Reference no: EM13150462

Volumetrica, a producer of audio equipment for large computer systems, is reviewing its policies as part of a biannual self-examination of the company. As part of this process, all managers have been asked to carefully examine costs and determine as closely as possible which costs are direct and which are indirect.

Marie Ramsey and Dan Wilson, managers of different manufacturing departments in the same building, have been working together. They found the following four costs that could be economically traced to the products, but have historically been a part of overhead:

• Cost of setting up the machinery for a different production run.

• Cost of minor assembly components such as knobs and switches.

• Cost of packaging, which is quite different for each model.

• Cost of inspecting and testing each model.

None of the costs is significant by itself, but together these four costs make up between 10 and 15% of the total cost of the product. Marie favors "leaving well enough alone," as she puts it, and leaving these costs in overhead. She is afraid that her volunteering to trace these costs will result in her having to trace many more costs in the future. Dan, on the other hand, prefers to have the product cost as accurate as possible. He points out that these costs are already known, and the process would require little extra work.

Required:

You have been called on in your function as accounting manager to resolve the dispute. In your report you should explain the different methods available to allocate the four costs to the product cost.