International Tennis (IT) Corporate, in New York, has two primary service divisions, Human Resources (HR) and Information Technology (Tech). The service divisions have never been allocated to the operating divisions Sales (London, England) and Production (Guangzhou, China). Chris Everest, the President of IT, has been reworking the performance measurement system with the input of the two operating company executives, Le Federar (London) and Tom Murray (China), as well as consultants from the Cost 2 class at well-known USFSP. Chris: I have been reading that it makes sense to allocate costs from the corporate division to the operating entities. Le: I dont need any more costs! We are so unprofitable this year with Covid! Plus, we dont control those costs at corporate. You cant charge us for costs we have no input for. Tom: What costs does corporate incur on our behalf? To my knowledge, we pay our own way here in China. Chris: Here is a detail of what we are spending at corporate. I am trying to be transparent here; we are all in this together: Human Resources: $250,000 Researching applicable hiring laws and practices in relevant countries, identifying candidates, virtual interviewing, onboarding new hires, supervision of annual reviews, handling all terminations. Information Technology: $500,000 Identifying new software/hardware, working with operating units and corporate personnel to implement, HELP line, designing and implementing training programs in all countries. Ensure recent new software laws between China and the US are adhered to. Legal, Accounting and Presidents staff - $250,000 all other functions Le: Well, I had no idea corporate was performing all those functions. We also interview the new hires, but I guess there is a lot of behind the scenes work related to HR. And we also have IT experts; Im surprised you are spending so much at corporate related to systems! Cant you cut some of those costs? I guess we should be paying our fair share of those functions, but I dont want to pay more than I could hire the same functions for here. Tom: I agree, but we have our own accounting, legal and President, so I cant see paying for yours as well. How about if you allocate us our fair share of Human Resources and Information Technology, but you pay for your legal, accounting and Presidents staff? Chris: Okay, we will start there. I think this is a good year to begin this. We are changing the balanced scorecard so lets change the allocations too. But I have read there are several ways to allocate the costs. I think we need the help of that ace Cost Accounting II class!

ACTUAL RESULTS JANUARY THROUGH JUNE 2021 China London New York Total IT Sales 18,000,000 20,000,000 0 38,000,000 Cost of sales 12,000,000 12,000,000 0 24,000,000 Gross Margin 6,000,000 8,000,000 0 14,000,000 Selling expenses 350,000 5,000,000 0 5,350,000 General and Admin 1,600,000 500,000 1,000,000 3,100,000 Operating Income 4,050,000 2,500,000 (1,000,000) 5,550,000 Total Assets 30,000,000 18,200,000 1,800,000 50,000,000 The divisions have gathered the following data per your request. HR will be allocated based on the number of employees and Tech will be allocated based on the number of software packages run at each location. For purposes of this exercise, ignore the "other corporate" divisions (accounting, legal etc.) for allocations. In other words, do not allocate to or from these divisions.

You gather the following information for the 12 months ended 12/31/20 # of employees # of software packages run Human Resources 30 75 Information Technology 50 450 London 100 175 China 200 600

Required: A) Calcuate the allocations from the support departments using the following methods: 1) Direct method 2) Step-down method with Human Resources allocated first; 3) Reciprocal method. B) Produce divisional financial statements for each method. Format should be: HR Tech Other corporate London China Total Company Revenues Costs + Allocations in - Allocations out Net profit C) Which method do you propose the company adopt and why? This is your conclusion