Allocation of common costs. Jim Dandy Auto Sales uses all types of media to advertise its prod- ucts (television, radio, newspaper, Internet, and so on). At the end of 2016, the company president, Jim McKinnley, decided that all advertising costs would be incurred by corporate headquarters and allocated to each of the company's four sales locations based on number of vehicles sold. Jim was confident that his corporate purchasing manager could negotiate better advertising contracts on a corporate-wide basis than each of the sales managers could on their own. McKinnley budgeted total advertising cost for 2017 to be $1.6 million. He introduced the new plan to his sales managers just before the New Year. The managers had already drawn up their advertising plans for 2017 and the corporate plan would do the same advertising for them as they had planned. Total advertising costs for 2017 were $1,600,000. If the managers had done this same advertising on their own, their advertising costs would be as follows: Actual Number of Cars Advertising Costs in 2017 if Divisions Had Bought the Advertising $ 279,500 473,000 580,500 817,000 $2,150,000 Sales Location Sold in 2017 5,600 1,440 3,200 East West North 5,760 16,000 South The manager of the East sales location, Tom Stevens, was not happy. He complained that the new allocation method was unfair and increased his advertising costs significantly. The East location sold high volumes of low-priced used cars and most of the corporate advertising budget was related to new car sales.

Principles of Cost Accounting

17th Edition

ISBN:9781305087408

Author:Edward J. Vanderbeck, Maria R. Mitchell

Publisher:Edward J. Vanderbeck, Maria R. Mitchell

Chapter10: Cost Analysis For Management Decision Making

Section: Chapter Questions

Problem 18E

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Q.Show the amount of the 2017 advertising cost ($1,600,000) that would be allocated to each of the divisions under the following criteria:

--The stand-alone method if divisions had done their own advertising

Allocation of common costs. Jim Dandy Auto Sales uses all types of media to advertise its prod-
ucts (television, radio, newspaper, Internet, and so on). At the end of 2016, the company president, Jim
McKinnley, decided that all advertising costs would be incurred by corporate headquarters and allocated
to each of the company's four sales locations based on number of vehicles sold. Jim was confident that
his corporate purchasing manager could negotiate better advertising contracts on a corporate-wide basis
than each of the sales managers could on their own. McKinnley budgeted total advertising cost for 2017 to
be $1.6 million. He introduced the new plan to his sales managers just before the New Year. The managers
had already drawn up their advertising plans for 2017 and the corporate plan would do the same advertising
for them as they had planned. Total advertising costs for 2017 were $1,600,000. If the managers had done
this same advertising on their own, their advertising costs would be as follows:
Actual Number of Cars
Advertising Costs in 2017 if Divisions
Had Bought the Advertising
$ 279,500
473,000
580,500
817,000
$2,150,000
Sales Location
Sold in 2017
5,600
1,440
3,200
East
West
North
5,760
16,000
South
The manager of the East sales location, Tom Stevens, was not happy. He complained that the new allocation
method was unfair and increased his advertising costs significantly. The East location sold high volumes of
low-priced used cars and most of the corporate advertising budget was related to new car sales.

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