A computer-service centre of Madrid University serves two major users, the department of Engineering and the department of Humanities and Sciences (H&S).
Required
1. When the computer equipment was initially installed, the procedure for cost allocation was straightforward. The actual monthly costs were compiled and divided between the two departments on the basis of the computer time used by each. In October, the costs were €100 000. H&S used 100 hours and Engineering used 100 hours. How much cost should be allocated to each department? Suppose costs were €110 000 because of various inefficiencies in the operation of the computer centre. How much cost would then be allocated? Does such an allocation seem justified? If not, what improvement would you suggest?
2. Use the same approach as in requirement 1. The actual cost-behavior pattern of the computer centre was €80000 fixed cost per month plus €100 variable cost per hour used. In November, H&S used 50 hours and Engineering used 100 hours. How much cost would be allocated to each department? Use a single-rate method.
3. As the computer-service centre developed, a committee was formed that included representatives of H&S and Engineering. This committee determined the size and composition of the centre's equipment. The committee based its planning on the longrun average utilization of 180 monthly hours for H&S and 120 monthly hours for Engineering. Suppose the €80 000 fixed costs are allocated through a budgeted monthly lump sum based on long-run average utilization. Variable costs are allocated through a budgeted unit rate of €100 per hour. How much cost should be allocated to each department? What are the advantages of this dual-rate allocation method over other methods?
4. What are the likely behavioral effects of lump-sum allocations of fixed costs? For example, if you were the representative of H&S on the facility planning committee, what would your biases be in predicting long-run usage? How would top management counteract the bias?