Gerterai see divsions: One, Two, and Three. Corporate headquarters 1s 24) headqu
ID: 2524058 • Letter: G
Question
Gerterai see divsions: One, Two, and Three. Corporate headquarters 1s 24) headquarters incurs costs of $20,000,000 per period, which is an indirect cost of the divisions. Corporate endquarters currently allocates this cost to the divisions based on the revenues of each division. The CEO has each division manager to suggest an allocation base for the indirect headquarters costs from among, revenues, costs, and number of employees. The following is relevant information about each division f each division. The CEO has asked ues, direct One Two Three Revenues Direct costs Segment margin Number of employees Required: s25,000,000 $ 27,000,000 22,000,000 16,000,000 6,000,000 6,000 17,000,000 14,000,000 13,000,000 $ 8,000,000 $ 7,000 13,000 1. Allocate the indirect headquarters cost of General Manufacturing to each of the three divisions using revenues Calculate operating margins for each division direct costs, and number of employees as the allocation bases. after allocating headquarters costs. Which allocation base do you think the manager of the Two division would prefer? Explain. 2.Explanation / Answer
Allocation of headquarter costs on various allocation basis to the three departments –
Allocation basis – Revenues
Divisions
Total
One
Two
Three
Revenues
$25,000,000
$27,000,000
$22,000,000
$74,000,000
Direct costs
$17,000,000
$14,000,000
$16,000,000
$47,000,000
Segment margin
$8,000,000
$13,000,000
$6,000,000
$27,000,000
Allocated indirect costs
$6,756,757
$7,297,297
$5,945,946
$20,000,000
Operating margin
$1,243,243
$5,702,703
$54,054
$7,000,000
Allocation on the basis of revenues is as follows,
Total indirect costs = $22,000,000
Total revenues = $74,000,000
Allocated to Division x (20,000,000/74,000,000) = $6,756,757
Allocation to Division Two = $27,000,000 x (20,000,000/74,000,000) = $7,297,297
Allocation to Division Three = $22,000,000 x (20,000,000/74,000,000) = $5,945,946
Allocation basis - Direct Costs
Divisions
Total
One
Two
Three
Revenues
$25,000,000
$27,000,000
$22,000,000
$74,000,000
Direct costs
$17,000,000
$14,000,000
$16,000,000
$47,000,000
Segment margin
$8,000,000
$13,000,000
$6,000,000
$27,000,000
Allocated indirect costs
$7,234,043
$5,957,447
$6,808,510
$20,000,000
Operating margin
$765,957
$7,042,553
($808,510)
$7,000,000
Notes:
Allocation on the basis of direct costs is as follows,
Total indirect costs = $22,000,000
Total direct costs = $47,000,000
Allocated to division x (20,000,000/47,000,000) = $7,234,043
Allocation to division Two = $14,000,000 x (20,000,000/47,000,000) = $5,957,447
Allocation to division Three = $16,000,000 x (20,000,000/47,000,000) = $6,808,510
Allocation basis - Number of employees
Departments
Total
One
Two
Three
Revenues
$25,000,000
$27,000,000
$22,000,000
$74,000,000
Direct costs
$17,000,000
$14,000,000
$16,000,000
$47,000,000
Segment margin
$8,000,000
$13,000,000
$6,000,000
$27,000,000
Allocated indirect costs
$5,384,615
$10,000,000
$4,615,385
$20,000,000
Operating margin
$2,615,385
$3,000,000
$1,384,615
$7,000,000
Notes:
Allocation on the basis of number of employees is as follows,
Total indirect costs = $22,000,000
Total number of employees = 7,000 + 13,000 + 6,000 = 26,000
Allocated to department x (20,000,000/26,000) = $5,384,615
Allocation to department Two = 13,000 x (20,000,000/26,000) = $10,000,000
Allocation to department Three = 6,000 x (20,000,000/6,000) = $4,615,385
Allocation basis – Revenues
Divisions
Total
One
Two
Three
Revenues
$25,000,000
$27,000,000
$22,000,000
$74,000,000
Direct costs
$17,000,000
$14,000,000
$16,000,000
$47,000,000
Segment margin
$8,000,000
$13,000,000
$6,000,000
$27,000,000
Allocated indirect costs
$6,756,757
$7,297,297
$5,945,946
$20,000,000
Operating margin
$1,243,243
$5,702,703
$54,054
$7,000,000
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