When investments in facilities are shared by different subunits in a firm, allocation of the cost of these common facilities to sharing units should be determined by:
A) Reference to Generally Accepted Accounting Principles (GAAP).
B) Relative sales dollars generated by the various units.
C) The relative amount of use of the facilities, or demand for the facilities, by the various investment centers in the organization.
D) Special techniques prescribed by the American Institute of Certified Public Accountants (AICPA).
E) Some measure of current value (e.g., replacement cost).

Question

Quizplus · Accepted Answer

The most appropriate method for allocating costs of common facilities when investments are shared by different subunits is to allocate them based on the relative amount of use or demand of facilities by different centers within the organization. This ensures that the subunits responsible for generating more demand or greater use of the facilities are allocated higher costs, reflecting their actual usage. The other methods, such as reference to GAAP, sales dollars generated, or replacement cost, may not accurately reflect the true cost allocation based on actual usage. The AICPA may provide some guidance on cost allocation, but it may not be specific to the situation.

When Investments in Facilities Are Shared by Different Subunits in a Firm