Home Insert Page Layout Formulas Data Review View A DIVISIONS Candy $ 870,000 330,800 Nuts Crackers Cookies Total 2 3 Revenues 4 Operating Costs 5 Operating Income $ 975,000 | $ 654,000 $ 501,000| $ 3,000,000 378,000 658,000 314,000 1,680,800 (4,000) $ 187,000 $ 1,319,200 $ 539,200 $ 597,000 $ $1,800,000 $ 2,880,000 $1,440,000 $1,080,000 $7,200,000 3,600 7 Identifiable assets 8 Number of employees 6,600 2,700 2,100 15,000 Home Insert Page Layout Formulas Data Review View Suggested 11 Corporate Cost Category 12 Interest on debt 13 Corporate salaries 14 Accounting and control 15 General marketing 16 Public affairs 17 Personnel and payroll 18 Total Suggested Allocation Base Identifiable assets Cost Pool Amount $380,000 Cost Pool 1 200,000 Cost Pool 2 160,000 Cost Pool 2 170,000 Cost Pool 2 150,000 Cost Pool 3 140,000 Cost Pool 4 $1,200,000 Division revenues Positive operating income* Number of employees 19 20 "Carpenter proposes that this cost be allocated using the operating income (if positive) of divisions, 21 with only divisions with positive operating income included in the allocation base. 1. Discuss two reasons why Sweet and Salty Snacks should allocate corporate costs to each division. 2. Calculate the operating income of each division when all corporate costs are allocated based on rev- enues of each division. Required 3. Calculate the operating income of each division when all corporate costs are allocated using the four cost pools. 4. How do you think the division managers will receive the new proposal? What are the strengths and weaknesses of Carpenter's proposal relative to the existing single cost-pool method?

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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Allocation of corporate costs to divisions. Cathy Carpenter, controller of the Sweet and Salty Snacks is preparing a presentation to senior executives about the performance of its four divisions. Summary data related to the four divisions for the most recent year are as follows:

Under the existing accounting system, costs incurred at corporate headquarters are collected in a single cost pool ($1.2 million in the most recent year) and allocated to each division on the basis of its actual revenues. The top managers in each division share in a division-income bonus pool. Division income is defined as operating income less allocated corporate costs.

Carpenter has analyzed the components of corporate costs and proposes that corporate costs be collected in four cost pools. The components of corporate costs for the most recent year and Carpenter’s suggested cost pools and allocation bases are as follows:

Home
Insert
Page Layout
Formulas
Data
Review
View
A
DIVISIONS
Candy
$ 870,000
330,800
Nuts
Crackers
Cookies
Total
2
3 Revenues
4 Operating Costs
5 Operating Income
$ 975,000 | $ 654,000 $ 501,000| $ 3,000,000
378,000
658,000
314,000
1,680,800
(4,000) $ 187,000 $ 1,319,200
$ 539,200 $ 597,000
$
$1,800,000 $ 2,880,000 $1,440,000 $1,080,000 $7,200,000
3,600
7 Identifiable assets
8 Number of employees
6,600
2,700
2,100
15,000

Home
Insert
Page Layout
Formulas
Data
Review
View
Suggested
11 Corporate Cost Category
12 Interest on debt
13 Corporate salaries
14 Accounting and control
15 General marketing
16 Public affairs
17 Personnel and payroll
18 Total
Suggested Allocation Base
Identifiable assets
Cost Pool
Amount
$380,000 Cost Pool 1
200,000 Cost Pool 2
160,000 Cost Pool 2
170,000 Cost Pool 2
150,000 Cost Pool 3
140,000 Cost Pool 4
$1,200,000
Division revenues
Positive operating income*
Number of employees
19
20 "Carpenter proposes that this cost be allocated using the operating income (if positive) of divisions,
21 with only divisions with positive operating income included in the allocation base.
1. Discuss two reasons why Sweet and Salty Snacks should allocate corporate costs to each division.
2. Calculate the operating income of each division when all corporate costs are allocated based on rev-
enues of each division.
Required
3. Calculate the operating income of each division when all corporate costs are allocated using the four
cost pools.
4. How do you think the division managers will receive the new proposal? What are the strengths and
weaknesses of Carpenter's proposal relative to the existing single cost-pool method?

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