Question:
Service department cost allocation is the first stage in a two-stage system. Suppose a company has a purchasing department that is responsible for buying all materials, including miscellaneous supplies for the company's three production departments. Each production department produces multiple products. Many of the supplies are used in more than one production department. For the service department allocation problem (the first stage), is the cost of the supplies (not the cost of the purchasing activity) a direct or an indirect cost? For the second stage, is the cost of supplies a direct or an indirect cost? Explain.