Chapter07 Solutions-Hansen6e

Chapter07 Solutions-Hansen6e - CHAPTER 7 ALLOCATING COSTS...

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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 us- ing factors that reflect the consumption of the services by each producing depart- ment. Stage two allocates the costs as- signed to the producing departments (in- cluding service 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 optimal. Allocating service costs would en- courage managers to use the service until such time as the marginal cost of the ser- vice 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. Allocating budgeted costs avoids this prob- lem. 6. Variable costs should be allocated accord- ing to usage, whereas fixed costs should be allocated according to capacity. Vari- able costs are based on usage because, as a department’s usage of a service in- creases, the variable costs of the service department increase. A service depart- ment’s capacity and the associated fixed costs were originally set by the user depart- ments’ capacities to use the service. Thus, each department should receive its share of fixed costs as originally conceived (to do otherwise allows one department’s perform- ance 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 essen- tially 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 vari- able. This can give faulty signals regarding the marginal cost of the service. If all costs of the service department were variable, there would be no need for a dual rate. In addition, if original capacity equaled actual usage, the dual-rate method and the single-rate method would give the same al- location. 9.
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This note was uploaded on 01/31/2011 for the course ACCT 360 taught by Professor N/a during the Spring '10 term at Mountain State.

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Chapter07 Solutions-Hansen6e - CHAPTER 7 ALLOCATING COSTS...

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