=+6-39 KK Cost allocation to divisions OBJECTIVE 5 Delta 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:

Chapter 6: Activity-based costing and activity-based management 251 M06_HORN3377_02_LT_C06.indd 251 2/09/13 3:26 PM Human resources (HR) costs $1 900 000 Accounting department costs 1 400 000 Rent and depreciation 1 200 000 Other 600 000 Total costs $5 100 000 The Delta Bakery 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 cost-allocation bases for the different indirect costs—number of employees for HR costs, total revenues for accounting department costs, square metres of space for rent and depreciation costs, and equal allocation among the divisions of ‘other’ costs. Information about the three divisions follows:

Bread Cake Doughnuts Total revenues $20 900 000 $4 500 000 $13 400 000 Direct costs 14 500 000 3 200 000 7 250 000 Segment margin $6 400 000 $1 300 000 $6 150 000 Number of employees 400 100 300 Square metres of space 929 371.6 557.4 Required 1 Allocate the indirect costs of Delta Bakery to each division equally. Calculate division operating profit after allocation of headquarter costs.