Question
Costs incurred in the main headquarters are as follows: Human resources (HR) costs $2,000,000 Accounting department costs 1,500,000 Rent and depreciation 1,300,000 Other 450,000 Total
Costs incurred in the main headquarters are as follows:
Human resources (HR) costs | $2,000,000 |
Accounting department costs | 1,500,000 |
Rent and depreciation | 1,300,000 |
Other | 450,000 |
Total costs | $5,250,000 |
The
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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
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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:
| Bread | Cake | Doughnuts |
Total revenues | $21,400,000 | $4,000,000 | $13,500,000 |
Direct costs | 14,000,000 | 3,000,000 | 7,350,000 |
Segment margin | $7,400,000 | $1,000,000 | $6,150,000 |
Number of employees | 500 | 150 | 350 |
Square feet of space | 15,000 | 5,000 | 5,000
|
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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.
Requirement 1. Allocate the indirect costs of
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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 | $7,400,000 | $1,000,000 | $6,150,000 |
Allocated headquarter costs |
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Operating income (loss) 2. Allocate headquarter costs to the individual divisions using the proposed allocation bases. Calculate the division operating income after allocation. Comment on the allocation bases used to allocate headquarter costs. 3. Which division manager do you think suggested this new allocation. Explain briefly. Which allocation do you think is better? |
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