Ch14

Ch14 - CHAPTER 14 SUPPORT DEPARTMENT COST ALLOCATION...

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CHAPTER 14 SUPPORT DEPARTMENT COST ALLOCATION DISCUSSION QUESTIONS 1. Producing departments work directly on the products and services being made, whereas support departments provide indirect sup- port to the producing departments. 2. Multiple products create the need to divide up shared costs, thus, creating a demand for an overhead assignment mechanism such as department overhead rates. 3. Stage one assigns support department costs to producing departments. Costs are assigned using factors that reflect the con- sumption of the services by each producing department. Stage two allocates the costs assigned to the producing departments (in- cluding service costs and direct costs) to the products passing through the producing de- partments. 4. Support department costs are part of the cost of producing a product. Knowing the in- dividual product costs, including support de- partment costs, is helpful for developing bids and cost-plus prices. 5. GAAP require that all manufacturing costs be assigned to products for inventory valu- ation. 6. Allocating support department costs makes users pay attention to the level of service activity consumed and also provides an in- centive for them to monitor the efficiency of the support departments. 7. Without any allocation of support depart- ment costs, users may view services as a free good and consume more of the service than is optimal. Allocating support depart- ment costs would encourage managers to use the service until such time as the mar- ginal cost of the service is equal to the mar- ginal benefit. 8. Since the user departments are charged for the services provided, they will monitor the performance of the support 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 support de- partment will exert effort to maintain a com- petitive level of service. 9. The identification and use of causal factors ensures that support department costs are accurately assigned to users. This increases the legitimacy of the control function and en- hances product-costing accuracy. 10. a. Number of employees b. Square footage c. Pounds of laundry d. Orders processed e. Maintenance hours worked f. Number of employees g. Number of transactions processed 11. Dual rates are more accurate because they separate fixed from variable service costs. Fixed costs are capacity costs and should be assigned to producing departments based on peak capacity usage by user de- partments. Variable costs are assigned in proportion to usage. Assigning all cost in proportion to usage as a single rate does ig- nores the fact that fixed costs are caused initially by expected peak capacity usage. 12.
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Ch14 - CHAPTER 14 SUPPORT DEPARTMENT COST ALLOCATION...

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