Problem 4-1 Allocation of Service Department Costs Pioneer Telephone Company of

Question

Problem 4-1 Allocation of Service Department Costs

Pioneer Telephone Company of Oreana has two types of customers: residential and business. They have several non-revenue cost centers. Two of those are switching and maintenance. Cost driver for switching is number of calls. Driver for maintenance is number of maintenance hours. Maintenance is the first department for step-down calculations.

                                                                  Hours                 Calls

                        Residential                        1,000              10,000

                        Business                              250                5,000

                        Switching                             150                      0

                        Maintenance                            0                   500                       

                        Costs:   Maintenance is $14,000

                                     Switching is $ 46,500

Required:

Allocate the costs using the step down method.

Allocate the costs using the reciprocal method.

What is the third method that could be used?

Which is the best method and why?

Explanation / Answer

Answer 1 Allocation of cost using step down method Service Department Maintenance Switching Business Residential Cost 14000 46500 0 0 - Allocation of Maintenance department cost -14000 1500 2500 10000 (Hours Ratio - 3 : 5 : 20) - Allocation of Switching department cost -48000 16000 32000 (Calls Ratio - 1 : 2) Total Cost 0 0 18500 42000 Answer 2 Allocation of cost using reciprocal method Assume maintenance department cost be X and Switching department cost be Y Hence, X = 14000 + (3% Y) Y = 46500 + (11% X) By putting the value of Y in equation 1 X = 14000+ 3%(46500 + 11%X) X = 14000 + 1395 + 0.0033X X = 15395 + 0.0033X 0.9967X = 15395 X = 15446 Y = 46500 + (11% *15446) = 48199 Service Department Maintenance Switching Business Residential Original Cost 14000 46500 0 0 - Allocation of Maintenance department cost -15446 1699                     2,780                    10,967 (Hours Ratio - 3 : 5 : 20) - Allocation of Switching department cost 1446 -48199                   15,424                    31,329 (Calls Ratio - 1 : 2) Total Cost 0 0                   18,204                    42,296 Answer 3 Third method that could be used is Direct Allocation method. Answer 4 The best method is step down method as it less complicated compared to other methods.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.