Author Question: Cost allocation to divisions. Holbrook Corporation has three divisions: pulp, paper, and fibers. ... (Read 105 times)

Pineappleeh · **on:** Jul 6, 2018

Cost allocation to divisions.

Holbrook Corporation has three divisions: pulp, paper, and fibers. Holbrook's new controller, Paul Weber, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2013:

Until now, Holbrook Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Weber asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:

Required:
1. Allocate 2013 fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?
2. Allocate 2013 fixed costs using the allocation bases suggested by Weber. What is each division's operating margin percentage under the new allocation scheme?
3. Compare and discuss the results of 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 division would be the least receptive? Why?
4. Which allocation scheme should Holbrook Corporation use? Why? How might Weber overcome any objections that may arise from the divisions?

Question 2

Which of the following statements is true?
a. Adjusting entries contain only balance sheet accounts.
b. Adjusting entries contain only income statement accounts.
c. Adjusting entries contains an income statement account and a balance sheet account.
d. none of the answers listed.

mmj22343 · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

Note: In some editions of the book, the revenues for the Pulp division has a zero missing at the end. It is shown as 9,800,00 instead of 9,800,000.

Percentages for various allocation bases (old and new):

Pulp Paper Fibers Total
(1) Division margin percentages
3,000,000; 7,300,000; 9,700,000
20,000,000 15.0 36.5 48.5 100.0
(2) Share of employees
300; 150; 550 1,000
30.0 15.0 55.0 100.0
(3) Share of floor space
53,200; 35,340; 101,460 190,000
28.0 18.6 53.4 100.0
(4) Share of total division administrative costs
3,300,000; 2,000,000; 4,700,000
10,000,000 33.0 20.0 47.0 100.0

1.
Pulp Paper Fibers Total
(5) Division margin 3,000,000 7,300,000 9,700,000 20,000,000
(6) Corporate overhead allocated on segment
margins = (1) 10,100,000
1,515,000 3,686,500 4,898,500 10,100,000
(7) Operating margin with division-margin-based
allocation = (5) (6) 1,485,000 3,613,500 4,801,500 9,900,000
(

Revenues 9,800,000 17,100,000 25,500,000 52,400,000
Operating margin as a percentage of revenues 15.2 21.1 18.8 18.9

2.
Pulp Paper Fibers Total
(5) Division margin 3,000,000 7,300,000 9,700,000 20,000,000
HRM costs (alloc. base: no. of employees)
= (2) 2,300,000
690 ,000 345,000 1,265,000 2,300,000
Facility costs (alloc. base: floor space)
= (3) 3,200,000
896,000 595,200 1,708,800 3,200,000
Cor

Answer to Question 2

C