Question

Direct Method, Variable versus Fixed Costing and Performance Evaluation

AirBorne is a small airline operating out of Boise, Idaho. Its three flights travel to Salt Lake City, Reno, and Portland. The owner of the airline wants to assess the full cost of operating each flight. As part of this assessment, the costs of two support departments (maintenance and baggage) must be allocated to the three flights. The two support departments that support all three flights are located in Boise (any maintenance or baggage costs at the destination airports are directly traceable to the individual flights). Budgeted and actual data for the year are as follows for the support departments and the three flights: Use the rounded values for subsequent calculations.

	Support Centers				Flights
	Maintenance		Baggage		Salt Lake City		Reno		Portland
Budgeted data:
Fixed overhead	$240,000		$150,000		$20,000		$18,000		$30,000
Variable overhead	$30,000		$64,000		$5,000		$10,000		6,000
Hours of flight time*	—		—		2,000		4,000		2,000
Number of passengers	—		—		10,000		15,000		5,000
Actual data:
Fixed overhead	$235,000		$156,000		$22,000		$17,000		$29,500
Variable overhead	$80,000		$33,000		$6,200		$11,000		$5,800
Hours of flight time	—		—		1,800		4,200		2,500
Number of passengers	—		—		8,000		16,000		6,000

^*Normal activity levels.

Round all allocation ratios and variable rates to four significant digits. Round all allocated amounts to the nearest dollar.

Required:

1. Using the direct method, allocate the support service costs to each flight, assuming that the objective is to determine the cost of operating each flight.

2. Using the direct method, allocate the support service costs to each flight, assuming that the objective is to evaluate performance.

Answer 1

ANSWER

1)

Budgeted Data:

Allocation of Ratios for Fixed Costs:

	Maintenance	Baggage	SLC	Reno	Portland
Budgeted Data:
Fixed Overhead	$240,000	$150,000	$20,000	$18,000	$30,000
Variable Overhead	$30,000	$64,000	$5,000	$10,000	$6,000
Total	$270,000	$214,000	$25,000	$28,000	$36,000
Maintenance	($270,000)	-	$67,500	$135,000	$67,500
Baggage	-	($214,000)	$70,620	$107,000	$36,380
Total	$0	$0	$163,120	$270,000	$139,880

2)

Actual Data:

Allocation of Ratios for Fixed Costs:

	Maintenance	Baggage	SLC	Reno	Portland
Actual Data:
Fixed Overhead	$235,000	$156,000	$22,000	$17,000	$29,500
Variable Overhead	$80,000	$33,000	$6,200	$11,000	$5,800
Total	$315,000	$189,000	$28,200	$28,000	$35,300
Maintenance	($315,000)	-	$66,150	$154,350	$91,350
Baggage	-	($189,000)	$51,030	$100,170	$37,800
Total	$0	$0	$145,380	$282,520	$164,450

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