Perez Corporation’s computer services department assists two operating departments in using the company’s information system effectively. The annual cost of computer services is $583,000. The production department employs 40 employees, and the sales department employs 13 employees. Perez uses the number of employees as the cost driver for allocating the cost of computer services to operating departments. Required Allocate the cost of computer services to operating departments.

Production department $440,000

Sales department $143,000

Explanation:

The allocation of the total cost to the operating departments is proportional to the number of employees. In other words, as the number of employees increases, so does the allocated cost and vice versa.

Hence,

Cost allocated to the production department

= 40/(40 + 13) × $583,000

= 40/53 × $583,000

= $440,000

Cost allocated to the sales department

= 13/(40 + 13) × $583,000

= 13/53 × $583,000

= $143,000

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