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 $ 780,000 $3,120,000 $ 3,900,000 2,400 4,800 7,200 The controller expects indirect costs to total $8.7 million next year. Revenues from Corporate clients are expected to be $26 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? Complete this question by entering your answers in the tabs below.

Answer 1

Solution to Q a)1)

Statement Showing Allocation of Indirect Cost as per Direct Cost

Particulars	Corporate	Government	Total
Direct Cost ($)	780,000	3,120,000	3,900,000
Percentage (%) (Note 1)	20	80	100
Allocation of Indirect Cost ($) (Note 2)	1,740,000	6,960,000	8,700,000
Percentage (%) (Note 3)	20	80	100

Working Note:

(1) % of Direct Cost for Corporate = (780,000/3,900,000)x100 = 20%

% of Direct Cost for Government = (3,120,000/3,900,000)x100 = 80%

(2) Allocated Indirect cost to Corporate based on direct cost

= 8,700,000 x 20% = 1,740,000

Allocated Indirect cost to Government based on direct cost

= 8,700,000 x 80% = 6,960,000

(3) Since the allocation is based on direct cost the % would be according to that.

Solution to Q a) 2)

Statement Showing Calculation of Total Revenue

Particulars	Corporate	Government	Total
Direct Cost ($)	780,000	3,120,000	3,900,000
Allocated Indirect Cost ($)	1,740,000	6,960,000	8,700,000
Total Cost ($)	2,520,000	10,080,000	12,600,000
Fixed Fee (Corporate) (Given)	2,600,000	-	2,600,000
Fixed Fee (Government) (Note 1)	-	11,592,000	11,592,000
Total Revenue	2,600,000	11,592,000	14,192,000

Therefore, $ 14,192,000 is expected to be collected as revenue in the next year in this case.

Working Note:

1) Calculation of Government's Fixed Fees

Government's Fixed Fees is based on the Total cost plus 15 percent (profit) , i.e.,

= 10,080,000 + 10,080,000 x 15% = $ 11,592,000

Solution to Q b)1)

Statement Showing Allocation of Indirect Cost as per Direct Contract Hours

Particulars	Corporate	Government	Total
Direct Contract Hours (Hrs)	2,400	4,800	7,200
Percentage (%) (Note 1)	33.33	66.67	100
Allocation of Indirect Cost ($) (Note 2)	2,900,000	5,800,000	8,700,000
Percentage (%) (Note 3)	33.33	66.67	100

Working Note:

(1) % of Direct Cost for Corporate = (2,400/7,200)x100 = 33.33%

% of Direct Cost for Government = (4,800/7,200)x100 = 66.67%

(2) Allocated Indirect cost to Corporate based on direct contract hours

= 8,700,000 x 33.33% = 2,900,000

Allocated Indirect cost to Government based on direct contract hours

= 8,700,000 x 66.67% = 5,800,000

(3) Since the allocation is based on direct contract hours, the % would be according to that.

Solution to Q b) 2)

Statement Showing Calculation of Total Revenue

Particulars	Corporate	Government	Total
Direct Cost ($)	780,000	3,120,000	3,900,000
Allocated Indirect Cost ($)	2,900,000	5,800,000	8,700,000
Total Cost ($)	3,680,000	8,920,000	12,600,000
Fixed Fee (Corporate) (Given)	2,600,000	-	2,600,000
Fixed Fee (Government) (Note 1)	-	10,258,000	10,258,000
Total Revenue	2,600,000	10,258,000	12,858,000

Therefore, $ 12,858,000 is expected to be collected as revenue in the next year in this case.

Working Note:

1) Calculation of Government's Fixed Fees

Government's Fixed Fees is based on the Total cost plus 15 percent (profit) , i.e.,

= 8,920,000 + 8,920,000 x 15% = $ 10,258,000