Question

Divisional Income Statements with Support Department Allocations

Horton Technology has two divisions, Consumer and Commercial, and two corporate support departments, Tech Services and Purchasing. The corporate expenses for the year ended December 31, 20Y7, are as follows:

Tech Services Department	$1,318,200
Purchasing Department	304,000
Other corporate administrative expenses	698,000
Total expense	$2,320,200

The other corporate administrative expenses include officers’ salaries and other expenses required by the corporation. The Tech Services Department allocates costs to the divisions based on the number of computers in the department, and the Purchasing Department allocates costs to the divisions based on the number of purchase orders for each department. The services used by the two divisions are as follows:

	Tech Services		Purchasing
Consumer Division	480	computers	5,300	purchase orders
Commercial Division	300		9,900
Total	780	computers	15,200	purchase orders

The support department allocations of the Tech Services Department and the Purchasing Department are considered controllable by the divisions. Corporate administrative expenses are not considered controllable by the divisions. The revenues, cost of goods sold, and operating expenses for the two divisions are as follows:

	Consumer		Commercial
Revenues	$10,786,500		$8,169,700
Cost of goods sold	5,992,500		4,125,300
Operating expenses	2,115,800		2,042,200

Prepare the divisional income statements for the two divisions. Do not round your interim calculations.

Horton Technology
Divisional Income Statements
For the Year Ended December 31, 20Y7
		Consumer Division		Commercial Division
Revenues		$		$
Cost of goods sold
Gross profit		$		$
Operating expenses
Operating income before support department allocations		$		$
Support department allocations:
Tech service department		$		$
Purchasing department
Total support department allocations		$		$
Operating income		$		$

Answer 1

Solution :

Particulars	Consumer Division	Commercial Division
(a) Revenue	$ 10,786,500	$ 8,169,700
(b) Cost of Goods Sold	($ 5,992,500)	($4,125,300)
(c) Gross Profit	$ 4,794,000	$ 4,044,400
(d) Operating Expenses	($ 2,115,800)	($ 2,042,200)
(e) Operating Income before Service Department Allocation	$ 2,678,200	$ 2,002,200
Support Department Allocation :
Tech Service Department	($ 811,200)	($ 507,000)
Purchasing Department	($ 106,000)	($ 198,000)
(f) Total Support Department Allocation	($ 917,200)	($ 705,000)
(g) Operating Income (e-f)	$ 1,761,000	$ 1,297,200

Working :

Support Department Cost Allocation :

Particulars	Total Cost	Total Allocation Basis	Consumer Division	Commercial Division
Tech Service Department	$ 1,318,200	780 Computers	$ 1,318,200 / 780 * 480 = $ 811,200	$ 1,318,200 / 780 * 300 = $ 507,000
Purchasing Department	$ 304,000	15,200 Orders	$ 304,000 / 15,200 * 5,300 = $ 106,000	$ 304,000 / 15,200 * 9,900 = $ 198,000