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Nixon & Ross, a law firm_Overhead allocation




Question;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


Paper#44652 | Written in 18-Jul-2015

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