Professional Documents
Culture Documents
Chap 012
Chap 012
Benefits of Top
Top management
management
Decentralization freed
freed to
to concentrate
concentrate
on
on strategy.
strategy.
Lower-level
Lower-level managers
managers
gain
gain experience
experience inin
decision-making.
decision-making. Decision-making
Decision-making
authority
authority leads
leads to
to
job
job satisfaction.
satisfaction.
Lower-level
Lower-level decisions
decisions
often
often based
based on
on
better
better information.
information.
Lower
Lower level
level managers
managers
can
can respond
respond quickly
quickly
to
to customers.
customers.
McGraw-Hill/Irwin Slide 2
Decentralization in Organizations
May
May be
be aa lack
lack of
of
coordination
coordination among
among
autonomous
autonomous
Lower-level
Lower-level managers
managers managers.
managers.
may
may make
make decisions
decisions
without
without seeing
seeing the
the
“big
“big picture.”
picture.” Disadvantages of
Decentralization
Lower-level
Lower-level manager’s
manager’s
objectives
objectives may
may not
not
be
be those
those of
of the
the May
May bebe difficult
difficult to
to
organization.
organization. spread
spread innovative
innovative ideas
ideas
in
in the
the organization.
organization.
McGraw-Hill/Irwin Slide 3
Cost, Profit, and Investments Centers
Cost
Cost Profit
Profit Investment
Investment
Center
Center Center
Center Center
Center
Cost, profit,
and investment
centers are all
known as Responsibility
Responsibility
Center
Center
responsibility
centers.
McGraw-Hill/Irwin Slide 4
Cost Center
McGraw-Hill/Irwin Slide 5
Profit Center
Revenues
A segment whose
Sales
manager has control
Interest
over both costs and
Other
revenues,
Costs
but no control over
investment funds. Mfg. costs
Commissions
Salaries
Other
McGraw-Hill/Irwin Slide 6
Investment Center
Corporate Headquarters
A segment whose
manager has control
over costs, revenues,
and investments in
operating assets.
McGraw-Hill/Irwin Slide 7
Responsibility Centers
Investment
Centers S u pe r i o r F o o d s
C o r p o r a t e
C o r p o r a t i o n
H e a d q u a r t e r s
P r e s i d e n t a n d C E O
O p e r a t i o n s F i n a n c e L e g a l P e r s o n n
V i c e P r e s i Cd eh ni e t f F I n a n c i Ga l e On fe f ri ca el rC o u Vn is c e e l P r e s
S a l t y S n a c B k es v e r a g e Cs o n f e c t i o n s
P r o d u c t M P a r on dg ue rc t M P a r no ad gu ec r t M a n a g e r
B o t t l i n g WP l aa r n e t h o Du si s e t r i b u t i o n
Cost
Centers
M a n a g e Mr a n a g e Mr a n a g e r
S u pe r i o r F o o d s C o r p o r a t i o n
C o r p o r a t e H e a d q u a r t e r s
P r e s i d e n t a n d C E O
O p e r a t i o n s F i n a n c e L e g a l P e r s o n n
V i c e P r e s i Cd eh ni e t f F I n a n c i Ga l e On fe f ri ca el rC o u Vn is c e e l P r e s
S a l t y S n a c B k es v e r a g e Cs o n f e c t i o n s
P r o d u c t M P a r on dg ue rc t M P a r no ad gu ec r t M a n a g e r
B o t t l i n g WP l aa r n e t h o Du si s e t r i b u t i o n
Profit
M a n a g e Mr a n a g e Mr a n a g e r
Centers
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
organization.
