(Seiuice department allocation) Columbia Company is a regional office supply chain with 26 independent stores. Each store has been responsible for its own credit and collections. The assistant manager in each store is assigned the re¬ sponsibility for credit activities including the collection of delinquent accounts because the stores do not need a full-time employee assigned to credit activities. The company has experienced a sharp rise in uncollectibles in the last 2 years. Corporate management has decided to establish a collections department in the home office to be responsible for the collections function companywide. The home office of Columbia Company will hire the necessary full-time personnel. The size of this department will be based on the historical credit activity of all the stores.

The new centralized collections department was discussed at a recent man¬ agement meeting. Finding a method to assign the costs of the new department to the stores has been difficult because this type of home office service is some¬ what unique. Alternative methods are being reviewed by top management.

The controller favored using a predetermined rate for charging the costs to the stores. The predetermined rate would be based on estimated costs. The vice president of sales had a strong preference for charging actual costs to the stores. In addition, the basis for the collection charges to the stores was also discussed. The controller identified the following four measures of services or allocation bases that could be used: total dollar sales; average number of past due accounts; number of uncollectible accounts written off; and 1/26 of the cost to each store.

The executive vice president stated he would like the accounting department to prepare a detailed analysis of the two charging methods (predetermined and actual) and the four service allocation bases.

a. Evaluate the two methods that could be used to charge the individual stores the costs of Columbia’s new collections department in terms of 1. practicality of application and ease of use; and 2. ability to control costs.

b. For each of the service allocation bases identified by the controller, 1. discuss whether the allocation base is appropriate to use in this situation; and 2. identify some behavioral problems that might arise as a consequence of adopting the allocation base.

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