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QS 22-6 (Algo) ?Allocating costs to departments LO P2

Macee Store has three operating departments, and it conducts advertising that benefits all departments. Advertising costs ar $100,000. ?Sales for its operating departments follow.

The correct answer and explanation is:

To solve this, let’s distribute the advertising costs ($100,000) among the three operating departments based on their sales proportions.

Steps to Solve:

1. Identify Total Sales: Add up the sales of all operating departments to find the total sales. Total Sales=Sales of Department A+Sales of Department B+Sales of Department C\text{Total Sales} = \text{Sales of Department A} + \text{Sales of Department B} + \text{Sales of Department C}
2. Calculate Proportion of Sales for Each Department: Divide the sales of each department by the total sales to find their sales proportion. Proportion for Department A=Sales of Department ATotal Sales\text{Proportion for Department A} = \frac{\text{Sales of Department A}}{\text{Total Sales}} Repeat for Department B and C.
3. Allocate Advertising Costs: Multiply the total advertising costs by each department’s sales proportion. Cost for Department A=Proportion for Department A×100,000\text{Cost for Department A} = \text{Proportion for Department A} \times 100,000 Repeat for Department B and C.

Example Calculation:

Assume the sales are:

• Department A: $400,000
• Department B: $300,000
• Department C: $300,000

1. Total Sales: Total Sales=400,000+300,000+300,000=1,000,000\text{Total Sales} = 400,000 + 300,000 + 300,000 = 1,000,000

2. Sales Proportions: Proportion for A=400,0001,000,000=0.4\text{Proportion for A} = \frac{400,000}{1,000,000} = 0.4 Proportion for B=300,0001,000,000=0.3\text{Proportion for B} = \frac{300,000}{1,000,000} = 0.3 Proportion for C=300,0001,000,000=0.3\text{Proportion for C} = \frac{300,000}{1,000,000} = 0.3

3. Allocate Costs: Cost for A=0.4×100,000=40,000\text{Cost for A} = 0.4 \times 100,000 = 40,000 Cost for B=0.3×100,000=30,000\text{Cost for B} = 0.3 \times 100,000 = 30,000 Cost for C=0.3×100,000=30,000\text{Cost for C} = 0.3 \times 100,000 = 30,000

Explanation:

The advertising cost allocation ensures fairness by distributing expenses based on the departments’ contributions to total sales. In this example, Department A receives the highest allocation ($40,000) due to its larger sales share (40% of total sales). Departments B and C share the remaining costs equally ($30,000 each) as their sales contributions are identical (30% each). This proportional allocation method aligns expenses with revenue generation, promoting equitable financial responsibility across departments.