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:
- 1. Discuss two reasons why Sweet and Salty Snacks should allocate corporate costs to each division.
Required
- 2. Calculate the operating income of each division when all corporate costs are allocated based on revenues of each division.
- 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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Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
- Classify each of the following actions as either being associated with the financial accounting information system (FS) or the cost management information system (CMS): a. Determining the total compensation of the CEO of a public company b. Issuing a quarterly earnings report c. Determining the unit product cost using TDABC d. Calculating the number of units that must be sold to break even e. Preparing a required report for the SEC f. Preparing a sales budget g. Using cost and revenue information to decide whether to keep, or drop, a product line h. Preparing an annual statement of financial position that conforms to generally accepted accounting principles (GAAP) i. Using cost and revenue information to decide whether to invest in a new production system or not j. Reducing costs by improving the overall quality of a product k. Using a debt-equity ratio and liquidity ratios from a balance sheet to assess the likelihood of bankruptcy l. Using a public companys financial statements to decide whether or not to buy its stockarrow_forwardService department charges In divisional income statements prepared for Demopolis Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of 64,560, and the Purchasing Department had expenses of 40,000 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: A. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division. B. Using the cost driver information in (A), determine the annual amount of payroll and purchasing costs allocated to the Residential, Commercial, and Government Contract divisions from payroll and purchasing services. C. Why does the Residential Division have a larger support department allocation than the other two divisions, even though its sales are lower?arrow_forwardHorton Technology has two divisions, Consumer and Commercial, and two corporate support departments, Tech Services and Purchasing. The corporate expenses for the year ended December 31, 20Y7, are as follows: Tech Services Department Purchasing Department Other corporate administrative expenses Total expense The other corporate administrative expenses include officers' salaries and other expenses required by the corporation. The Tech Services Department allocates costs to the divisions based on the number of computers in the department, and the Purchasing Department allocates costs to the divisions based on the number of purchase orders for each department. The services used by the two divisions are as follows: Consumer Division Commercial Division Total $1,125,900 235,500 Tech Services 310 $1,946,400 computers 500 810 585,000 Line Item Description 1,793,500 Purchasing 5,500 purchase orders 10,200 15,700 purchase orders computers The support department allocations of the Tech Services…arrow_forward
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- In divisional income statements prepared for Lemons Company, the Payroll Department costs are allocated to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are allocated on the basis of the number of purchase requisitions. The Payroll Department had costs of $126,550 and the Purchasing Department had costs of $68,000 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Residential Commercial GovernmentContract Sales $1,100,000 $1,760,000 $3,520,000 Number of employees: Weekly payroll (52 weeks per year) 410 190 280 Monthly payroll 95 200 110 Number of purchase requisitions per year 5,200 4,600 3,800 a. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division. Residential Commercial GovernmentContract Total Number of payroll…arrow_forwardKV Accounting and Business Consultants provides a variety of consulting services to a diverse range of clients. The company has three support departments and three revenue-generating departments, whose cost details for a typical quarter are presented below: Support Departments $ 290,500 IT Support Admin Support 724,000 206,250 Facilities Support Revenue-Generating Departments Assurance 883,500 Tax Advisory 635,000 Business Advisory 803,400 $3,542,650 The existing cost allocation system is designed as follows: (1) the support department costs are allocated to the three revenue- generating departments, and (2) the revenue-generating department costs are allocated to individual clients. The support department costs are allocated to the revenue-generating departments as follows: (1) IT Support costs are allocated to Assurance, Tax Advisory, and Business Advisory using a 30:30:40 ratio, (2) Admin Support costs are allocated using a 40:30:30 ratio, and (3) Facilities Support costs are…arrow_forwardCost Department Allocations In divisional income statements prepared for Demopolis Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $34,760, and the Purchasing Department had expenses of $15,660 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Sales Number of employees: Weekly payroll (52 weeks per year) Monthly payroll Number of purchase requisitions per year Number of payroll checks: Weekly payroll x 52 Monthly payroll x 12 Total Residential $ 327,000 Support department allocations: Payroll Department Purchasing Department 175 32 2,300 Total Commercial $ 434,000 Required: a. Determine the total amount of payroll checks and purchase requisitions processed per year by the…arrow_forward
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