Assume that Timberland Company uses a responsibility accounting system for evalu

Question

Assume that Timberland Company uses a responsibility accounting system for evaluating its managers, and that abbreviated performance reports for the company's three divisions for the month of March are as follows (amounts in thousands).

Total East Central West

Income 200,000 70,000 80,000 50,000

Less allocated costs:

Information Technology (96,000) (32,000) (32,000) (32,000)

Personal (75,000) (28,125) (28,125) (18,750)

Divison income $29,000 $9,875 $19,875 $(750)

The west divison manager is very disturbed over his performance report and recent rumors that he's division may be closed because of its failure to report a profit in recent periods. He believes that the reported profit figures do not fairly present operating results because his divion is being unfairly burndend with service department costs. He is particularly concerned over the amount of information Technology costs charged to his divison. He believes that it is inequitable for his division to be charged with one-third of the total cost when it is using only 20 percent of the services. He believes that the personnel departments use of the information technology department should also be considered in the cost allocations. Cost allocations were based on the following distributions of service provided:

Services Provider Personnel Computer Services East Central West

Information Technology 40% ---- 20% 20% 20%

Personnel ----- 20% 30 30 20

Question: Do direct allocation

Explanation / Answer

Direct allocation of expenses is as under; Personnel Computer Services East Central   West Total Information Technology 40% 0% 20% 20% 20% 100% Allocation of Information Technology $ 38,400 $ -   $ 19,200 $19,200 $19,200 $        96,000 Personnel 0 20% 30% 30% 20% 100% Allocation of personel 0 15000 22500 22500 15000 $        75,000 Calculation of division profit after direct allocation of expenses to the divisions are as under: East Central   West Total Income $ 70,000 $ 80,000 $ 50,000 $ 200,000 Less: Allocation of Information Technology $(19,200) $(19,200) $     (19,200) $ (57,600) Allocation of Personnel $(22,500) $(22,500) $ (15,000) $ (60,000) Profit $ 28,300 $ 38,300 $ 15,800 $ 82,400 The profit of west division is $15,800 after direct allocation of expenses.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.