McGraw-Hill/Irwin Slide 9
Responsibility Centers
S u pe r i o r F o o d s C o r p o r a t i o n
C o r p o r a t e H e a d q u a r t e r s
P r e s i d e n t a n d C E O
O p e r a t i o n s F i n a n c e L e g a l P e r s o n n
V i c e P r e s i Cd eh ni e t f F I n a n c i Ga l e On fe f ri ca el rC o u Vn is c e e l P r e s
S a l t y S n a c B k es v e r a g e Cs o n f e c t i o n s
P r o d u c t M P a r on dg ue rc t M P a r no ad gu ec r t M a n a g e r
B o t t l i n g WP l aa r n e t h o Du si s e t r i b u t i o n
Cost
Centers
M a n a g e Mr a n a g e Mr a n a g e r
McGraw-Hill/Irwin Slide 11
Decentralization and Segment Reporting
An Individual Store
Quick Mart
McGraw-Hill/Irwin Slide 12
Superior Foods: Geographic Regions
S u p e r i o r F o o d s C o r p o r a t i o n
$ 5 0 0 , 0 0 0 , 0 0 0
E a s t W e s t M i d w e s t S o u t h
$ 7 5 , 0 0 0 , 0 $ 0 3 0 0 0 , 0 0 0 , 0$ 05 05 , 0 0 0 , 0 $0 70 0 , 0 0 0 ,
O r e g o n W a s h i n g t oC n a l i f o r n Mi a o u n t a i n S t a t
$ 4 5 , 0 0 0 , 0 $0 50 0 , 0 0 0 , 0 $ 0 1 0 2 0 , 0 0 0 , 0$ 08 05 , 0 0 0 , 0 0 0
McGraw-Hill/Irwin Slide 13
Superior Foods: Customer Channel
S u p e r i o r F o o d s C o r p o r a t i o n
$ 5 0 0 , 0 0 0 , 0 0 0
C o n v e n i e n c eS uS p t oe rr em s a r k e W t Ch oh l a e i sn as l e D i s t D r i rb u u g t so tr os r e
$ 8 0 , 0 0 0 , 0 0 0 $ 2 8 0 , 0 0 0 , 0 0 0$ 1 0 0 , 0 0 0 , 0 0 0 $ 4 0 , 0 0 0 , 0 0
S u p e r m a r k eS t u C p h e a r mi n a A r k eS t u C p h e ar mi n a B r k eS t u C p h e ar mi n a C r k e t C h a i n
$ 8 5 , 0 0 0 , 0 0 0 $ 6 5 , 0 0 0 , 0 0 0 $ 9 0 , 0 0 0 , 0 0 0 $ 4 0 , 0 0 0 , 0 0 0
McGraw-Hill/Irwin Slide 14
Keys to Segmented Income Statements
McGraw-Hill/Irwin Slide 15
Identifying Traceable Fixed Costs
No computer No computer
division means . . . division manager.
McGraw-Hill/Irwin Slide 16
Identifying Common Fixed Costs
McGraw-Hill/Irwin Slide 17
Traceable Costs Can Become
Common Costs
Time
McGraw-Hill/Irwin Slide 19
Traceable and Common Costs
Traceable Common
McGraw-Hill/Irwin Slide 20
Activity-Based Costing
Activity-based costing can help identify how costs
shared by more than one segment are traceable to
individual segments.
Assume that three products, 9-inch, 12-inch, and 18-inch pipe, share 10,000
square feet of warehousing space, which is leased at a price of $4 per square
foot.
If the 9-inch, 12-inch, and 18-inch pipes occupy 1,000, 4,000, and 5,000 square
feet, respectively, then ABC can be used to trace the warehousing costs to the
three products as shown.
P ipe P roducts
9-inch 12-inch 18-inch Tota l
W a re house sq. ft. 1,000 4,000 5,000 10,000
Le a se price pe r sq. ft.
$ 4 $ 4 $ 4 $ 4
Tota l le a se cost $ 4,000 $ 16,000 $ 20,000 $ 40,000
McGraw-Hill/Irwin Slide 21
Levels of Segmented Statements
W e b b e r , I n c .
