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.
Wadsworth and Capell Services
Overhead Cost Distribution Sheet

Operating Departments Service Departments

Crimina Civil Persona Secreta Researc Administra TOTAL Basis of
l l & rial h tion Allocation
Family
Direct Overhead
Costs
Salaries and Wages 300,000 400,000 100,000 80,000. 120,000 1,000,00 Directly
.00 .00 .00 00 .00 0.00 Attributable
Fringe Benefits 30,000. 40,000. 10,000. 5,600.0 11,200. 96,800.0 Directly
00 00 00 0 00 0 Attributable
Depreciation 24,000. 32,000. 8,000.0 8,000.0 16,000. 88,000.0 Directly
00 00 0 0 00 0 Attributable
Supplies 4,500.0 6,000.0 1,500.0 16,000. 3,200.0 31,200.0 Directly
0 0 0 00 0 0 Attributable
Total Direct 358,50 478,00 119,50 109,60 150,40 1,216,00
Overhead Costs 0.00 0.00 0.00 0.00 0.00 0.00

Indirect Overhead
Costs
Insurance:
For Equipment 9,000.0 12,000. 3,000.0 5,250.0 6,000.0 750.00 36,000.0 Book Values
0 00 0 0 0 0
For Malpractice 20,666. 31,000. 10,333. 20,666. 31,000. 10,333.33 124,000. Number of
67 00 33 67 00 00 People
Leasing 14,400. 24,000. 9,600.0 19,200. 19,200. 9,600.00 96,000.0 Square Footage
00 00 0 00 00 0
Utilities 9,000.0 15,000. 6,000.0 12,000. 12,000. 6,000.00 60,000.0 Square Footage
0 00 0 00 00 0
Janitorial 5,400.0 9,000.0 3,600.0 7,200.0 7,200.0 3,600.00 36,000.0 Square Footage
0 0 0 0 0 0
Total Indirect 58,466 91,000 32,533. 64,316 75,400 30,283.33 352,000.
Overhead Costs .67 .00 33 .67 .00 00

416,96 569,00 152,03 173,91 225,80 1,568,0

Total Overhead 6.67 0.00 3.33 6.67 0.00 30,283.33 00.00
Costs
 1. Explain why the proration of indirect costs is necessary.
Indirect expenses are those expenses that cannot be traced directly to the product. The purpose
of the allocation of indirect expenses is to determine how it should be included in the total costs
of a project or a production. Because even if they are not directly identified, they are still costs
that have been incurred to make the product. Without them, the product would not be complete.
For example, rent, it is not specifically just for one product but without it, there would be no
building on which the product could be produced. When costs are properly allocated, the profit
for these products may be determined correctly. In line with this, managerial accounting reports
rely heavily on cost allocation to know the cost behaviour which affects the decision of
management.
 2. Using the direct method, allocate the service functions to the operating departments and develop the overhead rates
for each of the operating departments.
Wadsworth and Capell Services
Overhead Cost Distribution Sheet

Operating Departments Service Departments

Criminal Civil Personal Secretarial Research TOTAL Basis of
& Family Allocation
Direct Overhead
Costs
Salaries and Wages 300,000 400,000 100,000 80,000 120,000 1,000, Directly
000 Attributable
Fringe Benefits 30,000 40,000 10,000 5,600 11,200 96,800 Directly
Attributable
Depreciation 24,000 32,000 8,000 8,000 16,000 88,000 Directly
Attributable
Supplies 4,500 6,000 1,500 16,000 3,200 31,200 Directly
Attributable
Total Direct Overhead 358,500 478,00 119,500 109,600 150,400 1,216,
Costs 0 000
Indirect Overhead
Costs
Insurance:
For Equipment 9,000 12,000 3,000 5,250 6,000 35,250 Book Values
For Malpractice 20,667 31,000 10,333 20,667 31,000 113,66 Number of
7 People
Leasing 14,400 24,000 9,600 19,200 19,200 86,400 Square Footage
Utilities 9,000 15,000 6,000 12,000 12,000 54,000 Square Footage
Janitorial 5,400 9,000 3,600 7,200 7,200 32,400 Square Footage
Total Indirect 58,467 91,000 32,533 64,317 75,400 321,7
Overhead Costs 17
Total Overhead Costs 416,967 569,00 152,033 173,917 225,800 1,537,
0 717
Direct Allocation of
Service to Operating
Secretarial 57,972 86,958 28,986 173,917
Research 84,675 112,900 28,225 225,800
TOTAL 559,614 768,85 209,244 1,537,
 8 717
Basis of allocation
Salaries and Wages 300,000 400,000
Staff Time 5,000.00
OVERHEAD RATE 1.8654 1.9221 41.8489

