Farley 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:

Human resources (HR) costs	$2,400,000
Accounting department costs	1,900,000
Rent and amortization	740,000
Other	660,000
Total costs	$5,700,000

The

Farley

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

costsnumber

of employees for HR costs, total revenues for accounting division costs, square metres of space for rent and amortization costs, and equal allocation among the divisions of "other" costs. Information about the three divisions follows:

	Bread	Cake	Doughnuts
Total revenues	$20,600,000	$4,300,000	$13,500,000
Direct costs	14,500,000	3,100,000	7,350,000
Segment margin	$6,100,000	$1,200,000	$6,150,000
Number of employees	900	90	210
Square metres of space	15,000	2,000	3,000

Requirements

1.	Allocate the indirect costs of Farley to each division equally. Calculate division operating income after allocation of headquarters costs.
2.	Allocate headquarters 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 headquarters costs.
3.	Which division manager do you think suggested this new allocation? Explain briefly. Which allocation do you think is "better"?