Chapter 2, Problem 34E

Cost Allocation—Ethical Issues

Star Buck, a coffee shop manager, has two major product lines—drinks and pastries. If Star allocates common costs on any objective basis discussed in this chapter, the drinks are profitable, but the pastries are not. Star is concerned that her boss will pull the plug on pastries. Star’s brother, who is struggling to make a go of his new business, supplies pastries to the coffee shop. Star decides to allocate all common costs to the drinks because, “Drinks can afford to absorb these costs until we get the pastries line on its feet.” After assigning all common costs to drinks, both the drinks and pastries product lines appear to be marginally profitable. Consequently, Star’s manager decides to continue the pastries line.

Required

1. a.      How would you recommend Star allocate the common costs between drinks and pastries?
2. b.      You are the assistant manager and have been working with Star on the allocation problem. What should you do?