The rates to be charged by internal service funds may not be obvious—and can have a significant impact on who pays the costs of government.

A city maintains an internal service fund to account for a maintenance department. The department provides services to all city departments, which – with one exception – are accounted for in the city’s general fund. The exception is the department responsible for the city’s golf course. It is accounted for in an enterprise fund.

The maintenance department estimates that it provides approximately 20,000 hours of service per year. However, the volume is seasonal. During the “slack season”—four summer months – it provides approximately 1,400 hours of service per month; during the eight other months it provides approximately 1,800 hours of service per month.

The department has determined its fixed costs to be $33,333 per month ($400,000 per year) and its variable costs to be $30 per hour ($600,000 per year, if it provides 20,000 hours of service).

The departments accounted for in the general fund request 17,600 hours of service per year. The department in charge of the golf course requests the remaining 2,400 hours of service per year. However, all of its service is requested during the summer months – 600 hours per month. Were it not for the demands of the golf course department, the maintenance unit would otherwise have substantial excess capacity during the slack months, considering that no other department would require those 600 hours of service per month.

1. Suppose that the maintenance department determines its billing rates on an annual basis, based on total estimated costs for the year.
2. What would be the cost per hour of service?
3. How much of the total costs for the year would be billed to the golf course enterprise fund? How much would billed to the general fund?

Answer rating: 100% (QA)

1 Total expected cost incurred by maintenance department in a year Particulars ... View the full answer