Question

Service Department Charges

In divisional income statements prepared for LeFevre 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 $86,912, and the Purchasing Department had expenses of $39,530 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

		Residential		Commercial		Government Contract
Sales		$826,000		$1,095,000		$2,514,000
Number of employees:
	Weekly payroll (52 weeks per year)	250		70		75
	Monthly payroll	30		41		28
Number of purchase
	requisitions per year	2,800		2,000		1,900

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. If required, round your answers to two decimal places. Do not round your interim calculations, round your answers to two decimal places, if required.

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

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

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

Answer 1

[a]

	Residential	Commercial	Government contract	Total
No. of payroll checks:
Weekly Payroll [no of employees x 52]	13000	3640	3900
Monthly payroll [no of employees x 12]	360	492	336
Total	13360	4132	4236	21728
No. of purchase requisititon per year	2800	2000	1900	6700

[b]

	Cost	Allocation base	Service Department charge rate
Payroll Department	$                 86,912.00	21,728	$                    4.00	per payroll distribution
Purchasing Department	$                 39,530.00	6,700	$                    5.90	per requisition

	Residential	Commercial	Government Contract	Total
Service Department charges:
Payroll Department	$                 53,440.00	$          16,528.00	$          16,944.00	$        86,912.00
Purchasing Department	$                 16,520.00	$          11,800.00	$          11,210.00	$        39,530.00
Total	$                 69,960.00	$          28,328.00	$          28,154.00	$      126,442.00

[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.