Question

Consultant Co. is in the business of public relation consulting. The firm has two units: Government (working with various levels of government) and Corporate (working with different corporations). For government contracts, the firm can charge the total cost plus 15% in their consulting fees (a cost-plus contract). For corporate contracts, the firm can only charge a lump sum that is negotiated and signed into the contract.
The costs are estimated for the two units as the following:
Government Corporate Total
Direct costs 45000 75000 120000
Chief consultant input hours 300 700 1000
Total hours worked 1000 2000 3000
Consultant Co. has a total indirect costs total $1.2 million for the year.
a. If the firm chooses direct cost as their cost driver, how would the indirect costs be allocated to the two units? What is the expected revenue that they can generate from the Government unit?
b. If the firm chooses to allocate costs based on chief consultant input hours, how would the indirect costs be allocated to the two units? What is the revenue from the Government unit?
c. If the firm chooses total hours worked as the cost driver, how would the indirect costs be allocated to the two units? What is the revenue from the Government unit?

Answer 1

Answer: See attachment

Explanation:

a. Based on the information in the attachment, the indirect costs that's allocated to the units will be:

Government = 450,000

Corporate = 750,000

The expected revenue that can be generated from the government unit will be:

= 495,000 × (100% + 15%)

= 495,000 × 1.15

= $569250

b. Based on the information given, the indirect costs that's allocated to the units will be:

Government unit = 360,000

Corporate unit = 840,000

The revenue from the government will be:

= 405000 × (100% + 15%)

= 405000 × 115%

= 405000 × 1.15

= $465750

c. If the firm chooses total hours worked as the cost driver, the indirect costs be allocated to the two units as:

Government = 400,000

Corporate unit = 800,000

Revenue from government will be:

= 445000 × 115%

= 445000 × 1.15

= $511750

Check attachment for further explanation.