Using Revenue as a Basis for Allocating Costs ‘The Mideastern Transportation Company has had a long-standing policy of fully allocating all costs to its various divisions. Among the costs allocated were general and administrative costs in central headquarters, consisting of office salaries, executive salaries, travel expense, accounting costs, office supplies, donations, rents, depreciation, postage, and similar items.

All these costs were difficult to trace directly to the individual divisions benefited, so they were allocated on the basis of the total revenue of each of the divisions. The same basis was used for allocating general advertising and miscellaneous selling costs. For example, in 19_3 the following allocations were made: lop2 DIVISIONS A B C TOTAL Revenue (in millions) $50.0 $40.0 $10.0 $100.0 Costs allocated on the basis of revenue 6.0 4.8 ae 12.0 In 19_4, Division A’s revenue was expected to rise. But the division encountered severe competitive conditions; its revenue remained at $50 million.
In contrast, Division C enjoyed explosive growth in traffic because of the completion of several huge factories in its area; its revenue rose to $30 million.
Division B’s revenue remained unchanged. Careful supervision kept the total costs allocated on the basis of revenue at $12 million.
. What costs will be allocated to each division in 19_4?
. Using the results in part 1, comment on the limitations of using revenue as a basis for cost allocation.