ADM3346 Cost Accounting

Chapter 15 Period Cost Application

Universal Transport Enterprises (UTE)

Universal Transport Enterprises (UTE) operates an integrated transportation network that includes both air operations and road operations. UTE has 2 support departments (Administration and Information Systems) and 2 operating departments (Air and Road). The budgeted level of services at the start of the year was:

Services Provided By:

Percent of Support Services Used by

Administration Information

Systems Air Road

Administration ----- 0.10 0.30 0.60

Information Systems 0.20 ---- 0.50 0.30

Costs for administration were $135,000, and costs for the information systems department were $75,000.

UTE monitors the cost per kilometre in the air for the air department and the cost per kilometer on the road for the Road Department. These cost figures include costs allocated from the support departments to the transportation departments. During the year, the actual transportation kilometres were:

Air operations 800,000 kilometres

Road operations 1,500,000 kilometres

REQUIRED

1. Allocate the support department costs to the two transportation departments using the direct and step-down method.

2. Using the reciprocal approach, to create simultaneous equations (AD=Administration; IS=Information Systems) and allocate total costs of Administration and Information systems department among the operating departments.

3. Suppose you have been asked to help UTE decide on a method for allocating support department costs. List one pro and one con for the direct and reciprocal methods, and then make a recommendation for this company.