Case Analysis Write-Up #1
Case Study: Tots-R-Us
1. Compute the cost of a single preschool class and a single birthday party using the current cost system.
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.
Based upon the information available to us we would not recommend that TRU continue to allocate all of the building-related costs to the preschool program only since doing so ...view middle of the document...
TRU should account for the excess capacity by offering the elective classes that they intended on cancelling during the normal months of service or continue to offer the normal core classes. This could bring more revenue to the school as well as minimize the average cost of a preschool class during the normal months of service. The house and renovation costs are fixed and when the Director schedules services below capacity, the service costs of production average high. With offering additional classes during the June – August months TRU can increase its capacity utilization by 23%, instead of continuing to run at the 77% it is now.
4. Do you agree with TRU’s allocation method for salaries, supplies, and food? Why or why not? Be specific about any alternative allocation methods that you would consider.
We do agree the TRU’s current allocation method for salaries, supplies, and food. They are currently utilizing a Direct Cost Allocation Method that 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.
5. Do you agree with TRU’s decision not to allocate the cost of advertising? Why or why not? Be specific about any alternative allocation methods that you would consider?
No, we do not agree with TRU’s decision to not allocate the cost of advertising either business segment since 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. We believe that, just like the building-related costs discussed earlier, 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.
Revised Cost per Preschool Class & Birthday Party for FY2002 (1200 & 150 respectively)
Revised Cost per Preschool Class & Birthday Party w/ Year Round Classes (1560 & 150 respectively)
7. How could TRU use the information from the revised cost information to enhance profitability?
We believe that TRU can use the information obtained from the revised cost information to enhance their business profitability in a variety of way. First, we believe that 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...