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.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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.

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:

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:
$4
$4
$4

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