chapter 6 problem 6 6 allocating service department costs lo 3 world airlines has th 662933

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.