The motor pool of a major city provides automobiles for the use of various city departments. Currently, the motor pool has 50 autos. A recent study showed that it costs $4,800 of annual fixed cost per automobile plus $.30 per mile variable cost to own, operate, and maintain autos like those provided by the motor pool.
Each month, accountants allocate the costs of the motor pool to the user departments on the basis of miles driven. On average, each auto is driven 24,000 miles annually (that is, 2,000 miles monthly), although wide month-to-month variations occur. In April 20X1, the 50 autos were driven a total of 50,000 miles. The motor pool’s total costs for April were $45,000.
The chief planner for the city always seemed concerned about her auto costs. She was especially upset in April when she was charged $13,500 for the 15,000 miles driven in the department’s five autos. This is the normal monthly mileage in the department. Her memo to the head of the motor pool stated, “I can certainly get autos at less than the $.90 per mile you charged in April.” The response was, “I am under instructions to allocate the motor pool costs to the user departments. Your department was responsible for 30% of the April usage (15,000 miles , 50,000 miles) so I allocated 30% of the motor pool’s April costs to you (.30 * $45,000 = $13,500). That just seems fair.”
1. Calculate the city’s average annual cost per mile for owning, maintaining, and operating an auto.
2. Explain why the allocated cost in April ($.90 per mile) exceeds the average in number 1.
3. Describe any undesirable behavioral effects of the cost-allocation method used.
4. How would you improve the cost-allocation method?