Chapter 18, Problem 41E

1.

To determine

Determine the amount of central office cost that are allocated to each resort and the shortcomings of the mentioned allocation method.

Explanation of Solution

Calculate the amount of central office cost that is allocated to each resort.

Table (1)

Therefore, the operating margin percentage for all the four resorts is 34.2%.

The short comings of this method of allocation are:

• Various items in the central office costs are not related to revenue for instance, Interests are not related to revenue.
• The cost of front office personnel is related to the number of customers of the resort. The better measure for number of rooms is the cost of front office personnel.

Working notes:

1) Calculate the total revenue:

$\begin{array}{c}\text{Total revenue}=\left(\text{P resort}+\text{O resort}+\text{M resort}+\text{B resort}\right)\\ =\left(\$5,350+\$7,995+\$8,857+\$6,550\right)\\ =\$28,752\end{array}$

2) Calculate the percentage allocation of revenue:

For P’s revenue:

$\begin{array}{c}\left(\begin{array}{l}\text{Percentage allocation}\\ \text{ of P resort}\end{array}\right)=\left(\frac{\text{P's revenue}}{\text{Total revenue}}\times 100\right)\\ =\left(\frac{\$5,350}{\$28,752}\times 100\right)\\ =18.61\%\end{array}$

For O’s resort:

$\begin{array}{c}\left(\begin{array}{l}\text{Percentage allocation}\\ \text{ of O resort}\end{array}\right)=\left(\frac{\text{O's revenue}}{\text{Total revenue}}\times 100\right)\\ =\left(\frac{\$7,995}{\$28,752}\times 100\right)\\ =27.81\%\end{array}$

For M’s resort:

$\begin{array}{c}\left(\begin{array}{l}\text{Percentage allocation}\\ \text{ of M resort}\end{array}\right)=\left(\frac{\text{M's revenue}}{\text{Total revenue}}\times 100\right)\\ =\left(\frac{\$8,857}{\$28,752}\times 100\right)\\ =30.80\%\end{array}$

For B’s resort:

$\begin{array}{c}\left(\begin{array}{l}\text{Percentage allocation}\\ \text{ of B resort}\end{array}\right)=\left(\frac{\text{B's revenue}}{\text{Total revenue}}\times 100\right)\\ =\left(\frac{\$6,550}{\$28,752}\times 100\right)\\ =22.78\%\end{array}$

3) Calculate the operation margin percentage:

For P’s resort:

$\begin{array}{c}\left(\begin{array}{l}\text{Operting margin \% }\\ \text{of P's resort}\end{array}\right)=\left(\frac{\text{Operating margin}}{\text{Revenue}}\times 100\right)\\ =\left(\frac{\$1,828}{\$5,350}\times 100\right)\\ =34.20\%\end{array}$

For O’s resort:

$\begin{array}{c}\left(\begin{array}{l}\text{Operting margin \% }\\ \text{of O's resort}\end{array}\right)=\left(\frac{\text{Operating margin}}{\text{Revenue}}\times 100\right)\\ =\left(\frac{\$2,731}{\$7,995}\times 100\right)\\ =34.20\%\end{array}$

For M’s resort:

$\begin{array}{c}\left(\begin{array}{l}\text{Operting margin \% }\\ \text{of M's resort}\end{array}\right)=\left(\frac{\text{Operating margin}}{\text{Revenue}}\times 100\right)\\ =\left(\frac{\$3,026}{\$8,857}\times 100\right)\\ =34.20\%\end{array}$

For B’s resort:

$\begin{array}{c}\left(\begin{array}{l}\text{Operting margin \% }\\ \text{of B's resort}\end{array}\right)=\left(\frac{\text{Operating margin}}{\text{Revenue}}\times 100\right)\\ =\left(\frac{\$2,238}{\$6,550}\times 100\right)\\ =34.20\%\end{array}$

2.

To determine

Determine the cost that should be collected in each of the pools.

Explanation of Solution

The operating costs are to be allocated the four allocation base of resorts which are revenue, square feet, number of rooms and the value of resort assets. The following are the ways for allocation:

Revenue: The central office costs that are allocated to the revenue are advertising, depreciation and administrative and executive salaries.

