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Departmental allocation of computer costs

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Budget formula = $100,000 fixed costs monthly + $200 per hour of computer time used. Based on long-term 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 the school of business, would you prefer this method of the one in number 1? Explain.

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1. The fixed cost is allocated based on long term usage and variable cost based on hours
Cost allocated to business
Fixed cost = 100,000 X 30% =30,000
Variable cost = 200 per hour X 210 hours = 42,000
Total cost $72,000
Cost allocated ...

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Cost Allocation Sample Question: Direct Method

2. Computer Information Services is a computer software consulting company. Its three major functional areas are computer programming, information systems consulting, and software training. Carol Birch, a pricing analyst in the Accounting Department, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Birch is considering three different methods of allocating overhead costs-the direct method, the step method, and the reciprocal method. Birch assembled the following data on overhead from its two service departments, the Information Systems Department and the Facilities Department.

Service Departments User Departments
Info Computer
Systems Facilities Program Consult Training Total
Budgeted Overhead $50,000 $25,000 $75,000 $110,000 $85,000 $345,000
Info Systems (hrs) 400 1,100 600 900 3,000
Facilities (Sq ft) 200,000 400,000 600,000 800,000 2,000,000

Information systems is allocated on the basis of hours of computer usage; facilities are allocated on the basis of floor space.

Required:

Allocate the service department costs to the user departments using the direct method. (Round to the nearest dollar and provide total user department costs).

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