Question

Allocating indirect costs can be a challenging task. Almost all firms have some type of cost centers (departments), whether it is the administration overseeing the corporation as a whole or the accounting department processing billing and invoicing customers. What to do with the costs generated by these cost centers can be a tricky task. Let’s take a look at Sears Holdings Corporation, a firm that has three major operating segments.

1.     Go to the home page for Sears Holdings at www.searsholdings.com. How many companies are listed under the umbrella of Sears Holdings Corporation? What are these companies? How many of them are located in the area where you are located? If one or more is not located in your area, have you heard of it before?

2.     Locate Sears Holdings’ most recent annual report by clicking on “Investors” at Sears Holdings’ home page. Click on “financial information” and then on the most recent annual report. Look at the “notes to consolidated financial statements.” Did the firm provide any information on segment revenues? Sum the operating income of the segments for the current year. What is this figure? Now, look at the income statement for the current year. What is the operating income for the year? Why is it different from the sum of the segment pretax profit? What portion of company-wide operating costs are allocated to segments? What percent of the total selling and administrative costs are allocated to each segment?

3.     If Sears wants to allocate the selling and administrative costs to the major segments based on total segment revenue, what percent of selling and administrative expenses is allocated to each segment? What would be the allocation if the corporation used the number of stores as the allocation basis?