Robert Brown, CPA, has three revenue departments: Auditing and Accounting (A&A), Tax (T), and Consulting (C). In addition, the company has two support departments: Administration and EDP. Administration costs are allocated to the three revenue departments on the basis of number of employees. The EDP Department’s fixed costs are allocated to revenue departments on the basis of peak hours of monthly service expected to be used by each revenue department. EDP’s variable costs are assigned to the revenue department sat a transfer price of $40 per hour of actual service. Following are the direct costs and the allocation bases associated with each of the departments:
|
Direct Costs |
ALLOCATION BASES |
|||
|
(Before Transfer |
Number of |
Peak |
EDP |
|
|
Costs) |
Employees |
Hours |
Hours Used |
|
|
Administration |
$450,000 |
4 |
30 |
290 |
|
EDP—Fixed |
300,000 |
2 |
n/a |
n/a |
|
EDP—Variable |
90,000 |
2 |
n/a |
n/a |
|
A&A |
200,000 |
10 |
80 |
1,220 |
|
T |
255,000 |
5 |
240 |
650 |
|
C |
340,000 |
3 |
25 |
190 |
a. Was the variable EDP transfer price of $40 adequate? Explain.
b. Allocate the other service department costs to A&A, T, and C using the direct method.
c. What are the total costs of the revenue producing departments after the allocation in part (b)?
Robert Brown, CPA, has three revenue departments: Auditing and Accounting (A&A), Tax (T), and Consulting (C). In addition, the company has two support departments: Administration and EDP. Administration costs are allocated to the three revenue departments on the basis of number of employees. The EDP Department’s fixed costs are allocated to revenue departments on the basis of peak hours of monthly service expected to be used by each revenue department. EDP’s variable costs are assigned to the revenue department sat a transfer price of $40 per hour of actual service. Following are the direct costs and the allocation bases associated with each of the departments:
|
Direct Costs |
ALLOCATION BASES |
|||
|
(Before Transfer |
Number of |
Peak |
EDP |
|
|
Costs) |
Employees |
Hours |
Hours Used |
|
|
Administration |
$450,000 |
4 |
30 |
290 |
|
EDP—Fixed |
300,000 |
2 |
n/a |
n/a |
|
EDP—Variable |
90,000 |
2 |
n/a |
n/a |
|
A&A |
200,000 |
10 |
80 |
1,220 |
|
T |
255,000 |
5 |
240 |
650 |
|
C |
340,000 |
3 |
25 |
190 |
a. Was the variable EDP transfer price of $40 adequate? Explain.
b. Allocate the other service department costs to A&A, T, and C using the direct method.
c. What are the total costs of the revenue producing departments after the allocation in part (b)?