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Southward Company has implemented a JIT flexible manufacturing system. John Richins, controller of the company, has decided to reduce the accounting requirements given the expectation of lower inventories. For one thing, he has decided to treat direct labor cost as a part of overhead and to discontinue the detailed direct labor accounting of the past. The company has created two manufacturing cells, each capable of producing a family of products: the radiator cell and the water pump cell. The output of both cells is sold to a sister division and to customers who use the radiators and water pumps for repair activity. Product-level overhead costs outside the cells are assigned to each cell using appropriate drivers. Facility-level costs are allocated to each cell on the basis of square footage. The budgeted direct labor and overhead costs are as follows: The predetermined conversion cost rate is based on available production hours in each cell. The radiator cell has 45,000 hours available for production, and the water pump cell has 27,000 hours. Conversion costs are applied to the units produced by multiplying the conversion rate by the actual time required to produce the units. The radiator cell produced 81,000 units, taking 0.5 hour to produce one unit of product (on average). The water pump cell produced 90,000 units, taking 0.25 hour to produce one unit of product (on average). Other actual results for the year are as follows: All units produced were sold. Any conversion cost variance is closed to Cost of Goods Sold. Required: 1. Calculate the predetermined conversion cost rates for each cell. 2. Prepare journal entries using backflush accounting. Assume two trigger points, with completion of goods as the second trigger point. 3. Repeat Requirement 2, assuming that the second trigger point is the sale of the goods. 4. Explain why there is no need to have a work-in-process inventory account. 5. Two variants of backflush costing were presented in which each used two trigger points, with the second trigger point differing. Suppose that the only trigger point for recognizing manufacturing costs occurs when the goods are sold. How would the entries be listed here? When would this backflush variant be considered appropriate?

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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 33P
Textbook Problem
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Southward Company has implemented a JIT flexible manufacturing system. John Richins, controller of the company, has decided to reduce the accounting requirements given the expectation of lower inventories. For one thing, he has decided to treat direct labor cost as a part of overhead and to discontinue the detailed direct labor accounting of the past. The company has created two manufacturing cells, each capable of producing a family of products: the radiator cell and the water pump cell. The output of both cells is sold to a sister division and to customers who use the radiators and water pumps for repair activity. Product-level overhead costs outside the cells are assigned to each cell using appropriate drivers. Facility-level costs are allocated to each cell on the basis of square footage. The budgeted direct labor and overhead costs are as follows:

Chapter 11, Problem 33P, Southward Company has implemented a JIT flexible manufacturing system. John Richins, controller of , example  1

The predetermined conversion cost rate is based on available production hours in each cell. The radiator cell has 45,000 hours available for production, and the water pump cell has 27,000 hours. Conversion costs are applied to the units produced by multiplying the conversion rate by the actual time required to produce the units. The radiator cell produced 81,000 units, taking 0.5 hour to produce one unit of product (on average). The water pump cell produced 90,000 units, taking 0.25 hour to produce one unit of product (on average).

Other actual results for the year are as follows:

Chapter 11, Problem 33P, Southward Company has implemented a JIT flexible manufacturing system. John Richins, controller of , example  2

All units produced were sold. Any conversion cost variance is closed to Cost of Goods Sold.

Required:

  1. 1. Calculate the predetermined conversion cost rates for each cell.
  2. 2. Prepare journal entries using backflush accounting. Assume two trigger points, with completion of goods as the second trigger point.
  3. 3. Repeat Requirement 2, assuming that the second trigger point is the sale of the goods.
  4. 4. Explain why there is no need to have a work-in-process inventory account.
  5. 5. Two variants of backflush costing were presented in which each used two trigger points, with the second trigger point differing. Suppose that the only trigger point for recognizing manufacturing costs occurs when the goods are sold. How would the entries be listed here? When would this backflush variant be considered appropriate?

1.

To determine

Calculate the predetermined conversion cost rates for each cell.

Explanation of Solution

Back-flush costing: Back flush costing is a simplified approach wherein, production cycle time is in minutes or hours, and goods are shipped instantly upon completion, then all manufacturing costs of each day flows to cost of goods sold and recognition of this result leads to a simplified approach of accounting for manufacturing cost flows.

Conversion cost:  The cost of changing the materials into a finished product. It includes direct labour costs and manufacturing overhead costs.

Calculate the predetermined conversion cost rate for radiator cell:

Predetermined conversioncost rate for radiator cell}=TotalconversioncostProductionhoursavailable=$1,350,00045,000hours=$30perhour

Predetermined conversion cost rate for radiator cell is $30 per hour

2.

To determine

Prepare journal entries by using back flush accounting by assuming two trigger points.

3.

To determine

Prepare journal entries by using back flush accounting by assuming that the second trigger is the sale of the goods.

4.

To determine

Explain the reason for which there is no need to have a work-in-process inventory account.

5.

To determine

Prepare journal entries by assuming that only trigger point for recognizing manufacturing costs occurs only when the goods are sold and explain the reason for which back flush variant is considered appropriate.

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Chapter 11 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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