Marathon Running Shop Has Two Service Departments Advertisin

Marathon Running Shop Has Two Service Departments Advertising And Adm

Marathon Running Shop operates with two service departments—Advertising and Administrative—and two operating departments—Shoes and Clothing. During 2013, each department incurred specific direct expenses and occupied specific amounts of floor space. The Advertising department incurred $17,000, while the Administrative department incurred $18,700. The Shoes and Clothing departments had direct expenses of $101,700 and $12,100, respectively. The shop's total floor space was divided among these departments with Advertising occupying 120 square feet, Administrative 120 square feet, Shoes 1,280 square feet, and Clothing 760 square feet. Utilities expenses of $64,000 were incurred and are to be allocated to all departments based on their floor space. Additionally, the Advertising department created 120 advertisements, 90 promoting shoes and 30 promoting clothing. Sales for the year totaled $350,000, with $266,000 from Shoes and $84,000 from Clothing. The goal is to complete a departmental expense allocation spreadsheet by assigning direct expenses, allocating utilities based on floor space, allocating advertising expenses to operating departments based on the number of ads promoting each product, and allocating administrative expenses based on sales volume.

Paper For Above instruction

The effective allocation of expenses within a business is critical for accurate cost management and financial reporting. In the case of Marathon Running Shop, the complexity of support and operating departments necessitates a structured approach to distributing expenses such as utilities, advertising, and administrative costs. This paper outlines the process for allocating these expenses to the operating departments of Shoes and Clothing, based on appropriate allocation bases, ensuring a clear understanding of the true costs associated with each department's operations.

Direct Expenses Allocation

The first step in expense allocation involves assigning direct expenses directly to each department. For Marathon Running Shop, the direct expenses are $17,000 for Advertising, $18,700 for Administrative, $101,700 for Shoes, and $12,100 for Clothing. These expenses are directly attributable to their respective departments; thus, they are allocated without further adjustments. For example, the advertising expense of $17,000 is directly allocated to the Advertising department, and the same logic applies to the Administrative, Shoes, and Clothing expenses.

Utilities Expenses Allocation

The utilities expense of $64,000 is an indirect expense applicable to all departments. This expense is allocated based on the proportion of total floor space each department occupies. The total floor space is the sum of all departments: 120 + 120 + 1,280 + 760 = 2,280 square feet. The allocation of utilities is calculated as follows:

• Advertising: (120 / 2,280) * $64,000 = $3,366.67
• Administrative: (120 / 2,280) * $64,000 = $3,366.67
• Shoes: (1,280 / 2,280) * $64,000 = $35,877.19
• Clothing: (760 / 2,280) * $64,000 = $16,389.47

This method ensures that each department bears a share of utility costs proportional to the space it occupies, reflecting usage more accurately.

Advertising Expenses Allocation

The advertising expense of $17,000 is initially incurred by the Advertising department but must be allocated to the operating departments based on the number of advertisements promoting each department’s products. The Advertising department created a total of 120 advertisements: 90 promoting shoes and 30 promoting clothing. The allocations are as follows:

• Shoes Department: (90 / 120) * $17,000 = $12,750
• Clothing Department: (30 / 120) * $17,000 = $4,250

These amounts are then added to each department's expenses, reflecting the marketing efforts targeted at their respective products, thus aligning the advertising costs with the departments that benefit from these promotions.

Administrative Expenses Allocation

The administrative expense of $18,700 must be allocated to the operating departments based on their sales volume. Sales amounted to $266,000 for Shoes and $84,000 for Clothing, totaling $350,000. The allocation is calculated as:

• Shoes Department: ($266,000 / $350,000) * $18,700 = $14,238.86
• Clothing Department: ($84,000 / $350,000) * $18,700 = $4,461.14

This method ensures administrative costs are apportioned according to the relative size of sales, aligning expenses with the departments' revenue-generating activity.

Final Summary

After performing these allocations, the total expenses for each department include their direct expenses, assigned share of utilities, advertising, and administrative costs. For Shoes, the total expenses will be the sum of $101,700 (direct) + $35,877.19 (utilities) + $12,750 (advertising) + $14,238.86 (administrative). For Clothing, the total will be $12,100 (direct) + $16,389.47 (utilities) + $4,250 (advertising) + $4,461.14 (administrative). These allocations provide a comprehensive view of each department's total costs, enabling more accurate financial analysis and decision-making.

Conclusion

The systematic allocation of indirect expenses such as utilities, advertising, and administrative costs is crucial for a realistic depiction of departmental expenses. Using appropriate bases—floor space for utilities, number of ads for advertising, and sales volume for administrative costs—ensures each department bears a fair share of these costs. This approach improves cost control, pricing strategies, and profitability analysis, ultimately supporting better managerial decisions within Marathon Running Shop.

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