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.
A. 63% of direct-labor cost
B. 160% of direct-labor cost
C. 60% of direct labor cost
D. 38% of direct-labor cost

Answer 1

Answer:

c) 60% of direct labour cost

Explanation:

Indirect costs are also known as overheads. They are costs which are not incurred directly for the service been rendered. These costs can allocated to the cost of the core service using the direct labour cost basis as requested by the question.

To ascertain the  indirect costs rate, we use the formula below:

Indirect cost rate = (Indirect cost/Direct labour cost)   × 100

From the question,

Indirect cost = total cost less the direct labour cost

Indirect cost = $4,000,000 - 2,500,000

                   = $1,500,000

Indirect cost rate = Indirect cost/Direct labour cost   × 100

              = 1,500,000/2,500,000  × 100

            = 60% of direct labour cost