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.
- 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.
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