Question

The law firm of smith & jones has a staff of 30 lawyers and administrative staff. Budgeted total costs of the firm total $4,000,000 of which $2,500,000 is direct-labor costs. Assuming that the remaining costs are indirect and direct-labor cost is the allocation base, calculate the budgeted indirect cost rate.

Answer 1

Calculation of the budgeted indirect cost rate:

It is given that budgeted total costs of the firm total $4,000,000 of which $2,500,000 is direct-labor costs. Hence Total Indirect Cost is ($4,000,000-$2,500,000) = $1,500,000

It is also given that direct-labor cost is the allocation base. Hence the allocation rate shall be calculated as follows:

Budgeted indirect cost rate = Total Indirect Cost / Total direct-labor costs

= 1,500,000 / 2,500,000

= 0.6

=60%

Hence the budgeted indirect cost rate is 60% of Direct labor cost.