Question

Advertising department expenses of $42,800 and purchasing department expenses of $32,100 of Cozy Bookstore are allocated to operating departments on the basis of dollar sales and purchase orders, respectively. Information about the allocation bases for the three operating departments follows.
Department Sales Purchase Orders
Books $ 180,000 1,170
Magazines 108,000 520
Newspapers 112,000 910
Total $ 400,000 2,600
Complete the following table by allocating the expenses of the two service departments (advertising and purchasing) to the three operating departments. (Amounts to be deducted should be indicated with minus sign.)

Answer 1

Answer:

Cozy Bookstore

Allocation of Service Departments' Overheads to the Operating Departments:

                                 Books      Magazines       Newspapers   Total

Allocation of:

Advertising Dept.  $19,260     $11,556             $11,984       $42,800

(Dollar Sales)

Purchasing Dept.  $14,445      $6,420             $11,235       $32,100

(Purchase Orders)

Total                     $33,705     $17,976            $23,219      $74,900

Explanation:

a) Data and Calculations:

1. Allocation Basis:

Department               Sales                      Purchase Orders

Books                       $ 180,000 (45%)              1,170  (45%)

Magazines                  108,000 (27%)               520  (20%)

Newspapers               112,000 (28%)                910  (35%)

Total                      $ 400,000                      2,600

2. Allocation of Advertising Department expenses of $42,800 on the basis of dollar sales:

Books = 45% of $42,800 = $19,260

Magazines = 27% of $42,800 = $11,556

Newspapers = 28% of $42,800 = $11,984

3. Allocation of Purchasing Department expenses of $32,100 on the basis of  Purchase orders:

Books = 45% of $32,100 = $14,445

Magazines = 20% of $32,100 = $6,420

Newspapers = 35% of $32,100 = $11,235

4. The allocation of overheads for the service departments of Advertising and Purchase of Cozy Bookstore was done using the direct method.  This method allocates the overheads directly to each operating unit of either Books, Magazines, or Newspapers.  This is a straightforward method.  Other methods exists for the allocation.  They include the step method and the reciprocal method; details of their discussions are not included in this class.