The Allocation Problem

Current year 's segmented operating results of Creative Consumer Consultants , Ltd

br Billings (Revenue ) 50 ,000 22 ,000 10 ,000 16 ,000 2 ,000

Traceable Consulting Costs 33 ,500 14 ,000 6 ,000 12 ,500 1 ,000

Non-Traceable Consulting Costs 10 ,000 4 ,400 2 ,000 3 ,200 400

Gross Profit on Sales 6 ,500 3 ,600 2 ,000 300 600

Traceable Other Costs 1 ,000 300 200 500 0

Non-Traceable Other Costs 2 ,500 1 ,100 500 800 100

Net Income 3 ,000 2 ,200 1 ,300 (1 ,000 ) 500

Shown below is the revised table of operating results of Creative Consumer Consultants , Ltd ,assuming non-traceable cost is not allocated

br Center New York Chicago Paris Little Rock

Billings (Revenue ) 50 ,000

22 ,000 10 ,000 16 ,000 2 ,000

Traceable Consulting Costs 33 ,500

14 ,000 6 ,000 12 ,500 1 ,000

Non-Traceable Consulting Costs 10 ,000

10 ,000 0 0 0 0

Gross Profit on Sales 6 ,500

8 ,000 4 ,000 3 ,500 1 ,000

Traceable Other Costs 1 ,000

300 200 500 0

Non-Traceable Other Costs 2 ,500

2 ,500 0 0 0 0

Net Income 3 ,000 (12 ,500 ) 7 ,700 3 ,800 3 ,000 1 ,000 The original table shows that twenty percent (20 ) of the revenue represents non traceable costs and another five percent (5 ) is for non traceable other cost . Allocation of these costs to different offices indicates the proper matching of cost and revenue . In every business organization , management is interested in summarized cost data and a more detailed information in to know how much it costs to operate a given segment of the business . By looking at the net income , the office managers could assess if they are operating well . For example the manager of Paris might implement a cost cutting measures to increase its net income or think of another marketing strategy to get more clients and increase revenues . In the case of New York and Chicago offices , which shows good results on operation , could continue its current strategy

The revised table shows a higher income from each of the world-wide offices . Net income for each office indicates a net increase of twenty five percent (25 ) base on sales due to deletion of the allocated non-traceable costs but as a whole , net revenue remains the same . Under this table , there is no proper matching of cost and revenue , thus giving a misleading input to decision makers . Take for example , the office in Paris which turned out to have a net income of 3 ,000 ,000 , thus giving the manager of that particular office an additional bonus for the job well done when in fact , other costs necessary for the operation is not included

Obviously , the original method (with allocation on non-traceable cost could provide a more reliable and dependable information for decision makers . With these informations , the top management can come up with a more effective decisions that could improve the operation of the whole organization . The goal of...