Managers tend to prefer allocation bases for common costs that do not cause their division to be charged more than what they regard as their fair share of common costs. If common costs are allocated equally to each division, the manager of the Financial Consulting Division will feel it is unfair, because the Financial Consulting Division's share of total revenue, total variable expenses and the total contribution margin is only 30%. An allocation of 1/3 (33 1/3%) of the common costs would seem unfair and might be de-motivating.
Managers tend to prefer allocation bases for common costs that do not cause their division to be charged more than what they regard as their fair share of common costs. If they feel they are being charged more than they should be because their contribution margin is too high, they will feel they are being punished for doing well. A manager might even make changes that would cause the contribution margin to decrease, which would have a negative effect on the company, in an effort to cut the amount of common costs being allocated to his or her division.
Managers tend to prefer allocation bases for common costs that do not cause their division to be charged more than what they regard as their fair share of common costs. If they feel they are being charged more than they should be because their revenues too high, they will feel they are being punished for doing well. A manager might even cut back on sales efforts, which would have a negative effect on the company, in an effort to cut the amount of common costs being allocated to his or her division.
Managers tend to prefer allocation bases for common costs that do not cause their division to be charged more than what they regard as their fair share of common costs. If they feel they are being charged more because their revenues or their contribution margin is higher than other divisions', they will feel they are being punished for doing well. A manager might even cut back on sales efforts or make other changes that would have a negative effect on the company in an effort to cut the amount of common costs being allocated to his or her division. Allocating common costs on the basis of number of employees would likely have the least negative behavioral impact on the Financial Consulting Division's manager, because the Financial Consulting Division has fewer employees than the other two divisions have. As a result, the amount of common costs allocated to the Financial Consulting Division will be less than the amount allocated to the other divisions. Furthermore, if allocating common costs on the basis of number of employees causes the manager of the Financial Consulting Division to look at the possibility of cutting the number of employees in the division, that could be a positive behavioral impact. If the company is able to function well with fewer employees, then it should do so, because profits will increase as a result. So from the standpoint of management, workforce reductions are positive. Reduction of the workforce would be a negative thing only if the workforce were reduced so much that the company's operations were harmed — i.e. if it were not be able to provide product and service adequately to its customers as a result.
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