Jim Franklin, the operations manager for Tires for Speed, was reviewing the product costs for his company’s performance tires. The current production schedule calls for the tires to be produced in batches of 1,000 tires. Between each batch, the production and packaging lines must be completely cleaned to remove all remnants of rubber before changing to the next batch. Currently, Tires for Speed makes 6 different tire models. Under the company’s activity-based costing system, each batch incurs direct setup and cleaning charges of $500. To reduce costs in the coming year, Jim plans to increase the minimum batch size to 2,000 tires, which will reduce the number of required setups. A total of 80,000 tires are produced each year. Required A. What effect will Jim’s decision to increase the batch size have on his total setup costs? What effect will Jim’s decision to increase the batch size have on the cost of a tire? C. Suppose two workers are required to run each batch. Each worker is paid $20,000 per year. One worker can be eliminated if the batch size is increased to 2,000 tires, rather than 1,000 tires. Should the batch size be increased? Explain.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Jim Franklin, the operations manager for Tires for Speed, was reviewing the product costs for his company’s performance tires. The current production schedule calls for the tires to be produced in batches of 1,000 tires. Between each batch, the production and packaging lines must be completely cleaned to remove all remnants of rubber before changing to the next batch.
Currently, Tires for Speed makes 6 different tire models. Under the company’s activity-based costing system, each batch incurs direct setup and cleaning charges of $500. To reduce costs in the coming year, Jim plans to increase the minimum batch size to 2,000 tires, which will reduce the number of required setups. A total of 80,000 tires are produced each year.
Required
A. What effect will Jim’s decision to increase the batch size have on his total setup costs?
- What effect will Jim’s decision to increase the batch size have on the cost of a tire?
- C. Suppose two workers are required to run each batch. Each worker is paid $20,000 per year. One worker can be eliminated if the batch size is increased to 2,000 tires, rather than 1,000 tires. Should the batch size be increased? Explain.
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