Lincoln & Associates is a law firm specializing in labor relations and employee-related work. It employs 30 Professionals (5 partners and 25 associates) who work
Lincoln & Associates is a law firm specializing in labor relations and employee-related work. It employs 30 Professionals (5 partners and 25 associates) who work directly with its clients. Previously the firm accounted for all professional labor cost in one direct-cost account and all other costs in a single indirect-cost pool.The average budgeted total compensation per professional for 2012 is $97,500. Each professional is budgeted to have 1,500 billable hours to clients in 2012. All professionals work for clients to their maximum 1,500 billable hours available. All professional labor costs are included in a single direct-cost category and are traced to jobs on a per-hour basis. All costs of Lincoln & Associates other than professional labor costs are included in a single indirect-cost pool (legal support) and are allocated to jobs using professional labor-hours as the allocation base. The budgeted level of indirect costs in 2012 is $2,475,000.The cost estimates for the Richardson, Inc. job, which requires 110 budgeted hours of professional labor, and for the Punch, Inc. job, which requires 165 budgeted hours of professional labor, are as follows:
| Richardson | Punch |
Direct costs | $7,150 | $10,725 |
Indirect costs | 6,050 | 9,075 |
Total costs | $13,200 | $19,800 |
Lincoln has just completed a review of its job-costing system. This review included a detailed analysis of how past jobs used thefirms resources and interviews with personnel about what factors drive the level of indirect costs. Management concluded that a system with two direct-cost categories (professional partner labor and professional associate labor) and two indirect-cost categories (general support and secretarial support) would yield more accurate job costs. Budgeted information for 2012 related to the two direct-cost categories is as follows:
| Professional | Professional |
| Partner Labor | Associate Labor |
Number of professionals | 5 | 25 |
Hours of billable time per professional | 1,500 per year | 1,500 per year |
Total compensation (average per professional) | $210,000 | $75,000 |
Budgeted information for 2012 related to the two indirect-cost categories is
| General Support | Secretarial Support |
Total costs | $2,025,000 | $450,000 |
Cost-allocation base | Professional labor-hours | Partner labor-hours |
Required
1. | Compute the 2012 budgeted direct-cost rates for (a) professional partners and (b) professional associates. | |||
2. | Compute the 2012 budgeted indirect-cost rates for (a) general support and (b) secretarial support. | |||
3. | Compute the budgeted costs for the Richardson and Punch jobs, given the followinginformation:
| |||
| Richardson, Inc. | Punch, Inc. | ||
Professional partners | 44 hours | 33 hours | ||
Professional associates | 66 hours | 132 hours | ||
4. | Comment on the results in requirement 3. Why are the job costs different from those computed using the firm's previous method? | |||
5. | Would you recommend Lincoln & Associates use the previous job-costing system or the job-costing system in this problem? Explain. |
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