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 $40,768, and the Purchasing Department had expenses of $19,430 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

		Residential		Commercial		Government Contract
Sales		$ 406,000		$ 538,000		$ 1,236,000
Number of employees:
	Weekly payroll (52 weeks per year)	220		70		75
	Monthly payroll	36		47		34
Number of purchase requisitions per year		2,800		2,000		1,900

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   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

	Residential	Commercial	Government Contract	Total
Number of payroll checks:
Weekly payroll × 52	11,440.00	3,640.00	3,900.00	18,980.00
Monthly payroll × 12	432.00	432.00	432.00	1,296.00
Total	11,872.00	4,072.00	4,332.00	20,276.00
Number of purchase requisitions per year	2,800	2,000	1,900	6,700.00
Support department allocation rates:
Payroll Department = $40,768/20276	$2.01	per distribution
Purchasing Department= $19,430/6700	$2.90	per requisition
	Residential	Commercial	Government Contract	Total
Support department allocations:
Payroll Department = $2.01 x Total Payroll	$23,881.01	$8,190.99	$8,713.99	$40,786.00
Purchasing Department = $2.90 x # of purchase reqquisitions	$8,120.00	$5,800.00	$5,510.00	$19,430.00
Total	$32,001.01	$13,990.99	$14,223.99	$60,216.00
c) Residential’s service department charge is higher than the other two divisions. 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