Allocation of indirect costs to various departments can alter the departmental p

Question

Allocation of indirect costs to various departments can alter the departmental profit. Jacobs Company manufactures plates for drum brakes. To make the brake plate, three departments are required: stamping, plating, and packaging. At Jacobs, each department manager is eligible for a bonus based on departmental profit. You are the manager of the stamping department. Top management has given you the responsibility of assigning the indirect costs to each department. Stamping has higher material costs whereas plating has higher labor costs. You are to propose an allocation methodology that is fair to all department managers In order to understand the financial impact on each department, management will create a spreadsheet that assigns indirect expenses to the various departments (in this case: (A) Stam methodology ping (e) Plating (C) Packaging), based upon an accepted allocation The first step in the process is to complete the worksheet for Jacobs Company by entering the percentage allocations and subsequently preparing the corresponding Excel formulas to ensure all expenses are allocated. Click here to open the spreadsheet. in addition, as the manager of the Stamping Department you will also need to support your approach / logic. Within the Discussion Board please provide insight / reasoning as to why you allocated each expense in the manner you did. Professor's Discussion Points You do not need to upload your spreadsheet, but you should state your allocation in the post. There are no right or wrong answers as there are multiple approaches to this week's discussion. Ultimately, what allocation seems most fair? You can assume facts if you state them in your post. .

Explanation / Answer

1) Insurance expenses:

First it needs to be found out that to which item this insurance expense belongs to. If it is for fixed assets, e.g.Building, then floor size occupied by each department will be the basis of allocation.

2) Rent expense

Floor size occupied by each department should be the basis of allocation as rent is directly related to the space occupied.

3) Utilities expense

Utility expense is a combination of various expenses like electricity, water, gas etc.

Since it is used by all the departments for varied reasons but not directly in the production, it should be allocated based on the number of employees employed in each department.

4) Office salaries expenses

Since it is used by all the departments for varied reasons but not directly in the production, it should be allocated based on the number of employees employed in each department.

5) Other office expenses

Since there is no direct relation, it should be allocated based on the contribution made by each department in total COGS.

6) Uncollectible accounts expense

Based on the contribution made by each department in total COGS.

7) Depreciation expense

Floor size occupied by each department should be the basis of allocation

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