Question

An automotive company has three divisions. One division manufactures new replacements parts for automobiles, another rebuilds engines, and the third does repair and overhaul work on a line of trucks. All three divisions use the services of a central payroll department. The best method of allocating the cost of the payroll department to the various operating divisions is Select one: a. total labor hours incurred in the divisions b. machine hours used in the divisions c. value of production in the divisions d. direct labor costs incurred in the divisions

Answer 1

The best method to allocate payroll department costs in an automotive company is based on the direct labor costs incurred in the divisions, reflecting the proportional usage of payroll services.

Step-by-step explanation:

The best method of allocating the cost of the payroll department to the various operating divisions of an automotive company is (d) through direct labor costs incurred in the divisions. This allocation base is advantageous as it accurately reflects the actual usage of payroll services by each division, wherein each division would be allocated a share of the payroll department's costs in proportion to the direct labor costs they incur. This is generally considered a fair method of cost allocation since there is a direct correlation between the labor costs and the services provided by the payroll department.

Answer 2

Answer: a. total labor hours incurred in the divisions

Step-by-step explanation:

The best way to allocate payroll costs would be to apportion it by hour. The labor in the various departments should work by the hour and then the total amount of hours worked in the division will then be used as the base for payroll because it would show how much people in that division worked and how much they need to be compensated for doing so.

For instance, assume the total payroll cost is $1,000,000 and Division A worked 2,000 hours, Division B worked 4,000 hours and Division C worked 4,000 hours. The payroll would be apportioned as follows:

Division A = 2,000 / (2,000 + 4,000 + 4,000) * 1,000,000 = $200,000

Division B = 4,000 / (2,000 + 4,000 + 4,000) * 1,000,000 = $400,000

Division A = 4,000 / (2,000 + 4,000 + 4,000) * 1,000,000 = $400,000