Dual Allocation Approach and Charging for Services (L02) The Maintenance Departm

Question

Dual Allocation Approach and Charging for Services (L02) The Maintenance Department of Management Smart Suites Hotel has fixed costs of $600,000 a year. It also incurs $ 30 in out-of-pocket expenses for every hour of work. During the year the Rooms Department used 20,000 maintenance hours. The Food and Beverage (F&B;) Department used 5,000 maintenance hours. When the Maintenance Department was established the Rooms and F&B; departments estimated they would need 20.000 and 12,000 maintenance hours, respectively. It turns out F&B; cut back on maintenance hours used to insure it would meet its budget. Calculate the amount of Maintenance Department costs to allocate to Rooms and F&B; based entirely on actual usage. Calculate the amount of Maintenance Department costs to allocate to Rooms and F&B; using a dual allocation approach where fixed cost is allocated based on estimated capacity needed and variable cost s allocated based on actual usage. Which of the two methods applied in parts a. and b. is most fair to the two departments? Assume that the maintenance department allocates costs to the producing departments using a user charge. What amount would you suggest for the user charge? Is it a good idea to use a user charge for allocating costs?

Explanation / Answer

Most award budgets specify the approved dollar amounts for direct and indirect costs, but some give only percentages.

To calculate costs when an award specifies indirect costs as a percentage of total direct costs,use the following example.

Example:Consider a sponsored project award with these instructions:

Calculate the amount subject to indirect costs (IDC):

Total award $100,000 Minus exclusions (equipment) -$20,000 Modified total costs $80,000

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