Nixon & Ross, a law firm_Overhead allocation

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Description

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:
Billable
professional staff salaries $
4,000,000
Overhead
8,000,000
Total
costs $12,000,000

The overhead costs were as follows:
Secretarial
costs $1,500,000
Staff
benefits 2,750,000
Office
rent 1,250,000
Telephone
and mailing costs 1,500,000
Unbilled
staff salaries 1,000,000
Total
costs $8,000,000

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:

Billable
professional staff salaries $150,000
Secretarial
costs 25,000
Staff
benefits 13,500
Telephone
and mailing costs 8,000
Total
costs $196,500

a. Calculate the current year’s overhead application rate under the old cost
accounting system.
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

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