Oak City Case

4476 Words Apr 3rd, 2013 18 Pages
Colin Drury, Cost and Management Accounting – Oak City

Oak City’s cost allocation and determination
Robert W. Ingram, W. Cameron Parsons and Walter A. Robbins1
Abstract
Oak City is an interdisciplinary case that involves cost allocation and determination issues in a governmental setting. Ethical considerations related to the role of accountants as expert witnesses also are included in the case. The primary issue in this case (drawn from actual events) is the amount of cost associated with police and fire services that should be charged to businesses in an area adjacent to the city limits, referred to as its police jurisdiction. State law requires the city to provide these services and permits it to charge the incremental cost of
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She claims the city is charging her fees for costs it does not incur, in violation of state law.
“You’ll remember that state law requires the city to provide police and fire protection to residents of the police jurisdiction, which extends three miles beyond the city limits. While the law permits the city to levy a license fee on all businesses located in the police jurisdiction, the levy cannot exceed one-half of the amount charged to like businesses located within the city limits or the actual costs incurred in servicing the police jurisdiction, whichever is lower. If
Smith can prove we have been collecting excessive fees, we may be faced with a major class-action law suit.
“You determined those costs, Mike. I sure hope you can justify them. I’ll arrange a meeting for first thing tomorrow morning with city officials. Come prepared to explain how you’ve been determining the fees we’ve been charging in the police jurisdiction and the associated costs.”
Mike can hardly believe what he’ just heard. How can there be any questions about the way he determines cost for the city’s police jurisdiction? “All I did was allocate costs,” Mike thinks to himself.
Facts and legal background
Oak City is the largest city in its region of the state, with a population of about 100,000. Most of the city in bounded on the west by the Black River with the city limits extended along both the east and west banks of the river for

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