Departmental Cost Allocation in Profit Centers Elvis Wilbur owns two restaurants, the Beef Barn and the Fish Bowl. Each restaurant is treated as a profit center for performance evaluation. Although the restaurants have separate kitchens, they share a central baking facility. The principal costs of the baking area include depreciation and maintenance on the equipment, materials, supplies, and labor
Required
1. Elvis allocates the monthly costs of the baking facility to the two restaurants based on the number of tables served in each restaurant during the month. In April the costs were $24,000, of which $12,000 is fixed cost. The Beef Barn and the Fish Bowl each served 3,000 tables. How much of the joint cost should be allocated to each restaurant? a. Beef Barn: $16,000; Fish Bowl: $8,000 b. Beef Barn: $8,000; Fish Bowl: $16,000 c. Beef Barn: $10,000; Fish Bowl: $14,000 d. Beef Barn: $12,000; Fish Bowl: $12,000
2. In May, total fixed and unit variable costs remained the same, but the Beef Barn served 2,000 tables and the Fish Bowl served 3,000. How much should be allocated to each restaurant? a. Beef Barn: $8,000; Fish Bowl: $16,000 b. Beef Barn: $8,800; Fish Bowl: $13,200 c. Beef Barn: $9,600; Fish Bowl: $14,400 d. Beef Barn: $10,000; Fish Bowl: $12,000
3. Assume Elvis decides to use a dual allocation approach in which variable costs are traced directly to the user (based on tables served) and fixed costs are allocated evenly (because, on average, the two restaurants have equal activity levels). Considering again the tables served in requirement 2, how much should be allocated to each restaurant? a. Beef Barn: $8,000; Fish Bowl: $16,000 b. Beef Barn: $8,800; Fish Bowl: $13,200 c. Beef Barn: $9,600; Fish Bowl: $14,400 d. Beef Barn: $10,000; Fish Bowl: $12,000
4. Why would the managers of the Beef Barn and the Fish Bowl be upset about the cost allocations in requirement 2? Explain why the allocation method in requirement 3 is fairer and more motivating