91Ó°ÊÓ

Service industry, job costing, law firm. Kidman \(\&\) Associates is a law firm specializing in labor relations and employee-related work. It employs 30 professionals \((5 \text { partners and } 25\) associates) who work directly with its clients. The average budgeted total compensation per professional for 2017 is \(\$ 97,500\). Each professional is budgeted to have 1,500 billable hours to clients in 2017 . All professionals work for clients to their maximum 1,500 billable hours available. All professional labor costs are included in a single direct-cost category and are traced to jobs on a per-hour basis. All costs of Kidman \& Associates other than professional labor costs are included in a single indirect-cost pool (legal support) and are allocated to jobs using professional labor-hours as the allocation base. The budgeted level of indirect costs in 2017 is \(\$ 2,475,000\). 1\. Prepare an overview diagram of Kidman's job-costing system. 2\. Compute the 2017 budgeted direct-cost rate per hour of professional labor. 3\. Compute the 2017 budgeted indirect-cost rate per hour of professional labor. 4\. Kidman \& Associates is considering bidding on two jobs: a. Litigation work for Richardson, Inc., which requires 120 budgeted hours of professional labor b. Labor contract work for Punch, Inc., which requires 160 budgeted hours of professional labor. Prepare a cost estimate for each job.

Step by step solution

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1. Overview Diagram of Kidman's Job-Costing System

Kidman's job-costing system consists of two main components: direct costs (professional labor) and indirect costs (legal support). The direct costs are traced to jobs on a per-hour basis, while the indirect costs are allocated to jobs using professional labor-hours as the allocation base. Overview Diagram: - Direct Costs (Professional Labor) - 30 Professionals (5 partners and 25 associates) - Budgeted Total Compensation per Professional: \(\$97,500\) - Budgeted Billable Hours per Professional: 1,500 hours - Indirect Costs (Legal Support) - Budgeted Indirect Costs: \(\$2,475,000\) - Allocation Base: Professional Labor-Hours

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2. Compute the 2017 Budgeted Direct-Cost Rate per Hour of Professional Labor

To compute the budgeted direct-cost rate per hour, we need to find the total direct cost and divide it by the total number of billable hours available. Total Direct Cost = Total Compensation per Professional × Number of Professionals Total Direct Cost = \(\$97,500\) × 30 = \(\$2,925,000\) Total Billable Hours = Billable Hours per Professional × Number of Professionals Total Billable Hours = 1,500 hours × 30 = 45,000 hours Direct-Cost Rate per Hour = Total Direct Cost / Total Billable Hours Direct-Cost Rate per Hour = \(\$2,925,000\) / 45,000 hours = \(\$65\) per hour

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3. Compute the 2017 Budgeted Indirect-Cost Rate per Hour of Professional Labor

To compute the budgeted indirect-cost rate per hour, we need to divide the total budgeted indirect costs by the total number of billable hours available. Indirect-Cost Rate per Hour = Total Indirect Costs / Total Billable Hours Indirect-Cost Rate per Hour = \(\$2,475,000\) / 45,000 hours = \(\$55\) per hour

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4. Prepare a Cost Estimate for Each Job

We can now use the direct and indirect cost rates to prepare cost estimates for both jobs. a. Litigation work for Richardson, Inc. (120 budgeted hours of professional labor): Total Direct Cost = Direct-Cost Rate per Hour × Labor Hours Total Direct Cost = \(\$65\) per hour × 120 hours = \(\$7,800\) Total Indirect Cost = Indirect-Cost Rate per Hour × Labor Hours Total Indirect Cost = \(\$55\) per hour × 120 hours = \(\$6,600\) Total Cost Estimate = Total Direct Cost + Total Indirect Cost Total Cost Estimate = \(\$7,800\) + \(\$6,600\) = \(\$14,400\) b. Labor contract work for Punch, Inc. (160 budgeted hours of professional labor): Total Direct Cost = Direct-Cost Rate per Hour × Labor Hours Total Direct Cost = \(\$65\) per hour × 160 hours = \(\$10,400\) Total Indirect Cost = Indirect-Cost Rate per Hour × Labor Hours Total Indirect Cost = \(\$55\) per hour × 160 hours = \(\$8,800\) Total Cost Estimate = Total Direct Cost + Total Indirect Cost Total Cost Estimate = \(\$10,400\) + \(\$8,800\) = \(\$19,200\) In conclusion, the cost estimate for the litigation work for Richardson, Inc. is \(\$14,400\), and the cost estimate for the labor contract work for Punch, Inc. is \(\$19,200\).

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Understanding Cost Accounting

Cost accounting is an essential part of managing a service industry business like Kidman & Associates law firm. It involves tracking, recording, and analyzing costs associated with the jobs undertaken by the firm. This process allows businesses to determine the total cost of services provided to clients, including both direct and indirect expenses.

By accurately capturing these costs, service businesses can set prices that cover their costs while ensuring profitability. Additionally, cost accounting assists in budgeting and controlling expenses, as well as making strategic business decisions based on the financial data derived from costing analysis. This underscores the importance of having a comprehensive job-costing system that clearly delineates direct costs, such as salaries for professional labor, from indirect costs, such as legal support services.

In the case of Kidman & Associates, cost accounting enables them to calculate and apply direct-cost rates and indirect-cost rates, key elements in pricing their legal services competitively while maintaining firm solvency. Through this, the firm ensures that each professional’s billable hours are priced to cover not just the wage costs but also the supporting infrastructure necessary to provide their legal expertise.

The Role of Billable Hours

Billable hours represent the time a service provider, like a lawyer at Kidman & Associates, spends performing work that can be charged to a client. It's a fundamental concept in various service industries such as law, consulting, and accounting. Knowing the number of billable hours available and budgeted for each professional is crucial for revenue projection and workload distribution.

Kidman & Associates budgets 1,500 billable hours annually per professional. This allocation helps in forecasting the firm’s potential income and effectively managing each lawyer's time. Clients are then billed based on the hours dedicated to their cases at a pre-determined hourly rate. By optimizing their billable hours, professionals can improve their efficiency and the firm can enhance its profitability.

Moreover, understanding billable hours allows for accurate job costing. Firms compute the direct cost rate per hour by dividing the total compensation by the total billable hours. This becomes particularly useful when estimating the cost of a job and establishing a price that reflects the value of the expertise provided. Kidman & Associates incorporates this measure in their cost accounting system, enabling them to price their services methodically and fairly, for both the client and the firm.

Calculating the Indirect-Cost Rate

The indirect-cost rate is a ratio used to allocate shared expenses, which are not directly tied to the production of services, across various jobs in a firm. In essence, it's the method service industries use to apportion costs such as administrative support, rent, utilities, or in Kidman & Associates’ case, legal support services.

To calculate the indirect-cost rate, Kidman & Associates divides the total budgeted indirect costs by the total billable hours. For 2017, the firm’s indirect-cost rate is \(\$55\) per hour. This cost allocation approach ensures that each client job absorbs a fair share of the firm’s indirect costs. Utilizing the indirect-cost rate in pricing allows Kidman & Associates to recover these pooled costs systematically and maintain financial health.

When preparing job-cost estimates, both direct and indirect costs are considered, ensuring that none of the operational costs are overlooked. For instance, when bidding for jobs from Richardson, Inc. and Punch, Inc., the law firm utilizes both the direct-cost rate and the indirect-cost rate to determine a comprehensive cost estimate. This dual rate system is a cornerstone of effective job costing, ensuring not only transparency in billing but also sufficiency in covering all expenses associated with the firm's services.