Question

Cost Department Allocations

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

Required:

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 × 52	fill in the blank 1	fill in the blank 2	fill in the blank 3
Monthly payroll × 12	fill in the blank 4	fill in the blank 5	fill in the blank 6
Total	fill in the blank 7	fill in the blank 8	fill in the blank 9	fill in the blank 10
Number of purchase requisitions per year	fill in the blank 11	fill in the blank 12	fill in the blank 13	fill in the blank 14

b. Using the cost driver information in (a), determine the annual amount of payroll and purchasing costs allocated 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.

Support department allocation rates:
Payroll Department	$fill in the blank 15 per distribution
Purchasing Department	$fill in the blank 16 per requisition

	Residential	Commercial	Government Contract	Total
Support department allocations:
Payroll Department	$fill in the blank 17	$fill in the blank 18	$fill in the blank 19	$fill in the blank 20
Purchasing Department	fill in the blank 21	fill in the blank 22	fill in the blank 23	fill in the blank 24
Total	$fill in the blank 25	$fill in the blank 26	$fill in the blank 27

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

Answer 1

a.

	Residential	Commercial	Government Contract	Total
Number of Payrolls checks
Weekly Payroll	20800 checks (400 * 52 weeks)	13000 checks (250 * 52 weeks)	7800 checks (150 * 52 weeks)	41600 checks
Monthly Payroll	960 checks (80 * 12 months)	360 checks (30 * 12 month)	120 checks (10 * 12 months)	1440 checks
Total Payroll	21760 checks	13360 checks	7920 checks	43040 checks
Number of Purchase Requisition per year	7,500	3,000	2,000	12,500

b. Payroll Department = Total Payroll Department Expenses / Total Payroll Checks

= $64560 / 43040 checks

= $1.5 per check

Purchasing Department = Total Purchase Department Expenses / Total Number of Purchase Requisition

= $40000 / 12500

= $3.2 per purchase requisition

	Residential	Commercial	Government Contract	Total
Support Department Charge Rate
Payroll Department	$32640 (21760 * $1.5)	$20040 (13360 * $1.5)	$11880 (7920 * $1.5)	$64560
Purchasing Department	$24000 (7500 * $3.2)	$9600 (3000 * $3.2)	$6400 (2000 * $3.2)	$40000
Total	$56640	$29640	$18280	$104,560

c. The support department charge is higher than other departments (commercial and government contract) because residential is a heavy user of the support department and residential has many employees at weekly payroll which translates into a large number of payroll transactions.