Chapter 16 - Homework2

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1/28/24, 10:23 AM Chapter 16 - Homework-nation Wells https://tdx.acs.pearsonprd.tech/api/v1/print/highered 1/4 Student: nation Wells Date: 01/28/24 Instructor: Fabian Baapogmah Course: BAC 302 Cost Accounting II Spring 2024 (1) Assignment: Chapter 16 - Homework Dandy Auto Sales uses different media to advertise its products (television, radio, newspaper, Internet, and so on). At the end of , the company president, , decided that corporate headquarters would negotiate and pay for all advertising costs and allocate these costs to each of the company's four sales locations based on number of vehicles sold. Doug 2019 Doug Douglas (Click the icon to view the advertising information.) 1 If managers had done the same advertising on their own, their advertising costs and the actual number of cars sold would be as follows: (Click the icon to view the data.) 2 (Click the icon to view information about the east sales location.) 3 Read the requirements . 4 Requirement 1. Show the amount of the advertising cost ( ) that would be allocated to each of the divisions under the following criteria: (a) allocation method based on actual number of cars sold, (b) the stand-alone method based on the amounts divisions would have spent on their own advertising, (c) theincremental-allocation method, with divisions ranked on the basis of dollars they would have spent on advertising in . 2020 $1,500,000 Douglas' 2020 The goal of these methods is to allocate common costs to each user in a reasonable way. Let's review each of the three methods: 5 allocation method determines the weights for cost allocation based on number of cars sold. Douglas' The stand-alone cost-allocation method determines the weights for cost allocation by considering each user of the cost as a separate entity. The incremental cost-allocation method ranks the individual users of a cost object in the order of users most responsible for the common cost and then uses this ranking to allocate cost among those users. The first-ranked user of the cost object is the primary user and is allocated costs up to the costs of the primary user as a stand-alone user. The second-ranked user is the first incremental user and is allocated the additional cost that arises from two users instead of only the primary user. We will begin by allocating the advertising cost using (a) allocation method based on number of cars sold. This method determines the weights for cost allocation based on the ratio of cars sold in each division to the total cars sold. Complete the allocation using the table below. (Do not round intermediary calculations. Round the final answer to the nearest whole dollar.) $1,500,000 Douglas' Actual number of Total number of Budgeted cost cars sold in 2020 ÷ cars sold in 2020 × of advertising = Allocation East 3,410 ÷ 11,000 × 1,500,000 $ = 465,000 $ West 1,100 ÷ 11,000 × 1,500,000 $ = 150,000 $ North 2,420 ÷ 11,000 × 1,500,000 $ = 330,000 $ South 4,070 ÷ 11,000 × 1,500,000 $ = 555,000 $ Total 1,500,000 $ Next we will allocate the advertising cost using (b) the stand-alone method based on the amounts divisions would have spent on their own advertising. Recall that this method determines the weights for cost allocation by considering each user of the cost as a separate entity. Therefore, our calculations will weight the cost allocation on the basis of the budgeted cost of advertising in . Complete the allocation using the table below. (Round your answer to the nearest whole dollar.) $1,500,000 2020 Actual advertising Total Budgeted cost (stand-alone) cost ÷ advertising costs × of advertising = Allocation East 192,600 $ ÷ 2,140,000 $ × 1,500,000 $ = 135,000 $ West 556,400 $ ÷ 2,140,000 $ × 1,500,000 $ = 390,000 $ North 577,800 $ ÷ 2,140,000 $ × 1,500,000 $ = 405,000 $ South 813,200 $ ÷ 2,140,000 $ × 1,500,000 $ = 570,000 $ Total 1,500,000 $ Now we will allocate the advertising cost using (c) the incremental-allocation method, with divisions ranked on the basis of dollars spent on advertising in . $1,500,000 2020 Recall that the primary user is allocated all of the costs up to the costs of the service they use (as a stand-alone user). Any "left over" costs are then assigned to the incremental user. In our example, the divisions are ranked on the basis of dollars proposed to be spent on advertising in . Begin by ordering the divisions from highest to lowest in terms of advertising dollars spent. 2020

