# Cost Accounting-Cost allocation to divisions. Holbrook Corporation

January 30, 2017

Question
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:

Revenues
Direct manufacturing costs
Division margin
Number of employees
Floor space (square feet)

\$

\$

page
604

Pulp
Paper
Fibers
9,800,000.00 \$ 17,100,000.00 \$ 25,500,000.00
3,500,000
7,800,000
11,100,000
3,300,000
2,000,000
4,700,000
3,000,000.00 \$ 7,300,000.00 \$ 9,700,000.00
300
150
550
53,200
35,340
101,460

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:
Fixed Corporate Overhead Costs
Human resource management
Facility
Total

Suggested Allocation Bases
2,300,000.00 Number of employees
3,200,000 Floor space (square feet)
4,600,000 Division administratative costs
\$ 10,100,000.00
\$

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)?

Revenues
Direct Manufacturing Costs
Division Margin
Percentage of Division Margin On Revenus
(Division Margins/Revenues)
Division Margin
Operating Margin

\$

\$

\$
\$

Pulp
Paper
Fibers
Totals
9,800,000.00 \$ 17,100,000.00 \$ 25,500,000.00 \$ 52,400,000.00
3,500,000
7,800,000
11,100,000 \$ 22,400,000.00
3,300,000
2,000,000
4,700,000 \$ 10,000,000.00
3,000,000.00 \$ 7,300,000.00 \$ 9,700,000.00 \$ 20,000,000.00
30.6%
3,000,000.00 \$
-3091610
(91,610.00) \$

Percentage of Operating Margin on Revenues

42.7%
7,300,000.00 \$
-4311690
2,988,310.00 \$

-0.93%

38.04%
9,700,000.00 \$ 20,000,000.00
-3842040
-11245340
5,857,960.00 \$ 8,754,660.00

17%

23%

17%

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?
Pulp
300

Number of Employees
Percentage of Direct Cost on Total Direct
Costs

53,200

Percentage of Space Used By Each Division
on Total Floor Space
\$

3,300,000.00 \$

33%

\$

\$

Total
1000

15%
35,340

28%

Percentage of Administration Costs of Each
Division on Total Administration Costs

Revenues
Direct manufacturing costs
Division margin

Fibers
550

30%

Floor Space (Square Feet)

Paper
150

55%
101,460

18.6%
2,000,000.00 \$

20%

100%
190,000

53.4%

100%

4,700,000.00 \$ 10,000,000.00

47%

100%

Pulp
Paper
Fibers
Totals
9,800,000.00 \$ 17,100,000.00 \$ 25,500,000.00 \$ 52,400,000.00
3,500,000
7,800,000
11,100,000 \$ 22,400,000.00
3,300,000
2,000,000
4,700,000 \$ 10,000,000.00
3,000,000.00 \$ 7,300,000.00 \$ 9,700,000.00 \$ 20,000,000.00

Allocated Human Resource Manangement
( 30%,15%,55% of \$2,300,000)

\$

(690,000.00) \$

(345,000.00) \$ (1,265,000.00) \$ (2,300,000.00)

Allocated Facility Cost (28%,18.6%,53.4 of
\$3,200,000)

\$

(896,000.00) \$

(595,200.00) \$ (1,708,800.00) \$ (3,200,000.00)

Allocated Corporate Administration Costs
(33%, 20%,47% of \$4,600,000)
Operating Margin

\$ (1,518,000.00) \$
\$
(104,000.00) \$

(920,000.00) \$ (2,162,000.00) \$ (4,600,000.00)
5,439,800.00 \$ 4,564,200.00 \$ 9,900,000.00

Percentage of Operating Margin on Revenues

-3.5%

74.5%

47.1%

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?
The operating margin on the basis of allocation as suggested by Weber is higher in
the paper and fiber division and both shows profits. But the Pulp division shows loses,
if the division performance is measured by the operating margin then the new scheme
of allocating fixed cost should be adopted by the company.

49.5%

4. Which allocation scheme should Holbrook Corporation use? Why? How might Weber overcome any
objections that may arise from the divisions?
Hobrook should use the scheme of allocation because the allocation base has a cause and effect
relationship betwenn the cost and their cost drivers.
Human resource management cost is related to the number of employees like salaries, training,
and the cost of recruitment, therefore this cost has been apportioned on the basis of employees
to the divisions which means if the division has more employees the cost of H.R. will also be higher
for that division.
The facility cost is related to floor space used by each division so the cost has been
allocated on this basis.
The corporate administration cost have been allocated on the basis of each division, which is
only fair because this cost is related to the particular divisions.
Weber when faced with any objections he should inform the division about their performance
and allow them the time reduce their cost drivers.

15-30 Allocating costs of support departments; step-down and direct methods. The Central Valley Company
has prepared department overhead budgets for budgeted-volume levels before allocations as follows:
Support departments:
Building and grounds
Personnel
Cafeteria: operating loss
Storeroom

\$

45,000.00
300
37,320
970
9,990 \$

Operating departments:
Machining
\$
Assembly
Total for support and operating departments

93,580.00

36,600.00
46,000 \$
\$

82,600.00
176,180.00

2. Using the direct method, rewor
3. Based on the following informa
using rates developed in (a) requi

Direct Manufacturing LaborMachining Assembly
Job 88
17
7
Job 89
9
20

Management has decided that the most appropriate inventory costs are achieved by using individualdepartment
overhead rates. These rates are developed after support-department costs are allocated to
operating departments.
Bases for allocation are to be selected from the following:

Department
Buidings and grounds
Personnel
Cafeteria: operating loss
Storeroom
Machining
Assembly
Total

Direct
Manufacturing
Labor-Hours
0
0
0
0
0
8,000
32,000
40000

Page 650

Number of
Employees
0
0
40
10
5
55
140
250

Square Feet of
Floor Spcace Manufacturing
Occupied
Labor-Hours
Number of Requisitions
0
0
0
2,500
0
0
12,000
0
0
5,000
3,000
0
6,000
2,000
0
22,000
13,000
6,000
202,500
26,000
4,000
250000
44000
10000

1. Using the step-down method, allocate support-department costs. Develop overhead rates per direct
manufacturing labor-hour for machining and assembly. Allocate the costs of the support departments
in the order given in this problem. Use the allocation base for each support department you think is
most appropriate.

4. The company evaluates the per
well they managed their total cos
Department, which allocation me
and 2? Explain.

ork requirement 1.
ation about two jobs, determine the total overhead costs for each job by
irement 1 and (b) requirement 2.

erformance of the operating department managers on the basis of how
sts, including allocated costs. As the manager of the Machining
ethod would you prefer from the results obtained in requirements 1

16-23 Joint cost allocation: Sell immediately or process further. Illinois Soy Products (ISP) buys soybeans
and processes them into other soy products. Each ton of soybeans that ISP purchases for \$340 can be
converted for an additional \$190 into 575 pounds of soy meal and 160 gallons of soy oil. A pound of soy meal
can be sold at splitoff for \$1.24 and soy oil can be sold in bulk for \$4.25 per gallon.
ISP can process the 575 pounds of soy meal into 725 pounds of soy cookies at an additional cost of
\$380. Each pound of soy cookies can be sold for \$2.24 per pound. The 160 gallons of soy oil can be packaged
at a cost of \$240 and made into 640 quarts of Soyola. Each quart of Soyola can be sold for \$1.35.
1. Allocate the joint cost to the cookies and the Soyola using the following:
a. Sales value at splitoff method
b. NRV method

Page 678

2. Should ISP have processed each of the products further? What eff
on this decision?

effect does the allocation method have

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