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Departmental allocation of computer costs

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.

Solution Preview

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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