Rockville Sound Inc. produces audio equipment used by a large customer base of personal and business consumers. The company is reviewing their costing policies on direct and indirect costs included in their products. 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.
Serena Joseph and Hank Scoggins, 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. Serena 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. Hank, 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.