In Task 1, you will explore the choice of allocation base (Cost Driver) for service departments; in Task 2, you will explore make-or-buy decision on the basis of relevant costs.
Task 1: Choice of Allocation Base (Cost Driver) for Service Departments
Auburn Banking and Loan Company, has six service departments:
Human Resources (hires employees and manages benefits)
Duplicating (performs copy services)
Janitorial (provides routine cleaning services) ? Accounting (provides accounting services)
Graphic Design (designs forms)
Food Services (provides free breakfast and lunch to employees)
The services are used by the company's two subsidiaries, Auburn Personal Banking and Auburn Business Banking. Based on this information, answer the following questions:
1. Explain allocation bases to be used in allocating the service department costs to the two subsidiaries. Substantiate your response with appropriate references from the textbook.
2. Food services are used by employees in the human resources department. Would a share of food service costs be allocated to human resources under the direct method of allocation? Support your response with appropriate reasoning.