Question

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Woodland Hotels Inc. operates four resorts in the heavily wooded areas of northern California. The resorts...

Woodland Hotels Inc. operates four resorts in the heavily wooded areas of northern California. The resorts are named after the predominant trees at the resort: Pine Valley, Oak Glen, Mimosa, and Birch Glen. Woodland allocates its central office costs to each of the four resorts according to the annual revenue the resort generates. For the current year, the central office costs (000s omitted) were as follows:

Front office personnel (desk, clerks, etc.) $ 10,000
Administrative and executive salaries 5,000
Interest on resort purchase 4,000
Advertising 600
Housekeeping 3,000
Depreciation on reservations computer 80
Room maintenance 1,000
Carpet-cleaning contract 50
Contract to repaint rooms 500
$ 24,230
Pine Valley Oak Glen Mimosa Birch Glen Total
Revenue (000s) $ 7,750 $ 11,580 $ 12,830 $ 9,490 $ 41,650
Square feet 60,660 83,735 45,655 91,455 281,505
Rooms 86 122 66 174 448
Assets (000s) $ 100,975 $ 149,485 $ 79,080 $ 62,855 $ 392,395

Required:

1. Based on annual revenue, what amount of the central office costs are allocated to each resort?

2. Suppose that the current methods were replaced with a system of four separate cost pools with costs collected in the four pools allocated on the basis of revenues, assets invested in each resort, square footage, and number of rooms, respectively. Which costs should be collected in each of the four pools?

3. Using the cost pool system in requirement 2, how much of the central office costs would be allocated to each resort?

Solutions

Expert Solution

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Woodland Hotels Inc.
Answer 1 Pine Valley   Oak Glen   Mimosa Birch Glen Total Note
Revenue            7,750.00            11,580.00         12,830.00            9,490.00            41,650.00 A
Revenue % 18.61% 27.80% 30.80% 22.79% 100.00% B=A/Sum of A
Allocation of central office costs    4,508,583.43      6,736,696.28 7,463,887.15 5,520,833.13 24,230,000.00 C= $ 24,230,000* B
Answer 2
Calculation of ABC rates for overhead D E F=D/E
Activity cost pool Cost Driver Cost Quantity ABC rates
Front office personnel (desk, clerks, etc.) Rooms    10,000,000.00               448.00         22,321.43
Administrative and executive salaries Revenue (000s)      5,000,000.00         41,650.00               120.05
Interest on resort purchase Assets (000s)      4,000,000.00       392,395.00                 10.19
Advertising Revenue (000s)         600,000.00         41,650.00                 14.41
Housekeeping Rooms      3,000,000.00               448.00            6,696.43
Depreciation on reservations computer Assets (000s)            80,000.00       392,395.00                   0.20
Room maintenance Rooms      1,000,000.00               448.00            2,232.14
Carpet-cleaning contract Square feet            50,000.00       281,505.00                   0.18
Contract to repaint rooms Square feet         500,000.00       281,505.00                   1.78
Total Cost 24,230,000.00
Answer 3 See E G H=G*E I J=I*E K L=K*E M N=M*E
Allocation table Pine Valley Oak Glen Mimosa Birch Glen
Activity cost pool Cost Driver ABC Rates Activity used Cost assigned Activity used Cost assigned Activity used Cost assigned Activity used Cost assigned
Front office personnel (desk, clerks, etc.) Rooms            22,321.43                 86.00    1,919,642.86                 122.00            2,723,214.29          66.00     1,473,214.29        174.00           3,883,928.57
Administrative and executive salaries Revenue (000s)                 120.05            7,750.00       930,372.15            11,580.00            1,390,156.06 12,830.00     1,540,216.09     9,490.00           1,139,255.70
Interest on resort purchase Assets (000s)                   10.19       100,975.00    1,029,319.95         149,485.00            1,523,821.66 79,080.00        806,126.48 62,855.00              640,731.92
Advertising Revenue (000s)                   14.41            7,750.00       111,644.66            11,580.00               166,818.73 12,830.00        184,825.93     9,490.00              136,710.68
Housekeeping Rooms              6,696.43                 86.00       575,892.86                 122.00               816,964.29          66.00        441,964.29        174.00           1,165,178.57
Depreciation on reservations computer Assets (000s)                      0.20       100,975.00         20,586.40         149,485.00                  30,476.43 79,080.00           16,122.53 62,855.00                12,814.64
Room maintenance Rooms              2,232.14                 86.00       191,964.29                 122.00               272,321.43          66.00        147,321.43        174.00              388,392.86
Carpet-cleaning contract Square feet                      0.18         60,660.00         10,774.23            83,735.00                  14,872.74 45,655.00             8,109.09 91,455.00                16,243.94
Contract to repaint rooms Square feet                      1.78         60,660.00       107,742.31            83,735.00               148,727.38 45,655.00           81,090.92 91,455.00              162,439.39
Total Cost assigned 4,897,939.70            7,087,373.00     4,698,991.04

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