The Personnel Department at Hernandez Bros. is centralized and provides services to the two operating units: Miami and New York. The Miami unit is the original unit of the company and is well established. The New York unit is new, much like a start-up company. The costs of the Personnel Department are allocated to each unit based on the number of employees in order to determine unit profitability. The current rate is $530 per employee. Data for the fiscal year just ended show the following:

Miami New York Number of employees 1,230 330 Number of new hires 13 23 Number of employees departing 17 27

Orlando, the manager of the New York unit, is unhappy with the results of the controller's study. He asks the controller to develop separate rates for fixed and variable costs in the Personnel Department. The controller reports back to Orlando that the rates would be as follows:

Allocation based on Variable Rate Fixed Rate Total Rate Employees $ 65 per employee $ 165 per employee $ 230 per employee Transitions $ 2,030 per transition $ 3,820 per transition $ 5,850 per transition

Required:

a. Orlando argues that New York should only be allocated the variable costs from this system, because the company would have to pay the fixed costs even if New York did not exist. Compute the cost allocated to each unit using the approach Orlando prefers.

References

eBook & Resources

eBook: Compare and contrast plantwide and department allocation methods.eBook: Explain how a two-stage product costing system works.