A multinational aerospace firm uses traditional methods to allocate manufacturin

Question

A multinational aerospace firm uses traditional methods to allocate manufacturing and management support costs for its European division. However, accounts such as business travel have historically been allocated on the basis of the number of employees at the plants in France, Italy, Germany and Greece. At present, employees are distributed amongst the plants as shown in the table 2.1.

The president recently stated that some product lines are likely generating much more management travel than others. The ABC system is chosen to augment the traditional method to more precisely allocate travel costs to major product lines at each plant. An internal audit has indicated that in a one-year period, a total of 500 travel vouchers were processed by the management of the major five product lines produced at the four plants. The distribution is as shown in table 2.2.

While carrying out the internal audit, it was also found that about 5% of Paris’s $3 million support budget was spent on travel. 15% of Florence’s smaller $750,000 went on travel, as did 17.5% of the $1.5 million support budget for Hamburg. Somewhat surprisingly, 30% of Athens’ small $750,000 support budget was spent on travel.

a) First, assume that allocation of the total observed travel expenses of $750,000 to plants using a traditional basis of workforce size is sufficient. If total employment of 29,100 is distributed as shown in table 2.1, allocate the $750,000.

b) Now, assume that corporate management, having reviewed the actual travel costs for the four centres wants to know more about travel expenses based on product line, not merely plant location and workforce size. Use the ABC method to determine how the product lines may drive travel costs at the plants.

c) Of the two methods used to allocate the travel costs, which do you believe is the better approach and why?

Table 2.1 Distribution of employees for aerospace company's European division. Plant Paris, France Florence, Italy Hamburg, Germany Athens, Greece Number of employees 12,500 8,600 4,200 3,800

Explanation / Answer

a. Plant No.of employees Allocation of $ 750000 Paris 12500 750000/29100*12500= 322165 Florence 8600 750000/29100*8600= 221649 Hamburg 4200 750000/29100*4200= 108247 Athens 3800 750000/29100*3800= 97938 Total 29100 750000 b… Product Line(Pdt. Line no.of Voucher/Plant total no.of voucher*Plant travel expense budget Plant Plant Budget for travel exp. 1 2 3 4 5 Total Paris 5%*3000000= 150000 100000 50000 150000 Florence 750000*15%= 112500 64286 24107 24107 112500 Hamburg 17.5%*1500000= 262500 181034 45259 36207 262500 Athens 30%*750000= 225000 225000 225000 Total 750000 345320 95259 24107 36207 249107 750000 c. b. is a better approach. Obviously allocation b. based on travel vouchers generated is a perfect metric than total no.of employees in the entire plant---that includes employees who have not travelled at all. Also, in b. product-wise requirement of travel expense is known

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