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14-29 Purposes of cost allocation. Mary Martin recently started a job as an administrative assistant in the cost accounting department of Needham Manufacturing. New to the area of cost accounting, Mary is puzzled by the fact that one of Needham’s manufactured products, SR670, has a different cost depending on who asks for it. When the marketing department requested the cost of SR670 in order to determine pricing for the new catalog, Mary was told to report one amount, but when a request came in the very next day from the financial-reporting department for the cost of SR670, she was told to report a very different cost. Mary runs a report using Needham’s cost accounting system, which produces the following cost elements for one unit of SR670:
Direct materials | $114.00 |
Direct manufacturing labor | 65.40 |
Variable manufacturing overhead | 35.04 |
Allocated fixed manufacturing overhead | 131.36 |
Research and development costs specific to SR670a | 24.80 |
Marketing costsa | 23.80 |
Sales commissionsa | 45.60 |
Allocated administrative costs of corporate headquarters | 74.40 |
Customer service costsa | 12.20 |
Distribution costsa | 35.20 |
aThese costs are specific to SR670, but would not be eliminated if SR670 were purchased from an outside supplier. Allocated costs would be reallocated elsewhere in the company should the company cease production of SR670.
- 1. Explain to Mary why the cost given to the marketing and financial-reporting departments would be different.
Required
- 2. Calculate the cost of one unit of SR670 to determine the following:
- a. The selling price of SR670
- b. The cost of inventory for financial reporting
- c. Whether to continue manufacturing SR670 or to purchase it from an outside source (Assume that SR670 is used as a component in one of Needham’s other products.)
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Although each product differs in its labor content, the redesign efforts reduced the labor content for all products. On average, the labor content per unit of product dropped from 1.25 hours per unit to one hour per unit. Fixed overhead, however, increased from 5,000,000 to 6,600,000 per year. Suppose that a consultant was hired to explain the increase in fixed overhead costs. The consultants study revealed that the 30 per hour rate captured the unit-level variable costs; however, the cost behavior of other activities was quite different. For example, setting up equipment is a step-fixed cost, where each step is 2,000 setup hours, costing 90,000. The study also revealed that the cost of receiving goods is a function of the number of different components. This activity has a variable cost of 2,000 per component type and a fixed cost that follows a step-cost pattern. The step is defined by 20 components with a cost of 50,000 per step. 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