Problem 6 - Accounting

Question

Harris Corporation, a manufacturer of electronics and communications systems, uses a service department charge system to charge profit centers with Computing and Communications Services \((\mathrm{CCS})\) service department costs. The following table identifies an abbreviated list of service categories and activity bases used by the CCS department. The table also includes some assumed cost and activity base quantity information for each service for March. \begin{tabular}{llcc} & & & Assumed Activity \\ CCs Service Category & \multicolumn{1}{c}{ Activity Base } & Assumed Cost & Base Quantity \\ \hline Help desk & Number of calls & \(\$ 33,600\) & 1,050 \\ Network center & Number of devices monitored & 273,000 & 4,200 \\ Electronic mail & Number of user accounts & 23,800 & 2,800 \\ Local voice support & Number of phone extensions & 56,550 & 3,900 \end{tabular} One of the profit centers for Harris Corporation is the Communication Systems (COMM) sector. Assume the following information for the COMM sector: \- The sector has 1,800 employees, of whom \(50 \%\) are office employees. \- All the office employees have a phone, and \(80 \%\) of them have a computer on the network. \- Ninety percent of the employees with a computer also have an e-mail account. \- The average number of help desk calls for March was \(0.40\) calls per individual with a computer. \- There are 200 additional printers, servers, and peripherals on the network beyond the personal computers. a. Determine the service charge rate for the four CCS service categories for March. b. Determine the charges to the COMM sector for the four CCS service categories for March.

Step-by-Step Solution

Answer

Service charge rates are $32/call, $65/device, $8.50/account, $14.50/extension. COMM sector charges: $9,216, $59,800, $5,508, $13,050 respectively.

Step 1: Calculate the service charge rate for each category

To find the service charge rate for each category, divide the assumed cost by the assumed activity base quantity. - **Help desk**: Charge Rate = \( \frac{\\(33,600}{1,050} = \\)32 \) per call- **Network center**: Charge Rate = \( \frac{\\(273,000}{4,200} = \\)65 \) per device- **Electronic mail**: Charge Rate = \( \frac{\\(23,800}{2,800} = \\)8.50 \) per account- **Local voice support**: Charge Rate = \( \frac{\\(56,550}{3,900} = \\)14.50 \) per phone extension.

Step 2: Calculate the number of devices for each service category in COMM

- **Help desk**: *Number of employees with a computer* = \( 1,800 \times 0.5 \times 0.8 = 720 \) *Average calls* = \( 720 \times 0.4 = 288 \) calls (rounded to the nearest whole number)- **Network center**: *Number of computers* = \( 720 \) *Additional devices* = 200 *Total devices on network* = \( 720 + 200 = 920 \)- **Electronic mail**: *Number of employees with email* = \( 720 \times 0.9 = 648 \)- **Local voice support**: *Number of phone extensions* = \( 1,800 \times 0.5 = 900 \) extensions.

Step 3: Calculate the charges for the COMM sector

Multiply the number of devices or accounts in the COMM sector by the service charge rate for each category:- **Help desk charges**: \( 288 \times \\(32 = \\)9,216 \)- **Network center charges**: \( 920 \times \\(65 = \\)59,800 \)- **Electronic mail charges**: \( 648 \times \\(8.50 = \\)5,508 \)- **Local voice support charges**: \( 900 \times \\(14.50 = \\)13,050 \)

Key Concepts

Cost Allocation

Cost allocation is a crucial method used by organizations to distribute service department costs to various profit centers. The main idea is to assign costs to the departments that benefit from certain services, which reflect their usage levels. By doing this, companies can ensure that each profit center accounts for its proportional consumption of various services.
Allocating costs properly helps in understanding true profitability. It enables companies to make informed decisions about pricing, budgeting, and resource allocation.

• Identifies cost drivers: To allocate costs effectively, organizations need to identify what drives the costs, also known as 'activity bases.'
• Fosters accountability: By assigning costs, departments become more aware of their resource consumption, leading to improved efficiency.

In the given exercise, cost allocation is achieved by determining the number of activities each profit center uses and then applying appropriate service charge rates.

Service Charge Rate Calculation

Service charge rate calculation involves determining how much a department should be charged for a particular service it utilizes. It's an essential part of the service department charge system. The calculation is straightforward:
The formula is: \[\text{Service Charge Rate} = \frac{\text{Assumed Cost}}{\text{Activity Base Quantity}}\]By dividing the total cost by the activity base quantity, we find how much to charge per unit of use (such as per call, device, or account).

• Ensures fairness: By linking charges to actual usage, profit centers pay proportionally, ensuring fair resource utilization.
• Improves efficiency: Tracking usage can lead departments to use resources more efficiently, potentially reducing unnecessary expenses.

In the example, the help desk, network center, electronic mail, and local voice support each have specific charge rates based on their activity calculations.

Profit Centers

Profit centers are individual departments within a company that are treated as separate business units. They are tasked with generating revenue and profits while being responsible for their costs. The crucial aspect is that they can evaluate their profitability just like standalone businesses might.
Each profit center is accountable for its own financial performance, including both revenues and expenses. In this exercise, the Communication Systems (COMM) sector is treated as a profit center.

• Encourages competition: Departments are incentivized to improve their performance and efficiency, enhancing overall company productivity.
• Directs strategic focus: Each profit center can tailor its strategies to maximize profitability, adapting quickly to market changes.

Understanding how service charges affect profit centers is vital, as it plays a significant role in their financial performance evaluation and resource allocation.

Activity Base Quantity

Activity base quantity refers to the measurable service output used as a basis to allocate costs. It is an essential concept in the service department charge system, as it represents the volume of service provided or utilized within the profit centers.
For example, the number of calls, devices monitored, user accounts, or phone extensions all serve as activity bases in the given exercise. These measurements allow for a precise allocation of costs, ensuring departments are charged fairly based on actual usage.

• Promotes transparency: By using a quantitative measure, organizations achieve clarity in how costs are distributed among departments.
• Encourages data-driven decisions: Profit centers can analyze their activity use to optimize their operations and reduce costs.

In this exercise, the activity base quantities help calculate both the service charge rates and the corresponding total charges for the COMM sector.