Question

The Personnel Department at LastCall Enterprises handles many administrative tasks for the two divisions that make up LastCall: LaidBack and StressedOut. LaidBack division manages the company’s traditional business line. This business, although lucrative, is currently not growing. StressedOut, on the other hand, is the company’s new business, which has experienced double-digit growth for each of the last three years.

The cost allocation system at LastCall allocates all corporate costs to the divisions based on a variety of cost allocation bases. Personnel costs are allocated based on the average number of employees in the two divisions.

There are two basic activities in the Personnel Department. The first, called employee maintenance, manages employee records. Virtually all of this activity occurs when employees are hired or leave the company. The other activity is payroll, which is an ongoing activity and requires the same amount of work for each employee regardless of the employee’s salary.

Assorted data for LastCall for the last year follow.

	LaidBack	StressedOut	Total
Number of employees (average)	100	25	125
Employees hired/leaving	5	13	18

The Personnel Department incurred the following costs during the year.

Employee maintenance	$	108,000
Payroll		12,500
Total	$	120,500

a. Under the current allocation system, what are the costs that will be allocated from personnel to LaidBack? To StressedOut?
b. Suppose the company implements an activity-based cost system for personnel with the two activities, employee maintenance and payroll. Use the number of employees hired/leaving as the cost driver for employee maintenance costs and the average number of employees for payroll costs. What are the costs that will be allocated from personnel to LaidBack? To StressedOut?

Answer 1

a. Under the current allocation system, what are the costs that will be allocated from personnel to LaidBack? To StressedOut?
		Cost		Amount
		Employee maintenance cost		$108,000
		Payroll cost		$12,500
		Total Personnel cost		$120,500
			LaidBack	StressedOut	Total
	Total Number of employees (average)		100	25	125
	Number of Employees hired/leaving		5	13	18
	Under current allocation system, Personnel costs are allocated based on the average number of employees in the two divisions
	Blanket Personnel cost rate	=	Total Personnel cost
			Average number of employees
		=	$120,500
			125
		=	$964	per employee
	Division	Activity Driver		Blanket Personnel cost rate		Total Personnel Cost Allocated
	a	b		c		d = b*c
	LaidBack	100	employees	$964	per employee	$96,400
	StressedOut	25	employees	$964	per employee	$24,100

b. Suppose the company implements an activity-based cost system for personnel with the two activities, employee maintenance and payroll. Use the number of employees hired/leaving as the cost driver for employee maintenance costs and the average number of employees for payroll costs. What are the costs that will be allocated from personnel to LaidBack? To StressedOut?
							Activity Cost Pool	Costs	Cost Driver	No.	Cost per driver
							a	b	c	d	e = b/d
	Employee maintenance cost	$108,000	Number of Employees hired/leaving	18	$6,000
	Payroll cost	$12,500	Average number of employees	125	$100
	Division	Activity Driver		Activity Rate	Total Personnel Cost Alloacted
	LaidBack
	Employee maintenance cost	5	employees	$6,000	$30,000
	Payroll cost	100	employees	$100	$10,000
	Total Personnel cost Allocated to LaidBack				$40,000
	StressedOut
	Employee maintenance cost	13	employees	$6,000	$78,000
	Payroll cost	25	employees	$100	$2,500
	Total Personnel cost Allocated to StressedOut				$80,500

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Thank you.