Question

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.)	$	9,800
Administrative and executive salaries		4,900
Interest on resort purchase		3,900
Advertising		600
Housekeeping		2,900
Depreciation on reservations computer		80
Room maintenance		980
Carpet-cleaning contract		50
Contract to repaint rooms		490
	$	23,700

	Pine Valley		Oak Glen		Mimosa		Birch Glen		Total
Revenue (000s)	$	7,550	$	11,285	$	12,500	$	9,245	$	40,580
Square feet		60,140		83,020		45,280		90,690		279,130
Rooms		86		122		66		174		448
Assets (000s)	$	100,110	$	148,205	$	78,425	$	62,325	$	389,065

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?

Answer 1

Answer :-

1). Based on annual revenue, The amount of the central office costs are allocated to each resort :-

Resorts	Revenue percent	Cost allocation of the total central office costs
Pine valley	$7,550/$40,580*100% = 18.61%	$23,700,000*0.1861 = $4,410,570
Oak Glen	$11,285/$40,580*100% = 27.81%	$23,700,000*0.2781 = $6,590,970
Mimosa	$12,500/$40,580*100% = 30.80%	$23,700,000*0.3080 = $7,299,600
Brich Glen	$9,245/$40,580*100% = 22.78%	$23,700,000*0.2278 = $5,398,860
Total	100%	$23,700,000

2). 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 are :-

a). Assets pool :  Interest on resort purchase = $3,900,000.

b). Square feet pool : Carpet cleaning contract + Contract to repair rooms = $50,000 + $490,000 = $540,000.

c). Numbers of rooms pool : Front office personnel + housekeeping + Room maintenance = $9,800,000 + $2,900,000 + $980,000 = $13,680,000.

d). Revenue pool = Advertising + Depreciation on reservations + Administrative executive salaries = $600,000 + $80,000 + $4,900,000 = $5,580,000.

3). Step 1 - we need to find the percentage(000s omitted) :-

	Pine valley	Oak Glen	Mimosa	Brich Glen
Revenue	$7,550/$40,580*100% = 18.61%	$11,285/$40,580*100% = 27.81%	$12,500/$40,580*100% = 30.80%	$9,245/$40,580*100% = 22.78%
Square feet	$60,140/$279,130*100% = 21.54%	$83,020/$279,130*100% = 29.74%	$45,280/$279,130*100% = 16.22%	$90,690/$279,130*100% = 32.50%
Rooms	$86/$448*100% = 19.20%	$122/$448*100% = 27.23%	$66/$448*100% = 14.73%	$174/$448*100% = 38.83%
Assets	$100,110/$389,065*100% = 25.73%	$148,205/$389,065*100% = 38.10%	$78,425/$389,065*100% = 20.16%	$62,325/$389,065*100% = 16.01%

Step 2 - Cost allocation on the basis of the percentage of cost pools(000s omitted) :-

Revenue pool	$5,580*18.61% = $1,038.30	$5,580*27.81% = $1,551.40	$5,580*30.80% = $1,718.65	$5,580*22.78% = $1,271.12	$5,580
Square feet pool	$540*21.54% = $116.31	$540*29.74% = $160.60	$540*16.22% =$87.59	$540*32.50% = $175.50	$540
Rooms pool	$13,680*19.20% = $2,627.56	$13,680*27.23% = $3,725.07	$13,680*14.73% = $2,015.06	$13,680*38.83% = $5,312.94	$13,680
Assets pool	$3,900*25.73% = $1,003.50	$3,900* 38.10% = $1,486	$3,900*20.16% = $786.20	$3,900*16.01 = $624.30	$3,900
Total	$4,785.67	$6,923.07	$4,607.50	$7,383.86	$23,700