Cranshaw Business Services (CBS) operates an information technology (IT) consulting firm out of two offices: Detroit and Los Angeles. Corporate services, such as legal, finance, and personnel, are centralized at the main office and the costs of these services are allocated to the two offices for the purposes of profitability assessment. The Detroit office is the original unit of the company and is well established, having long-time clients from the automotive and other manufacturing industries. The Los Angeles office is new with a smaller, much more varied, clientele. The costs of personnel services at CBS are currently allocated on the basis of the number of employees in each office. The annual costs of the personnel department total $350,000. Data for the fiscal year just ended show the following:

	Detroit	Los Angeles
Number of employees	380	120
Number of new hires	7	20
Number of employees departing	3	10

Exercise 9-31 (Static) Unitwide versus Department AllocationAdministrative (Service) Function (LO 9-2, 3)

Required:

Compute the cost allocated to each unit using the current allocation system.

The manager of the Detroit office believes that Detroit gets little benefit from the personnel office other than the occasional hire and termination help. The manager asks the controllers office to estimate the amount of Personnel Department cost associated with routine personnel matters (benefits and so on) and those associated with hiring employees and assisting with departing employees (transitions). The controller responds that if they separated the overhead costs on this basis, the cost of the Personnel Department for routine matters is $200,000 and the cost of the Personnel Department for transitions (each hire and each departure counts as one transition) is $150,000.

Recompute the costs allocated to each unit using the separate rates for routine and transitional matters.

	Total Allocated Cost
	Detroit	Los Angeles
a. Using current allocation system	$266,000	$84,000
b. Using separate rates

a is correct