EXERCISE 11B–2 Sales Dollars as an Allocation Base for Fixed Costs [LO6]
Lacey’s Department Store allocates its fixed administrative expenses to its four operating depart- ments on the basis of sales dollars. During 2009, the fixed administrative expenses totaled
$900,000. These expenses were allocated as follows:
Total sales—2009 . . . . Percentage of total sales . . . . . . . . . . . . $600,000
Allocation (based on the above
percentages) . . . . . . $90,000 $225,000 $315,000 $270,000 $900,000
During 2010, the following year, the Women’s Department doubled its sales. The sales levels in the other three departments remained unchanged. The company’s 2010 sales data were as follows:
1. Using sales dollars as an allocation base, show the allocation of the fixed administrative expenses among the four departments for 2010.
2. Compare your allocation from (1) above to the allocation for 2009. As the manager of the Women’s Department, how would you feel about the administrative expenses that have been charged to you for 2010?
3. Comment on the usefulness of sales dollars as an allocation base.