Chapter 5, Problem 5.31P

Problems

5-31 Job costing with single direct-cost category, single indirect-cost pool, law firm. Wharton Associates is a recently formed law partnership Denise Peyton, the managing partner of Wharton Associates, has just finished a tense phone call with Gus Steger, president of Steger Enterprises. Gus strongly complained about the price Wharton charged for some legal work done for his company.

Peyton also received a phone call from its only other client, Bluestone, Inc., which was very pleased with both the quality of the work and the price charged on its most recent job.

Wharton 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:

	Steger Enterprises	Bluestone Inc.
Professional labor	3,000 hours	2,000 hours

Professional labor costs at Bradley Associates are $160 an hour. Indirect costs are allocated to cases at $100 an hour. Total indirect costs in the most recent period were $500,000.

1. 1. Why is it important for Bradley Associates to understand the costs associated with individual jobs?

Required

1. 2. Compute the costs of the Steger Enterprises and Bluestone Inc. jobs using Bradley’s simple costing system.