=+Under the existing accounting system, costs incurred at corporate headquarters are collected in a single cost pool ($3228 million in the most recent year) and allocated to each division on the basis of its actual revenues. The top managers in each division share in a division income bonus pool. Division income is defined as operating profit less allocated corporate costs.

Bob has analysed the components of corporate costs and proposes that corporate costs be collected in four cost pools.

The components of corporate costs for the most recent year (dollar amounts in millions) and Bob’s suggested cost pools and costallocation bases are:

Cost pool 1 Cost pool 2 Cost pool 2 Cost pool 2 Cost pool 2 Cost pool 2 Cost pool 3 Cost pool 4 A B C D E 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Corporate cost category Amount Suggested cost pool Interest on debt 2000 Executive salaries 150 Accounting and control 110 General marketing 200 lageL 041 Research and Development 200 Public affairs 203 Personnel and payroll 225 latoT $ 8223

$

a Since Public Affairs cost includes the cost of public relations staff, lobbyists and donations to environmental charities, Bob proposes that this cost be allocated using operating profit of divisions, with only divisions with operating profit included in the allocation base.

Suggested allocation base Identifiable assets Division revenues Operating profita Number of employees F

Required 1 Discuss two reasons why Wells Oil Ltd should allocate corporate costs to each division.