Question

Marathon Running Shop has two service departments (advertising and administrative) and two operating departments (shoes and clothing). The table that follows shows the direct expenses incurred and square footage occupied by all four departments, as well as total sales for the two operating departments for the year 2017.

Department	Direct expenses	Square feet	Sales
Advertising	\(18,000	1,120	-
Administrative expenses	25,000	1,400	-
Shoes	103,000	7,140	\)273,000
Clothing	15,000	4,340	77,000

The advertising department developed and distributed 120 advertisements during the year. Of these, 90 promoted shoes and 30 promoted clothing. Utilities expense of \(64,000 is an indirect expense to all departments. Prepare a departmental expense allocation spreadsheet for Marathon Running Shop. The spreadsheet should assign

(1) direct expenses to each of the four departments,

(2) the \)64,000 of utilities expense to the four departments on the basis of floor space occupied,

(3) the advertising department’s expenses to the two operating departments on the basis of the number of ads placed that promoted a department’s products, and

(4) the administrative department’s expenses to the two operating departments based on the amount of sales. Provide supporting computations for the expense allocations.

Short answer

The shoe department is allocated a total cost of$177,472.

Step-by-step solution

Definition of Utility Expenses

The cost incurred against the use of utilities such as electricity, water, and heating is known as utility expense. Such cost is allocated to different departments depending upon the utilities used.

Allocating direct expenses to four departments

Particulars	Service Department		Operating Department		Total
	Advertising	Administrative	Shoes	Clothing
Departmental Expenses	$18,000	$25,000	$103,000	$15,000	$161,000
Utilities expenses	5,120	6,400	32,640	19,840	$64,000
Advertising expenses	(23,120)		17,340	5,780	$0
Administrative expenses		(31,400)	24,492	6,908	$0
	$0	$0	$177,472	$47,528	$225,000

Allocating utility expenses on the basis of floor space occupied

Department	Space occupied	/	Total Space	X	Utility expenses	=	Allocated expenses
Advertising	1,120	/	14,000	X	$64,000	=	$5,120
Administrative	1,400	/	14,000	X	$64,000	=	6,400
Shoes	7,140	/	14,000	X	$64,000	=	32,640
Clothing	4,340	/	14,000	X	$64,000	=	19,840
							$64,000

Allocating advertising department costs to operating departments

Department	Advertisements	/	Total advertisements	X	Advertisement expenses	=	Allocated cost
Shoes	90	/	120	X	$23,120	=	$17,340
Clothing	30	/	120	X	$23,120	=	5,780
							$23,120

Allocating administrative department cost to operating departments

Department	Sales	/	Total sales	X	Administrative expenses	=	Allocated cost
Shoes	$273,000	/	$350,000	X	$31,400	=	$24,492
Clothing	$77,000	/	350,000	X	$31,400	=	6,908
							$31,400