Management Accounting

Question

XFILES Consulting is an accounting firm specializing in tax planning and advising. The firm is composed of five partners and five support persons. The firm employs a job-order costing system to accumulate costs chargeable to each client, and it is organized into two departments: the tax reports filing department and the tax planning department. The firm uses predetermined overhead rates to charge the costs of these departments to its clients. At the beginning of the current year, the firm's management made the following estimates for the year 20X9:

Department

Tax reports filing Tax planning

Tax reporting hours 20,000

Direct partner-hours 9,000 16,000

Materials and supplies 18,000 5,000

Direct partners cost 430,000 800,000

Departmental overhead cost 700,000 320,000

The predetermined overhead rate in the tax reports filing department is based on tax reports filing hours, and the rate in the tax planning department is based on direct partner cost.

The costs chargeable to each client are made up of three elements: materials and supplies used, direct partner costs incurred, and an applied amount of overhead from each department in which work is performed for the client.

In March 20X9, client Ferguson has job 605, consisting of a few tax reports prepared and filed and also tax planning services. During this period, the following costs and time were recorded for client Ferguson:

Department

Tax reports filing Tax planning

Tax reporting hours 18

Direct partner-hours 9 42

Materials and supplies 50 30

Direct partners cost 410 2,100

Required

a. Compute the predetermined overhead rate that should be used during the year in the tax report filing department. Compute the rate that should be used in the tax planning department.

b. Using the rates computed in (a) above, compute the total overhead cost applied to Ferguson job 605.