Question

Which of the following methods of charging service cost centers to user cost centers will be compatible with control of the efficiency of the service within the service cost centre?

• A. No charge to users.
• B. Charge users with total actual cost incurred.
• C. Charge users with total absorption cost.
• D. Charge users with the opportunity cost of the service.

Answer 1

The correct option is C Charge users with total absorption cost.

The process of overheads of a cost center to different cost units or products is called absorption of overheads. Simply, its the process of sharing of overheads by all products or jobs of the department.

A basis for absorption of overhead of each department is found out so that each job or product gets due share of overheads.

Overheads of service cost center to the user cost center is to be done on total absorption cost method.