At the last staff meeting of the Gulf Shop, the question of how expenses are allocated to each department was raised. Since year-end bonuses are awarded to the managers on the basis of departmental net income from operations, the discussion was lively.

Susie Shark, manager of the repair department, said that each department should be charged only with the expenses directly related to the department. She indicated that while managers can influence the sales and direct expenses in their departments, they have little control over many of the indirect expenses such as depreciation, office salaries, and taxes.

Betty Brandon, manager of the new boat sales department, argued that all expenses—direct and indirect—should be allocated. “After all,” she said, “all the revenue is allocated to each department, so why not allocate all the expenses? The store could not operate if it did not incur the indirect expenses.” She also stated that many of the indirect expenses, such as insurance and cleaning services, could be allocated on a meaningful basis.

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