A company should not allocate all of its corporate costs to its divisions. do you agree? explain.
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Problem 1$"$ I'm going to focus on the customers of my business and leave cost-allocation issues to my accountant." Do you agree with this comment by a division president? Explain.  Ameer S. Numerade Educator
Problem 2Why is customer-profitability analysis an important topic for managers? Ameer S. Numerade Educator
Problem 3How can a company track the extent of price discounting on a customer-by-customer basis? Ameer S. Numerade Educator
Problem 4"A customer-profitability profile highlights those customers a company should drop to improve profitability." Do you agree? Explain. Ameer S. Numerade Educator
Problem 5Give examples of three different levels of costs in a customer-cost hierarchy Ameer S. Numerade Educator
Problem 6What information does the whale curve provide? Ameer S. Numerade Educator
Problem 7"A company should not allocate all of its corporate costs to its divisions." Do you agree? Explain.
Problem 8What criteria might managers use to guide cost-allocation decisions? Which are the dominant criteria?
Problem 9"Once a company allocates corporate costs to divisions, these costs should not be reallocated to the indirect-cost pools of the division." Do you agree? Explain.
Problem 10"A company should not allocate costs that are fixed in the short run to customers." Do you agree? Explain briefly.
Problem 11How should a company decide on the number of cost pools it should use to allocate costs to divisions, channels, and customers?
Problem 12Show how managers can gain insight into the causes of a sales-volume variance by subdividing the components of this variance.
Problem 13How can the concept of a composite unit be used to explain why an unfavorable total sales-mix variance of contribution margin occurs?
Problem 14Explain why a favorable sales-quantity variance occurs. Ameer S. Numerade Educator
Problem 15How can the sales-quantity variance be decomposed further? Ameer S. Numerade Educator
Problem 16The actual contribution margin per unit will impact the following sales variance:a. Flexible-budget variance
Problem 17Lexota, Inc., an auto manufacturer,
reported the following budgeted and actual sales of its vehicles during September, Year 2:
Problem 18Harold Monette vacationed at Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital. Monette's insurance company received a 4,950
Problem 19EnviroTech has only two retail and
two wholesale customers. Information relating to each customer for 2017 follows (in thousands):Enviro-Tech's annual distribution-channel costs are $\$ 33$ million for wholesale customers and $\$ 12$ million for retail customers. The company's annual corporate-sustaining costs, such as salary for top management and general-administration costs are 48 million dollars . There is no cause-and-effect or benefits-received relationship between any cost-allocation base and corporate-sustaining costs.
That is, Enviro-Tech could save corporate-sustaining costs only if the company completely shuts down. 1. Calculate customer-level operating income using the format in Exhibit $14-3$
Problem 20Instant Service (IS) repairs
printers and photocopiers for five multisite companies in a tristate area. IS's costs consist of the cost of technicians and equipment that are directly traceable to the customer site and a pool of ottice overhead. Until recently, IS estimated customer profitability by allocating the office overhead to each customer based on share of revenues. For $2017,$ IS reported the following results:Abby costa, IS's new controller, notes that office overhead is more than $10 \%$ of total costs, so she
spends a couple of weeks analyzing the consumption of office overhead resources by customers. She collects the following information:1. Compute customer-level operating income using the new information that costa has gathered.
Problem 21 Best Drugs
is a distributor of pharmaceutical products. Its ABC system has five activities:Rick Flair, the controller of Best Drugs, wants to use this ABC system to examine individual customer profitability within each distribution market. He focuses first on the Ma and Pa single-store distribution market. Using only two customers helps highlight the insights available with the ABC approach. Data pertaining to these two customers in August 2017 are as follows:1. Use the ABC information to compute the
operating income of each customer in August 2017 . Comment on the results and what, if anything, Flair should do.
