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CHAPTER 14 COST ALLOCATION, CUSTOMER-PROFITABILITY ANALYSIS, AND SALES-VARIANCE ANALYSIS 14-2 Exhibit 14-1 outlines four purposes for allocating costs: 1. To provide information for economic decisions. 2. To motivate managers and other employees. 3. To justify costs or compute reimbursement amounts. 4. To measure income and assets. 14-3 Exhibit 14-2 lists four criteria used to guide cost allocation decisions: 1. Cause and effect. 2. Benefits received. 3. Fairness or equity. 4. Ability to bear. The cause-and-effect criterion and the benefits-received criterion are the dominant criteria when the purpose of the allocation is related to the economic decision purpose or the motivation purpose. 14-4 Disagree. In general, companies have three choices regarding the allocation of corporate costs to divisions: allocate all corporate costs, allocate some corporate costs (those “controllable” by the divisions), and allocate none of the corporate costs. Which one of these is appropriate depends on several factors: the composition of corporate costs, the purpose of the costing exercise, and the time horizon, to name a few. For example, one can easily justify allocating all corporate costs when they are closely related to the running of the divisions and when the purpose of costing is, say, pricing products or motivating managers to consume corporate resources judiciously. 14-5 Disagree. If corporate costs allocated to a division can be reallocated to the indirect cost pools of the division on the basis of a logical cause-and-effect relationship, then it is in fact preferable to do so—this will result in fewer division indirect cost pools and a more cost-effective cost allocation system. This reallocation of allocated corporate costs should only be done if the allocation base used for each division indirect cost pool has the same cause-and-effect relationship with every cost in that indirect cost pool, including the reallocated corporate cost. Note that we observe such a situation with corporate human resource management (CHRM) costs in the case of CAI, Inc., described in the chapter—these allocated corporate costs are included in each division’s five indirect cost pools. (On the other hand, allocated corporate treasury cost pools are kept in a separate cost pool and are allocated on a different cost-allocation base than the other division cost pools.) 1
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14-17 (15 min.) Allocating costs to divisions. 1. Allocations based on square feet. Refrigerator Stove Dishwasher Microwave Oven Total 1. Square feet 130,000 90,000 80,000 10,000 400,000 2. % square feet (130,000; 90,000; 80,000; 10,000 ÷ 400,000) 32.5% 22.5% 20% 25% 100% 3. Allocated headquarter cost (Row 2 × $14,255,000) $4,632,875 $3,207,37 5 $2,851,00 0 $3,563,750 $14,255,000 Refrigerator Stove Dishwasher Microwave oven Total Segment margin $5,200,000 $8,400,00 0 $5,300,000 $3,560,000 $22,460,000 Less: Headquarter costs 4,632,875 3,207,37 5 2,851,000 3,563,750 14,255,000 Division margin $ 567,125 $5,192,62
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This note was uploaded on 08/11/2009 for the course ACCT 612 taught by Professor Jamesswanson during the Spring '09 term at Univ. of Massachusetts Med. School.

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