Direct Method, Variable versus Fixed Costing and Performance Evaluation
AirBorne is a small airline operating out of Boise, Idaho. Its three flights travel to Salt Lake City, Reno, and Portland. The owner of the airline wants to assess the full cost of operating each flight. As part of this assessment, the costs of two support departments (maintenance and baggage) must be allocated to the three flights. The two support departments that support all three flights are located in Boise (any maintenance or baggage costs at the destination airports are directly traceable to the individual flights). Budgeted and actual data for the year are as follows for the support departments and the three flights: Use the rounded values for subsequent calculations.
|Maintenance||Baggage||Salt Lake City||Reno||Portland|
|Hours of flight time*||—||—||2,000||4,000||2,000|
|Number of passengers||—||—||10,000||15,000||5,000|
|Hours of flight time||—||—||1,800||4,200||2,500|
|Number of passengers||—||—||8,000||16,000||6,000|
*Normal activity levels.
Round all allocation ratios and variable rates to four significant digits. Round all allocated amounts to the nearest dollar.
1. Using the direct method, allocate the support service costs to each flight, assuming that the objective is to determine the cost of operating each flight.
Allocation ratios for fixed costs
|Hours of flight time|
|Number of passengers|
|Maintenance:||$||per flight hour|
2. Using the direct method, allocate the support service costs to each flight, assuming that the objective is to evaluate performance.
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