Wigan Associates is a recently formed law partnership. Ellery Hanley, the managing partnerof Wigan Associates, has just finished a tense phone call with Martin Offiah, president ofWidnes Coal. Offiah strongly complained about the price Wigan charged for some legal workdone for Widnes Coal.Hanley also received a phone call from its only other client (St. Helen’s Glass), which wasvery pleased with both the quality of the work and the price charged on its most recent job.Wigan Associates operates at capacity and uses a cost-based approach to pricing (billing)each job. Currently it uses a simple costing system with a single direct-cost category(professional labor-hours) and a single indirect-cost pool (general support). Indirect costs areallocated to cases on the basis of professional labor-hours per case. The job files show thefollowing: Widnes Coal St. Helen’s GlassProfessional labor 104 hours 96 hoursProfessional labor costs at Wigan Associates are $70 an hour. Indirect costs are allocated tocases at $105 an hour. Total indirect costs in the most recent period were $21,000.1. Why is it important for Wigan Associates to understand the costs associated with individualjobs?2. Compute the costs of the Widnes Coal and St. Helen’s Glass jobs using Wigan’s simplecosting system.3. Hanley asks his assistant to collect details on those costs included in the $21,000 indirectcost pool that can be traced to each individual job. After analysis, Wigan is able to reclassify$14,000 of the $21,000 as direct costs: Other Direct Costs Widnes Coal St. Helen’s GlassResearch support labor $1,600 $3,400Computer time 500 1,300Travel and allowances 600 4,400Telephones/faxes 200 1,000Photocopying 250 750Total $3,150 $10,850 Hanley decides to calculate the costs of each job as if Wigan had used six direct cost-poolsand a single indirect-cost pool. The single indirect-cost pool would have $7,000 of costs andwould be allocated to each case using the professional labor-hours base.(a) What is the revised indirect-cost allocation rate per professional labor-hour for WiganAssociates required when total indirect costs are $7,000?(b) Compute the costs of the Widnes and St. Helen’s jobs if Wigan Associates had used itsrefined costing system with multiple direct-cost categories and one indirect-cost pool.(c) Compare the costs of Widnes and St. Helen’s jobs in requirement (b) above with those inrequirement 2. Comment on the results.
Wigan Associates is a recently formed law
of Wigan Associates, has just finished a tense phone call with Martin Offiah, president of
Widnes Coal. Offiah strongly complained about the price Wigan charged for some legal work
done for Widnes Coal.
Hanley also received a phone call from its only other client (St. Helen’s Glass), which was
very pleased with both the quality of the work and the price charged on its most recent job.
Wigan Associates operates at capacity and uses a cost-based approach to pricing (billing)
each job. Currently it uses a simple costing system with a single direct-cost category
(professional labor-hours) and a single indirect-cost pool (general support). Indirect costs are
allocated to cases on the basis of professional labor-hours per case. The job files show the
following:
Widnes Coal St. Helen’s Glass
Professional labor 104 hours 96 hours
Professional labor costs at Wigan Associates are $70 an hour. Indirect costs are allocated to
cases at $105 an hour. Total indirect costs in the most recent period were $21,000.
1. Why is it important for Wigan Associates to understand the costs associated with individual
jobs?
2. Compute the costs of the Widnes Coal and St. Helen’s Glass jobs using Wigan’s simple
costing system.
3. Hanley asks his assistant to collect details on those costs included in the $21,000 indirectcost pool that can be traced to each individual job. After analysis, Wigan is able to reclassify
$14,000 of the $21,000 as direct costs:
Other Direct Costs Widnes Coal St. Helen’s Glass
Research support labor $1,600 $3,400
Computer time 500 1,300
Travel and allowances 600 4,400
Telephones/faxes 200 1,000
Photocopying 250 750
Total $3,150 $10,850
Hanley decides to calculate the costs of each job as if Wigan had used six direct cost-pools
and a single indirect-cost pool. The single indirect-cost pool would have $7,000 of costs and
would be allocated to each case using the professional labor-hours base.
(a) What is the revised indirect-cost allocation rate per professional labor-hour for Wigan
Associates required when total indirect costs are $7,000?
(b) Compute the costs of the Widnes and St. Helen’s jobs if Wigan Associates had used its
refined costing system with multiple direct-cost categories and one indirect-cost pool.
(c) Compare the costs of Widnes and St. Helen’s jobs in requirement (b) above with those in
requirement 2. Comment on the results.
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