Question

In: Accounting

John’s Custom Computer Shop (JCCS) assembles computers for both individual and corporate customers. The company is...

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

Solutions

Expert Solution

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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

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