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The law firm of Duwe, Cheatem & Howe provides legal services for clients. During the year. corporate clients required 5,000 hours of legal services, while
The law firm of Duwe, Cheatem & Howe provides legal services for clients. During the year. corporate clients required 5,000 hours of legal services, while individuals required 3,000 hours. The firm has traditionally used direct labor hours to assign overhead. However, Ms. Duwe believes services to businesses cost more than services to individuals and wishes to adopt activity-based costing. The firm?s revenues and costs for the year are shown below: Mr. Cheatem has kept records of the following data for use in the new activity-based costing system: REQUIRED: a. Prepare an income statement showing profits by segments using the traditional direct-hour allocation base. b. Prepare an income statement showing profits by segments using the three cost drivers in the ABC model. c. Discuss the best way to allocate costs in this example and include the approximate difference in profits between Corporate and Individual clients. Why would Activity based costing be preferred as a cost allocation method
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