Question

A College's School of Liberal Arts has 3 departments Estimated information for next year is presented below. Once table information is completed please provide the following information:

Does the allocation of equal amounts of indirect cost provide a "fair" allocation? Yes or No and explain

Which cost driver services the self-interest of the Science Department? History Department? English Department?

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

INFORMATION:

Number of Students per year: Science = 1400, History = 800, English =400

Number of classes per semester: Science - 70, History = 40, English = 30

Number of professors: Science =20, History = 24, English = 10

Revenues: Science = $30,000,000, History = $17,000,000, English = $9,000,000

Direct Expenses: Science = $25,000,000 History = $14,000,000 English = $7,000,000

Each department keeps 20% of the profit it generates

Indirect costs are projected to be $5,000,000

Use a different table of the one below for each plan:

Plan 1: Allocate Equal Amounts of Indirect Costs to Each Department

Plan 2: Allocate Indirect Costs using # of Students as Cost Driver

Plan 3: Allocate Indirect Costs using # of classes/semester as cost driver

Plans 4: Allocate Indirect Costs using # of professors as cost driver

	Science	History	English
Revenues
Direct Exp
Indirect Exp
Net Inc
20% Net

Answer 1

Answer 1:

Let us first calculate department wise allocation of indirect expenses based on different plans / cost drivers:

Answer 2 (A):

Allocations of equal amounts of indirect cost do not provide a "fair" allocation. To be accurate, it is better to analyze indirect expense and understand what drives the components of indirect cost and establish cause and affect relationship.

Answer 2 (B):

Cost driver that serves the self-interest of the Science Department is # of professors

Cost driver that serves the self-interest of the history Department is # of classes/semester

Cost driver that serves the self-interest of the English Department is # of students

Answer 2 (C):

It is difficult to suggest cost driver(s) to assign indirect expense unless indirect expenses are analyzed and drivers are identified.

From the given information:

School may use # of Students as cost driver to assign a "fair" portion of overhead costs to each department.

Out of given cost drivers, # of students appears to be most appropriate.