Case 11321

Delaney Motors

SUMMARY OF THE CASE:

Frank Delaney owned and operated Delaney Motors, a general motors automobile dealership in Ohio. Its operations consisted of new-car sales, used-car sales, part sales, vehicle lease and rental, vehicle service, and automobile repairing and repainting. The dealership was profitable, earning almost 5% on sales, but the reported profit on body shop operations seemed low to Mr. Delaney. With that, he hired a consultant to study the body shop operations and make recommendation.

FACTS:

Most semi-variable costs contain a significant portion of common cost.

Although many of the expenses would not be significantly reduced if the owner sold certain departments, each department’s benefits from these expenses, thus should be allocated a portion of this cost.

Telephone expenses and the fixed cost could be allocated to departments if the necessary documentation were available, since it is not, other allocation cost must be considered.

Semi-variable cost can be allocated to operating departments in several ways, but since operating department produce heterogeneous products that require dissimilar materials and machines the units of production, machine-hours, and material cost are clearly inappropriate.

Direct labor costs also do not constitute a competent activity basis for the company to compute semi-variable cost.

Calculations of the consultant:

Semi-variable costs are based upon direct labor hours, assuming that each employee works the same number of hours per week.

In line 13, the number of body shop employees performing the direct labor work is divided by the total number of employees for entire dealership.

Based on the method used by the consultant, the increase in semi variable cost shows that there is an under-allocated semi-variable cost to the body shop manager, whose bonus includes a portion of his department’s profit.

Revised fixed cost allocations fixed costs to body shop based on ratio of body shop...