Auburn Banking and Loan Company has six service departments—human resources, duplicating, janitorial, accounting, graphic design, and food services—whose costs are allocated to the company’s two subsidiaries, Auburn Personal Banking and Auburn Business Banking, on the basis of their relative sales.
Required
a. Suppose you are the president of Auburn Business Banking. Will you perceive the allocated service department costs to be fixed costs, variable costs, or mixed costs?
b. In performing incremental analysis related to expanding or contracting her business, will the president of Auburn Business Banking tend to overestimate or underestimate incremental costs? Explain.