Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 31

Allocation of Central Costs; Profit Centers Woodland Hotels, Inc., operates four resorts in the heavily wooded areas of northern California. The resorts are named after the predominant trees at the resort: Pine Valley, Oak Glen, Mimosa, and Birch Glen. Woodland allocates its central office costs to each of the four resorts according to the annual revenue the resort generates. For the current year, the central office costs (000s omitted) were as follows:

Required
1. Based on annual revenue, what amount of the central office costs are allocated to each resort What are the shortcomings of this allocation method
2. Suppose that the current method were replaced with a system of four separate cost pools with costs collected in the four pools allocated on the basis of revenues, assets invested in each resort, square footage, and number of rooms, respectively. Which costs should be collected in each of the four pools
3. Using the cost pool system in requirement 2, how much of the central office costs would be allocated to each resort Is this system preferable to the single-allocation base system used in requirement 1 Why or why not