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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 |
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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Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
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- A new product Zico was recently introduced by Philadelphia Co., in order to complement its other products, Novo and Domo. The accountant used to allocate the indirect cost according to the units produced. With the recent addition of an expanded computer system, Sonata would like to investigate the possibility of implementing ABC. Before making a final decision, management has come to you for advice. You collected the following information regarding manufacturing overhead: Table (1) Mfg. Overhead Mfg. Overhead Allocation bases Costs $ 40,000 $ 45,000 $ 9,000 $ 21,000 Number of set-ups Set-up Ordering materials Handling materials Inspection Number of material orders Number of times material was handled Number of inspection hours $115,000 Table (2) Products Activity Zico Novo Domo Total Number of set-ups 5 20 55 Total Number of material orders 1 2 7 Total Number of times material was handled 1 17 Total Number of inspection hours Number of units produced 3 10 6,000 3,000 1,000 Required: 1.…arrow_forwardSuppose you are the controller for a company that produces handmade glassware.1. Choose a volume-based cost driver upon which to base the application of overhead. Write a memo to the company president explaining your choice.2. Now you have changed jobs. You are the controller of a microchip manufacturer that uses a highly automated production process. Repeat the same requirements stated above.arrow_forwardPlease solve the task by reading attached pictures of background knowledge. Christine wants to improve the profit situation of her company - and learn more about the profit per product for the past month. Christine is a follower of a full costing approach. Therefore all the costs should be allocated to the products. Perform this calculation by calculating three alternatives for the distribution of fixed overheads:? •Distribution in equal parts? •Distribution proportional to sales ? •Distribution proportional to sales. All three allocation keys are common allocation routes in practice. Which one should Christine prefer?arrow_forward
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