EXERCISE 11B–2 Sales Dollars as an Allocation Base for Fixed Costs [LO6]

Lacey’s Department Store allocates its fixed administrative expenses to its four operating depart- ments  on  the  basis  of  sales  dollars.  During  2009,  the  fixed  administrative  expenses totaled

$900,000. These expenses were allocated as follows:

 

Â	Men’s	Women’s	Shoes	Housewares	Total
Total sales—2009 . . . . Percentage of total sales   . . . . . . . . . . . .	$600,000   10%	$1,500,000   25%	$2,100,000   35%	$1,800,000   30%	$6,000,000   100%

Allocation (based on the above

percentages)  . . . . . .        $90,000         $225,000         $315,000           $270,000          $900,000

 

 

During 2010, the following year, the Women’s Department doubled its sales. The sales levels in the other three departments remained unchanged. The company’s 2010 sales data were as follows:

 

 

 

Required:

1.       Using sales dollars as an allocation base, show the allocation of the fixed administrative expenses among the four departments for 2010.

2.       Compare your allocation from (1) above to the allocation for 2009. As the manager of the Women’s Department, how would you feel about the administrative expenses that have been charged to you for 2010?

3.       Comment on the usefulness of sales dollars as an allocation base.