720,000. At the end of the year, the records revealed the following costs and operating data for all cases handled during the year:

Litigation Consulting # of Employees 13 11 Direct Attorney Hours(# of hrs) 10,000 6,000 Direct Attorney Costs ($) $400,000 $250,000 Direct Material Costs ($) $15,500 $13,500

Part I Job Order Costing a. (2 points) Compute the overhead allocation rates for general overhead based on different cost drivers. What are the overhead costs assigned to each department, using different cost drivers?

Assume that the company uses attorney hours to allocate general overhead costs. For litigation department, the costs charged to each case are made up of three elements: - Direct attorney costs (charged at $40 per hour) - Direct materials and supplies used - General overheads are applied by direct attorney hours

The information on one of its cases during this period is given as follows: Case 618 Direct attorney-hours 150 Direct Materials and supplies $5000

b. (2 points) What are the total costs accumulated for Case 618? The company charged the client $30,000 for the service, what is the profit the company earned?

c. (2 points) Suppose the firm's annual revenue is 2 million dollars. The corporate tax rate is 35%. How much taxes shall the company pay? Does the choice of cost driver affect the total taxes due?

Part II Tax Strategy and Transfer Pricing

Now the company spins off its consulting department and sets up a subsidiary in Bahamas. The subsidiary will conduct the consulting work and the parent will pay a consulting service fee to acquire the consulting service. The consulting department in Bahamas will use the same overhead allocation rate as in the parent company. The consulting fee paid will be recognized as part of costs of the parent company. The corporate tax rate in Bahamas is 5%.

d. (2 points) Assume the corporate revenue is still 2 million dollars. Assume that general overhead is assigned by direct attorney hours. Compare the tax implications (i.e., tax payments of parent and subsidiary companies and total consolidated profits) when the consulting fee is equal to 120% and 150% of the costs of consulting service, respectively.

e. (2 point) Compared to the total taxes you calculated for part d, why do we have different tax liabilities in this case?