The Allocation Problem

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

assuming non-traceable cost is allocated (In thousand dollars

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 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 first table shows that twenty percent (20 ) of the revenue represents non traceable consulting costs and another five percent (5 ) is for non traceable other cost . Allocation of the costs to different offices indicates the proper matching of cost and revenue So in this case , New York office will carry 44 , Chicago 20 , Paris 32 , and Little rock 4 of the year

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 the net income , the office managers could evaluate the operational performance of their office . For instance , 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 . On the other hand , New York , Chicago and Little Rock offices , which indicates good results on operation in terms of profitability , could continue its current strategy

The revised table shows a higher net 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 non-traceable fixed costs but as a whole , net revenue remains the same . Under the revised table , cost and revenue were not properly matched , thus giving a misleading input to decision makers . For example , The manager of Paris might have an additional bonus for the job well done because the office turned out to have a net income of 3 ,000 ,000 , when in fact , other costs necessary for the operation were not included

Obviously , the original method (with allocation on non-traceable cost could provide a more reliable and dependable information for decision makers...