Management of Children Are Precious (CAP), an operator of day-care facilities, w

Question

Management of Children Are Precious (CAP), an operator of day-care facilities, wants the company's profit to be subdivided by center. The firm's accountant has provided the following data:

CAP's advertising, which is handled by the home office, is not reflected in the preceding figures and amounted to $60,000.

If advertising expense were allocated to centers based on actual center profitability, the amount of advertising expense allocated to the Irvine center would be closest to?

and

Assume that management used the allocation base that is most influenced by advertising effort and consistent with sound managerial accounting practices. How much advertising would be allocated to the Irvine center?

Explanation / Answer

Centre Actual Revenue Budgeted Revenue Actual Direct Cost Budgeted Direct Cost Actual Profit w/o Advertsisng Budgeted Profit w/o Advertisisng Down Town                     340,200               320,000           300,000                  300,000               40,200             20,000 Irvine                     534,600               560,000           440,000                  510,000               94,600             50,000 H Beach                     745,200               720,000           740,000                  690,000                  5,200             30,000 Total                 1,620,000            1,600,000       1,480,000              1,500,000             140,000           100,000 Centre Actual Profit w/o Advertising % wieghtage Allocation of Advertising cost Down Town                       40,200 28.71%             17,229 Irvine                       94,600 67.57%             40,543 H Beach                          5,200 3.71%                2,229 Total                     140,000 100.00%             60,000 So Advertising cost allocated to Irvine would be $40,543 If advertising cost allocated on the basis of efforts , then the cost should be allocated on the basis of actual revenue Allocation on the basis of revenue Centre Actual Revenue % Weightage Alloacated advertising cost Down Town                     340,200 21.00%             12,600 Irvine                     534,600 33.00%             19,800 H Beach                     745,200 46.00%             27,600 Total                 1,620,000 100%             60,000 So Advertising cost allocated to Irvine on the basis of revenue would be $19,800

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