(Effect of service department allocations on reporting and evaluation) Kendra Corporation is a diversified manufacturing company with corporate head¬ quarters in Eagan, Minnesota. The three operating divisions are Kennedy Di¬ vision, Plastic 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.

Kendra Corporation headquarters provides general administrative support and computer services to each of the three operating divisions. The com¬ puter services are provided through a computer time-sharing arrangement. The central processing unit (CPU) is located in St. Paul, and the divisions have remote terminals connected to the CPU by telephone lines. One stan¬ dard from the Cost Accounting Standards Board provides that the cost of general administration may be allocated to negotiated defense contracts. Fur¬ thermore, the standards provide that, in situations in which computer ser¬ vices 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 2006 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 Department’s 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 Systems De¬ partment.
(CMA adapted) LO.1

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Sales Cost of goods sold Gross profit Selling and administrative Division selling and administration costs Corporate general administration costs Corporate computing Total Profit before taxes Kennedy Division Plastics Products Division Outerspace Products Division $ 23 $ 15 $ 55 (13) (7) (38) $ 10 $ 8 $ 17 $ 5 511 $ 5 $ 8 0 $ 7 $ 5 $ 8 $ 3 $ 3 $ 9