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Arlo Tech Inc. has an Automotive and a Consumer Products Division. The two divisions share a...

Arlo Tech Inc. has an Automotive and a Consumer Products Division. The two divisions share a distribution warehouse in another city. The space in the warehouse is allocated 60% to Automotive and 40% to Consumer Products. The warehouse manager spends about 70% of his time working on Consumer Products matters and 30% on Automotive matters. The total cost of running the warehouse is $1,000,000 a year, all of this cost is considered a fixed cost. How much of the annual warehouse cost should appear on the Automotive Division Income Statement?

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Arlo Tech

Determination of the amount of the annual warehouse cost that should appear on the Automotive Division income statement:

Annual warehouse cost = $1,000,000

Warehouse cost, considered as a fixed cost is normally allocated based on the building’s square footage.

Warehouse cost would comprise several components, and one component could be the warehouse manager’s salary. Also, warehouse manager does not directly support all the warehouse activities and hence this is not an appropriate basis for allocation of warehouse cost.

Hence, the warehouse cost should be allocated on the building footage base.

Considering building footage as the appropriate basis, the Automotive Division accounts for 60% of the warehouse’s space.

Allocated warehouse cost to Automotive division = $1,000,000 x 60% = $600,000

The amount of warehouse cost that should appear on the Automotive Division’s income statement = $600,000

ekkarill92 answered 2 years ago
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