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(i) Identify the job that is chosen as cost object : For instance, litigation work for Motorola India Ltd. by Dua & Associates by assuming that work requires 100 budgeted hours of professional labour.
(ii) Identify the direct cost categories for the job: In the above example the professional hours required for doing litigation work is a direct cost.
(iii) Identify indirect costs (overheads) associated with the job: This step requires identification of indirect costs incurred for providing services. These costs may include the costs of support labour, computer time,
travel, telephone/fax machine, photocopying etc.
(iv) Select the cost allocation base to be used in assigning each indirect cost to the job: This step requires the selection of cost allocation base that has a cause and effect relationship between changes in it and changes in the level of indirect costs. The allocation base suitable for allocating indirect cost of law firm is professional labour hours.
(v) Identify the rate per unit of the cost allocation base used to allocate cost to the job: The budgeted indirect cost allocation rate is computed by using following formula
Budgeted indirect cost rate = Budgeted total indirect cost / Budgeted total quantity of cost allocation base
The indirect cost of job is computed as = Budgeted indirect cost rate × Professional labour hours required. for job
