Chapter 9, Problem 5E

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:

1. A. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division.
2. 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.
3. C. Why does the Residential Division have a larger support department allocation than the other two divisions, even though its sales are lower?

To determine

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.

  $\begin{array}{c}\begin{array}{l}\text{Weekly payroll }\\ \text{checks in a year}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of weekly payroll × }\\ \text{Number of weeks in a year}\end{array}\right\}\\ \text{= 400 payroll checks × 52 weeks}\\ \text{=20,800 payroll checks}\end{array}$

(2) Compute number of payroll checks issued weekly, for C Division.

  $\begin{array}{c}\begin{array}{l}\text{Weekly payroll }\\ \text{checks in a year}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of weekly payroll × }\\ \text{Number of weeks in a year}\end{array}\right\}\\ \text{= 250 payroll checks × 52 weeks}\\ \text{=13,000 payroll checks}\end{array}$

(3) Compute number of payroll checks issued weekly, for GC Division.

  $\begin{array}{c}\begin{array}{l}\text{Weekly payroll }\\ \text{checks in a year}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of weekly payroll × }\\ \text{Number of weeks in a year}\end{array}\right\}\\ \text{= 150 payroll checks × 52 weeks}\\ \text{=7,800 payroll checks}\end{array}$

(4) Compute number of payroll checks issued monthly, for R Division.

  $\begin{array}{c}\begin{array}{l}\text{Monthly payroll }\\ \text{checks in a year}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of monthly payroll × }\\ \text{Number of months in a year}\end{array}\right\}\\ \text{= 80 payroll checks × 12 months}\\ \text{=960 payroll checks}\end{array}$

(5) Compute number of payroll checks issued monthly, for C Division.

  $\begin{array}{c}\begin{array}{l}\text{Monthly payroll }\\ \text{checks in a year}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of monthly payroll × }\\ \text{Number of months in a year}\end{array}\right\}\\ \text{= 30 payroll checks × 12 months}\\ \text{=360 payroll checks}\end{array}$

(6) Compute number of payroll checks issued monthly, for GC Division.

  $\begin{array}{c}\begin{array}{l}\text{Monthly payroll }\\ \text{checks in a year}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of monthly payroll × }\\ \text{Number of months in a year}\end{array}\right\}\\ \text{= 10 payroll checks × 12 months}\\ \text{=120 payroll checks}\end{array}$

To determine

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.

  $\begin{array}{c}\begin{array}{l}\text{Payroll }\\ \text{service charges}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of payroll checks issued to R Division}\times \\ \text{Rate per payroll check issued}\end{array}\right\}\\ \text{=}\left\{\begin{array}{l}\text{Number of payroll checks issued to R Division }\times \\ \frac{\text{Payroll department expenses}}{\text{Total number of payroll checks issued by the department}}\end{array}\right\}\\ \text{= 21,760 payrolls × }\frac{\text{\$64,500}}{\text{43,040 payrolls}}\\ \text{= \$32,640}\end{array}$

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.

  $\begin{array}{c}\begin{array}{l}\text{Payroll }\\ \text{service charges}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of payroll checks issued to C Division}\times \\ \text{Rate per payroll check issued}\end{array}\right\}\\ \text{=}\left\{\begin{array}{l}\text{Number of payroll checks issued to C Division }\times \\ \frac{\text{Payroll department expenses}}{\text{Total number of payroll checks issued by the department}}\end{array}\right\}\\ \text{= 13,360 payrolls × }\frac{\text{\$64,560}}{\text{43,040 payrolls}}\\ \text{= \$20,040}\end{array}$

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.

  $\begin{array}{c}\begin{array}{l}\text{Payroll }\\ \text{service charges}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of payroll checks issued to GC Division}\times \\ \text{Rate per payroll check issued}\end{array}\right\}\\ \text{=}\left\{\begin{array}{l}\text{Number of payroll checks issued to GC Division }\times \\ \frac{\text{Payroll department expenses}}{\text{Total number of payroll checks issued by the department}}\end{array}\right\}\\ \text{= 7,920 payrolls × }\frac{\text{\$64,560}}{\text{43,040 payrolls}}\\ \text{= \$11,880}\end{array}$

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.

  $\begin{array}{c}\begin{array}{l}\text{Purchasing }\\ \text{service }\\ \text{charges}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of purchase requisitions billed to R Division}\times \\ \text{Rate per billed purchase requisitions}\end{array}\right\}\\ \text{=}\left\{\begin{array}{l}\text{Number of purchase requisitions billed to R Division }\times \\ \frac{\text{Purchasing department expenses}}{\text{Number of purchase requisitions billed to the department}}\end{array}\right\}\\ \text{= 7,500 purchase requisitions × }\frac{\text{\$40,000}}{\text{12,500 requisitions}}\\ \text{= \$24,000}\end{array}$

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.

  $\begin{array}{c}\begin{array}{l}\text{Purchasing }\\ \text{service }\\ \text{charges}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of purchase requisitions billed to C Division}\times \\ \text{Rate per billed purchase requisitions}\end{array}\right\}\\ \text{=}\left\{\begin{array}{l}\text{Number of purchase requisitions billed to C Division }\times \\ \frac{\text{Purchasing department expenses}}{\text{Number of purchase requisitions billed to the department}}\end{array}\right\}\\ \text{= 3,000 purchase requisitions × }\frac{\text{\$40,000}}{\text{12,500 requisitions}}\\ \text{= \$9,600}\end{array}$

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.

  $\begin{array}{c}\begin{array}{l}\text{Purchasing }\\ \text{service }\\ \text{charges}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of purchase requisitions billed to GC Division}\times \\ \text{Rate per billed purchase requisitions}\end{array}\right\}\\ \text{=}\left\{\begin{array}{l}\text{Number of purchase requisitions billed to GC Division }\times \\ \frac{\text{Purchasing department expenses}}{\text{Number of purchase requisitions billed to the department}}\end{array}\right\}\\ \text{= 2,000 purchase requisitions × }\frac{\text{\$40,000}}{\text{12,500 requisitions}}\\ \text{= \$6,400}\end{array}$

Note: Refer to Table (1) for value and computation of total number of purchase requisitions billed to GC Division, and total department.

To determine

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.