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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Service department charges

 In divisional income statements prepared for LeFevre 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 $575,400 and the Purchasing Department had expenses of $42,000 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

  Residential Commercial Government Contract
Sales. $1,000,000 $1,600,000 $3,200,000
Number of employees:      
Weekly payroll (52 weeks per year) 300 150 200
Monthly payroll 75 160 90
Number of purchase requisitions per year 4,000 3,500 3,000

 a.    Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division.

 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.

 c.    Why does the Residential Division have a larger service department charge than the other two divisions even though its sales are lower?

(a)

To determine

Service department charges: These are the indirect expenses incurred by profit center. These are charged for the services received by the department or division, based on the activity base of the service department.

To determine: The total number of payroll checks and purchase requisitions processed by R Division, C Division, GC Division, and on the whole by Company L

Explanation

Determine the total number of payroll checks and purchase requisitions processed by R Division, C Division, and on the whole by Company L.

Particulars R Division C Division GC Division Total Company
Number of employees:        
     On weekly payroll 15,600 7,800 10,400  
     On monthly payroll 900 1,920 1,080  
            Total payroll checks 16,500 9,720 11,480 37,700
Number of purchase requisitions 4,000 3,500 3,000 10,500

Table (1)

Working Notes:

Compute number of payroll checks issued weekly, for R Division.

Weekly payroll checks in a year} = {Number of weekly payroll × Number of weeks in a year}= 300 payroll checks × 52 weeks=15,600 payroll checks

Compute number of payroll checks issued weekly, for C Division.

Weekly payroll checks in a year} = {Number of weekly payroll × Number of weeks in a year}= 150 payroll checks × 52 weeks=7,800 payroll checks

Compute number of payroll checks issued weekly, for GC Division

(b)

To determine
The payroll and purchasing service charges to be charged for R Division, C Division, and GC Division

(c)

To determine

To explain: The reasons for larger service department charges of R Division, comparatively, despite the lower sales revenue

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