Question

Pacific Hotels operates a centralized call center for the reservation needs of its hotels. Costs associated with use of the center are charged to the hotel group (luxury, resort, standard, and budget) based on the length of time of calls made (time usage). Idle time of the reservation agents, time spent on calls in which no reservation is made, and the fixed cost of the equipment are allocated based on the number of reservations made in each group. Due to recent increased competition in the hotel industry, the company has decided that it is necessary to better allocate its costs in order to price its services competitively and profitably. During the most recent period for which data are available, the use of the call center for each hotel group was as follows:

Division	Time Usage(thousands of minutes)			Number of Reservations (thousands)
Luxury		220			135
Resort		110			165
Standard		440			315
Budget		330			885

During this period, the cost of the call center amounted to $880,000 for personnel and $630,000 for equipment and other costs.

Required:

a. Determine the allocation to each of the divisions using the following:

1. A single rate based on time used. (Do not round intermediate calculations.)

Department	Allocated Cost
Luxury
Resort
Standard
Budget

2. Dual rates based on time used (for personnel costs) and number of reservations (for equipment and other cost). (Do not round intermediate calculations.)

Department	Allocated Cost
Luxury
Resort
Standard
Budget

Answer 1

Solution 1:

Total cost of call center = Personnel Cost + Equipment and other cost

= $880,000 + $630,000 = $1,510,000

Total time usage = 220 +110 + 440 + 330 = 1100 thousand minutes

Allocation rate based on time used = $1,510,000 /1100 = $1,372.72727272 per thousand minutes

Allocation of call center cost to department (Single rate based on time used)
Department	Time Usage	Allocation Rate	Allocated Cost
Luxury	220	$1,372.73	$302,000.00
Resort	110	$1,372.73	$151,000.00
Standard	440	$1,372.73	$604,000.00
Budget	330	$1,372.73	$453,000.00
Total			$1,510,000.00

Solution 2:

Computation of allocation rate [Dual rate based on time used (for personnel costs) and number of reservations (for equipment and other cost)]
Particulars	Personnel	Equipment and other cost
Cost Incurred	$880,000.00	$630,000.00
Total Time Usage	1100
Total reservations		1500
Allocation rate	$800.00	$420.00

Allocation of call center cost to department (Dual rate)
Department	Personnel			Equipment and Other cost			Total Allocated Cost
	Time Usage	Allocation Rate	Allocated Cost	Time Usage	Allocation Rate	Allocated Cost
Luxury	220	$800.00	$176,000.00	135	$420.00	$56,700.00	$232,700.00
Resort	110	$800.00	$88,000.00	165	$420.00	$69,300.00	$157,300.00
Standard	440	$800.00	$352,000.00	315	$420.00	$132,300.00	$484,300.00
Budget	330	$800.00	$264,000.00	885	$420.00	$371,700.00	$635,700.00
Total			$880,000.00			$630,000.00	$1,510,000.00