Question

    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 $680 per employee. Data for the fiscal year just ended show the following:

	Miami		New York
Number of employees	1,380		480
Number of new hires	18		38
Number of employees departing	12		12

Orlando, the manager of the New York unit, is unhappy with the results of the controller’s study. He asks the controller to develop separate rates for fixed and variable costs in the Personnel Department. The controller reports back to Orlando that the rates would be as follows:

Allocation based on	Variable Rate				Fixed Rate				Total Rate
Employees	$	140	per employee		$	240	per employee		$	380	per employee
Transitions	$	2,180	per transition		$	4,795	per transition		$	6,975	per transition

Required:

a. Orlando argues that New York should only be allocated the variable costs from this system, because the company would have to pay the fixed costs even if New York did not exist. Compute the cost allocated to each unit using the approach Orlando prefers.

Answer 1

Total Cost to be Allocated = (1,380 + 480) x 680

=1,264,800

New York will be allocated as per variable cost and Balance will be Allocated to Miami

	New York
Employees	480.00
Rate per employee	140.00
Allocated cost		67,200.00
Transitions	50.00
Rate per transition	2,180.00
Allocated cost		109,000.00
Total allocated cost		176,200.00

Allocated to Miami =  1,264,800 - 176,200

=1,088,600