Secretari Research
al Cost Cost
Basis: Allocatio Basis: Allocation
Secretarial n Salaries &
Time (in Wages
Hours)
Criminal 2,000.00 57,972. 300,000.0 84,675.00
22 0
Civil 3,000.00 86,958. 400,000.0 112,900.00
34 0
Personal&Family 1,000.00 28,986. 100,000.0 28,225.00
11 0
TOTAL DIRECT 6,000.00 173,916 800,000. 225,800.00
ALLOCATION .67 00
 3. 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.
Wadsworth & Capell Legal Services
Overhead Cost Distribution Sheet

Operating Departments Service TOTAL

Departments
Crimina Civil Personal Secreta Researc Basis of
l & Family rial h Allocation
Direct Overhead
Costs
Salaries and Wages 300,000 400,0 100,000 80,000 120,000 1,000,000 Directly
00 Attributable
Fringe Benefits 30,000 40,00 10,000 5,600 11,200 96,800 Directly
0 Attributable
Depreciation 24,000 32,00 8,000 8,000 16,000 88,000 Directly
0 Attributable
Supplies 4,500 6,000 1,500 16,000 3,200 31,200 Directly
Attributable
Total Direct 358,50 478,0 119,500 109,60 150,40 1,216,000
Overhead Costs 0 00 0 0
Indirect Overhead
Costs
Insurance:
For Equipment 9,000 12,00 3,000 5,250 6,000 35,250 Book Values
0
For Malpractice 20,667 31,00 10,333 20,667 31,000 113,667 Number of People
0
Leasing 14,400 24,00 9,600 19,200 19,200 86,400 Square Footage
0
Utilities 9,000 15,00 6,000 12,000 12,000 54,000 Square Footage
0
Janitorial 5,400 9,000 3,600 7,200 7,200 32,400 Square Footage
Total Indirect 58,467 91,00 32,533 64,317 75,400 321,717
Overhead Costs 0
Total Overhead 416,96 569,0 152,033 173,91 225,80 1,537,717
Costs 7 00 7 0
Distribution of 43,479 65,21 21,740 (173,91 43,479 -
Secretarial Costs 9 7)
Distribution of 100,980 134,6 33,660 (269,27 -
Research Costs 39 9)
Total Distributed 144,45 199,8 55,400 (173,9 (225,8 -
Cost 9 58 17) 00)
TOTAL COST PER 561,42 768,8 207,433 - - 1,537,717
DEPARTMENT 6 58

Total Cost per 561,426 768,8 207,433

Department 58
Base of Overhead
Rate
Salaries & Wages 300,000 400,0
00
Staff Time (in Hours) 5,000
Overhead Rate 1.8714 1.922 41.4866
1

Secretarial Cost Research Cost

Basis: Allocation Basis: Allocation
Secretarial Salaries &
Time (in Wages
Hours)
Criminal 2,000.00 43,479.17 300,000.00 100,979.63
Civil 3,000.00 65,218.75 400,000.00 134,639.50
Personal&Family 1,000.00 21,739.58 100,000.00 33,659.88
Secretarial - -
Research 2,000.00 43,479.17 -
Admin - -
8,000.00 173,916.6 800,000.00 269,279.0
7 0
4. Using the reciprocal method, allocate the service functions to the operating departments and develop the overhead
rates for each of the operating departments.
Wadsworth & Capell Legal Services
Overhead Cost Distribution Sheet

