Question

Pacific Hotels operates a centralized call center for the reservation needs of its hotels. Costs associated with use of the center are charged to the hotel group (luxury, resort, standard, and budget) based on the length of time of calls made (time usage). Idle time of the reservation agents, time spent on calls in which no reservation is made, and the fixed cost of the equipment are allocated based on the number of reservations made in each group. Due to recent increased competition in the hotel industry, the company has decided that it is necessary to better allocate its costs in order to price its services competitively and profitably. During the most recent period for which data are available, the use of the call center for each hotel group was as follows.

Division	Time Usage (thousands of minutes)			Number of Reservations (thousands)
Luxury		220			136
Resort		110			204
Standard		440			425
Budget		330			935

During this period, the cost of the call center amounted to $880,000 for personnel and $640,000 for equipment and other costs.

Required:

a-1. Determine the allocation to each of the divisions using a single rate based on time used.

a-2. Determine the allocation to each of the divisions using the Dual rates based on time used (for personnel costs) and number of reservations (for equipment and other cost).

Answer 1

• Total overhead= 880000+640000= $1520000
• Total minutes= 1100 minutes
• Single overhead rate= 1520000/1100= $1382

Allocation to divisions using single overhead rate

Division	Minutes	Rate	Overhead
Luxury	220	1381.82	304000
Resort	110	1381.82	152000
Standard	440	1381.82	608000
Budget	330	1381.82	456000

Allocation based on dual rate