(Cost allocation using cost drivers) Blanco Worldwide Industries has decided to implement an activity-based costing system for its in-house legal department.

The principal expense in the legal department is professional salaries, and the estimated cost of professional salaries associated with each activity follow:

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 professional hours. For 2007, the le¬ gal department reviewed 300,000 pages of contracts, responded to 500 regu- , latory review requests, and logged 5,000 professional hours in court.

a. Determine the allocation rate for each activity in the legal department.

b. What amount would be charged to a producing department that had 8,000 pages of contracts reviewed, made 25 regulatory review requests, and consumed 210 professional hours in court services during the year?

c. 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?LO1.

Transcribed Image Text:

Reviewing supplier or customer contracts (Contracts) Reviewing regulatory compliance issues (Regulation) Court actions (Court) $360,000 500,000 825,000