C o m p u t e r DT ie v l ie s v i oi s n i o n
McGraw-Hill/Irwin Slide 22
Levels of Segmented Statements
Our approach to segment reporting uses the
contribution format.
Income Statement Cost
Cost of
of goods
goods
Contribution Margin Format sold
sold consists
consists of
of
Television Division variable
variable
Sales $ 300,000 manufacturing
manufacturing
Variable COGS 120,000 costs.
costs.
Other variable costs 30,000
Fixed
Fixed and
and
Total variable costs 150,000
variable
variable costs
costs
Contribution margin 150,000
are
are listed
listed in
in
Traceable fixed costs 90,000
separate
separate
Division margin $ 60,000
sections.
sections.
McGraw-Hill/Irwin Slide 23
Levels of Segmented Statements
Our approach to segment reporting uses the
contribution format.
Income Statement
Contribution Margin Format Contribution
Contribution margin
margin
Television Division is
is computed
computed byby
Sales $ 300,000 taking
taking sales
sales minus
minus
Variable COGS 120,000 variable
variable costs.
costs.
Other variable costs 30,000
Total variable costs 150,000
Segment
Segment margin
margin
Contribution margin 150,000
is
is Television’s
Television’s
Traceable fixed costs 90,000
contribution
contribution
Division margin $ 60,000
to
to profits.
profits.
McGraw-Hill/Irwin Slide 24
Levels of Segmented Statements
Income Statement
Company Television Computer
Sales $ 500,000 $ 300,000 $ 200,000
Variable costs 230,000 150,000 80,000
CM 270,000 150,000 120,000
Traceable FC 170,000 90,000 80,000
Division margin 100,000 $ 60,000 $ 40,000
Common costs
Net operating
income
McGraw-Hill/Irwin Slide 25
Levels of Segmented Statements
Income Statement
Company Television Computer
Sales $ 500,000 $ 300,000 $ 200,000
Variable costs 230,000 150,000 80,000
CM 270,000 150,000 120,000
Traceable FC 170,000 90,000 80,000
Division margin 100,000 $ 60,000 $ 40,000
Common costs 25,000
Common
Common costs
costs should
should notnot
Net operating
be
be allocated
allocated to
to the
the
income $ 75,000 divisions.
divisions. These
These costs
costs
would
would remain
remain even
even ifif one
one
of
of the
the divisions
divisions were
were
eliminated.
eliminated.
McGraw-Hill/Irwin Slide 26
Traceable Costs Can Become
Common Costs
McGraw-Hill/Irwin Slide 27
Traceable Costs Can Become
Common Costs
Product
Lines
McGraw-Hill/Irwin Slide 28
Traceable Costs Can Become
Common Costs
Income Statement
Television
Division Regular Big Screen
Sales $ 200,000 $ 100,000
Variable costs 95,000 55,000
CM 105,000 45,000
Traceable FC 45,000 35,000
Product line margin $ 60,000 $ 10,000
Common costs
Divisional margin
Fixed
Fixed costs
costs directly
directly traced
traced
to
to the
the Television
Television Division
Division
$80,000
$80,000 ++ $10,000
$10,000 == $90,000
$90,000
McGraw-Hill/Irwin Slide 30
External Reports
The Financial Accounting Standards Board now requires
that companies in the United States include segmented
financial data in their annual reports.
McGraw-Hill/Irwin Slide 31
Omission of Costs
Product Customer
R&D Design Manufacturing Marketing Distribution Service
McGraw-Hill/Irwin Slide 32
Inappropriate Methods of Allocating Costs
Among Segments
Failure to trace
costs directly Inappropriate
allocation base
McGraw-Hill/Irwin Slide 33
Common Costs and Segments
Common costs should not be arbitrarily allocated to segments
based on the rationale that “someone has to cover the
common costs” for two reasons:
1. This practice may make a profitable business segment appear
to be unprofitable.
