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

Exercise 25

Cost Allocations: Comparison of Dual and Single Rates

Pacific Hotels operates a centralized call center for the reservation needs of its hotels. Costs associated with use of the center are charged to the hotel group (luxury, resort, standard, and budget) based on the length of time of calls made (time usage). Idle time of the reservation agents, time spent on calls in which no reservation is made, and the fixed cost of the equipment are allocated based on the number of reservations made in each group. Due to recent increased competition in the hotel industry, the company has decided that it is necessary to more accurately allocate its costs in order to price its services competitively and profitably. During the most recent period for which data are available, the use of the call center for each hotel group was as follows.

Division	Time Usage (thousands of minutes)	Number of Reservations (thousands)
Luxury	750	45.0
Resort	500	67.5
Standard	2,000	187.5
Budget	1,750	450.0

During this period, the cost of the call center amounted to $2,100,000 for personnel and $1,500,000 for equipment and other costs.

Required

a. Determine the allocation to each of the divisions using the following:

(1) A single rate based on time used.

(2) Dual rates based on time used (for personnel costs) and number of reservations (for equipment and other cost).

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b. Write a short report to management explaining whether a single rate or dual rates should be used and why.

Step 1 of 2

(40 min.)?Cost Allocations—Comparison of Dual and Single Rates: Pacific Hotels.

a.?Allocations based on time usage:

(1)

Department	Proportion of Total Time				Allocated Cost
Luxury?		.15a			$540,000b
Resort?		.10			360,000
Standard?		.40			1,440,00
Budget?		.35			1,260,000
					$3,600,000

a?750 ¸ (750 + 500 + 2,000 + 1,750) = 750 ¸ 5,000 = .15; .10 = 500 ¸ 5,000;    .40 = 2,000 ¸ 5,000; ?.35 = 1,750 ¸ 5,000

b?.15 x ($2,100,000 + 1,500,000) = $540,000; $360,000 = .10 x $3,600,000;

?$1,440,000 = .40 x $3,600,000; $1,260,000 = .35 x $3,600,000

(2)?Dual allocations

	(1)Proportion of Time Usage				(2)AllocatedTime Cost		(3)Proportion of Reservations				(4)Allocated Equipment Cost		(5) TotalAllocated Cols. 2 + 4
Luxury?		.15a			$315,000b			.06c			$90,000d		$405,000
Resort?		.10			210,000			.09			135,000		345,000
Standard?		.40			840,000			.25			375,000		1,215,000
Budget?		.35			735,000			.60			900,000		1,635,000
													$3,600,000

a?from part (a)

b?$315,000 = $2,100,000 x .15; $210,00 = $2,100,000 x .10;     $840,000 = $2,100,000 x .40; ??$735,000 = $2,100,000 x .35

c?.06 = 45.0 ¸ (45.0 + 67.5 + 187.5 + 450.0) = 45 ¸ 750; .09 = 67.5 ¸ 750;

?.25 = 187.5 ¸ 750; .60 = 450 ¸ 750

d?$90,000 = .06 x $1,500,000; $135,000 = .09 x $1,500,000; and so on.