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?
The solution is a word document that answers the following problem about Fixed Costs and Allocated Costs.