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 $40,248, and the Purchasing Department had expenses of $12,470 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

		Residential		Commercial		Government Contract
Sales		$ 261,000		$ 345,000		$ 793,000
Number of employees:
	Weekly payroll (52 weeks per year)	225		65		70
	Monthly payroll	36		47		34
Number of purchase requisitions per year		1,800		1,300		1,200

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
Monthly payroll × 12
Total
Number of purchase requisitions per year

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	$ per distribution
Purchasing Department	$ per requisition

	Residential	Commercial	Government Contract	Total
Support department allocations:
Payroll Department	$	$	$	$
Purchasing Department
Total	$	$	$

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

Answer 1

• [a]

	Residential	Commercial	Government contract	Total
No. of payroll checks:
Weekly Payroll [no of employees x 52]	11700	3380	3640
Monthly payroll [no of employees x 12]	432	564	408
Total	12132	3944	4048	20124
No. of purchase requisititon per year	1800	1300	1200	4300

• [b]

	Cost	Allocation base	Service Department charge rate
Payroll Department	$                 40,248.00	20,124	$                    2.00	per payroll distribution
Purchasing Department	$                 12,470.00	4,300	$                    2.90	per requisition

	Residential	Commercial	Government Contract	Total
Service Department charges:
Payroll Department	$                 24,264.00	$            7,888.00	$            8,096.00	$        40,248.00
Purchasing Department	$                   5,220.00	$            3,770.00	$            3,480.00	$        12,470.00
Total	$                 29,484.00	$          11,658.00	$          11,576.00	$        52,718.00

• [c]

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