Biotechtron, Inc., has two research laboratories in the Southwest, one in Taos,

Question

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.

Explanation / Answer

Solution.

1. Determination of the amount of legal services support center costs that should be assigned to each office.

Budgeted fixed costs = $120,000

Budgeted variable rate = $40 per hour.

Basis of cost distribution is "Service hour"

Cost of Taos Branch..

Fixed Cost = ($120,000 / 2,500 ) x 1,800 = $81,600

Variable cost = 1,800 hour x $40 = $72,000

Cost of Angel Fire Branch..

Fixed Cost = ($120,000 / 2,500 ) x 700 = $33,600

Variable cost = 700 hour x $40 = $28,000

2. Since the offices produce services, not tangible products, need of cost allocation is due to company want to know how much service provided to both of branches and want to fix libility of cost for each branch.

3. Allocation of actual cost.

Actual fixed costs = $123,000

Actual variable rate = $108,000.

Basis of cost distribution is "Service hour"

Cost of Taos Branch..

Fixed Cost = ($123,000 / 2,750 ) x 1,650 = $73,800

Variable cost = ($108,000 / 2,750 ) x 1,650 = $64,800

Cost of Angel Fire Branch..

Fixed Cost = ($123,000 / 2,750 ) x1,100 = $49,200

Variable cost = ($108,000 / 2,750 ) x1,100 = $43,200

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