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In allocating factory service department costs to producing departments, which one of the following items would most likely be used as an activity base?
A. Units of product sold.
B. Salary of service department employees.
C. Units of electric power consumed.
D. Direct materials usage.
Answer (A) is incorrect because Making allocations on the basis of units sold may not meet the cause-and-effect criterion.
Answer (B) is incorrect because The salary of service department employees is the cost allocated, not a basis of allocation.
Answer (C) is correct. Service department costs are considered part of factory overhead and should be allocated to the production departments that use the services. A basis
reflecting cause and effect should be used to allocate service department costs. For example, the number of kilowatt hours used by each producing department is probably the best
allocation base for electricity costs.
Answer (D) is incorrect because Making allocations on the basis of materials usage may not meet the cause-and-effect criterion.
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