A college's School of Liberal Arts has three departments. Estimated information for next year is presented in the self-checking spreadsheet for assignment.

(a) Does the allocation of equal amounts of indirect cost provide a "fair" allocation? Answer yes or no and explain your reasoning.

(b) Which cost driver best serves the interests of the history department? Which cost driver best serves the interests of the English department?

(c) What cost driver(s) would you suggest that the school use to assign a "fair" portion of overhead costs to each department?

 

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A college's School of Liberal Arts has 3 departments. Estimated information for next year is presented in the table below: Number of Students per Year Number of Classes per Semester Number of Professors Revenues Direct expenses Plan 1: Allocate Equal Amounts of Indirect Costs to Each Department Revenues Direct Exp Indirect Exp Net Inc. 20% Net Science History $30,000,000 $17,000,000 $9,000,000 ($25,000,000) ($14,000,000) ($7,000,000) Plan 3: Allocate Indirect Costs using # of Classes/semester as Cost Driver English Science History Revenues $30,000,000 $17,000,000 Direct Exp Indirect Exp Net Inc. 20% Net Each department creates an Income Statement. Departments are rewarded for being profitable -- the college allows each department to "keep" 20% of the profit it generates to use as it desires. Indirect Costs (for administrative salaries and office expesens, costs of the registrar's office, etc.) are projected to be: English Science $9,000,000 ($25,000,000) ($14,000,000) ($7,000,000) ($2,500,000) $2,500,000 $500,000 1,400 70 20 $30,000,000 25,000,000 History 800 40 24 $17,000,000 14,000,000 Revenues Direct Exp Indirect Exp Net Inc. 20% Net English Plan 2: Allocate Indirect Costs Using # of Students as Cost Driver Revenues Direct Exp Indirect Exp Net Inc. 20% Net $9,000,000 7,000,000 Plan 4: Allocate Indirect Costs. Using # of Professors as Cost Driver Science History 400 30 10 Science History $30,000,000 $17,000,000 ($25,000,000) ($14,000,000) $30,000,000 $17,000,000 ($25,000,000) ($14,000,000) English $9,000,000 ($7,000,000) English $9,000,000 ($7,000,000) 20% $5,000,000 A college's School of Liberal Arts has 3 departments. Estimated information for next year is presented in the table below: Number of Students per Year Number of Classes per Semester Number of Professors Revenues Direct expenses Plan 1: Allocate Equal Amounts of Indirect Costs to Each Department Revenues Direct Exp Indirect Exp Net Inc. 20% Net Science History $30,000,000 $17,000,000 $9,000,000 ($25,000,000) ($14,000,000) ($7,000,000) Plan 3: Allocate Indirect Costs using # of Classes/semester as Cost Driver English Science History Revenues $30,000,000 $17,000,000 Direct Exp Indirect Exp Net Inc. 20% Net Each department creates an Income Statement. Departments are rewarded for being profitable -- the college allows each department to "keep" 20% of the profit it generates to use as it desires. Indirect Costs (for administrative salaries and office expesens, costs of the registrar's office, etc.) are projected to be: English Science $9,000,000 ($25,000,000) ($14,000,000) ($7,000,000) ($2,500,000) $2,500,000 $500,000 1,400 70 20 $30,000,000 25,000,000 History 800 40 24 $17,000,000 14,000,000 Revenues Direct Exp Indirect Exp Net Inc. 20% Net English Plan 2: Allocate Indirect Costs Using # of Students as Cost Driver Revenues Direct Exp Indirect Exp Net Inc. 20% Net $9,000,000 7,000,000 Plan 4: Allocate Indirect Costs. Using # of Professors as Cost Driver Science History 400 30 10 Science History $30,000,000 $17,000,000 ($25,000,000) ($14,000,000) $30,000,000 $17,000,000 ($25,000,000) ($14,000,000) English $9,000,000 ($7,000,000) English $9,000,000 ($7,000,000) 20% $5,000,000

Answer rating: 100% (QA)

a No the allocation of equal amounts of indirect cost does not provide a fair allocation This is bec... View the full answer