Concept explainers
Welcome Inns is a chain of motels serving business travelers in New Mexico and southwest Texas. The chain has grown from one motel several years ago to five motels. In 20x1, the owner of the company decided to set up an internal Accounting Department to centralize control of financial information. (Previously, local CPAs handled each motel’s bookkeeping and financial reporting.) The accounting office was opened in January 20x1 by renting space adjacent to corporate headquarters in Ruidoso, New Mexico. All motels have been supplied with personal computers and internet access to transfer information to central accounting on a daily basis.
The Accounting Department has budgeted fixed costs of $135,000 per year. Variable costs are budgeted at $20 per hour. In 20x1, actual cost for the Accounting Department was $223,000. Further information is as follows:
Required:
- 1. Suppose the total actual costs of the Accounting Department are allocated on the basis of 20x1 sales revenue. How much will be allocated to each motel?
- 2. Suppose that Welcome Inns views 20x0 sales figures as a proxy for budgeted capacity of the motels. Thus, fixed Accounting Department costs are allocated on the basis of 20x0 sales, and variable costs are allocated according to 20x1 usage multiplied by the variable rate. How much Accounting Department cost will be allocated to each motel?
- 3. Comment on the two allocation schemes. Which motels would prefer the method in Requirement 1? The method in Requirement 2? Explain.
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Chapter 7 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Your public accounting practice is located in a city of 15,000 people. The majority of your work, conducted by you and two assistants, consistsof compiling clients’ monthly statements and preparing income tax returns for individuals from cash data and partnership returns from books and records. You have a small number of audit clients; given the current size of your practice, you generally consider it a challenge to accept new audit clients.One of your corporate clients is a retail hardware store. Your work for this client has been limited to preparing the corporate income tax return from a trial balance submitted by the bookkeeper.On December 26, you receive from the president of the corporation a letter containing the following request:We have made arrangements with First National Bank to borrow $500,000 to finance the purchase of a complete line of appliances. The bank has asked us to furnish our auditors’ certified statement as of December 31, which is the closing date of our…arrow_forwardJimmy Pace has recently been hired as the manager of Jittery Jon’s Coffee Shop. Jittery Jon’s Coffee Shop is a national chain of franchised coffee shops. During his first month as store manager, Jimmy encountered the following internal control situations: a. Jittery Jon’s Coffee Shop has one cash register. Prior to Jimmy’s joining the coffee shop, each employee working on a shift would take a customer order, accept payment, and then prepare the order. Jimmy made one employee on each shift responsible for taking orders and accepting the customer’s payment. Other employees prepare the orders. b. Because only one employee uses the cash register, that employee is responsible for counting the cash at the end of the shift and verifying that the cash in the drawer matches the amount of cash sales recorded by the cash register. Jimmy expects each cashier to balance the drawer to the penny every time—no exceptions. c. Jimmy caught an employee putting a case of 1,000 single-serving tea bags in…arrow_forwardJimmy Pace has recently been hired as the manager of Jittery Jon’s Coffee Shop. Jittery Jon’s Coffee Shop is a national chain of franchised coffee shops. During his first month as store manager, Jimmy encountered the following internal control situations:a. Jittery Jon’s Coffee Shop has one cash register. Prior to Jimmy’s joining the coffee shop, each employee working on a shift would take a customer order, accept payment, and then prepare the order. Jimmy made one employee on each shift responsible for taking orders and accepting the customer’s payment. Other employees prepare the orders.b. Because only one employee uses the cash register, that employee is responsible for counting the cash at the end of the shift and verifying that the cash in the drawer matches the amount of cash sales recorded by the cash register. Jimmy expects each cashier to balance the drawer to the penny every time—no exceptions.c. Jimmy caught an employee putting a case of 1,000 single-serving tea bags in her…arrow_forward
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