Description
. A college’s School of Liberal Arts has three departments. Estimated information for next year is presented in the self-checking spreadsheet for assignment 6.
(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 E n g l i s h department?
(c) What cost driver(s) would you suggest that the school use to assign a “fair” portion of overhead costs to each department?
Explanation & Answer
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5.6. A college’s School of Liberal Arts has three departments. Estimated information for next
year is presented in the self-checking spreadsheet for assignment 5.6.
1. Does the allocation of equal amounts of indirect cost provide a “fair” allocation? Answer
yes or no and explain your reasoning.
2. Which cost driver best serves the interests of the history department? Which cost driver best
serves the interests of the English department?
3. What cost driver(s) would you suggest that the school use to assign a “fair” portion of
overhead costs to each department?
A
1
B
C
D
E
F
G
H
I
J
K
L
M
Please enter your name on the first page
N
O
P
Q
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R
x
2 A college's School of Liberal Arts has 3 departments. Estimated information for next year is presented in the table below:
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
Percent Correct (Excludes Manual Grades)
Grade in Points
Science
Number of Students per Year
Number of Classes per Semester
Number of Professors
Revenues
Direct expenses
1,400
70
20
$30,000,000
25,000,000
400
30
10
$9,000,000
7,000,000
20%
Revenues
Direct Exp
Indirect Exp
Net Inc.
20% Net
$5,000,000
Plan 2: Allocate Indirect Costs
Using # of Students as Cost Driver
Science
History
English
$30,000,000
$17,000,000
$9,000,000
($25,000,000) ($14,000,000)
($7,000,000)
($1,666,667) ($1,666,667)
($1,666,667)
$3,333,333
$1,333,333
$333,333
$666,667
$266,667
$66,667
Revenues
Direct Exp
Indirect Exp
Net Inc.
20% Net
Plan 3: Allocate Indirect Costs using
# of Classes/semester as Cost Driver
Science
History
English
Revenues
$30,000,000
$17,000,000
$9,000,000
Direct Exp
($25,000,000) ($14,000,000)
($7,000,000)
Indirect Exp
($2,500,000) ($1,428,571)
($1,071,429)
Net Inc.
$2,500,000
$1,571,429
$928,571
20% Net
$500,000
$314,286
$185,714
Worksheet
Plan 1
Science
History
English
$30,000,000
$17,000,000
$9,000,000
($25,000,000) ($14,000,000)
($7,000,000)
($2,692,308) ($1,538,462)
($769,231)
$2,307,692
$1,461,538
$1,230,769
$461,538
$292,308
$246,154
Plan 4: Allocate Indirect Costs
Using # of Professors as Cost Driver
Science
History
English
Revenues
$30,000,000
$17,000,000
$9,000,000
Direct Exp
($25,000,000) ($14,000,000)
($7,000,000)
Indirect Exp
($1,851,852) ($2,222,222)
($925,926)
Net Inc.
$3,148,148
$777,778
$1,074,074
20% Net
$629,630
$155,556
$214,815
1. Does the allocation of equal amounts of indirect cost provide a “fair” allocation?
Answer “Yes” or “No” and explain!
No, equal amounts allocation is not fair. This is becuase euqal amount allocation resultes in smaller departments (History and English) being alloctaed a huge
amount of indirect cost, despite them not using up a lot of overhead resources like administrative time spent and related office expenses(as they have lower
number of students, c...
