In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $69,984, and the Purchasing Department had expenses of $31,860 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:
Residential Commercial Government
Contract Sales $666,000 $883,000 $2,026,000 Number of employees: Weekly payroll (52 weeks per year) 190 60 65 Monthly payroll 28 39 26 Number of purchase requisitions per year 2,300 1,600 1,500
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 $ payroll distribution Purchasing Department $ per requisition
Residential Commercial Government Contract Total Service department charges: Payroll Department $ $ $ $ Purchasing Department $ $ $ $ Total $ $ $
c. Residential's service department charge is than the other two divisions because Residential is a user of service department services. Residential has many employees on a weekly payroll, which translates into a number of check-issuing transactions.
In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of $69,984, and the Purchasing Department had expenses of $31,860 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records:
| Residential | Commercial | Government Contract | |||||
| Sales | $666,000 | $883,000 | $2,026,000 | ||||
| Number of employees: | |||||||
| Weekly payroll (52 weeks per year) | 190 | 60 | 65 | ||||
| Monthly payroll | 28 | 39 | 26 | ||||
| Number of purchase | |||||||
| requisitions per year | 2,300 | 1,600 | 1,500 | ||||
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 | $ payroll distribution |
| Purchasing Department | $ per requisition |
| Residential | Commercial | Government Contract | Total | |||||
| Service department charges: | ||||||||
| Payroll Department | $ | $ | $ | $ | ||||
| Purchasing Department | $ | $ | $ | $ | ||||
| Total | $ | $ | $ | |||||
c. Residential's service department charge is than the other two divisions because Residential is a user of service department services. Residential has many employees on a weekly payroll, which translates into a number of check-issuing transactions.
Related questions
Service Department Charges
In divisional income statements prepared for Mills ConstructionCompany, the Payroll Department costs are charged back to userdivisions on the basis of the number of payroll checks, and thePurchasing Department costs are charged back on the basis of thenumber of purchase requisitions. The Payroll Department hadexpenses of $34,008, and the Purchasing Department had expenses of$15,370 for the year. The following annual data for Residential,Commercial, and Government Contract divisions were obtained fromcorporate records:
| Residential | Commercial | Government Contract | |||||
| Sales | $ 321,000 | $ 426,000 | $ 978,000 | ||||
| Number of employees: | |||||||
| Weekly payroll (52 weeks per year) | 175 | 60 | 65 | ||||
| Monthly payroll | 36 | 47 | 34 | ||||
| Number of purchase | |||||||
| requisitions per year | 2,200 | 1,600 | 1,500 | ||||
a. Determine the total amount of payroll checksand purchase requisitions processed per year by the company andeach 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 chargedback to the Residential, Commercial, and Government Contractdivisions from payroll and purchasing services. If required, roundyour answers to two decimal places. Do not round your interimcalculations, round your answers to two decimal places, ifrequired.
| 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 | $ | $ | $ | |||||
c. Residential's service department chargeis
than the other two divisions because Residential is a user ofservice department services. Residential has many employees on aweekly payroll, which translates into a number of check-issuingtransactions.
