Question

The Personnel Department at Hernandez Bros. is centralized and provides services to the two operating units:...

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 $550 per employee. Data for the fiscal year just ended show the following:

Miami New York
Number of employees 1,250 350
Number of new hires 15 25
Number of employees departing 15

25

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 $ 75 per employee $ 175 per employee $ 250 per employee
Transitions $ 2,050 per transition $ 3,950 per transition $ 6,000 per transition

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.

Total Allocated Cost
Miami
New York

Homework Answers

Answer #1

a.

Total Allocated Cost
Miami $ 751,250
New York $ 128,750

Costs allocated to the Miami unit = 1,250 employees x $ 75 per employee + ( 1,250 + 350) x $ 175 per employee + 30 transitions x 2,050 per transition + ( 30 + 50) x $ 3,950 per transition = $ 312.500 + $ 180,000 = $ 93,750 + $ 280,000 + $ 61,500 + $ 316,000 = $ 751,250.

OR $ 550 x ( 1,250 + 350) employees - $ 128,750 = $ 751,250

Costs allocated to New York unit = 350 employees x $ 75 per employee + 50 transitions x $ 2,050 per transition = $ 26,250 + $ 102,500 = $ 128,750

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