RBB BrandsYou are working on a special assignment as a financial analyst for the president...

RBB Brands

You are working on a special assignment as a financial analyst for the president of household products of RBB Brands. RBB Brands is a large $4 billion diversified consumer products firm. RBB has two divisions, household products and foods, each headed by a president. Each division is evaluated as a profit center. The senior managers of each division receive bonuses paid out of a pool equal to 1 percent of the division’s accounting profits. Both divisions receive services from two corporate service departments: engineering and maintenance.

The president of household products attended a meeting at which the corporate controller made a presentation proposing that the two divisions’ accounting profits be charged for engineering and maintenance services. Table 1 summarizes each division’s use of the two service departments as well as each service department’s use of the other service department (as well as its own use).

The controller then distributed Tables 2 and 3 . He explained that each division would be charged for the hours of maintenance and engineering it actually used. The charge per hour would be based on the allocated cost of the service department. Table 2 reports the allocation of service department costs using the step-down allocation method starting with maintenance costs. Table 3 reports the allocation of service department costs using the step-down allocation method but starting with engineering costs. The controller’s office is considering adopting one of these two methods and is seeking input from the divisions.

Required:

Analyze and critically evaluate the controller’s proposal in a position paper to the president of household products. In addition, provide a series of key points that the president can raise at the next meeting with the corporate controller and corporate management.

TABLE 1 RBB Brands

Summary of Service Department Utilization (All Numbers, Except Dollars, Are 1,000 Hours)

TABLE 2 RBB Brands

Allocation of Service Department Costs Using Step-Down Allocation

First Department Allocated: Maintenance (Millions of Dollars Except Cost per Hour)

TABLE 3 RBB Brands

Allocation of Service Department Costs Using Step-Down Allocation

First Department Allocated: Engineering (Millions of Dollars Except Cost per Hour)