Service department charges
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:
- A. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division.
- B. Using the cost driver information in (A), determine the annual amount of payroll and purchasing costs allocated to the Residential, Commercial, and Government Contract divisions from payroll and purchasing services.
- C. Why does the Residential Division have a larger support department allocation than the other two divisions, even though its sales are lower?
(a)
Ascertain the total number of payroll checks and purchase requisitions processed by R Division, C Division, GC Division, and on the whole by Company D
Explanation of Solution
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.
Ascertain the total number of payroll checks and purchase requisitions processed by R Division, C Division, and on the whole by Company D.
Particulars | R Division | C Division | GC Division | Total Company |
Number of employees: | ||||
On weekly payroll | (1) 20,800 | (2) 13,000 | (3) 7,800 | |
On monthly payroll | (4) 960 | (5) 360 | (6) 120 | |
Total payroll checks | 21,760 | 13,360 | 7,920 | 43,040 |
Number of purchase requisitions | 7,500 | 3,000 | 2,000 | 12,500 |
Table (1)
Working Notes:
(1) Compute number of payroll checks issued weekly, for R Division.
(2) Compute number of payroll checks issued weekly, for C Division.
(3) Compute number of payroll checks issued weekly, for GC Division.
(4) Compute number of payroll checks issued monthly, for R Division.
(5) Compute number of payroll checks issued monthly, for C Division.
(6) Compute number of payroll checks issued monthly, for GC Division.
(b)
Calculate the payroll and purchasing service charges to be charged for R Division, C Division, and GC Division
Explanation of Solution
Calculate the payroll and purchasing service charges to be charged for R Division, C Division, and GC Division
Particulars | R Division | C Division | GC Division | Total Company |
Payroll department | (7) $32,640 | (8) $20,040 | (9) $11,880 | $64,560 |
Purchasing department | (10) 24,000 | (11) 9,600 | (12) 6,400 | 40,000 |
Total | $56,640 | $29,640 | $18,280 |
Table (2)
Working Notes:
(7) Determine the service charges to be charged for payroll department of R Division.
Note: Refer to Table (1) for value and computation of total number of payroll checks issued to R Division, and total department.
(8) Determine the service charges to be charged for payroll department of C Division.
Note: Refer to Table (1) for value and computation of total number of payroll checks issued to C Division, and total department.
(9) Determine the service charges to be charged for payroll department of GC Division.
Note: Refer to Table (1) for value and computation of total number of payroll checks issued to GC Division, and total department.
(10) Determine the service charges to be charged for purchasing department of R Division.
Note: Refer to Table (1) for value and computation of total number of purchase requisitions billed to R Division, and total department.
(11) Determine the service charges to be charged for purchasing department of C Division.
Note: Refer to Table (1) for value and computation of total number of purchase requisitions billed to C Division, and total department.
(12) Determine the service charges to be charged for purchasing department of GC Division.
Note: Refer to Table (1) for value and computation of total number of purchase requisitions billed to GC Division, and total department.
(c)
Explain the reasons for larger service department charges of R Division, comparatively, despite the lower sales revenue
Explanation of Solution
The following are the reasons for larger service department charges of R Division, comparatively, despite the lower sales revenue:
- ■ R Division depends mostly, on service departments for the services.
- ■ R Division has more number of employees, and hence, more number of payroll checks, and consequently, high service department charges.
- ■ Despite more number of employees, the lower sales indicate that the employees of R Division are not so productive.
- ■ In the same manner, R Division is involved more in purchase transactions than other departments.
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Chapter 9 Solutions
MANAGERIAL ACCOUNTING-ACCESS
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