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    Cost Allocation To Divisions

    Uploaded by

    Elliot Richard
    The document provides income statement information for 2016 for the hotel, restaurant, and casino divisions of Rembrandt Hotel & Casino, and asks the new controller to recommend an approach for allocating $14.55 million in fixed overhead costs among the three divisions based on direct costs, floor space, or number of employees. Calculations are shown allocating the overhead costs using each of the three bases, and the resulting operating margins for each division are presented.

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    Cost Allocation To Divisions

    Uploaded by

    Elliot Richard
    117 views2 pages
    The document provides income statement information for 2016 for the hotel, restaurant, and casino divisions of Rembrandt Hotel & Casino, and asks the new controller to recommend an approach for allocating $14.55 million in fixed overhead costs among the three divisions based on direct costs, floor space, or number of employees. Calculations are shown allocating the overhead costs using each of the three bases, and the resulting operating margins for each division are presented.

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    Cost Allocation to Divisions

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    The document provides income statement information for 2016 for the hotel, restaurant, and casino divisions of Rembrandt Hotel & Casino, and asks the new controller to recommend an approach for allocating $14.55 million in fixed overhead costs among the three divisions based on direct costs, floor space, or number of employees. Calculations are shown allocating the overhead costs using each of the three bases, and the resulting operating margins for each division are presented.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    117 views2 pages

    Cost Allocation To Divisions

    Uploaded by

    Elliot Richard
    The document provides income statement information for 2016 for the hotel, restaurant, and casino divisions of Rembrandt Hotel & Casino, and asks the new controller to recommend an approach for allocating $14.55 million in fixed overhead costs among the three divisions based on direct costs, floor space, or number of employees. Calculations are shown allocating the overhead costs using each of the three bases, and the resulting operating margins for each division are presented.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Cost allocation to divisions.

    Rembrandt Hotel & Casino is situated on beautiful Lake Tahoe in


    Nevada. The complex includes a 300-room hotel, a casino, and a restaurant. As Rembrandt’s
    new controller, your manager asks you to recommend the basis the hotel should use for
    allocating fixed overhead costs to the three divisions in 2017. You are presented with the
    following income statement information for 2016:

    You are told that you may choose to allocate indirect costs based on one of the following: direct
    costs, floor space, or the number of employees. Total fixed overhead costs for 2016 were
    $14,550,000.
    1. Calculate division margins in percentage terms prior to allocating fixed overhead costs.
    2. Allocate indirect costs to the three divisions using each of the three allocation bases suggested.
    For each allocation base, calculate division operating margins after allocations, in dollars and as
    a percentage of revenues.
    3. Discuss the results. How would you decide how to allocate indirect costs to the divisions?
    Why?
    4. Would you recommend closing any of the three divisions (and possibly reallocating resources
    to other divisions) as a result of your analysis? If so, which division would you close and why?

    (30 min.) Cost allocation to divisions.

    1.
    Hotel Restaurant Casino Rembrandt
    Revenue $16,425,000 $5,256,000
    $12,340,000 $34,021,000
    Direct costs 9,819,260 3,749,1724,248,768 17,817,200
    Segment margin $ 6,605,740 $1,506,828
    $ 8,091,232 16,203,800
    Fixed overhead costs 14,550,000
    Income before taxes $ 1,653,800
    Segment margin % 40.22% 28.67% 65.57%

    2.
    Hotel Restaurant Casino Rembrandt
    Direct costs $9819260 $3749172 $4248768 $17817200
    Direct cost % 55.11% 21.04% 23.85% 100.00%
    Square footage 80,000 16,000 64,000 160,000
    Square footage % 50.00% 10.00% 40.00% 100.00%
    Number of employees 200 50 250 500
    Number of employees % 40.00% 10.00% 50.00% 100.00%

    A: Cost allocation based on direct costs:


    Hotel Restaurant Casino Rembrandt
    Revenue $16,425,000 $ 5,256,000 $12,340,000 $34,021,00
    Direct costs 9,819,260 3,749,172 4,248,768 17,817,20
    Segment margin 6,605,740 1,506,828 8,091,232 16,203,80
    Allocated fixed overhead costs 8,018,505 3,061,320 3,470,175 14,550,00
    Segment pre-tax income $ (1,412,765 $(1,554,492 $ 4,621,057 $ 1,653,80
    Segment pre-tax income % of rev. –8.60% –29.58% 37.45%

    B: Cost allocation based on floor space:


    Hotel Restaurant Casino Rembrandt
    Allocated fixed overhead costs $7,275,000 $1,455,000 $5,820,000 $14,550,00
    Segment pre-tax income $ (669,260) $ 51,828 $2,271,232 $ 1,653,80
    Segment pre-tax income % of rev. –4.07% 0.99% 18.41%

    C: Cost allocation based on number of employees


    Hotel Restaurant Casino Rembrandt
    Allocated fixed overhead costs $5,820,000 $1,455,000 $7,275,000 $14,550,00
    Segment pre-tax income $ 785,740 $ 51,828 $ 816,232 $ 1,653,80
    Segment pre-tax income % of rev. 4.78% 0.99% 6.61%

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