Allocating costs

  

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Homework Handout Problem 4-1
Allocation of Service Department Costs
Pioneer Telephone Company of Oreana has two types of customers: residential and business. They have
several non-revenue cost centers. Two of those are switching and maintenance. Cost driver for
switching is number of calls. Driver for maintenance is number of maintenance hours. Maintenance is
the first department for step-down calculations.
Hours
Calls
1,000
10,000
Business
250
5,000
Switching
150
0
0
500
Residential
Maintenance
Costs: Maintenance is $14,000
Switching is $ 46,500
Required:
1.
2.
3.
4.
Allocate the costs using the step down method.
Allocate the costs using the reciprocal method.
What is the third method that could be used?
Which is the best method and why?

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