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) 200 50 250 Employees hired/leaving 10 30 40 The Personnel Department incurred the following costs during the year: Employee maintenance $ 240,000 Payroll 35,000 Total $ 275,000

Required:

a. Under the current allocation system, what are the costs that will be allocated from personnel to LaidBack? To StressedOut?

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

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