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 financialreporting 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$114.00Direct manufacturing laborVariable manufacturing overheadAllocated fixed manufacturing overheadResearch and development costs specific to SR670ªMarketing costsSales commissions65.4035.04131.3624.8023.8045.60Allocated administrative costs of corporate headquartersCustomer service costs74.4012.20Distribution costsa35.20aThese costs are specific to SR670, but would not be eliminated if SR670 were purchasedfrom an outside supplier. Allocated costs would be reallocated elsewhere in the companyshould the company cease production of SR670.Required1. Explain to Mary why the cost given to the marketing and financial-reporting departments would be different.2. Calculate the cost of one unit of SR670 to determine the following:a. The selling price of SR670b. The cost of inventory for financial reportingc. Whether to continue manufacturing SR670 or to purchase it from an outside source (Assume thatSR670 is used as a component in one of Needham's other products.)

Direct cost:Direct cost is that cost which can be directly identified with the manufacturing of a…

Answered: Direct materials $114.00 Direct…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter7: Allocating Costs Of Support Departments And Joint Products

Section: Chapter Questions

Problem 23E: Refer to the data in Exercise 7.22. The company has decided to simplify its method of allocating...

See similar textbooks

Related questions

Question

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 financialreporting 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
Variable manufacturing overhead
Allocated fixed manufacturing overhead
Research and development costs specific to SR670ª
Marketing costs
Sales commissions
65.40
35.04
131.36
24.80
23.80
45.60
Allocated administrative costs of corporate headquarters
Customer service costs
74.40
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.
Required
1. Explain to Mary why the cost given to the marketing and financial-reporting departments would be different.
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.)

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.