SOLUTION EXHIBIT 14-25
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
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.