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Mott Company recently implemented a JIT manufacturing system. After one year of operation, Heidi Burrows, president of the company, wanted to compare product cost under the JIT system with product cost under the old system. Mott’s two products are weed eaters and lawn edgers. The unit prime costs under the old system are as follows: Under the old manufacturing system, the company operated three service centers and two production departments. Overhead was applied using departmental overhead rates. The direct overhead costs associated with each department for the year preceding the installation of JIT are as follows: Under the old system, the overhead costs of the service departments were allocated directly to the producing departments and then to the products passing through them. (Both products passed through each producing department.) The overhead rate for the Machining Department was based on machine hours, and the overhead rate for assembly was based on direct labor hours. During the last year of operations for the old system, the Machining Department used 80,000 machine hours, and the Assembly Department used 20,000 direct labor hours. Each weed eater required 1.0 machine hour in Machining and 0.25 direct labor hour in Assembly. Each lawn edger required 2.0 machine hours in Machining and 0.5 hour in Assembly. Bases for allocation of the service costs are as follows: Upon implementing JIT, a manufacturing cell for each product was created to replace the departmental structure. Each cell occupied 40,000 square feet. Maintenance and materials handling were both decentralized to the cell level. Essentially, cell workers were trained to operate the machines in each cell, assemble the components, maintain the machines, and move the partially completed units from one point to the next within the cell. During the first year of the JIT system, the company produced and sold 20,000 weed eaters and 30,000 lawn edgers. This output was identical to that for the last year of operations under the old system. The following costs have been assigned to the manufacturing cells: Required: 1. Compute the unit cost for each product under the old manufacturing system. 2. Compute the unit cost for each product under the JIT system. 3. Which of the unit costs is more accurate? Explain. Include in your explanation a discussion of how the computational approaches differ. 4. Calculate the decrease in overhead costs under JIT, and provide some possible reasons that explain the decrease.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 11, Problem 32P
Textbook Problem
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Mott Company recently implemented a JIT manufacturing system. After one year of operation, Heidi Burrows, president of the company, wanted to compare product cost under the JIT system with product cost under the old system. Mott’s two products are weed eaters and lawn edgers. The unit prime costs under the old system are as follows:

Chapter 11, Problem 32P, Mott Company recently implemented a JIT manufacturing system. After one year of operation, Heidi , example  1

Under the old manufacturing system, the company operated three service centers and two production departments. Overhead was applied using departmental overhead rates. The direct overhead costs associated with each department for the year preceding the installation of JIT are as follows:

Chapter 11, Problem 32P, Mott Company recently implemented a JIT manufacturing system. After one year of operation, Heidi , example  2

Under the old system, the overhead costs of the service departments were allocated directly to the producing departments and then to the products passing through them. (Both products passed through each producing department.) The overhead rate for the Machining Department was based on machine hours, and the overhead rate for assembly was based on direct labor hours. During the last year of operations for the old system, the Machining Department used 80,000 machine hours, and the Assembly Department used 20,000 direct labor hours. Each weed eater required 1.0 machine hour in Machining and 0.25 direct labor hour in Assembly. Each lawn edger required 2.0 machine hours in Machining and 0.5 hour in Assembly. Bases for allocation of the service costs are as follows:

Chapter 11, Problem 32P, Mott Company recently implemented a JIT manufacturing system. After one year of operation, Heidi , example  3

Upon implementing JIT, a manufacturing cell for each product was created to replace the departmental structure. Each cell occupied 40,000 square feet. Maintenance and materials handling were both decentralized to the cell level. Essentially, cell workers were trained to operate the machines in each cell, assemble the components, maintain the machines, and move the partially completed units from one point to the next within the cell. During the first year of the JIT system, the company produced and sold 20,000 weed eaters and 30,000 lawn edgers. This output was identical to that for the last year of operations under the old system. The following costs have been assigned to the manufacturing cells:

Chapter 11, Problem 32P, Mott Company recently implemented a JIT manufacturing system. After one year of operation, Heidi , example  4

Required:

  1. 1. Compute the unit cost for each product under the old manufacturing system.
  2. 2. Compute the unit cost for each product under the JIT system.
  3. 3. Which of the unit costs is more accurate? Explain. Include in your explanation a discussion of how the computational approaches differ.
  4. 4. Calculate the decrease in overhead costs under JIT, and provide some possible reasons that explain the decrease.

1.

To determine

Calculate the unit cost of each product under old manufacturing system.

Explanation of Solution

Just-in-time (JIT) manufacturing system: Just-in-time (JIT) manufacturing system is an approach to manufacturing, that eliminates and reduces the non-value-added activities and it concentrates on both product quality and efficiency.

Calculate the unit cost of each product under old manufacturing system as follows:

ParticularsEatersEdgers
Direct materials$12.00$45.00
Direct labor$4.00$30.00
Overhead (7)$10.07$20.14
    Total$26.07$95.14

Table (1)

Working note (1):

Calculate the allocation ratios for machining and assembly.

ParticularsMachine hourAllocation ratioMaterial movesAllocation ratioSquare feetAllocation ratio
Machining80,0004/590,0003/580,0002/3
Assembly20,0001/560,0002/540,0001/3
     Total100,000 150,000 120,000 

Table (2)

Note: Formula for allocation ratio is (Individual valueTotal amount of line).

Working note (2):

Calculate the direct overhead cost of maintenance.

For machining department:

Direct overhead cost = (Total direct overhead cost of maintenance×Allocation rate in machine hours (1))=$110,000×45=$88,000

For assembly department:

Direct overhead cost = (Total direct overhead cost of maintenance×Allocation rate in machine hours (1))=$110,000×15=$22,000

Working note (3):

Calculate the direct overhead cost of material handling.

For machining department:

Direct overhead cost = (Total direct overhead cost for materials handling×Allocation rate for material moves (1))=$90,000×35=$54,000

For assembly department:

Direct overhead cost = (Total direct overhead cost of mateiral handling×Allocation rate in material handling (1))=$90,000×25=$36,000

Working note (4):

Calculate the direct overhead cost of building and grounds.

For machining department:

Direct overhead cost = (Total direct overhead cost for buildings and grounds×Allocation rate for square feet (1))=$150,000×23=$100,000

For assembly department:

Direct overhead cost = (Total direct overhead cost of building and grounds×Allocation rate in square feet (1))=$150,000×13=$50,000

Working note (5):

Calculate the total direct overhead cost for each department

2.

To determine

Calculate the unit cost of each product under JIT system.

3.

To determine

Identify the unit cost which is more accurate, and explain the manner in which the computational approaches differ.

4.

To determine

Ascertain the decrease in overhead costs under just in time method and given some possible reasons.

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Chapter 11 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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