Chapter07Solutions-Hansen6e (1)

Chapter07Solutions-Hansen6e (1) - CHAPTER 7 ALLOCATING...

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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. 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. 3. 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. 4. 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. 5. 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. Al- locating budgeted costs avoids this problem. 6. 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). 7. Using variable bases to allocate fixed costs allows one department’s performance to af- fect the costs allocated to other depart- ments. Variable bases also fail to reflect the original consumption levels that essentially caused the level of fixed costs. 8. The dual-rate method separates the fixed and variable costs of providing services and charges them separately. In effect, a single rate treats all service costs as variable. This can give faulty signals regarding the margin- al cost of the service. If all costs of the ser- vice department were variable, there would be no need for a dual rate. In addition, if ori- ginal capacity equaled actual usage, the dual-rate method and the single-rate method would give the same allocation. 9.
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This note was uploaded on 04/08/2010 for the course ACCT 305 taught by Professor Zhou during the Spring '09 term at Binghamton University.

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Chapter07Solutions-Hansen6e (1) - CHAPTER 7 ALLOCATING...

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