Which of the Following Methods of Allocating Service Department Costs

question 127

Multiple Choice

Which of the following methods of allocating service department costs to user departments is superior?

• A) The step down method is superior because it is easy to understand.
• B) The direct method is superior because it recognizes the support provided between service departments.
• C) The direct and step down methods allocate the same amount of total costs so both methods are comparable.
• D) The step down method is superior because it recognizes the support provided between service departments.

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Definitions:

Differential Analysis

A decision-making process that examines the differences in cost and revenue between different business alternatives to determine the most profitable option.

Fixed Costs

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance.

Outside Purchase

Acquisition of goods or services from external suppliers due to inability or inefficiency in producing internally.

Total Cost Concept

A principle in accounting and economics that considers all costs related to the production of a good or service, both fixed and variable.