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Digital Communication

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The Encoding Device Division (EDD), a division of Digital Communication Inc., manufactures defense communication products to be used on the battlefield. As all the four production departments of EDD operate in secluded “factory within a factory” environment and they usually bid for end-to-end product solutions, the EDD’s present cost system is fairly straightforward. The EDD’s cost system is based on the direct method of cost allocation. Service costs related to support departments are allocated directly to the user departments based on labor hours.
The EDD now has the opportunity to bid on a potentially lubrative sub-assembly contract. The present accounting system is not able to differentiate the cost of different sub-assemblies. It is obvious to the management that not all sub-assemblies are produced the same, so the allocating service departments’ costs based on the direct labor basis is an incorrect approach. In order to quantify accurate cost levels, the EDD must properly allocate support overhead costs to their productive departments correctly.
Rebecca Wills, a business school summer intern, is faced with a daunting task of evaluating different approaches of allocating joint expenses and their impact on the costs of different product sub-assemblies, specifically the cost of Board 2. This will help EDD to decide the accurate cost of the sub-assembly so that they can make an appropriately priced bid for the business. Rebecca compared the direct cost allocation method with two different step-down allocation methods and found that end-item costs of the pertinent subassembly were significantly different. In order to fully understand the cost of Board 2 and decide on an appropriate bid price, Rebecca must decide on the best treatment of service department costs and the best method to allocate these costs to the corresponding productive

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