Allocation for economic decisions and motivation (adapted from CMA exam).

Bonn Company recently reorganized its computer and data processing system. Bonn has replaced the individual installations located within the accounting departments at its plants and subsidiaries with a single data-processing department at corporate headquarters responsible for the operations of a newly acquired large-scale computer system. The new department has been operating for 2 years and regularly producing reliable and timely data for the past 12 months.

Because the department has focused its activities on converting applications to the new system and producing reports for the plant and subsidiary management, it has devoted little attention to the costs of the department. Now that the department's activities are operating relatively smoothly, company management has requested that the departmental manager recommend a cost accumulation system to facilitate cost control and the development of suitable rates to charge users for service.

For the past 2 years, the department has recorded costs in one account. The department has then allocated the costs to user departments on the basis of computer time used. The schedule below reports the costs and charging rate for Year 4.

The department manager recommends that the five activity centers within the department accumulate the department costs. The five activity centers are systems analysis, programming, data preparation, computer operations (processing), and administration.
She then suggests that the firm allocate the costs of the administration activity to the other four activity centers before developing a separate rate for charging users for each of the first four activities.
Alter reviewing the details of the accounts, the manager made the following observations regarding the charges to the several subsidiary accounts within the department:
(1) Salaries and benefits — records the salary and benefit costs of all employees in the department.
(2) Supplies — records paper costs for printers and a small amount for other miscellaneous costs.
(3) Equipment maintenance contracts — records charges for maintenance contracts that cover all equipment.
(4) Insurance — records cost of insurance covering the equipment and the furniture.

(5) Heat and air conditioning — records a charge from the corporate heating and air conditioning department estimated to be the incremental costs to meet the special needs of the computer department.
(6) Electricity — records the charge for electricity based on a separate meter within the department.
(7) Equipment and furniture depreciation — records the depreciation charges for all equipment and furniture owned within the department.
(8) Building improvements — records the amortization charges for the building changes required to provide proper environmental control and electrical service for the computer equipment.
(9) Building occupancy and security — records the computer department's share of the depreciation, maintenance, heat, and security costs of the building;
the firm allocates these costs to the department on the basis of square feet occupied.
(10) Corporate administrative charges — records the computer department's share of the corporate administrative costs. The firm allocates those costs to the department on the basis of number of employees in the department.

a. For each of the ten cost items, state whether or not the firm should distribute it to the live activity centers; and for each cost item that the firm should distribute, recommend the basis on which it should be distributed. Justify your conclusion in each case.

b. Assume that the costs of the computer operations (processing) activity will be charged to the user departments on the basis of computer hours. Using the analysis of computer utilization shown as a footnote to the department cost schedule presented in the problem, determine the total number of hours that should be employed to determine the charging rate for computer operations (processing). Justify your answer.

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Data Processing Department Costs for the Year Ended December 31, Year 4 (1) Salaries and Benefits. (2) Supplies... (3) Equipment Maintenance Contract (4) Insurance (5) Heat and Air Conditioning. (6) Electricity ... (7) Equipment and Furniture Depreciation. (8) Building Improvements Depreciation (9) Building Occupancy and Security... (10) Corporate Administrative Charges. Total Costs ... Computer Hours for User Processing. Hourly Rate ($1,176,000/2,750). Use of available computer hours: Testing and Debugging Programs Setup of Jobs... Processing Jobs Downtime for Maintenance Idle Time Total $ 622,600 40,000 15,000 25,000 36,000 50.000 285.400 10,000 39,300 52,700 $1,176,000 68 2,750 428 250 500 2,750 750 742 4,992