Hansen, Kotter, and Zales is a law firm that contains one service department (Research & Document) and two production 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:

		Research & Document			Litigation		Consulting
# of Employees		10			8		6
Direct Attorney Hours(# of hrs)		3,000			8,000		5,000
Direct Attorney Costs ($)		$150,000			$400,000		$250,000
Direct Material Costs ($)		$16,000			$15,500		$13,500

*** 50% of Research & Department's service is provided to litigation department and the other 50% to consulting department.

Part I Cost Allocation

1. (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?
2. (3 points) Compare the total costs of each production department after departmental cost allocation, using attorney hours and the number of employees as cost driver, respectively. Does the choice of cost driver affect the total costs of each production department?

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 four elements:

• Direct attorney costs (charged at $50 per hour)
• Direct materials and supplies used
• General overheads are applied by direct attorney hours
• Costs allocated from the service department is assigned to cases by direct attorney hours incurred within the department

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

3. (3 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?

d. (2 points) Suppose the firms 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 (Bonus points: 3 points)

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

e. (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 when the property fee is equal to 120% and 150% of the costs of R&D service, respectively.

f. (1 point) Compared to the total taxes you calculated for part d, why do we have different tax liabilities in this case?