Cost Allocation and Decision Making: The promotion department of the Doxolby Company is reponsible for the design and development of all marketing campaign materials and related literature, pamphlets, and brochures. Management is reviewing the effectiveness of the promotion department to determine if the department's services could be acquired more economically from an outside promotion agency. Management has asked for a summary of the promotion department's costs for the most recent year. The following cost summary was supplied:

Direct department costs are those that can be traced directly to the activities of the promotion department, such as staff and clerical salaries, including related employee benefits, supplies, etc. Charges from other departments represent the costs of services that are provided by other departments of Doxolby at the request of the promotion department. The company has developed a charging system for such interdepartmental uses of services. For instance, the in-house printing department charges the promotion department for the promotional literature printed. All such services provided to the promotion department by other departments of Doxolby are included in the "Charges from Other Departments." General administrative over- head is composed of such costs as executive salaries and benefits, depreciation, heat, insurance, property taxes, etc. These costs are allocated to all departments in proportion to the number of employees in each department Required:

Discuss the usefulness of the cost figures as presented for the promotion department of Doxolby, Inc., as a basis for comparison with a bid from an outside agency to provide the same type of activities as Doxolby"s own promotion department.

Transcribed Image Text:

PROMOTION DEPARTMENT Costs for the Year Ended November 30 Direct department costs Charges from other departments Allocated share of general administrative overhead Total costs $257,500 44,700 22,250 $324,450