Chapter 22: 1DQ (page 1012)
Question: Why are many companies divided into departments?
Large business entities are divided into departments for increasing efficiency in handling complex business processes.
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Vortex Company operates a retail store with two departments. Information about those departments follows.
Department A | Department B | |
Sales | \(800,000 | \)450,000 |
Cost of goods sold | 497,000 | 291,000 |
Direct expenses | ||
Salaries | 125,000 | 88,000 |
Insurance | 20,000 | 10,000 |
Utilities | 24,000 | 14,000 |
Depreciation | 21,000 | 12,000 |
Maintenance | 7,000 | 5,000 |
The company also incurred the following indirect costs.
Salaries | $36,000 |
Insurance | 6,000 |
Depreciation | 15,000 |
Office expenses | 50,000 |
Indirect costs are allocated as follows: salaries on the basis of sales; insurance and depreciation on the basis of square footage; and office expenses on the basis of number of employees. Additional information about the departments follows.
Department | Square footage | Number of employees |
A | 28,000 | 75 |
B | 12,000 | 50 |
Required
1. For each department, determine the departmental contribution to overhead and the departmental net income.
2. Should Department B be eliminated? Explain
Jessica Porter works in both the jewelry department and the cosmetics department of a retail store. She assists customers in both departments and arranges and stocks merchandise in both departments. The store allocates her $30,000 annual wages between the two departments based on the time worked in the two departments. Jessica reported the following hours and activities spent in the two departments. Allocate Jessica’s annual wages between the two departments.
Activities | Hours |
Selling in jewelry department | 51 |
Arranging and stocking merchandise in jewelry department | 6 |
Selling in cosmetic department | 12 |
Arranging and stocking merchandise in cosmetic department | 7 |
Idle time spent waiting for a customer to enter one of the department | 4 |
Define and describe cycle time and identify the components of cycle time.
Question: Pablo Management has five part-time employees, eachof whom earns $250 per day. They are normally
paid on Fridays for work completed Monday through Friday of the same week. Assume that December 28,
2017, was a Friday, and that they were paid in full on that day. The next week, the five employees worked
only four days because New Year’s Day was an unpaid holiday.
a. Assuming that December 31, 2017, was a Monday, prepare the adjusting entry for wages expense that
would be recorded at the close of that day.
b. Assuming that January 4, 2018, was a Friday, prepare the journal entry that would be made to record
payment of the employees’ wages for that week.
Refer to the information in Exercise 22-12. Assume that each of the company’s divisions has a required rate of return of 7%. Compute residual income for each division.
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