Question
Mr. Bailey is considering temporarily using some of the staff from the Tax Division to assist the Audit Division during the upcoming busy audit season,
Mr. Bailey is considering temporarily using some of the staff from the Tax Division to assist the Audit Division during the upcoming busy audit season, and would like to evaluate the effect of this on net income. The Tax Division is estimated to have 800 hours of excess capacity.
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 service department charges.
Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services) | $110.00 |
---|---|
Average hourly cost rate for staff (the average price the company pays to its staff) | $50.00 |
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.
Audit Division | 7150 |
Tax Division |
22100 |
Mr. Bailey asks that you prepare Divisional Income Statements showing what 20Y1 results would have been had the Audit Division purchased all the excess capacity of the Tax Division, using a market transfer price. The divisional managers tell you that, 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 $110.00 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. |
Income Statements |
For the Year Ended December 31, 20Y1 |
1 | Audit Division | Tax Division | Total Company | |
2 | Fees earned: | |||
3 | Audit fees (16 engagements) | $1,200,000.00 | $1,200,000.00 | |
4 | Tax fees (45 engagements) | $708,750.00 | 708,750.00 | |
5 | Transfer-pricing fees | ? | ? | |
6 | Expenses: | |||
7 | Variable: | |||
8 | Audit hours provided by Audit Division | 180,000.00 | 180,000.00 | |
9 | Tax hours provided by Tax Division | 236,250.00 | 236,250.00 | |
10 | Excess capacity hours paid to salaried staff | ? | ? | |
11 | Audit hours provided by Tax Division | ? | ? | ? |
12 | Fixed expenses | 50,000.00 | 65,500.00 | 115,500.00 |
13 | Income from operations before service department charges | ? | ? | ? |
14 | Service department charges for payroll | ? | ? | ? |
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