Please use the following information to answer the following question.... - What
ID: 2578921 • Letter: P
Question
Please use the following information to answer the following question....
- What is the net income for the Corporate client services segment using the three cost drivers in the ABC model? .
Duwe Chetam and Howe:
The law firm of Duwe, Cheatam and Howe provides legal services for clients. During the year corporate clients required 5,000 hours of legal services, while individuals required 3,000 hours. The firm has traditionally used direct labor hours to assign overheads. However, Ms. Duwe believes services to business clients cost more than services to individuals and is considering an activity-based costing system. The firm's revenues and costs for the year are show below:
Corporate
Individual
Total
Revenue
$150,000
$150,000
$300,000
Expenses:
Lawyers' salaries
$100,000
$ 50,000
$150,000
Overhead:
Filing
$ 10,000
Quality control
$ 5,000
Data entry
$ 25,000
Total Overhead
$ 40,000
Mr. Cheatam has kept records of the following data for use in the activity-based costing system:
Activity Level
Overhead Cost
Cost Driver
Corporate
Individual
Filing
Number of clients
5
5
Quality control
Number of hours spent
75
25
Data entry
Number of pages entered
1,000
1,500
Corporate
Individual
Total
Revenue
$150,000
$150,000
$300,000
Expenses:
Lawyers' salaries
$100,000
$ 50,000
$150,000
Overhead:
Filing
$ 10,000
Quality control
$ 5,000
Data entry
$ 25,000
Total Overhead
$ 40,000
Explanation / Answer
Net income for the Corporate client services segment using the three cost drivers in the ABC model:
Working:
Filling Overhead allocated to corporate = 10000/(5+5)x5 = 5000
Filling Overhead allocated to Individual = 10000/(5+5)x5 = 5000
Quality Control Overhead allocated to corporate = 5000/(75+25)x75 = 3750
Quality Control Overhead allocated to Individual = 5000/(75+25)x25 = 1250
Data Entry Overhead allocated to corporate = 25000/(1000+1500)x1000 = 10000
Data Entry Overhead allocated to Individual = 25000/(1000+1500)x1500 = 15000
Corporate Individual Total Revenue 150000 150000 300000 Expenses: Lawyers' salaries 100000 50000 150000 Overhead: Filling 5000 5000 10000 Quality Control 3750 1250 5000 Data Entry 10000 15000 25000 Net Income 31250 78750 110000