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	600	400	1,000
Number of disputes	60	12	72

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

Billing	$	48,000
Dispute resolution		36,000
Total	$	84,000

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

a.

	Personal Business Allocated costs $50,400 $

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.

	Personal Business Billing Dispute resolution

Answer 1

Question 1

Particulars	Personal	Business
Number of Bills	600	400
* Predetermined Billing Rate	84	84
Accounts Receivable Cost	50,400	33,600

Total Accounts Receivables Cost = $ 84,000

Total Bills = 1,000 Bills

Predetermined Billing Rate = Total Accounts Receivables Cost / Total Bills

= 84,000 / 1,000

= $ 84 per Bill

Question 2

Using Activity Based Costing

Particulars	Personal	Business
Billing	28,800	19,200
Dispute Resolution	30,000	6,000

	A	B	C= A/B
Particulars	Activity Cost	Total Cost Driver	Activity Allocation Rate
Billing	48,000	1,000	48	Per Bill
Dispute Resolution	36,000	72	500	Per Dispute
Total	84,000

	A	B	C =A*B	D	E= A*D
Particulars	Activity Allocation Rate	Cost Driver for Personal	Total Overhead for Personal	Cost Driver for Business	Total Overhead for Business
Billing	48	600	28,800	400	19,200
Dispute Costs	500	60	30,000	12	6,000
Total			58,800		25,200