Nixon & Ross, a law firm, is about to
install a new accounting system that will allow the firm to track more of the
overhead costs to individual cases.
Overheads are currently allocated to
individual client cases based on billable professional staff salaries.
Attorneys working on client cases charge their time to “billable
professional staff salaries.” Attorney time spent in training, law firm
administrative meetings, and the like is charged to an overhead account titled
“unbilled staff salaries.”
The following is a summary of the costs for
the current year:
professional staff salaries $
The overhead costs were as follows:
and mailing costs 1,500,000
staff salaries 1,000,000
Under the new accounting system, the firm will be able to trace secretarial
costs, staff benefits, and telephone and mailing costs to specific clients.
The following are the costs incurred on the Lawson Company case:
professional staff salaries $150,000
and mailing costs 8,000
a. Calculate the current yearâ€™s overhead application rate under the old cost
b. How would this application rate change if the secretarial costs, staff
benefits, and telephone and mailing costs were reclassified as direct costs
instead of overhead, and overhead was assigned based on direct costs (instead
of staff salaries)? Direct costs are defined as billable staff salaries plus
secretarial costs, staff benefits, and telephone and mailing costs.
c. Use the overhead application rates from (a) and (b) to compute the cost of
the Lawson case.
d. Nixon & Ross bills clients 150 percent of the total costs of the job.
What will be the total billings to the Lawson Co. if the old overhead
application scheme is replaced with the new overhead scheme?
e. Steve Nixon , managing partner, has
commented that replacing the old allocation system with the direct charge
method of the new accounting system will result in more accurate costing and
pricing of cases. Evaluate the new system