Problem 22Reidland Manufacturing has four divisions: Acme, Dune, Stark, and Brothers. Corporate headquarters is in Minnesota. Reidland corporate headquarters incurs costs of $\$ 16,800,000$ per period, which is an indirect cost of the divisions. Corporate headquarters currently allocates this cost to the divisions
based on the revenues of each division. The CEO has asked each division manager to suggest an allocation base for the indirect headquarters costs from among revenues, segment margin, direct costs, and number of employees. The following is relevant information about each division:1. Allocate the indirect headquarters costs of Reidland Manufacturing to each of the four divisions using revenues, direct costs, segment margin, and number of employees as the allocation bases. Calculate operating
margins for each division after allocating headquarters costs.
Problem 23Rembrandt Hotel \& Casino is situated on beautiful Lake Tahoe in Nevada. The complex includes a 300 -room hotel, a casino, and a restaurant. As Rembrandt's new controller, your manager asks you to recommend the basis the hotel should use for allocating fixed overhead costs to the three divisions in $2017
.$ You are presented with the following income statement information for 2016 :You are told that you may choose to allocate indirect costs based on one of the following: direct costs, floor space, or the number of employees. Total fixed overhead costs for 2016 were $\$ 14,550,000$ Oluwadamilola A. Numerade Educator
Problem 24Bergen Corporation has three divisions: pulp, paper, and fibers. Bergen's new controller, David Fisher, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2017 :Until now, Bergen Corporation has allocated
fixed corporate-overhead costs to the divisions on the basis of division margins. Fisher asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:1. Allocate 2017 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)?
Problem 25The Chicago Tigers play in the American Ice Hockey League. The Tigers play in the Downtown Arena, which is owned and managed by the City of Chicago. The arena has a capacity of 15,000 seats $(5,500 \text { lower-tier seats and } 9,500$ upper-tier seats). The arena charges the Tigers a per-ticket charge for
use of its facility. All tickets are sold by the Reservation Network, which charges the Tigers a reservation fee per ticket. The Tigers' budgeted contribution margin for each type of ticket in 2017 is computed as follows:The budgeted and actual average attendance figures per game in the 2017 season are as follows:Therewas no difference between the budgeted and actual contribution marginiforlower-tier or upper-tier seats The manager of the Tigers was delighted that actual attendance was $10 \%$
above budgeted attendance
Problem 26The Hiro Corporation sells two brands of wine glasses:
Problem 27Emcee Inc. manufactures and sells two fruit drinks: Kostor and limba. Budgeted and actual results for 2017 are as follows:1. Compute the total sales-volume variance, the total sales-mix variance, and the total sales-quantity variance. (Calculate all variances in terms of contribution margin.) Show results
for each product in your computations.
Problem 28 Emcee Inc. prepared the budget for 2017 assuming a $20 \%$ market share based on total sales in the Midwest region of the United States. The total fruit drinks market was estimated to reach sales of 1.25 million cartons in the region. However, actual total sales volume in the western region was 1.5 million
cartons.
Problem 29Mary Martin recenty started a job as an adminisistative assistant in the costaccounting departmentof Needham Manufacturing. New to the area of cost accounting, Mary is puzled by the fact that tone of Needham's manufactured products, SR67, has a different cost depending on who asks for it.
When the marketing department requested the cost of SR670 in order to determine pricing for the new catalog, Mary was told to report one amount, but when a request came in the very nextday from the financial reporting department for the cost of SR670, she was told to report a very different cost Mary runs a report using Needham's cost accounting system, which produces the following cost elements for one unit of SR670.1. Explain to Mary why the cost given to the marketing and financial-reporting
departments would be different
Problem 30Bracelet Delights is a new company
that manufactures custom jewelry. Bracelet Delights currently has six customers referenced by customer number: $01,02,03,04,05,$ and 06 Besides the costs of making the jewelry, the company has the following activities:1. Customer orders. The salespeople, designers, and jewelry makers spend time with the customer. The cost-driver rate is 42dollars per hour spent with a customer.
Problem 31Delivery has decided to analyze the
profitability of five new customers. It buys recycled paper at 20 dollars per case and sells to retail customers at a list price of $\$ 26$ per case. Data pertaining to the five customers are:1. Compute the customer-level operating income of each of the five retail customers now being examined $(1,2,3,4, \text { and } 5) .$ Comment on the results.
