Question

Paul Corp. is a retailing firm which has two service departments, Human resources and Information systems, and two operating departments, Corporate sales and Consumer sales. The Human resources Department costs of $100,000 are allocated on the basis of number of employees. The Information systems Department costs of $150,000 are allocated based on the processing time. The costs of operating departments, Corporate sales and Consumer sales, are $528,000 and $222,000, respectively.
Data on overhead costs, and information about the number of employees and processing time given as percentages (e.g., 13% is shown as 0.13), are as follows:

Service Departments		operating Departments
​	Human resources Department	Information systems Department	Corporate sales Department	Consumer sales Department
Overhead costs:	$100,000	$150,000	$528,000	$222,000
number of employees (percent)	0.06	0.20	0.28	0.46
processing time (percent)	0.07	0.00	0.41	0.52

Overhead rates are established for each of the operating departments. The Corporate sales Department allocates overhead based upon corporate sales calls and the Consumer sales Department allocates overhead based upon cases of books sold. The planned levels are 16,000 corporate sales calls and 22,200 cases of books sold.

Allocate costs to the operating departments using the step method and allocating Information systems Department costs first, then find the overhead rates for the Corporate sales and Consumer sales departments.

Answer 1

since we have to start with inforamtion system department first, we will allocate the cost of 150000 on the basis of processing time (as given in question)

rate = 150000 / ( 7% + 41% + 52%)

rate = 1500 per 1 %

so cost for

Human resource = 1500 x 7  = 10500

corporate sales = 1500 x 41 = 61500

consumer sales = 1500 x 52 = 78000

Now we need to allocate the human resource cost based on number of employees

cost to be allocated = 100000 + 10500 (allocated from information system)

cost to be allocated = 110500 to corporate sales and consumer sales department

rate = 110500 / ( 28% + 46%)

rate = 1493.24 per 1 %

so cost for

corporate sales = 1493.24 x 28 = 41810.81

consumer sales = 1493.24 x 46 = 68689.19

So total cost of corporate sales department = 528000 + 41810.81 + 61500 = $631310.81

corporate sales calls = 16000 calls

overhead allocation rate = 631310.81/16000 = $39.46 per corporate call

So total cost of consumer sales department = 222000 + 68689.19 + 78000 = $368689.19

cases of books sold = 22200

overhead allocation rate = 368689.19/22000 = $16.60 per case of book sold

Thanks, if you have any questions please leave a comment and let me know