Chapter 14, Problem 14.35P

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:

Human resources (HR) costs	$1,900,000
Accounting department costs	1,400,000
Rent and depreciation	1,200,000
Other	600,000
Total costs	$5,100,000

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. 1. Allocate the indirect costs of Forber to each division equally. Calculate division operating income after allocation of headquarter costs.
2. 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. 3. Which division manager do you think suggested this new allocation. Explain briefly. Which allocation do you think is “better?”