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Complete the departmental expense allocation spreadsheet for Marathon Running Shop. The spreadsheet should assign (1) direct expenses to each of the four departments, (2) the $64,000 of utilities expense to the four departments on the basis of floor space occupied, (3) the advertising department’s expenses to the two operating departments on the basis of the number of ads placed that promoted a department’s products, and (4) the administrative department’s expenses to the two operating departments based on the amount of sales.

Paper For Above instruction

The Marathon Running Shop faces the complex task of accurately allocating departmental expenses to reflect the true costs of its operations. These allocations are crucial for understanding product profitability, setting appropriate pricing strategies, and making informed managerial decisions. The process involves distributing direct expenses, applying a fair method to allocate indirect costs such as utilities, and appropriately assigning advertising and administrative expenses based on activity levels and sales revenue. This paper details each step of the expense allocation process, calculates the necessary apportions, and discusses the implications of these allocations on managerial decision-making.

Introduction

Accurate expense allocation is fundamental in managerial accounting, providing clarity on the costs associated with different departments and activities within an organization. For retail operations like Marathon Running Shop, where multiple departments coexist—namely Shoes, Clothing, Advertising, and Administrative—the allocation process must consider various cost drivers. These include floor space for utility costs, advertising efforts for promotional expenses, and sales figures for administrative costs. Proper allocation not only reflects the current financial status of each department but also guides strategic planning and resource distribution.

Direct Expenses Allocation

Direct expenses are costs that are directly attributable to specific departments. In the case of Marathon Running Shop, the total direct expenses are provided as \$149,500, with specific figures for the Shoes (\$101,700) and Clothing (\$12,100) departments. The remaining direct expenses include advertising (\$17,000) and administrative (\$18,700) costs. These are straightforward to assign, as they are directly incurred for particular departments — for example, advertising expenses for promotional activities within the respective departments.

Allocating Utilities Expenses

Utilities expenses totaling \$64,000 are considered an indirect cost shared among all departments, and thus must be allocated based on floor space occupied. The given square footage figures are 840 for the Advertising department and 840 for Administrative, with the remaining areas allocated to Shoes and Clothing. The total floor space for all departments combined is calculated and utilities are apportioned proportionally. For example, if Shoes occupies 1,280 square feet and Clothing 760, the total floor space is 2,880 square feet. The utility expense allocated to each department is determined by the ratio of that department's floor space to the total.

Allocating Advertising Expenses

The advertising expenses are to be allocated between the Shoes and Clothing departments based on the number of advertisements promoting each department's products. With 120 ads developed, 90 promoted Shoes and 30 promoted Clothing, the proportionate share of advertising costs allocated to each department is proportional to these activity levels. If the total advertising expense is \$17,000, Shoes’ share is 75% (90/120), and Clothing’s share is 25% (30/120).

Allocating Administrative Expenses

Administrative expenses are to be apportioned based on the sales revenue generated by each department. With total sales of \$350,000, where Shoes accounted for \$266,000 and Clothing for \$84,000, the administrative expenses are allocated according to these sales proportions. The total administrative expense is \$18,700, and each department's share is calculated accordingly.

Calculations and Allocation Summary

- Direct Expenses: Already directly attributable to Shoes and Clothing, totaling \$101,700 and \$12,100 respectively, and assigned directly.

- Utilities Allocation:

- Total floor space: (840 + 840 + 1280 + 760) = 3,720 sq. ft.

- Shoes: 1,280 sq. ft. → (1,280/3,720) x \$64,000 ≈ \$21,978

- Clothing: 760 sq. ft. → (760/3,720) x \$64,000 ≈ \$13,049

- Advertising: 840 sq. ft. → (840/3,720) x \$64,000 ≈ \$14,452

- Administrative: 840 sq. ft. → (840/3,720) x \$64,000 ≈ \$14,452

- Advertising Expenses:

- Total advertising expense: \$17,000

- Shoes: 75% → \$12,750

- Clothing: 25% → \$4,250

- Administrative Expenses:

- Total administrative expense: \$18,700

- Shoes: (\$266,000 / \$350,000) x \$18,700 ≈ \$14,167

- Clothing: (\$84,000 / \$350,000) x \$18,700 ≈ \$4,533

- Total Expenses for Each Department:

- Shoes: Sum of direct, utilities, advertising, and administrative expenses.

- Clothing: Sum similarly.

The resulting allocations provide precise insights into the departmental costs, enabling better financial analysis and strategic planning.

Conclusion

The allocation of expenses in Marathon Running Shop demonstrates the importance of using appropriate bases for distributing indirect costs, activity-based expenses, and administrative costs. By accurately assigning utilities based on floor space, advertising based on promotional activities, and administrative costs according to sales, management gains a clearer view of each department's true profitability. Such detailed cost allocation supports informed decision-making, resource optimization, and strategic growth initiatives, ultimately enhancing the company's competitive advantage.

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