Selecting an appropriate cost driver (What is the base?)
The Vest School of Vocational Technology has organized the school training programs into three departments. Each department provides training in a different area as follows: nursing assistant, dental hygiene, and office technology. The school’s owner, Wilma Vest, wants to know how much it cost to operate each of the three departments. To accumulate the total cost for each department, the accountant has identified several indirect cost that must be allocated to each. These costs are $10,080 of telephone expenses, $2,016 of supplies expense, $720,000 of office rent, $144,000 of janitorial services, and $150,000 of salary paid to the dean of students. To provide a reasonably accurate allocation of costs, the accountant has identified several possible cost drivers. These drivers and their association with each department follow.
|
Cost Driver |
Dept. 1 |
Dept. 2 |
Dept. 3 |
|
Number of telephones |
28 |
32 |
52 |
|
Number of faculty Members |
20 |
16 |
12 |
|
Square footage of office space |
28,000 |
16,8000 |
12,000 |
|
Number of secretaries |
2 |
2 |
2 |
Requirements:
a. Identify the appropriate cost objectives
b. Identify the appropriate cost driver for each indirect cost and compute the allocation rate for assigning each indirect cost to the cost objectives.
c. Determine the amount of telephone expense that should be allocated to each of the three departments.
d. Determine the amount of supplies expense that should be allocated to Department 3.
e. Determine the amount of office rent that should be allocated to Department 2.
f. Determine the amount of janitorial services cost that should be allocated to Department 1.
g. Identify two cost drivers not listed here that could be used to allocate the cost of the dean’s salary to the three departments.