Reference no: EM132501093

At the start of 2017, allocated costs were estimated as follows:

Employee benefits$1,500,000

Rent1,500,000

Telecommunications500,000

General and administrative costs1,000,000

Total$4,500,000

• In the past, allocations have been based on headcount (the number of employees in each business unit). There were 240 employees in Stock and 80 employees in Custom. The new controller of Kiddo believes that the key driver of employee benefits and telecommunications costs is headcount. However, rent is driven by space occupied, and general and administrative costs are driven by relative sales. Kiddo rents 20,000 square feet; approximately 10,000 is occupied by Stock employees and 10,000 by Custom personnel.

REQUIRED

Question a. Prepare profit reports for Stock and Custom, assuming the company allocates costs using headcount, space occupied, and sales as allocation bases. Compare the new levels of profit to the levels that result using a single allocation base (headcount). Round to two decimal places.

Question b. Which provides the best information on profitability: a single overhead cost pool with headcount as the allocation base, or multiple cost pools using headcount, sales, and space occupied?