Betty Jones and Penny White are associates at the same law firm in Atlanta.They traveled to New York City together recently to visit their respective clients.From the airport,they shared a cab ride to their hotel.The cab ride for Betty alone would have cost $18.00,but for two passengers the cost was $22.00.Had Betty not offered to share the cab ride,Penny (in deference to her client's frugality)would have taken the bus to Grand Central Station,which is six blocks from the hotel,at a cost of $10.00.
Required: How should the $22.00 cost of the cab ride be allocated to the two clients?

Question

Quizplus · Accepted Answer

Feedback: This cost allocation case deals with cost reimbursement more than cost management,but the principles of management control still apply -- the objective is to achieve fairness and a desired motivation.In this case the desired motivation is for the associates of the law firm to provide excellent service to their client at fair prices.Thus,the idea to share a taxi achieves this objective.Also,the cost allocation should fairly allocate the cost to the different clients.One alternative would be to bill Jones's client for the $18 single rider charge,and bill White's client for the $4 second rider surcharge.However,there is no reason in fairness for Jones's client to pay more.Another option would be to charge the clients $11 each,which would be an intuitive,satisfying solution.A third option would be to charge White's client $10 for the cost of the bus ride that White did not take,and charge Jones's client the $12 remainder.The logic of this is that White's client should pay no more than the $10 bus fare that White had planned,but that the sharing of the taxi should allow Jones to reduce the cost to her client.The choice in this case will depend on Jones's and White's discussion of the desired fairness in this case.

Betty Jones and Penny White Are Associates at the Same