1.The manager of an operating department just received a cost report and has mad
ID: 2590619 • Letter: 1
Question
1.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?
2. “Preparing a budget is a waste of time. The strategic plan is what we work to accomplish.” How would you respond to this comment?
Explanation / Answer
1. This problem can be solved with the use of Activity Based Costing for allocation of fixed overheads. The problem as discussed by the manager of concerned operating department is faced due to the adoption of absorption costing method of allocation of fixed overheads. Under Activity Based Costing, the overall fixed cost being incurred by the organization is classified into most-specific, product or task or activity oriented, and thereby department oriented. It can be almost directly related to any product, process, or department. Hence the various costs are identifiable and distributed in a proper manner to various departments.
2. The statement is not correct. Preparing budget is better planning in advance about effective utilization of resources. Budgeting is planning before hand of what is to be done with manpower, money, equipment and other material and non-material resources in a given time.The performance reports are prepared based on such budget and the variances can be worked upon. The areas of problem are better highlighted due to this.
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