Selection of the cost driver Vulcan College School of Business is divided into three departments: accounting, marketing, and management. Relevant information for each of the departments follows. 

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Vulcan is a private school that expects each department to generate a profit. It rewards departments for profitability by assigning 20 percent of each department’s profits back to that department. Departments have free rein as to how to use these funds. Some departments have used them to supply professors with computer technology. Others have expanded their travel budgets. The practice has been highly successful in motivating the faculty to control costs. The revenues and direct costs for the year 2011 follow: 

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Vulcan allocates to the School of Business $4,492,800 of indirect overhead costs such as administrative salaries and the costs of operating the registrar’s office and the bookstore. 

Required

a. Divide the class into groups and organize the groups into three sections. Assign each section a department. For example, groups in Section 1 should represent the Accounting Department Groups in Sections 2 and 3 should represent the Marketing Department and Management Department, respectively. Assume that the dean of the school is planning to assign an equal amount of the college overhead to each department. Have the students in each group prepare a response to the dean’s plan. Each group should select a spokesperson who is prepared to answer the following questions.

(1) Is your group in favor of or opposed to the allocation plan suggested by the dean?

(2) Does the plan suggested by the dean provide a fair allocation? Why? The instructor should lead a discussion designed to assess the appropriateness of the dean’s proposed allocation plan.

b. Have each group select the cost driver (allocation base) that best serves the self-interest of the department it represents.

c. Consensus on Requirement c should be achieved before completing Requirement d. Each group should determine the amount of the indirect cost to be allocated to each department using the cost driver that best serves the self-interest of the department it represents. Have a spokesperson from each section go to the board and show the income statement that would result for each department.

d. Discuss the development of a cost driver(s) that would promote fairness rather than self interest in allocating the indirect costs. 

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Cost Driver Accounting Marketing Management Number of students Number of classes per semester Number of professors 1,400 64 20 800 36 24 400 28 10 20