Problem 1 ABC Sports Company has two service departments (advertising and admini
ID: 2483007 • Letter: P
Question
Problem 1
ABC Sports Company has two service departments (advertising and administrative) and two operating departments (sports equipment and clothing). During 2008, the departments had the following direct expenses and occupied the following floor space.
Department
Direct Expenses
Square Feet
Advertising
$22,000
1,200
Administrative
28,000
1,550
Sports equipment
122,000
8,250
Clothing
18,000
4,000
Advertising department developed and distributed 140 ads during the year (84 promoted sports equipment and 56 promoted clothing).
The store sold $475,000 of merchandise during the year ($370,500 sports equipment and $104,500 clothing).
The utilities expense of $84,000 is an indirect expense of all departments.
Required:
1.Prepare a departmental expense allocation spreadsheet for ABC Sports Company.
2.The spreadsheet should assign:
a.Direct expenses to each of the four departments,
b.The $84,000 of utilities expense to the four departments on the basis of floor space occupied,
c.The advertising department’s expense to the two operating departments on the basis of the number of ads placed that promoted a department’s products, and
d.The administrative department’s expenses to the two operating departments based on the amount of sales.
3.Provide supporting computations for the expense allocations.
Department
Direct Expenses
Square Feet
Advertising
$22,000
1,200
Administrative
28,000
1,550
Sports equipment
122,000
8,250
Clothing
18,000
4,000
Explanation / Answer
This is pure question of cost allocation of service departments to operating departments. Reason for such allocation is that opearting departmenst are the one which earn revenue and by proper allocation right profit and loss will be calculated
Utilities cost will be distributed first, and then 2service departments cost will be allocated to 2 operating departments
We summarize as follows Department Advertising Administrative Sports equipment Clothing Direct Expense 22000 28000 122000 18000 Utility expense = 84000 allocated to 4 departments on basis of floor area (1200: 1550: 8250: 4000) 6720 8680 46200 22400 Sub total 28720 36680 168200 40400 Allocation of Advertising department cost -28720 17232 11488 ( sports equipment : clothing) (84 : 56 ) as per ads developed Allocation of administrative cost -36680 28610 8070 ( sports equipment : clothing) (370500 : 104500) as per sales Total expense 0 0 214042 59958Related Questions
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