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Tanufacturing is a cost center and the two sales departments are profit centers. full cost of each roll of carpeting produced (including fully absorbed overhead) is transferred to the sales department ordering the carpet. The evaluation of the sales departments includes the fully absorbed cost of each roll as the transfer price. The current manufacturing plant is operating at capacity. A new plant is being built that will more than double capacity. Within two years, management believes that its businesses will grow such that most of the excess capacity will be eliminated. When the new plant comes online, the plan is for one plant to produce exclusively commercial carpeting and the other to produce exclusively residential carpeting. This change will simplify scheduling, ordering, and inventory control in each plant. It will also create some economies of scale by producing longer mill runs. Nevertheless, it will take a couple of years before these economies of scale can be realized. Each mill produces carpeting in four-meter-wide rolls of up to 100 meters in length. The output of each mill is measured in terms of meters of four-meter rolls produced. Overhead is assigned to carpet rolls using carpet meters produced in the mill. The cost structure of each plant is as follows: Old Plant New Plant Normal machine hours per year 6,000 5,000 Normal carpet meters per hour 1,000 1,400 Normal capacity 6,000,000 meters 7,000,000 meters Annual manufacturing overhead costs excluding accounting depreciation €15,000,000 €21,000,000 Accounting depreciation per year € 6,000,000 €21,000,000 Karsten's new mill will run at higher speed and therefore produce more meters of carpet per hour. Moreover, the new mill will use 15 percent less direct materials and direct labor because the new machines, being more automated, produce less scrap and 497

Tanufacturing is a cost center and the two sales departments are profit centers. full cost of each roll of carpeting produced (including fully absorbed overhead) is transferred to the sales department ordering the carpet. The evaluation of the sales departments includes the fully absorbed cost of each roll as the transfer price. The current manufacturing plant is operating at capacity. A new plant is being built that will more than double capacity. Within two years, management believes that its businesses will grow such that most of the excess capacity will be eliminated. When the new plant comes online, the plan is for one plant to produce exclusively commercial carpeting and the other to produce exclusively residential carpeting. This change will simplify scheduling, ordering, and inventory control in each plant. It will also create some economies of scale by producing longer mill runs. Nevertheless, it will take a couple of years before these economies of scale can be realized. Each mill produces carpeting in four-meter-wide rolls of up to 100 meters in length. The output of each mill is measured in terms of meters of four-meter rolls produced. Overhead is assigned to carpet rolls using carpet meters produced in the mill. The cost structure of each plant is as follows: Old Plant New Plant Normal machine hours per year 6,000 5,000 Normal carpet meters per hour 1,000 1,400 Normal capacity 6,000,000 meters 7,000,000 meters Annual manufacturing overhead costs excluding accounting depreciation €15,000,000 €21,000,000 Accounting depreciation per year € 6,000,000 €21,000,000 Karsten's new mill will run at higher speed and therefore produce more meters of carpet per hour. Moreover, the new mill will use 15 percent less direct materials and direct labor because the new machines, being more automated, produce less scrap and 497

Accounting (Text Only)
Accounting (Text Only)
26th Edition
ISBN:9781285743615
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Carl Warren, James M. Reeve, Jonathan Duchac
Chapter21: Cost Behavior And Cost-volume-profit Analysis
Section: Chapter Questions
Problem 21.4CP: Variable costs and activity bases in decision making The owner of Warwick Printing, a printing...
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AIP 10.7 Overhead Costs from a New Factory Karsten is one of the premier carpet manufacturers in the world. It manufactures carpeting for both residential and commercial applications. Home sales and commercial sales each account for about 50 percent of total revenues. The firm is organized into three departments: Manu facturing, Residential Sales, and Commercial Sales. Manufacturing is a cost center and the two sales departments are profit centers. The full cost of each roll of carpeting produced (including fully absorbed overhead) is transferred to the sales department ordering the carpet. The evaluation of the sales departments includes the fully absorbed cost of each roll as the transfer price. The current manufacturing plant is operating at capacity. A new plant is being built that will more than double capacity. Within two years, management believes that its businesses will grow such that most of the excess capacity will be eliminated. When the new plant comes online, the plan is for one plant to produce exclusively commercial carpeting and the other to produce exclusively residential carpeting. This change will simplify scheduling, ordering, and inventory control in each plant. It will also create some economies of scale by producing longer mill runs. Nevertheless, it will take a couple of years before these economies of scale can be realized. Each mill produces carpeting in four-meter-wide rolls of up to 100 meters in length. The output of each mill is measured in terms of meters of four-meter rolls produced. Overhead is assigned to carpet rolls using carpet meters produced in the mill. The cost structure of each plant is as follows: Old Plant New Plant Normal machine hours per year 6,000 5,000 Normal carpet meters per hour Normal capacity 1,000 1,400 6,000,000 meters 7,000,000 meters Annual manufacturing overhead costs excluding accounting depreciation €15,000,000 €21,000,000 Accounting depreciation per year € 6,000,000 €21,000,000 Karsten's new mill will run at higher speed and therefore produce more meters of carpet per hour. Moreover, the new mill will use 15 percent less direct materials and direct labor because the new machines, being more automated, produce less scrap and 497
