Design a step method to allocate and apportion hotel overheads between the cost centres and profit centres that more fairly reflects the use of overheads by profit and cost centres. Furthermore, justify the bases (cost drivers) you have implemented so that the new system can be better ‘sold’ to profit centre managers.

You have been asked to devise a more sophisticated and fairer method to allocate and apportion hotel overheads between the 4 cost centres and 4 profit centres. Furthermore, you have been asked to justify the bases you have implemented.

Below are extracts from the coming year’s projected Income Statement and data relating to the hotel’s profit and cost centres.

 

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Undistributed (indirect) Expenses marketing praperty operation & mairtenance 310,000 1,350,000 1,660,000 340,000 1,140,000 1,480,000 70,000 190,000 human resources 115,000 185,000 admin & general 630,000 820,000 Insurance 610,000 610,000 electricity 630,000 630,000 Depreciation 1,240,000 1,240,000 6,625,000 Income Before Tax -6,625,000 Income Tax Net Income fixed assets % area employees % revenue POM work orders % rooms 5,000,000 43.63 6,200 78.18 47 39.17 60% 3900 69.57 food 2,200,000 19.20 800 10.09 42 35.00 22% 900 16.05 spa 1,100,000 9.60 400 5.04 10 8.33 17% 600 10.70 gift shop marketing 50,000 0.44 80 1.01 2 1.67 1% 15 0.27 260,000 2.27 100 1.26 4.17- 16 0.29 POM 1,950,000 17.02 180 2.27 6.67 87 155 A &G 550,000 4.80 90 1.13 4 333 56 1.00 HR 350,000 3.05 80 1.01 2 1.67 32 0.57 11,460,000 100.00 7,930 100.00 120 100.00 100% 5606 100.00 Undistributed (indirect) Expenses marketing praperty operation & mairtenance 310,000 1,350,000 1,660,000 340,000 1,140,000 1,480,000 70,000 190,000 human resources 115,000 185,000 admin & general 630,000 820,000 Insurance 610,000 610,000 electricity 630,000 630,000 Depreciation 1,240,000 1,240,000 6,625,000 Income Before Tax -6,625,000 Income Tax Net Income fixed assets % area employees % revenue POM work orders % rooms 5,000,000 43.63 6,200 78.18 47 39.17 60% 3900 69.57 food 2,200,000 19.20 800 10.09 42 35.00 22% 900 16.05 spa 1,100,000 9.60 400 5.04 10 8.33 17% 600 10.70 gift shop marketing 50,000 0.44 80 1.01 2 1.67 1% 15 0.27 260,000 2.27 100 1.26 4.17- 16 0.29 POM 1,950,000 17.02 180 2.27 6.67 87 155 A &G 550,000 4.80 90 1.13 4 333 56 1.00 HR 350,000 3.05 80 1.01 2 1.67 32 0.57 11,460,000 100.00 7,930 100.00 120 100.00 100% 5606 100.00