Question

Which of the following statements is incorrect when allocating service department costs to operating departments?

a. Variable costs should be charged using a predetermined rate applied to actual services consumed.
b. Fixed costs should be charged in lump sums to each operating department in proportion to peak-period needs or long-run average needs.
c. Fixed costs are typically not allocated to operating departments, but must be absorbed by the service departments.
d. Variable costs and fixed costs should be charged separately.

Answer 1

Option C is incorrect when allocating service department costs to operating departments.

Explanation:

Typically, fixed costs are not assigned to working departments; however, they have to be absorbed by the service. This statement is incorrect in the service dept. Cost to Operating dept.

The reciprocal method assigns the cost of services to operating departments and other departments. The reciprocal costs are identified and the costs are assigned to each other and to services offered by each service department.

For example, if Service Department A requires certain services of Service Department B, the cost allocation system would not include these services. Since these services are not delegated to other departments, some auditors assume that the direct approach is not right.