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.   Support Centers   Flights   Maintenance   Baggage   Salt Lake City   Reno   Portland Budgeted data:                     Fixed overhead $240,000   $150,000   $20,000   $18,000   $30,000   Variable overhead $30,000   $64,000   $5,000   $10,000   6,000   Hours of flight time* —   —   2,000   4,000   2,000   Number of passengers —   —   10,000   15,000   5,000 Actual data:                     Fixed overhead $235,000   $156,000   $22,000   $17,000   $29,500   Variable overhead $80,000   $33,000   $6,200   $11,000   $5,800   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. Required: 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   SLC Reno Portland Hours of flight time       Number of passengers         Variable rates: Maintenance: $ per flight hour Baggage: $ per passenger   Cost Allocation   SLC Reno Portland Maintenance—fixed: $ $ $ Maintenance—variable:       Baggage—fixed:       Baggage—variable:         $ $ $   2. Using the direct method, allocate the support service costs to each flight, assuming that the objective is to evaluate performance.   SLC Reno Portland Maintenance—fixed: $ $ $ Maintenance—variable:       Baggage—fixed:       Baggage—variable:         $ $ $

Question

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.

  Support Centers   Flights
  Maintenance   Baggage   Salt Lake City   Reno   Portland
Budgeted data:                  
  Fixed overhead $240,000   $150,000   $20,000   $18,000   $30,000
  Variable overhead $30,000   $64,000   $5,000   $10,000   6,000
  Hours of flight time*     2,000   4,000   2,000
  Number of passengers     10,000   15,000   5,000
Actual data:                  
  Fixed overhead $235,000   $156,000   $22,000   $17,000   $29,500
  Variable overhead $80,000   $33,000   $6,200   $11,000   $5,800
  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.

Required:

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

  SLC Reno Portland
Hours of flight time      
Number of passengers      

 

Variable rates:

Maintenance: $ per flight hour
Baggage: $ per passenger

 

Cost Allocation

  SLC Reno Portland
Maintenance—fixed: $ $ $
Maintenance—variable:      
Baggage—fixed:      
Baggage—variable:      
  $ $ $

 

2. Using the direct method, allocate the support service costs to each flight, assuming that the objective is to evaluate performance.

  SLC Reno Portland
Maintenance—fixed: $ $ $
Maintenance—variable:      
Baggage—fixed:      
Baggage—variable:      
  $ $ $

 

 

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