The Personnel Department at Hernandez Bros. is centralized and provides services
ID: 2520162 • Letter: T
Question
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 $300 per employee. Data for the fiscal year just ended show the following: Miami New York Number of employees 1,900 600 Number of new hires 35 100 Number of employees departing 15 50 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 $ 20 per employee $ 60 per employee $ 80 per employee Transitions $ 750 per transition $ 2,000 per transition $ 2,750 per transition Required: 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.
Explanation / Answer
calculation of Cost allocated Miami New York Employees [1] $ 1,900 $ 600 raate per employee [2] 80 80 Allocated Cost [1*2=3] $ 152,000 $ 48,000 Transitions [4] 50 150 rate per transitions [5] $ 2,750 $ 2,750 allocated Cost [ 4*5 = 6] $ 137,500 $ 412,500 Total allocated Cost [3+6] $ 289,500 $ 460,500
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