2: City of Pennywise

The City of Pennywise has two overhead departments and two mission departments. The first mission department does not charge for its services but the second does. The City Administrator has suggested that the finance department allocate the expenditures of the two overhead departments to both mission departments based upon already commonly collected organizational statistics. For the Administration overhead expenditure, base the allocation on the number of employees and for the IT department base the allocation on the budget for each department. Using a double step-down methodology, fully allocate these budget costs from the two overhead departments (Administration and IT) to the mission department. The general rule of thumb is that you start with the most general cost first, so allocate the Administration first.

Also, remember that when you are allocating the overhead cost to the department that you will not count the overhead base in the total.

The second mission department has previously charged for its services based upon the budgeted cost divided by the planned output plus 20% to capture the cost of overhead. The planned output for the second department is 125,000 units. Assume that the cost allocation methodology is acceptable, is this charge sufficient to recover the full cost of providing the service? (5 points)

Departments	Budget	FTE
Administration	70,000	2
IT	55,000	5
Mission Dept. 1	147,500	20
Mission Dept. 2	97,500	15
Total	370,000	4