Question

but #17 11 Drivers ge School of Business is divided into three departments Accounting, ment. Relevant information for each of the departments follows Vulcan College Sche and management. Rele Cast Driver ents: accounting, marketing, Accounting Number of classes per semester Mating Management Number of classes per semester Number of professors 300 Vulcan is a private departments for p department. Depa a private school that expects each department to generate a profit. It rewards ments for profitability by assigning 20 percent of each department's profits back to that ent. Departments have free rein as to how to use these funds. Some departments have with computer technology. Others have expanded their travel The practice has been highly successful in motivating the faculty to control com nues and direct costs for the year 2011 follow: used them to supply professors with con budgets. The practice has Accounting Marketing Mយតប Revenue Direct costs 529,600,000 24,600,000 $16,600,000 13,800,000 $3,300,000 8,600,000 Vulcan allocates to the School of Business $4,492,800 of indirect overhead costs such as administrative salaries and the costs of operating the registrar's office and the bookstore. Required a. Assume that the dean of the school is planning to assign an equal amount of the college overhead to each department. You have been appointed by the faculty of the Accounting Department to evaluate the allocation plan suggested by the dean. 1. Are you in favor of or opposed to the allocation plan suggested by the dean? 2. Does the plan suggested by the dean provide a fair allocation? Why? b. Select the cost dri Select the cost driver (allocation base) that best serves the self-interest of the Accounting Department and results in the lowest amount of indirect cost allocated. 135

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Answer 1

Yaren Page 1 - Answer:- * from the information: - | TOIHTUMIHIMMEM 6 The plan of the dean to allocate the I same amount to each department for college over heads is not sational St is an arbitrary allocation and does not use any appropriate cost drivers... 2 The plan suggested by the dean is not at all fair. It allocate more overheads to departments that use fewer resources and vice versa. It does not have a logical relationship between the extent of use of resources on one hand and the amount of overheads allocated on the other. P TYR YN - The group representing the accounting department select the allocation based on the number of professors. The group representing the marketing department select the allocation based on the number of classes per semester.

Page 2 The group representing the management department select the allocation based on the departmental revenue. These cost drives minimize the allocated amounts for the concerned departments. © There may be possible consensus on using the number of students as the cast driver because it represents a fair allocation of cvenhead cost. the cost driver should be developed by studying the amounts allocated to all departments by using the different cest drivers The cost driver that is extremely benefical for che department and extremely unfavorable for another department should be avoid. T The cost driver which does not have any extreme allocations, should be selected. It definitely represents a fair albcation rather than self-interest - X -