Question

Managerial Accounting

Three department managers jointly decide to hire a consulting firm for advice on increasing departmental effectiveness and efficiency. The consulting firm spends 50% of their efforts in department A and 25% in each of the other two departments. The manager of department A suggest that all three departments equally share the consulting fee.

You are the manager of one of the other two departments. Write a memo to the manager making the suggestion and explain how you think the consulting firm's fee should be allocated based on what you learned in this chapter.

Please Help!! Thank you so much!!

Answer 1

Hello Manager!

I would like to make you understand my perspective in allocation of consulting cost to department's vs current method.

Under current method,

Cost of consulting is shared among departments equally irrespective of the proportion of work they are receiving. This might affect the inter-department profits.

Costs are to be allocated as per the usage like in Activity based costing.

The department to which the consulting firm is redenering more services and to the department it is rendering less services are currently sharing the cost equally.

Proposed method:

Costs are to be allocated based on the usage.
For example, rent- It is to be allocated based on the area in which each department is present.

Here cost is rent and cost driver is area.

In the similar way,

Consulting firm service cost is to be allocated based on some cost driver unlike sharing equally.

Cost driver here can be the services each department is utilising.

Department A is utilising 50% of services whereas it is participating equally is cost share.

To balance the profits this consulting costs are to be shared as per utilisation which is 50%,25% and 25% respectively

This will motivate the department managers since profits are shown as per the work they utilise.

Hence cost driver basis is better to be implemented than current method.