Question

Allocation: Fixed and Variable Costs, Budgeted Fixed and Variable Costs

Biotechtron, Inc., has two research laboratories in the Southwest, one in Yuma, Arizona, and the other in Bernalillo, New Mexico. The owner of Biotechtron centralized the legal services function in the Yuma office and had both laboratories send any legal questions or issues to the Yuma office. The legal services support center has budgeted fixed costs of $172,000 per year and a budgeted variable rate of $69 per hour of professional time. The normal usage of the legal services center is 2,585 hours per year for the Yuma office and 2,115 hours per year for the Bernalillo office. This corresponds to the expected usage for the coming year.

Required:

1. Determine the amount of legal services support center costs that should be assigned to each office. In your computations, carry ratio values out to two decimal places. Round your final answers to the nearest dollar if rounding is required.

Yuma	$
Bernalillo	$

2. Since the offices produce services, not tangible products, what purpose is served by allocating the budgeted costs?

It serves the same purposes as costing out tangible products (e.g., pricing, profitability analysis, and performance evaluation).  

3. Now, assume that during the year, the legal services center incurred actual fixed costs of $175,100 and actual variable costs of $277,300. It delivered 4,000 hours of professional time—2,640 hours to Yuma and 1,360 hours to Bernalillo.

Determine the amount of the legal services center's costs that should be allocated to each office.

Yuma	$
Bernalillo	$

Answer 1

Answer 1).

Yuma = (Normal usage for Yuma*Variable rate) + {Fixed cost*[Normal usage for Yuma/( Normal usage for Yuma + Normal usage for Bernalillo)]}

= (2,585 hours*$69 per hour) + {$172,000*[2,585 hours/(2,585 hours + 2,115 hours)]}

= $178,365 + [$172,000*(2,585 hours/4,700 hours)]

= $178,365 + ($172,000*0.55 hours)

= $178,365 + $94,600

= $272,965

Bernalillo = (Normal usage for Bernalillo*Variable rate) + {Fixed cost*[Normal usage for Bernalillo/( Normal usage for Yuma + Normal usage for Bernalillo)]}

= (2,115 hours*$69 per hour) + {$172,000*[2,115 hours/(2,585 hours + 2,115 hours)]}

= $145,935 + [$172,000*(2,115 hours/4,700 hours)]

= $145,935 + ($172,000*0.45)

= $145,935 + $77,400

= $223,335

Answer 2). It serves similar purpose as for the costing out of tangible goods or products like performance evaluation, profitability analysis, and pricing.

Answer 3).

Variable cost per unit = Total variable cost/Total units

                                   = $277,300/4,000 units

                                   = $69 per unit (approx.)

Yuma = (Normal usage for Yuma*Variable rate) + {Fixed cost*[Normal usage for Yuma/( Normal usage for Yuma + Normal usage for Bernalillo)]}

= (2,640 hours*$69 per hour) + {$175,100*[2,640 hours/(2,640 hours + 1,360 hours)]}

= $182,160 + [$175,100*(2,640 hours/4,000 hours)]

= $182,160 + ($175,100*0.66 hours)

= $182,160 + $115,566

= $297,726

Bernalillo = (Normal usage for Bernalillo*Variable rate) + {Fixed cost*[Normal usage for Bernalillo/( Normal usage for Yuma + Normal usage for Bernalillo)]}

= (1,360 hours*$69 per hour) + {$175,100*[1,360 hours/(2,640 hours + 1,360 hours)]}

= $93,840 + [$175,100*(1,360 hours/4,000 hours)]

= $93,840 + ($175,100*0.34)

= $93,840 + $59,534

= $153,374