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    Cost allocation

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    Consider the following scenario:
    A company has two major businesses that it operates. One business manufactures and sells unicycles for commercial use in circuses and so forth (total sales of $150M), and the other sells bicycles to the public (total sales of $20M). The unicycle business occupies 75,000 square feet of the manufacturing warehouse, and the bicycle business occupies the remaining 25,000 square feet. Cost were split 50-50 between the 2 businesses for advertising (total advertising expense of $5M) and warehouse expense (total warehouse expense of $3M) in the past (traditional method).

    1. What was the cost of advertising and warehouse expense allocated to each of the businesses based on the traditional method?
    2. What recommendation would you make in allocating these expenses to each of the businesses, and how much would be allocated to each business?
    3. What would be some of the issues of too many expenses or too little expenses being allocated to each of the businesses?

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    Solution Preview

    1. As given in the question, in the traditional method the costs were split 50-50 between the two businesses.
    Total advertising cost is $5 million. Cost allocated to Unicycles will be $2.5 million and cost allocated to bicycles will be $2.5 million
    Total warehousing cost is $3 million. Cost allocated to Unicycles will be $1.5 million and cost allocated to ...

    Solution Summary

    The solution explains how to allocate the advertising and warehousing cost

    $2.19