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Cost allocation

Subject:Economics, Cost-Benefit Analysis - OtherDescription:Follow the below posted informationProblem:Crafton Carbuckle began a corporate consulting firm, Creative Consumer Consultants, Ltd., in 1994. The firm specializes in assisting corporate clients analyze markets and promotional campai ...there is moreshow problemCrafton Carbuckle began a corporate consulting firm, Creative Consumer Consultants, Ltd., in 1994. The firm specializes in assisting corporate clients analyze markets and promotional campaigns. Most clients are mid-sized local corporations who do not have highly developed in-house marketing departments.

CCC has proved to be highly successful primarily because of the strong personal attention given to the clients by the project managers. Since inception, CCC has expanded to four world-wide offices with locations in New York, Chicago, Little Rock AK, and Paris. The home office is in New York.

Except for the Little Rock office, all offices have been in business for at least four years and have a well established clientele. The Little Rock office was established just last year and is struggling to attract major clients. The office in Little Rock is an experiment by the company to determine the feasibility of locating future offices in smaller business communities.

Each office is headed by an office manager who is reasonable for all activities in that office. The managers are paid a reasonable salary plus a bonus with two inputs. The first input is the net income of the manager's office and the second is the sharing of a portion of the overall company profits. Managers have a high level of independence to make decisions and are held accountable for the results.

Each office is allocated a portion of the non-traceable fixed costs of the organization that are common to all offices. It is the policy of the company that this allocation is based on the estimated total billings of each individual office for the year. Currently, this allocation is on the basis of gross office billings.

The current year's segmented operating results are shown below. All numbers are in 000's of $.

Total New York Chicago Paris Little Rock
Billings (Revenue) 50,000 22,000 10,000 16,000 2,000
Traceable Consulting Costs 33,500 14,000 6,000 12,500 1,000
Non-Traceable Consulting Costs 10,000 4,400 2,000 3,200 400
Gross Profit on Sales 6,500 3,600 2,000 300 600
Traceable Other Costs 1,000 300 200 500 0
Non-Traceable Other Costs 2,500 1,100 500 800 100
Net Income 3,000 2,200 1,300 (1.000) 500

Revise the table above assuming that non-traceable costs are not allocated.

Compare the evaluation of the office managers that would be made under the original table and the table you have just created.

Which method provides for more goal congruence? Why? Support your answer with relevant data and arguments -- this should be a two-page paper.

Solution Summary

The solution explains cost allocation and goal congruence

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