Which of the following statements regarding fees in an internal service fund is TRUE?

The statement that fees in an internal service fund must recover costs associated with services provided is accurate because internal service funds are designed to operate like business entities that provide services to other governmental departments or agencies on a cost-reimbursement basis. This means that the primary goal of the internal service fund is to ensure that the expenses incurred in providing those services are fully covered by the fees charged.

Setting fees to cover costs ensures that the fund remains financially viable and sustainable over time. It helps maintain accountability and transparency in financial reporting, as it reflects the actual cost of services rendered to other departments. If fees were allowed to be set below the actual costs, it could lead to deficits in the fund, requiring transfers from other funds or budget adjustments to cover the shortfall, undermining the purpose of the internal service fund.

This principle aligns with best practices in governmental accounting and financial management, where it is essential for service-providing entities to recover their costs to prevent unnecessary financial strain on the organization.