1/28/24, 10:23 AM Chapter 16 - Homework-nation Wells https://tdx.acs.pearsonprd.tech/api/v1/print/highered 2/4 1: More Info 2: Data Table Sales Location South North West East Let's begin the incremental-allocation method by allocating the ( ) budgeted advertising cost to the divisions with the highest proposed advertising cost. We know that the South incurred the highest cost of $ . Therefore, the South will be allocated a cost of $ . The "leftover costs" will then be assigned first to the North. Remember, the allocation to the North will not exceed the advertising cost incurred in the North of $ . Calculate the allocation to the South and North divisions and calculate the cumulative costs allocated. $1,500,000 2020 2019 813,200 813,200 2020 577,800 Cost Cumulative Costs Sales Location Allocated Allocated South 813,200 $ 813,200 $ North 577,800 1,391,000 West East Now continue the incremental-allocation method by allocating the remainder of the ( ) advertising cost to the divisions with the lower advertising costs. At this point a total of has been allocated to the South and the North divisions. The remainder of the costs will now be allocated to the division with the next highest costs (the West) up to the advertising cost incurred in the West. If any costs remain, they will then be allocated to the East. Complete the allocation now. (Enter a "0" for amounts with a zero value.) $1,500,000 2020 2020 $1,391,000 6 2020 Cost Cumulative Costs Sales Location Allocated Allocated South 813,200 $ 813,200 North 577,800 1,391,000 West 109,000 1,500,000 East 0 1,500,000 1,500,000 $ Requirement 2. Which method do you think is most equitable to the divisional sales managers? What other options might President have for allocating the advertising costs? Doug Douglas In this situation, the best method would be the method that allocates the same relative proportion of advertising costs to actual spending. The sales managers would likely not consider the incremental method fair because the locations with the higher advertising costs would be subsidizing the locations with the lower advertising costs (especially the West location, which would pay nothing in advertising). If it is true what the East sales manager says that most of the advertising cost is for new car sales and not used car sales (the majority of the East location's business) then method of allocating costs based on number of cars sold, would be unfair especially to East, which would pay of the in total advertising cost. Douglas' $465,000 $1,500,000 What other option(s) might President have for allocating the advertising costs? Doug Douglas Again, if it is true what the East sales manager says that most of the advertising cost is for new car sales and not used car sales then should devise a method that takes into consideration the advertising costs for both new and used cars. Douglas The managers had already drawn up their advertising plans for so the corporate plan would do the same advertising for them as they had planned. budgeted million of total advertising cost for , which was also the actual advertising costs in . 2020 Douglas $1.5 2020 2020

1/28/24, 10:23 AM Chapter 16 - Homework-nation Wells https://tdx.acs.pearsonprd.tech/api/v1/print/highered 3/4 3: More Info 4: Requirements 5: Definition 6: Definition Sales Location Actual Number of Cars Sold in 2020 Advertising Costs in 2020 if Divisions Had Bought the Advertising East 3,410 192,600 $ West 1,100 556,400 North 2,420 577,800 South 4,070 813,200 Total 11,000 2,140,000 $ The manager of the East sales location, , 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. Joe Samson 1. Show the amount of the advertising cost ( ) that would be allocated to each of the divisions under the following criteria: 2020 $1,500,000 a. allocation method based on actual number of cars sold Douglas' b. The stand-alone method based on the amounts divisions would have spent on their own advertising c. The incremental-allocation method, with divisions ranked on the basis of dollars they would have spent on advertising in 2020 2. Which method do you think is most equitable to the divisional sales managers? What other options might President have for allocating the advertising costs? Doug Douglas A common cost is a cost of operating a facility, activity, or like cost object that is shared by two or more users. Common costs exist because each user obtains a lower cost by sharing than the separate cost that would result if such user were an independent entity. Remainder = $1,500,000 − $1,391,000 = ?

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1/28/24, 10:23 AM Chapter 16 - Homework-nation Wells https://tdx.acs.pearsonprd.tech/api/v1/print/highered 4/4 YOU ANSWERED: Actual number of Total number of Budgeted cost cars sold in 2020 ÷ cars sold in 2020 × of advertising = Allocation East nothing ÷ nothing × nothing = nothing West nothing ÷ nothing × nothing = nothing North nothing ÷ nothing × nothing = nothing South nothing ÷ nothing × nothing = nothing Total nothing Actual advertising Total Budgeted cost (stand-alone) cost ÷ advertising costs × of advertising = Allocation East nothing ÷ nothing × 1,500,000 $ = nothing West nothing ÷ nothing × 1,500,000 $ = nothing North nothing ÷ nothing × 1,500,000 $ = nothing South nothing ÷ nothing × 1,500,000 $ = nothing Total nothing Sales Location nothing nothing nothing nothing Cost Cumulative Costs Sales Location Allocated Allocated South nothing nothing North nothing nothing West East Cost Cumulative Costs Sales Location Allocated Allocated South 813,200 $ 813,200 North 577,800 1,391,000 West nothing nothing East nothing nothing nothing