At the end of last year, a group of architects and engineers in Squamish, B.C., decided to join efforts in providing one-stop design and engineering consulting services to the construction industry. The founding partners decided to divide the operation into three parts: the Consulting Department, the Legal Department, and the Accounting Department. The consulting department deals directly with the clients, providing two somewhat distinct services, design consulting (DC) and engineering consulting (EC). In its first full month of operations, the consulting department incurred costs of $40,000, with 40% attributed to design consultations and 60% to engineering consultations. Billings to clients amounted to $80,000 and $51,000 for design and engineering consultations, respectively. This department made use of the other two departments' services in preparing work for the external clients. The accounting and legal departments also provided professional services for each other and for the two consulting departments on the basis of time according to the following schedule: Departmental costs before allocation Proportion of Accounting Department services used Proportion of Legal Department services used Consulting Accounting Legal Department Department $20,000 $30,000 DC EC ? ? 20% 60% 20% 50% 10% 40% Having completed the first month's activity, the partners are ready to evaluate the performance of the group and of the individual areas. Required: 1. Prepare an income statement for DC and EC using the direct allocation method. Income Statements Revenue Costs Design Consulting Engineering Consulting Allocated costs Net income (loss) $ 0 2. Prepare an income statement for DC and EC using the the step-down method. Income Statements Revenue Costs Allocated costs Net income Design Consulting Engineering Consulting $ 0 $ 3. Recommend one of the two methods to the partners and justify your choice. Direct allocation method Step-down method