Allocation Problem - Research Paper Example

Cost Allocation I have chosen Dell Incorporation, which is a global manufacturer of computer PCs and laptops, networks, software, peripherals and accessories. The company offers aforementioned products and services to millions of customers worldwide. However, Dell does reveal total revenues from each of mentioned product and service categories but it does not disclose any cost allocations to protect private information. More specifically, the company only provides total revenue figures so that competitors could not estimate the gross margins on each category and estimate how much Dell spends on Research & Development costs.

In this paper, I have chosen Desktop PCs product category of which contribution in Dell’s total revenues during fiscal year of 2010 was $12,947. I would, therefore, create a report on cost allocation based on certain estimations after analyzing Dell’s gross margin from income statements (Dell Financials, 2010). In Desktop PCs category, the main inputs include motherboard, processor, peripheral devices (keyboard and mouse), monitor, hard disks, DVD ROM, RAM, power supply, power buttons, speakers, outer casing, internal and external wire connectors, modem, LAN and 3D-graphics cards etc.

The Desktop PCs category could be divided into departments such as purchases, component production, fitting and hardware installation, software installation, administration, inventory maintenance, after sales services (warranty expenses), wastage, breakage, pilferage etc. The costs will be allocated to each department after calculation of direct labor and direct material. Manufacturing Overheads will include indirect labor and material, while, the supporting expenses will include rentals, insurance, depreciation and amortization, advertising and marketing, general administrative and others etc.

followed by miscellaneous expenses (Ross 2009); (Grover, 2010). The company’s overall gross fit margin on all product categories was 14% during 2010 and net margin was just under 3%. Therefore, I assume that total cost of goods sold after allocations should be estimated at 80 - 85% of net revenues ($11,000 at most) from Desktop PCs category. Desktop PCs All components (raw materials and labor).………$6000 Hardware fitting (labor).…………………………..$1000 Software Installation (labor).

…………………….$1500 Warranty……………………………………………..$500 Wastage / Breakage / Defects………………………..$500 Administration………………………………………..$300 Plant Maintenance and Utilities……………………..$1200 Although some estimations have been provided but, of course, the researcher could not guarantee their authenticity because Dell does not provide any clues that could facilitate in appropriate cost allocations. However, one thing is clear, the cost structure of Desktop PCs is designed in a way it generates at least 15 - 20% gross margin for the company.

The margin could be higher if gross margin is lower in other client – related product categories such as Mobility. References Dell Financials (2010) “Annual Financial Report 2010” Dell [Online] Available at http://content.dell.com/us/en/corp/investor-financial-reporting.aspx Retrieved - March 6, 2011 Grover, Sam (2010) “How to Allocate Costs in the Manufacturing Process” eHow.com [Online] Available at http://www.ehow.com/how_7528778_allocate-costs-manufacturing-process.html Stephen Ross (2009).

Fundamentals of Corporate Finance. McGraw-Hill/Irwin. Thomas L. Wheelen, D. L. (2007). Strategic Management and Business Policy. Prentice Hall.