John\'s Custom Computer Shop (JCCS) assembles computers for both individual and
ID: 2539493 • Letter: J
Question
John's Custom Computer Shop (JCCS) assembles computers for both individual and corporate customers. The company is organized into two divisions. Personal and Business. Once a computer is built, it is shipped to the cuslomer. Billing for all customers is handled by the corporate Accounts Receivable Department. Accounts Receivable performs two major activities: billing and dispute resolution. Billing refers to preparing and sending the bills as well as processing the payments. Dispute resolution occurs when a customer refuses to pay, usually due to an error in billing. The costs of the Accounts Receivable Department are allocated to the two divisions based on the number of bills prepared. Kyle, the manager of the business division, has complained that the allocated costs from Accounts Receivable are beginning to make the business division look unprofitable and has asked you to recommend some changes to the allocation system. If he agrees with your recommendation, he will pass them on to the chief financial officer Data on costs and activities in the Accounts Receivable Department follow Personal Number of bills prepared Number of disputes 400 12 1,000 72 60 The Accounts Receivable Department incurred the following costs during the year S 48,000 Dispute resolution Total S 84,000 Required a. Under the current allocation system, what is the cost that will be allocated from Accounts Receivable to Personal? To Business? Business Alocated costs ippose the company implements an activity-based cost system tor Accounts Receable with wo act es billing and dispute resolution what is the cost that will be allocated trom Accounts Receivable to Personal? To Business? the number of bills prepared as the cost driver for billing costs and the number or disputes for dispute resolution costs. Billing Dispute resolutionExplanation / Answer
Total overhead cost = $84,000
Total number of bills prepared = 1,000
Cost per bill prepared = $84,000/1,000 = $84
Overhead cost allocated to Personal - $84 x 600 = $50,400
Overhead cost allocated to Business - $84 x 400 = $33,600
Personal
Business
Allocated Costs
$50,400
$33,600
Personal
Business
Billing
$28,800
$19,200
Dispute Resolution
$30,000
$6,000
Overhead cost assigned to Personal
Activity
Activity Basis
Activity Rate
Assigned Cost
Billing
600 bills
$48 per bill
$28,800
Dispute Resolution
60 disputes
$500 per dispute
$30,000
Overhead cost assigned to Personal
$58,800
Overhead cost assigned to Business
Activity
Activity Basis
Activity Rate
Assigned Cost
Billing
400 bills
$48 per bill
$19,200
Dispute Resolution
12 disputes
$500 per dispute
$6,000
Overhead cost assigned to Personal
$25,200
Workings –
Activity
Activity basis
activity cost
Usage
Activity rate
Billing
number of bills prepared
$48,000
1,000 bills
$48
Dispute Resolution
number of disputes
$36,000
72 disputes
$500
Personal
Business
Allocated Costs
$50,400
$33,600
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