The method used to allocate service department costs can cause overstatement of costs for some cost objects and understatement for others.

Question

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Since service department costs are indirect costs, allocation methods are used to assign them to cost objects. However, these methods may lead to overstatement or understatement of costs for some cost objects, depending on the allocation basis used. For example, if the number of employees is used as an allocation basis, a department with more employees may end up with higher allocated costs than a department with fewer employees, even if the latter uses more of the service department's resources. This can result in distortion of product costs and affect the accuracy of cost-based decisions.

The Method Used to Allocate Service Department Costs Can Cause