Question

Central State College (CSC) is a state-supported college with a large business school. The business school offers an undergraduate degree and training programs for a local manufacturer. The state does not support the training programs, which are paid for by the manufacturer under a fixed-price contract.

The college president has asked the dean of the business school for a breakdown of costs by program. The president will be meeting with state legislators asking for an increase in support for the college’s programs. The dean has assigned you to lead the team that will develop the costs by program.

The business school’s computer lab is a major cost item. The lab is used during the day for the undergraduate program and in the evening for the training program.

Required

How will you recommend that the cost of the computer lab be allocated to the two programs? Be explicit in your description of the allocation base.

The dean tells you that the training program should not be allocated any costs other than its direct costs. She points out that the college was established for undergraduate education and the training program is an incremental activity. “After all, if we didn’t have the training program, we would still have the computer lab,” she says. Do you agree with the dean? Is the dean’s suggestion ethical?

Answer 1

ques 1 )
If the Lab is used during the day and equally during the night the cost allocation should be split evenly between the undergrad and the business programs. But it is most likely not the case will more classes utilizing the Lab during the day than the program using the lab at night. so whatever is the no. of classes in the day and night we will take that ratio and split the costs
suppose we have 3 classes in day and 2 at night so total 5 classes
so
we allocate 60%(3/5) to the undergraduate programme and rest 40%(2/5) to business programme

Ques 2)
I suppose since the lab is used in both programmes , there needs to be a mechanism like activity based costing to allocate costs to both programmes as allocating overheads only to one programme does not bring out the true financial picture to the undergraduate programme as costs will be high (because we are allocating 100% of the costs)
costs of the programming and the use will cause the lab to amortize faster and require them to be upgraded sooner. If you only claim one of the programs for the full cost then you are having to replace or repair them more often.
so a allocating mechanism needs to be decided , This would at least allow the college to raise the price of the next contract with the companies to ensure proper maintenance of the computer lab will be cost effective to the college.
only allocating direct costs to business programme is not ethical in my opinion