Problem 6-6 Allocating Service Department Costs

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Solution Guide / Answer Key:

ACCOUNTING

MT425 / MT 425
Managerial Finance and Accounting
Kaplan University (KU Campus)

James Jiambalvo
Managerial Accounting, 4e
Hoboken, NJ: John Wiley & Sons.

Unit 5: Cost Allocation and Business Strategy

Chapter 6 Problem 6-6 Allocating Service Department Costs [LO 3] World Airlines has three service departments: (1) ticketing, (2) baggage handling, and (3) engine maintenance. The service department 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 $5,000,000
Baggage handling $3,000,000
Engine maintenance $7,000,000
Domestic flights 6,000,000
International flights 24,000,000

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.

FILE: MS WORD