Question

In: Accounting

The maintenance department's costs are allocated to other departments based on the number of hours of...

The maintenance department's costs are allocated to other departments based on the number of hours of maintenance use by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 10,000 hours of maintenance.

  1. What problem exists if the other departments are allowed to go outside the organization to buy maintenance services?

Solutions

Expert Solution

Answer :

1.There are 2 types of fixed costs :-

a) Traceable: Cost arise because of the existence of particular department. If the department is shut down, such cost can be avoided.

b) Common : It is arising due to overall operating activities . Even if a department is totally shut down, there would be no change in such cost.

☆ Problems for the organisation are :-

2. If the other departments are allowed to go outside for buying maintenance services , variable cost of maintenance department will be avoided but fixed cost cant be avoided. As the departments are buying from outside such services, allocation of common fixed maintenance cost will not be done to those departments . This will increase the total cost of maintenance department and profit of such department will be reduce by $ 500000 and it will hamper profit of that department .

3. It will reduce the quality of financial reporting and affect decision making within the company.

4. Cost allocation is one of the motivator , giving incentives managers of department that making sure that costs are not accumulated carelessly. But the manager of maintenance department will be demotivated.


Related Solutions

The Grey Manufacturing Company has two service departments: Maintenance and Accounting. The Maintenance Department's costs of...
The Grey Manufacturing Company has two service departments: Maintenance and Accounting. The Maintenance Department's costs of $300,000 are allocated on the basis of machine hours. The Accounting Department's costs of $120,000 are allocated on the basis of the number of employees within a specific department. The direct departmental costs for A and B are $300,000 and $500,000, respectively. Maintenance Accounting A B Machine hours 480 20 2,300 200 Number of employees 2 2 8 4 What are the total service...
A. The Grey Manufacturing Company has two service departments: Maintenance and Accounting. The Maintenance Department's costs...
A. The Grey Manufacturing Company has two service departments: Maintenance and Accounting. The Maintenance Department's costs of $300,000 are allocated on the basis of machine hours. The Accounting Department's costs of $120,000 are allocated on the basis of the number of employees within a specific department. The direct departmental costs for A and B are $300,000 and $500,000, respectively. Maintenance Accounting A B Machine hours 480 20 2,300 200 Number of employees 2 2 8 4 What are the total...
CJ’s Motorcycle Store has two service departments: Maintenance and Personnel. The maintenance department’s costs are allocated...
CJ’s Motorcycle Store has two service departments: Maintenance and Personnel. The maintenance department’s costs are allocated on the basis of maintenance hours. The personnel department’s costs are allocated based on the number of employees. CJ has two production departments: Assembly and Repairs. The following data is provided to you for review: Support Departments Production Departments Maintenance Personnel Assembly Repairs Budgeted costs Support Departments Support Departments Production Departments Production Departments Maintenance Personnel Assembly Repairs Budgeted cost $320,000 $80,000 $160,000 $240,000 Budgeted...
Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $300,000 are allocated...
Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $300,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $100,000 are allocated based on the number of employees. The costs of operating departments A and B are $160,000 and $240,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows: Support Departments Production Departments Maintenance Department Personnel Department A B Budgeted costs $300,000 $100,000 $160,000 $240,000 Budgeted maintenance-hours NA 800 1,200...
Bolton Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $300,000 are allocated...
Bolton Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $300,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $100,000 are allocated based on the number of employees. The costs of operating departments A and B are $160,000 and $240,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows: Support Departments Production Departments Maintenance Department Personnel Department A B Budgeted costs $300,000 $100,000 $160,000 $240,000 Budgeted maintenance-hours NA 800 1,200...
Using Activity based costing, why are indirect costs allocated while direct costs are not allocated?
Using Activity based costing, why are indirect costs allocated while direct costs are not allocated?
Use the Direct Method to allocate Service Department Costs to the Operating Departments based on number...
Use the Direct Method to allocate Service Department Costs to the Operating Departments based on number (percentage) of employees. Painting Dept = 110 employees Welding Dept = 135 employees Service Dept. Maintenance Service Dept. Cafeteria Service Dept. Custodial Operating Dept. Painting Operating Dept. Welding Dept costs before allocation $200,000 110,000 275,000 500,000 850,000 Maintenance Cafeteria Custodial Total after allocation Use the Step-Down Method to allocate Service Department costs to the Operating Departments based on the number (percentage) of employees. Cafeteria...
Use the Direct Method to allocate Service Department Costs to the Operating Departments based on number...
Use the Direct Method to allocate Service Department Costs to the Operating Departments based on number (percentage) of employees. Attacking Dept = 110 employees Shark Dept = 135 employees Service Dept. Maintenance Service Dept. Cafeteria Service Dept. Custodial Operating Dept. Painting Operating Dept. Welding Dept costs before allocation $200,000 110,000 275,000 500,000 850,000 Maintenance Cafeteria Custodial Total after allocation
Mushed’s String Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $320,000 are...
Mushed’s String Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $320,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $80,000 are allocated based on the number of employees. The costs of operating departments A and B are $160,000 and $240,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows: Support Departments Production Departments Maintenance Personnel A B Budgeted costs $320,000 $80,000 $160,000 $240,000 Budgeted maintenance-hours NA 200 240 160...
Jake's Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $160,000 are...
Jake's Battery Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $160,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $40,000 are allocated based on the number of employees. The costs of operating departments A and B are $80,000 and $120,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows: Support Departments Production Departments Maintenance Department Personnel Department A B Budgeted costs $160,000 $40,000 $80,000 $120,000 Budgeted maintenance-hours NA 400...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT