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14-35 Cost allocation to divisions. Forber 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 head- quarters incurs costs that are indirect costs for the divisions. Costs incurred in the main headquarters are as follows: Human resources (HR) costs Accounting department costs Rent and depreciation Other Total costs $1,900,000 1,400,000 1,200,000 600,000 $5,100,000 The Forber upper management currently allocates this cost to the divisions equally. One of the division man- agers 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 depart- ment 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: Total revenues Direct costs Segment margin Number of employees Square feet of space Bread $20,900,000 14,500,000 $ 6,400,000 400 10,000 Cake $4,500,000 3,200,000 $1,300,000 100 4,000 Doughnuts $13,400,000 7,250,000 $ 6,150,000 300 6,000 1. Allocate the indirect costs of Forber to each division equally. Calculate division operating income after allocation of headquarter costs. 2 Allocate headquarter costs to the individual divisions using the proposed allocation bases. Calculate the division operating income after allocation. Comment on the allocation bases used to allocate head- quarter costs. 3. Which division manager do you think suggested this new allocation. Explain briefly. Which allocation do you think is "better

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