Question

Divisional Income Statements with Service Department Charges

Yozamba Technology has two divisions, Consumer and Commercial, and two corporate service departments, Tech Support and Purchasing. The corporate expenses for the year ended December 31, 20Y7, are as follows:

Tech Support Department	$772,900
Purchasing Department	235,500
Other corporate administrative expenses	434,000
Total corporate expense	$1,442,400

The other corporate administrative expenses include officers’ salaries and other expenses required by the corporation. The Tech Support Department charges the divisions for services rendered, based on the number of computers in the department, and the Purchasing Department charges divisions for services, based on the number of purchase orders for each department. The usage of service by the two divisions is as follows:

	Tech Support		Purchasing
Consumer Division	360	computers	5,500	purchase orders
Commercial Division	230		10,200
Total	590	computers	15,700	purchase orders

The service department charges of the Tech Support Department and the Purchasing Department are considered controllable by the divisions. Corporate administrative expenses are not considered controllable by the divisions. The revenues, cost of goods sold, and operating expenses for the two divisions are as follows:

	Consumer		Commercial
Revenues	$6,516,500		$5,264,500
Cost of goods sold	3,620,300		2,658,300
Operating expenses	1,278,200		1,316,000

Prepare the divisional income statements for the two divisions. Do not round your interim calculations.

Yozamba Technology
Divisional Income Statements
For the Year Ended December 31, 20Y7
		Consumer Division		Commercial Division
		$fill in the blank 2		$fill in the blank 3
		fill in the blank 5		fill in the blank 6
		$fill in the blank 8		$fill in the blank 9
		fill in the blank 11		fill in the blank 12
Income from operations before service department charges		$fill in the blank 13		$fill in the blank 14
Service department charges:
		$fill in the blank 16		$fill in the blank 17
		fill in the blank 19		fill in the blank 20
Total service department charges		$fill in the blank 21		$fill in the blank 22
		$fill in the blank 24		$fill in the blank 25

Answer 1

Answer:

Yozamba Technology
Divisional Income Statements
For the Year Ended December 31, 20Y7
	Consumer Division	Commercial Division
Revenues	6,516,500	5,264,500
Cost of goods sold	3,620,300	2,658,300
Gross profit	2,896,200	2,606,200
Operating expenses	1,278,200	1,316,000
Operating income before service department allocations	1,618,000	1,290,200
Support department Charges:
Tech Support department	471,600	301,300
Purchasing department	82,500	153,000
Total Service department Charges	554,100	454,300
Operating income	1,063,900	835,900

Calculation:

We need to prepare the divisional income statements for the two divisions that is the Consumer division and the Commercial division.

Here, the revenues, cost of goods sold, and operating expenses of the two divisions are given.

First step is to deduct the cost of goods sold from revenues to calculate the Gross profit.

Next step is to deduct the Operating expenses from gross profit to calculate the Operating income before support department allocations.

After that, we need to calculate the allocation of Tech Support costs to Consumer and Commercial divisions. For that we need to multiply the total department costs by the ratio of the usage of service by the two divisions.

So we need to divide the number of computers in the department by the total number of computers.

Consumer :

Allocated Costs = $772,900 × 360 / 590 = $471,600

Commercial :

Allocated Costs = $772,900 × 230 / 590 = $301,300

Next step is to calculate the allocation of Purchasing costs to Consumer and Commercial divisions by multiplying the total department costs by the ratio of the number of purchase orders for each department.

So we need to divide the the the number of purchase orders for each department by the total number of purchase orders.

Consumer :

Allocated Costs = $235,500 × 5,500 / 15,700 = $82,500

Commercial :

Allocated Costs = $235,500 × 10,200/ 15,700 = $153,000

Then we need to deduct these total After deducting these service department charges to calculate the Operating income.