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

Info icon This preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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%
Image of page 2
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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.
Image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern