Ex 24-5 Service department charges

In divisional income statements prepared for Wilborne Construction Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll checks, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $119,280, and the Purchasing Department had expenses of $57,750 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:

                                                          Residential | Commercial | Government Contract
Sales                                                    $900,000 | $1,218,750 | $2,800,000
Number of employees:
Weekly payroll (52 weeks per year)             250 |             125 |             150
Monthly payroll                                              50 |             100 |               60
Number of purchase requisitions per year 3,750 |          3,125 |          2,750

a. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division.

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.

c.  Why does the Residential Division have a larger service department charge than the other two divisions, even though its sales are lower?


Answer:

Government 
a. Residential Commercial Contract Total 
Number of payroll checks: 
Number of purchase 
Service department charge rates: 
Payroll Department………………………  $119,280 ÷ 29,820 = $4.00/check 
Purchasing Department……………………  $57,750 ÷ 9,625 = $6.00/req. 
Service department charges: 
Government 
Residential Commercial Contract Total 
Payroll Department…………   $54,400 
1 
$
30,800 
2 
$
34,080 
3
 4

Purchasing Department……    22,500 
5 
  18,750 
6 
  16,500 57,750 
Total………………………  $76,900 $49,550 $50,580  
13,600 checks × $4.00 per check 
7,700 checks × $4.00 per check 
8,520 checks × $4.00 per check 
3,750 requisitions × $6.00 per requisition 
3,125 requisitions × $6.00 per requisition 
2,750 requisitions × $6.00 per requisition 
The service department charges are determined by multiplying the service 
department charge rate by the activity base for each division. 
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. This may be because residential jobs are less 
productive per labor hour, compared to larger commercial and government 
contract jobs. Additionally, Residential uses purchasing services more than the 
other two divisions. This may be because the division has many different 
smaller jobs requiring frequent purchase transactions.