Question

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 $64,560, and the Purchasing Department had expenses of $40,000 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

		Residential		Commercial		Government Contract
Sales		$2,000,000		$3,250,000		$2,900,000
Number of employees:
	Weekly payroll (52 weeks per year)	400		250		150
	Monthly payroll	80		30		10
Number of purchase requisitions per year		7,500		3,000		2,000

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 interim calculations. Round your answers to two decimal places.

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	$	$	$

Answer 1

Solution

Demopolis Company

1. Determination of 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	20,800	13,000	7,800	41,600
Monthly payroll	960	360	120	1,440
Total	21,760	13,360	7920	43,040
Number of purchase requisitions per year	7,500	3,000	2,000	12,500

The number of payroll checks processed per year is determined as follows,

For instance, Weekly payroll for Residential = 400 x 52 weeks = 20,800

Commercial = 250 x 52 = 13,000

Government contract = 150 x 52 = 7,800

Monthly payroll –

Residential – 80 x 12 months = 960

Commercial – 30 x 12 = 360

Government contract – 10 x 12 = 120

1. Determination of the annual amount of payroll and purchasing costs charged back to the Residential, Commercial and Government Contract divisions from payroll and purchasing services.

payroll department charges		$64,560/43,040 = $1.50
Purchase department charges		$40,000/12,500 = $3.20
	Residential		Commercial		Government Contract		Total
Service Department Charges:
Payroll Department	$32,640		$20,040		$11,880		$64,560
Purchasing Department	$24,000		$9,600		$6,400		$40,000
Total	$56,640		$29,640		$18,280		$104,560

The charges are allocated as follows,

Payroll department,

Residential = $1.5 x 21,760 = $32,640

Commercial = $1.50 x 13,360 = 20,040

Government contract = $1.5 x 7,920 = 11,880

Purchasing department charges –

Residential = $3.20 x 7,500 = $24,000

Commercial = $3.20 x 3,000 = $9,600

Government contract = $3.20 x 2,000 = $6,400