In governmental accounting, separate funds are created to keep track of revenues and costs for different activities.

Question:

In governmental accounting, separate funds are created to keep track of revenues and costs for different activities. An internal service fund (ISF) accumulates the cost for services provided within the government. Common types of internal services include motor pools, central data processing, human resources, purchasing, accounting, duplicating and printing departments, and self-insurance pools. An ISF charges other funds for their share of service costs. Thus, ISF accounting is one way to allocate the cost of internal services to other governmental activities.
The following table provides examples of internal service funds used by state and local governments in the United States:

In a 1993 survey of 237 city chief financial officers, researchers found that 28% of cities did not use ISF accounting. Even among cities that did use ISFs, many used them only for the motor pool and self-insurance and did not necessarily assign all relevant costs to those funds. Only 7 cities used a sophisticated cost accounting system that measured and allocated all internal service costs. When ISFs are not used, the costs of internal services are usually pooled with other administrative and general costs and are not allocated to other activities.
Survey respondents using ISFs reported that measuring and allocating service costs provided information to help them:
— Justify budget requests.
— Price city services.
— Decide whether to in-source or outsource services.
— Compare the costs of units performing similar services.
— Analyze how costs vary with circumstances such as crew size, equipment condition, and weather.

REQUIRED
A. Conduct research on the Internet to locate the comprehensive annual financial report, budget, or other information that identifies the internal service funds used by a state or local government. What internal funds are used? What is the description for each fund?
B. How are the uses of internal service fund accounting in a government similar to the uses of support cost allocations in a business organization?
C. Proponents of ISF accounting argue that a failure to allocate internal service costs overstates the cost of general governmental management, making the government appear to be inefficient and understating the cost of other activities. Explain what these arguments mean.
D. As a citizen and taxpayer, do you think that state and local governments should use internal service fund accounting? Explain yourreasoning.