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Welcome Inns is a chain of motels serving business travelers in New Mexico and southwest Texas. The chain has grown from one motel several years ago to five motels. In 20x1, the owner of the company decided to set up an internal Accounting Department to centralize control of financial information. (Previously, local CPAs handled each motel’s bookkeeping and financial reporting.) The accounting office was opened in January 20x1 by renting space adjacent to corporate headquarters in Ruidoso, New Mexico. All motels have been supplied with personal computers and internet access to transfer information to central accounting on a daily basis. The Accounting Department has budgeted fixed costs of $135,000 per year. Variable costs are budgeted at $20 per hour. In 20x1, actual cost for the Accounting Department was $223,000. Further information is as follows: Required: 1. Suppose the total actual costs of the Accounting Department are allocated on the basis of 20x1 sales revenue. How much will be allocated to each motel? 2. Suppose that Welcome Inns views 20x0 sales figures as a proxy for budgeted capacity of the motels. Thus, fixed Accounting Department costs are allocated on the basis of 20x0 sales, and variable costs are allocated according to 20x1 usage multiplied by the variable rate. How much Accounting Department cost will be allocated to each motel? 3. Comment on the two allocation schemes. Which motels would prefer the method in Requirement 1? The method in Requirement 2? Explain.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 7, Problem 38P
Textbook Problem
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Welcome Inns is a chain of motels serving business travelers in New Mexico and southwest Texas. The chain has grown from one motel several years ago to five motels. In 20x1, the owner of the company decided to set up an internal Accounting Department to centralize control of financial information. (Previously, local CPAs handled each motel’s bookkeeping and financial reporting.) The accounting office was opened in January 20x1 by renting space adjacent to corporate headquarters in Ruidoso, New Mexico. All motels have been supplied with personal computers and internet access to transfer information to central accounting on a daily basis.

The Accounting Department has budgeted fixed costs of $135,000 per year. Variable costs are budgeted at $20 per hour. In 20x1, actual cost for the Accounting Department was $223,000. Further information is as follows:

Chapter 7, Problem 38P, Welcome Inns is a chain of motels serving business travelers in New Mexico and southwest Texas. The

Required:

  1. 1. Suppose the total actual costs of the Accounting Department are allocated on the basis of 20x1 sales revenue. How much will be allocated to each motel?
  2. 2. Suppose that Welcome Inns views 20x0 sales figures as a proxy for budgeted capacity of the motels. Thus, fixed Accounting Department costs are allocated on the basis of 20x0 sales, and variable costs are allocated according to 20x1 usage multiplied by the variable rate. How much Accounting Department cost will be allocated to each motel?
  3. 3. Comment on the two allocation schemes. Which motels would prefer the method in Requirement 1? The method in Requirement 2? Explain.

1.

To determine

Calculate the cost allocated to each motel during on the basis of 20x1 models.

Explanation of Solution

Cost Allocation: The process of assigning the cost to the cost object is cost allocation. The cost allocation is done by the accountant to allocate the manufacturing overhead cost to different divisions.

Calculate the cost allocated to each motel:

MotelsActual Revenues÷Total Revenues×Actual cost=

Allocation of

cost to each motel

Ruidoso$420,000  (1)$2,800,000  $223,000  $33,450
Roswell$588,000  (1)$2,800,000  $223,000  $46,830
Santa Rosa$364,000  (1)$2,800,000  $223,000  $28,990
El Paso$728,000  (1)$2,800,000  $223,000  $57,980
Albuquerque$700,000  (1)$2,800,000  $223,000  $55,750

Table (1)

Working note:

(1...

2.

To determine

Calculate the accounting department cost that will be allocated to each motel on the basis of 20x0 sales and variable costs are allocated according to 20x1 usage multiplied by the variable rate.

3.

To determine

Comment on the two allocation schemes and state the method preferred in requirement 1 and the method preferred in requirement 2.

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Chapter 7 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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