PROBLEM 6-6. Allocating Service Department Costs [LO 1] World Airlines has three service departments: (1) ticketing, (2) baggage handling, and (3) engine maintenance. The service department costs are estimated for separate cost pools formed by department and are allocated to two revenue-producing departments: (1) domestic flights and (2) international flights. World does not differentiate between fixed and variable costs in making allocations. The following data relate to the allocations:

Budgeted Data

Costs Air Miles

Ticketing $4,000,000

Baggage handling $2,000,000

Engine maintenance $9,000,000

Domestic flights 7,500,000

International flights 22,500,000

Required

a. Allocate the service department costs to the revenue-producing departments using air miles as the allocation base.

b. Evaluate the cause-and-effect relationship resulting from the use of air miles as the allocation base. In which of the cost pools do you think the cause-and-effect relationship is the strongest?

Suggest alternative allocation bases for the two remaining cost pools with the weakest cause-and effect relationship.