The traditional costing system employs the allocation of costs to the operating departments of the business and instead the service based departments that are often ignored for their contribution in the business and their respective costs. The reciprocal and the interdepartmental services are not acknowledged by the traditional cost allocation system which can result in the cost being operations to the operating departments to be much higher and overstated. This can result in dysfunctional decisions being made by the management regarding the establishment o0f distorted levels of costs and profitability attributed to the operational centers and the service centers while the interdepartmental services would be ignored entirely.
The alternative solution that is provided for John and Mary’s farm is much better and appropriate for their operations as it is more simple and comprehendible as opposed top the solution that is being employed by them currently. The alternative solution identifies the cost centers, the profit centers as well as highlights the interdependent services and costs that are shared by the different cost centers. The alternative solution helps in highlighting and clarifying the relationship between the different centers which was previously being ignored by the accounting solution used by John and Mary for their agricultural business. The alternative management accounting system provides that specifically the support cost centers and the production cost centers make use of services like General Sales & administration and Financing that are shared by the two centers and therefore their costs should be shared by the two centers as well.