Chance Morton, the manager of the service department at the Proton Electronics Company, is evaluated based on the profit performance of his department. The profit of the department is down this year because the service department’s share of allocated general and administrative costs (allocated based on relative sales dollars) is much higher than last year. In the current year, service revenue has increased slightly while sales of handheld electronic game devices, the company’s major product, have decreased substantially.
a. Explain why the allocation of general and administrative costs to the service department is higher in the current year.
b. Discuss how this situation relates to a responsibility accounting system and controllable costs.