Review the section Allocation of service department costs, p. 522–529, especially the example of the use of the computer by the university. Recall that the budget formula was €100,000 fixed cost monthly plus €200 per hour of computer time used. Based on long-run predicted usage, the fixed costs were allocated on a lump-sum basis, 30 per cent to business and 70 per cent to engineering.
1. Show the total allocation if business used 210 hours and engineering used 390 hours in a given month. Assume that the actual costs coincided exactly with the budgeted amount for total usage of 600 hours.
2. Assume the same facts as in number 1 except that the fixed costs were allocated on the basis of actual hours of usage. Show the total allocation of costs to each school. As the dean of the school of business, would you prefer this method or the method in number 1? Explain.