Pacific Airlines has three service departments; ticketing, baggage handling, and aircraft...

Question

Pacific Airlines has three service departments; ticketing, baggage handling, and aircraft maintenance. Costs of these departments are allocated to two revenue producing departments, domestic and international flights. Costs for the service departments are not separated into fixed and variable and the totals areas follows:

Ticketing	$4,000,000
Baggage handling	$2,000,000
Aircraft maintenance	$6,000,000

Air miles are as follows:

Domestic	10,000,000
International	30,000,000

(a) Allocate the service department costs based on air miles.
(b) Evaluate World Airlines use of air miles as a basis for allocation. Do you think the cause-and-effect relationship is strong?
(c) Suggest alternative methods toallocate the servicedepartment costs.

David · Accepted Answer

a) Allocation of Cost on the basis of air miles 
Total Cost of Departments 
Department Total Cost 
Ticketing $4,000,000  
Baggage handling $2,000,000  
Aircraft maintenance $6,000,000  
 Total Cost $12,000,000  
  Total Air Miles 
Domestic 10,000,000 
International 30,000,000 
 Total miles
40,000,

Pacific Airlines has three service departments; ticketing, baggage handling, and aircraft maintenance. Costs of these departments are allocated to two revenue producing departments, domestic and...

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