TufStuff, Inc., sells a wide range of drums, bins, boxes, andother containers that are used in the chemical industry. One of thecompanyâs products is a heavy-duty corrosion-resistant metal drum,called the WVD drum, used to store toxic wastes. Production isconstrained by the capacity of an automated welding machine that isused to make precision welds. A total of 2,200 hours of weldingtime is available annually on the machine. Because each drumrequires 0.8 hours of welding machine time, annual production islimited to 2,750 drums. At present, the welding machine is usedexclusively to make the WVD drums. The accounting department hasprovided the following financial data concerning the WVD drums: |
| WVD Drums | |||
| Selling price perdrum | $ | 156.00 | |
| Cost per drum: | |||
| Directmaterials | $44.70 | ||
| Directlabor ($18 per hour) | 4.50 | ||
| Manufacturing overhead | 3.35 | ||
| Sellingand administrative expense | 15.60 | 68.15 | |
| Margin per drum | $ | 87.85 | |
Management believes 3,250 WVD drums could besold each year if the company had sufficient manufacturingcapacity. As an alternative to adding another welding machine,management has considered buying additional drums from an outsidesupplier. Harcor Industries, Inc., a supplier of quality products,would be able to provide up to 2,000 WVD-type drums per year at aprice of $140 per drum, which TufStuff would resell to itscustomers at its normal selling price after appropriaterelabeling. |
Megan Flores, TufStuffâs production manager,has suggested that the company could make better use of the weldingmachine by manufacturing bike frames, which would require only 0.2hours of welding machine time per frame and yet sell for far morethan the drums. Megan believes that TufStuff could sell up to 3,100bike frames per year to bike manufacturers at a price of $67 each.The accounting department has provided the following dataconcerning the proposed new product: |
| Bike Frames | |||
| Selling price perframe | $ | 67.00 | |
| Cost per frame: | |||
| Directmaterials | $17.70 | ||
| Directlabor ($18 per hour) | 22.50 | ||
| Manufacturing overhead | 15.95 | ||
| Sellingand administrative expense | 6.70 | 62.85 | |
| Margin perframe | $ | 4.15 | |
The bike frames could be produced withexisting equipment and personnel. Manufacturing overhead isallocated to products on the basis of direct labor-hours. Most ofthe manufacturing overhead consists of fixed common costs such asrent on the factory building, but some of it is variable. Thevariable manufacturing overhead has been estimated at $1.07 per WVDdrum and $.80 per bike frame. The variable manufacturing overheadcost would not be incurred on drums acquired from the outsidesupplier. |
Selling and administrative expenses areallocated to products on the basis of revenues. Almost all of theselling and administrative expenses are fixed common costs, but ithas been estimated that variable selling and administrativeexpenses amount to $0.87 per WVD drum whether made or purchased andwould be $.60 per bike frame. |
All of the companyâs employeesâdirect andindirectâare paid for full 40-hour workweeks and the company has apolicy of laying off workers only in major recessions. |
| Required: |
| 1. | Would you be comfortable relying on the financial data providedby the accounting department for making decisions related to theWVD drums and bike frames? | ||||||
| |||||||
| 2. | Compute the contribution margin per unit for [assume directlabor is a fixed cost]: (Do not round intermediatecalculations. Round your answers to 2 decimal places.) |
| 3. | As soon as your analysis was shown to the top management team atTufStuff, several managers got into an argument concerning howdirect labor costs should be treated when making this decision. Onemanager argued that direct labor is always treated as a variablecost in textbooks and in practice and has always been considered avariable cost at TufStuff. After all, âdirectâ means you candirectly trace the cost to products. âIf direct labor is not avariable cost, what is?â Another manager argued just as strenuouslythat direct labor should be considered a fixed cost at TufStuff. Noone had been laid off in over a decade, and for all practicalpurposes, everyone at the plant is on a monthly salary. Everyoneclassified as direct labor works a regular 40-hour workweek andovertime has not been necessary since the company adopted LeanProduction techniques. Whether the welding machine is used to makedrums or frames, the total payroll would be exactly the same. Thereis enough slack, in the form of idle time, to accommodate anyincrease in total direct labor time that the bike frames wouldrequire. |
| a. | Compute the contribution margin per welding hour for [assumedirect labor is a fixed cost]: (Round your final answers to2 decimal places.) |
| b. | Determine the number of WVD drums (if any) that should bepurchased and the number of WVD drums and/or bike frames (if any)that should be manufactured. [Assume direct labor is a fixedcost] |
| c. | What is the increase in net operating income that would resultfrom this plan over current operations? (Do not roundintermediate calculations.) |
| 4. | Redo requirements (2) and (3) making the opposite assumptionabout direct labor from the one you originally made. In otherwords, if you treated direct labor as a variable cost, redo theanalysis treating it as a fixed cost. If you treated direct laboras a fixed cost, redo the analysis treating it as a variablecost. |
| a. | Compute the contribution margin per unit for [assume directlabor is a variable cost]: (Do not round intermediatecalculations. Round your answers to 2 decimal places.) |
| b. | Compute the contribution margin per welding hour for [assumedirect labor is a variable cost]: (Round your final answersto 2 decimal places.) |
| c. | Determine the number of WVD drums (if any) that should bepurchased and the number of WVD drums and/or bike frames (if any)that should be manufactured. [Assume direct labor is a variablecost] |
| d. | What is the increase in net operating income that would resultfrom this plan over current operations? (Do not roundintermediate calculations.) |
