The corporate controller is mulling over the issue of

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The corporate controller is mulling over the issue of allocating the costs of distribution. Several allocation schemes are possible:1. Allocate all distribution division costs based on gross sales of the LOBs.2. Allocate all distribution division costs based on LOB profits.3. Allocate the direct costs of each shipment (driver, fuel, truck depreciation, tolls) using the gross weight of each LOB’s product in the shipment. Then allocate the other costs of the distribution division (schedulers, management, telephones, etc.) using the total direct shipping costs assigned to each LOB.One argument against allocating is that it will distort relative profitability. The controller says, “Because allocations are arbitrary, the resulting LOB profitabilities become arbitrary.” Another argument is that it is not fair to charge managers for costs they cannot control. LOBs cannot control shipping costs. For example, there are savings when two small separate shipments are combined into a single large shipment. LOBs will tend to avoid opening up new sales territories when other Telstar products are not being shipped to that area.
Required:Write a memo addressing the controller’s concerns. Should Telstar begin allocating distribution costs to the LOBs? If so, which allocation scheme should it use?24.Single vs. Dual-Rate AllocationsBio Labs is a genetic engineering firm manufacturing a variety of gene-spliced, agricultural-based seed products. The firm has five separate laboratories producing different product lines. Each lab is treated as a profit center and all five labs are located in the same facility. The wheat seed lab and corn seed lab manufacture two of the five product lines. These two labs are located next to each other and are of roughly equal size in terms of sales. The two departments have close interaction, often sharing equipment and lab technicians. Both use very similar technology and science and usually attend the same scientific meetings.Recent discoveries have shown how low-power lasers can be used to significantly improve product quality. The wheat seed and corn seed managers are proposing the creation of a laser testing department to employ this new technology. Leasing the equipment and hiring the personnel cost $350,000 per year. Supplies, power, and other variable costs are $25 per testing hour. The testing department is expected to provide 2,000 testing hours per year. The wheat seed manager expects to use 700 testing hours per year of the laser testing department and the corn seed manager expects to use 800 testing hours. The remaining
500 hours of testing capacity can be used by the other three labs if the technology applies or can be left idle for future expected growth of the two departments. Initially, only wheat and corn are expected to use lasertesting.The executive committee of Bio Labs has approved the proposal but is now grappling with how to treat the costs of the laser testing department. The committee wants to charge the costs to the wheat seed and corn seed labs but is unsure of how to proceed.

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