Allocating Fixed Costs of Central Facility
Belmont Hill Distributors is a decentralized firm specializing in the distribution of consumer products. The firm is divided into three operating divisions along the major product lines: Tru-Fit Hardware Supplies, Mudd Beauty Products, and Atomo Lighting Fixtures.
Three years ago, the company acquired a huge, highly automated regional warehouse. This effort was undertaken as a company project, since no single division had the size to take advantage of the economies of scale attainable by using such a warehouse. At the time of purchase, the three divisions agreed to “share costs on the basis of usage.”
The past three years have witnessed large changes in the divisions. Tru-Fit Hardware Division has nearly doubled its volume of operations, whereas the Atomo Lighting Fixtures Division has suffered serious sales setbacks.
Against this background, a meeting took place between the corporate controller and the three divisional controllers. The meeting had been requested by the controller, Art Green, of the Tru-Fit Hardware Division, who was upset about the rapidly increasing warehouse costs being allocated to his division. Green commented: “This business of allocating total warehouse costs to divisions on the basis of actual usage has been prejudicial to our division.” Further, Green proposed that “in the future, fixed costs (capital costs) be allocated on the basis of planned usage and standard variable cost on the basis of actual usage.” Ralph White, the Atomo controller objected, saying, “What if our usage continues to fall? We will end up subsidizing the capital charges associated with the facilities that Tru-Fit uses.”
Required
(1) Comment on this controversy. Do you believe that White’s point is valid? If not, why? If so, what would you do to resolve this impasse?
(2) Assume that all the facts are the same as before with one exception. In this case, the above discussion ends with the following comment from Reg Brown, controller of the Mudd Division: “I’m sick of having to fight about these unreasonable cost allocations all the time. There is an organized marker for warehouse space out there that would cost us less than what we pay now. We are taking our business outside.”
How, if at all, would this proposal alter your response?
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