Solved: Allocation of corporate costs to divisions Dusty

Rhodes
Allocation of corporate costs to divisions Dusty Rhodes

Allocation of corporate costs to divisions. Dusty Rhodes, controller of Richfield Oil Company, is
preparing a presentation to senior executives about the performance of its four divisions.
Summary data (dollar amounts in millions) related to the four divisions for the most recent year
are:

Under the existing accounting system, costs incurred at corporate headquarters are collected in
a single cost pool ($3228 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.
Rhodes 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 (dollar
amounts in millions) and Rhodes’ suggested cost pools and allocation bases are:

1. Discuss two reasons why Richfield Oil should allocate corporate costs to each division.
2. Calculate the operating income of each division when all corporate costs are allocated based
on revenues of each division.
3. Calculate the operating income of each division when all corporate costs are allocated using
the four cost pools.
4. How do you think the new proposal will be received by the division managers? What are the
strengths and weaknesses of Rhodes’ proposal relative to the existing single-cost-poolmethod?

Allocation of corporate costs to divisions Dusty Rhodes

ANSWER
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