Question

In divisional income statements prepared for Demopolis Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $64,560, and the Purchasing Department had expenses of $40,000 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

		Residential		Commercial		Government Contract
Sales		$2,000,000		$3,250,000		$2,900,000
Number of employees:
	Weekly payroll (52 weeks per year)	400		250		150
	Monthly payroll	80		30		10
Number of purchase requisitions per year		7,500		3,000		2,000

a. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division.

	Residential	Commercial	Government Contract	Total
Number of payroll checks:
Weekly payroll
Monthly payroll
Total
Number of purchase requisitions per year

b. Using the activity base information in (a), determine the annual amount of payroll and purchasing costs charged back to the Residential, Commercial, and Government Contract divisions from payroll and purchasing services. Do not round interim calculations. Round your answers to two decimal places.

Service department charge rates:
Payroll Department	$ per payroll check
Purchasing Department	$ per purchase requisition

	Residential	Commercial	Government Contract	Total
Service department charges:
Payroll Department	$	$	$	$
Purchasing Department
Total	$	$	$

c. Residential's service department charge is _______ than the other two divisions because Residential is a   user of service department services. Residential has many employees on a weekly payroll, which translates into a ________ number of payroll transactions.

Answer 1

SOLUTION

(A)

	Residential	Commercial	Government Contract	Total
Number of payroll checks:
Weekly payroll	(400*52) = 20,800	(250*52) = 13,000	(150*52) = 7,800	41,600
Monthly payroll	(80*12) = 960	(30*12) = 360	(10*12) = 120	1,440
Total	21,760	13,360	7,920	43,040
Number of purchase requisitions per year	7,500	3,000	2,000	12,500

(B)

Service department charge rates:
Payroll Department (64,560/43,040)	$1.5 per payroll check
Purchasing Department (40,000/12,500)	$3.2 per purchase requisition

	Residential	Commercial	Government Contract	Total
Service department charges:
Payroll Department	(21,760*1.5) = 32,640	(13,360*1.5) = 20,040	(7,920*1.5) = 11,880	64,560
Purchasing Department	(7,500*3.2) = 24,000	(3,000*3.2) = 9,600	(2,000*3.2) = 6,400	40,000
Total	56,640	29,640	18,280	104,560

(C) Residential's service department charge is higher than the other two divisions because Residential is a heavy user of service department services. Residential has many employees on a weekly payroll, which translates into a larger number of payroll transactions.