Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 16

Single versus Dual Rates: Ethical Considerations

A consulting firm has two departments, Corporate and Government. Computer support is common to both departments. The cost of computer support is $6 million. The following information is given:

	Gigabytes of Storage	Number of Consultants
Corporate	75,000	150
Government	50,000	69

Required

a. What is the cost charged to each department if the allocation is based on the number of gigabytes of storage?

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b. What is the cost charged to each department if number of consultants is the allocation basis?

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c. Most of the business in the Corporate Department is priced on a fixed fee basis, and most of the work in the Government Department is priced on a cost-plus fixed fee basis. Will this affect the choice of the allocation base? Should it?

Step 1 of 3

A consulting firm has two departments C and G. The common cost for both the departments is computer support which has to be allocated to both the departments.

a.

The cost of computer support allocated on the basis of number of gigabytes of storage. The common cost allocation on the basis of number of gigabytes of storage calculated as under:

	C	G	Total
No. Of Gigabytes	75,000	50,000	125,000
Common cost	$3,600,000	$2,400,000	$6,000,000