Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 25

Allocation of Marketing and Administrative Costs; Profit SBUs Tilton Academy allocates marketing and administrative costs to its three schools based on total annual tuition revenue for the schools. In 2009 the allocations (000s omitted) were as follows:

	Lower School	Middle School	Upper School	Total
Tuition revenue	$1,500	$500	$2,000	$4,000
Marketing and administration	375	125	500	$1,000

In 2010, the middle and upper schools experienced no change in revenues, but the lower school’s tuition revenue increased to $1.9 million. Marketing and administrative costs rose to $1,250,000.

Required

1. Using revenue as an allocation base, how should the costs be allocated for 2010?

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2. What are the shortcomings of this allocation formula?

Step 1 of 3

Profit centers have to take care of both revenue as well as costs that are incurred by their units. These costs have to be allocated between several SBUs depending upon factor like cost control and on basis of revenue earned.