Question

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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.

Allocation ratios for fixed costs

	SLC	Reno	Portland
Hours of flight time	fill in the blank 1	fill in the blank 2	fill in the blank 3
Number of passengers	fill in the blank 4	fill in the blank 5	fill in the blank 6

Variable rates:

Maintenance:	$fill in the blank 7	per flight hour
Baggage:	$fill in the blank 8	per passenger

Cost Allocation

	SLC	Reno	Portland
Maintenance—fixed:	$fill in the blank 9	$fill in the blank 10	$fill in the blank 11
Maintenance—variable:	fill in the blank 12	fill in the blank 13	fill in the blank 14
Baggage—fixed:	fill in the blank 15	fill in the blank 16	fill in the blank 17
Baggage—variable:	fill in the blank 18	fill in the blank 19	fill in the blank 20
	$fill in the blank 21	$fill in the blank 22	$fill in the blank 23

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

	SLC	Reno	Portland
Maintenance—fixed:	$fill in the blank 24	$fill in the blank 25	$fill in the blank 26
Maintenance—variable:	fill in the blank 27	fill in the blank 28	fill in the blank 29
Baggage—fixed:	fill in the blank 30	fill in the blank 31	fill in the blank 32
Baggage—variable:	fill in the blank 33	fill in the blank 34	fill in the blank 35
	$fill in the blank 36	$fill in the blank 37	$fill in the blank 38

Answer 1

1. Allocation ratios for fixed costs (uses normal levels):

SLC Reno Portland

Hours of flight time................... 0.2500 0.5000 0.2500

Number of passengers................ 0.3333 0.5000 0.1667

Variable rates:

Maintenance: $30,000/8,000 = $3.75 per flight hour

Baggage: $64,000/30,000 = $2.1333 per passenger

SLC Reno Portland

Maintenance-fixed:

(0.2500 — $240,000)................... $ 60,000

(0.5000 — $240,000)................... $ 120,000

(0.2500 — $240,000)................... $ 60,000

Maintenance-variable:

($3.75 — 2,000)......................................... 7,500

($3.75 — 4,000).................................................. 15,000

($3.75 — 2,000).................................................. 7,500

Baggage-fixed:

(0.3333 — $150,000)............................... 49,995

(0.5000 — $150,000).......................................... 75,000

(0.1667 — $150,000).......................................... 25,005

Baggage-variable:

($2.1333 — 10,000)................................. 21,333

($2.1333 — 15,000)............................................ 32,000

($2.1333 — 5,000).............................. 10,667

$ 138,828 $ 242,000 $ 103,172

2. The allocations are the same as in Requirement 1, except variable costs are assigned using actual instead of budgeted activity.

SLC Reno Portland

Maintenance-fixed................................. $ 60,000 $ 120,000 $ 60,000

Maintenance-variable:

($3.75 — 1,800)......................................... 6,750

($3.75 — 4,200).................................................. 15,750

($3.75 — 2,500).................................................. 9,375

Baggage-fixed........................................ 49,995 75,000 25,005

Baggage-variable:

($2.1333 — 8,000)................................... 17,066

($2.1333 — 16,000)............................................ 34,133

($2.1333 — 6,000).............................. 12,800

$133,811 $244,883 $107,180

Yes, maintenance actually cost $315,000, but only $271,875 was allocated. Baggage actually cost $189,000, but $213,999 was allocated (no costs remain). Actual costs are not allocated so that inefficiencies or efficiencies of support centers will not be passed on.