Solutions_CH 07 - CHAPTER 7 SUPPORT-DEPARTMENT COST...

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CHAPTER 7 SUPPORT-DEPARTMENT COST ALLOCATION QUESTIONS FOR WRITING AND DISCUSSION 1. 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. 2. Support-department costs are part of the cost of producing a product. Knowing the in- dividual product costs is helpful for develop- ing bids and cost-plus prices. 3. GAAP require that all manufacturing costs be assigned to products for inventory valu- ation. 4. 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. 5. 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. 6. 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. 7. 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. 8. a. Number of employees; b. Square foot- age; c. Pounds of laundry; d. Orders pro- cessed; e. Maintenance hours worked; f. Number of employees; and g. Number of transactions processed. 9. Allocating actual costs passes on the effi- ciencies or inefficiencies of the support de- partment, something which the manager of the producing department cannot control. Al- locating budgeted costs avoids this problem. 10. The direct method allocates the direct costs of each support department directly to the producing departments. No consideration is given to the fact that other support depart- ments may use services. The sequential method allocates support-department costs sequentially. First, the costs of the center providing the greatest service to all user de- partments, including other support depart- ments, are allocated. Next the costs of the second greatest provider of services are al- located to all user departments, excluding any department(s) that has already alloc- ated costs. This continues until all support- department costs have been allocated. The principal difference in the two methods is the fact that the sequential method considers some interactions among support depart-
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Solutions_CH 07 - CHAPTER 7 SUPPORT-DEPARTMENT COST...

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