Chapter 22, Problem 4E

To determine

Cost Allocation:

Sometime a cost is incurred for a whole firm and not for a particular department. In this case cost allocation is used. It is a way through which a particular cost is assigned to the respective department.

To compute: Allocation of annual wages.

Explanation of Solution

Formula to calculate annual wages to a particular department,

$\text{Annual}\text{wages}=\left(\begin{array}{l}\frac{\text{Total}\text{hours}\text{spent}\text{in}\text{this}\text{department}}{\text{Total}\text{hours}\text{worked}}\\ \times \text{Total}\text{annual}\text{wages}\end{array}\right)$...........(1)

Jewelry department:

Given,
Total hours spent in this department is 57 hours.
Total hours worked is 76 hours.
Total annual wages is $30,000.

Substitute 57 hours for total hours spent in this department, 76 hours for total hours worked and $30,000 for total annual wages in the above equation (1).

$\begin{array}{c}\text{Annual}\text{wages}=\frac{57\text{hours}}{76\text{hours}}\times \$30,000\\ =\$22,500\end{array}$

Hence, annual wages allocated to jewelry department is $22,500.

Working notes:

Calculation for total hours worked,

$\begin{array}{c}\text{Total}\text{hours}\text{worked}=\left(\begin{array}{l}\text{Selling}\text{in}\text{jewelry}\text{department}\\ +\text{Arranging}\text{and}\text{stocking}\text{merchandise}\text{in}\text{jewelry}\text{department}\\ +\text{Selling}\text{in}\text{cosmetics}\text{department}\\ +\text{Arranging}\text{and}\text{stocking}\text{merchandise}\text{in}\text{cosmetics}\text{department}\end{array}\right)\\ =51\text{hours}+6\text{hours}+12\text{hours}+\text{7}\text{hours}\\ =76\text{hours}\end{array}$

Calculation for total hours spent in this department,

$\begin{array}{c}\text{Total}\text{hours}\text{spent}\text{in}\text{this}\text{department}=\left(\begin{array}{l}\text{Selling}\text{in}\text{this}\text{department}\\ +\left(\begin{array}{l}\text{Arranging}\text{and}\text{stocking}\text{merchandise}\\ \text{in}\text{this}\text{department}\end{array}\right)\end{array}\right)\\ =51\text{hours}+6\text{hours}\\ =57\text{hours}\end{array}$

Cosmetics department:

Given,
Total hours spent in this department is 23 hours.
Total hours worked is 76 hours.
Total annual wages is $30,000.

Substitute 23 hours for total hours spent in this department, 76 hours for total hours worked and $30,000 for total annual wages in the above equation (1).

$\begin{array}{c}\text{Annual}\text{wages}=\frac{19\text{hours}}{76\text{hours}}\times \$30,000\\ =\$7,500\end{array}$

Hence, annual wages allocated to cosmetics department is $7,500.

Working notes:

Calculation for total hours spent in this department,

$\begin{array}{c}\text{Total}\text{hours}\text{spent}\text{in}\text{this}\text{department}=\left(\begin{array}{l}\text{Selling}\text{in}\text{this}\text{department}\\ +\left(\begin{array}{l}\text{Arranging}\text{and}\text{stocking}\text{merchandise}\\ \text{in}\text{this}\text{department}\end{array}\right)\end{array}\right)\\ =12\text{hours}+7\text{hours}\\ =19\text{hours}\end{array}$