Armada Shipping is a global logistics company. The company is organized into two divisions: Contracts and Retail. The Contracts Division, which is by far the larger division, handles customers who have regular shipping requirements and have signed contracts specifying costs and schedule for up to one year. The Retail Division handles shipments for customers who have only occasional shipping requirements and pay on an as-used basis. Billing for all customers is handled by the corporate Accounts Receivable Department. Accounts Receivable performs two major activities: billing and accounts. Billing refers to preparing and sending the bills as well as processing the payments. Accounts refers to establishing accounts, ensuring credit status, following up on collection, and so on.

The costs of the Accounts Receivable Department are allocated to the two divisions based on the number of bills prepared. The manager of the Contracts Division has complained that the allocated costs from Accounts Receivable are beginning to make the Contracts Division look unprofitable and has asked the Finance Division to recommend some changes to the allocation system.

Data on costs and activities in the Accounts Receivable Department follow:

	Contract	Retail	Total
Number of bills prepared	520	680	1,200
Number of new accounts/collections	58	142	200

The Accounts Receivable Department incurred the following costs during the year.

Billing	$ 141,000
Accounts	135,000
Total	$ 276,000

Required:

a. Under the current allocation system, what is the cost that will be allocated from Accounts Receivable to the Contracts Division? To the Retail Division?

b. Suppose the company implements an activity-based cost system for Accounts Receivable with two activities, billing and accounts. What is the cost that will be allocated from Accounts Receivable to the Contracts Division? To the Retail Division? Use the number of bills prepared as the cost driver for billing costs and the number of new accounts/collections for accounts costs.

Required A Required B Under the current allocation system, what is the cost that will be allocated from Accounts Receivable to the Contracts Division? To the Retail Division? Allocated costs Contracts Retail