Hilgen Hotel & Spa is located in beautiful Sydney, Australia. Hilgen operates three profit centers: the hotel, restaurant, and spa. The complex occupies 100,000 square feet and has 250 employees. The complex’s general upkeep costs (e. g., insurance, utilities, etc.) are $800,000 per month, and the human resource department costs are $150,000 per month. If the spa occupies 2,000 square feet and has eight employees, show how upkeep and human resource costs could be assigned to the spa.

Step 1

Common Cost

The cost which is incurred in general and is occurred for a number of cost units or centres is known as indirect cost/common cost. These are not directly identified with a particular cost unit, department or processes. Examples are factory rent, depreciation, repairs, managerial salaries.

Step 2

Allocation / Tracing of the cost is a process of assigning the overhead cost with which it is identified. The principle is to carefully assess the common cost and allocate in a logical manner. Incorrect allocation of the common cost would lead to incorrect decision making. The common cost has to be allocated to various departments on the basis of appropriate basis.

Step 3

In the current situation, the common cost of three departments is given. The general upkeep cost of $800,000 and human resource department cost of $150,000 is to be allocated to three departments. The appropriate basis is the Total area covered and a number of employees respectively.

The spa department has covered an area of 2,000 sq feet and a number of employees are 8. The total complex area is 100,000 sq feet and a total number of employees is 250. Using Ms-Excel, find out the common cost to be traced to spa department.

[Find the attachment 1]

Step 4

After applying the above formula, the final solution is as follows.

[Find the attachment 2]

Step 5

The general upkeep cost traceable to spa department is $16000 and the human resource department cost traceable to spa department is $4800.