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	$1,352,000
Purchasing Department	219,000
Other corporate administrative expenses	676,000
Total corporate expense	$2,247,000

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	490	computers	5,100	purchase orders
Commercial Division	310		9,500
Total	800	computers	14,600	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	$10,638,200		$7,722,700
Cost of goods sold	5,910,100		3,899,600
Operating expenses	2,086,700		1,930,500

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
Revenues		$		$
Cost of goods sold
Gross profit		$		$
Operating expenses
Income from operations before service department charges		$		$
Service department charges:
Tech support department		$		$
Purchasing department
Total service department charges		$		$
Income from operations		$		$

Answer 1

Solution:

Determination of allocation rate and cost allocation of service department to divisions
Service Department	Total Expenses	Allocation Base	Quantity of Allocation Base	Alocation rate	Consumer division		Commercial division
					Usage	Allocated Costs	Usage	Allocated Costs
Tech Support Department	$1,352,000.00	Computers	800	$1,690.00	490	$828,100.00	310	$523,900.00
Purchasing Department	$219,000.00	Nos of orders	14600	$15.00	5100	$76,500.00	9500	$142,500.00
Total	$1,571,000.00					$904,600.00		$666,400.00

Yozmba Technology
Divisional Income Statement
For the year ended December 31, 20Y7
Particulars	Consumer Division	Commercial Division
Revenues	$10,638,200.00	$7,722,700.00
Cost of goods sold	$5,910,100.00	$3,899,600.00
Gross Profit	$4,728,100.00	$3,823,100.00
Operating Expenses	$2,086,700.00	$1,930,500.00
Income from operations before service department charges	$2,641,400.00	$1,892,600.00
Service department charges:
Tech support department	$828,100.00	$523,900.00
Purchasing department	$76,500.00	$142,500.00
Total service department charges	$904,600.00	$666,400.00
Income from operations	$1,736,800.00	$1,226,200.00