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.

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(Click to view information for each division and the main headquarters.)Read the requirements

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Part 1

Requirement 1. Allocate the indirect costs of

Fortune

to each division equally. Calculate division operating income after allocation of headquarter costs. (Enter operating losses with minus signs or parentheses.)

	Bread	Cake	Doughnuts
Segment margin	$6,900,000	$900,000	$5,750,000
Allocated headquarter costs
Operating income (loss)

Part 2

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
Segment margin	$6,900,000	$900,000	$5,750,000
Allocated headquarter costs:
Human resources
Accounting department
Rent and depreciation
Other
Operating income (loss)

Part 3

Comment on the allocation bases used to allocate headquarter costs.

A cause-and-effect relationship

always exists

may exist

never exists

between Human Resources costs and the number of employees at each division. Rent and depreciation costs

are always

are never

may be

related to square feet. The Accounting Department costs are

always

never

probably

related to the revenues earned by each division. Other overhead costs are allocated arbitrarily so the method used

is not reasonable

is reasonable

.

Part 4

Requirement 3. Which division manager do you think suggested this new allocation? Explain briefly.

The manager suggesting the new allocation bases probably works in the

Bread

Cake

Doughnuts

Division. Under the old scheme, this division was allocated

a larger

a smaller

an equal

amount of costs even though it was much

larger

smaller

than the other divisions.The new allocation scheme shows an operating

loss

profit

in this Division, even after allocating headquarter costs.

Part 5

Which allocation do you think is "better"?

The

activity-based costing

equal allocation

method is a better way to allocate headquarter costs because it

it is the easiest and takes up the least resources

uses cost allocation bases that represent cause-and-effect relationships

.

Costs incurred in the main headquarters are as follows: The Fortune 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