Help me answse this accounting question Give arguments for and against allocatin
ID: 2423995 • Letter: H
Question
Help me answse this accounting question
Give arguments for and against allocating all costs of the association to the four divisions.
CASE 6–30 Service Organization; Segment Reporting [LO6–4]
Music Teachers, Inc., is an educational association for music teachers that has 20,000 members. The association operates from a central headquarters but has local membership chapters throughout the United States. Monthly meetings are held by the local chapters to discuss recent developments on topics of interest to music teachers. The association’s journal, Teachers’ Forum, is issued monthly with features about recent developments in the field. The association publishes books and reports and also sponsors professional courses that qualify for continuing professional education credit. The association’s statement of revenues and expenses for the current year is presented below.
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The board of directors of Music Teachers, Inc., has requested that a segmented income statement be prepared showing the contribution of each segment to the association. The association has four segments: Membership Division, Magazine Subscriptions Division, Books and Reports Division, and Continuing Education Division. Mike Doyle has been assigned responsibility for preparing the segmented income statement, and he has gathered the following data prior to its preparation.
Membership dues are $100 per year, of which $20 is considered to cover a one-year subscription to the association’s journal. Other benefits include membership in the association and chapter affiliation. The portion of the dues covering the magazine subscription ($20) should be assigned to the Magazine Subscription Division.
One-year subscriptions to Teachers’ Forum were sold to nonmembers and libraries at $30 per subscription. A total of 2,500 of these subscriptions were sold last year. In addition to subscriptions, the magazine generated $100,000 in advertising revenues. The costs per magazine subscription were $7 for printing and paper and $4 for postage and shipping.
A total of 28,000 technical reports and professional texts were sold by the Books and Reports Division at an average unit selling price of $25. Average costs per publication were $4 for printing and paper and $2 for postage and shipping.
The association offers a variety of continuing education courses to both members and nonmembers. The one-day courses had a tuition cost of $75 each and were attended by 2,400 students. A total of 1,760 students took two-day courses at a tuition cost of $125 for each student. Outside instructors were paid to teach some courses.
Salary costs and space occupied by division follow:
Personnel costs are 25% of salaries in the separate divisions as well as for the corporate staff. The $280,000 in occupancy costs includes $50,000 in rental cost for a warehouse used by the Books and Reports Division for storage purposes.
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Printing and paper costs other than for magazine subscriptions and for books and reports relate to the Continuing Education Division.
General and administrative expenses include costs relating to overall administration of the association as a whole. The company’s corporate staff does some mailing of materials for general administrative purposes.
The expenses that can be traced or assigned to the corporate staff, as well as any other expenses that are not traceable to the segments, will be treated as common costs. It is not necessary to distinguish between variable and fixed costs.
Below is the contribution format segmented income statement for Music Teachers, Inc. This statement should show the segment margin for each division as well as results for the association as a whole.
See the segmented statement on the second following page. Supporting computations for the statement are given below:
1.
Sales:
Membership dues (20,000 × $100)........................
$2,000,000
Assigned to Magazine Subscriptions Division
(20,000 × $20).................................................
400,000
Assigned to Membership Division..........................
$1,600,000
Non-member magazine subscriptions (2,500 × $30)
$ 75,000
Reports and texts (28,000 × $25)..........................
$ 700,000
Continuing education courses:
One-day (2,400 × $75)......................................
$ 180,000
Two-day (1,760 × $125)....................................
220,000
Total revenue.....................................................
$ 400,000
Salary and personnel costs:
Salaries
Personnel Costs (25% of Salaries)
Membership Division....................
$210,000
$ 52,500
Magazine Subscriptions Division....
150,000
37,500
Books and Reports Division..........
300,000
75,000
Continuing Education Division.......
180,000
45,000
Total assigned to divisions............
840,000
210,000
Corporate staff............................
80,000
20,000
Total..........................................
$920,000
$230,000
Some may argue that, except for the $50,000 in rental cost directly attributed to the Books and Reports Division, occupancy costs are common costs that should not be allocated. The correct treatment of the occupancy costs depends on whether they could be avoided in part by eliminating a division. In the solution below, we have assumed they could be avoided.
