1 Bread Cake Doughnuts Total Segment margin $6,400,000 $1,300,000 $6,150,000 $13,850,000 Allocated headquarters costs ($5,100,000 3) 1,700,000 1,700,000 1,700,000 5,100,000 Operating income $4,700,000 $ (400,000) $4,450,000 $ 8,750,000 2 Bread Cake Doughnuts Total Segment margin $6,400,000 $1,300,000 $6,150,000 $13,850,000 Allocated headquarters costs, Human resources1 (50 125 375 $1,900,000) 950,000 237,500 712,500 1,900,000 Accounting department2 (539 116 345 $1,400,000) 754,600 162,400 483,000 1,400,000 Rent and depreciation3 (50 20 30 $1,200,000) 600,000 240,000 360,000 1,200,000 Other () 200,000 200,000 200,000 600,000 Total 2,504,600 839,900 1,755,500 5,100,000 Operating income $3,895,400 $ 460,100 $4,394,500 $ 8,750,000 1HR costs 400 800 50 100 800 125 300 800 375 2Accounting $20,900,000 $38,800,000 539 $4,500,000 $38,800,000 116 $13,400,000 $38,800,000 345 3 Rent and depreciation 10,000 20,000 50 4,000 20,000 20 6,000 20,000 30 A causeandeffect relationship may exist between Human Resources costs and the number of employees at each division Rent and depreciation costs may be related to square metres, except that very expensive machines may require few square metres, which is inconsistent with this choice of allocation base The Accounting Department costs are probably related to the revenue earned by each divisionhigher revenue mean more transactions and more accounting Other overhead costs are allocated arbitrarily 3 The manager suggesting the new allocation bases probably works in the Cake Division Under the old scheme, the Cake Division shows an operating loss after allocating headquarters costs because it is smaller, yet was charged an equal amount (a third) of headquarters costs The new allocation scheme shows an operating profit in the Cake Division, even after allocating headquarters costs The ABC method is a better way to allocate headquarters costs because it uses cost allocation bases that, by and large, represent causeandeffect relationships between various categories of headquarters costs and the demands that different divisions place on these costs