Kumar, Inc., evaluates managers of producing departments on their ability to control costs. In addition to the costs directly traceable to their departments, each production manager is held responsible for a share of the costs of a support center, the Human Resources (HR) Department.
The total costs of HR are allocated on the basis of actual direct labor hours used. The total costs of HR and the actual direct labor hours worked by each producing department are as follows:

Required:

1. Allocate the HR costs to each producing department for Year 1 and Year 2 using the direct method with actual direct labor hours and actual HR costs.

2. Discuss the following statement: “The costs of human resource-related matters increased by 25 percent for Department A and decreased by over 16 percent for Department B. Thus, the manager of Department B must be controlling HR costs better than the manager of Department A.”

3. Can you think of a way to allocate HR costs so that a more reasonable and fair assessment of cost control can be made? Explain.

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Year 1 Year 2 Direct labor hours worked: Department A 24,000 36,000 60,000 $120,000 115,000 25,000 25,000 50,000 $120,000 112,500* Department IB Total hours Actual HR cost Budgeted HR cost