2.
Occupancy costs ($230,000 allocated + $50,000 direct to the Books and
Reports Division = $280,000):
Allocated to:
Membership Division
($230,000 × 0.2)........................................
$ 46,000
Magazine Subscriptions Division
($230,000 × 0.2)........................................
46,000
Books and Reports Division
($230,000 × 0.3 + $50,000).........................
119,000
Continuing Education Division
($230,000 × 0.2)........................................
46,000
Corporate staff
($230,000 × 0.1)........................................
23,000
Total occupancy costs....................................
$280,000
Printing and paper costs..................................
$320,000
Assigned to:
Magazine Subscriptions Division
(22,500 × $7)..........................................
$157,500
Books and Reports Division
(28,000 × $4)..........................................
112,000
269,500
Remainder—Continuing Education Division....
$ 50,500
Postage and shipping costs..............................
$176,000
Assigned to:
Magazine Subscriptions Division
(22,500 × $4)..........................................
$ 90,000
Books and Reports Division
(28,000 × $2)..........................................
56,000
146,000
Remainder—corporate staff.........................
$ 30,000
Division
Association Total
Membership
Magazine Subscriptions
Books & Reports
Continuing Education
Sales:
Membership dues........................
$2,000,000
$1,600,000
$400,000
Non-member magazine subscriptions............................
75,000
75,000
Advertising..................................
100,000
100,000
Reports and texts........................
700,000
$700,000
Continuing education courses........
400,000
$400,000
Total revenues.............................
3,275,000
1,600,000
575,000
700,000
400,000
Expenses traceable to segments:
Salaries......................................
840,000
210,000
150,000
300,000
180,000
Personnel costs...........................
210,000
52,500
37,500
75,000
45,000
Occupancy costs..........................
257,000
46,000
46,000
119,000
46,000
Reimbursement of member costs to local chapters..............................
600,000
600,000
Other membership services...........
500,000
500,000
Printing and paper.......................
320,000
157,500
112,000
50,500
Postage and shipping...................
146,000
90,000
56,000
Instructors’ fees..........................
80,000
80,000
Total traceable expenses...............
2,953,000
1,408,500
481,000
662,000
401,500
Division segment margin.................
322,000
$ 191,500
$94,000
$ 38,000
$(1,500)
Division
Association Total
Membership
Magazine Subscriptions
Books & Reports
Continuing Education
Division segment margin.................
322,000
$ 191,500
$94,000
$ 38,000
$(1,500)
Common expenses not traceable to divisions:
Salaries—corporate staff...............
80,000
Personnel costs...........................
20,000
Occupancy costs..........................
23,000
Postage and shipping...................
30,000
General and administrative...........
38,000
Total common expenses..................
191,000
Excess of revenues over expenses...
$ 131,000
Sales:
Membership dues (20,000 × $100)........................
$2,000,000
Assigned to Magazine Subscriptions Division
(20,000 × $20).................................................
400,000
Assigned to Membership Division..........................
$1,600,000
Non-member magazine subscriptions (2,500 × $30)
$ 75,000
Reports and texts (28,000 × $25)..........................
$ 700,000
Continuing education courses:
One-day (2,400 × $75)......................................
$ 180,000
Two-day (1,760 × $125)....................................
220,000
Total revenue.....................................................
$ 400,000
Music Teachers, Inc. Statement of Revenues and Expenses For the Year Ended November 30 Expenses 920,000 230,000 280,000 600,000 500,000 320,000 176,000 80,000 38,000 Reimbursement of member costs to local chapters. . Postage and ship ping . Excess of revenues over expenses . . . . . .. . _ . . . . . . . . . . . $ 131,000Explanation / Answer
Answer: While we do not favor the allocation of common costs to segments, the reason most often given for this practice is that segment managers need to be aware of the fact that common costs exist and that they must be covered.
Arguments against allocation of common costs include:
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