(1) Complete the proration of indirect costs to all support functions and operating departments.

Show the sum of direct and indeirect cost in each function and department.

Wadsworth & Capell Legal Services

Overhead Cost Distribution Sheet

OPERATING DEPARTMENTS SERVICE DEPARTMENTS Administration

Basis for Allocation TOTAL
Criminal Civil Personal & Family Secretarial Research (Period Cost)
Direct Overhead Costs
Salaries and wages Directly Attributable 300,000.00 400,000.00 100,000.00 80,000.00 120,000.00 1,000,000.00
Fringe Benefits Directly Attributable 30,000.00 40,000.00 10,000.00 5,600.00 11,200.00 96,800.00
Depreciation Directly Attributable 24,000.00 32,000.00 8,000.00 8,000.00 16,000.00 88,000.00
Supplies Directly Attributable 4,500.00 6,000.00 1,500.00 16,000.00 3,200.00 31,200.00
Total Direct Overhead Costs 358,500.00 478,000.00 119,500.00 109,600.00 150,400.00 - 1,216,000.00

Indirect Overhead Costs

Insurance
Coverage for equipment,
fixtures, and furniture Book Value 9,000.00 12,000.00 3,000.00 5,250.00 6,000.00 750.00 36,000.00
Malpractice Number of People 20,666.67 31,000.00 10,333.33 20,666.67 31,000.00 10,333.33 124,000.00
Leasing Square Footage 14,400.00 24,000.00 9,600.00 19,200.00 19,200.00 9,600.00 96,000.00
Utilities Square Footage 9,000.00 15,000.00 6,000.00 12,000.00 12,000.00 6,000.00 60,000.00
Janitorial Square Footage 5,400.00 9,000.00 3,600.00 7,200.00 7,200.00 3,600.00 36,000.00
Total Indirect Overhead Costs 58,466.67 91,000.00 32,533.33 64,316.67 75,400.00 30,283.33 352,000.00

Total Overhead Costs $ 416,966.67 $ 569,000.00 $ 152,033.33 $ 173,916.67 $ 225,800.00 $ 30,283.33 $ 1,568,000.00

(2) Explain why the proration of indirect costs is necessary.

The proration of indirect cost is necessary because there must be a just and fair charging of all the expenses to the specific department. Without proper
proration, the profitability of products could be distorted after allocation of common cost. Profitable products could be loss-making or vice-versa. It may also affect
the financial success of the product/service that may in turn affect management and workers’ motivation because there are indirect costs that need to be recovered
through product and service pricing.
(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.)

Wadsworth & Capell Legal Services

Overhead Cost Distribution Sheet

OPERATING DEPARTMENTS SERVICE DEPARTMENTS

TOTAL
Criminal Civil Personal & Family Secretarial Research
Direct Overhead Costs
Salaries and wages 300,000.00 400,000.00 100,000.00 80,000.00 120,000.00 1,000,000.00
Fringe Benefits 30,000.00 40,000.00 10,000.00 5,600.00 11,200.00 96,800.00
Depreciation 24,000.00 32,000.00 8,000.00 8,000.00 16,000.00 88,000.00
Supplies 4,500.00 6,000.00 1,500.00 16,000.00 3,200.00 31,200.00
Total Direct Overhead Costs 358,500.00 478,000.00 119,500.00 109,600.00 150,400.00 1,216,000.00

Indirect Overhead Costs

Insurance
Coverage for equipment,
fixtures, and furniture 9,000.00 12,000.00 3,000.00 5,250.00 6,000.00 35,250.00
Malpractice 20,666.67 31,000.00 10,333.33 20,666.67 31,000.00 113,666.67
Leasing 14,400.00 24,000.00 9,600.00 19,200.00 19,200.00 86,400.00
Utilities 9,000.00 15,000.00 6,000.00 12,000.00 12,000.00 54,000.00
Janitorial 5,400.00 9,000.00 3,600.00 7,200.00 7,200.00 32,400.00
Total Indirect Overhead Costs 58,466.67 91,000.00 32,533.33 64,316.67 75,400.00 321,716.67

Total Overhead Costs $ 416,966.67 $ 569,000.00 $ 152,033.33 $ 173,916.67 $ 225,800.00 $ 1,537,716.67

Direct Method
Distribution of Secretarial 57,972 86,958 28,986 - 173,917 -
Distribution of Research 84,675 112,900 28,225 - 225,800 -
Total 559,614 768,858 209,244 - - 1,537,717

Total Cost per Department 559,614 768,858 209,244

Base of Overhead Rate
Salaries and Wages 300,000 400,000
Staff Time (Hours) 5,000
Overhead Rate 1.8654 1.9221 41.8489
(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.)

