Question

The Personnel Department at LastCall Enterprises handles many administrative tasks for the two divisions that make up LastCall: LaidBack and StressedOut. LaidBack division manages the company’s traditional business line. This business, although lucrative, is currently not growing. StressedOut, on the other hand, is the company’s new business, which has experienced double-digit growth for each of the last three years.

The cost allocation system at LastCall allocates all corporate costs to the divisions based on a variety of cost allocation bases. Personnel costs are allocated based on the average number of employees in the two divisions.

There are two basic activities in the Personnel Department. The first, which is called employee maintenance, manages employee records. Virtually all of this activity occurs when employees are hired or leave the company. The other activity is payroll, which is an ongoing activity and requires the same amount of work for each employee regardless of the employee’s salary.

Assorted data for LastCall for the last year follow: LaidBack StressedOut Total Number of employees (average) 100 20 120 Employees hired/leaving 5 13 18 The Personnel Department incurred the following costs during the year:

Employee maintenance $ 108,000

Payroll 12,000

Total $ 120,000

Required:

A. Under the current allocation system, what are the costs that will be allocated from personnel to LaidBack? To StressedOut? (Do not round intermediate calculations.)

B. Suppose the company implements an activity-based cost system for personnel with the two activities, employee maintenance and payroll. Use the number of employees hired/leaving as the cost driver for employee maintenance costs and the average number of employees for payroll costs. What are the costs that will be allocated from personnel to LaidBack? To StressedOut?

Answer 1

a.
	Costs that will be allocated from personnel to LaidBack and Stressed Out is calculated as under:
	Total personnel Department cost is $120,000
	Average number of employees is 120
	Employees in Laid Back department is 100 and Stressed Out department is 20
	So cost is $1000,000 in laidback and $20,000 in Stressed out.
b.
	Costs that will be allocated from personnel to LaidBack and To StressedOut using ABC is:
	Activity	Activity Cost Pool	Cost driver	LaidBack	StressedOut	Total
	Employee Maintenance	$108,000	No. of employees hired/leaving	5	13	18
	Payroll	12,000	Average number of employees	100	20	120
	Total	$120,000		105	33	138
	Activity	Activity Cost Pool	Cost driver	LaidBack	StressedOut	Total
	Employee Maintenance	$108,000	No. of employees hired/leaving	$30,000	$78,000	$108,000
	Payroll	12,000	Average number of employees	$10,000	$2,000	$12,000
	Total	$120,000		$40,000	$80,000	$120,000