Task: Allocating Costs Equitably Among Divisions
|
|
Domestic |
Overseas |
|
|
Freight |
Passenger |
Passengers |
Total |
| First quarter actual results: |
|
|
|
|
| Hours of hangar use |
900 |
1800 |
300 |
3000 |
| Percent of total |
30% |
60% |
10% |
100% |
| Hangar cost allocated |
$51,600 |
$103,200 |
$17,200 |
$172,000 |
|
|
|
|
|
| Second quarter actual results: |
|
|
|
|
| Hours of hangar use |
800 |
700 |
500 |
2000 |
| Percent of total |
40% |
35% |
25% |
100% |
| Hangar cost allocated |
$67,200 |
$58,800 |
$42,000 |
$168,000 |
|
|
|
|
|
Mr. Cosic, manager of the Freight Division is upset because his hangar is charged more and he says he used it less. The Freight Division requires 30% of the hangar's capacity during peak periods; the domestic passenger division 50%; and the Overseas Passenger Division 20%. The peak period oiccurs in the fourth quarter.
Required:
1. Is there any merit to Mr. Cosic's complaint? Explain
2. Using the high-Low Method, determine the cost formula for the hangar in terms of a variable rate per hour and total fixed cost each quarter
3. Reallocate the hangar costs for the first and second quarters in accordance with the cost allocation principles discussed in the chapter.
Allocate the variable and fixed costs separately.