Week 2 Master

Week 2 Master - Week2Master 14-18 (30 min.) Cost allocation...

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Week 2 Master 14-18 (30 min.) Cost allocation to divisions. 1. Hotel Restaurant Casino Rembrandt Revenue $16,425,000 $5,256,000 $12,340,000 $34,021,000 Direct costs 9,819,260 3,749,172 4,248,768 17,817,200 Segment margin $ 6,605,740 $1,506,828 $ 8,091,232 16,203,800 Fixed overhead costs 14,550,000 Income before taxes $ 1,653,800 Segment margin % 40.22% 28.67% 65.57% 2. Hotel Restaurant Casino Rembrandt Direct costs $9 , 819 , 260 $3 , 749 , 172 $4 , 248 , 768 $17 , 817 , 200 Direct cost % 55.11% 21.04% 23.85% 100.00% Square footage 80,000 16,000 64,000 160,000 Square footage % 50.00% 10.00% 40.00% 100.00% Number of employees 200 50 250 500 Number of employees % 40.00% 10.00% 50.00% 100.00% A: Cost allocation based on direct costs: Hotel Restaurant Casino Rembrandt Revenue $16,425,000 $ 5,256,000 $12,340,000 $34,021,000
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Direct costs 9,819,260 3,749,172 4,248,768 17,817,200 Segment margin 6,605,740 1,506,828 8,091,232 16,203,800 Allocated fixed overhead costs 8,018,505 3,061,320 3,470,175 14,550,000 Segment pre-tax income $ (1,412,765 ) $(1,554,492 ) $ 4,621,057 $ 1,653,800 Segment pre-tax income % of rev. -8.60% -29.58% 37.45% B: Cost allocatio n based on floor space: Hotel Restaurant Casino Rembrandt Allocated fixed overhead costs $ 7,275,000 $ 1,455,000 $ 5,820,000 $14,550,000 Segment pre-tax income $ (669,260) $ 51,828 $ 2,271,232 $ 1,653,800 Segment pre- tax income % of rev. -4.07% 0.99% 18.41% C: Cost allocati on based on numbe r of employ ees Hotel Restaurant Casino Rembrandt Allocated fixed overhead costs $ 5,820,000 $ 1,455,000 $ 7,275,000 $14,550,000 Segment pre- tax income $ 785,740 $ 51,828 $ 816,232 $ 1,653,800 Segment pre- tax income % of rev. 4.78% 0.99% 6.61%
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3. Requirement 2 shows the dramatic effect of the choice of cost allocation base on segment pre-tax income as a percentage of revenues: Pre-tax Income Percentage Allocation Base Hotel Restaurant Casino Direct costs –8.60% –29.58% 37.45% Floor space –4.07 0.99 18.41 Number of employees 4.78 0.99 6.61 The decision context should guide (a) whether costs should be allocated, and (b) the preferred cost allocation base. Decisions about, say, performance measurement, may be made on a combination of financial and nonfinancial measures. It may well be that Rembrandt may prefer to exclude allocated costs from the financial measures to reduce areas of dispute. Where cost allocation is required, the cause-and-effect and benefits-received criteria are recommended in Chapter 14. The $14,550,000 is a fixed overhead cost. This means that on a short-run basis, the cause-and-effect criterion is not appropriate but Rembrandt could attempt to identify the cost drivers for these costs in the long run when these costs are likely to be more variable. Rembrandt should look at how the $14,550,000 cost benefits the three divisions. This will help guide the choice of an allocation base in the short run.
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This note was uploaded on 06/01/2011 for the course ACCT 433b taught by Professor Alfredcontreras during the Spring '11 term at National.

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Week 2 Master - Week2Master 14-18 (30 min.) Cost allocation...

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