Question

Konig Enterprises, Ltd., owns and operates three restaurants in Vancouver, B.C. The company allocates its fixed administrative expenses to the three restaurants on the basis of sales dollars. Last year the fixed administrative expenses totaled $2,000,000 and were allocated as follows: Ginger Total sales-Last Year Percentage of total sales Allocation (based on the above percentages) Rick's Harborside $16,000,000 40% $ 800,000 Restaurants Imperial Garden $15,000,000 37.5% $ 750,000 Wok $9,000,000 22.5% $450,000 Total $40,000,000 100% $2,000,000 ntages) This year the Imperial Garden restaurant increased its sales by $10 million. The sales levels in the other two restaurants remained unchanged. The company's sales data for this year were as follows: Rick's Harborside $16,000,000 32% Restaurants Imperial Garden $25,000,000 50% Ginger Wok $9,000,000 18% Total sales-This Year Percentage of total sales Total $50,000,000 100% Fixed administrative expenses for this year remained unchanged at $2,000,000. Required: 1. Using sales dollars as an allocation base, show the allocation of the fixed administrative expenses among the three restaurants for this year. 2. Calculate the change in each restaurant's allocated cost from last year to this year. 3. Is sales dollars a good base for allocation of fixed costs? Complete this question by entering your answers in the tabs below. Req 1 and 2 Req3 1. Using sales dollars as an allocation base, show the allocation of the fixed administrative expenses among the three restaurants for this year. 2. Calculate the change in each restaurant's allocated cost from last year to this year. (Negative amounts should be indicated by a minus sign.) Ginger Wok Rick's Harborside $ 640,000 Imperial Garden $ 1,000,000 Total 2,000,000 $ 360,000 $ 1. Fixed administrative expense allocation - current year 2. Change in allocated cost

Answer 1

Answer -

1 and 2. Answer-

		Rick's Harborside	Imperial Garden	Ginger Wok	Total
1.	Fixed administrative expense allocation-current year	$640000	$1000000	$360000	$2000000
2.	Change in allocated cost	-$160000	$250000	-$90000	$0

Calculation:

1. Fixed administrative expense allocation-current year:

Rick's Harborside = $2000000 * 32% = $640000

Imperial Garden = $2000000 * 50% = $1000000

Ginger Wok = $2000000 * 18% = $360000

2. Change in allocated cost:

Rick's Harborside = $640000 - $800000 = ($160000) (Decrease)

Imperial Garden = $1000000 - $750000 = $250000 (Increase)

Ginger Wok = $360000 - $450000 = ($90000) (Decrease)

3. Answer -

No

Explanation: Sales dollars is not ordinarily a good base for allocating fixed costs. The departments with the greatest sales will be allocated the greatest amount of cost and the costs allocated to a department will be affected by the sales in other departments.

In above example, the sales in two restaurants remained static and the sales in the third increased. As a result, less cost was allocated to the restaurants with static sales and more cost was allocated to the one restaurant that showed improvement during the period.