Question

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 $79,456, and the Purchasing Department had expenses of $27,730 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Government Contract Residential $ 580,000 Commercial $768,000 Sales $ 1,764,000 Number of employees: 210 70 75 Weekly payroll (52 weeks per year) Monthly payroll 36 47 34 Number of purchase requisitions per year 2,000 1,400 1,300 a. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division. Residential Commercial Government Contract Total Number of payroll checks: Weekly payroll Monthly payroll Total

Answer 1

a.					Residential	Commercial	Government contract	Total
	Number of payroll checks:
	Weekly payroll				210	70	75	355
	Monthly payroll				36	47	34	117
	Total				246	117	109	472
	Number of purchase requisitions per year				2000	1400	1300	4700
b.	Service department charge rates:
	Payroll department		Service department charge rates=Department expenses/Total payroll=79456/472=$ 168.34 per payroll check
	Purchasing department		Service department charge rates=Department expenses/Total number of purchase requisitions per year=27730/4700=$ 5.9 per purchase requisition
	Cost allocation=Actual usage of allocation base by the department*Service department charge rates
					Residential	Commercial	Government contract	Total
	Service department charges:
	Payroll department				41411.64	19695.78	18349.06	79456.48
					(246*168.34)	(117*168.34)	(109*168.34)
	Purchasing department				11800	8260	7670	27730
					(2000*5.9)	(1400*5.9)	(1300*5.9)
	Total				53211.64	27955.78	26019.06	107186.5
c.	Residential's service department charge is more than other two divisions because residential is a large user of service department services.
	Residential has many employees on a weekly payroll,which translates into a large number of check-issuing transactions