Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 14

Alternative Allocation Bases: Service

Packages-2-Go has two divisions, air express and ground service, that share the common costs of the company’s communications network, which are $10,000,000 a year. You have the following information about the two divisions and the common communications network:

	Calls (thousands)	Time on Network (hours)
Air express	240,000	200,000
Ground service	160,000	800,000

Required

a. What is the communications network cost that is charged to each division if the number of calls is used as the allocation basis?

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b. What is the communications network cost to each division using time on network as the allocation basis?

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c. The cost of the communications network is necessary regardless of which division uses it. Why is the method of allocation important?

Step 1 of 4

Cost allocation:

• Allocation of costs to the respective cost objects is known as cost allocation.

• Allocation depends upon the respective cost centers that consume the products and services.

• An effective cost allocation methodology enables an organization to know the costs incurred, to allocate ands to manage cost recovery.