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# PROBLEM 6-6. Allocating Service Department Costs [LO 3] World Airlines has three service departments: (1) ticketing, (2) baggage handling, and (3) engine maintenance. The service department costs are estimated for separate cost pools formed by department and are allocated to two revenue-producing departments: (1) domestic flights and (2) international flights. World does not differentiate between fixed and variable costs in making allocations. The following data relate to the allocations: Budgeted Data Costs Air Miles Ticketing \$5,000,000 Baggage handling \$3,000,000 Engine maintenance \$7,000,000 Domestic flights 6,000,000 International flights 24,000,000 Required a. Allocate the service department costs to the revenue-producing departments using air miles as the allocation base. b. Evaluate the cause-and-effect relationship resulting from the use of air miles as the allocation base. In which of the cost pools do you think the cause-and-effect relationship is the strongest? Suggest alternative allocation bases for the two remaining cost pools with the weakest cause-and-effect relationship.

PROBLEM 6-6. Allocating Service Department Costs [LO 3] World Airlines has three service departments: (1) ticketing, (2) baggage handling, and (3) engine maintenance. The service department costs are estimated for separate cost pools formed by department and are allocated to two revenue-producing departments: (1) domestic flights and (2) international flights. World does not differentiate between fixed and variable costs in making allocations. The following data relate to the allocations:

Budgeted Data
Costs    Air Miles
Ticketing    \$5,000,000
Baggage handling    \$3,000,000
Engine maintenance    \$7,000,000
Domestic flights         6,000,000
International flights         24,000,000
Required
a. Allocate the service department costs to the revenue-producing departments using air miles as the allocation base.
b. Evaluate the cause-and-effect relationship resulting from the use of air miles as the allocation base. In which of the cost pools do you think the cause-and-effect relationship is the strongest? Suggest alternative allocation bases for the two remaining cost pools with the weakest cause-and-effect relationship.

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