Advanced A local government authority is organized so that some operating departments (e.g. building, trans¬ port, printing, catering) supply services to several functional departments (e.g. education, recreational facilities, road works, fire service). At present the total cost of each service department is allocated on a simple proportional basis to user departments.

As an aid to cost control the authority has decided to charge the user departments for these services on the basis of cost or market price whichever is the lower.

You are required to:

(a) indicate the benefits likely to arise from this decision;

(b) outline the problems you expect may be encountered in putting the decision into prac¬ tice;

(c) state how these problems might be overcome.

(20 marks)

CIMA P3 Management Accounting