Hotel Restaurant Casino Revenues $16,425,000 $5,256,000 $12,340,000 Direct costs 9,819,260 3,749,172 4,248,768 $ 6,605,740 $ 8,091,232 Segment margin $1,506,828 You are also given the following data on the three divisions: Hotel Restaurant Casino Floor space (square feet) Number of employees 16,000 64,000 80,000 200 50 250 You are told that you may choose to allocate indirect costs based on one of the following: direct costs, floor space, or the number of employees. Total fixed overhead costs for 2016 were $14,550,000. Required 1. Calculate division margins in percentage terms prior to allocating fixed overhead costs. 2. Allocate indirect costs to the three divisions using each of the three allocation bases suggested. For each allocation base, calculate division operating margins after allocations, in dollars and as a per- centage of revenues. 3. Discuss the results. How would you decide how to allocate indirect costs to the divisions? Why? 4. Would you recommend closing any of the three divisions (and possibly reallocating resources to other divisions) as a result of your analysis? If so, which division would you close and why?

Hotel Restaurant Casino Revenues $16,425,000 $5,256,000 $12,340,000 Direct costs 9,819,260 3,749,172 4,248,768 $ 6,605,740 $ 8,091,232 Segment margin $1,506,828 You are also given the following data on the three divisions: Hotel Restaurant Casino Floor space (square feet) Number of employees 16,000 64,000 80,000 200 50 250 You are told that you may choose to allocate indirect costs based on one of the following: direct costs, floor space, or the number of employees. Total fixed overhead costs for 2016 were $14,550,000. Required 1. Calculate division margins in percentage terms prior to allocating fixed overhead costs. 2. Allocate indirect costs to the three divisions using each of the three allocation bases suggested. For each allocation base, calculate division operating margins after allocations, in dollars and as a per- centage of revenues. 3. Discuss the results. How would you decide how to allocate indirect costs to the divisions? Why? 4. Would you recommend closing any of the three divisions (and possibly reallocating resources to other divisions) as a result of your analysis? If so, which division would you close and why?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter13: Lean Manufacturing And Activity Analysis

Section: Chapter Questions

Problem 4BE

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Concept explainers

Overheads

In cost accounting, overhead refers to those expenses which occur during the operating of a business. Overhead includes the fixed, variable, or semi-variable which is not directly involved with a company product or service. It is very important to analyze overhead expense as it helps the company in determining how much a company must charge for its products and services so that they can generate profit. Overhead expenses depend upon the nature of the business operations.

Question

Cost allocation to divisions. Rembrandt Hotel & Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a 300-room hotel, a casino, and a restaurant. As Rembrandt’s new controller, your manager asks you to recommend the basis the hotel should use for allocating fixed overhead costs to the three divisions in 2017. You are presented with the following income statement information for 2016:

Hotel
Restaurant
Casino
Revenues
$16,425,000
$5,256,000
$12,340,000
Direct costs
9,819,260
3,749,172
4,248,768
$ 6,605,740
$ 8,091,232
Segment margin
$1,506,828
You are also given the following data on the three divisions:
Hotel
Restaurant
Casino
Floor space (square feet)
Number of employees
16,000
64,000
80,000
200
50
250
You are told that you may choose to allocate indirect costs based on one of the following: direct costs, floor
space, or the number of employees. Total fixed overhead costs for 2016 were $14,550,000.
Required
1. Calculate division margins in percentage terms prior to allocating fixed overhead costs.
2. Allocate indirect costs to the three divisions using each of the three allocation bases suggested. For
each allocation base, calculate division operating margins after allocations, in dollars and as a per-
centage of revenues.
3. Discuss the results. How would you decide how to allocate indirect costs to the divisions? Why?
4. Would you recommend closing any of the three divisions (and possibly reallocating resources to other
divisions) as a result of your analysis? If so, which division would you close and why?

Definition Definition Indirect costs incurred while producing goods or services. Overhead costs cannot be directly attributed to products or services. Overhead includes indirect material cost, indirect labor cost, rent, utilities expenses, and depreciation. Since these costs directly affect the profitability of a company, managing overhead becomes an important task for management.

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