Plausibility and probable reliability


Task: Activity analysis

The cost of system support department (SS) department (and other service departments) of Clark paper products inc. have always been charged to the three business divisions of management, lumber products and paper products) based on the number of employees in each division this measure is easy to obtain and updated and until recently none of the divisions had complained about the charges the paper products division has recently automated many of its operations and has reduced the number of it’s employees at the same time ,however to monitor its new process  paper products have increased its requests for various reports provided by the SS department cost passed on activity analysis of possible cost drivers cost analyst have suggested using the number of reports prepared as means of charging for SS costs and have gathered the following information

                                             Forest management         lumber products        paper products    
2000 Number of employees                  762                             457                       502
2000 Number of reports                       410                              445                       377
2000 SS costs: $ 300,000
2001 Number of employees                  751                              413                       131
2001 Number of reports                       412                              432                       712
2000 SS costs: $ 385,000

1. Discuss the plausibility and probable reliability of each of the cost drivers – number of employees or number of reports?

2. What are the 2000 and 2001 SS costs per unit of cost driver for each division using each cost driver? Do the forest management and lumber products divisions have legitimate complaints? Explain

3. What are the incentives that are implied by each cost driver?

4. Which cost driver should Clark paper products use to charge its division for SS service? For other services? Why?

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Accounting Basics: Plausibility and probable reliability
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