Jan 12, 2018 in Business

Birnbrey & Bogart Legal Services

Birnbrey & Bogart Legal Services is a law firm with offices located in St. Louis. It has three operating departments, namely Criminal Department, Civil Department and Personal & Family Services Department. The support functions departments include secretarial pool department and research center. There is an administrative function department, which manages the whole firm. Birnbrey & Bogart allocates support functions to the three operating departments in order to establish a cost-based charge for pricing the various legal services to clients. Costs in the administrative department are not allocated. These costs are treated as period costs in the income statement. However, these costs are recovered through the profit margin derived as a percentage of all other costs. The following direct costs were included in the next fiscal year‘s budget.

Direct costs include salaries and wages, fringe benefits, depreciation and supplies costs calculated for secretarial, research, criminal, civil and personal & family departments.

Indirect costs refer to costs incurred during general operations of a firm. These costs cannot be calculated as production costs and do not relate to a specific objective of a financial cost. In order to compute indirect costs allocation, we will use the following data, which was extracted from the budget of the next financial year.Adding salaries and wages, fringe benefits, depreciation and supplies costs helps to obtain the sum of allocated direct cost for each of the support functions and operation departments. For example, in secretarial department, the sum is $(80000+ 5600+ 8000+ 16,000) =$109,000. The sum of Research Department is $150, 400, Criminal Department’s sum amounts to $358,500, Civil Department comes down to $478,000, and the total for Persona & Family Department is $119,500.

In Birnbrey & Bogart Legal Services, indirect costs prorated to administration, support functions and operating departments are in four forms, namely insurance, leasing, utilities and janitorial services.

There are $160,000 of insurance costs for malpractice coverage and equipment, as well as fixtures and furniture. This includes $36,000 premium representing coverage on equipment, fixtures and furniture, which are prorated on the basis of book value. The remaining $124,000 covers malpractice, and this proration is based on the number of people.

The leasing costs, which allocated $96,000, were prorated on the grounds of square footage because they are incurred as a result of space occupied by an office.

Utility costs of $60,000 were prorated on the basis of square footage of the office. These costs are incurred from heat, light and water utilized in each office.

Janitorial services with total sum of $36,000 were prorated in accordance with a square footage of the office. These are the costs incurred to keep the offices clean.

Sum of the prorated indirect cost is obtained by adding the insurance, leasing, utilities and janitorial services costs allocated to the operation departments. The secretarial department’s sum is $92,266, research center converges to $117,066, expenses of Criminal Department amount to $45,500, Civil Department’s charges turn into $71,334, and the sum of Personal and Family Department is $25834.

Proration of indirect costs is necessary because it helps the firm to determine its profitability, control decision making on charges for their clients, as well as manage the main expenses. There are three methods used in allocating indirect costs. These methods include direct, step-down and reciprocal. Each method has its strengths and weaknesses. However, all these methods are important in achieving a feasible decision by the Birnbrey & Bogart Legal Services management.

Trying to allocate service functions’ costs to the operating departments of Birnbrey & Bogart Legal Services, we will use direct method and step method. In the allocation of these support functions, secretarial service function cost is allocated on the grounds of secretarial time in the operation department. The service functions’ cost of the research center is allocated according to the salaries and wages of each operating department.

Service Functions Costs Allocation Using Direct Method

Direct method of allocating service functions’ costs to the operating departments ignore the service departments. The allocated costs are obtained with help of operations department only. This method is very simple compared to the other methods. The service functions’ costs are allocated directly to the operations department. Direct method bypasses all the services that operations departments get from the existing service departments in this firm. The allocated costs acquired using this method for Birnbrey & Bogart Legal Services are in the following table. The total for each department and the overhead rates is also in this table.

Service Functions Costs Allocation Using Step-Down Method

In this method, the service functions costs allocated are inclusive of services that the service departments offer to the operations departments. This method allocates the service functions’ costs to service departments and operation departments sequentially. Step-down method is more complicated compared to the direct method, but this method is more thorough.

Comparison between Direct Method and Step-Down Methods of Cost Allocation

Comparing the service functions’ costs attained using the direct method of allocation to the costs obtained using step-down method of allocation, it can be estimated that the allocated cost to Civil Department is $235, 000, and the overhead rate is 3.1333 in both methods. However, the allocated costs to Criminal department and Personal & Family departments differ from one method to the other. Direct method is preferred because it is simpler than the step-down method. This method is widely used because it is easier to understand.

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