Question

18-30 Allocation of Marketing and Administrative Costs; Profit SBUS Chilton Day School allocates marketing and administrative costs to its three schools based on total annual tuition revenue for the schools. Last year the allocations (000s omitted) were as follows: Preschool Middle School High School Total $1,500 $1,800 Tuition revenue $2,200 400 $5,500 1,000 Marketing and administration 275 325 page 806 In the current year, the middle and high schools experienced no change in revenues, but the preschool's tuition revenue increased to $1.9 million. Marketing and administrative costs rose to $1,250,000 Required 1. Using revenue as an allocation base, how should the costs be allocated for the current year? 2. What are the shortcomings of this allocation formula?

Answer 1

1)
Current Year:	Pre-School	Middle School	High School	Total
Tuition Revenue	$1,900,000	$1,800,000	$2,200,000	$5,900,000
% of revenue earned in current year ($1,900,000/$5,900,000*100); ($1,800,000/$5,900,000*100); ($2,200,000/$5,900,000*100)	32%	31%	37%	100%
Allocation of Marketing and administrative costs based on current year's sales ($1,250,000*32/100); ($1,250,000*31/100); ($1,250,000*37/100)	$402,542	$381,356	$466,102	$1,250,000

2)

The main shortcomings of this allocation formula is that there is no improvement in sales revenue of Middle and High Schools as the sales revenue is same as last year but the costs of marketing and administrative costs are allocated to these two schools even there is no additional revenue, hence, it is treated as shortcomings of this allocation formula.