Question

Suggest a reasonable basis for allocating each of the following indirect expenses to departments: (a) salary of a supervisor who manages several departments, (b) rent, (c) heat, (d) electricity for lighting, (e) janitorial services, (f) advertising, (g) expired insurance on equipment, and (h) property taxes on equipment.

Short answer

Indirect expenses	Allocation basis
(a) Salary of a supervisor who manages several departments	Number of employees
(b) Rent	Area in square feet
(c) Heat	Area in square feet
(d) Electricity for lighting	Area in square feet
(e) Janitorial services	Area in square feet
(f) Advertising	Sales
(g) Expired insurance on equipment	Value of assets insured
(h) Property taxes on equipment	Area in square feet covered by the equipment

Step-by-step solution

Definition of Indirect Expenses

The expenses that are not directly associated with the production but assist in the business’s operations are indirect expenses. It includes costs such as administration and selling expenses.

The basis for allocating indirect expenses

1. Salary paid to supervisors will be allocated according to the number of supervisors in each department.

2. Expenses associated with rent, electricity, heat, and janitorial services will be allocated to each department depending on the area occupied in square feet.

3. Advertising expenses will be allocated to each department depending upon the sales value of each department.

4. Property tax on equipment will be allocated according to the area of the property occupied in square feet by the equipment.