Essay: Allocation of Fixed Costs-Income Statement

Sample Essay

Recasting the report that allocates most of the fixed costs to one department and ensuring that all the fixed costs are shared among all the three departments. This method is the most advocated for since it ensures that the profitability of all the departments will be easily determined. Further, if the department of BCC, which has the least sales contribution, is found to be contributing losses, it can be wiped out of the company. This means that the divisions, which are making losses for the company, are easily identified and thus wiped if at all they do not show promising results in the future.

The below income statement shows how best fixed cost can be allocated to the different department. It is also important to note that not all fixed costs are traceable to specific divisions and thus such costs should not be allocated to any divisions but from the overall operating income of the entire firm. This is the most effective method to use.

Total company Divisions
(in million dollars) BCC IDS Commercial
Sales 1,000,000 9,600 492,900 498,600
Less variable expenses
COGS 40,000 5,000 10,000 25,000
Other variable expenses 15,000 2,000 5,000 8,000
Total variable expenses 55,000 7,000 15,000 33,000
Contribution margin 45,000 2,600 467,900 465,600
Less traceable fixed expenses 20,500 500 7,000 13,000
Divisional segment margin 24,500 1,900 460,900 452,000
Less non-traceable fixed expenses 4,000
Net operating income 20,500

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