CHAPTER 14
COST ALLOCATION, CUSTOMER-PROFITABILITY
ANALYSIS, AND SALES-VARIANCE ANALYSIS
14-1 Disagree. Cost accounting data plays a key role in many management planning and
control decisions. The division president will be able to make better operating and strategy
decisions by being involved in key decisions about cost pools and cost allocation bases. Such an
understanding, for example, can help the division president evaluate the profitability of different
customers.
14-2 Exhibit 14-1 outlines four purposes for allocating costs:
1. To provide information for economic decisions.
2. To motivate managers and other employees.
3. To justify costs or compute reimbursement amounts.
4. To measure income and assets.
14-3 Exhibit 14-2 lists four criteria used to guide cost allocation decisions:
1. Cause and effect.
2. Benefits received.
3. Fairness or equity.
4. Ability to bear.
The cause-and-effect criterion and the benefits-received criterion are the dominant criteria when
the purpose of the allocation is related to the economic decision purpose or the motivation
purpose.
14-4 Disagree. In general, companies have three choices regarding the allocation of corporate
costs to divisions: allocate all corporate costs, allocate some corporate costs (those “controllable”
by the divisions), and allocate none of the corporate costs. Which one of these is appropriate
depends on several factors: the composition of corporate costs, the purpose of the costing
exercise, and the time horizon, to name a few. For example, one can easily justify allocating all
corporate costs when they are closely related to the running of the divisions and when the
purpose of costing is, say, pricing products or motivating managers to consume corporate
resources judiciously.
14-5 Disagree. If corporate costs allocated to a division can be reallocated to the indirect cost
pools of the division on the basis of a logical cause-and-effect relationship, then it is in fact
preferable to do so—this will result in fewer division indirect cost pools and a more cost-
effective cost allocation system. This reallocation of allocated corporate costs should only be
done if the allocation base used for each division indirect cost pool has the same cause-and-effect
relationship with every cost in that indirect cost pool, including the reallocated corporate cost.
Note that we observe such a situation with corporate human resource management (CHRM)
costs in the case of CAI, Inc., described in the chapter—these allocated corporate costs are
included in each division’s five indirect cost pools. (On the other hand, allocated corporate
treasury cost pools are kept in a separate cost pool and are allocated on a different cost-allocation
base than the other division cost pools.)
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