Service Department Charges In divisional income statements prepared for Mills Co

Question

Service Department Charges

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 $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 from corporate records:

a. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division.

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.

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.

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

Explanation / Answer

Answer:

a) Total amount of payroll checks and purchase requisitions processed per year by the company and each division:-

b) Computation of the annual amount of payroll and purchasing cost charged back to Residential,Commercial and Government Contracts division from Payroll and Purchasing services using Activity based costing:-

c) Residential service dept charge is less than Commercial division in case of monthly payroll system but higher than the other two divisions in case of weekly payroll system.

Residential Commercial Goverment Contract Total No. of Payroll Checks Weekly payroll 175 * 52 =9,100 60 * 52 = 3,120 65 *52 = 3,380 15,600 Monthly Payroll 36*12 = 432 47*12 = 564 34*12 = 408 1,404 No. of purchase requisitions 2,200 1,600 1,500 5,300

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