WCB Co. Part #3

Allocating Service Department Costs

Goal:

To allocate service department costs in a service company and use them to calculate total cost per unit.

Information:

WCBs board was impressed by your analysis and has decided that a more detailed cost allocation system would indeed be better for the company (even if they still arent convinced that they should perform the power systems harmonics analysis for their client). However, the management team is not sure how they should do these allocations.

Some members of the management team feel that they should just use DM, DL, and Manufacturing OH as they have always done. Others feel that the company should start allocating the costs of its service departments to its final products. This second group feels that the additional allocations will allow them to create a better pricing system for their services. The first group, on the other hand, feels that it is not worth the time or effort, especially since they have enjoyed considerable success using their former methods. The only consensus the team has reached is that they want you to compute the total cost per job both ways for comparison.

After talking with the service department managers, your staff has put together the following table indentifying WCBs four departments, the cost driver for each department, and the estimated driver usage. Any other necessary information for your calculations can be found in WCB part #2.

	Departments
	Data Gathering	Analysis	Admin. Support	Marketing
Budgeted OH	$1,310,000	$1,415,000	$2,000,000	$500,000
Assigned Driver	DL hrs	Computer hrs	Sq. feet of office space	# of projects
Budget Drivers Used:
DL hrs	75,000	25,000	40,000	9,600
Computer hrs	68,000	77,000	30,000	9,000
Sq. feet of office space	1,200	500	1,500	700
# of projects	6,438	6,438	0	0

Assignment:

Identify and summarize the problem or issue: What is the fundamental or underlying issue (or issues) in this problem? Explain.

Calculate the average cost to be assigned to each Electrical Design and Energy Reduction project using only DM, DL, and manufacturing OH (the OH from the Data Gathering and Analysis departments). [1]

Calculate the average cost per Electrical Design and Energy Reduction project using all applied manufacturing and service department OH.[2] The company has decided to use the sequential method for allocating service overhead and apply administrative support costs to marketing as well as the production departments.

Which result will the Energy Reduction project manager prefer? Explain.

Based on your answers to the previous questions, which group in the management team do you agree with? Explain.

[1] HINT: You already calculated applied OH per product for this method in WCB Part #2, question #3. You can also find the DM, DL, and number of project completed information in WCB Part #2.

[2] HINT: The information about cost drivers used for each product line can also be found in WCB Part #2.