The discussion activity is based on Case 22.1, Allocating Fixed Costs to Responsibility Centers, on page 990 in
Read the case information given below, and then follow the instructions for completing the discussion activity.
Case 22.1, Allocating Fixed Costs to Responsibility Centers
You have just been hired as the controller of Land’s End Hotel. The hotel prepares monthly responsibility
income statements in which all fixed costs are allocated among the various profit centers in the hotel, based on
the relative amounts of revenue generated by each profit center.
Robert Chamberlain, manager of the hotel dining room, argues that this approach understates the profitability
of his department. “Through developing a reputation as a fine restaurant, the dining room has significantly
increased its revenue. Yet the more revenue we earn, the larger the percentage of the hotel’s operating costs
that are charged against our department. Also, whenever vacancies go up, rental revenue goes down, and the
dining room is charged with a still greater percentage of overall operating costs. Our strong performance is
concealed by poor performance in departments responsible for keeping occupancy rates up.” Chamberlain
suggests that fixed costs relating to the hotel should be allocated among the profit centers based on the
number of square feet occupied by each department.
Debra Mettenburg, manager of the Sunset Lounge, objects to Chamberlain’s proposal. She points out that the
lounge is very big, because it is designed for hotel guests to read, relax, and watch the sunset. Although the
lounge does serve drinks, the revenue earned in the lounge is small in relation to its square footage. Many
guests just come to the lounge for the free hors d’oeuvres and don’t even order a drink. Chamberlain’s
proposal would cause the lounge to appear unprofitable; yet a hotel must have some “open space” for its
guests to sit and relax.
- Separately evaluate the points raised by each of the two managers.
- Suggest your own approach to allocating the hotel’s fixed costs among the various profit centers.