Cornerstones of Cost Accounting 1st Edition by Don Hansen,Maryanne Mowen

Exercise 12

ALLOCATION: FIXED AND VARIABLE COSTS, BUDGETED FIXED AND VARIABLE COSTS
Biotechtron, Inc., has two research laboratories in the Southwest, one in Taos, New Mexico, and one in Angel Fire, New Mexico. The owner of Biotechtron centralized the legal services function in the Taos office and had both laboratories send any legal questions or issues to the Taos office. The legal services support center has budgeted fixed costs of $120,000 per year and a budgeted variable rate of $40 per hour of professional time. The normal usage of the legal services center is 1,700 hours per year for the Taos office and 800 hours per year for the Angel Fire 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.
2. Since the offices produce services, not tangible products, what purpose is served by allocating the budgeted costs?
3. Now, assume that during the year, the legal services center incurred actual fixed costs of $123,000 and actual variable costs of $108,000. It delivered 2,750 hours of professional time-1,650 hours to Taos and 1,100 hours to Angel Fire. Determine the amount of the legal services center's costs that should be allocated to each office. Explain the purposes of this allocation.
4. Did the costs allocated differ from the costs incurred by the legal services center? If so, why?