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Divya Krishna Murthy

BUS 512A

Tots R Us
1. Compute the cost of a single preschool class and a single birthday party using the current
cost system.
Answer: Unit cost for Preschool Class and Birthday Party

Building Related
Salaries
Supplies & food
Advertising
Total
Unit Cost

Pre-School Class Costs


$216,000
$50,000 + 2*20,000 = $90,000
$18,000
NA
$324,000
$270

Birthday Party Costs


NA
$5,000*2 = $10,000
$3,000
NA
$13,000
$86.67

Cost of single preschool class is estimated as total/1200 meetings per year (as mentioned in
the case) = $270
Cost of single birthday party is estimated as total/150 parties held per year (as mentioned in
the case) = $86.67

2. Would you recommend that TRU continue to allocate the building-related costs only to the
preschool program? What alternative allocation method would you suggest? Justify your
answer. Ignore consideration of excess capacity discussed in question 3 below for this
answer. Please discuss any additional information that you feel is needed.
Answer: No, I would not recommend that TRU continue to allocate all of the buildingrelated costs to the preschool program only as it would result in an inaccurate computation of
the actual cost for birthday party segment of the business.

TRU is using a direct method of cost allocation which is less accurate in this case hence the
alternative cost allocation method that I would suggest is Step-Down Method as it considers
the interdependency of each departments. It will also define how indirect costs must be
allocated to both the preschool service department and the birthday service department and
the cost allocation would then be more accurate for each service provided. All direct and
indirect costs should be accounted for accordingly based on the percentage each services use
it.

4. Do you agree with TRUs allocation method for salaries, supplies, and food? Why or why
not? Be specific about any alternative allocation methods that you would consider.

Divya Krishna Murthy


BUS 512A
Answer: Yes, I agree with the TRUs current allocation method for salaries, supplies, and
food. They are currently using Direct Cost Allocation Method which is based on the
percentage of time that each employee is associated with a particular service which
accurately reflects the actual cost of labor for the associated service. Hence based on the
number of hours and number of days per week the employees are available for the services,
their cost gets allocated and similarly based on the number of children attending the class and
the birthday party the cost for supplies and food is computed.

5. Do you agree with TRUs decision not to allocate the cost of advertising? Why or why not?
Be specific about any alternative allocation methods that you would consider?
Answer: No, I do not agree with TRUs decision to not allocate the cost of advertising either
business segment as it prevents the true cost of either product from being realized.
Furthermore, failing to allocate the advertising expenses can create inefficiencies waste, and
possibly even fraud. Just like the building-related costs, TRU should begin allocating the
advertising costs utilizing the Step-Down allocation method. Applying the Step-Down
method for the most recent year, (FY2002) which had a total of 1350 services provided
during the most recent year (1200 classes and 150 birthday parties), the total advertising costs
would be allocated at a rate of 92% to the preschool segment and 8% to the birthday party
segment.

6. Compute the cost per class meeting and per birthday party under the assumptions that you
have made.
Answer:
Building Related
Salaries
Supplies & food
Advertising
Total
Unit Cost

Pre-School Class Costs


$216,000 * 0.92 = 198,720
$50,000 + 2*20,000 = $90,000
$18,000
$10,000 * 0.92 = 9,200
$315,920
$263.27

Birthday Party Costs


$216,000 * 0.08 = 17,280
$5,000*2 = $10,000
$3,000
10,000 * 0.08 = 800
$31,080
$207.2

Cost of single preschool class is estimated as total/1200 meetings per year (as mentioned in
the case) = $263.27
Cost of single birthday party is estimated as total/150 parties held per year (as mentioned in
the case) = $207.2

7. How could TRU use the information from the revised cost information to enhance
profitability?
2

Divya Krishna Murthy


BUS 512A
Answer: TRU can use the information obtained from the revised cost information to enhance
their business profitability in a variety of way. First, a thorough review of the revised cost
information and performing a cost analysis TRU could see the increased profitability that
would result from them offering preschool classes on a year round basis. Second, they could
adjust their pricing to more accurately account for the cost of each service, which, for
birthday parties, is actually much higher than they initially believed. By accounting for the
actual costs associated with each service and adjusting their prices accordingly, TRU will be
able to make better decisions about the long-term future, and thus success, of the business.
Third, TRU can utilize the revised cost information to develop more accurate and dependable
budgets for future years and analysis the costs and benefits of future expenditures, whether it
be advertising, supplies and food, or employee-related decisions.

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