ch10 Mastery

The unit for determining sales revenue in both divisions is the "engagement", which means the total agreed-upon work for a given client in either audit or tax for a given year. The company charges on average a fee of $75,000 per audit engagement, and $15,750 per tax engagement.

The company has its own Payroll Office, which provides payroll services to both divisions and will allocate its total expenses to the two divisions as support department allocations.

The following chart shows some basic data for the company:

Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services)	$100
Average hourly cost rate for staff (the average price the company pays to its staff)	$60
Number of paychecks issued by Audit Division	110
Number of paychecks issued by Tax Division	340
Total expense for Payroll Office	$29,250
Amount of assets invested in Audit Division by BOR CPAs, Inc.	$10,000,000
Amount of assets invested in Tax Division by BOR CPAs, Inc.	$4,000,000

Payroll

Mr. Bailey would like you to start by analyzing the Payroll Office expenses, and allocating the total expenses to each division. He has decided to use the number of payroll checks as the activity base for the allocation.

Fill in the following blanks, allocating the total expense for the Payroll Office to each of the two divisions.

Payroll Charge Rate $65 per payroll check

Division	Support Department Allocations
Audit Division	7,150
Tax Division	22,100

BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 20Y8
	Audit Division	Tax Division	Total Company
Fees earned:
Audit fees (12 engagements)	$900,000		$900,000
Tax fees (45 engagements)		$708,750	708,750
Transfer-pricing fees			0
Expenses:
Variable:
Audit hours provided by Audit Division	(216,000)		(216,000)
Tax hours provided by Tax Division		(283,500)	(283,500)
Excess capacity hours paid to salaried staff		(48,000)	(48,000)
Audit hours provided by Tax Division		0	0
Fixed expenses	(50,000)	(65,500)	(115,500)
Operating income before support department allocations	$634,000	$311,750	$945,750
Support department allocations for payroll	fill in the blank	fill in the blank	fill in the blank
Operating income	$fill in the blank	$fill in the blank	$fill in the blank

with the excess capacity of the Tax Division of 800 hours, the Audit Division can perform 4 more audits during the year, and the Tax Division would charge the Audit Division the market rate of $100 per hour for the additional hours required, selling all its excess capacity to the Audit Division. The Tax Division would still be responsible for paying the salaries of their employees.

BOR CPAs, Inc. Divisional Income Statements For the Year Ended December 31, 20Y8
	Audit Division	Tax Division	Total Company
Fees earned:
Audit fees (16 engagements)	$1,200,000		$1,200,000
Tax fees (45 engagements)		$708,750	708,750
Transfer-pricing fees		fill in the blank	fill in the blank
Expenses:
Variable:
Audit hours provided by Audit Division	(216,000)		(216,000)
Tax hours provided by Tax Division		(283,500)	(283,500)
Excess capacity hours paid to salaried staff		fill in the blank	fill in the blank
Audit hours provided by Tax Division	fill in the blank	fill in the blank	fill in the blank
Fixed expenses	(50,000)	(65,500)	(115,500)
Operating income before support department allocations	$fill in the blank	$fill in the blank	$fill in the blank
Support department allocations for payroll	fill in the blank	fill in the blank	fill in the blank
Operating income	$fill in the blank	$fill in the blank	$fill in the blank