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Cost allocation

Allocating Costs Equitably Among Divisions

This is a practice question I am having problem solving.

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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.

Solution Preview

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 occurs in the fourth quarter.

Required:
1. Is there ...

Solution Summary

The solution explains how to allocate costs among divisions

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