Question

Business Assignment 6 - Comparing Activity Based Costing and Traditional Costing Assume you are looking to share an apartment with another person, Joe. The rent for a 2-bedroom/2 bath apartment is $1,000 per month. Joe wants to split the rent 50/50. Prior to agreeing to this, you find out the following information: Joe’s bedroom is 20’ x 24’ or 480 square feet with an on suite bath. Your bedroom is 12’ x 10’ or 120 square feet and the bath will be used by visitors too. You think that the rent should be allocated between you and Joe based upon the relative square feet of your rooms.

1. Using Joe’s method for splitting the rent, how much rent will each of you pay? (2 points)

2. Using your method of allocating rental costs based upon the square feet of your rooms, how much rent will each of you pay? (4 points)

3. Whose method (Joe’s or yours) represents activity-based costing? (2 points)

4. Which method is most accurate? Why? (2 points)

Answer 1

1)	Using Joe's method of splitting, we need to pay $ 500 (i.e., $ 1000 / 2) per month each.

2)	Total Cost	Total Sq. Feet	Rate
	$ 1,000.00	600	$      1.67
	Using my method, amount of rent we'll pay is:
		Sq.feet	Rate	Amount
	Me	480	$      1.67	$ 800.00
	Joe	120	$      1.67	$ 200.00

3)	The method used by me to calculate the amount of
	rent payable by each of us is known as Activity Based Costing

4)	The method used by me is more accurate because using
	this method helps in allocating cost based on the activity
	consumed or used by an entity in actual.