Digitech Corporation, Has Centralized Much of Its Specialized Data Processing

question 47

Essay

Digitech Corporation, has centralized much of its specialized data processing operation, with the Computer Department performing services for Departments A and B. Service hours consumed during Quarter No. 1 and Quarter No. 2 follow:
$\begin{array} { l l l } & \underline{ \mathrm { A } } & \underline { \mathrm { B } } \\\text { Quarter No.1 } & { 30 }& { 30 }\\\text { Quarter No.2 } & 10 & 30\end{array}$ Computer Department operating costs were: $\begin{array} { l cc } &\text { Variable } \\&\underline{ \text { (Per Hour)} }&\underline{ \text { Fixed }} \\\text { Quarter No. 1 } & \$ 30 & \$ 60,000 \\\text { Quarter No. 2 } & 25 & 28,000\end{array}$ Company policy currently requires that total variable and fixed costs be combined and allocated as a lump-sum to users based on service hours.
Digitech has been financially healthy for a number of years but began to experience problems toward the end of Quarter No. 1. In response to these problems, management issued a directive to closely monitor costs and computer usage, effective at the start of Quarter No. 2.
Required:
A. Compute Quarter No. 1's total computer cost and determine the allocation to Department A and Department B.
B. How much cost would be allocated to Departments A and B during Quarter No. 2, and how would the heads of these departments likely react to the allocations in light of management's directive?
C. Assume that at the beginning of Quarter No. 2, the company switched to dual-cost allocations, with variable costs allocated based on current usage and fixed costs allocated based on long-run average utilization. An analysis of projected usage found that work for Department A was expected to consume 55% of the Computer Department's time over the coming year. How much cost would be allocated to A and B in Quarter No. 2?

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Definitions:

Interaction Effects

Occurs when the effect of one independent variable on the dependent variable differs according to levels of another independent variable.

Marginal Mean

The average of values in a row or column of a contingency table, which represents the mean of a variable while controlling for another variable.

Main Effect

The direct influence of an independent variable on a dependent variable in an experiment, disregarding the effects of or interactions with other variables.

Day of Week

Indicates one of the seven named divisions in a week, ranging from Sunday to Saturday.