Author Question: Purposes of cost allocation Sarah Reynolds recently started a job as an administrative assistant ... (Read 118 times)

clmills979 · **on:** Jul 6, 2018

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, has 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 for the cost of SR460, she was told to report a very different cost. Sarah runs a report using Mize's cost accounting system, which produces the following cost elements for one unit of SR460:

aThese costs are specific to SR460, but would not be eliminated if SR460 were purchased from an outside supplier. Allocated costs would be reallocated elsewhere in the company should the company cease production of SR460.

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

Question 2

Burnet Co has a 4,050 balance in Prepaid Insurance that represents the premium paid in advance for a nine-month liability insurance policy. Assuming that 5 months of premium is still remaining, the adjusting entry would be recorded as:
a. Insurance Expense 1,800
Prepaid Insurance 1,800
b. Insurance Expense 2,250
Prepaid Insurance 2,250
c. Insurance Expense 1,800
Cash 1,800
d. Insurance Expense 2,250
Cash 2,250

komodo7 · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1. Financial reporting is guided by GAAP when determining the cost of a product such as SR460. Therefore, only inventoriable costs, such as direct materials, direct labor, and manufacturing overhead, are included in the cost of SR460 that are given to the financial reporting department. In contrast, managers at Mize will include any relevant costs when making internal decisions, such as pricing for the new catalog. Typically, pricing decisions are based on full costing or all of the costs related to the product.

2. For the four different purposes considered in the question, the cost of one unit of SR460 would be determined as follows:
a. b. c. d.
Direct materials 57.00 57.00 57.00 57.00
Direct manufacturing labor 32.70 32.70 32.70 32.70
Variable manufacturing overhead 17.52 17.52 17.52 17.52
Allocated fixed manufacturing overhead 65.68 65.68 65.68
Research and development costs specific to SR460 12.40
Marketing costs 11.90
Sales commissions 22.80
Allocated administrative costs of production depart. 10.76 10.76
Allocated administrative costs of corporate headquarters 37.20
Customer service costs 6.10
Distribution costs 17.60
Total 291.66 172.90 107.22 183.66

Answer to Question 2

A