4. Internal Service Fund Decision Making

Using the information in the scenario presented below, what problems can you see with making these decisions? Spend time here discussing some of the issues related to internal service funds.

A city accounts for a vehicle repair service in an internal service fund and bills departments at "full cost."The department's fixed costs are $80,000 per month; its variable costs are $40 per hour.On average it provides 4,000 hours of service per month.

• Fixed costs:$80,000
• Variable costs:160,000 (4,000x $40)
• Total cost:240,000
• No.of hours:4,000
• Cost per hour:60

The police department determines that it is economically justifiable to repair a car if it can be fixed for $3,000 or less. The repair service estimates that the job will take 60 hours.