Question

Service Department Charges

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 $29,848, and the Purchasing Department had expenses of $16,530 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

		Residential		Commercial		Government Contract
Sales		$ 345,000		$ 458,000		$ 1,051,000
Number of employees:
	Weekly payroll (52 weeks per year)	125		65		70
	Monthly payroll	36		47		34
Number of purchase
	requisitions per year	2,400		1,700		1,600

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
Monthly payroll
Total
Number of purchase requisitions per year

b. Using the activity base information in (a), determine the annual amount of payroll and purchasing costs charged back to the Residential, Commercial, and Government Contract divisions from payroll and purchasing services. Do not round your interim calculations, round your answers to two decimal places, if required.

Service department charge rates:
Payroll Department	$ per payroll check
Purchasing Department	$ per purchase requisition

	Residential	Commercial	Government Contract	Total
Service department charges:
Payroll Department	$	$	$	$
Purchasing Department
Total	$	$	$

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

Answer 1

Part a)

The completed table is provided as below:

	Residential	Commercial	Government Contract	Total
Number of payroll checks:
Weekly payroll	6,500 (125*52)	3,380 (65*52)	3,640 (70*52)	13,520
Monthly payroll	432 (36*12)	564 (47*12)	408 (34*12)	1,404
Total	6,932	3,944	4,048	14,924
Number of purchase requisitions per year	2,400	1,700	1,600	5,700

_____

Part b)

The completed table is prepared as follows:

Service department charge rates:
Payroll Department	$2.00 (29,848/14,924)	per payroll check
Purchasing Department	$2.90 (16,530/5,700)	per purchase requisition

___

	Residential	Commercial	Government Contract	Total
Service department charges:
Payroll Department	13,864 (6,932*2.00)	7,888 (3,944*2.00)	8,096 (4,048*2.00)	29,848
Purchasing Department	6,960 (2,400*2.90)	4,930 (1,700*2.90)	4,640 (1,600*2.90)	16,530
Total	$20,824	$12,818	$12,736	$46,378

_____

Part 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 payroll transactions.