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Allocation of Automobile Costs

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The motor pool of a major city provides automobiles for the use of various city departments. Currently, the motor pool has 50 autos. A recent study showed that it costs $4,800 of annual fixed cost per automobile plus $.20 per mile variable cost to own, operate, and maintain autos, such as those provided by the motor pool. Each month, the costs of the motor pool are allocated to the user departments on the basis of miles driven. On average, each auto is driven 24,000 miles annually, although wide month-to-month variations occur. In April 2007, the 50 autos were driven a total of 50,000 miles. The motor pool's total costs for April were $38,000. The chief planner for the city always seemed concerned about her auto costs. She was especially upset in April when she was charged $11,400 for the 15,000 miles driven in the department's five autos. This is the normal monthly mileage in the department. Her memo to the head of the motor pool stated, can certainly get autos at less than the $.76 per mile you charged in April.

1. Calculate the city's average annual cost per mile for owning, maintaining, and operating an auto.
2. Explain why the allocated cost in April ($.76 per mile) exceeds the average in number 1.
3. Describe any undesirable behavioral effects of the cost-allocation method used.
4. How would you improve the cost-allocation method?

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Solution Preview

Answer 1
The total cost includes fixed and variable both costs. To calculate the city's average annual cost per mile for owning, maintaining and operating, following information are obtained-
Total number of Autos = 50
Annual fixed cost per auto = $4800
Total annual fixed cost = $240000 (4800×50)
Average miles driven by each auto annually = 24000 miles
Total miles driven annually = 1200000 (24000×50)
Variable cost per mile = $0.20
Total annual variable cost = $240000 (1200000*0.20)
Total annual cost = Total annual variable cost + Total annual fixed cost
= 240000+ 240000
Total annual cost = $480000
City's average annual cost per mile = Total annual cost/Total miles driven in year
= 480000/1200000
Average annual cost per mile for owning, maintaining and operating an auto = $0.40

Answer 2
In the month of April the allocated cost is $.76 per mile that is quite high than the average annual cost, which is $.40 per mile. Following are the important factors that exceed the April ...

Solution Summary

The solution gives guidelines and ideas for the cost-allocation method and shows how to calculate annual cost per mile.