Konig Enterprises, Ltd., owns and operates three restaurants in Vancouver, B.C.
ID: 2513851 • Letter: K
Question
Konig Enterprises, Ltd., owns and operates three restaurants in Vancouver, B.C. The company allocates its fixed administrative expenses to the three restaurants on the basis of sales dollars. During 2008, the fixed administrative expenses totaled $2.000,000. These expenses were allocated as follows Restaurants Rick's Harborside $16,000,000 $15,000,000 $9,000,000 $40,000,000 Imperial Garden Ginger Wok Total Total sales-2008 Percentage of total sales Allocation (baced on the 40% 37.5% 22.5% 100% above percentages).. $800,000 $750,000 $450,000 $2,000,000 During 2009, the following year, the Imperial Garden restaurant increased its sales by $10 million. The sales levels in the other two restaurants remained unchanged. The company's 2009 sales data were as follows Restaurants Rick's Harborside $16,000,000 $25,000,000 $9,000,000 $50,000,000 Imperial Garden Ginger Wok Total Total sales--2009 Percentage of total sales. 32% 50% 18% 100% Fixed administrative expenses remained unchanged at $2,000,000 during 2009 Required: I. Using sales dollars as an allocation base, show the allocation of the fixed administrative expenses among the three restaurants for 2009 Compare your allocation from (1) above to the allocation for 2008. As the manager of the Imperial Garden, how would you feel about the amount that has been charged to you for 2009? Comment on the usefulness of sales dollars as an allocation base. 2. 3.Explanation / Answer
Requirement-1 Allocation of Fixed Expense on Proportion of Sales for 2009 Rock's Harborside Imerial Garden Ginger Work Total Sales $16,000,000 $25,000,000 $9,000,000 $50,000,000 Fixed Administrative Expense for 2009 $640,000 $1,000,000 $360,000 $2,000,000 ($2,000,000 allocated to Proportion of Sales 16:25:9) Requirement -2 : Computation of amount that has been Charged for 2009 Rock's Harborside Imerial Garden Ginger Work Total Fixed Administrative Expense for 2008 $800,000 $750,000 $450,000 $2,000,000 ($2,000,000 allocated to Proportion of Sales 16:15:9) Fixed Administrative Expense in 2009 $640,000 $1,000,000 $360,000 $2,000,000 Increase/(Decrease) in 2009 -$160,000 $250,000 -$90,000 $0 Cost allocation to a departmnet will be affected by the sales in other departmnet . The department with great sales will be allocated the greatest amount of Cost. However, Sales dollar is not ordinarily a good base for allocating fixed cost.
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