Question

Biotech, Inc., recently began providing cafeteria services to its employees. Because revenue from the sale of food at the cafeteria does not fully cover cafeteria expenses, Biotech must pay for the shortfall. These costs are allocated to production departments based on employee usage. That is, the company tracks which employees use the cafeteria and allocates costs to production departments accordingly.

Sarah Kolster, manager of the quality testing department, is not happy with receiving cafeteria cost allocations. She is evaluated based on meeting a cost budget established at the beginning of the fiscal year, which does not include the cafeteria allocation, and she clearly has an incentive to minimize costs.

When Sarah met with the company’s accountant, Dan, regarding this issue, she said, “Dan, I like the idea of providing cafeteria service to our employees, but the costs allocated to my department are killing my budget. Last month alone, I was allocated $3,000 in costs related to the new cafeteria. I have no choice but to require my employees to go elsewhere for food.”

Dan responded, “I understand your concern, Sarah. Management’s intent was to provide a service to our employees that would improve productivity and reward employees for their hard work. If you tell your employees to stop using the cafeteria, more costs will be allocated to other departments, and the other departments might also stop using the cafeteria. My belief is that the cafeteria will be self-sufficient within a year if more employees are encouraged to use it. This translates into no more cost allocations to departments within a year. I’ll discuss your concerns with top management later this week.”

Required:

1. Why does Biotech, Inc., allocate cafeteria costs to departments?
2. What recommendations would you make to top management regarding the way cafeteria costs are allocated to department?

Answer 1

Answer:

a.The employees of the company are encouraged to use the cafeteria of the company so that the cafeteria can develop into self-sufficient, and at the current moment, the revenue created by the cafeteria is not covering the costs sustained by it, and therefore, the extra costs are indicted to the production department of the company. The main drive of charging the cafeteria cost to the production department is to make sure that cafeteria endures to function for enough time period that it becomes self-sustaining finally.

b.The cost of the cafeteria has to be endured by the company only, and the only substance to debate is how to charge the extra cost to the departments so that one department does not get all the burden. The company is allocating the cost on the basis of employee usage, and accordingly the cost is charged to the production department.

The main recommendation that I would give to the management is that the extra cost of the cafeteria is not to be fully charged to the production department only, but the charge should be divided among all the departments of the company because all the employees of the company are free to use the cafeteria, and it would make sure that all the burden is not put on a single department.