The manager of an operating department just received a cost report and has made
ID: 2444390 • Letter: T
Question
The manager of an operating department just received a cost report and has made the following comment with respect to the costs allocated from one of the service departments: “This charge to my division doesn't seem right. The service center installed equipment with more capacity than our division requires. Most of the service department costs are fixed, but we seem to be allocated more costs in periods when other departments use less. We are paying for the excess capacity of other departments when other departments cut their usage levels.” How could this manager's problem be solved?Explanation / Answer
In this example, the firm is using actual costing. Theoperating department is paying for their actual share of costs asopposed to their planned share. As a result, when otherdivisions use the supporting division less, the costs of themanager's division increases. If the manager were to usenormal or standard costing, then the BUDGETED rate for fixed costswould be used. As a result, a decrease in other divisions useof resources will not affect the manager's department (if we areonly considering the supporting division's fixed costs).
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