PIR Corporation has 2 support departments and 2 operating departments. Number of employees is used as an allocation base for personnel support costs, and square metres are used for janitorial support costs. A breakdown of their costs, along with other operating information, is shown below for a recent accounting period: If PIR uses single-rate allocation and the direct method, the total cost (including support department costs) for Product Assembly will be:
A) $14,000
B) $28,000
C) $30,400
D) None of the above

Question

PIR Corporation has 2 support departments and 2 operating departments. Number of employees is used as an allocation base for personnel support costs, and square metres are used for janitorial support costs. A breakdown of their costs, along with other operating information, is shown below for a recent accounting period:   If PIR uses single-rate allocation and the direct method, the total cost (including support department costs) for Product Assembly will be:
A) $14,000 
B) $28,000 
C) $30,400 
D) None of the above

Quizplus · Accepted Answer

To use the single-rate allocation method with the direct method, we need to allocate the support department costs to the operating departments first.

First, let's allocate the personnel support costs, using the number of employees as the allocation base:

Personnel Support Department 1 Allocation: 
Operating Department 1: (4/10) x $20,000 = $8,000 
Operating Department 2: (6/10) x $20,000 = $12,000

Personnel Support Department 2 Allocation: 
Operating Department 1: (3/12) x $24,000 = $6,000 
Operating Department 2: (9/12) x $24,000 = $18,000

Next, let's allocate the janitorial support costs, using square metres as the allocation base:

Janitorial Support Department Allocation: 
Operating Department 1: (300/600) x $6,000 = $3,000 
Operating Department 2: (300/600) x $6,000 = $3,000

Now, we can add up the total costs for each department, including the support department allocations:

Operating Department 1 Total Cost: 
Direct Operating Costs: $40,000 
Personnel Support Allocation: $8,000 + $6,000 = $14,000 
Janitorial Support Allocation: $3,000 
Total Cost: $57,000

Operating Department 2 Total Cost: 
Direct Operating Costs: $60,000 
Personnel Support Allocation: $12,000 + $18,000 = $30,000 
Janitorial Support Allocation: $3,000 
Total Cost: $93,000

Finally, we can allocate the support department costs to the operating departments, using a single rate for all support department costs:

Single Rate: Total Support Department Costs / Total Allocation Base 
Total Personnel Support Costs = $20,000 + $24,000 = $44,000 
Total Janitorial Support Costs = $6,000 
Total Allocation Base = Number of Employees + Square Metres 
Operating Department 1 Allocation Base: 10 + 600 = 610 
Operating Department 2 Allocation Base: 12 + 600 = 612 
Single Rate = $50,000 / 1,222 = $40.90 per allocation base unit

Support Department 1 Allocation: 
Operating Department 1: 10 employees x $40.90 = $409 
Operating Department 2: 12 employees x $40.90 = $491

Support Department 2 Allocation: 
Operating Department 1: 300 sqm x $40.90 = $12,270 
Operating Department 2: 300 sqm x $40.90 = $12,270

Now we can add up the total costs for each operating department, including the support department allocations:

Operating Department 1 Total Cost: 
Direct Operating Costs: $40,000 
Personnel Support Allocation: $8,000 + $6,000 + $409 = $14,409 
Janitorial Support Allocation: $3,000 + $12,270 = $15,270 
Total Cost: $69,679

Operating Department 2 Total Cost: 
Direct Operating Costs: $60,000 
Personnel Support Allocation: $12,000 + $18,000 + $491 = $30,491 
Janitorial Support Allocation: $3,000 + $12,270 = $15,270 
Total Cost: $105,761

Therefore, the total cost (including support department costs) for Product Assembly (Operating Department 1) is $69,679.

The correct answer is C) $30,400.

PIR Corporation Has 2 Support Departments and 2 Operating Departments