Operating Departments Service Departments TOTAL

Criminal Civil Personal & Secretarial Research
Family
Direct Overhead
Costs
Salaries and Wages 300,000 400,000 100,000 80,000 120,000 1,000,000
Fringe Benefits 30,000 40,000 10,000 5,600 11,200 96,800
Depreciation 24,000 32,000 8,000 8,000 16,000 88,000
Supplies 4,500 6,000 1,500 16,000 3,200 31,200
 Total Direct Overhead 358,50 478,00 119,500 109,600 150,400 1,216,000
Costs 0 0
Indirect Overhead
Costs
Insurance:
For Equipment 9,000 12,000 3,000 5,250 6,000 35,250
For Malpractice 20,667 31,000 10,333 20,667 31,000 113,667
Leasing 14,400 24,000 9,600 19,200 19,200 86,400
Utilities 9,000 15,000 6,000 12,000 12,000 54,000
Janitorial 5,400 9,000 3,600 7,200 7,200 32,400
Total Indirect 58,467 91,000 32,533 64,317 75,400 321,717
Overhead Costs
Total Overhead Costs 416,96 569,00 152,033 173,917 225,800 1,537,717
7 0
Distribution of 49,748 74,622 24,874 (198,992) 49,748 -
Secretarial Costs
Distribution of 93,934 125,237 31,302 25,075 (275,548) -
Research Costs
Total Distributed Cost 143,68 199,85 56,176 (173,917) (225,800) -
2 9
TOTAL COST PER 560,64 768,85 208,209 - - 1,537,717
DEPARTMENT 9 9
Total Cost per 560,649 768,859 208,209
Department
Base of Overhead
Rate
Salaries & Wages 300,000 400,000
Staff Time (in Hours) 5,000
Overhead Rate 1.8688 1.9221 41.6418

Secretarial Cost Research Cost

Basis: Secretarial Time (in Allocati Basis: Salaries & Allocation
Hours) on Wages

Criminal 2,000 0 49,74 300,000 0 93,93 93,934

 8 4
Civil 3,000 0 74,62 400,000 0 125,2 125,23
2 37 7
Personal&Family 1,000 0 24,87 100,000 0 31,30 31,302
4 2
Secretarial - 80,000 0 25,07 25,075
5
Research 2,000 0 49,74 - -
8
TOTAL 8,000 198,9 880,000 275,5 275,5
92 48 48

S = Secretarial S= 173917 + 0.091 R

R = Research R= 225800 + 0.25 S

S= 173,917 + 0.91 (225,800 R= 225,800 + 0.25 S

+ 0.25 S)
S= 173,917 + 20,547.80 + R= 225,800 + 0.25
0.02275 S (198,992)
S - 0.02275 S = 173,917 + 20,547.80 R= 225,800 + 49,748
0.97725 S = 194,464.80 R= 275,548
S= 194,465
0.97725
S= 198,992

R = 225,800 + 0.25 S
R = 225,800 + 0.25 (198,992)
R = 225,800 + 49,748
R = 275,548
5. 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 or the step method in part 4 preferred? Why?

METHOD CRIMIN CIVI PERSONAL&F

AL L AMILY
DIRECT METHOD 1.8654 1.92 41.8489
21
STEP 1.8714 1.92 41.4867
21
RECIPROCAL 1.8688 1.92 41.6419
21

- The difference of values between the three methods is attributed to the difference of
the indirect costs which is divided by the same divisors throughout. The total secretarial
and research cost still remain the same as a whole but it is allocated differently,
different methods equalled different cost totals for each production department. As an
illustration, for Direct Method, the total Criminal Direct and Indirect cost is 559,614, for
Step Method it is 561,426 and for Reciprocal Method 560,649. This means that for the
Criminal Division, the most low cost method is the direct method, therefore, the direct
method yielded the lowest rate per labour hour.

- There is no telling what method is best to use since it is the manager's goal which
should be based upon. If the manager's goal is to get the lowest cost out of the three
methods in order to "save", he should choose the Direct Method for the Criminal
Division and the Step Method for the Personal & Family Division. However, if the
manager stands by the conservatism principle, which is to anticipate the highest costs
and lowest profits in any decision-making report, then he would use the Reciprocal
method for the Criminal Division and the Direct Method for the Personal and Family
Division. But it all boils down to the manager if he/she wants the easy method of
allocation or the complicated one. Furthermore, direct method maybe generally easy
but Reciprocal Method allocates costs in a complicated but complete way since it
allocates to all departments regardless if they are production departments or service
departments.