Volumetrica a Producer of Audio Equipment for Large Computer Systems $\bullet$

question 92

Essay

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.
Linda Bedard and Sam Hilton 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:
$\bullet$ Cost of setting up the machinery for a different production run.
$\bullet$ Cost of minor assembly components such as knobs and switches.
$\bullet$ Cost of packaging which is quite different for each model.
$\bullet$ 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. Linda 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. Sam 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. Write a memo to Linda and Sam supporting one or the other position. Be sure to adequately defend your position but be brief.

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Definitions:

Quantity Purchased

The total amount of a good or service bought by consumers at a specific price level.

Income Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in consumers' income, holding everything else constant.

College Income

The earnings received from work or investments by someone who is attending college or the revenue generated by colleges through tuition, donations, and grants.

Cross-Price Elasticity

A measure indicating how the demand for one product changes in response to a price change of another product.