Cost Allocation
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
Residential 1,000 10,000
Business 250 5,000
Switching 150 0
Maintenance 0 500
Costs: Maintenance is $14,000
Switching is $ 46,500
Required:
- 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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