Question

A college's School of Liberal Arts has 3 departments. Estimated information for next year is presented in the table below: Number of Students per Year Number of Classes per Semester Number of Professors Revenues Direct expenses Science 1,400 70 20 $30,000,000 25,000,000 History 800 40 24 $17,000,000 14,000,000 English 400 30 10 $9,000,000 7,000,000 Each department creates an Income Statement Departments are rewarded for being profitable - the college allows each department to "keep" 20% of the profit it generates to use as it desires. 20% Indirect Costs (for administrative salaries and office expesens, costs of the registrar's office, etc.) are projected to be: $5,000,000 Plan 1: Allocate Equal Amounts of Indirect Costs to Each Department Plan 2: Allocate Indirect Costs Using # of Students as Cost Driver Science History $30,000,000 $17,000,000 English $9,000,000 Science History $30,000,000 $17,000,000 English $9,000,000 Revenues Direct Exp Indirect Exp Net Inc. 20% Net Revenues Direct Exp Indirect Exp Net Inc. 20% Net Plan 3: Allocate Indirect Costs using # of Classes/semester as Cost Driver Science History Revenues $30,000,000 $17,000,000 Direct Exp Indirect Exp Net Inc. 20% Net English $9,000,000 English $9,000,000 Plan 4: Allocate Indirect Costs Using # of Professors as Cost Driver Science History Revenues $30,000,000 $17,000,000 Direct Exp Indirect Exp Net Inc. 20% Net 1. Does the allocation of equal amounts of indirect cost provide a "fair" allocation? Answer "Yes" or "No" and explain! Professor Basis Select one for each: Equal Amounts Student Basis Classes Basis 2. Which cost driver best serves the self-interest of the Science Department? Which cost driver best serves the self-interest of the History Department? Which cost driver best serves the self-interest 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? The nubmer of sudents.

Answer 1

Plan 1:	Allocate Equal Amount
		Science	History	English
	Revenue	3,00,00,000	1,70,00,000	90,00,000
	Direct Expenses	2,50,00,000	1,40,00,000	7000000
	Indirect Expenses	1666667	1666667	1666667
	Net Income	33,33,333	13,33,333	3,33,333
	20% of Net	666667	266667	66667
	Indirect Cost Allocation	5000000/3	5000000/3	5000000/3

Plan 2:	Using Student as Cost Driver
		Science	History	English
	Revenue	3,00,00,000	1,70,00,000	90,00,000
	Direct Expenses	2,50,00,000	1,40,00,000	7000000
	Indirect Expenses	2692308	1538462	769231
	Net Income	23,07,692	14,61,538	12,30,769
	20% of Net	461538	292308	246154
	Indirect Cost Allocation	5000000 X 1400/ ( 1400+800+400)	5000000 X 800/ ( 1400+800+400)	5000000 X 400/ ( 1400+800+400)

Plan 3:	Using Classes / Smester as Cost Driver
		Science	History	English
	Revenue	3,00,00,000	1,70,00,000	90,00,000
	Direct Expenses	2,50,00,000	1,40,00,000	7000000
	Indirect Expenses	2500000	1428571	1071429
	Net Income	25,00,000	15,71,429	9,28,571
	20% of Net	500000	314286	185714
	Indirect Cost Allocation	5000000 X 70/ ( 70+ 40+30)	5000000 X 40/ ( 70+ 40+30)	5000000 X 30/ ( 70+ 40+30)

Plan 4:	Using No. of professor as Cost Driver
		Science	History	English
	Revenue	3,00,00,000	1,70,00,000	90,00,000
	Direct Expenses	2,50,00,000	1,40,00,000	7000000
	Indirect Expenses	1851852	2222222	925926
	Net Income	31,48,148	7,77,778	10,74,074
	20% of Net	629630	155556	214815
	Indirect Cost Allocation	5000000 X 20/ (20+24+10)	5000000 X 24/ (20+24+10)	5000000 X 10/ (20+24+10)

1.  

Allocation of Indirect cost as equal proportion is not justifiable at any cost , because different department have different student and no, of lecturers to be talen and no of Teacher to be appointed for the same, Hence Alloctaion equally is not justificable

2			Plan 1	Plan 2	Plan 3	Plan 4
	Self Interest	Science	666667	461538	500000	629630
	Self Interest	History	266667	292308	314286	155556
	Self Interest	English	66667	246154	185714	214815

Here highlighted portion will be in best interest because with this plan will get 20% extra out of Net profit from th eDeaprtment which can be utilised as per the Departmental needslike purchase of new equipment in lab, Purchase of new books or other material for students interest.

3.

No. of Student will be best, With the no. of Student enrolled in a department will determiend the No. of classses, to be conducted within a smestar / year an secondly on that basis it is easy to determine the no. of professor is require dto be appointed hence forth.