Question

Assume that a company has decided not to allocate any support department costs to producing departments. Describe the likely behavior of the managers of the producing departments. Would this be good or bad? Explain why allocation would correct this type of behavior.

Answer 1

If a company decides not to allocate any support department costs to producing departments, the managers of the producing departments may prioritize minimizing costs in their own department without considering the broader impact on the entire company. Allocation of support department costs helps correct this behavior by encouraging managers to consider the overall costs and benefits of their decisions.

Step-by-step explanation:

If a company decides not to allocate any support department costs to producing departments, the managers of the producing departments are likely to focus solely on their own department's performance and costs. They may prioritize minimizing costs in their own department without considering the broader impact on the entire company. This behavior can be seen as bad because it can lead to inefficiencies and suboptimal decision-making.

Allocation of support department costs helps correct this behavior by ensuring that the costs of support departments are distributed among the producing departments based on their usage or other allocation methods. This encourages managers to consider the overall costs and benefits of their decisions and promotes better coordination and resource allocation across the company.