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BUS 512A
Tots R Us
1. Compute the cost of a single preschool class and a single birthday party using the current
cost system.
Answer: Unit cost for Preschool Class and Birthday Party
Building Related
Salaries
Supplies & food
Advertising
Total
Unit Cost
Cost of single preschool class is estimated as total/1200 meetings per year (as mentioned in
the case) = $270
Cost of single birthday party is estimated as total/150 parties held per year (as mentioned in
the case) = $86.67
2. Would you recommend that TRU continue to allocate the building-related costs only to the
preschool program? What alternative allocation method would you suggest? Justify your
answer. Ignore consideration of excess capacity discussed in question 3 below for this
answer. Please discuss any additional information that you feel is needed.
Answer: No, I would not recommend that TRU continue to allocate all of the buildingrelated costs to the preschool program only as it would result in an inaccurate computation of
the actual cost for birthday party segment of the business.
TRU is using a direct method of cost allocation which is less accurate in this case hence the
alternative cost allocation method that I would suggest is Step-Down Method as it considers
the interdependency of each departments. It will also define how indirect costs must be
allocated to both the preschool service department and the birthday service department and
the cost allocation would then be more accurate for each service provided. All direct and
indirect costs should be accounted for accordingly based on the percentage each services use
it.
4. Do you agree with TRUs allocation method for salaries, supplies, and food? Why or why
not? Be specific about any alternative allocation methods that you would consider.
5. Do you agree with TRUs decision not to allocate the cost of advertising? Why or why not?
Be specific about any alternative allocation methods that you would consider?
Answer: No, I do not agree with TRUs decision to not allocate the cost of advertising either
business segment as it prevents the true cost of either product from being realized.
Furthermore, failing to allocate the advertising expenses can create inefficiencies waste, and
possibly even fraud. Just like the building-related costs, TRU should begin allocating the
advertising costs utilizing the Step-Down allocation method. Applying the Step-Down
method for the most recent year, (FY2002) which had a total of 1350 services provided
during the most recent year (1200 classes and 150 birthday parties), the total advertising costs
would be allocated at a rate of 92% to the preschool segment and 8% to the birthday party
segment.
6. Compute the cost per class meeting and per birthday party under the assumptions that you
have made.
Answer:
Building Related
Salaries
Supplies & food
Advertising
Total
Unit Cost
Cost of single preschool class is estimated as total/1200 meetings per year (as mentioned in
the case) = $263.27
Cost of single birthday party is estimated as total/150 parties held per year (as mentioned in
the case) = $207.2
7. How could TRU use the information from the revised cost information to enhance
profitability?
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