Scribd Logo
Upload

Welcome to Scribd!

  • 17 views

    Dollar Amounts in Millions

    Uploaded by

    Elliot Richard
    The document compares different methods for allocating corporate costs across divisions in a large oil and gas company. It proposes allocating costs based on four cost pools (interest expense based on assets, personnel costs based on employees, property taxes based on assets, and insurance based on assets) rather than the existing single cost pool method. This addresses some weaknesses but could also promote some dysfunctional decision making unless additional steps are taken. It is preferable to the status quo but still has some room for improvement.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Dollar Amounts in Millions

    Uploaded by

    Elliot Richard
    17 views2 pages
    The document compares different methods for allocating corporate costs across divisions in a large oil and gas company. It proposes allocating costs based on four cost pools (interest expense based on assets, personnel costs based on employees, property taxes based on assets, and insurance based on assets) rather than the existing single cost pool method. This addresses some weaknesses but could also promote some dysfunctional decision making unless additional steps are taken. It is preferable to the status quo but still has some room for improvement.

    Original Description:

    WINDANG KA

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document compares different methods for allocating corporate costs across divisions in a large oil and gas company. It proposes allocating costs based on four cost pools (interest expense based on assets, personnel costs based on employees, property taxes based on assets, and insurance based on assets) rather than the existing single cost pool method. This addresses some weaknesses but could also promote some dysfunctional decision making unless additional steps are taken. It is preferable to the status quo but still has some room for improvement.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    17 views2 pages

    Dollar Amounts in Millions

    Uploaded by

    Elliot Richard
    The document compares different methods for allocating corporate costs across divisions in a large oil and gas company. It proposes allocating costs based on four cost pools (interest expense based on assets, personnel costs based on employees, property taxes based on assets, and insurance based on assets) rather than the existing single cost pool method. This addresses some weaknesses but could also promote some dysfunctional decision making unless additional steps are taken. It is preferable to the status quo but still has some room for improvement.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Oil & Gas Chemica

    Oil & Gas Downstrea l Copper


    (Dollar amounts in millions) Upstream m Products Mining Total
    Operating Income $1,000.0 $(300.00
    (before corp. cost allocation) $5,000.00 $1,000.00 0 ) $6,700
    Division income under revenue-
    based $ $(623.00
    allocation of corporate costs $4,193.00 $ (614.00) 516.00 ) $3,472
    Division income under four-cost-
    pool allocation of corporate $ $(562.50
    costs $3,467.50 $ 1.00 566.00 ) $3,472

    Strengths of Rhodes’ proposal relative to existing single-cost pool method:

    a. Better able to capture cause-and-effect relationships. Interest on debt is more likely


    caused by the financing of assets than by revenues. Personnel and payroll costs are more
    likely caused by the number of employees than by revenues.
    b. Relatively simple. No extra information need be collected beyond what is already
    available. (Some students will list the extra costs of Rhodes’ proposal as a weakness.
    However, for a company with $32 billion in revenues, those extra costs are minimal.)

    Weaknesses of Rhodes’ proposal relative to existing single-cost pool method:

    a. May promote dysfunctional decision making. May encourage division managers to lease
    or rent assets rather than to purchase assets, even where it is economical for Richfield Oil
    to purchase them. This off-balance sheet financing will reduce the “identifiable assets”
    of the division and thus will reduce the interest on debt costs allocated to the division.
    (Richfield Oil could counteract this problem by incorporating leased and rented assets in
    the “identifiable assets” base.)

    Note: Some students criticized Rhodes’ proposal despite agreeing that it is preferable to the
    existing single-cost-pool method. These criticisms include:

    a. The proposal does not adequately capture cause-and-effect relationships for the legal and
    research and development cost pools. For these cost pools, specific identification of
    individual projects with an individual division can better capture cause-and-effect
    relationships.
    b. The proposal may give rise to disputes over the definition and valuation of “identifiable
    assets.”
    c. The use of actual rather than budgeted amounts in the allocation bases creates
    interdependencies between divisions. Moreover, use of actual amounts means that
    division managers do not know cost allocation consequences of their decisions until the
    end of each reporting period.

    d. A separate allocation of fixed and variable costs would result in more refined cost
    allocations.
    e. It is questionable that 100% of central corporate costs should be allocated. Many students
    argue that public affairs should not be allocated to any division, based on the notion that
    division managers may not control many of the individual expenditures in this cost pool.

    You might also like