Question

Konig Enterprises, Ltd., owns and operates three restaurants in Vancouver, B.C. The company allocates its fixed administrative expenses to the three restaurants on the basis of sales dollars. Last year the fixed administrative expenses totaled $880,000 and were allocated as follows:

	Restaurants
		Rick’s Harborside				Imperial Garden				Ginger Wok				Total
Total sales—Last Year	$	19,270,000			$	11,280,000			$	16,450,000			$	47,000,000
Percentage of total sales		41	%			24	%			35	%			100	%
Allocation (based on the above percentages)	$	360,800			$	211,200			$	308,000			$	880,000

This year the Imperial Garden restaurant increased its sales by $1 million. The sales levels in the other two restaurants remained unchanged. The company’s sales data for this year were as follows:

	Restaurants
		Rick’s Harborside				Imperial Garden				Ginger Wok				Total
Total sales—This Year	$	19,270,000			$	12,280,000			$	16,450,000			$	48,000,000
Percentage of total sales		40	%			26	%			34	%			100	%

Fixed administrative expenses for this year remained unchanged at $880,000.

Required:

1. Using sales dollars as an allocation base, show the allocation of the fixed administrative expenses among the three restaurants for this year.

2. Calculate the change in each restaurant’s allocated cost from last year to this year.

3. Is sales dollars a good base for allocation of fixed costs?

- This is the question.

Answer 1

Part 1 ) Allocation of the fixed administrative expenses

Restaurant	Percentage on sale	Calculation	Fixed administrative expenses ($)
Rick’s Harborside	40%	880000*40%	352000
Imperial Garden	26%	880000*26%	228800
Ginger Wok	34%	880000*34%	299200
			880000

Part 2 ) Change in each restaurant’s allocated cost

Restaurant	Allocation in Current Year	Allocation in Last Year	Increase/(Decrease) ($)
Rick’s Harborside	352000	360800	(8,800)
Imperial Garden	228800	211200	17,600
Ginger Wok	299200	308000	(8,800)
	880000	880000	NIL

Part 3 ) Is sales dollars a good base for allocation of fixed costs?

Sales of Rick’s Harborside and Ginger Wok are same in previous year and current year but sales of Imperial Garden is increased.

Therfore more fixed cost allocated to Imperial Garden and less allocated to others, which is very logical and usefull.

Therefore Sales dollar is good base for allocation of fixed cost.