Question

Fixed and Variable Cost Allocation

Kumar, Inc., evaluates managers of producing departments on their ability to control costs. In addition to the costs directly traceable to their departments, each production manager is held responsible for a share of the costs of a support center, the Human Resources (HR) Department. The total costs of HR are allocated on the basis of actual direct labor hours used. The total costs of HR and the actual direct labor hours worked by each producing department are as follows:

	Year 1	Year 2
Direct labor hours worked:
Department A	33,000	34,000
Department B	36,000	34,000
Total hours	69,000	68,000
Actual HR cost	$122,250	$122,250
Budgeted HR cost	117,250*	117,000*

*$0.25 per direct labor hour plus $100,000.

When the capacity of the HR Department was originally established, the normal usage expected for each department was 18,000 direct labor hours. This usage is also the amount of activity planned for the two departments in Year 1 and Year 2.

Required:

1. Allocate the costs of the HR Department using the direct method and assuming that the purpose is product costing.

	Department A	Department B
Variable costs	$	$
Fixed costs
Total cost	$	$

2. Allocate the costs of the HR Department using the direct method and assuming that the purpose is to evaluate performance.

	Year 1			Year 2
	Department A	Department B		Department A	Department B
Variable costs	$	$		$	$
Fixed costs
Total cost	$	$		$	$

Answer 1

1)

Allocation of HR Costs of the Department using Direct Method:

	Department A	Department 2
Variable Costs ($10,761 + $11,250); ($11,739 + $11,250)	$22,011	$22,989
Fixed Costs ($47,826 + $50,0000; ($52,174 + $50,000)	$97,826	$102,174
Total Cost	$119,837	$125,163

Working notes:

	Year 1
	Department A	Department 2	Total
Variable Costs ($122,500 - $100,000 = $22,500*33,000/69,000 hours); ($22,500*36,000/69,000 hours)	$10,761	$11,739	$22,500
Fixed Costs ($100,000*33,000/69,000 hours); ($100,000*36,000/69,000)	$47,826	$52,174	$100,000
Total Costs	$58,587	$63,913	$122,500
	Year 2
	Department A	Department 2	Total
Variable Costs ($122,500 - $100,000 = $22,500*34,000/68,000 hours); ($22,500*34,000/68,000 hours)	$11,250	$11,250	$22,500
Fixed Costs ($100,000*34,000/68,000 hours); ($100,000*34,000/68,000)	$50,000	$50,000	$100,000
Total Costs	$61,250	$61,250	$122,500

2)

Allocation of costs of the HR Department using direct method for evaluation purpose:

	Year 1		Year 2
	Department A	Department 2	Department A	Department 2
Variable Costs ($122,500 - $100,000 = $22,500*33,000/69,000 hours); ($22,500*36,000/69,000 hours) | ($122,500 - $100,000 = $22,500*34,000/68,000 hours); ($22,500*34,000/68,000 hours)	$10,761	$11,739	$11,250	$11,250
Fixed Costs ($100,000*33,000/69,000 hours); ($100,000*36,000/69,000) | ($100,000*34,000/68,000 hours); ($100,000*34,000/68,000)	$47,826	$52,174	$50,000	$50,000
Total Costs	$58,587	$63,913	$61,250	$61,250