Accounting Business Reporting for Decision Making

474 Accounting: Business Reporting for Decision Making

(continued)

Resource driver usage

Departments

Metres floor

space m^2 Kilowatt hours Number of employees

Finance 500 10 000 10

Personnel 500 10 000 5

Computer services 1 000 20 000 10

Home insurance 500 10 000 20

Car insurance 500 10 000 25

Life insurance 200 10 000 10

Totals 3 200 70 000 80

With the above data it is now possible to calculate the indirect cost rate for each indirect cost

category to enable the indirect cost to be allocated to each department. Remember the allocation

formula is the cost to be allocated divided by the total amount of the cost driver.

Indirect cost category Allocation formula Indirect cost rate

Rent $200 000/3200 m^2 $62.50 per m^2

Electricity $199 500/70 000 kilowatt hrs $2.85 per kilowatt hr

General administration $300 000/80 employees $3750 per employee

The indirect cost rate calculated can now be used to allocate the indirect costs to each department

based on its use of the resource driver. For example, we can see that the finance department was

charged electricity costs ($28 500) based on its use of kilowatt hours (10 000 hours) multiplied by the

indirect cost rate ($2.85 per kilowatt hour).

Resource driver usage

Departments

Rent — metres

floor space m^2

Electricity —

kilowatt hours

General

administration —

number of employees

Total cost

allocated

Finance $31 250

(500 × $62.50)

$28 500

(10 000 × $2.85)

$37 500

(10 × $3750)

$ 97 250

Personnel $31 250

(500 × $62.50)

$28 500

(10 000 × $2.85)

$18 750

(5 × $3750)

78 500

Computer services $62 500

1000 × $62.50

$57 000

(20 000 × $2.85)

$37 500

(10 × $3750)

157 000

Home insurance $31 250

500 × $62.50

$28 500

(10 000 × $2.85)

$75 000

(20 × $3750)

134 750

Car insurance $31 250

500 × $62.50

$28 500

(10 000 × $2.85)

$93 750

(25 × $3750)

153 500

Life insurance $12 500

(200 × $62.50)

$28 500

(10 000 × $2.85)

$37 500

(10 × $3750)

78 500

Total allocated $200 000 $199 500 $300 000 $ 699 500