Sample Essay The income statement included in the financial statement is quite informative as it…
Essay: Allocation of Fixed Costs-Income Statement
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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