Allocation and Responsibility Accounting (LO2)

Timberland Company Assume that Timberland Company uses a responsibility accounting system for evaluating its managers, ies) and that abbreviated performance reports for the company’s three divisions for the month of March are as follows (amounts in thousands).

Total East Central — West IME OMCM ern atthe

a. ns a: $200,000 $70,000 $80,000 $50,000 Less allocated costs:

Information Technology .. . (96,000) (32,000) (32,000) (82,000)

Persomielmrire oss 4.4. (75,000) (28,125) (28,125) (18,750)

IDINASIOIMIMNGONNE 655560 5nn0e $ 29,000 $9,875 $19,875 $ (750)

The West Division manager is very disturbed over his performance report and recent rumors that his division may be closed because of its failure to report a profit in recent periods. He believes that the reported profit figures do not fairly present operating results because his division is being unfairly burdened with service department costs. He is particularly concerned over the amount of Information Technology costs charged to his division. He believes that it is inequitable for his division to be charged with one-third of the total cost when it is using only 20 percent of the services. He believes that the Personnel Department’s use of the Information Technology Department should also be considered in the cost allocations. Cost allocations were based on the following distributions of service provided:

Services Receiver Computer Services Provider Personnel Services East Central West Information Technology... 40% _— 20% 20% 20%

SOMME oon beonnbn per = 20% 30 30 20 Required

a. What method is the company using to allocate Personnel and Information Technology costs?

b. Recompute the cost allocations using the step method. (Round calculations to the nearest dollar.)

c. Revise the performance reports to reflect the cost allocations computed in requirement (b).

d. Comment on the complaint of the West Division’s manager.