Chapter 24, Problem 2E

To determine

Introduction:-

Allocation of expenses refers to bifurcation of expenses based on service or support on the basis of percentage of expense in each department when compared to the total expense of the company. In this answer, we will learn how to allocate the cost based on departmental sales; square footage occupied; and number of advertisements.
Allocation of cost based on departmental sales is computed on the percentages of contribution made by each department when compared to the total revenue earned through sales. In the same way, expense incurred on advertising is computed on the basis of percentage of total advertisement used for each department and the cost incurred on square footage occupied is computed on the percentage of area occupied by each department when compared to the total area.

To Determine:-

(1) Departmental expense allocation spreadsheet for Marathon Running Shop
(2) Direct expenses to each of the four departments.
(3) The $64,000 of utilities expense to the four departments on the basis of floor space occupied.
(4) The advertising department’s expenses to the two operating departments on the basis of the number of ads placed that promoted a department’s products, and
(5) The administrative department’s expenses to the two operating departments based on the amount of sales.

Answer to Problem 2E

Solution:-

(1) Department-wise total expense allocation for Marathon Running Shop

Departments	Shoes (in $)	Clothing (in $)
Direct Expenses	103000	15000
Utilities	32640	19840
Advertising	17340	5780
Administrative	24492	6908
Total (in $)	177472	47528

(2) Direct expenses allocation to each department

Department	Direct Expenses (in $)
Advertising	18000
Administrative	25000
Shoes	103000
Clothing	15000
Total (in $)	161000

(3) Allocation of Utilities expense of $64000

Particulars	%	Allocation of Expense
Advertising	8	5120
Administrative	10	6400
Shoes	51	32640
Clothing	31	19840
Total (in $)	100	64000

Therefore , the total cost of the service department
Advertising Cost = $18000+ $5120 = $23120
Administrative cost= $25,000+$6140 =$31,400

(4) Allocation of Advertising expenses

Particulars	%	Allocation of expense(in $)
Shoes	75	17340
Clothing	25	5780
Total (in $)	100	23120

(5) Allocation of Administrative expenses based on the percentage on sales:

Particulars	%	Allocation of expense(in $)
Shoes	78	24492
Clothing	22	6908
Total (in $)	100	31400

Explanation of Solution

Explanation:-

(1) By putting the calculated values, we get the allocation of total expenses departments wise.

(2) Direct expenses allocation to each department is the given data.

Department	Direct Expenses (in $)
Advertising	18000
Administrative	25000
Shoes	103000
Clothing	15000
Total (in $)	161000

(3) Allocation of Utilities expenses is based on floor space occupied

Particulars	Area in Square feet	%
Advertising	1120	8	1120/14000
Administrative	1400	10	1400/14000
Shoes	7140	51	7140/14000
Clothing	4340	31	4340/14000
Total	14000	100

Now, we need to take these percentages and allocate the expense of $64000.

Particulars	%	Allocation of Expense
Advertising	8	5120	64000*8/100
Administrative	10	6400	64000*10/100
Shoes	51	32640	64000*51/100
Clothing	31	19840	64000*31/100
Total	100	64000

Total cost of the service department
Advertising Cost = $18000 + $5120 = $23120
Administrative cost= $25,000+$6400 =$31,400

(4) Allocation of Advertising expenses:

Particular	Number of Advertisements	%
Shoes	90	75	90/120
Clothes	30	25	30/120

Now we need to take these percentages and allocate expense of $23120

Particulars	%	Allocation of expense
Shoes	75	17340	23120*75/100
Clothing	25	5780	23120*25/100
Total (in $)	100	23120

(5) Allocation of Administrative expenses based on the percentage on sales:

Particular	Sales	%
Shoes	273000	78	273000/350000
Clothes	77000	22	77000/350000
Total	350000	100

Now, we need to take these percentages and allocate expense of $31400

Particulars	%	Allocation of expense
Shoes	78	24492	31400*78/100
Clothing	22	6908	31400*22/100
Total (in $)	100	31400