For performance evaluation purposes, the fixed costs of a service department should be charged to operating departments using:
A) actual fixed costs and the budgeted level of activity for the period.
B) budgeted fixed costs and the actual level of activity for the period.
C) budgeted fixed costs and the peak-period or long-run average servicing capacity.
D) actual fixed costs and the peak-period or long-run average servicing capacity.

Question

Quizplus · Accepted Answer

Charging fixed costs based on budgeted fixed costs and the peak-period or long-run average servicing capacity is a better choice as it takes into account the long-term capacity of the service department and helps in budgeting and planning for the future. Charging based on actual fixed costs and budgeted level of activity or actual level of activity may not accurately reflect the service department's long-term capacity and can lead to under or over-absorption of fixed costs.

For Performance Evaluation Purposes, the Fixed Costs of a Service