Question

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.

As a manager of one of the other two departments, respond to his suggestion with a memo.

Answer 1

To : Manager , Department A

From : Manager , Department B

Date : 20/09/2019

Subject : Clarification on Consultant charge Allocation

Hi,

This is with reference to the cost allocation methodology you suggested for booking the consultant fees we hired for increasing the departmental effectiveness and efficiency. We understood that your suggestion is to allocate the cost equally among the 3 departments , whereas depending on the actual time sheet submitted by the Consultant Firm , the consultant has spent not less than 50% of time in Department A. This calls for 50% cost allocation in the Department A and 25% each in Department B and Department C. Since our Departmental expenses has exceeded the budgeted for this Quarter we might not be in a situation to absorb the expenses more than what is ours.

We have attached a simple simulation for your better understanding of how it will increase the total Indirect costs in our PnL.

Kindly reach me for any further clarification.

CC : Manager ,Department A

Attachment : Simulation of effect of incremental allocation in the Department PnL