Chapter 22, Problem 3E

To determine

Cost Allocation:

Sometime a cost is incurred for a whole firm and not for a particular department. In this case cost allocation is used. It is a way through which a particular cost is assigned to the respective department.

To prepare: A table to allocate departmental expense.

Explanation of Solution

Table(1)

Hence, total expense distributed among department is $698,000.

Working notes:

Calculation for advertising cost of book department,

$\begin{array}{c}\text{Advertising}\text{cost}\text{of}\text{books}\text{department}=\left(\begin{array}{l}\frac{\text{Sales}\text{of}\text{its}\text{department}}{\text{Total}\text{sales}}\\ \times \text{Total}\text{advertising}\text{cost}\end{array}\right)\\ =\frac{\$495,000}{\$900,000}\times \$24,000\\ =\$13,200\end{array}$

Calculation for advertising cost of magazines department,

$\begin{array}{c}\text{Advertising}\text{cost}\text{of}\text{magazines}\text{department}=\left(\begin{array}{l}\frac{\text{Sales}\text{of}\text{its}\text{department}}{\text{Total}\text{sales}}\\ \times \text{Total}\text{advertising}\text{cost}\end{array}\right)\\ =\frac{\$198,000}{\$900,000}\times \$24,000\\ =\$5,280\end{array}$

Calculation for advertising cost of newspapers department,

$\begin{array}{c}\text{Advertising}\text{cost}\text{of}\text{newspapers}\text{department}=\left(\begin{array}{l}\frac{\text{Sales}\text{of}\text{its}\text{department}}{\text{Total}\text{sales}}\\ \times \text{Total}\text{advertising}\text{cost}\end{array}\right)\\ =\frac{\$207,000}{\$900,000}\times \$24,000\\ =\$5,520\end{array}$

Calculation for purchasing cost of books department,

$\begin{array}{c}\text{Purchasing}\text{cost}\text{of}\text{books}\text{department}=\left(\begin{array}{l}\frac{\text{Purchase}\text{order}\text{of}\text{books}\text{department}}{\text{Total}\text{purchase}\text{orders}}\\ \times \text{Purchasing}\text{cost}\end{array}\right)\\ =\frac{516}{1,200}\times \$34,000\\ =\$14,620\end{array}$

Calculation for purchasing cost of magazines department,

$\begin{array}{c}\text{Purchasing}\text{cost}\text{of}\text{magazines}\text{department}=\left(\begin{array}{l}\frac{\text{Purchase}\text{order}\text{of}\text{magazines}\text{department}}{\text{Total}\text{purchase}\text{orders}}\\ \times \text{Purchasing}\text{cost}\end{array}\right)\\ =\frac{360}{1,200}\times \$34,000\\ =\$10,200\end{array}$

Calculation for purchasing cost of newspapers department,

$\begin{array}{c}\text{Purchasing}\text{cost}\text{of}\text{newspapers}\text{department}=\left(\begin{array}{l}\frac{\text{Purchase}\text{order}\text{of}\text{newspapers}\text{department}}{\text{Total}\text{purchase}\text{orders}}\\ \times \text{Purchasing}\text{cost}\end{array}\right)\\ =\frac{324}{1,200}\times \$34,000\\ =\$9,180\end{array}$