Question

Greenfield Consultants conducts analyses of public policy issues. The company has two units: Government (with various U.S. government agencies as the only clients) and Corporate (with several corporations as clients). Government business is charged on the total costs (direct and indirect) plus a 15 percent fee (profit). Corporate clients are charged a fixed fee negotiated at the beginning of the project. During the planning process for the following year, the controller has estimated costs for the two units. Direct costs Direct contract hours worked Corporate Government Total $ 780,000 $3,120,000 $3,900,000 2,400 4,800 7,200 The controller expects indirect costs to total $8.7 million next year. Revenues from Corporate clients are expected to be $2.6 millio Required: a. Suppose Greenfield chooses to allocate indirect cost based on direct cost. 1. What cost would be allocated to the two units (Corporate and Government)? 2. What total revenue would they expect to collect next year? b. Suppose Greenfield chooses to allocate indirect cost based on direct contract hours worked 1. What cost would be allocated to the two units (Corporate and Government)? 2. What total revenue would they expect to collect next year?

Answer 1

Requirement A

Rate for Indirect Cost Allocation = Expected Indirect Costs / Expected Direct Costs * 100

Expected Indirect Costs = $ 87,00,000

Expected Direct Costs = $ 39,00,000

Rate for Indirect Cost Allocation = 87,00,000 / 39,00,000 * 100

Indirect Cost Allocation Rate = 223.08% of Direct Labour Cost

Formula for Calculating Indirect Labour Costs = Direct Labour Cost * Indirect Cost Allocation Rate

For Government Department

Indirect Costs = Direct Costs * Indirect Cost Allocation Rate

Direct Costs = $ 31,20,000

Indirect Costs = 31,20,000 * 223.08%

Indirect Costs = $ 69,60,000

For Corporate Department

Indirect Costs = Direct Costs * Indirect Cost Allocation Rate

Direct Costs = $ 780,000

Indirect Costs = 780,000 * 223.08%

Indirect Costs = $ 17,40,000

Requirement 1B

Total Sales Revenue = Sales Revenue of Corporate Department + Sales Revenue of Government Department

Sales Revenue of Corporate Department = $ 26,00,000

Sales Revenue for Government Department = Total Costs + (15% of Total Costs)

Total Costs = Direct Costs + Indirect Costs

Direct Costs = $ 31,20,000

Indirect Costs = $ 69,60,000

Total Costs = 31,20,000 + 69,60,000

Total Costs = $ 1,00,80,000

Sales Revenue for Government Department = 1,00,80,000 + (15% * 1,00,80,000)

Sales Revenue for Government Department = 1,00,80,000 + 15,12,000

Sales Revenue for Government Department = $ 1,15,92,000

Total Sales Revenue = 26,00,000 + 1,15,92,000

Total Sales Revenue = $ 1,41,92,000

Requirement 2A

Allocation Rate for Indirect Cost based on Direct Contract Hours Worked = Expected Indirect Costs / Total Contact Hours Worked

Expected Indirect Costs = $ 87,00,000

Total Contract Hours Worked = 7,200 Hours

Allocation Rate based on Contract Hours Worked = 87,00,000 / 7,200 = $ 1,208.33 per Contract Hour

For Corporate Department

Indirect Costs = Contract Hours for Corporate Department * Allocation Rate based on Contract Hours

Contract Hours = 2,400 Hours

Indirect Costs = 2,400 * $ 1208.33

Indirect Costs = $ 29,00,000

For Government Department

Indirect Costs = 4,800 Hours * $ 1208.33

Indirect Costs = $ 58,00,000

Requirement 2B

Total Sales Revenue = Sales Revenue of Corporate Department + Sales Revenue of Government Department

Sales Revenue of Corporate Department = $ 26,00,000

Sales Revenue for Government Department = Total Costs + (15% of Total Costs)

Total Costs = Direct Costs + Indirect Costs

Direct Costs = $ 31,20,000

Indirect Costs = $ 58,00,000

Total Costs = 31,20,000 + 58,00,000

Total Costs = $ 89,20,000

Sales Revenue for Government Department = 89,20,000 + (15% * 89,20,000)

Sales Revenue for Government Department = 89,20,0000 + 13,38,000

Sales Revenue for Government Department = $ 1,02,58,000

Total Sales Revenue = 26,00,000 + 1,02,58,000

Total Sales Revenue = $ 1,28,58,000