Wadsworth & Capell Legal Services is a large law office in St. Louis. It is organized into

Question:

Wadsworth & Capell Legal Services is a large law office in St. Louis. It is organized into three operating departments: Criminal, Civil, and Personal & Family Services. Support functions include a secretarial pool and a research center. An administrative function is responsible for managing the entire company. Wadsworth & Capell follows the practice of allocating support functions to the three operating departments in order to establish a cost- based charge for pricing the various legal services to clients. Administrative costs are not allocated (they are treated as period costs in the income statement), but they are recovered through the profit margin developed as a percentage of all other costs. Budgeting for the upcoming fiscal year has resulted in the following costs charged directly to all functions and departments:

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Required:
1. Complete the proration of indirect costs to all support functions and operating departments.
Show the sum of direct and indirect costs in each function and department.
2. Explain why the proration of indirect costs is necessary.
3. Using the direct method, allocate the service functions to the operating departments
and develop the overhead rates for each of the operating departments. (Round allocations
to the nearest dollar and overhead rates to four decimal places.)
4. Using the step method, allocate the service functions to the operating departments and
develop the overhead rates for each of the operating departments. The secretarial pool
is allocated first. (Round allocations to the nearest dollar and overhead rates to four
decimal places.)
5. Compare the answers in Part (3) and Part (4) and explain why the differences occurred.
Is the direct method used in Part (3) or the step method used in Part (4) preferred? Why?