PROBLEM 6-6. Allocating Service Department Costs [LO 1] World Airlines has three
ID: 415218 • Letter: P
Question
PROBLEM 6-6. Allocating Service Department Costs [LO 1] World Airlines has three service departments: (1) ticketing, (2) baggage handling, and (3) engine maintenance. The service depart ment costs are estimated for separate cost pools formed by department and are allocated to two revenue-producing departments: (1) domestic flights and (2) international flights. World does not differentiate between fixed and variable costs in making allocations. The following data relate to the allocations: Budgeted Data Costs Air Miles Ticketing Baggage handling Engine maintenance Domestic flights International flights $4,000,000 $2,000,000 $9,000,000 7,500,000 22,500,000 REQUIRED a. Allocate the service department costs to the revenue-producing departments using air miles as the allocation base. b. Evaluate the cause-and-effect relationship resulting from the use of air miles as the allocation base. In which of the cost pools do you think the cause-and-effect relationship is the strongest? Suggest alternative allocation bases for the two remaining cost pools with the weakest cause-and- effect relationship.Explanation / Answer
(a) Domestic flights= 7500000
International flights = 22500000
Total air miles = Domestic + international
So, 7500000+22500000 = 30000000
Total air miles = 30000000
Service department total cost = Ticketing + Baggage handling+ engine maintenance
Ticketing = 4,000,000
Baggage handling = 2,000,000
Engine maintenance = 9,000,000
4,000,000+2,000,000+9,000,000 = 15,000,000
Service department total cost = 15,000,000
Cost allocated to the domestic = (Service department total cost*domestic flight air miles)/ Total air miles
= (15,000,000 * 75,00,000)/30000000
= 3750000
Cost allocated to international flight = (Service department total cost*International flight air miles)/ Total air miles
= (15,000,000*22500000)/30000000
= 11250000
(b) Only the engine maintenance cost would have the strong effect on the air miles
Ticketing and baggage handling would not have a strong cause and effect in the air mile.
An alternative way will be:
In ticketing: Ticket should be sold on the base of class and no of ticket sold
In baggage: Baggage cost should be allocated based on the number of baggage.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.