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:

  1. Allocate the costs using the step down method.
  2. Allocate the costs using the reciprocal method.
  3. What is the third method that could be used?
  4. Which is the best method and why?

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