Figure 7-1 Luxurious Department Store incurred $6,000 of indirect advertising costs for its operations. The following data has been collected for 2014 for its three departments:
Refer to Figure 7-1. How much of the indirect advertising costs will be allocated to the Sportswear Department if newspaper ad space is the activity driver?

Question

Figure 7-1 Luxurious Department Store incurred $6,000 of indirect advertising costs for its operations. The following data has been collected for 2014 for its three departments:
 Refer to Figure 7-1. How much of the indirect advertising costs will be allocated to the Sportswear Department if newspaper ad space is the activity driver?

Quizplus · Accepted Answer

To allocate indirect advertising costs using the newspaper ad space as an activity driver, we need to calculate the allocation rate first. 
Allocation rate = Total indirect advertising costs / Total newspaper ad space used
Total newspaper ad space used = 150 + 200 + 100 = 450 sq. ft.

Allocation rate = 6,000 / 450 = $13.33 per sq. ft.

To allocate the indirect advertising costs to the Sportswear department: 
Sportswear department's newspaper ad space used in sq. ft. = 200 
Allocation to Sportswear department = 200 x $13.33 = $2,666.67

Therefore, Choice C, $3,720, is the correct answer as it is the total indirect advertising cost allocated to the Sportswear Department.

Figure 7-1 Luxurious Department Store Incurred $6,000 of Indirect Advertising