Duvernoy Corporation is a manufacturing company with six support departments: finance, marketing, personnel, production engineering, research and

Question:

Duvernoy Corporation is a manufacturing company with six support departments: finance, marketing, personnel, production engineering, research and development (R&D), and information systems, each administered by a vice president. The information systems department (ISD) was established in 2008 when Duvernoy decided to acquire a large computer and develop a new information system.

While systems development and implementation is an ongoing process at Duvernoy, many basic systems needed by each functional department were operational at the end of 2009. Thus, calendar year 2010 is considered the first year for which the ISD costs can be estimated with a high degree of accuracy. Duvernoyâ€™s president wants the other five functional departments to be aware of the magnitude of the ISD costs by allocating them in the reports and statements prepared at the end of the first quarter of 2010. The allocation to each department was based on its actual use of ISD services. Jon Werner, vice president of ISD, suggested that the actual ISD cost be allocated on the basis of pages of actual computer output. He chose this basis because all departments use reports to evaluate their operations and make decisions. The use of this basis resulted in the following allocation:


	Percentage	Allocated Cost
Department
Finance	50%	$112,500
Marketing	30%	$67,500
Personnel	9%	$20,250
Production Engineering	6%	$13,500
R&D	5%	$11,250

After the quarterly reports were distributed, the finance and marketing departments objected to this allocation method. Both departments recognized that they were responsible for most of the report output, but they believed that these output costs might be the smallest of ISD costs and requested that a more equitable allocation basis be developed. After meeting with Jon, Elaine Jergens, Duvernoy's controller, concluded that ISD provides three distinct services: systems development, computer processing, and report generation. She recommended that a predetermined rate be developed for each service based on budgeted annual activity and costs. The ISD costs would then be assigned to the other functional departments using the predetermined rate times the actual activity used. ISD would absorb any difference between actual costs incurred and costs allocated to the other departments. Elaine and Jon concluded that systems development could be charged on the basis of hours devoted to systems development and programming, computer processing based on time used for operations (exclusive of database development and maintenance), and report generation based on number of pages of output. The only cost they thought should not be included in any of the predetermined rates was for purchased software; these packages usually were acquired for a specific department's use. Thus, Elaine concluded that purchased software would be charged at cost to the department for which it was purchased. To revise the first-quarter allocation, she gathered this information on ISD costs and services:

Duvernoy Corporation is a manufacturing company with six support

Required

1. For ISD, determine the following:

a. The predetermined rates for each service category: systems development, computer processing, and report generation.

b. Using the predetermined rates developed in requirement 1a, calculate the amount each of the other five functional departments would be charged for ISD's services provided during the first quarter of 2010.

2. With the method proposed by Elaine Jergens for charging the ISD costs to the other five functional departments, ISD's actual costs incurred and the costs assigned to the five user department might differ.

a. Explain the nature of this difference.

b. Discuss whether this proposal will improve cost control in ISD.

3. Explain whether Elaine's proposed method of charging user departments for ISD costs will improve planning and control in the user departments.

4. Assume that a finance manager has suggested outsourcing ISD. What factors should Duvernoy consider in deciding whether to outsource ISD functions?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...