The Sweeney Trucking Company has one service department and two regional operating departments. The budgeted cost behaviour pattern of the service department is $624,000 monthly in fixed costs plus $0.90 per 1,000 tonne-kilometres operated in the West and East Regions. (A tonne-kilometre is the number of tonnes carried times the number of kilometres traveled.) The actual monthly costs of the service department are allocated using tonne-kilometres operated as the cost-allocation base.

Requirement 1.

Sweeney processed 520 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 520 million tonne-kilometres. Compute the costs that would be allocated to each operating region on an actual tonne-kilometres basis. (Round rates to three decimal places.)

		x		=	Allocation
West		x		=
East		x		=

Requirement 2. Suppose the Westregion was plagued by strikes, so that the amount of freight handled was much lower than originally anticipated.West moved only 150 million tonne-kilometres of traffic. The East region handled 240 million tonne-kilometres. The actual costs were exactly as budgeted for this lower level of activity. Compute the costs that would be allocated to East and West on an actual tonne-kilometres basis. Note that the total costs will be lower. (Round rates to three decimal places.)

		x		=	Allocation
West		x		=
East		x		=

Requirement 3. Refer to the facts in number 1. Various inefficiencies caused the service department to incur total costs of $1,222,000. Compute the costs to be allocated to West and East. (Round rates to three decimal places.)

		x		=	Allocation
West		x		=
East		x		=

Are the allocations justified? If not, what improvement do you suggest?

Such allocation seems JUSTIFIED / UNJUSTIFIED because the operating departments DO NOT HAVE / HAVE to bear another department's cost of inefficiency.

If the allocations are unjustified, select an improvement:

A. Using a predertermined or budgeted cost rate applied to actual levels of activity.

B. Using a predertermined or budgeted total amount geared to the various levels of activity of the perating departments

C. Using an actual cost rate applied to predertermined or budgeted levels of activity.

Requirement 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 West egion at a level of 434 million tonne-kilometres and the East region at a level of 266 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.

		+		=	Allocation
West		+		=
East		+		=

Select the two advantages of this method over other methods:

The use of actual tonne-kilometres for fixed costs prevents the total charges from being affected by the maximum capacity and not the actual usage.

The use of a predetermined lump-sum for fixed costs prevents the total charges from being affected by the consumption of service or the activity levels of other operating departments or the activity level of the service department.

The use of a predetermined unit rate for variable costs prevents the total charges from being affected by the efficiency of price changes of the service department.

The use of maximum capacity tonne-kilometres for variable costs prevents the total charges from being affected by the efficiency of price changes of the service department