John’s Custom Computer Shop (JCCS) assembles computers for bothindividual and corporate customers. The company is organized intotwo divisions: Personal and Business. Once a computer is built, itis shipped to the customer. Billing for all customers is handled bythe corporate Accounts Receivable Department. Accounts Receivableperforms two major activities: billing and dispute resolution.Billing refers to preparing and sending the bills as well asprocessing the payments. Dispute resolution occurs when a customerrefuses to pay, usually due to an error in billing.

The costs of the Accounts Receivable Department are allocated tothe two divisions based on the number of bills prepared. Kyle, themanager of the Business division, has complained that the allocatedcosts from Accounts Receivable are beginning to make the businessdivision look unprofitable and has asked you to recommend somechanges to the allocation system. If he agrees with yourrecommendation, he will pass them on to the chief financialofficer.

Data on costs and activities in the Accounts ReceivableDepartment follow.

	Personal	Business	Total
Number of bills prepared	600	350	950
Number of disputes	60	15	75

The Accounts Receivable Department incurred the following costsduring the year.

Billing	$	38,000
Dispute resolution		37,500
Total	$	75,500

Required:

a. Under the current allocation system, what isthe cost that will be allocated from Accounts Receivable toPersonal? To Business?

Allocated Costs: Personal? Business?

b. Suppose the company implements anactivity-based cost system for Accounts Receivable with twoactivities, billing and dispute resolution. What is the cost thatwill be allocated from Accounts Receivable to Personal? ToBusiness? Use the number of bills prepared as the cost driver forbilling costs and the number of disputes for dispute resolutioncosts.

Billing for Personal? Billing for Business?

Dispute Resolution for Personal? Dispute Resolution forBusiness?