Booth Financial Services, LLC has two revenue producing departments, Financial Planning and Business Consulting. The accounting department is trying to determine the best method to allocate $1,000,000 of common costs (secretarial staff, reception personnel, etc), either by salary or number of employees. Information on the revenue departments are as follows:
Department Employees Salaries
Financial Planning 150 employees $10,000,000
Business Consulting 50 employees $5,000,000
(a) Allocate the $1,000,000 common costs to the two revenue departments using both methods.
(b) Why are allocations called arbitrary?