Wadsworth & Capell Legal Services

Overhead Cost Distribution Sheet

OPERATING DEPARTMENTS SERVICE DEPARTMENTS

TOTAL
Criminal Civil Personal & Family Secretarial Research
Direct Overhead Costs
Salaries and wages 300,000.00 400,000.00 100,000.00 80,000.00 120,000.00 1,000,000.00
Fringe Benefits 30,000.00 40,000.00 10,000.00 5,600.00 11,200.00 96,800.00
Depreciation 24,000.00 32,000.00 8,000.00 8,000.00 16,000.00 88,000.00
Supplies 4,500.00 6,000.00 1,500.00 16,000.00 3,200.00 31,200.00
Total Direct Overhead Costs 358,500.00 478,000.00 119,500.00 109,600.00 150,400.00 1,216,000.00

Indirect Overhead Costs

Insurance
Coverage for equipment,
fixtures, and furniture 9,000.00 12,000.00 3,000.00 5,250.00 6,000.00 35,250.00
Malpractice 20,666.67 31,000.00 10,333.33 20,666.67 31,000.00 113,666.67
Leasing 14,400.00 24,000.00 9,600.00 19,200.00 19,200.00 86,400.00
Utilities 9,000.00 15,000.00 6,000.00 12,000.00 12,000.00 54,000.00
Janitorial 5,400.00 9,000.00 3,600.00 7,200.00 7,200.00 32,400.00
Total Indirect Overhead Costs 58,466.67 91,000.00 32,533.33 64,316.67 75,400.00 321,716.67

Total Overhead Costs $ 416,966.67 $ 569,000.00 $ 152,033.33 $ 173,916.67 $ 225,800.00 $ 1,537,716.67

Step-down Method
Distribution of Secretarial 43,479 65,219 21,740 - 173,917 43,479 -
Distribution of Research 100,980 134,640 33,660 - - 269,279 -
Total 561,426 768,858 207,433 - - 1,537,717

Total Cost per Department 561,426 768,858 207,433

Base of Overhead Rate
Salaries and Wages 300,000 400,000
Staff Time (Hours) 5,000
Overhead Rate 1.8714 1.9221 41.4866
(5) Using the reciprocal 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.)

Wadsworth & Capell Legal Services

Overhead Cost Distribution Sheet

OPERATING DEPARTMENTS SERVICE DEPARTMENTS

TOTAL
Criminal Civil Personal & Family Secretarial Research
Direct Overhead Costs
Salaries and wages 300,000.00 400,000.00 100,000.00 80,000.00 120,000.00 1,000,000.00
Fringe Benefits 30,000.00 40,000.00 10,000.00 5,600.00 11,200.00 96,800.00
Depreciation 24,000.00 32,000.00 8,000.00 8,000.00 16,000.00 88,000.00
Supplies 4,500.00 6,000.00 1,500.00 16,000.00 3,200.00 31,200.00
Total Direct Overhead Costs 358,500.00 478,000.00 119,500.00 109,600.00 150,400.00 1,216,000.00

Indirect Overhead Costs

Insurance
Coverage for equipment,
fixtures, and furniture 9,000.00 12,000.00 3,000.00 5,250.00 6,000.00 35,250.00
Malpractice 20,666.67 31,000.00 10,333.33 20,666.67 31,000.00 113,666.67
Leasing 14,400.00 24,000.00 9,600.00 19,200.00 19,200.00 86,400.00
Utilities 9,000.00 15,000.00 6,000.00 12,000.00 12,000.00 54,000.00
Janitorial 5,400.00 9,000.00 3,600.00 7,200.00 7,200.00 32,400.00
Total Indirect Overhead Costs 58,466.67 91,000.00 32,533.33 64,316.67 75,400.00 321,716.67

