Question

Allocation: Fixed and Variable Costs, Budgeted Fixed and Variable Costs Biotechtron, Inc., has two research laboratories in the Midwest, one in Tulsa, Oklahoma, and one in Ames, Iowa. The owner of Biotechtron centralized the legal services function in the Tulsa office, where both laboratories send any legal questions or issues. The legal services support center has budgeted fixed costs of $60,000 per year and a budgeted variabie rate of $40 per hour of professional time. The normal usage of the legal services center is 1,625 hours per year for the Tulsa office and 875 hours per year for the Ames office. This corresponds to the expected usage for the coming year Required: I. Determine the amount of legal scrvices support center costs that should be assigned to each office 2. Since the offices produce services, not tangible products, what purpose is served by allocating the budgeted costs? ow, assume that during the year, the legal services center incurred actual fixed costs of $59,000 and actual variable costs of $91,500. It delivered 2,300 hours of professional time-1,200 hours to Tulsa and ,100 hours to Ames. Determine the amount of the legal services center's costs that should be allocated to each office 3. N Explain the purposes of this allocation 4. Did the costs allocated differ from the costs incurred by the legal services center? If So, W

Answer 1

1. Predetermined overhead rate = $ 60,000 / ( 1,625 + 875) + $ 40 per hour = $ 64 per hour of professional time.

	Legal Services Support Center Costs Assigned
Tulsa	$ 104,000
Aimes	$ 56,000

2. In this case, the service is the product. It does not matter whether it is tangible or intangible. But this service department is consuming resources or costs. And these costs need to be allocated to the respective laboratories to compute the correct cost for which each of these two offices are responsible.

3.

	Allocation of Legal Service Center Costs
Tulsa ( 1,200 @ $ 64)	$ 76,800
Aimes ( 1,100 @ $ 64)	$ 70,400
Total Costs Allocated	$ 147,200

The purpose of this allocation is to apportion the costs of the support department to the respective cost centers.

4. Actual costs incurred : $ 150,500.

Total costs allocated : $ 147,200

Threfore, the legal costs are underallocated to the extent of $ 3,300.

The difference has occurred because allocation is done on the basis of a predetermined rate, and both the costs and the volume of cost drivers cost drivers ( hours of professional time) were estimated at the beginning of the period. The actual usage turned out to be different.