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    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.