Problem 32Mississippi Manufacturing makes a component called B2040. This component is manufactured only when ordered by a customer, so Mississippi keeps no inventory of B2040. The list price is $\$ 112$ per unit, but customers who place "large" orders receive a $10 \%$ discount on price. The customers are
manufacturing firms. Currently, the salespeople decide whether an order is large enough to qualify for the discount. When the product is finished, it is packed in cases of 10 . If the component needs to be exchanged or repaired, customers can come back within 14 days for free exchange or repair.The full cost of manufacturing a unit of $\mathrm{B} 2040$ is $\$ 95 .$ In addition, Mississippi incurs customer-level costs. Customer-level cost-driver rates are: All customers except E ordered units in
the same order size. Customer E's order quantity varied, so E got a discount part of the time but not all the time.
Problem 33Louise Newman operates Interiors by Louise, an interior design consulting and window treatment fabrication business. Her business is made up of two different distribution channels, a consulting business in which Louise serves two architecture firms (Adams and Betz) and a commercial window treatment business
in which Louise designs and constructs window treatments for three commercial clients (Chatham, Dedham, and Elm). Louise would like to evaluate the profitability of her two architecture firm clients and three commercial window treatment clients, as well as evaluate the profitability of each of the two channels and the business as a whole. Information about her most recent quarter follow:Overhead costs total 340,400 dollars . Louise has determined that $25 \%$ of her overhead costs relate
directly to her architectural business, $40 \%$ relate directly to her window treatment business, and the remainder are corporate overhead costs.On the revenues indicated above, Louise gave a $10 \%$ discount to Adams in order to lure it away from a competitor and gave a $5 \%$ discount to Elm for advance payment in cash.1. Prepare a customer-cost hierarchy report for Interiors by Louise, using the format in Exhibit $14-6$
Problem 34Cathy Carpenter, controller of the Sweet and Salty Snacks is preparing a presentation to senior executives about the performance of its four divisions. Summary data related to the four divisions for the most recent year are as follows:Under the existing accounting system, costs incurred at corporate
headquarters are collected in a single cost pool (S1.2 million in the most recent year) and allocated to each division on the basis of its actual revenues. The top managers in each division share in a division-income bonus pool. Division income is defined as operating income less allocated corporate costs.Carpenter has analyzed the components of corporate costs and proposes that corporate costs be collected in four cost pools. The components of corporate costs for the most recent year and
Carpenter's suggested cost pools and allocation bases are as follows:1. Discuss two reasons why Sweet and Salty Snacks should allocate corporate costs to each division.
Problem 35Forber Bakery makes baked goods for grocery stores and has three divisions: bread, cake, and doughnuts. Each division is run and evaluated separately, but the main headquarters incurs costs that are indirect costs for the divisions. costs incurred in the main headquarters are as follows:The Forber upper
management currently allocates this cost to the divisions equally. 0 ne of the division managers has done some research on activity-based costing and proposes the use of different allocation bases for the different indirect costs - number of employees for HR costs, total revenues for accounting department costs, square feet of space for rent and depreciation costs, and equal allocation among the divisions of "other" costs. Information about the three divisions follows:1. Allocate the indirect
costs of Forber to each division equally. Calculate division operating income after allocation of headquarter costs.
Problem 36The Insurance Company insures homeowners in three regions of the United States: Eastern, Midwest, and South. In the past year, several hurricanes hit the Southern region of the United States, requiring payments to insured homeowners.Management of the company wishes to analyze the profitability of the three key regions and has gathered the following information:In addition to the customer-level costs above, the company also allocates 750,000 dollars of corporate costs to each region based
on the revenues of each region.
Problem 37$14-37$ cost-hierarchy income statement and allocation of corporate, division, and channel costs to customers. Vocal Speakers makes wireless speakers that are sold to different customers in two main distribution channels. Recently, the company's profitability has decreased. Management would like to analyze
the profitability of each channel based on the following information:The company allocates distribution channel costs of marketing and administration as follows:Based on a special study, the company allocates corporate costs to the two channels based on the corporate resources demanded by the channels as follows: Distribution Channel $A, \$ 45,000,$ and Distribution Channel $B, 55,000 1. Calculate the operating income for each distribution channel as a percentage of revenue after assigning
customer-level costs, distribution-channel costs, and corporate costs.
