The Personnel Department at Hemandez Bros. is centralized and provides services

Question

The Personnel Department at Hemandez 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 S300 per employee. Data for the fiscal year just ended show the following Miami New York Number of employees Number of new hires 1,900 35 15 600 100 Number of employees departing Orlando, the manager or the New York unit, is unhappy with the resuits or the controller's study. He asks the controlier to develop separate rates for fixed and vanable costs in the Personnel Department. The controer reports back to Orlando that the rates would be as tollows: Variable Rate Fixed Rate 3 60 per employee $2,000 per transition Alocation based on Total Rate Employees Transitions 20 peremployee $750 per transition $ 80 per employee 2,750 per transition Required a. Orlando argues that New York should only be allocated the varlable costs from this system, because the company would have to pay the flxed costs even if New York did not exist. Compute the cost allocated to each unit using the approach Orlando preters. Miami New York

Explanation / Answer

a) Total cost on the basis of employees = (1,900+600)*$80 per employee

= 2,500 employees*$80 per employee = $200,000

Total cost on the basis of transistors = (35+15+100+50)*$2,750 per transistor

= 200 transistors*$2,750 per transistor = $550,000

Total cost to be allocated = $200,000+$550,000 = $750,000

We just need to calculate the variable cost to be allocated to New York and the difference between this cost and $750,000 will be allocated to Miami.

Calculation of variable cost to be allocated to New York

Employees in New York = 600

Variable rate per employee = $20

Transistors in New York = No. of new employees+No. of employees departing

= 100+50 = 150

Variable rate per transistor = $750 per transistor

Allocated cost to new York = (600 employees*$20)+(150 transistors*$750)

= $12,000+$112,500 = $124,500

Amount allocated to Miami = Total cost - Allocated cost to New York

= $750,000 - $124,500 = $625,500

Particulars Total Allocated Cost Miami $625,500 New York $124,500

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