Allocate the HR costs to each producing department for Year 1 and Year 2 using the direct method with actual direct labor hours and actual HR costs.   Discuss the following statement: “The costs of human resource-related matters increased by 25 percent for department A and decreased by over 16 percent for department B. Thus, the manager of department B must be controlling HR costs better than the manager of department A.”   Can you think of a way to allocate HR costs so that a more reasonable and fair assessment of cost control can be made? Explain.

Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter7: Allocating Costs Of Support Departments And Joint Products
Section: Chapter Questions
Problem 28E: Minor Co. has a job order cost system and applies overhead based on departmental rates. Service...
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Kumar, Inc., evaluates managers of producing departments on their ability to control costs.

In addition to the costs directly traceable to their departments, each production manager is held responsible for a share of the costs of a support center, the human resources (HR) department. The total costs of HR are allocated on the basis of actual direct labor hours used. The total costs of HR and the actual direct labor hours worked by each producing department are as follows:

 

                                                                                    Year 1                                     Year 2

Direct labor hours worked:

Department A                                                                         24,000                                     25,000

Department B                                                             36,000                                     25,000

Total hours                                                                  60,000                                     50,000

Actual HR cost                                                           $120,000                                 $120,000

Budgeted HR cost                                                        115,000*                                 112,500*

*$0.25 per direct labor hour plus $100,000.

 

Required:

  1. Allocate the HR costs to each producing department for Year 1 and Year 2 using the direct method with actual direct labor hours and actual HR costs.

 

  1. Discuss the following statement: “The costs of human resource-related matters increased by 25 percent for department A and decreased by over 16 percent for department B. Thus, the manager of department B must be controlling HR costs better than the manager of department A.”

 

  1. Can you think of a way to allocate HR costs so that a more reasonable and fair assessment of cost control can be made? Explain.
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