Purposes of cost allocation. Sarah Reynolds recently started a job as an administrative assistant in the cost accounting department of Mize Manufacturing. New to the area of cost accounting, Sarah is puzzled by the fact that one of Mize’s manufactured products, SR460, seem to have a different cost, depending on who asks for it. When the marketing department requested the cost of SR460 in order to determine pricing for the new catalog, Sarah was told to report one amount, but when a request came in the very next day from the financial reporting department, the cost of SR460, she was told the cost was very different. Sarah runs a report using Mize’s cost accounting system, which produces the following cost elements for one unit of SR460:
Direct materials.......................$28.50
Direct manufacturing labor....................16.35
Variable manufacturing overhead.................8.76
Allocated fixed manufacturing overhead.............32.84
Research and development costs specific to SR460a...........6.20
Marketing costsa.........................5.95
Sales commissionsa....................................................................................11.40
Allocated administrative costs of production department.........5.38
Allocated administrative costs of corporate headquarters.......18.60
Customer service costsa......................3.05
Distribution costsa........................8.80
a These costs are specific to SR460, but would not be eliminated if SR460 were purchased from an outside supplier.
Required
1. Explain to Sarah why the cost given to the marketing and financial reporting departments would be different.
2. Calculate the cost of one unit of SR460 to determine the following:
a. The selling price of SR460
b. The cost of inventory for financial reporting
c. Whether to continue manufacturing SR460, or to purchase it from an outside source (Assume that
SR460 is used as a component in one of Mize’s other products.)
d. The ability of Mize’s production manager to control costs