Solutions Guide: Please reword 12-B1 Allocation of Computer Costs Review the section Allocation of Service Department Costs,

pages 527534, especially the example of the use of the computer by the university. Recall that the budget formula was $100,000 fixed cost monthly plus $200 per hour of computer time used. Based on long-run predicted usage, the fixed costs were allocated on a lump-sum basis, 30% to Business and 70% to Engineering. 1. Show the total allocation if Business used 210 hours and Engineering used 390 hours in a given month. Assume that the actual costs coincided exactly with the budgeted amount for total usage of 600 hours. 2. Assume the same facts as in number 1 except that the fixed costs were allocated on the basis of actual hours of usage. Show the total allocation of costs to each school. As the dean of Business, would you prefer this method or the method in number 1? Explain. 1. Fixed costs per month: 210 700, or 30% of $100,000 490 700, or 70% of $100,000 Variable costs @ $200 per hour: 210 hours 42,000 390 hours Total costs 2. Fixed costs per month: 210/600 x $100,000 390/600 x $100,000 Variable costs, as before Total costs Business $30,000 $ 70,000 78,000 $72,000 Business $35,000 42,000 $77,000 $ 65,000 78,000 $143,000 Engineering

$148,000 Engineering

The dean of Business would probably be unhappy. The Business School has operated exactly in accordance with the long-range plan. Nevertheless, Business is bearing an extra $5,000 of fixed costs because of what another consumer is using. The dean would prefer the method in Requirement 1 because it insulates Business from short-run fluctuations in costs caused by the actions of other users.