Activity-Based Costing of Customers: Ethical Issues

Central State College (CSC) is a state-supported college with a large business school. The business school offers an undergraduate degree and training programs for a local manufacturer. The state does not support the training programs, which are paid for by the manufacturer under a fixed-price contract.

The college president has asked the dean of the business school for a breakdown of costs by program. The president will be meeting with state legislators asking for an increase in support for the colleges programs. The dean has assigned you to lead the team that will develop the costs by program.

The business schools computer lab is a major cost item. The lab is used during the day for the undergraduate program and in the evening for the training program.

Required

a. How will you recommend that the cost of the computer lab be allocated to the two programs? Be explicit in your description of the allocation base.

b. The dean tells you that the training program should not be allocated any costs other than its direct costs. She points out that the college was established for undergraduate education and the training program is an incremental activity. After all, if we didnt have the training program, we would still have the computer lab, she says. Do you agree with the dean? Is the deans suggestion ethical?