Case Analysis Write-Up #1
Case Study: Tots-R-Us
Questions:
1. Compute the cost of a single preschool class and a single birthday party using the current cost system.

2. Would you recommend that TRU continue to allocate the building-related costs only to the preschool program? What alternative allocation method would you suggest? Justify your answer. Ignore consideration of excess capacity discussed in question 3 below for this answer. Please discuss any additional information that you feel is needed.
Based upon the information available to us we would not recommend that TRU continue to allocate all of the building-related costs to the preschool program only since doing so results in an inaccurate representation of the actual cost for both the preschool and birthday party segments of the business.
The alternative cost allocation method that we believe if the most appropriate for TRU and therefore the one we would suggest that they should use would be the Step-Down Method as it will allocate the cost of one service department to the other service department. It will also define how indirect costs must be allocated to both the preschool service department and the birthday service department and the cost allocation would then be more accurate for each service provided.
TRU is using a direct method of cost allocation which is less accurate than other methods that could be used, such as the Step-Down method. TRU has two departments that provide services within their business, the preschool classes and the birthday parties. All direct and indirect costs should be accounted for accordingly based on the percentage each services use it.

3. For three months each year (June – August), the school building is largely unused except for the birthday parties. This represents approximately 60 days, or 360 additional classes that could be run but are not. How