Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 49

Allocate Service Department Costs: Ethical Issues

Fifth Street Publishing (FSP) was founded many years ago as a printing cooperative offering printing services to members. Most members were charitable and religious organizations. Ten years ago, FSP became a for-profit corporation, although it retained its commitment to the original member groups. It has two production departments, Member and Commercial. The Member Department handles printing jobs for nonprofit groups and Commercial serves the remaining customers. FSP is organized this way to facilitate its billing: FSP charges nonprofit customers a price equal to the full cost of job, including allocated overhead; commercial jobs are priced based on what the market will bear. FSP has two service departments, Accounting and Computer Services (CS). Accounting costs are allocated based on number of employees and CS costs are allocated based on computer time (hours). Selected percentage use data follow:

Using Department
Supplying Department	Accounting	Computer Services	Member	Commercial
Accounting (employees)	0%	20%	40%	40%
Computer Services (hours)	50	-0-	10	40
Direct cost	$16,000	$61,600	$192,000	$576,000

Required

a.Suppose FSP allocated service department costs using the direct method. What is the amount of service department costs that will be allocated to each of the production departments?

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b.Suppose that, after reviewing the results, the controller tells the cost accountant to change the percentage of computer time so 20 percent is shown as used by the Member Department and 30 percent is shown as used by the Commercial Department. Would this be ethical?

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c.Suppose the controller tells the cost accountant to use employee wages instead of number of employees to allocate accounting department cost. Employees in the Commercial Department earn lower salaries. Would this be ethical?

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d.Although FSP’s policy is to allocate service department costs using the direct method, the controller asks the cost accountant to allocate the costs using the step method, allocating Computer Service Department costs first. What is the amount of service department costs that will be allocated to each of the production departments?

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e.The controller next asks the cost accountant to allocate the costs using the reciprocal method. What is the amount of service department costs that will be allocated to each of the production departments?

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f.Suppose the controller tells the cost accountant to use each month the method that allocates the highest cost to the Member Department. Would this be ethical?

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