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14-25 (Cont’d.)


Market-Share and Market-Size Variance Analysis of Soda King for 2003

Static Budget: Actual Market SizeActual Market SizeBudgeted Market Size Actual Market Share Budgeted Market Share Budgeted Market Share Budgeted Average Budgeted Average Budgeted Average Contribution MarginContribution MarginContribution Margin Per UnitPer UnitPer Unit

24,000,000 0.125a $2.108b24,000,000 0.10c $2.108 b25,000,000 0.10c $2.108b


$1,264,800 F$210,800 U

Market-share varianceMarket-size variance

$1,054,000 F

Sales-quantity variance

F = favorable effect on operating income; U = unfavorable effect on operating income

aActual market share: 3,000,000 units ÷ 24,000,000 units = 0.125, or 12.5%

bBudgeted average contribution margin per unit $5,270,000 ÷ 2,500,000 units = $2.108 per unit

cBudgeted market share: 2,500,000 units ÷ 25,000,000 units = 0.10, or 10%

14-26(40 min.)  Allocation of central corporate costs to divisions.

1.The purposes for allocating central corporate costs to each division include:

a.To provide information for economic decisions.  Allocations can signal to division managers that decisions to expand (contract) activities will likely require increases (decreases) in corporate costs that should be considered in the initial decision about expansion (contraction).  When top management is allocating resources to divi­sions, analysis of relative divi­sion profitability should consider differential use of corporate services by divisions.  Some alloca­tion schemes can encourage the use of central ser­vices that would otherwise be underutilized.  A common rationale related to this pur­pose is "to remind profit center managers that central corporate costs exist and that division earnings must be adequate to cover some share of those costs."

b.Motivation.  Creates an incentive for division managers to control costs; for example, by reducing the number of employees at a divi­sion, a manager will save direct labor costs as well as central personnel and payroll costs allocated on the basis of number of employees.  Allocation also creates incentives for division managers to monitor the effectiveness and efficiency with which central corporate costs are spent.


Cost justification or reimbursement. Some lines of business of Richfield Oil may be regulated with cost data used in determining "fair prices"; allocations of central corporate costs will result in higher prices being set by a regulator.  

d.Income measurement for external parties.  Richfield Oil may in­clude allocations of central corporate costs in its external line-of-busi­ness reporting.

Instructors may wish to discuss the "Surveys of Company Practice" evidence from the United States, Canada, Australia, and the United Kingdom in Chapter 14 (p. 488).

2.Total costs in single pool = $3,000

Allocation base  =  $30,000 revenue

Allocation rate   =  $3,000  ÷  $30,000  =  $0.10 per $1 of revenue

See Solution Exhibit 14-26 for additional answers.

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