Problem 38Miami Infonautics, Inc., produces
handheld Windows CETM-compatible organizers. Miami Infonautics markets three different handheld models: PalmPro is a souped-up version for the executive on the go, PalmCE is a consumer-oriented version, and PalmKid is a stripped-down version for the young adult market. You are Miami Infonautics' senior vice president of marketing. The CEO has discovered that the total contribution margin came in lower than budgeted, and it is your responsibility to explain to him why actual results are different
from the budget. Budgeted and actual operating data for the company's third quarter of 2017 are as follows:1. Compute the actual and budgeted contribution margins in dollars for each product and in total for the third quarter of 2017
Problem 39Miami Infonautics" senior vice president of marketing prepared his budget at the beginning of the third quarter assuming a $25 \%$ market share based on total sales. Foolinstead Research estimated that the total
handheld-organizer market would reach sales of 408,600 units worldwide in the third quarter. However, actual sales in the third quarter were 515,000 units.1. Calculate the market-share and market-size variances for Miami Infonautics in the third quarter of 2017 (calculate all variances in terms of contribution margins).
Problem 40The Robin's Basket operates a chain of Italian gelato stores. Although the Robin's Basket charges customers the same price for all flavors, production costs vary, depending on the type of ingredients. Budgeted and actual operating data of its Washington, D.C., store for August 2017 are as
follows:The Robin's Basket focuses on contribution margin in its variance analysis
Problem 41KC Corporation manufactures an
air-freshening device called GoodAir, which it sells to six merchandising firms. The list price of a GoodAir is 30,dollars and the full manufacturing costs are 18 dollars . Salespeople receive a commission on sales, but the commission is based on number of orders taken, not on sales revenue generated or number of units sold. Salespeople receive a commission of 10 dollars per order (in addition to regular salary).KC Corporation makes products based on anticipated demand. KC carries an inventory
of GoodAir, so rush orders do not result in any extra manufacturing costs over and above the 18 dollars per unit. KC ships finished product to the customer at no additional charge for either regular or expedited delivery. KC incurs significantly higher costs for expedited deliveries than for regular deliveries. Customers occasionally return shipments to $\mathrm{KC}$, and the company subtracts these returns from gross revenue. The customers are not charged a restocking fee for returns.Because
salespeople are paid $\$ 10$ per order, they often break up large orders into multiple smaller orders. This practice reduces the actual order-taking cost by 7 dollars per smaller order from 15 dollars per order to 8 dollars per order) because the smaller orders are all written at the same time. This lower cost rate is not included in budgeted rates because salespeople create smaller orders without telling management or the accounting department. All other actual costs are the same as budgeted
costs. Informatinn ahout KC's clients follows:1. Classify each of the customer-level operating costs as a customer output unit-level, customer batchlevel, or customer-sustaining cost. Should a company allocate its corporate costs to divisions?Product line divisions may be split depending on the functional divisions, including marketing, human resources and finance. The variety of types of divisions is one reason why a company shouldn't allocate all its costs to divisions, because the divisions could have shortfalls or unexpected costs.
Why do companies allocate costs?Cost allocation is the method business owners use to calculate profitability for the purpose of financial reporting. To ensure the business's finances are on track, costs are separated, or allocated, into different categories based on the area of the business they impact.
What are allocated corporate costs?Cost allocation is the distribution of one cost across multiple entities, business units, or cost centers. An example is when health insurance premiums are paid by the main corporate office but allocated to different branches or departments.
What is the main purpose of allocating it costs to user departments?Provides Accurate Cost
By allocating cost to the respective departments that used a particular resource, you're able to show that the item associated with the cost had an input in the cost generation. Specifically, you can easily identify the amount spent on specific areas of the company.
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