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…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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.)

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