Pacific Airlines has three service departments
(TCO 6) Pacific Airlines has three service departments; ticketing, baggage handling, and aircraft maintenance. Costs of these departments are allocated to two revenue producing departments, domestic and international flights. Costs for the service departments are not separated into fixed and variable and the totals are as follows:
Baggage handling $2,000,000
Aircraft maintenance $6,000,000
Air miles are as follows:
(a) Allocate the service department costs based on air miles.
(b) Evaluate Pacific Airlines use of air miles as a basis for allocation. Do you think the cause-and-effect relationship is strong?
(c) Suggest alternative methods to allocate the service department costs. (Points : 25)