Forber Bakery makes baked goods for grocery stores, and has three divisions: Bread, Cake, and Doughnuts. Each division is run and evaluated separately, but the main headquarters incurs costs that are indirect costs for the divisions. Costs incurred in the main headquarters are:
Human resources (HR) costs ............... $1,900,000
Accounting department costs............... 1,400,000
Rent and amortization ................ 1,200,000
Other ........................ 600,000
Total costs ...................... $5,100,000
The Forber upper management currently allocates this cost to the divisions equally. One of the division managers has done some research on activity-based costing and proposes the use of different allocation bases for the different indirect costs€”number of employees for HR costs, total revenues for accounting division costs, square metres of space for rent and amortization costs, and equal allocation among the divisions of €œother€ costs. Information about the three divisions follows:

REQUIRED
1. Allocate the indirect costs of Forber to each division equally. Calculate division operating income after allocation of headquarters costs.
2. Allocate headquarters costs to the individual divisions using the proposed allocation bases. Calculate the division operating income after allocation. Comment on the allocation bases used to allocate headquarters costs.
3. Which division manager do you think suggested this new allocation? Explain briefly. Which allocation do you think is €œbetter€?

Transcribed Image Text:

Bread Cake Doughnuts $20,900,000 14,500,000 S 6,400,000 400 10,000 $4,500,000 3,200,000 $1,300,000 100 4,000 $13,400,000 7,250,000 6,150,000 300 6,000 Lotal revenues Direct costs egment margin Number of employees Square metres of space