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Social ScienceStarkBrothersAcmeDune$25,500,00012,300,000$13,200,00012,000Revenues$23,400,00015,900,000$18,600,00012,900,000$16,500,00013,800,000Direct costs$ 7,500,000$ 5,700,0004,500$ 2,700,0001,500Segment marginNumber of employees6,000 Required1. Allocate the indirect headquarters costs of Reidland Manufacturing to each of the four divisions usingrevenues, direct costs, segment margin, and number of employees as the allocation bases. Calculateoperating margins for each division after allocating headquarters costs.2. Which allocation base do you think the manager of the Brothers division would prefer? Explain.3. What factors would you consider in deciding which allocation base Reidland should use?4. Suppose the Reidland CEO decides to use direct costs as the allocation base. Should the Brothers divi-sion be closed? Why or why not?
Cost allocation and decision making. Reidland Manufacturing has four divisions: Acme, Dune, Stark, and Brothers. Corporate headquarters is in Minnesota. Reidland corporate headquarters incurs costs of $16,800,000 per period, which is an indirect cost of the divisions. Corporate headquarters currently allocates this cost to the divisions based on the revenues of each division. The CEO has asked each division manager to suggest an allocation base for the indirect headquarters costs from among revenues, segment margin, direct costs, and number of employees. The following is relevant information about each division:
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Stark Brothers Acme Dune $25,500,000 12,300,000 $13,200,000 12,000 Revenues $23,400,000 15,900,000 $18,600,000 12,900,000 $16,500,000 13,800,000 Direct costs $ 7,500,000 $ 5,700,000 4,500 $ 2,700,000 1,500 Segment margin Number of employees 6,000
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Required 1. Allocate the indirect headquarters costs of Reidland Manufacturing to each of the four divisions using revenues, direct costs, segment margin, and number of employees as the allocation bases. Calculate operating margins for each division after allocating headquarters costs. 2. Which allocation base do you think the manager of the Brothers division would prefer? Explain. 3. What factors would you consider in deciding which allocation base Reidland should use? 4. Suppose the Reidland CEO decides to use direct costs as the allocation base. Should the Brothers divi- sion be closed? Why or why not?
Expert Answer
Cost Allocation:
The process of assigning the cost to the cost object is cost allocation. The cost allocation is done by the accountant to allocate the manufacturing overhead cost to different divisions.
1.
2.
The company use number of employees as the cost allocation base.
While using number of employees as cost allocation base, the company gets the operating margin 10% in case of B division and that is the highest among the other option.
Thus, for B Division Company choose number of employee as cost allocation basis.
3.
The R Company should see the ability to bear factor for deciding the cost allocation base.
- While allocating cost to the cost object t...
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