Why Are Costs Allocated?—Ethical Issues
You are the division president of Stable Division of Giga Corp. Your friend, Ligia, is the division president of Giga Corp.’s Turmoil Division. These are the only divisions. Each division has 5,000 employees. Last year, Stable Division had a turnover of 1,000 employees (1,000 employees left and 1,000 were hired). Turmoil Division had a turnover of 4,000 employees. There were no transfers between divisions.
Giga Corp.’s Personnel Department only provides services to Stable and Turmoil and only when an employee leaves or is hired. The total cost of the Personnel Department last year was $100,000.
Required
a. As the Stable Division president, how would you recommend the cost of the Personnel Department be allocated? What arguments would you use to support your claim?
b. As the Turmoil Division president, how do you think Ligia will recommend allocating the cost of the Personnel Department? Why?
c. You are going to be transferred to Turmoil Division, but before the transfer, Giga Corp.’s CEO asks you to recommend an allocation method. How would you recommend the cost of the Personnel Department be allocated? What arguments would you use?
d. Is it ethical to recommend different allocation methods depending on which division you will be heading?