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: StarkBrothersAcmeDune$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:The process of assigning the cost to the cost object is cost allocation. The cost…

Answered: Stark Brothers Acme Dune $25,500,000…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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:

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

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?

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