What are your thoughts on this? Should they be?

Appendix Should overhead costs be allocated? By A. Naal Geller and Raymond S. Schmidgall known to management. In addition, The allocation process is fairly cost allocation provides department complex, and is not well understood by heads with more realistic assessment the lodging industry. This article, there of overhead costs their department fore, has two purposes must cover. Without the benefit of 1) to discuss the advantages and fully allocated income statements, a drawbacks of allocation, and rooms department manager, for exam 2) to illustrate cost allocation. ple, may not understand why a 70 percent contribution from the room Cost allocation is the assignment department is imperative for the firm of overhead costs to operated depart. to realize a profit. ments according to benefits received, Finally, fully-allocated income responsibilities, or other logical mea. statements are useful in dealing with sures of use. Such overhead costs as the government regulations. They provide general manager's salary are spread better information for wage-and-price across profit centers such as rooms and food and beverage. guidelines, government per diem rates and general lobbying efforts. Advantages of allocation Drawbacks of allocation The major advantage of cost al. location is that it results in better The major drawbacks of cost alloca decision-making by the general and tion relate primarily to the managers of departmental managers. These deci. operated departments and to misunder sions are improved when based on standings as to its use. For example: fully allocated income statements: PRICING. Pricing is best accom- Department heads may not plished when the full costs of an oper. understand the process and may resist it. ated department are known. MARKETING. Management can Department heads may defer dis- best determine which services to em- cretionary costs such as repairs of phasize after the full costs of each oper- otherwise strive to achieve short- ated department are realized. run profitability at the expense of CHANGES IN CAPACITY. Ex. the long-run profitability of the pansion or reduction in the capacity of company the hotel/motel operation should be Fully-allocated department state- based on the profit potential (net of indi- ments are not appropriate for rect costs) of the operating departments. performance evaluation STAFFING. More judicious staff- ing decisions are possible with the full The effects of these drawbacks cost of each operated department will be minimized if top-level manage ment will do the following: This article first appeared in Lodging *Note: This article was written before the Uniform System of Accounts for Hotels (USAH (USALD. However, in terms of allocating expenses, the approaches suggested here have not changed with the revision of the uniform system. Therefore, it is relevant to cost allocation as when it was first written