Module 5: Cost Allocation

1. Ash County’s organizational structure includes one county manager and three deputy county managers. Each of the deputies oversees a handful of departments and provides human resource support and information technology support to each of those departments. Table 5.3 shows the data for the deputy county manager overseeing the public works departments (transportation, facilities, solid waste, and stormwater control). Allocate the cost of the deputy’s organization based on full-time equivalent employees (FTEs).

(a) What is the pool?

(b) What is the base?

(c) How much should be allocated to each department?

• In the scenario in assignment 1, the deputy county manager wants the cost allocation to be redone using expenditures as the base. What are the new cost allocations?
• In the scenario in assignment 1, the deputy county manager is still concerned with creating equity in the distribution of the costs of the organization. Additional information has been collected to increase the accuracy of the allocation. Each area under the supervision of the deputy county manager has tracked the time it spent providing services to each of the departments during the most recent month, as shown in Table 5.4. Use this additional information to produce a direct allocation for the deputy’s organization.
• The deputy county manager asks you to create a simple table showing the total cost allocation to each department using the three models you have developed. Prepare a one-page memo to the deputy county manager explaining the differences among the models, your recommended method, and why you recommend it.
• Boomtown is preparing a cost analysis of three departments: Parks, Fire, and Water. To comply with accuracy standards in allocating indirect costs, Boomtown will employ the step-down method of cost allocation. There are two indirect cost groups that are allocated: city administration and facilities. Costs for facilities are allocated first, and then costs for city administration are allocated. Using the data in Table 5.5, prepare the cost allocation using direct cost as the base and determine the full cost of the departments.

6. A college’s School of Liberal Arts has three departments. Estimated information for next year is presented in the self-checking spreadsheet for assignment 6.

(a) Does the allocation of equal amounts of indirect cost provide a “fair” allocation? Answer yes or no and explain your reasoning.

(b) Which cost driver best serves the interests of the history department? Which cost driver best serves the interests of the English department?

(c) What cost driver(s) would you suggest that the school use to assign a “fair” portion of overhead costs to each department?

Module 7: Inflation

1. Define the following:

Nominal dollars.

Constant dollars.

• Lake City’s Park gazebo is available for residents to rent for picnics and other gatherings. You have been tasked with building a compelling financial story to convince the city council to raise the rental rates. The rental revenue history is shown in Table 7.2, along with the CPI for each of the years.
1. Calculate 2012 constant dollars for the rental revenue.
2. Calculate 1984 constant dollars for the rental revenue.
3. Create a line graph displaying the nominal dollars, 2012 constant dollars, and 1984 constant dollars across all years of data.
4. How would you use these data to create a compelling financial argument to increase rental rates? Would you use all the data?
5. A member of Lake City’s town council—who has been on the city council for almost 25 years, remembers everything, and has a particular fondness for the park—questions the data you have presented. He presents you with a newspaper clipping from 1996 that claims the revenue in 1984 was just under \$20,000 per year. Back at your desk, you tackle your new task of determining where this “under \$20,000 per year” figure came from as well as how to explain nominal dollars and constant dollars to this member of the town council.
1. Using the same nominal dollars as in assignment 2, add a column and calculate 1995 constant dollars.
3. Using this graph, write a simple explanation about nominal dollars and the use of different base years to create constant dollars. The explanation should be no more than a page and written for an audience that does not have a financial background.
• Big East City’s Public Works Department is asking for an additional \$100,000 for sign repairs in the next budget cycle because its costs have increased by at least that much since 1995. The department has provided you with the information in Table 7.3. Big East City has adjusted funding for each of its departments every year to keep up with the buying power of money.
1. Calculate 2012 constant dollars for the expenditures.
2.  Calculate 1995 constant dollars for the expenditures.
3. Create a line graph displaying the nominal dollars, 2012 constant dollars, and 1995 constant dollars across all years of data.
4. Based on the data provided and the calculations you have completed above, does the Public Works Department’s request make sense? How much additional funding do you think it might need?

Module 8: Sensitivity Analysis

Winterville, a city of population 125,000 in the Rust Belt, has a significant homeless population. At present, it has facilities that can provide overnight residence for 200 single homeless individuals and 100 family members (normally mothers with children). No one really knows how many homeless are in Winterville, and other nearby localities also have some number of home-less individuals. However, due to all-too-frequent emergency responses during periods of severe weather, the number of beds is insufficient. There is a proposal to acquire a former hotel and convert it to 200 spaces for family members while converting the 100 current family spaces to additional spaces for single individuals. Write three scenarios reflecting possible outcomes of this decision. The scenarios should reflect policy success, potential failure due to doing too little, and potential failure due to doing too much.

2. The Winterville homeless shelters, including the potential new facility, are located in the same neighborhood as a facility that provides evening meals at no cost for needy individuals all week, year-round. The cost per meal is \$7. Historically, all families and 70% of the single individu-als have taken advantage of this service. Others come as well, and the facility has found it effective to plan for usage to be a total of 110% of the capacity of the family shelter and 90% of the capacity of the single-person shelter. With the new shelter’s capacity for 200 more individuals, the 110% ratio is uncertain. In Worksheet 8.1, examine the effect if the ratio falls by 10 percentage points or increases by 10 percentage points for each group. Show the change from the current annual cost.

3. Extending the previous exercise, in Worksheet 8.2 examine the effect if the cost increases by \$0.50 per meal because of adding new kitchen capacity and staff or decreases by \$0.50 because of spreading the fixed costs over more meals. Show the change from the current annual cost.

• Find a published cost-benefit analysis (net present value analysis) for any level of government and any public policy. Determine whether a sensitivity analysis has been conducted and, if so, whether any alternatives result in a recommendation that is contrary to the central recommendation of the published analysis. What variable changed in a way that led to the contrary recommendation?

5. Eastview’s police department hires a new class of 50 trainees every quarter to begin the 3-month police academy program. Four nearby communities have struggled in running their own police academies, partly due to their own city funding but also because their class size is much smaller (ranging from 5 to 15 trainees in each city). Eastview’s newspaper recently ran a story about the city’s intent to build a new training facility for the police academy. The four communities want to partner with Eastview to have Eastview pro-vide their academy program rather than hosting it themselves. Using the information in Worksheet 8.3, analyze how the cost would vary from the lowest enrollment to the highest enrollment if Eastview and the four surrounding communities cooper-acted on a joint academy. The academy provides room and board to all trainees for a period of 11 weeks.

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