Total Overhead Costs $ 416,966.67 $ 569,000.00 $ 152,033.33 $ 173,916.67 $ 225,800.00 $ 1,537,716.67

Reciprocal Method
Distribution of Secretarial 49,748 74,622 24,874 - 198,992 49,748 -
Distribution of Research 93,934 125,237 31,302 25,075 - 275,548 -
Total 560,649 768,858 208,210 - - 1,537,717

Total Cost per Department 560,649 768,858 208,210

Base of Overhead Rate
Salaries and Wages 300,000 400,000
Staff Time (Hours) 5,000
Overhead Rate 1.8688 1.9221 41.6419
 Secretarial Research
Secretarial Time % of Total Salaries & Wages % of Total
Criminal 2,000.00 25.00% 300,000.00 34.09%
Civil 3,000.00 37.50% 400,000.00 45.45%
Personal & Family 1,000.00 12.50% 100,000.00 11.36%
Secretarial - 0.00% 80,000.00 9.10%
Research 2,000.00 25.00% - 0.00%
8,000.00 100% 880,000.00 100%

Let S = Secretarial
R = Research

S = 173,916.67 + 9.10% R
R = 225,800.00 + 25% S

S= 173,916.67 + 9.10% (225,800.00 + 25% S)

S= 173,916.67 + 20,547.80 + 2.275% S
S - 2.275% S = 194,464.47
97.725 % S = 194,464.47
S= 194,464.47 / 97.725%
S= 198,991.53

R = 225,800.00 + 25% (198,991.53)

R = 225,800.00 + 49,747.88
R = 275,547.88

Other relevant information:

Administrative Costs (treated as period costs in the income statement)

Insurance
Coverage for equipment, fixtures, and furniture 750.00
Malpractice 10,333.33
Leasing 9,600.00
Utilities 6,000.00
Janitorial 3,600.00
Total Administrative Costs 30,283.33

OPERATING DEPARTMENTS SERVICE DEPARTMENTS

Administration TOTAL
Criminal Civil Personal & Family Secretarial Research
Number of people 4 6 2 4 6 2 24
Book values 120,000.00 160,000.00 40,000.00 70,000.00 80,000.00 10,000.00 480,000.00
Square footage 1,500.00 2,500.00 1,000.00 2,000.00 2,000.00 1,000.00 10,000.00
Staff time (hours) 9,000.00 12,500.00 5,000.00 8,500.00 12,500.00 4,000.00 51,500.00
Secretarial time (hours) 2,000.00 3,000.00 1,000.00 200.00 2,000.00 500.00 8,700.00
(6) Compare the answers in Part (3), Part (4), and Part (5) and explain why the differences occurred. Is the direct method
used in Part (3), the step method used in Part (4), or the reciprocal method used in Part (5) preferred? Why?

As stated in most discussion, the direct method is the simplest method since it ignores the services provided by
the service department to the producing departments. On the other hand, step-down method provides for allocation of a
service department’s cost to other departments, as well as to operating departments. But we should always note that the
allocation begins with the greatest amount of service rendered to other departments. Moreover, the most effective
allocation method is noted as the reciprocal method because it provides the full recognition of the indirect costs to all
departments. With the overhead rate data given:

METHOD USED CRIMINAL CIVIL PERSONAL & FAMILY

DIRECT 1.8654 1.9221 41.8489
STEP-DOWN 1.8714 1.9221 41.4866
RECIPROCAL 1.8688 1.9221 41.6419

 With regards to the criminal department, the step-down method has the highest cost at $1.8714, followed by the
reciprocal method at $1.8688 and lastly the direct method at $1. 8654.

 In the civil department, overhead rates tallied in all methods at $1.9221.

 Looking at the Personal & Family department, the lowest overhead is in the step-down method at $41. 4866, followed
by the reciprocal method at $41.6419 and the highest overhead rate is at $41.8489 using direct method.

 To conclude, if the company is looking for an accurate charging of indirect costs, it must make use of the reciprocal
method. This is because it allocates indirect expenses to all departments in the company. Moreover, if the company
wants to use a practical method that is easy to use and convenient to management, it must use the direct method for
allocation of indirect expenses. However, it is still the management’s say as to what specific method to use provided
that they will shoulder all the possible losses that they will encounter given the chosen allocation method.