| 1. What was the cost of advertising and | | | | Unicycle business advertising |
| warehouse expense allocated to each of the | | | | cost=150,000,000*0.029412=4,411,765 |
| business based on the traditional method? | | | | Bicycle business advertising |
| In this case there are two businesses unicycle and | | | | cost=20,000,000*0.029412=588,235 |
| bicycle business, the costs are split 50-50 | | | | Therefore 4.411 million of advertising cost should |
| between the two, Advertising expense is 5m, | | | | be allocated to the unicycle business and 0.588 |
| Warehouse expense is 3M and therefore total | | | | million allocated to the bicycle business. The table |
| cost = 5M + 3M = 8M.Using the traditional method | | | | below summarizes the costs allocated to each |
| the costs are split 50-50 between the two, and | | | | business:warehouse costadvertising |
| therefore each business was allocated 4 million | | | | costtotalunicycle business |
| each in costs. | | | | 2,250,000 |
| 2. What recommendation would you make in | | | | 4,411,765 |
| allocating these expenses to each of the business | | | | 6,661,765bicycle business |
| and how much would be allocated to each | | | | 750,000 |
| business? | | | | 588,235 |
| An Activity based costing would be more | | | | 1,338,235total |
| appropriate in allocation of costs. Activity based | | | | 3,000,000 |
| costing according to Drury, C. (2000) refers to a | | | | 5,000,000 |
| method of costing that involves the allocation of | | | | 8,000,000 |
| costs using cost drivers, costs drivers are | | | | 3. What would be some of the issues of too |
| activities that are used to allocate costs, according | | | | many expenses or too little expenses being |
| to Stratton (2002) warehouse cost can be | | | | allocated to each of the businesses? |
| allocated using the area as a cost driver. Total | | | | The activity based method offers a more |
| area of the warehouse is 75,000 + 25,000 = | | | | accurate method of cost allocation, these aids in |
| 100,000, Total warehouse expense is 3 million, | | | | performance management of each business which |
| therefore cost per square feet will be determined | | | | will be hard to determine when the traditional |
| by dividing the cost by total area, 3 m/100,000 = | | | | method is used. Also the allocation of costs using |
| 30, therefore cost per square feet is $30. Using | | | | the traditional method may lead to disadvantages |
| this rate the warehouse cost is allocated | | | | whereby the company may fail to be competitive |
| depending on area as follows: | | | | in the market given that one business is allocated |
| Unicycle business warehouse | | | | more expenses, it is also evident that using the |
| cost=75000*30=2,250,000 | | | | traditional method 4 million of costs were allocated |
| Bicycle business warehouse | | | | to the bicycle business whereas using the activity |
| cost=25000*30=750,000 | | | | based costing method the cost is 1.338, this may |
| Therefore the unicycle business warehouse cost | | | | explain why there is a higher sales level in the |
| is 2,250,000 while bicycle business warehouse cost | | | | unicycle business than the bicycle industry. |
| should be 750,000. | | | | References: |
| According to Weetman (2002) the appropriate | | | | Drury, C. (2000) Management and cost |
| cost driver for advertising costs is sales, sales for | | | | accounting, New York: McGraw hill |
| both businesses amount to (bicycles) 20m+ | | | | Sundem, G. and Stratton, W. (2002) Introduction |
| (unicycles) 150m = 170m, total advertising costs | | | | to management accounting, New Jersey: Prentice |
| amount to 5m and therefore advertising cost per | | | | hall |
| sales unit = 5/170 = 0.029412 | | | | Weetman, P. |