Question

1. 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 $36,840, and the Purchasing Department had expenses of $12,470 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

   		Residential		Commercial		Government Contract
   Sales		$ 261,000		$ 345,000		$ 793,000
   Number of employees:
   	Weekly payroll (52 weeks per year)	175		75		80
   	Monthly payroll	32		43		30
   Number of purchase
   	requisitions per year	1,800		1,300		1,200

   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
   Number of purchase requisitions per year

   b. Using the activity base information in (a), determine the annual amount of payroll and purchasing costs charged back to the Residential, Commercial, and Government Contract divisions from payroll and purchasing services. Do not round your interim calculations, round your answers to two decimal places, if required.

   Service department charge rates:
   Payroll Department	$ per payroll check
   Purchasing Department	$ per purchase requisition

   	Residential	Commercial	Government Contract	Total
   Service department charges:
   Payroll Department	$	$	$	$
   Purchasing Department
   Total	$	$	$

   c. Residential's service department charge is higher

   • higher
   • lower
   than the other two divisions because Residential is a heavy
   • heavy
   • light
   user of service department services. Residential has many employees on a weekly payroll, which translates into a larger
   • larger
   • smaller
   number of payroll transactions.

   Feedback

   a. Add the number of weekly and monthly payroll checks for each division. Add the number of requisitions for each division.

   b. Divide the Payroll and Purchasing expenses by the appropriate activity base from (a). Then apply the rate per activity by the actual checks and requisitions.

   c. Consider how each department functions within the business.

   Learning Objective 3.

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Answer 1

• [a]

	Residential	Commercial	Government contract	Total
No. of payroll checks:
Weekly Payroll [no of employees x 52]	9100	3900	4160
Monthly payroll [no of employees x 12]	384	516	360
Total	9484	4416	4520	18420
No. of purchase requisititon per year	1800	1300	1200	4300

• [b]

	Cost	Allocation base	Service Department charge rate
Payroll Department	$                 36,840.00	18,420	$                    2.00	per payroll distribution
Purchasing Department	$                 12,470.00	4,300	$                    2.90	per requisition

	Residential	Commercial	Government Contract	Total
Service Department charges:
Payroll Department	$                 18,968.00	$            8,832.00	$            9,040.00	$        36,840.00
Purchasing Department	$                   5,220.00	$            3,770.00	$            3,480.00	$        12,470.00
Total	$                 24,188.00	$          12,602.00	$          12,520.00	$        49,310.00

• [c]

Residential's service department charge is HIGHER than the other two divisions because Residential is a HEAVY  user of service department services. Residential has many employees on a weekly payroll, which translates into a LARGER number of check-issuing transactions.