BOR CPAs, Inc. is a closely held corporation owned by three stockholders who use
ID: 2480110 • Letter: B
Question
BOR CPAs, Inc. is a closely held corporation owned by three stockholders who used the initials of their last names to form the corporation’s name: Cyrus Bailey, John Ogden, and Samuel Rogers. The firm’s Certified Public Accountants (CPAs) perform audits of both public companies and privately owned companies. BOR’s CPAs also provide tax services to both individuals and businesses.
The corporation is divided into two profit centers: the Audit Division and the Tax Division. Each division is composed of two cost centers. The Audit Division is composed of two cost-center departments: Public Company Audits and Private Company Audits. The Tax Division is composed of two cost-center departments also: Individual Tax and Business Tax.
BOR, a decentralized organization, is interested in evaluating the performance of the two divisions. The stockholders are responsible for deciding on investment in the two divisions. Cyrus Bailey is in charge of the performance evaluation, and turns to you for assistance. Mr. Bailey is only interested in evaluating operations at the profit center (division) level, and not at the cost center (department) level.
Mr. Bailey is considering temporarily using some of the staff from the Tax Division to assist the Audit Division during the upcoming busy audit season, and would like to evaluate the effect of this on net income. The Tax Division is estimated to have 800 hours of excess capacity.
The unit for determining sales revenue in both divisions is the "engagement," which means the total agreed-upon work for a given client in either audit or tax for a given year. The company charges on average a fee of $75,000 per audit engagement, and $15,750 per tax engagement.
The company has its own Payroll Office, which provides payroll services to both divisions and will allocate its total expenses to the two divisions as service department charges.
The chart below shows some basic data for the company:
Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services)
$110.00
Average hourly cost rate for staff (the average price the company pays to its staff)
$60.00
Number of paychecks issued by Audit Division
110
Number of paychecks issued by Tax Division
340
Total expense for Payroll Office
$29,250
Amount of assets invested in Audit Division by BOR CPAs, Inc.
$10,000,000
Amount of assets invested in Tax Division by BOR CPAs, Inc.
$5,000,000
Mr. Bailey would like you to start by analyzing the Payroll Office expenses, and allocating the total expenses to each division. He has decided to use the number of payroll checks as the activity base for the allocation.
Fill in the blanks below, allocating the total expense for the Payroll Office to each of the two divisions.
DivisionAllocated Service Department ChargesAudit Division
$
Tax Division
$
Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services)
$110.00
Average hourly cost rate for staff (the average price the company pays to its staff)
$60.00
Number of paychecks issued by Audit Division
110
Number of paychecks issued by Tax Division
340
Total expense for Payroll Office
$29,250
Amount of assets invested in Audit Division by BOR CPAs, Inc.
$10,000,000
Amount of assets invested in Tax Division by BOR CPAs, Inc.
$5,000,000
Explanation / Answer
Using activity based cost allocation to two division as advised by Mr. Bailey, total expense for the Payroll Office of $29,250 shall be allocated in the ratio of number of paycheck issued by respective division. So Activity cost per paycheck issued = Expenses / total number of payckecks issued = 29250 / (110+340) = $65
Allocated Service Department Charges
Divisision :
Audit Division = Number of paycheck issued * rate per paycheck = 110 * 65 = $7,150
Tax Division = 340 * 65 = $22,100
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