The company allocates its administrative expenses to all the divisions and these common costs are used in this analysis.
From the annual report of Wal-Mart, the incomes from various divisions are gathered. The administrative expenses are then allocated to each division. The allocation depends on a number of factors including the scale of operations in the division, number of stores operating in the division and the revenue generated (Wal-Mart Financial Review). The incomes from various divisions are presented below:
The above report indicates that the Wal-Mart U S has the highest profit margin standing at 7.5 % ($ 19522 million / $ 258,229 million). However the International division has a low profit margin at 5 %. These performances are based on the incomes generated after taking the common costs into account. In order to identify the actual performance of the various divisions, the report is recast without taking the common costs into consideration.
The recast report above without the unallocated common costs (administrative expenses, in this case) reveals that the International division contributes significantly towards the total income and towards covering the common costs. It is a known fact that the administrative expenses are hard to predict and are very unstable in large organizations. Hence the above report without the administrative expenses can be used to predict or estimate future performance of the divisions.
Thus the common costs (in this case, the advertising expenses) are analyzed for Wal-Mart. The recast report with the unallocated costs reveals a number of facts about the profitability, thus giving a clear picture of the performance of the various divisions. This information without the allocated common costs can be useful in analyzing the contribution of the division to the company as a