Connect 2-Semester Access Card for Fundamental Accounting Principles
Connect 2-Semester Access Card for Fundamental Accounting Principles
22nd Edition
ISBN: 9780077632755
Author: John Wild
Publisher: McGraw-Hill Education
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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.

Expert Solution & Answer
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Answer to Problem 2E

Solution:-

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

    DepartmentsShoes (in $)Clothing (in $)
    Direct Expenses
    103000
    15000
    Utilities
    32640
    19840
    Advertising
    17340
    5780
    Administrative
    24492
    6908
    Total (in $)17747247528



    (2) Direct expenses allocation to each department

    DepartmentDirect 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 $)10064000

    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 $)10023120

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

    Particulars%Allocation of expense(in $)
    Shoes
    78
    24492
    Clothing
    22
    6908
    Total (in $)10031400

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.

    DepartmentDirect 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
     

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Chapter 24 Solutions

Connect 2-Semester Access Card for Fundamental Accounting Principles

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