Managing and Allocating Support: Service Costs
Chapter 10
Managing and Allocating Support-Service Costs
ANSWERS TO REVIEW QUESTIONS
10.1 The following factors should be considered when deciding whether to outsource a support service:
• cost
• quality, timeliness, and reliability
• security of sensitive information
• knowledge required
10.2 Some of the costs of cost allocation include:
• additional bookkeeping;
• additional management costs in selecting allocation methods and allocation bases; and
• costs of making the wrong decision if the allocations provide misleading information.
10.3 Some of the benefits of cost allocation include:
• instilling responsibility for all costs of the company in the division managers;
• relating indirect costs to contracts, jobs and products; and
• constructing performance measures (“net profit”) for a division that may be more meaningful to management than contribution margins.
10.4 Aside from regulatory requirements, costs are allocated if the benefits of cost allocation exceed the costs incurred to make the allocation.
10.5 Management often uses this type of information for performance evaluation and to assess long-run decisions. That is, in the long run, an activity (e.g., production) must recover all of its costs (both direct and indirect).
10.6 Some common cost categories and allocation bases are:
|Cost Category | |Allocation Bases |
|Labor-related costs | |number of employees |
| | |labor hours |
| | |wages paid |
| | |some other labor-related base |
|Machine-related
Managing and Allocating Support-Service Costs
ANSWERS TO REVIEW QUESTIONS
10.1 The following factors should be considered when deciding whether to outsource a support service:
• cost
• quality, timeliness, and reliability
• security of sensitive information
• knowledge required
10.2 Some of the costs of cost allocation include:
• additional bookkeeping;
• additional management costs in selecting allocation methods and allocation bases; and
• costs of making the wrong decision if the allocations provide misleading information.
10.3 Some of the benefits of cost allocation include:
• instilling responsibility for all costs of the company in the division managers;
• relating indirect costs to contracts, jobs and products; and
• constructing performance measures (“net profit”) for a division that may be more meaningful to management than contribution margins.
10.4 Aside from regulatory requirements, costs are allocated if the benefits of cost allocation exceed the costs incurred to make the allocation.
10.5 Management often uses this type of information for performance evaluation and to assess long-run decisions. That is, in the long run, an activity (e.g., production) must recover all of its costs (both direct and indirect).
10.6 Some common cost categories and allocation bases are:
|Cost Category | |Allocation Bases |
|Labor-related costs | |number of employees |
| | |labor hours |
| | |wages paid |
| | |some other labor-related base |
|Machine-related