McGraw-Hill/Irwin Slide 34
Quick Check
Income Statement
Hoagland's
Lakeshore Bar Restaurant
Sales $ 800,000 $ 100,000 $ 700,000
Variable costs 310,000 60,000 250,000
CM 490,000 40,000 450,000
Traceable FC 246,000 26,000 220,000
Segment margin 244,000 $ 14,000 $ 230,000
Common costs 200,000
Profit $ 44,000
McGraw-Hill/Irwin Slide 36
Quick Check
McGraw-Hill/Irwin Slide 37
Quick Check
McGraw-Hill/Irwin Slide 38
Quick Check
McGraw-Hill/Irwin Slide 39
Quick Check
McGraw-Hill/Irwin Slide 40
Allocations of Common Costs
Income Statement
Hoagland's
Lakeshore Bar Restaurant
Sales $ 800,000 $ 100,000 $ 700,000
Variable costs 310,000 60,000 250,000
CM 490,000 40,000 450,000
Traceable FC 246,000 26,000 220,000
Segment margin 244,000 14,000 230,000
Common costs 200,000 20,000 180,000
Profit $ 44,000 $ (6,000) $ 50,000
McGraw-Hill/Irwin Slide 42
Quick Check
Should the bar be eliminated?
a. Yes
b. No The profit was $44,000 before
eliminating the bar. If we eliminate
the bar,
Income profit drops to $30,000!
Statement
Hoagland's
Lakeshore Bar Restaurant
Sales $ 700,000 $ 700,000
Variable costs 250,000 250,000
CM 450,000 450,000
Traceable FC 220,000 220,000
Segment margin 230,000 230,000
Common costs 200,000 200,000
Profit $ 30,000 $ 30,000
McGraw-Hill/Irwin Slide 43
Learning Objective 2
McGraw-Hill/Irwin Slide 44
Return on Investment (ROI) Formula
Income
Incomebefore
before interest
interest
and
and taxes
taxes(EBIT)
(EBIT)
Cash,
Cash, accounts
accountsreceivable,
receivable, inventory,
inventory,
plant
plantand
andequipment,
equipment, and
andother
other
productive
productiveassets.
assets.
McGraw-Hill/Irwin Slide 45
Net Book Value vs. Gross Cost
Acquisition cost
Less: Accumulated depreciation
Net book value
McGraw-Hill/Irwin Slide 46
Understanding ROI
Net operating income
ROI =
Average operating assets
Net operating income
Margin =
Sales
Sales
Turnover =
Average operating
assets
Margin × Turnover
ROI =
McGraw-Hill/Irwin Slide 47
Increasing ROI
McGraw-Hill/Irwin Slide 48
Increasing ROI – An Example
Regal Company reports the following:
Net operating income $ 30,000
Average operating assets $ 200,000
Sales $ 500,000
Operating expenses $ 470,000
McGraw-Hill/Irwin Slide 49
Increasing ROI – An Example
Margin × Turnover
ROI =
ROI = Net operating income × Sales
Sales Average operating assets
McGraw-Hill/Irwin Slide 50
Investing in Operating Assets to Increase
Sales
Assume that Regal's manager invests in a $30,000
piece of equipment that increases sales by
$35,000, while increasing operating expenses
by $15,000.
Regal Company reports the following:
Net operating income $ 50,000
Average operating assets $ 230,000
Sales $ 535,000
Operating expenses $ 485,000
Margin × Turnover
ROI =
ROI = Net operating income × Sales
Sales Average operating assets
ROI
ROI increased
increased from
from 15%
15% to
to 21.8%.
21.8%.
McGraw-Hill/Irwin Slide 52
Criticisms of ROI
McGraw-Hill/Irwin Slide 53
Learning Objective 3
McGraw-Hill/Irwin Slide 54
Residual Income - Another Measure of
Performance
McGraw-Hill/Irwin Slide 55
Calculating Residual Income
The
The Retail
Retail Division
Division of
of Zephyr,
Zephyr, Inc.
