Case: Birnbrey & Bogart Legal Services Birnbrey & Bogart 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. Birnbrey & Bogart 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: Secretarial Research Criminal Civil Personal & Family Salaries and wages $80,000 $120,000 $300,000 $400,000 $100,000 Fringe benefits 5,600 11,200 30,000 40,000 10,000 Depreciation 8,000 16,000 24,000 32,000 8,000 Supplies 16,000 3,200 4,500 6,000 1,500 The indirect costs that are prorated to administration, support functions, and operating departments are of four varieties: insurance, leasing, utilities, and janitorial services. The following means are used to prorate indirect costs: a. Insurance costs ($160,000) are for malpractice coverage and for equipment, fixtures, and furniture. The premium ($36,000) representing coverage on equipment, fixtures, and furniture is prorated on the basis of book value. The remainder of the $160,000 is for malpractice. Since malpractice relates to people, the proration is based on the number of people in each department. b. Leasing costs ($96,000) are incurred for the office space occupied by the firm. Therefore, these costs are prorated based on square footage occupied. c. Utilities costs ($60,000) are for heat, light, and water. They are prorated on the basis of square footage occupied. d. Janitorial services ($36,000) to keep the offices clean are contracted out. These costs are prorated on square footage. In allocating the support functions to the operating departments, Secretarial is allocated on the basis of secretarial time. The Research Center is allocated on the basis of salaries and wages. Overhead rates for the operating departments are determined by using salaries and wages in the Criminal and Civil Departments, and staff time in Personal & Family Services. The following budgeted data are available for the allocation bases: Administration Secretarial Research Criminal Civil Personal & Family Number of people 2 4 6 4 6 2 Book values $10,000 $70,000 $80,000 $120,000 $160,000 $40,000 Square footage 1,000 2,000 2,000 1,500 2,500 1,000 Staff time (hours) 4,000 8,500 12,500 9,000 12,500 5,000 Secretarial time (hours) 500 200 2,000 2,000 3,000 1,000 Questions: 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' costs to the operating departments, and develop the overhead rates for each of the operating departments. (Round dollar allocations to the nearest dollar and overhead rates to four decimal places.) 4. Using the step method, allocate the service functions' costs to the operating departments, and develop the overhead rates for each of the operating departments. The secretarial pool is allocated first. (Round dollar 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