Question: 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 financial reporting 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:
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.)