Cost allocation to divisions:
Lenzing Corporation has three divisions. Fibers, paper, and Pulp. As Lenzig's new controller, you are reviewing the basis to be used for allocating fixed overhead costs to the three divisions in 2004. The following information is avbailable for 2003:
|
|
|
|
Pulp |
|
Paper |
|
Fibers |
| Revenue |
|
|
|
$8,500,000 |
|
$17,500,000 |
|
$24,000,000 |
| Administrative costs |
|
|
$1,200,000 |
|
$1,800,000 |
|
3,000,000 |
| Number of employees |
|
300 |
|
250 |
|
450 |
| Floor space (square feet) |
|
30,000 |
|
24,000 |
|
66,000 |
| Segment margin |
|
|
$3,200,000 |
|
$7,100,000 |
|
$9,700,000.00 |
In the past, Le4nzig has allocated fixed overhead costs to the division usinig segment margin percentage. A review of the fixed overhead costs indicates that they cosists fo the following:
| Human resouce management |
|
$1,800,000 |
| Facilitity |
|
|
|
2,700,000 |
| Corporate administration |
|
4,500,000 |
| Total |
|
|
|
$9,000,000 |
After considering the nature of the fixed-cost items, you decide to make the allocations in 2004 using the following bases:
| Human resource management |
|
Number of employees |
|
| Facility |
|
|
|
Floor space |
|
| Corporate administration |
|
Divisional administrative costs |
Question 1. Allocate 2003 indirect costs to the three divisions using segment margin percentages.
Question 2. Allocate 2003 indirect costs to the three divisons using the bases you have selected.
Question 3. Discuss the reason(s) why your approach is preferable.