We have one company that operates two businesses. They both manufacture and sell their product. One specializes in unicycles and the other bicycles. Total sales of both businesses are $170 million, $150 million for the unicycle and $20 million for the bicycle. They share a warehouse of 100,000 square feet, 25,000 square feet for the bicycle and the remaining for the unicycle. Total costs were split 50-50. The total warehouse cost is $3 million and the total advertising cost is $5 million.
Unicycle Bicycle
Total Sales 150,000,000 20,000,000
Advertising 2,500,000 2,500,000
Rent 1,500,000 1,500,000
The costs of advertising and rent for both businesses within the company are the same based on the traditional method. Both businesses have an expense of $4 million.
The unicycle business takes up 75% of the warehouse and makes 88.24% of the total sales for the company. The bicycle business company uses 25% of the warehouse and brings in 11.76% of the total sales for this company. In allocating the expenses between these two businesses one will need to implement a new accounting system. The ABC (activity based costing) system will work well within this company. This system will first take into account all indirect resource costs for the company. It will then assign costs of activities within the two businesses. (Horngren, Sundem, and Stratton, ...