The Vigil Trucking Company has one service department and two regional operating departments. The budgeted cost behaviour pattern of the service department is $750,000 monthly in fixed costs plus $0.75 per 1,000 tonne-kilometres operated in the North and South regions. (A tonne-kilometre is the number of tonnes carried times the number of kilometres travelled.) The actual monthly costs of the service department are allocated using tonne-kilometres operated as the cost-allocation base.

1. Vigil processed 500 million tonne-kilometres of traffic in April, half in each operating region. The actual costs of the service department were exactly equal to those predicted by the budget for 500 million tonne-kilometres. Compute the costs that would be allocated to each operating region on an actual tonne-kilometres basis.

2. Suppose the North region was plagued by strikes, so that the amount of freight handled was much lower than originally anticipated. North moved only 150 million tonne-kilometres of traffic. The South region handled 250 million tonne-kilometres. The actual costs were exactly as budgeted for this lower level of activity. Compute the costs that would be allocated to North and South on an actual tonne-kilometre basis. Note that the total costs will be lower.

3. Refer to the facts in number 1. Various inefficiencies caused the service department to incur total costs of $1,250,000. Compute the costs to be allocated to North and South. Are the allocations justified? If not, what improvement do you suggest?

4. Refer to the facts in number 2. Assume that assorted investment outlays for equipment and space in the service department were made to provide a basic maximum capacity to serve the North region at a level of 360 million tonne-kilometres and the South region at a level of 240 million tonne-kilometres. Suppose fixed costs are allocated on the basis of this capacity to serve. Variable costs are allocated by using a predetermined standard rate per 1,000 tonne-kilometres. Compute the costs to be allocated to each department. What are the advantages of this method over other methods?