XXX Corporation has three divisions: A, B, and C.

XXX Corp’s new controller(?), DD, is reviewing the allocation of fixed corporate-overhead costs to the
three divisions. He is presented with the following information for each division for 2018:

ZOE B C
Revenues $ 9,800,000.00 $ 17,100,000.00 $ 25,500,000.00
Direct manufacturing costs 3,500,000 7,800,000 11,100,000
Division administratative costs 3,300,000 2,000,000 4,700,000
Division margin $ 3,000,000.00 $ 7,300,000.00 $ 9,700,000.00
Number of employees 200 150 550
Floor space (square feet) 53,200 35,340 101,460

Until now, XXX Corporation has allocated fixed corporate-overhead costs to the divisions on the basis
of division margins. DD asks for a list of costs that comprise fixed corporate overhead and suggests the
following new allocation bases:

Fixed Corporate Overhead Costs Suggested Allocation Bases

Human resource management $ 3,300,000.00 Number of employees
Facility 1,900,000.00 Floor space (square feet)
Corporate administration 4,800,000.00 Division administratative costs
Total $ 10,000,000.00

CURRENT
2018 fixed corporate-overhead costs is allocated to the three divisions using division margin as the allocation
base.
ZOE B C
Revenues $ 9,800,000.00 $ 17,100,000.00 $ 25,500,000.00
Direct Manufacturing Costs 3,500,000 7,800,000 11,100,000
Division Administration Costs 3,300,000 2,000,000 4,700,000
Division Margin $ 3,000,000.00 $ 7,300,000.00 $ 9,700,000.00
Percentage of Division Margin
On Revenus (Division
Margins/Revenues) 30.6% 42.7% 38.04%
Division Margin $ 3,000,000.00 $ 7,300,000.00 $ 9,700,000.00
Allocated Fixed Overhead - 3,061,224.49 - 4,269,005.85 - 3,803,921.57
Operating Margin $ (61,224.49) $ 3,030,994.15 $ 5,896,078.43
Percentage of Operating
Margin on Revenues -0.62% 18% 23%

Allocated 2018 fixed costs using the allocation bases suggested by DD.
PROPOSED

ZOE B C
Number of Employees 200 150 550
Percentage of Direct Cost on
Total Direct Costs 22% 17% 61%
Floor Space (Square Feet) 53,200 35,340 101,460
Percentage of Space Used By
Each Division on Total Floor
Space 28% 18.6% 53.4%
Percentage of Administration
Costs of Each Division on Total
Administration Costs 33% 20% 47%

Division Administration Costs $ 3,300,000.00 $ 2,000,000.00 $ 4,700,000.00

ZOE B C
Revenues $ 9,800,000.00 $ 17,100,000.00 $ 25,500,000.00
Direct manufacturing costs 3,500,000 7,800,000 11,100,000
Division administratative costs 3,300,000 2,000,000 4,700,000
Division margin $ 3,000,000.00 $ 7,300,000.00 $ 9,700,000.00

Allocated Human Resource

Manangement ( 30%,15%,55%
of $2,300,000) $ (733,333.33) $ (550,000.00) $ (2,016,666.67)

Allocated Facility Cost

(28%,18.6%,53.4 of
$3,200,000) $ (532,000.00) $ (353,400.00) $ (1,014,600.00)

Allocated Corporate
Administration Costs (33%,
20%,47% of $4,600,000) $ (1,584,000.00) $ (960,000.00) $ (2,256,000.00)
Operating Margin $ 150,666.67 $ 5,436,600.00 $ 4,412,733.33
Percentage of Operating
Margin on Revenues 5.0% 74.5% 45.5%

Which allocation scheme should XXX Corporation use? Why? How might DD overcome any
objections that may arise from the divisions?

XXX 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.
DD when faced with any objections he should inform the division about their performance
and allow them the time reduce their cost drivers.
costs to the

Totals
$ 52,400,000.00
$ 22,400,000.00
$ 10,000,000.00
$ 20,000,000.00

on the basis
d suggests the

gin as the allocation

Totals
$ 52,400,000.00
$ 22,400,000.00
$ 10,000,000.00
$ 20,000,000.00

$ 20,000,000.00
- 10,000,000.00
$ 10,000,000.00

19%

Total
 900

100%
190,000

100%

100%

$ 10,000,000.00

Totals
$ 52,400,000.00
$ 22,400,000.00
$ 10,000,000.00
$ 20,000,000.00

$ (3,300,000.00)

$ (1,900,000.00)

$ (4,800,000.00)
$ 10,000,000.00

50.0%