Question:
Cost Allocation with Cost Flow Diagram
The library at Pacific Business School (PBS) serves both undergraduate and graduate programs. The dean of PBS is interested in evaluating the profitability of the degree programs and has asked the head of the library, Rex Gilmore, to allocate the annual library cost of $4,035,000 to the two programs.
Rex believes that two cost drivers explain most of the costs: number of students and credit hours. Using information from a previous analysis, he split the annual library budget as follows:
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A
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B
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C
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D
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1
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Costs driven by number of students
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2
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Library management
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$ 950,000
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3
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Acquisitions
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1,300,000
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4
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$ 2,250,000
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5
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6
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Costs driven by number of credit hours
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|
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7
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Computer support
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$ 135,000
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8
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Building maintenance
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496,000
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9
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Library staff
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788,000
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10
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Utilities and supplies
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366,000
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11
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$ 1,785,000
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12
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Total library costs
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$ 4,035,000
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13
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14
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15
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Data on students and credit hours
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Undergraduate
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Graduate
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16
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Number of students
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900
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600
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17
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Number of credit hours
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13,500
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16,500
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18
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Required
a. Allocate the cost of the library to the two programs (undergraduate and graduate).
b. Draw a cost flow diagram to illustrate your answer to requirement (a).