In divisional income statements prepared for Mills Construction Company, the Pay

Question

In divisional income statements prepared for Mills 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 $84,832, and the Purchasing Department had expenses of $25,370 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: Residential Commercial Government Contract Sales $ 530,000 $ 703,000 $ 1,614,000 Number of employees: Weekly payroll (52 weeks per year) 240 70 75 Monthly payroll 30 41 28 Number of purchase requisitions per year 1,800 1,300 1,200 a. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division. Residential Commercial Government Contract Total Number of payroll checks: Weekly payroll Monthly payroll Total Number of purchase requisitions per year: 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. If required, round your answers to two decimal places. Do not round your interim calculations, round your answers to two decimal places, if required. Service department charge rates: Payroll Department $ per check Purchasing Department $ per requisition Residential Commercial Government Contract Total Service department charges: Payroll Department $ $ $ $ Purchasing Department $ $ $ $ Total $ $ $

Explanation / Answer

Answer :

Part a.

In ABC analysis we distribute expenses as per the activity cost drivers so we have to first calculate the cost drivers as follows:

So For Payroll Expenses amounted $ 84832

We have

Employees on Weekly Basis :

Residential : 240*52= 12480 Pay Checks per annum

Commercial : 70*52 = 3640 Pay Checks per annum

Government : 75*52= 3900 Pay checks per annum

Total : 20020 Pay checks..........A

Employees on Monthly basis:

Residential : 30*12= 360 Pay Checks per annum

Commercial : 41*12 = 492 Pay Checks per annum

Government : 28*12= 336 Pay checks per annum

Total : 1188 Pay checks..........B

So Total Payout Checks become

Residential : 12480+360 = 12840 Pay Checks per annum

Commercial : 3640+ 492 = 4132 Pay Checks per annum

Government : 3900 + 336 = 4236 Pay checks per annum

Total : 21208 Pay checks

In the same way for Purchase requisite

Residential : 1800 purchase requisite per annum

Commercial : 1300 purchase requisite per annum

Government : 1200 purchase requisite per annum

Total Purchase requisite 4300 Purchase requisite

Part b

Now Cost of Purchase department is = $ 25370 or 25370/4300 = 5.90 $ per purchase requisite.

So

Residential Purchase cost : 1800*5.9= $ 10620

Commercial Purchase cost: 1300*5.9 = $ 7670

Government Purchase cost: 1200*5.9 = $ 7080

Total Purchase cost = $ 25370

And in the same way

Total Payroll Department expenses = $84,832

So Payroll Department expense per pay check is 84832/21208 = $4 per pay check

Now Finally

Residential Payroll Department expense :

Weekly Employees : 12480 *4 = $ 49920

Monthly Employees : 360*4 = $1440

Total 49920+1440 = $ 51360

Commercial Payroll Department expense :

Weekly Employees : 3640 *4 = $ 14560

Monthly Employees : 492*4 = $1968

Total 14560+1968 = $ 16528

Government Payroll Department expense :

Weekly Employees : 3900 *4 = $ 15600

Monthly Employees : 336*4 = $ 1344

Total : 15600+1344 = $ 16944

Total Payroll Department Expense of company : 51360+16528+16944= 84832 $

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