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 nancialreporting 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 commissionsAllocated administrative costs of corporate headquartersCustomer service costs65.4035.04131.3624.8023.8045.6074.4012.20Distribution costsa35.20These 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 SR670.1. 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 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.)Required

Definition: Capital budgeting: It refers to the long-term investment decisions that has been taken…

Answered: Direct materials $114.00 Direct…

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter10: Accounting Systems For Manufacturing Operations

Section: Chapter Questions

Problem 10.25E: Activity-based costing in an insurance company Umbrella Insurance Company carries three major lines...

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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 nancialreporting 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
Allocated administrative costs of corporate headquarters
Customer service costs
65.40
35.04
131.36
24.80
23.80
45.60
74.40
12.20
Distribution costsa
35.20
These 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.
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.)
Required

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