Single versus Dual Rates
Required
Refer to data for Packages 2 Go in Exercise 12 21. Determine the cost allocation if $5.2 million of the communications network costs are fixed and allocated on the basis of time on network, and the remaining costs, which are variable, are allocated on the basis of the number of calls.
Exercise 12 21: 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?
b. What is the communications network cost to each division using time on network as the allocation basis?
c. The cost of the communications network is necessary regardless of which division uses it. Why is the method of allocation important?