Kensington Corporation is a diversified manufacturing company with corporate headquarters in Easton, Massachusetts. The three operating divisions are Kennedy Division, Consumer Products Division, and Outerspace Products Division. Much of Kennedy Division's manufacturing activity is related to work performed for the government space program under negotiated contracts.
Kensington Corporation headquarters provides general administrative support and computer services to each of the three operating divisions. The computer services are provided through a computer time-sharing arrangement. The central processing unit (CPU) is located in Boston, and the divisions have remote terminals connected to the CPU by telephone lines. One standard from the Cost Accounting Standards Board provides that the cost of general administration may be allocated to negotiated defense contracts. Furthermore, the standards provide that, in situations in which computer services are provided by corporate headquarters, the actual costs (fixed and variable) of operating the computer department may be allocated to the Kennedy Division based on a reasonable measure of computer usage.
The general manager of each of the three divisions is evaluated based on the division's before-tax performance. The November 2010 performance evaluation reports (in millions of dollars) for each division follow.

Without a charge for computing services, the operating divisions might not make the most cost-effective use of the computer systems resources. Outline and discuss a method for charging the operating divisions for use of computer services that would promote cost consciousness by the operating divisions and operating efficiency by the computer systemsservices.

Transcribed Image Text:

Outerspace Products DiiSion Consumer Kennedy DiiSion Products Division $30 $110 Cost of goods sold Gross profit Selling and administrative s 16 Division selling and administration costs 10 Corporate general administration costs Corporate computing Profit before taxes 18