Cost allocation to divisions. Lenzig Corporation has three divisions: pulp, pape
ID: 2446901 • Letter: C
Question
Cost allocation to divisions. Lenzig Corporation has three divisions: pulp, paper, and fibers. Lenzig’s new controller, Ari Bardem, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2012:
A
B
C
D
1
Pulp
Paper
Fibers
2
Revenues
$ 8,500,000
$17,500,000
$ 24,000,000
3
Direct manufacturing costs
4,100,000
8,600,000
11,300,000
4
Division administrative costs
2,000,000
1,800,000
3,200,000
5
Division margin
$ 2,400,000
$ 7,100,000
$ 9,500,000
6
7
Number of employees
350
250
400
8
Floor space (square feet)
35,000
24,000
66,000
Until now, Lenzig Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Bardem asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:
F
G
H
1
Fixed Corporate Overhead Costs
Suggested Allocation Bases
2
Human resource management
$ 1,800,000
Number of employees
3
Facility
2,700,000
Floor space (square feet)
4
Corporate Administration
4,500,000
Division administrative costs
5
Total
$ 9,000,000
1. Allocate 2012 fixed corporate-overhead costs to the three divisions using division margin as the alloca- tion base. What is each division’s operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?
2. Allocate 2012 fixed costs using the allocation bases suggested by Bardem. What is each division’s operating margin percentage under the new allocation scheme?
3. Compare and discuss the result sof requirements 1 and 2. If division performance is linked to operating margin percentage, which division would be most receptive to the new allocation scheme? Which divi- sion would be the least receptive? Why?
4. Which allocation scheme should Lenzig Corporation use? Why? How might Bardem overcome any objections that may arise from the divisions?
A
B
C
D
1
Pulp
Paper
Fibers
2
Revenues
$ 8,500,000
$17,500,000
$ 24,000,000
3
Direct manufacturing costs
4,100,000
8,600,000
11,300,000
4
Division administrative costs
2,000,000
1,800,000
3,200,000
5
Division margin
$ 2,400,000
$ 7,100,000
$ 9,500,000
6
7
Number of employees
350
250
400
8
Floor space (square feet)
35,000
24,000
66,000
Explanation / Answer
Answer
1. Allocate 2012 fixed corporate-overhead costs to the three divisions using division margin as the alloca- tion base. What is each division’s operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?
Answer
2. Allocate 2012 fixed costs using the allocation bases suggested by Bardem. What is each division’s operating margin percentage under the new allocation scheme?
3. Compare and discuss the result sof requirements 1 and 2. If division performance is linked to operating margin percentage, which division would be most receptive to the new allocation scheme? Which divi- sion would be the least receptive? Why?
Answer:-
When corporate overhead costs to the three divisions using division margin as the allocation base in Question 1(requirment 1) all divisions are in profit and having good operating margin in all divisions. Paper division appears to be more profitble and Pulp division being leaast profitable
When fixed costs using the allocation bases suggested by Bardem is used Pulp division appears to be in loss with negative operating profit and Paer didvision is more profitable.
So under both the requirements 1 & 2, Paper didvsion is most profitable but Pulp division is least profitable but under requirement 2 it is in loss.
4.Which allocation scheme should Lenzig Corporation use? Why? How might Bardem overcome any objections that may arise from the divisions?
Answer :-
Approach used under requirement 1 is more preferable as under indirect FOH it is sub didvided into three similar cost drivers.
The cost drivers used are based on cause and effect relationships. For example
Bardem may overcome the objections by not allocating the costs to each divisions . He can share each division performance and ask Pulp division to focus on its cost and setting benchmak for each divisions.
Pulp Paper Fibers Total Allocated corporate-overhead costs $1,136,842 $3,363,158 $4,500,000 $9,000,000 Pulp Paper Fibers Total margin $2,400,000 $7,100,000 $9,500,000 $19,000,000 Allocated corporate-overhead costs 1,136,842 3,363,158 4,500,000 9,000,000 Division operating margin $1,263,158 $3,736,842 $5,000,000 $10,000,000 Division operating margin percentage 14.86% 21.35% 20.83% 20.00%