Problem 17 - Accounting

Question

The consulting firm of Tilton and Henderson accumulates costs associated with individual cases, using a job order cost system. The following transactions occurred during June: June 4. Charged 600 hours of professional (lawyer) time to the Rucker Co. breech of contract suit to prepare for the trial, at a rate of \(\$ 200\) per hour. 8\. Reimbursed travel costs to employees for depositions related to the Rucker case, \(\$ 21,000\). 12\. Charged 300 hours of professional time for the Rucker trial at a rate of \(\$ 260\) per hour. 16\. Received invoice from consultants Wenzel and Lachgar for \(\$ 64,000\) for expert testimony related to the Rucker trial. 24\. Applied office overhead at a rate of \(\$ 55\) per professional hour charged to the Rucker case. 30\. Paid secretarial and administrative salaries of \(\$ 35,000\) for the month. 30\. Used office supplies for the month, \(\$ 12,000\). June 30. Paid professional salaries of \(\$ 180,000\) for the month. 30\. Billed Rucker \(\$ 380,000\) for successful defense of the case. a. Provide the journal entries for each of the above transactions. b. How much office overhead is over- or underapplied? c. Determine the gross profit on the Rucker case, assuming that over- or underapplied office overhead is closed monthly to cost of services.

Step-by-Step Solution

Answer

Gross profit is $47,500; office overhead is applied correctly (neither over- nor underapplied).

Step 1: Calculate and Record Professional Time Costs

For the professional hours charged on June 4 and June 12, calculate the cost and record the journal entries: - June 4: 600 hours × $200/hour = $120,000 **Journal Entry**: - Debit Work in Process: Rucker Case $120,000 - Credit Professional Salaries Payable $120,000 - June 12: 300 hours × $260/hour = $78,000 **Journal Entry**: - Debit Work in Process: Rucker Case $78,000 - Credit Professional Salaries Payable $78,000

Step 2: Record Travel Reimbursement

On June 8, reimburse travel costs: **Journal Entry**: - Debit Travel Expenses: Rucker Case $21,000 - Credit Cash/Bank $21,000

Step 3: Record Consultant Invoice

On June 16, receive the consultant's invoice: **Journal Entry**: - Debit Work in Process: Rucker Case $64,000 - Credit Accounts Payable $64,000

Step 4: Apply Office Overhead

On June 24, calculate and apply the office overhead. The total professional hours are 600 + 300 = 900. Apply overhead at $55 per hour: 900 hours × $55/hour = $49,500 **Journal Entry**: - Debit Work in Process: Rucker Case $49,500 - Credit Office Overhead $49,500

Step 5: Record Regular Monthly Salaries and Office Supplies

Record the payment of secretarial, administrative salaries on June 30 and usage of supplies: **Journal Entry**: - Debit Salaries Expense $35,000 - Credit Cash/Bank $35,000 **Journal Entry**: - Debit Office Supplies Expense $12,000 - Credit Office Supplies Inventory $12,000

Step 6: Record Payment of Professional Salaries

Record the payment of professional salaries as of June 30: **Journal Entry**: - Debit Professional Salaries Expense $180,000 - Credit Cash/Bank $180,000

Step 7: Bill Rucker Co.

On June 30, record billing Rucker Co. for the defense work: **Journal Entry**: - Debit Accounts Receivable $380,000 - Credit Service Revenue $380,000

Step 8: Calculate Office Overhead Over/Underapplied

Since overhead is applied at $55 per hour and 900 hours were worked, actual overhead is $49,500. Check if this matches the recorded office overhead. In this case, since no specifics are given for actual overhead costs incurred, assume office overhead is correctly applied (no over/under).

Step 9: Compute Gross Profit

Calculate the total costs for the Rucker case and subtract from billed revenue to find gross profit: - Professional Costs: $120,000 + $78,000 = $198,000 - Travel Expenses: $21,000 - Consultant Invoice: $64,000 - Applied Overhead: $49,500 Total Cost: $198,000 + $21,000 + $64,000 + $49,500 = $332,500 Gross Profit = Revenue - Total Cost = $380,000 - $332,500 = $47,500

Key Concepts

Professional Time Costs

In a job order cost system, professional time costs are crucial for determining the total expenses associated with a specific case or project. These costs involve calculating the hours that professionals, such as lawyers, spend on a case and multiplying these by their hourly rates. For instance, in the Rucker Co. breach of contract case, 600 hours were billed at $200 each, amounting to $120,000 on June 4. Similarly, on June 12, another 300 hours were charged at $260 per hour, totaling $78,000. By totaling these amounts, we can see how much the professional time alone costs for this particular case. Understanding this helps in budget planning, resource allocation, and ultimately, in determining the pricing structures for clients.

Office Overhead Application

Office overhead refers to the indirect costs that support the professional work but are not directly billable to a specific case. This includes utilities, rent, and administrative salaries. For the Rucker case, office overhead was applied at a rate of $55 per professional hour. Given a total of 900 professional hours (600 + 300), the calculated overhead was $49,500. This process ensures that the firm recovers part of its operational costs from each job it undertakes, thus maintaining profitability. Applying overhead helps in comprehensively assessing the total cost associated with a case beyond just direct, billable hours.

Journal Entries

Journal entries record all businesses' financial transactions in accounting books. Each entry must include at least one debit and one credit for proper bookkeeping. For Tilton and Henderson's Rucker case, journal entries recorded various transactions:

• Professional time costs on June 4 and 12, recording a debit to Work in Process and a credit to Professional Salaries Payable.
• Travel costs reimbursed on June 8, leading to a debit in Travel Expenses and a credit in Cash/Bank.
• The consultant invoice on June 16 resulted in a debit to Work in Process and a credit to Accounts Payable.
• Office overhead application on June 24 records show debits and credits to Work in Process and Office Overhead.

These entries help track each component's costs and ensure the firm's financial statements reflect its operational activities accurately.

Consultant Expenses

Consultant expenses encompass fees paid to external experts who provide specialized knowledge or skills that enhance the firm's service offering. These professionals often hold expertise that is integral to the case's successful outcome but is not available internally. For example, the Rucker case involved employing consultants Wenzel and Lachgar, whose expert testimony billed at $64,000 on June 16. This cost was essential in building a strong defense but needed careful recording for financial transparency. Tracking consultant expenses within the job order cost system allows firms to fully account for all costs while assessing profitability, ensuring that services are priced appropriately, and maintaining clear financial records.