Background: O’Neill Auto Company incurred $20,000 of indirect advertising costs
ID: 2465658 • Letter: B
Question
Background: O’Neill Auto Company incurred $20,000 of indirect advertising costs for its operations. The following 2011 data have been collected for its three departments:
New Cars
Used Cars
Parts and Service
Direct advertising costs
$20,000
$16,000
$4,000
Newspaper ad space
60%
30%
10%
Sales
$200,000
$150,000
$50,000
Requirements: Determine the indirect advertising costs allocated to each department using the following allocation bases and comment on your allocation preference.
a. Direct advertising costs
b. Newspaper ad space
c. Sales
New Cars
Used Cars
Parts and Service
Total
Method a: allocation based on direct advertising costs:
Method b: allocation based on newspaper ad space:
Method c: allocation based on sales:
Describe your preference. Which of these 3 methods of
allocation do you prefer and why?
New Cars
Used Cars
Parts and Service
Direct advertising costs
$20,000
$16,000
$4,000
Newspaper ad space
60%
30%
10%
Sales
$200,000
$150,000
$50,000
Explanation / Answer
Method a: Calculation of allocation based on direct advertising costs:
Details
New Cars
Used Cars
Parts and Service
Total
Direct advertising costs
$ 20,000
$ 16,000
$ 4,000
Ratio
5
4
1
Overhead cost
$ 10,000
$ 8,000
$ 2,000
$ 20,000
Under this method, overhead of new cars is $10,000 and Parts and service is $2,000 it low amount and equal to compare to other methods. New cars and Parts and service point of view this method is preferable.
Method b: Calculation of allocation based on newspaper ad space:
Details
New Cars
Used Cars
Parts and Service
Total
Newspaper ad space
60%
30%
10%
Ratio
60
30
10
Overhead cost
$ 12,000
$ 6,000
$ 2,000
$ 20,000
Under this method, overhead of used cars is $6,000 it low amount compared to other methods. Used cars point of view this method is preferable.
Method c: Calculation of allocation based on sales:
Details
New Cars
Used Cars
Parts and Service
Total
Sales
$200,000
$150,000
$50,000
Ratio
4
3
1
Overhead cost
$ 10,000
$ 7,500
$ 2,500
$ 20,000
Under this method, overhead of new cars is $10,000 and used cars are $7,500 it low amount and equal to compare to other methods. New cars and used cars point of view this method is preferable.
Details
New Cars
Used Cars
Parts and Service
Total
Direct advertising costs
$ 20,000
$ 16,000
$ 4,000
Ratio
5
4
1
Overhead cost
$ 10,000
$ 8,000
$ 2,000
$ 20,000
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