$\begin{array}{c}\text{Total cost in this pool}=\left(\begin{array}{l}\text{Advertising}\\ +\text{Depreciation}\\ +\text{Administrative and executive salaries}\end{array}\right)\\ =\left(\$600+\$80+\$4,000\right)\\ =\$4,680\end{array}$

Square feet: The central office costs that are allocated to the revenue are carpet cleaning and contract to repaint rooms.

$\begin{array}{c}\text{Total cost in the pool}=\left(\text{Carpet cleaning}+\text{Contract to repaint rooms}\right)\\ =\$50+\$400\\ =\$450\end{array}$

Number of rooms: The central office costs that are allocated to the number of rooms are front office personnel, housekeeping, and room maintenance.

$\begin{array}{c}\text{Total cost in this pool}=\left(\begin{array}{l}\text{Front office personnel}\\ +\text{Housekeeping}\\ +\text{Room maintenance}\end{array}\right)\\ =\$8,000+\$2,000+\$800\\ =\$10,800\end{array}$

Value of resort’s assets: The central office costs that are allocated to the value of resort assets are interest on resort purchase.

$\begin{array}{c}\text{Total cost in this pool}=\left(\text{Interest on resort purchase}\right)\\ =\$3,000\end{array}$

3.

To determine

Determine the amount of central office cost that is allocated to each of four resorts.

Explanation of Solution

The allocations for the multiple costs are done in manner which is related to the cause-and-effect relationship of these central office cost. For example, advertising is related to revenue. The allocations that are close will motivate the strategic performance measurement system.

3.

To determine

Calculate the cost that should be allocated to each resort.

Explanation of Solution

Calculate the cost that should be allocated to each resort:

Working notes:

Calculate the percentage for revenue:

$\begin{array}{c}\text{Percentage}=\left(\frac{\text{P's revenue}}{\text{Total revenue}}\times 100\right)\\ =\left(\frac{\$5,350}{\$28,752}\times 100\right)\\ =18.61\%\end{array}$

Likewise it is calculated for all the allocation bases.

4) Calculate the revenue:

For P:

$\begin{array}{c}\text{Revenue}=\left(\text{Total revenue cost}\times \text{P's percentage}\right)\\ =\left(\text{\$4,680}\times \text{18}\text{.61\%}\right)\\ =\$871\end{array}$

For O:

$\begin{array}{c}\text{Revenue}=\left(\text{Total revenue cost}\times \text{O's percentage}\right)\\ =\left(\text{\$4,680}\times 27.81\text{\%}\right)\\ =\$1,301\end{array}$

For M:

$\begin{array}{c}\text{Revenue}=\left(\text{Total revenue cost}\times \text{M's percentage}\right)\\ =\left(\text{\$4,680}\times 30.80\text{\%}\right)\\ =\$1,442\end{array}$

For B:

$\begin{array}{c}\text{Revenue}=\left(\text{Total revenue cost}\times \text{B's percentage}\right)\\ =\left(\text{\$4,680}\times 22.78\text{\%}\right)\\ =\$1,066\end{array}$

5) Calculate the square feet:

For P:

$\begin{array}{c}\text{Square feet}=\left(\text{Total square feet cost}\times \text{P's percentage}\right)\\ =\left(\text{\$450}\times 21.\text{54\%}\right)\\ =\$97\end{array}$

For O:

$\begin{array}{c}\text{Square feet}=\left(\text{Total square feet cost}\times \text{O's percentage}\right)\\ =\left(\text{\$450}\times 29.75\text{\%}\right)\\ =\$134\end{array}$

For M:

$\begin{array}{c}\text{Square feet}=\left(\text{Total square feet cost}\times \text{M's percentage}\right)\\ =\left(\text{\$450}\times 16.22\text{\%}\right)\\ =\$73\end{array}$

For B:

$\begin{array}{c}\text{Square feet}=\left(\text{Total square feet cost}\times \text{B's percentage}\right)\\ =\left(\text{\$450}\times 32.49\text{\%}\right)\\ =\$146\end{array}$

6) Calculate the number of rooms:

For P:

