220 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS

2. How wou ld flu ctu ation s in freigh t traffic affect com m u ter costs u n der th e NP m eth od?

P5-12

A LLOCATIN G A UTOMOBILE COSTS. Th e m otor pool of a Megalopolis provides au tom obiles for th e u se of variou s city departm en ts. Cu rren tly, th e m otor pool h as 50 au tos.

A recen t stu dy sh owed th at it costs $3,600 of an n u al fixed cost per au tom obile plu s $.10 per kilom etre variable cost to own , operate, an d m ain tain au tos su ch as th ose provided by th e m otor pool.

Each m on th , th e costs of th e m otor pool are ch arged to th e u ser depart- m en ts on th e basis of kilom etres driven . On average, each au to is driven 24,000 kilom etres an n u ally, alth ou gh wide m on th -to-m on th variation s occu r. In April 2001, th e 50 au tos were driven a total of 50,000 kilom etres. Th e m otor pool’s total costs for April were $24,000.

Th e ch ief plan n er for th e city always seem ed con cern ed abou t h er au to costs. Sh e was especially u pset in April wh en sh e was ch arged $7,200 for th e 15,000 kilom etres driven in th e departm en t’s five au tos. Th is is th e n orm al m on th ly m ileage in th e departm en t. Her m em o to th e h ead of th e m otor pool stated, “I can certain ly get au tos at less th an th e $.48 per kilom etre you ch arged in April.” Th e respon se was, “I am u n der in stru ction s to allocate th e m otor-pool costs to th e u ser departm en ts. You r departm en t was respon sible for 30 percen t of th e April u sage (15,000 kilom etres ÷ 50,000 kilom etres), so I allocated 30 percen t

of th e m otor pool’s April costs to you (.30 × $24,000). Th at ju st seem s fair.”

1. Calcu late th e city’s average an n u al cost per kilom etre for own in g, m ain tain in g, an d operatin g an au to.

2. Explain wh y th e allocated cost in April ($.48 per kilom etre) exceeds th e average in requ irem en t 1 above.

3. Describe an y u n desirable beh aviou ral effects of th e cost-allocation m eth od u sed.

4. How wou ld you im prove th e cost-allocation m eth od?

P5-13

A LLOCATION OF COSTS. Th e Pegasu s Tru ckin g Com pan y h as on e service departm en t an d two region al operatin g departm en ts. Th e bu dgeted cost beh aviou r pattern of th e service departm en t is $750,000 m on th ly in fixed costs plu s $.80 per 1,000 ton n e- kilom etres operated in th e East an d West region s. (Ton n e-kilom etres are th e n u m ber of m etric ton n es carried tim es th e n u m ber of kilom etres travelled.) Th e actu al m on th ly costs of th e service departm en t are allocated u sin g ton n e-kilo- m etres operated as th e cost driver.

1. Pegasu s processed 500-m illion ton n e-kilom etres of traffic in April, h alf for each operatin g region . Th e actu al costs of th e services departm en t were exactly equ al to th ose predicted by th e bu dget for 500-m illion ton n e-kilom etres. Com pu te th e costs th at wou ld be allocated to each operation region .

2. Su ppose th e East region was plagu ed by strikes, so th at th e freigh t h an - dled was m u ch lower th an origin ally an ticipated. East m oved on ly 150- m illion ton n e-kilom etres of traffic. Th e West region h an dled 250-m illion ton n e-kilom etres. Th e actu al costs were exactly as bu d- geted for th is lower level of activity. Com pu te th e costs th at wou ld be allocated to East an d West. Note th at th e total costs will be lower.

Chapter 5 Cost Allocation and Activity-Based Costing Systems

3. Refer to th e facts in requ irem en t 1 above. Variou s in efficien cies cau sed th e service departm en t to in cu r costs of $1,275,000. Com pu te th e costs to be allocated to East an d West. Are th e allocation s ju stified? If n ot, wh at im provem en t do you su ggest?

4. Refer to th e facts in requ irem en t 2 above. Assu m e th at assorted in vest- m en t ou tlays for equ ipm en t an d space in th e service departm en t were m ade to provide a basic m axim u m capacity to serve th e East Region at

a level of 360-m illion ton n e-kilom etres an d th e West region at a level of 240-m illion ton n e-kilom etres. Su ppose fixed costs are allocated on th e basis of th is capacity to serve. Variable costs are assign ed by u sin g

a predeterm in ed stan dard rate per 1,000 ton n e-kilom etres. Com pu te th e costs to be allocated to each departm en t. Wh at are th e advan tages of th is m eth od over oth er m eth ods?

P5-14 HOSPITA L EQUIPMEN T. Man y provin ces h ave a h ospital regu latory board th at m u st approve th e acqu isition of specified m edical equ ipm en t before th e h ospitals in th e provin ce can qu alify for cost-based reim bu rsem en t related to th at equ ipm en t. Th at is, h ospitals can n ot bill govern m en t agen cies for th e later u se of th e equ ip- m en t u n less th e board origin ally au th orized th e acqu isition .

Two h ospitals in on e su ch provin ce proposed th e acqu isition an d sh arin g of som e expen sive X-ray equ ipm en t to be u sed for u n u su al cases. Th e am ortization an d related fixed costs of operatin g th e equ ipm en t were predicted at $12,000 per m on th . Th e variable costs were predicted at $30 per patien t procedu re.

Th e board asked each h ospital to predict its u sage of th e equ ipm en t over its expected u sefu l life of five years. Prem ier Hospital predicted an average u sage of

75 X-rays per m on th , an d St. Mary’s Hospital predicted 50 X-rays per m on th . Th e com m ission regarded th is in form ation as critical to th e size an d degree of soph istication th at wou ld be ju stified. Th at is, if th e n u m ber of X-rays exceeded

a certain qu an tity per m on th , a differen t con figu ration of space, equ ipm en t, an d person n el wou ld be requ ired, wh ich wou ld m ean h igh er fixed costs per m on th .

1. Su ppose fixed costs are allocated on th e basis of th e h ospitals’ predicted average u se per m on th . Variable costs are assign ed on th e basis of $30 per X-ray, th e bu dgeted variable-cost rate for th e cu rren t fiscal year. In October, Prem ier Hospital h ad 50 X-rays an d St. Mary’s Hospital h ad 50 X-rays. Com pu te th e total costs allocated to Prem ier Hospital an d St. Mary’s Hospital.

2. Su ppose th e m an ager of th e equ ipm en t h ad variou s operatin g in efficien cies so th at th e total October costs were $16,500. Wou ld you

ch an ge you r an swers in requ irem en t 1? Wh y?

3. A tradition al m eth od of cost allocation does n ot u se th e m eth od in requ irem en t 1. In stead, an allocation rate depen ds on th e actu al costs an d actu al volu m e en cou n tered. Th e actu al costs are totalled for th e m on th an d divided by th e actu al n u m ber of X-rays du rin g th e m on th . Su ppose th e actu al costs agreed exactly with th e bu dget for a total of 100 actu al X-rays. Com pu te th e total costs allocated to Prem ier Hospital an d St. Mary’s Hospital. Com pare th e resu lts with th ose in requ irem en t 1. Wh at is th e m ajor weakn ess in th is tradition al m eth od? Wh at are som e of its possible beh aviou ral effects?

220 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISIONS