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Lenzing Corporation - Cost Allocation

Cost allocation to divisions. See attached file for full problem description.

Lenzing Corporation has three divisions. Fibers, paper, and Pulp. As Lenzing's new controller, you are reviewing the basis to be used for allocating fixed overhead costs to the three divisions in 2004. The following information is available for 2003:

Pulp Paper Fibers
Revenue $8,500,000 $17,500,000 $24,000,000
Administrative costs $1,200,000 $1,800,000 3,000,000
Number of employees 300 250 450
Floor space (square feet) 30,000 24,000 66,000
Segment margin $3,200,000 $7,100,000 $9,700,000.00

In the past, Lenzing has allocated fixed overhead costs to the division using segment margin percentage. A review of the fixed overhead costs indicates that they consists of the following:

Human resouce management $1,800,000
Facilitity 2,700,000
Corporate administration 4,500,000
Total $9,000,000

After considering the nature of the fixed-cost items, you decide to make the allocations in 2004 using the
following bases:

Human resource management Number of employees
Facility Floor space
Corporate administration Divisional administrative costs

1. Allocate 2003 indirect costs to the three divisions using segment margin percentages 2. Allocate 2003 indirect costs to the three divisions using the bases you have selected.
3. Discuss the reason(s) why your approach is preferable.

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Solution Preview

1. Allocate 2003 indirect costs to the three divisions using segment margin percentages

Pulp Paper Fibers Total
Revenue $8,500,000 $17,500,000 $24,000,000 $50,000,000
Segment margin $3,200,000 $7,100,000 $9,700,000.00 $20,000,000
Segment margin percentage 16.00% 35.50% 48.50%

Human resouce management 288,000.00 639,000.00 873,000.00 1,800,000.00
Facilitity 432,000.00 958,500.00 1,309,500.00 ...

Solution Summary

This solution is comprised of a detailed explanation to answer the cost allocation to divisions problem for Lenzing Corporation in excel file.

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