Inc. has
has
average
average operating
operating assets
assets of
of $100,000
$100,000 and
and is
is
required
required toto earn
earn aa return
return of
of 20%
20% on
on these
these
assets.
assets.
InIn the
the current
current period,
period, the
the division
division earns
earns
$30,000.
$30,000.
McGraw-Hill/Irwin Slide 57
Residual Income – An Example
McGraw-Hill/Irwin Slide 58
Motivation and Residual Income
Residual income encourages managers to
make profitable investments that would
be rejected by managers using ROI.
McGraw-Hill/Irwin Slide 59
Quick Check
McGraw-Hill/Irwin Slide 60
Quick Check
McGraw-Hill/Irwin Slide 61
Quick Check
McGraw-Hill/Irwin Slide 62
Quick Check
McGraw-Hill/Irwin Slide 63
Quick Check
McGraw-Hill/Irwin Slide 64
Quick Check
McGraw-Hill/Irwin Slide 65
Quick Check
McGraw-Hill/Irwin Slide 66
Quick Check
McGraw-Hill/Irwin Slide 67
Quick Check
McGraw-Hill/Irwin Slide 68
Quick Check
McGraw-Hill/Irwin Slide 69
Divisional Comparisons and Residual
Income
The residual
income approach
has one major
disadvantage.
It cannot be used
to compare the
performance of
divisions of
different sizes.
McGraw-Hill/Irwin Slide 70
Zephyr, Inc. - Continued
Recall the following Assume the following
information for the Retail information for the Wholesale
Division of Zephyr, Inc. Division of Zephyr, Inc.
Retail W holesale
Operating assets $ 100,000 $ 1,000,000
Required rate of return× 20% 20%
Minimum required return $ 20,000 $ 200,000
Retail W holesale
Actual income $ 30,000 $ 220,000
Minimum required return (20,000) (200,000)
Residual income $ 10,000 $ 20,000
McGraw-Hill/Irwin Slide 71
Zephyr, Inc. - Continued
The residual income numbers suggest that the Wholesale Division outperformed
the Retail Division because its residual income is $10,000 higher. However, the
Retail Division earned an ROI of 30% compared to an ROI of 22% for the
Wholesale Division. The Wholesale Division’s residual income is larger than the
Retail Division simply because it is a bigger division.
Retail W holesale
Operating assets $ 100,000 $ 1,000,000
Required rate of return× 20% 20%
Minimum required return $ 20,000 $ 200,000
Retail W holesale
Actual income $ 30,000 $ 220,000
Minimum required return (20,000) (200,000)
Residual income $ 10,000 $ 20,000
McGraw-Hill/Irwin Slide 72
Learning Objective 4
McGraw-Hill/Irwin Slide 73
The Balanced Scorecard
Management
Management translates
translates its
its strategy
strategy into
into
performance
performance measures
measures that
that employees
employees
understand
understand and
and influence.
influence.
Financial Customers
Performance
measures
Internal Learning
business and growth
processes
McGraw-Hill/Irwin Slide 74
The Balanced Scorecard: From
Strategy to Performance Measures
Performance Measures
Financial What are our
Has our financial financial
performance improved? goals?
Financial
Financial measures
measures are are lag
lag indicators
indicators that
that summarize
summarize
the
the results
results of
of past
past actions.
actions. Non-financial
Non-financial measures
measures are
are
leading
leading indicators
indicators of
of future
future financial
financial performance.
performance.
Top
Top managers
managers are
are ordinarily
ordinarily responsible
responsible forfor financial
financial
performance
performance measures
measures –– not
not lower
lower level
level managers.
managers.
Non-financial
Non-financial measures
measures are
are more
more likely
likely to
to be
be
understood
understood and
and controlled
controlled by
by lower
lower level
level managers.
managers.
