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Allocating Indirect Costs EXERCISE 1: Baskings Incorporated manufactures and sells industrial shelving units through two departments; 1) Retail- where units are sold online directly to consumers 2) Government- where units are sold to various governmental agencies. To house and distribute its inventory, Baskings maintains a total of 120,000 sq. feet of warehousing space. The company also has 400 employees Baskings pays a monthly lease fee on its sorting and distribution equipment in the amount of $84,000. The equipment services both departments and is identified as an indirect cost. Following are some more specific breakdowns for each department Total Retail Government 120,000 sq. ft Warehouse space 40,000 sq. ft 130 80,000 sq. ft Employees 400 270 What is the cost object in this example? Departments Baskings would like to evaluate the differences in allocating leasing costs using the following cost drivers 1) Warehouse spac Step 1: Compute an allocation rate Cost Driver(Allocation Base) Indirect Costs Allocation Rate Total Sq. Feet Lease Fee per foot Step 2: Allocate costs: Allocated Allocation Rate Cost Driver Retail sq ft. Government $ sq. ft. TOTAL 1 Page 2) Total Emplovees Step 1: Compute an allocation rate: Cost Driver(Allocation Base) Indirect Costs Allocation Rate Employees Lease Fee Step 2: Allocate costs: Allocation Rate Cost Driver Allocated Retail emp. Government $ Xx TOTAL Allocating Fixed Overhead Costs: Since fixed costs do not vary with changes in volume, the options for allocation of these costs are limited. See completed example below for illustration on how we allocate these costs

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