The Western Canadian Railroad allocates all central corporate overhead costs to its divisions. Some costs, such as specified internal auditing and legal costs, are identified on the basis of time spent. However, other costs are harder to allocate, so the revenue achieved by each division is used as an allocation base. Examples of such costs are executive salaries, travel, secretarial, utilities, rent, depreciation, donations, corporate planning, and general marketing costs.

Allocations on the basis of revenue for 2012 were (in millions):

In 2013, Alberta’s revenue remained unchanged. However, B.C.’s revenue soared to $280 million because of unusually large imports. The latter are troublesome to forecast because of variations in world markets. Prairie had expected a sharp rise in revenue, but severe competitive conditions resulted in a decline to $200 million. The total cost allocated on the basis of revenue was again $30 million, despite rises in other costs. The president was pleased that central costs did not rise for the year.

1. Compute the allocations of costs to each division for 2013.

2. How would each division manager probably feel about the cost allocation in 2013 as compared with 2012? What are the weaknesses of using revenue as a basis for cost allocation?

3. Suppose the budgeted revenues for 2013 were $120, $240, and $280, respectively, and the budgeted revenues were used as a costallocation base for allocation. Compute the allocations of costs to each division for 2013. Do you prefer this method to the one used in number 1? Why?

4. Many accountants and managers oppose allocating any central costs. Why?

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Division Revenue Allocated Costs $ 6 Alberta $120 Prairie 240 12 B.C. 240 12 Total $600 $30