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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

Divisional income statements with service department charges

 Grael 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 $336,000
Purchasing Department 67,500
Other corporate administrative expenses 448,000
Total corporate expense $851,500

 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 300 computers 1,800 purchase orders
Commercial Division 1S0 2,700
Total 480 computers 4,500 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 $5,900,000 $4,950,000
Cost of goods sold 3,304,000 2,475,000
Operating expenses 1,180,000 1,237,500

 Prepare the divisional income .statements for the two divisions.

To determine

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

To prepare: The income statements for CR Division and CL Division

Explanation

Prepare divisional income statements for CR Division and CL Division.

G Technology
Divisional Income Statements
For the Year Ended December 31, 20Y7
  CR Division CL Division
Sales   $5,900,000   $4,950,000
Cost of goods sold 3,304,000 2,475,000
Gross profit   2,596,000   2,475,000
Operating expenses   1,180,000   1,237,500
Income from operations before service department charges   1,416,000   1,237,500
Service department charges:    
   Tech Support department $210,000 $126,000
   Purchasing department 27,000 237,000 40,500 166,500
Income from operations $1,179,000 $1,071,000

Table (1)

Working Notes:

Determine the service charges to be charged for tech support department of CR Division.

Tech support department}{Number of computers used by tech support of CR Division× Rate per computer used}={Number of computers used by tech support of CR Division × Tech support department expensesTotal number of computers used by tech support deparment}= 300 computers × $336,000480 computers= $210,000

Determine the service charges to be charged for tech support department of CL Division

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