Question: The HeavensAbove Hotel in Auckland has three revenue-generating departments: rooms, restaurant/bar and disco. The following schedule provides the most recent profit performance statement for the hotel.
The hotel's new accountant believes that significant further performance insights could be gained if the indirect expenses were allocated to the hotel's three revenue departments. He has determined that marketing expenses should be allocated based on the relative level of sales made by each department. Facility maintenance is to be allocated based on floor space, general administration is to be allocated according to the number of employees in each department, and depreciation and insurance is to be allocated according to the book value of depreciable assets held in each department. The accountant has compiled the following information to aid in the allocation of indirect expenses.
Required: (a) Prepare a profit and loss statement that allocates the indirect costs to the three sales-generating departments and shows each departments' profitability subsequent to this allocation exercise.
(b) Imagine that following the allocation of indirect expenses to the revenue generating departments it has been found that one of the departments is recording a loss. Explain whether from this analysis one can conclude that the loss-making department should be closed down.