2. (TCO 6) Booth Financial Services, LLC has two revenue producing departments,

Question

2. (TCO 6) Booth Financial Services, LLC has two revenue producing departments, Financial Planning and Business Consulting. The accounting department is trying to determine the best method to allocate $1,000,000 of common costs (secretarial staff, reception personnel, etc), either by salary or number of employees. Information on the revenue departments are as follows:

Department Employees Salaries
Financial Planning 150 employees $10,000,000
Business Consulting 50 employees $5,000,000



(a) Allocate the $1,000,000 common costs to the two revenue departments using both methods.
(b) Why are allocations called arbitrary?

Explanation / Answer

(a) Allocate the $1,000,000 common costs to the two revenue departments using both methods. Salary method: Financial Planning 75%, Business Consulting 25% Employee method: Financial Planning 2/3, Business Consulting 1/3. (b) Why are allocations called arbitrary? Although data may be gathered to select the best method of allocation, it is still subject to individual judgment or preference

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