Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher

Exercise 18

Cost Allocation with Cost Flow Diagram
The library at Pacific Business School (PBS) serves both undergraduate and graduate students. The dean of PBS is interested in evaluating the profitability of the degree programs and has asked the head of the library, Rex Gilmore, to allocate the annual library cost of $2 million to the two programs.
Rex believes that two cost drivers explain most of the costs: number of students and credit hours. Using information from a previous analysis, he split the annual library budget as follows:

Required
a. Allocate the cost of the library to the two programs (undergraduate and graduate).
b. Draw a cost flow diagram to illustrate your answer to requirement (a).