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INTRODUCTION The Encoder Device division EDD at Digital Communications is a producer of communications devices for Government Agencies in the United States The company works closely with Government Agencies and due to the nature of the devices they produce and their application the Company works on a need to know basis and as such production departments are compartmentalised Production of Voice Ratio Encoding VRE devices is on going however a new microprocessor has been developed rendering the existing microprocessor obsolete As a consequence the microprocessor needs be fitted to all existing devices in the field and all new devices in production EDD wish to win this replacement contract EDD have vast experience in ground up bids for entire programmes but not on single sub-assemblies for resale EDD are confident that they understand their business well however they fear they lack the detailed information about the costs associated with sub assemblies They wish to make an attractive but profitable bid for the contract STRUCTURE OF EDD EDD has four separate production departments Data Encoding DE Video Encoding VE Voice Ratio Encoding VRE and Variable Wire Encoding This specific contract is exclusive to VRE EDD therefore need to ensure that they have the correct division of costs between each production department and that the cost for each department is then split correctly between the underlying manufacturing processes within the department EDD AND ACTIVITY-BASED COSTING EDD has already completed a great deal of work for Activity Based Costing ABC however their actual costing system needs to be capable of allocating the costs of multiple support departments in a refined and appropriate manner As EDD has good product diversity broad allocation of costs has becoming increasingly inaccurate and has probably already lead to either product overcosting or undercosting or both A refined costing system will reduce the use of broad averages for assigning the cost of resources to cost objects and provide better measurement of the costs of indirect
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