Question

John’s Custom Computer Shop (JCCS) assembles computers for both individual and corporate customers. The company is organized into two divisions: Personal and Business. Once a computer is built, it is shipped to the customer. Billing for all customers is handled by the corporate Accounts Receivable Department. Accounts Receivable performs two major activities: billing and dispute resolution. Billing refers to preparing and sending the bills as well as processing the payments. Dispute resolution occurs when a customer refuses to pay, usually due to an error in billing.

The costs of the Accounts Receivable Department are allocated to the two divisions based on the number of bills prepared. Kyle, the manager of the Business division, has complained that the allocated costs from Accounts Receivable are beginning to make the business division look unprofitable and has asked you to recommend some changes to the allocation system. If he agrees with your recommendation, he will pass them on to the chief financial officer.

Data on costs and activities in the Accounts Receivable Department follow.

	Personal	Business	Total
Number of bills prepared	650	350	1,000
Number of disputes	60	20	80

The Accounts Receivable Department incurred the following costs during the year.

Billing	$	45,000
Dispute resolution		44,000
Total	$	89,000

Required:

a. Under the current allocation system, what is the cost that will be allocated from Accounts Receivable to Personal? To Business?

b. Suppose the company implements an activity-based cost system for Accounts Receivable with two activities, billing and dispute resolution. What is the cost that will be allocated from Accounts Receivable to Personal? To Business? Use the number of bills prepared as the cost driver for billing costs and the number of disputes for dispute resolution costs.

Under the current allocation system, what is the cost that will be allocated from Accounts Receivable to Personal? To Business? (Do not round intermediate calculations.)

	Personal Business Allocated costs

Suppose the company implements an activity-based cost system for Accounts Receivable with two activities, billing and dispute resolution. What is the cost that will be allocated from Accounts Receivable to Personal? To Business? Use the number of bills prepared as the cost driver for billing costs and the number of disputes for dispute resolution costs.

	Personal Business Billing Dispute resolution

Answer 1

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John's Custom		A	B	C	D=B+C	E=A/D
Answer a			Activity Usages
Activity cost pool	Cost Driver	Cost	Personal	Business	Total	ABC rates
Accounts Receivable	Number of bills	89,000.00	650.00	350.00	1,000.00	89.00
Total Costs		89,000.00
		See E	See B	F=E*B	See C	G=E*C
Cost allocation			Personal		Business
Activity cost pool	Cost Driver	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Accounts Receivable	Number of bills	89.00	650.00	57,850.00	350.00	31,150.00
Cost allocated				57,850.00		31,150.00
		A	B	C	D=B+C	E=A/D
Answer b			Activity Usages
Activity cost pool	Cost Driver	Cost	Personal	Business	Total	ABC rates
Billing department	Number of bills	45,000.00	650.00	350.00	1,000.00	45.00
Dispute resolution	Number of disputes	44,000.00	60.00	20.00	80.00	550.00
Total Cost assigned		89,000.00
		See E	See B	F=E*B	See C	G=E*C
Cost allocation			Personal		Business
Activity cost pool	Cost Driver	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Billing department	Number of bills	45.00	650.00	29,250.00	350.00	15,750.00
Dispute resolution	Number of disputes	550.00	60.00	33,000.00	20.00	11,000.00
Cost allocated				62,250.00		26,750.00