Question

h Training 8. Number of travel claims EX 8-5 Service department charges OBJ.3 la divisional income statements prepared for LeFevre Company, the Payroll Demar costs are charged back to user divisions on the basis of the number of payroll distrit tions and the Purchasing Department costs are charged back on the basis of the num. ber of purchase requisitions. The Payroll Department had expenses of $75,400, 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: 150 160 75 4.000 Residential Commercial Government Contract Sales $1,000,000 $1,600,000 $3,200,000 Number of employees: Weekly payroll (52 weeks per year) 300 200 Monthly payroll Number of purchase requisitions per year! 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. Why does the Residential Division have a larger service department charge than the other two divisions, even though its sales are lower?

Answer 1

a.

		Residential	Commercial	Government Contract	Total
Number of Payroll checks
Weekly Payroll	Number of Employees X 52	15,600	7,800	10,400	33,800
Monthly Payroll	Number of Employees X 12	900	1,920	1,080	3,900
Total		16,500	9,720	11,480	37,700
Number of Purchase Requisition		4,000	3,500	3,000	10,500

b.

Rates

	Number of checks, requisition	Total Cost	Per unit
Payroll Department	37,700	$      75,400	$            2.00	per payroll check
Purchasing Department	10,500	$      42,000	$            4.00	per purchase requisition
		$    117,400

Allocation

		Residential	Commercial	Government Contract	Total
Service Department Charges
Payroll Department	Number of Payroll Checks X 2	$      33,000	$       19,440	$                           22,960	$     75,400
Purchasing Department	Number of Purchase Requisitions X 4	$      16,000	$       14,000	$                           12,000	$     42,000
Total		$      49,000	$       33,440	$                           34,960	$   117,400

c.

Residential department has the largest service department charge even though it has the lowest sales is because it has the highest amount of cost drivers.

It has highest amount of payroll cheques processed and the highest number of purchase requisitions among the three departments. Due to this allocation is the highest.