Mesa Consultants has projects with both private and government clients. Its overhead consists of both negotiations costs (including proposal preparation) and general administrative costs. Mesa has two groups, private and government, each working solely with one type of client. The following estimated operating data are available for next year:
|
|
Government |
Private |
|
Direct costs |
$4,000,0000 |
$1,000,000 |
|
Number of contracts |
20 |
30 |
Costs in the two administrative departments are expected to be as follows:
|
Negotiations |
$ 750,000 |
|
General administrative |
850,000 |
|
Total |
$1,600,00 |
Mesa management is considering two approaches to assigning overhead costs to projects. One is to use a plantwide rate based on direct costs. The second is to use separate rates for the negotiations and general administrative costs. Under this method, negotiations costs will be allocated based on the number of contracts, and general administrative costs will be allocated based on the direct costs.
Compute the overhead costs allocated to the two groups using (1) the plantwide rate and (2) the individual department rates. What are the advantages and disadvantages of the separate rates compared to the plantwide rate?