Allocation of corporate costs to divisions. Dusty Rhodes, controller of Richfield Oi...

Allocation of corporate costs to divisions. Dusty Rhodes, controller of Richfield Oil Company, is preparing a presentation to senior executives about the performance of its four divisions. Summary data (dollar amounts in millions) related to the four divisions for the most recent year are as follows:

Under the existing accounting system, costs incurred at corporate headquarters are collected in a single cost pool ($3,228 million in the most recent year) and allocated to each division on the basis of its actual revenues. The top managers in each division share in a division-income bonus pool. Division income is defined as operating income less allocated corporate costs.

Rhodes has analyzed the components of corporate costs and proposes that corporate costs be collected in four cost pools. The components of corporate costs for the most recent year (dollar amounts in millions) and Rhodes’ suggested cost pools and allocation bases are as follows:

1. Discuss two reasons why Richfield Oil should allocate corporate costs to each division.

2. Calculate the operating income of each division when all corporate costs are allocated based on revenues

of each division.

3. Calculate the operating income of each division when all corporate costs are allocated using the four

cost pools.

4. How do you think the division managers will receive the new proposal? What are the strengths and

weaknesses of Rhodes’ proposal relative to the existing single-cost-pool method?