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.

Front office personnel	10900
Administrative and executive salaries	5300
Interest on resort purchase	4300
Advertising	600
Housekeeping	3,300
Depreciation on reservations computer	80
Room maintenance	1,090
Carpet-cleaning contract	50
Contract to repaint rooms	530
	$26,150

	Pine Valley	Oak Glen	Mimosa	Birch Glen	Total
Revenue (000s)	8350	12480	13825	10,225	44,880
Square feet	62215	85890	46835	93,820	288,760
Rooms	86	122	66	174	448
Assets (000s)	103565	153335	81120	$ 64,480	402,500

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

1. Amount of the central office costs are allocated to each resort

	Revenue(000s)	Calculation	Cost to be allocated
Pine Valley	8350	26,150 * (8,350 / 44,880)	4865
Oak Glen	12480	26,150 * (12,480 / 44,880)	7272
Mimosa	13825	26,150 * (13,825 / 44,880)	8055
Birch Glen	10225	26,150 * (10,225 / 44,880)	5958
Total	44880		26150

2. Cost allocated in each pool:

Expense	Amount	Pool
Front office personnel	10,900	Revenue (000s)
Administrative and executive salaries	5,300	Revenue (000s)
Interest on resort purchase	4,300	Assets
Advertising	600	Revenue (000s)
Housekeeping	3,300	Rooms
Depreciation on reservations computer	80	Assets (000s)
Room maintenance	1,090	Rooms
Carpet-cleaning contract	50	Square feet
Contract to repaint rooms	530	Rooms

3. Central Cost allocation:

	Cost	Pine Valley	Oak Glen	Mimosa	Birch Glen
Revenue(000s)	16,800	16,800 * 8,350 / 44,880	16,800 * 12,480 / 44,880	16,800 * 13,825 / 44,880	16,800 * 10,225 / 44,880
Square feet	50	50 * 62,215 / 288,760	50 * 85,890 / 288,760	50 * 46,835 / 288,760	50 * 93,820 / 288,760
Rooms	4,920	4,920 * 86 / 448	4,920 * 122 / 448	4,920 * 66 / 448	4,920 * 174 / 448
Assets (000s)	4,380	4,380 * 103,565 / 402,500	4,380 * 153,335 / 402,500	4,380 * 81,120 / 402,500	4,380 * 64,480 / 402,500
	Cost	Pine Valley	Oak Glen	Mimosa	Birch Glen	Total
Revenue(000s)	16,800	3,126	4,672	5,175	3,828	16,800
Square feet	50	11	15	8	16	50
Rooms	4,920	944	1,340	725	1,911	4,920
Assets (000s)	4,380	1,127	1,669	883	702	4,380
	26,150	5,208	7,695	6,791	6,456	26,150