Question

A company has two operating departments (appliances and electronics) and one service department (office). The office department reports direct expenses of $50,000. The company also has $6,900 of utilities expense, which is an indirect expense to all departments. Additional information on square feet occupied and sales follows.

How should utilities expense be allocated to the three departments?
A. Based on square feet occupied
B. Based on sales
C. Equally to all departments
D. Based on the number of employees in each department

Answer 1

To allocate utilities expense fairly across departments in a company, the method chosen should reflect actual resource use. Options include allocation based on square footage, sales, an equal distribution, or the number of employees, with the first or last options potentially being more equitable.

Step-by-step explanation:

When dealing with allocation of indirect expenses like utilities across various departments, companies need to consider the method that most accurately reflects the usage of resources. The four options provided each represent a different allocation base:

• Based on square feet occupied might reflect the actual physical space utilisation and related utility consumption.
• Based on sales could be an indicator of how busy each department is, implying more utility use for higher sales.
• Equally to all departments ignores any proportional use and is the simplest but not always the most accurate method.
• Based on the number of employees suggests that more staff might consume more utilities, such as lighting, heating, and cooling.

Without specific data on these factors, we cannot definitively choose the best method. However, if square footage or number of employees correlates closely with utility use, those might be more equitable distribution methods compared to equal distribution or sales-based, which can be skewed by high sales in one department regardless of actual utility consumption.