Packages-2-Go has two divisions, air express and ground service, that share the
ID: 2478525 • Letter: P
Question
Packages-2-Go has two divisions, air express and ground service, that share the common costs of the company's communications network, which are $4,820,000 a year. You have the following information about the two divisions and the common communications network: Required: Determine the cost allocation if $3.10 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. (Do not round intermediate calculations. Round final answers to the nearest dollar amounts.)Explanation / Answer
Solution:
First of all we need to find out total variable cost.
Total Common Cost (Variable + Fixed) is given $4,820,000
Fixed Cost = $3,100,000
Variable Cost = $4,820,000 - $3,100,000 = $1,720,000
Variable Cost vary with the output but remain same per output / units / cost object.
Calculation of Variable Cost & Fixed Cost of each division
In the question it is given that Variable Costs are allocated on the basis of the number of calls.
Total Call = Air express 130,000 + Ground Service 84,000 = 214,000
Variable Cost for Air Express Division = Total Variable Cost x Air Express Call / Total Calls = $1,720,000 x 130,000 / 214,000 = $1,044,860
Variable Cost for Ground Service Division = Total Variable Cost x Ground Service Call / Total Calls = $1,720,000 x 84,000 / 214,000 = $675,140
Fixed Costs are allocated on the basis of time on network
Total Time on Network (hours) = Air express 170,000 + Ground Service 460,000 = 630,000 Hours
Fixed Cost for Air Express Division = Total Fixed Cost x Air Express time on network / Total time on network = $3,100,000 x 170,000 / 630,000 = $836,508
Fixed Cost for Ground Service Division = Total Fixed Cost x Ground Service time on network / Total time on network = $3,100,000 x 460,000 / 630,000 = $2,263,492
Air Express
Ground Service
Fixed
$836,508
$2,263,492
Variable
$1,044,860
$675,140
Total
$1,881,368
$2,938,632
Air Express
Ground Service
Fixed
$836,508
$2,263,492
Variable
$1,044,860
$675,140
Total
$1,881,368
$2,938,632
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