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CHAPTER 7 ALLOCATING COSTS OF SUPPORT DEPARTMENTS AND JOINT PRODUCTS QUESTIONS FOR WRITING AND DISCUSSION 1. Stage one assigns service costs to produ- cing departments. Costs are assigned using factors that reflect the consumption of the services by each producing department. Stage two allocates the costs assigned to the producing departments (including ser- vice costs and direct costs) to the products passing through the producing departments. 2. GAAP requires that all manufacturing costs be assigned to products for inventory valu- ation. 3. Allocation of service costs aids in planning because it makes users pay attention to the level of service activity being consumed and also provides an incentive for them to monit- or the efficiency of the service departments. It aids in pricing because support depart- ment costs are part of the cost of producing a product. Knowing the individual product costs is helpful for developing bids and cost- plus prices. 4. Without any allocation of service costs, users may view services as a free good and consume more of the service than is optim- al. Allocating service costs would encourage managers to use the service until such time as the marginal cost of the service is equal to the marginal benefit. 5. Since the user departments are charged for the services provided, they will monitor the performance of the service department. If the service can be obtained more cheaply externally, then the user departments will be likely to point this out to management. Knowing this, a manager of a service de- partment will exert effort to maintain a com- petitive level of service. 6. The identification and use of causal factors ensures that service costs are accurately assigned to users. This increases the legit- imacy of the control function and enhances product costing accuracy. 7. Allocating actual costs passes on the effi- ciencies or inefficiencies of the service de- partment, something that the manager of the producing department cannot control. Alloc- ating budgeted costs avoids this problem. 8. Variable costs should be allocated according to usage, whereas fixed costs should be al- located according to capacity. Variable costs are based on usage because, as a depart- ment’s usage of a service increases, the variable costs of the service department in- crease. A service department’s capacity and the associated fixed costs were originally set by the user departments’ capacities to use the service. Thus, each department should receive its share of fixed costs as originally conceived (to do otherwise allows one de- partment’s performance to affect the amount of cost assigned to another department). 9. Normal or peak capacity measures the ori- ginal capacity requirements of each produ- cing department. It is used when one de- partment’s spike in usage affects the amount of capacity needed. 10.
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