Question

Greenfield Consultants conducts analyses of public policy issues. The company has two units: Government (with various U.S. government agencies as the only clients) and Corporate (with several corporations as clients). Government business is charged based on the total costs (direct and indirect) plus a 15 percent fee (profit). Corporate clients are charged a fixed fee negotiated at the beginning of the project During the planning process for the following year, the controller has estimated costs for the two units. Direct costs Direct contract hours worked Corporate Government Total $ 540,000 $2,160,000 $2,700,000 1,200 2,400 3,600 The controller expects indirect costs to total $5.1 million next year. Revenues from Corporate clients are expected to be $1.4 million. Required: a. Suppose Greenfield chooses to allocate indirect cost based on direct cost. 1. What cost would be allocated to the two units (Corporate and Government)? 2. What total revenue would they expect to collect next year? b. Suppose Greenfield chooses to allocate indirect cost based on direct contract hours worked. 1. What cost would be allocated to the two units (Corporate and Government)? 2. What total revenue would they expect to collect next year?

Answer 1

Required A Total Direct Cost Percentage Allocation of Indirect cost Percentage (W. Note 1) Corporate $540,000 20% $1,020,000 188.889% of D. Cost Government $2,160,000 80% $4,080,000 188.889% of D. Cost $2,700,000 100% $5,100,000 Direct Cost Allocation of Indirect cost Total Cost Fixed fee (Corperate) (Balance Fig) Fixed fee (Government) (6240000*15%) Total Revenue $540,000 $1,020,000 $1,560,000 ($160.000) $2,160,000 $4,080.000 $6,240,000 $2,700,000 $5,100,000 $7,800,000 ($160,000) $936,000 $8,576,000 $936,000 $7.176.000 $1,400,000 Working Note 1 Calculation of Allocation of Indirect Cost Percentage of Allocation = (Indirect Cost Total Material cost) * 100 =(5100000 2700000)*100 = 188.889% of Direct Cost

Required B Total Direct Cost Percentage Allocation of Indirect cost Percentage (W.Note 2) Corporate $540,000 20% $1,700,000 1416.67% Government $2,160,000 80% $3,400,000 1416.67% $2,700,000 100% $5,100,000 Direct Cost Allocation of Indirect cost Total Cost Fixed fee (Corperate) (Balance Fig) Fixed fee (Government) (5560000*15%) Total Revenue $540,000 $1,700,000 $2,240,000 ($840,000) $2,160,000 $3,400,000 $5,560,000 $2,700,000 $5,100,000 $7,800,000 (5840,000) $834,000 $7,794,000 $1,400,000 $834.000 $6,394,000 Working Note 2 Calculation of Allocation of Indirect Cost on Direct Hour worked Percentage of Allocation = (Indirect Cost Total Material cost) * 100 =(5100000/3600)*100 = 1416.67% of Direct Labour Hour Worked

Note : Allocatiom of indirect Expensse round off in the multiple of 10's i.e 34 to 30 and 36 to 40, Because percentage is in decimals.

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