Question

Service Department Charges

In divisional income statements prepared for LeFevre 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 $41,896, and the Purchasing Department had expenses of $15,370 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

		Residential		Commercial		Government Contract
Sales		$321,000		$426,000		$978,000
Number of employees:
	Weekly payroll (52 weeks per year)	245		65		70
	Monthly payroll	30		41		28
Number of purchase
	requisitions per year	2,200		1,600		1,500

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. If required, round your answers to two decimal places. Do not round your interim calculations, round your answers to two decimal places, if required.

Service department charge rates:
Payroll Department	$ payroll distribution
Purchasing Department	$ per 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 check-issuing transactions.

Answer 1

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
The number of payroll checks:
Weekly payroll	245*52=12740	65*52=3380	70*52=3640	19760
Monthly payroll	30*12=360	41*12=492	28*12=336	1188
Total	13100	3872	3976	20948
The number of purchase requisitions per year:	2200	1600	1500	5300

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. If required, round your answers to two decimal places. Do not round your interim calculations, round your answers to two decimal places, if required.

Service department charge rates:
Payroll Department	total expense/total checks	41896$/20948=2$ per distribution
Purchasing Department	total expense/total purchase requisiotions	15370$/5300=2.9$per equisition

	Residential	Commercial	Government Contract	Total
Service department charges:
Payroll Department	$2*13100=26200	$2*3872=7744	$2*3976=7952	$41896
Purchasing Department	2200*2.9=6380	1600*2.9=4640	1500*2.9=4350	$15370
Total	$32580	$12384	$12302

c. Residential's service department charge is HIGHER than the other two divisions because Residential is a MAJOR user of service department services. Residential has many employees on a weekly payroll, which translates into a LARGER number of check-issuing transactions.

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