Chapter 14, Problem 14.24E

Cost allocation to divisions. Bergen Corporation has three divisions: pulp, paper, and fibers. Bergen’s new controller, David Fisher, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2017:

Until now, Bergen Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Fisher asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:

Fixed Corporate-Overhead Costs		Suggested Allocation Bases
Human resource management	$ 4,600,000	Number of employees
Facility	6,400,000	Floor space (square feet)
Corporate administration	9,200,000	Division administrative costs
Total	$20,200,000

1. 1. Allocate 2017 fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division’s operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?

Required

1. 2. Allocate 2017 fixed costs using the allocation bases suggested by Fisher. What is each division’s operating margin percentage under the new allocation scheme?
2. 3. Compare and discuss the results of requirements 1 and 2. If division performance incentives are based on operating margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why?
3. 4. Which allocation scheme should Bergen Corporation use? Why? How might Fisher overcome any objections that may arise from the divisions?