Cost allocation to divisions. Lenzig Corporation has three divisions: Fibres, Paper, and Pulp. As Lenzig’s new controller, you are reviewing the basis to be used for allocating fixed overhead costs to the three divisions in 2007. The following information is available for 2007:

Pulp Paper Fibres Revenue $8,500,000 Administrative costs $1,300,000 Number of employees 300 Floor space (square metres) 30,000 Segment margin $3,200,000

$17,500,000

$ 1,900,000 250 24,000

$ 7,100,000

$24,000,000

$ 3,100,000 450 66,000

$ 9,700,000 In the past, Lenzig has allocated fixed overhead costs to the division using segment margin percentages. A review of the fixed overhead costs indicates that they consist of the following:

Human resource management Facility Corporate administration Total

$1,800,000 2,700,000 4,500,000

$9,000,000 After considering the nature ofthe fixed-cost items, you decide to make the allocations in 2007 using the following bases:

Human resource management Facility Corporate administration Number of employees Floor space Divisional administrative costs Required 1. Allocate 2007 indirect costs to the three divisions using segment margin percentages.

2. Allocate 2007 indirect costs to the three divisions using the bases you have selected.

3. Discuss the reason(s) why your approach is preferable.