Please prepare a report answering the listed questions. You may use
Excel to create spreadsheets and copy the answers to this document.
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:

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?

2
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:

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?

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