McGraw-Hill/Irwin Slide 76
The Balanced Scorecard for Individuals
AA personal
personal scorecard
scorecard should
should contain
contain measures
measures that
that can
can be
be
influenced
influenced by
by the
the individual
individual being
being evaluated
evaluated and
and that
that
support
support the
the measures
measures in in the
the overall
overall balanced
balanced scorecard.
scorecard.
McGraw-Hill/Irwin Slide 77
The Balanced Scorecard
McGraw-Hill/Irwin Slide 78
The Balanced Scorecard and Compensation
Incentive compensation should be linked to
balanced scorecard performance
measures.
McGraw-Hill/Irwin Slide 79
The Balanced Scorecard ─ Jaguar Example
Profit
Financial
Contribution per car
Internal
Business Number of Time to
options available install option
Processes
Customer satisfaction
with options Satisfaction
Increases
Number of Time to
options available install option
Employee skills in
installing options
McGraw-Hill/Irwin Slide 82
The Balanced Scorecard ─ Jaguar Example
Profit
Results
Contribution per car Contribution
Increases
Customer satisfaction
with options Satisfaction
Increases
Number of Time to
options available install option Time
Decreases
Employee skills in
installing options
McGraw-Hill/Irwin Slide 83
The Balanced Scorecard ─ Jaguar Example
Results
Profit Profits
Increase
If number
Contribution per car Contribution
of cars sold Increases
and contribution
Cars Sold
per car increase, Number of cars sold
Increases
profits
increase. Customer satisfaction
with options
Number of Time to
options available install option
Employee skills in
installing options
McGraw-Hill/Irwin Slide 84
Transfer Pricing
Appendix 12A
McGraw-Hill/Irwin Slide 86
Three Primary Approaches
McGraw-Hill/Irwin Slide 87
Learning Objective 5
McGraw-Hill/Irwin Slide 88
Negotiated Transfer Prices
McGraw-Hill/Irwin Slide 89
Grocery Storehouse – An Example
McGraw-Hill/Irwin Slide 90
Grocery Storehouse – An Example
The selling division’s (West Coast Plantations) lowest acceptable transfer
price is calculated as:
Variable cost Total contribution margin on lost sales
Transfer Price ≥ +
per unit Number of units transferred
If an outside supplier does not exist, the highest acceptable transfer price
is calculated as:
Transfer Price ≤ Profit to be earned per unit sold (not including the transfer price)
McGraw-Hill/Irwin Slide 91
Grocery Storehouse – An Example
If West Coast Plantations has sufficient idle capacity (3,000 crates) to
satisfy Grocery Mart’s demands (1,000 crates), without sacrificing
sales to other customers, then the lowest and highest possible
transfer prices are computed as follows:
Selling division’s lowest possible transfer price:
$ -
Transfer Price ≥ $10 + = $ 10
1,000
McGraw-Hill/Irwin Slide 95
Transfers at the Cost to the Selling Division
McGraw-Hill/Irwin Slide 96
Transfers at Market Price
McGraw-Hill/Irwin Slide 97
Divisional Autonomy and Suboptimization
The principles of
decentralization suggest
that companies should
grant managers autonomy
to set transfer prices and
to decide whether to sell
internally or externally,
even if this may
occasionally result in
suboptimal decisions.
This way top management
allows subordinates to
control their own destiny.
McGraw-Hill/Irwin Slide 98
Service Department Charges
Appendix 12B
Operating Service
Departments Departments
Do not directly
Carry out central
engage in
purposes of
operating
organization.
activities.
To
To provide
provide operating
operating
To
To encourage
encourage departments
departments with
with
operating
operating departments
departments more
more complete
complete cost
cost
to
to wisely
wisely use
use service
service data
data for
for making
making
department
department resources.
resources. decisions.
decisions.
To
To help
help measure
measure the the To
To create
create an
an incentive
incentive
profitability
profitability of
of for
for service
service
operating
operating departments
departments to to
departments.
departments. operate
operate efficiently.
efficiently.
