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 as follows: Human resources (HR) costs $ 2,200,000 Accounting department costs 1,700,000 Rent and depreciation 870,000 Other 630,000 $ 5,400,000 Total costs The Ford 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 allocation bases for the different indirect costs - number of employees for HR costs, total revenues for accounting department costs, square feet of space for rent and depreciation costs, and equal allocation among the divisions of "other" costs. Information about the three divisions follows: Total revenues $ Bread Cake Doughnuts 20,800,000 $ 4,500,000 $ 13,500,000 14,100,000 3,300,000 7,350,000 6,700,000 $ 1,200,000 $ 6,150,000 $ Direct costs Segment margin Number of employees Square feet of space 500 100 200 7,500 3,000 4,500 Requirement 1. Allocate the indirect costs of Ford to each division equally. Calculate division operating income after allocation of headquarter costs. (Enter operati losses with minus signs or parentheses.) Bread Cake Doughnuts 6,150,000 Segment margin $ 6,700,000 $ 1,200,000 $ Allocated headquarter costs Operating income (loss) Requirement 2. Allocate headquarter costs to the individual divisions using the proposed allocation bases. Calculate the division operating income after allocation. (Round allocation proportions to three decimal places. Enter operating losses with minus signs or parentheses.) Bread Cake Doughnuts $ 6,700,000 $ 1,200,000 $ 6,150,000 Segment margin Allocated headquarter costs: Human resources Accounting department Rent and depreciation Other Enter any number in the edit fields and then continue to the next question. Comment on the allocation bases used to allocate neadquarter Costs. A cause-and-effect relationship between Human Resources costs and the number of employees at each division. Rent and depreciation costs related to square feet. The Accounting Department costs are V related to the revenues earned by each division. Other overhead costs are allocated arbitrarily so the method used Requirement 3. Which division manager do you think suggested this new allocation? Explain briefly. Division. Under the old scheme, this division was allocated amount The manager suggesting the new allocation bases probably works in the of costs even though it was much than the other divisions. The new allocation scheme shows an operating in this Division, even after allocating headquarter costs. Which allocation do you think is "better"? The method is a better way to allocate headquarter costs because it Enter any number in the edit fields and then continue to the next
