Allocated costs and expenses


Case Scenario:

Watson Company pays a bonus to any of its five division managers who increase their percentage of income to sales over that of the year before. The manager of Division A is displeased because of the results of operations of the line for the current year. The division showed a decrease in net income percentage, as follows:

 

Current Year

Last Year

Net sales

 

$252,000

 

$216,000

Cost of goods sold

 

 

 

 

Division fixed costs

$29,000

 

$29,000

 

Allocated costs

$40,000

 

$19,000

 

Variable costs

$72,000

$141,000

$72,000

$120,000

 

 

$111,000

 

$96,000

Gross margin

 

 

 

 

Selling and administrative expense

 

 

 

 

Division fixed expenses

$25,000

 

$22,000

 

Allocated expenses

$45,000

 

$37,000

 

Variable expenses

$22,000

$92,000

$19,000

$78,000

Income

 

$19,000

 

$18,000

The items of allocated costs and expenses represent general cots and expenses of the company that were allocated to the divisions.

Required:

Q1. Prepare a statement that shows more clearly the performance of Division A.

Q2. Comment on the method used by the company to calculate bonuses.

Solution Preview :

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Accounting Basics: Allocated costs and expenses
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