Answered: Jansen Corp. has decided to implement…

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter18: Activity-based Costing

Section: Chapter Questions

Problem 13E: Handbrain Inc. is considering a change to activity-based product costing. The company produces two...

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Jansen Corp. has decided to implement an activity-based costing system for its in-house legal department. The legal department’s primary expense is professional salaries, which are estimated for associated activities as follows:

Reviewing supplier or customer contracts (Contracts) P270,000

Reviewing regulatory compliance issues (Regulation) 375,000

Court actions (Court) 862,500

Management has determined that the appropriate cost allocation base for Contracts is the number of pages in the contract reviewed, for Regulation is the number of reviews, and for Court is number of hours of court time. For 2010, the legal department reviewed 450,000 pages of contracts, responded to 750 regulatory review requests, and logged 3,750 hours in court.

Determine the allocation rate for each activity in the legal department.
What amount would be charged to a producing department that had 21,000 pages of contracts reviewed, made 27 regulatory review requests, and consumed 315 professional hours in court services during the year?
How can the developed rates be used for evaluating output relative to cost incurred in the legal department? What alternative does the firm have to maintaining an internal legal department and how might this choice affect costs?

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