Question

Required information The Personnel Department at Hernandez Bros. is centralized and provides services to the two operating units: Miami and New York. The Miami unit is the original unit of the company and is well established. The New York unit is new, much like a start-up company. The costs of the Personnel Department are allocated to each unit based on the number of employees in order to determine unit profitability. The current rate is $700 per employee. Data for the fiscal year just ended show the following. Number of employees Number of new hires Number of employees departing Miami New York 1,400 500 20 40 10 10 Required: a. Compute the cost allocated to each unit using the current allocation system, b. Livan, the manager of the Miami unit, is unhappy with the allocation from Personnel. He believes that he gets little benefit other than the occasional hire and termination help. He asks the controller's office to estimate the amount of Personnel Department cost associated with routine personnel matters (benefits, and so on) and those associated with hiring employees and assisting with departing employees (transitions). The controller responds that if they separated the overhead costs on this basis, the rates would be $400 per employee for routine matters and $7,125 for each transition (each hiring and each departure counts as one transition). Recompute the costs allocated to each unit using the separate rates for routine and transitional matters. Total Allocated Cost Miami New York a Using current allocation system Using separate rates b.

Answer 1

		Total Allocated Cost
		Miami	New York
a.	Using Current allocation system	$980,000	$350,000
b.	Using Separate rates	$631,250	$271,250

Answer a)

Calculation of cost allocated to Miami Unit using current allocation system

Cost allocated to Miami unit = Number of employees in Miami unit X Cost Allocation rate per employee

                                                     = 1,400 employee X $ 700 per employee

                                                     = $ 980,000

Calculation of cost allocated to New York Unit using current allocation system

Cost allocated to Miami unit = Number of employees in New York unit X Cost Allocation rate per employee

                                                     = 500 employee X $ 700 per employee

                                                     = $ 350,000

Answer b)

Calculation of cost allocated to Miami Unit using separate rates

Cost allocated to Miami unit = (Number of employees in Miami unit X Cost Allocation rate per employee) + (Number of transitions in Miami unit X cost allocation rate per transition)

                                      = (1,400 employee X $ 400 per employee) + (10 transitions X $ 7,125 per transition)

                                      = $ 560,000 + $ 71,250

                                      = $ 631,250

Note: The number of new hiring in Miami unit are 20 and the number of employees departing is 10. Since each hiring and each departure counts as one transition, the number of transitions will be 10.

Calculation of cost allocated to New York Unit using separate rates

Cost allocated to New York = (Number of employees in New York unit X Cost Allocation rate per employee) + (Number of transitions in New York unit X cost allocation rate per transition)

                                      = (500 employee X $ 400 per employee) + (10 transitions X $ 7,125 per transition)

                                      = $ 200,000 + $ 71,250

                                      = $ 271,250

Note: The number of new hiring in New York unit are 40 and the number of employees departing is 10. Since each hiring and each departure counts as one transition, the number of transitions will be 10.