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Fixed Costs and Allocated Costs in the Service Department

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The maintenance department's costs are allocated to other departments based on the number of hours of maintenance use by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 10,000 hours of maintenance.

a. What is the application rate for the maintenance department?
b. What is the additional cost to the maintenance department of providing another hour of maintenance?
c. What problem exists if the managers of other departments can choose how much maintenance to be performed?
d. What problem exists if the other departments are allowed to go outside the organization to buy maintenance services?

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Solution Summary

Your tutorial is 161 words in everyday language suitable for an individual not very familiar with this subject. This response explains that when a charge is based on activity, it gives the impression that it is a variable cost and this misleads the managers into finding alternatives that will eliminate the cost when the cost cannot be eliminated.

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a. What is the application rate for the maintenance department?

$35 per hour ($30 per hour plus $500,0000 / 10,000)

b. What is the additional cost to the maintenance department of providing another hour of maintenance?

Additional cost is $30 per hour. Fixed costs don't increase.

c. What problem exists if the managers ...

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Carol Sargent, PhD
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  • MSc, University of Virginia
  • PhD, Georgia State University
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