Question

The Company ABC has 3 Departments. The Controller asked you how the best alternative is to distribute $50,000 received from Company Head Quarters. Department A: has 25 employees and budgeted expenses of $15,000. Department B: has 33 employees, and budgeted expenses of $10,000 and Department C: has 75 employees and budgeted expenses of $1,000. Each department has only one supervisor Assume that each organization wishes to obtain the highest funding possible. Required:

a. Which cost driver will each organization recommend be used to distribute the funds?

b. Which cost driver would you recommend and why?

Answer 1

working:

total employees = 25+33+75 =>133

total budgeted expenses =15,000+10,000+1,000=>26,000

department	proportion of employees	proportion of budgeted expenses
A	(25/133)=>0.19	(15/26)=>0.58
B	(33/133)=>0.25	10/26=>0.38
C	(75/133)=>0.56	1/26=>0.04

a.

cost driver recommended by organisation:

Department A	proportion of budgeted expenses
department B	proportion of budgeted expenses
department C	proportion of employees

b.

It would be better to distribute the funds using budgeted expenses as the base.

Since the expenses of the departments are not varying on the basis of employees, it would be better to allocate the funds on the basis of budgeted expenses.