Question

Cost allocation to divisions. Forber 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:

The Forber 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:

  1. Allocate the indirect costs of Forber to each division equally. Calculate division operating income after allocation of headquarter costs.
  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?”
$1,900,000
Human resources (HR) costs
Accounting department costs
1,400,000
1,200,000
Rent and depreciation
Other
600,000
$5,100,000
Total costs
expand button
Transcribed Image Text:$1,900,000 Human resources (HR) costs Accounting department costs 1,400,000 1,200,000 Rent and depreciation Other 600,000 $5,100,000 Total costs
Doughnuts
Bread
Cake
$20,900,000
$4,500,000
$13,400,000
Total revenues
Direct costs
14,500,000
3,200,000
7,250,000
$ 6,150,000
300
$ 6,400,000
$1,300,000
Segment margin
Number of employees
Square feet of space
400
100
4,000
10,000
6,000
expand button
Transcribed Image Text:Doughnuts Bread Cake $20,900,000 $4,500,000 $13,400,000 Total revenues Direct costs 14,500,000 3,200,000 7,250,000 $ 6,150,000 300 $ 6,400,000 $1,300,000 Segment margin Number of employees Square feet of space 400 100 4,000 10,000 6,000
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