$\begin{array}{c}\text{Number of rooms}=\left(\text{Total room cost}\times \text{P's percentage}\right)\\ =\left(\text{\$10,800}\times 19.20\text{\%}\right)\\ =\$2,073\end{array}$

For O:

$\begin{array}{c}\text{Number of rooms}=\left(\text{Total room cost}\times \text{O's percentage}\right)\\ =\left(\text{\$10,800}\times 27.23\text{\%}\right)\\ =\$2,941\end{array}$

For M:

$\begin{array}{c}\text{Number of rooms}=\left(\text{Total room cost}\times \text{M's percentage}\right)\\ =\left(\text{\$10,800}\times 14.73\text{\%}\right)\\ =\$1,591\end{array}$

For B:

$\begin{array}{c}\text{Number of rooms}=\left(\text{Total room cost}\times \text{B's percentage}\right)\\ =\left(\text{\$10,800}\times 38.84\text{\%}\right)\\ =\$4,195\end{array}$

7) Calculate the assets:

For P:

$\begin{array}{c}\text{Assets}=\left(\text{Total assets cost}\times \text{P's percentage}\right)\\ =\left(\text{\$3,000}\times 25.73\text{\%}\right)\\ =\$772\end{array}$

For O:

$\begin{array}{c}\text{Assets}=\left(\text{Total assets cost}\times \text{O's percentage}\right)\\ =\left(\text{\$3,000}\times 38.10\text{\%}\right)\\ =\$1,143\end{array}$

For M:

$\begin{array}{c}\text{Assets}=\left(\text{Total assets cost}\times \text{M's percentage}\right)\\ =\left(\text{\$3,000}\times 20.16\text{\%}\right)\\ =\$605\end{array}$

For B:

$\begin{array}{c}\text{Assets}=\left(\text{Total assets cost}\times \text{B's percentage}\right)\\ =\left(\text{\$3,000}\times 16.02\text{\%}\right)\\ =\$481\end{array}$

8) Calculate the operating margin:

For P:

$\begin{array}{c}\text{Operating margin}=\left(\text{Revenue}-\text{Total cost allocated}\right)\\ =\left(\$5,350-\$3,813\right)\\ =\$1,537\end{array}$

$\begin{array}{c}\text{Operating margin \%}=\left(\frac{\text{Operating margin}}{\text{Revenue}}\times 100\right)\\ =\left(\frac{\$1,537}{\$5,350}\times 100\right)\\ =28.73\%\end{array}$

For O:

$\begin{array}{c}\text{Operating margin}=\left(\text{Revenue}-\text{Total cost allocated}\right)\\ =\left(\$7,995-\$5,519\right)\\ =\$2,476\end{array}$

$\begin{array}{c}\text{Operating margin \%}=\left(\frac{\text{Operating margin}}{\text{Revenue}}\times 100\right)\\ =\left(\frac{\$2,476}{\$7,995}\times 100\right)\\ =30.97\%\end{array}$

For M:

$\begin{array}{c}\text{Operating margin}=\left(\text{Revenue}-\text{Total cost allocated}\right)\\ =\left(\$8,857-\$3,710\right)\\ =\$5,147\end{array}$

$\begin{array}{c}\text{Operating margin \%}=\left(\frac{\text{Operating margin}}{\text{Revenue}}\times 100\right)\\ =\left(\frac{\$5,147}{\$8,857}\times 100\right)\\ =58.11\%\end{array}$

For B:

$\begin{array}{c}\text{Operating margin}=\left(\text{Revenue}-\text{Total cost allocated}\right)\\ =\left(\$6,550-\$5,888\right)\\ =\$662\end{array}$

$\begin{array}{c}\text{Operating margin \%}=\left(\frac{\text{Operating margin}}{\text{Revenue}}\times 100\right)\\ =\left(\frac{\$662}{\$6,550}\times 100\right)\\ =10.11\%\end{array}$

The above calculation show that P has the smaller resort with lesser room rates, whereas M has also small resort but with high room rates, and in case of B it is a big resort with a lower room rate.

The relationships that exist between the revenue and number of rooms, the results shows that the resort P and O’s cost allocation and operating margin are similar. Whereas in case of B, large number of rooms are in B resort so higher cost is allocated with a lower operating margin.