The
The service
service department
department charges
charges
considered
considered inin this
this appendix
appendix can
can bebe
viewed
viewed as
as aa transfer
transfer price
price that
that is
is
charged
charged for
for services
services provided
provided byby
service
service departments
departments to to operating
operating
departments.
departments.
Service
Departments
$ Operating
Departments
Whenever possible,
variable and fixed
service department costs
should be charged
separately.
Variable service
department costs should be
charged to consuming departments
according to whatever activity
causes the incurrence
of the cost.
Charge
Charge fixed
fixed service
service department
department costs
costs to
to
consuming
consuming departments
departments inin predetermined
predetermined
lump-sum
lump-sum amounts
amounts that
that are
are based
based on
on the
the
consuming
consuming department’s
department’s peak-period
peak-period or
or
long-run
long-run average
average servicing
servicing needs.
needs.
Budgeted variable
and fixed service department
costs should be charged to
operating departments.
Actual hours
Cutting Assembly
Department Department
Variable cost allocation:
$0.60 × 80,000 hours $ 48,000
$0.60 × 40,000 hours $ 24,000
Fixed cost allocation:
Actual hours
Cutting Assembly
Department Department
Variable cost allocation:
$0.60 × 80,000 hours $ 48,000
$0.60 × 40,000 hours $ 24,000
Fixed cost allocation:
60% × $200,000 120,000
40% × $200,000 80,000
Total allocated cost $ 168,000 $ 104,000
Percent of
Peak-Period
Capacity Miles Miles
Hospitals Required Planned Used
Mercy 45% 15,000 16,000
Northside 55% 17,000 17,500
Total 100% 32,000 33,500
How
How much
much ambulance
ambulance service
service cost
cost will
will be
be
allocated
allocated to
to Mercy
Mercy Hospital
Hospital at
at the
the end
end of of the
the
year?
year?
a.
a. $121,200
$121,200
b.
b. $254,400
$254,400
c.
c. $139,500
$139,500
d.
d. $117,000
$117,000
How
How much
much ambulance
ambulance service
service cost
cost will
will be
be
allocated
allocated to to Mercy
Mercy Hospital
Hospital at
at the
the end
end ofof the
the
year?
year?
a.
a. $121,200
$121,200
b.
b. $254,400
$254,400
c. $139,500
c.Variable
$139,500cost allocation:
Mercy Northside
d.
d. $117,000
$117,000
$4.20 × 16,000 miles $ 67,200
$4.20 × 17,500 miles $ 73,500
Fixed cost allocation
45% × $120,000 54,000
55% × $120,000 66,000
Total allocated cost $ 121,200 $ 139,500
Allocating fixed
costs using a variable
allocation base.
Using sales
dollars as an
allocation base. Result
Sales of one department
influence the service
department costs
allocated to other
departments.
Departments
New Used Parts Total
Sales by department $ 1,500,000 $ 900,000 $ 600,000 $ 3,000,000
Percentage of total sales 50% 30% 20% 100%
Allocation of service
department costs $ 40,000 $ 24,000 $ 16,000 $ 80,000
In
In the
the next
next year,
year, the
the manager
manager of of the
the New
New Cars
Cars department
department
increases
increases sales
sales byby $500,000.
$500,000. Sales
Sales inin the
the other
other departments
departments
are
are unchanged.
unchanged. Let’s Let’s allocate
allocate the
the $80,000
$80,000 service
service department
department
cost
cost for
for the
the second
second year
year given
given the
the sales
sales increase.
increase.
McGraw-Hill/Irwin Slide 117
Autos R Us – Second-year Allocation
Departments
New Used Parts Total
Sales by department $ 2,000,000 $ 900,000 $ 600,000 $ 3,500,000
Percentage of total sales 57% 26% 17% 100%
Allocation of service
department costs $ 45,714 $ 20,571 $ 13,714 $ 80,000