this needs to be answered with about 300 words or more keep under 500 words Brad
ID: 2755039 • Letter: T
Question
this needs to be answered with about 300 words or more keep under 500 words
Brad’s company, an eastern based firm, is going through tough times. Downsizing is the only way to keep the company from going bankrupt. Brad has been given the assignment to eliminate an unprofitable region. His analysis has shown that the southwest region has a positive contribution margin but a net loss due to fixed costs. The western region has a positive contribution margin and a net loss. The eastern region has a positive contribution margin and a net income. The northeastern region has a positive contribution margin but a net loss. Brad further discovers that the net losses of the western and southwestern regions are due to fixed costs. Further investigation finds that the fixed costs can be separated by region costs and corporate costs. In Brad’s investigation, the eastern region, though having all the costs of a corporate office, has lower fixed costs, making it a profitable region. Brad finds that Joe Black, the manager of the eastern region, has decided to allocate all the corporate office expenses to the other three divisions to make his region appear more profitable. More analysis indicates that if the corporate offices are allocated evenly to all four regions, the eastern region would have a net loss and the other regions would have a slight net income. What should Brad do? Should Joe have the ability to allocate costs to other regions?
Explanation / Answer
southwest region has a positive contribution margin but a net loss due to fixed costs.
The western region has a positive contribution margin and a net loss
eastern region has a positive contribution margin and a net income.
northeastern region has a positive contribution margin but a net loss
the manager of the eastern region, has decided to allocate all the corporate office expenses to the other three divisions to make his region appear more profitable, cost allocation of corporate offices should be done on some reasonable basis for eg: labour hours or revenue generated etc and the manager of any region must not have authority to allocate the cost ot any other region, if the corporate offices are allocated evenly to all four regions, the eastern region would have a net loss and the other regions would have a slight net income. hence Eastern region can be eliminated by Brad.
Explanation:
Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department.The very term "allocation" implies that there is no overly precise method available for charging a cost to a cost object, so the allocating entity is using an approximate method for doing so. Thus, you may continue to refine the basis upon which you allocate costs, using such allocation bases as square footage, headcount, cost of assets employed, or (as in the example) electricity usage. The goal of whichever cost allocation method you use is to either spread the cost in the fairest way possible, or to do so in a way that impacts the behavior patterns of the cost objects. Thus, an allocation method based on headcount might drive department managers to reduce their headcount or to outsource functions to third parties.
An entirely justifiable reason for not allocating costs is that no cost should be charged that the recipient has no control over. In such a situation, the entity simply includes the unallocated cost in the company's entire cost of doing business. Any profit generated by the departments contributes toward paying for the unallocated cost.
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