Question

Fixed and Variable Cost Allocation Kumar, Inc., evaluates managers of producing departments on their ability to control costs. In addition to the costs directly traceable to their departments, each production manager is held responsible for a share of the costs of a support center, the Human Resources (HR) Department. The total costs of HR are allocated on the basis of actual direct labor hours used. The total costs of HR and the actual direct labor hours worked by each producing department are as follows:

Year 1 Year 2 Direct labor hours worked: Department A 24,000 25,000 Department B 36,000 25,000 Total hours 60,000 50,000 Actual HR cost $120,000 $120,000 Budgeted HR cost 115,000 * 112,500 * *$0.25 per direct labor hour plus $100,000. When the capacity of the HR Department was originally established, the normal usage expected for each department was 20,000 direct labor hours. This usage is also the amount of activity planned for the two departments in Year 1 and Year 2.

Required: 1. Allocate the costs of the HR Department using the direct method and assuming that the purpose is product costing. Department A Department B Variable costs $ $ Fixed costs Total cost $ $

2. Allocate the costs of the HR Department using the direct method and assuming that the purpose is to evaluate performance. Year 1 Year 2 Department A Department B Department A Department B Variable costs $ $ $ $ Fixed costs Total cost $ $ $ $

Answer 1

Answer ;

(1). Allocating costs to HR Department using direct method for the purpose of product costing

Particulars	Department A	Department B
Variable costs	$5,000	$5,000
Fixed costs	$50,000	$50,000
Total cost	$55,000	$55,000

Variable cost = 20000 normal direct labour hours * 0.25 per hours

= $5,000

fixed costs = 100000/2 (Total fixed costs are dividend betweeen two departments equally)

= $50,000

(2). Allocating costs to HR Department using direct method for the purpose of evaluating performance

Here, variable costs are calculated based on actual hours usage

-	Year 1	Year 2
Particulars	Department A	Department B	Department A	Deparment B
Direcct labour hours used (a)	$24,000	$36,000	$25,000	$25,000
Rate (b)	0.25	0.25	0.25	0.25
Variable costs (a*b)	$6,000	$9,000	$6,250	$6,250
Fixed costs	$50,000	$50,000	$50,000	$50,000
Total cost	$56,000	$59,000	$56,250	$56,250

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