(Justification ofcost allocations) Wales Company recently reorganized its computer and data processing activities. The small installations located within the account¬ ing departments at its plants and subsidiaries have been replaced with a single data processing department at corporate headquarters responsible for the oper¬ ations of a newly acquired large-scale computer system. The new department has been in operation for 2 years and has been 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 subsidiaries manage¬ ments, little attention has been devoted to the costs of the department. Now CHAPTER 19 Responsibility Accounting and Transfer Pricing in Decentralized Organizations 917 that the department’s activities are operating relatively smoothly, company man¬ agement has requested that the department manager recommend a cost accu¬ mulation system to facilitate cost control and the development of suitable rates to charge users for service.

For the past 2 years, the departmental costs have been recorded in one account. The costs have then been allocated to user departments on the basis of computer time used. The schedule below reports the costs and charging rate for calendar year 1997:

The department manager recommends that the department costs be accu¬ mulated by five activity centers within the department: Systems Analysis, Program¬ ming, Data Preparation, Computer Operations (Processing), and Administration. She also suggests that the costs of the Administration activity be allocated to the other four activity centers before a separate rate for charging users is developed for each of the first four activities. The manager made the following observations re¬ garding the charges to the several subsidiary accounts within the department after reviewing details of the accounts: 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 miscel¬ laneous other costs. 3. Equipment maintenance contracts—records charges for maintenance con¬ tracts; all equipment is covered by maintenance contracts. 4. Insurance—records costs of insurance covering the equipment and furniture. 5. Pleat and air-conditioning—records a charge from the corporate heating and air-conditioning department; estimated to be the incremental cost to meet the special needs of the computer department. 6. Electricity—records the charge for electricity based on a separate meter in the department. 7. Equipment and furniture depreciation—records the depreciation charges for all owned equipment and furniture in 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; allocated 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; allocated to the department on the basis of number of employees in the department.

a. For each of the ten cost items, state whether it should be distributed to the five activity centers. For each cost item that should be distributed, recommend the basis on which it should be distributed. Justify your con¬ clusion in each case.

b. Assume 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, determine the total number of hours that should be employed to determine the charging rate for Computer Operations (processing). Justify your answer.

(CMA adapted)

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(1) Salaries and benefits (2) Supplies (3) Equipment maintenance contract (4) Insurance (5) Heat and air-conditioning $ 622,600 40,000 15,000 25,000 36,000 (6) Electricity 50,000 (7) Equipment and furniture depreciation (8) Building improvements depreciation 285,400 10,000 (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: 39,300 52,700 $1,176,000 2,750 $428 Testing and debugging programs Setup of jobs Processing jobs Downtime for maintenance Idle time Total hours of usage 250 500 2,750 750 742 4,992