Transcribed Image Text:AIP 10.7 Overhead Costs from a New Factory Karsten is one of the premier carpet manufacturers in the world. It manufactures carpeting for both residential and commercial applications. Home sales and commercial sales each account for about 50 percent of total revenues. The firm is organized into three departments: Manu facturing, Residential Sales, and Commercial Sales. Manufacturing is a cost center and the two sales departments are profit centers. The full cost of each roll of carpeting produced (including fully absorbed overhead) is transferred to the sales department ordering the carpet. The evaluation of the sales departments includes the fully absorbed cost of each roll as the transfer price. The current manufacturing plant is operating at capacity. A new plant is being built that will more than double capacity. Within two years, management believes that its businesses will grow such that most of the excess capacity will be eliminated. When the new plant comes online, the plan is for one plant to produce exclusively commercial carpeting and the other to produce exclusively residential carpeting. This change will simplify scheduling, ordering, and inventory control in each plant. It will also create some economies of scale by producing longer mill runs. Nevertheless, it will take a couple of years before these economies of scale can be realized. Each mill produces carpeting in four-meter-wide rolls of up to 100 meters in length. The output of each mill is measured in terms of meters of four-meter rolls produced. Overhead is assigned to carpet rolls using carpet meters produced in the mill. The cost structure of each plant is as follows: Old Plant New Plant Normal machine hours per year 6,000 5,000 Normal carpet meters per hour Normal capacity 1,000 1,400 6,000,000 meters 7,000,000 meters Annual manufacturing overhead costs excluding accounting depreciation €15,000,000 €21,000,000 Accounting depreciation per year € 6,000,000 €21,000,000 Karsten's new mill will run at higher speed and therefore produce more meters of carpet per hour. Moreover, the new mill will use 15 percent less direct materials and direct labor because the new machines, being more automated, produce less scrap and 497
require less direct labor per meter. A job sheet run at the old mill is as follows: Carpet A6106: (100-meter roll) Direct materials € 800 Direct labor 600 Direct costs €1,400 Although the new mill has lower direct costs of carpet production than the old mill does, the new facility's higher overhead costs per meter have the sales department managers worried. They already are lobbying senior management to have the old mill assigned to produce their products. The Commercial Sales department manager argues, “More of my customers are located closer to the old plant than are the Residential Sales department's customers. Therefore, to economize on transportation costs, my products should be produced in the old plant." The Residential Sales department manager counters with the argument, "Transportation costs are less than 1 percent of total revenues. The new plant should produce commercial products because we expect new commercial products to use more synthetic materials and the latest technology at the new mill is better able to adapt to the new synthetics." Senior management is worried about how to deal with the two sales department managers' reluctance to have their products produced at the new plant. One suggestion put forth is for each plant to produce about half of Commercial Sales products and about half of Residential Sales products. However, this proposal would eliminate most of the economies of scale that would result from specializing production in each plant to one market segment. a. Calculate the overhead rates for the new plant and the old plant, where overhead is assigned to carpet based on normal meters per year. b. Calculate the expected total cost of carpet A6106, if run at the old mill and if run at the new mill. c. Put forth two new potential solutions that overcome the desire of the Residential and Commercial Sales department managers to have their products produced in the old plant. Discuss the pros and cons of your two solutions.
Transcribed Image Text:require less direct labor per meter. A job sheet run at the old mill is as follows: Carpet A6106: (100-meter roll) Direct materials € 800 Direct labor 600 Direct costs €1,400 Although the new mill has lower direct costs of carpet production than the old mill does, the new facility's higher overhead costs per meter have the sales department managers worried. They already are lobbying senior management to have the old mill assigned to produce their products. The Commercial Sales department manager argues, “More of my customers are located closer to the old plant than are the Residential Sales department's customers. Therefore, to economize on transportation costs, my products should be produced in the old plant." The Residential Sales department manager counters with the argument, "Transportation costs are less than 1 percent of total revenues. The new plant should produce commercial products because we expect new commercial products to use more synthetic materials and the latest technology at the new mill is better able to adapt to the new synthetics." Senior management is worried about how to deal with the two sales department managers' reluctance to have their products produced at the new plant. One suggestion put forth is for each plant to produce about half of Commercial Sales products and about half of Residential Sales products. However, this proposal would eliminate most of the economies of scale that would result from specializing production in each plant to one market segment. a. Calculate the overhead rates for the new plant and the old plant, where overhead is assigned to carpet based on normal meters per year. b. Calculate the expected total cost of carpet A6106, if run at the old mill and if run at the new mill. c. Put forth two new potential solutions that overcome the desire of the Residential and Commercial Sales department managers to have their products produced in the old plant. Discuss the pros and cons of your two solutions.
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