Blue Incs Copy Department Handles All Photocopying

Blue Incs Copy Department Does All Of The Photocopying For The Marke

Blue Inc.'s copy department does all of the photocopying for the marketing and human resources departments. Blue Inc. budgets the following costs for the coming year based on 5,000,000 copies: Salaries and wages (fixed) $60,000; Employee Benefits (fixed) $8,000; Paper (variable $0.01 per copy) $50,000; Toner (variable $0.01 per copy) $50,000; Depreciation (fixed) $10,000; Utilities (fixed) $4,000; Total $182,000. The copy department's costs are allocated to the marketing and human resources departments based on $0.037 per copy. If actual copies made are 4,800,000, what are the costs allocated to each department assuming the marketing department requested 2,500,000 copies and HR requested 2,300,000 copies? What are the problems with using one allocation rate for the copy department's costs? Devise a better allocation system based on pooling costs. Show how the costs would be allocated based on your new system. Present your computations in this Excel spreadsheet with the answer to each of the requirements on a separate tab.

Paper For Above instruction

The task involves analyzing the allocation of costs incurred by Blue Inc.'s copy department to two of its internal departments—Marketing and Human Resources (HR)—based on photocopy requests. The company budgets for various fixed and variable costs associated with photocopying, and an allocation rate is used to distribute these costs. The primary objectives are to determine the allocated costs based on actual copies made and departmental requests, examine the limitations of a single allocation rate, and propose a more accurate pooling-based allocation system.

Introduction

Cost allocation in a manufacturing or service environment is essential for accurate departmental budgeting, performance evaluation, and strategic decision-making. When costs are shared across multiple departments, allocating them fairly becomes challenging, especially when some costs are fixed while others are variable. Blue Inc.’s photocopying department serves two departments—Marketing and HR—and incurs costs that are both fixed and variable.

Analysis of Current Allocation Method

The company’s current approach uses a single rate of $0.037 per copy, calculated based on the budgeted number of copies (5,000,000). Under this method, costs are allocated proportionally based on the number of copies requested by each department:

  • Marketing requests 2,500,000 copies.
  • HR requests 2,300,000 copies.

The total actual copies made are 4,800,000, slightly less than the budgeted 5 million copies. Using the existing $0.037 rate, the total allocated cost would be:

Total allocated cost = 4,800,000 copies × $0.037 = $177,600

Dividing this between departments based on requested copies:

  • Marketing: 2,500,000 / 4,800,000 × $177,600 ≈ $92,500
  • HR: 2,300,000 / 4,800,000 × $177,600 ≈ $85,100

This method assumes that costs are driven solely by the number of copies, disregarding the fixed costs and the nature of different cost components, which can lead to inaccurate or unfair allocations.

Problems with Using One Allocation Rate

Using a single rate for cost allocation presents several issues:

  1. Ignoring Fixed Costs: Fixed costs such as salaries, depreciation, and utilities do not vary with the number of copies. Allocating these based solely on copies results in distortions, potentially overcharging departments that requested fewer copies.
  2. Misrepresenting Cost Drivers: Different cost components are driven by different factors. For example, paper and toner are variable, strongly correlated with volume, whereas salaries and depreciation are fixed and unrelated to volume.
  3. Potential for Cross-Subsidization: Departments with smaller copy requests could subsidize larger ones, or vice versa, leading to unfair cost sharing and poor budgeting insights.

Devising a Better Allocation System

A more accurate approach involves pooling costs into categories—fixed and variable—and allocating each based on the appropriate drivers:

  • Fixed Costs: Allocate fixed costs (salaries, benefits, depreciation, utilities) based on a reasonable method, such as equal or proportional share, or based on an activity measure that reflects their usage.
  • Variable Costs: Allocate variable costs (paper, toner) based directly on the number of copies requested, as these are volume-driven.

Steps to implement this system:

  1. Calculate total fixed and variable costs:
  2. Allocate fixed costs proportionally to departments based on their requested copies or other rational measure.
  3. Allocate variable costs directly according to copies requested.
  4. Combine allocated fixed and variable costs for the total departmental allocation.

Calculations Using Pooling Method

Assuming the total fixed costs are $82,000 (sum of salaries, benefits, depreciation, utilities), and variable costs are $100,000 (paper and toner):

  • Total fixed costs = $60,000 + $8,000 + $10,000 + $4,000 = $82,000
  • Total variable costs = $50,000 + $50,000 = $100,000

The fixed costs can be allocated proportionally to requested copies:

- Total requested copies by both departments: 2,500,000 + 2,300,000 = 4,800,000


- Department share of fixed costs:


– Marketing: (2,500,000 / 4,800,000) × $82,000 ≈ $42,604


– HR: (2,300,000 / 4,800,000) × $82,000 ≈ $39,396


- Variable costs are allocated directly based on copies requested:


– Marketing: (2,500,000 / 4,800,000) × $100,000 ≈ $52,083


– HR: (2,300,000 / 4,800,000) × $100,000 ≈ $47,917

Adding fixed and variable allocations provides each department's total cost:

  • Marketing: $42,604 + $52,083 ≈ $94,687
  • HR: $39,396 + $47,917 ≈ $87,313

This method distributes costs more fairly respecting the nature of each type of cost and the volume requested by each department, reducing cross-subsidization and better reflecting actual resource consumption.

Conclusion

Allocating copy department costs using a single rate oversimplifies complex cost behaviors and leads to inaccuracies and unfairness. By segregating costs into fixed and variable pools and allocating each based on their respective drivers, organizations can achieve more precise and equitable cost sharing. This approach aligns with best practices in activity-based costing and improves managerial decision-making and cost control. Implementing such systems, particularly in service departments, enhances transparency, accountability, and strategic resource allocation.

References

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