Financial & Managerial Accounting
14th Edition
ISBN: 9781337119207
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 17, Problem 17.3TIF
To determine
To Prepare: The Memo to JM with a recommendation to management.
Expert Solution & Answer
Explanation of Solution
From:
LB
Former Plant manager
Company GP
To:
JM
Current Plant manager
Company GP
Re: Analysis of August month increase in unit costs for Papermaking Department.
Dear Mr. JM,
The increase in the unit costs from the month of July to August happened for both the material costs (pulp and chemical) and conversion costs in the papermaking department, as showed in the table below:
| Particulars | July | August |
| Material costs (A) | $295,600 | $304,100 |
| Conversion costs (B) | $146,000 | $149,600 |
| Total cost (A+B) | $441,600 | $453,700 |
| Number of tons (C') | 1,200 | 1,130 |
| Material cost per ton D = (A ÷ C) | $246.33 | $269.12 |
| Conversion cost per ton E =(B ÷ C) | $121.67 | $132.39 |
| Total cost per ton (D + E) | $368 | $401.50 |
Table (1)
An analysis was done to segregate the reason of the increased cost per ton. My interviews designated that there were two possible causes. First, we changed the condition of the green paper in early month of August. This may changed the way the paper machines process the green paper. Therefore, it is feasible that the paper machines have unacceptable settings for the new requirement and are over applying materials. Second one is some question, whether paper machine No.1 is need of maintenance. It is possible that our problem is due to lack of repairs on this machine.
Luckily, we run both colors on paper machine No.1 Therefore; we can divide the analysis among these two possible explanations. I have offered the following cost per ton data for the two paper machines and the two product colors:
Analyzing paper machine:
| Production Run Number | Paper Machine | Color | Materials costs | Conversion costs | Tons | |
| 1 | 1 | Green | $40,300 | $18,300 | 150 | |
| 2 | 1 | Yellow | $41,700 | $21,200 | 140 | |
| 3 | 1 | Green | $44,600 | $22,500 | 150 | |
| 4 | 1 | Yellow | $36,100 | $18,100 | 120 | |
| Total | $162,700 | $80,100 | 560 | |||
Table (2)
| Paper Machine No.1 | Material cost per ton (A ÷ C) | Conversion cost per ton (B ÷ C) | |
| Total direct material costs (A) | $162,700 | ||
| Total conversion costs (B) | $80,100 | ||
| Tons (C ) | 560 | 560 | |
| Cost per ton | $290.54 | $143.04 |
Table (3)
| Production Run Number | Paper Machine | Color | Materials costs | Conversion costs | Tons | |
| 5 | 2 | Green | $38,300 | $18,900 | 160 | |
| 6 | 2 | Yellow | $33,900 | $15,200 | 140 | |
| 7 | 2 | Green | $35,600 | $18,400 | 130 | |
| 8 | 2 | Yellow | $33,600 | $17,000 | 140 | |
| Total | $141,400 | $69,500 | 570 | |||
Table (4)
| Paper Machine No.2 | Material cost per ton (A ÷ C) | Conversion cost per ton (B ÷ C) | |
| Total direct material costs | $141,400 | ||
| Total conversion costs | $69,500 | ||
| Tons | 570 | 570 | |
| Cost per ton | $248.07 | $121.93 |
Table (5)
| Particulars | Paper Machine No.1 (A) | Paper Machine No.2 (B) | Difference (A – C) |
| Material cost per ton | $290.54 | $143.04 | $147.50 |
| Conversion cost per ton | $248.07 | $121.93 | $126.14 |
Table (6)
Product color analysis:
| Production Run Number | Paper Machine | Color | Materials costs | Conversion costs | Tons | |
| 1 | 1 | Green | $40,300 | $18,300 | 150 | |
| 3 | 1 | Green | $44,600 | $22,500 | 150 | |
| 5 | 2 | Green | $38,300 | $18,900 | 160 | |
| 7 | 2 | Green | $35,600 | $18,400 | 130 | |
| Total | $158,800 | $78,100 | 590 | |||
Table (7)
| Production Run Number | Paper Machine | Color | Materials costs | Conversion costs | Tons | |
| 2 | 1 | Yellow | $41,700 | $21,200 | 140 | |
| 4 | 1 | Yellow | $36,100 | $18,100 | 120 | |
| 6 | 2 | Yellow | $33,900 | $15,200 | 140 | |
| 8 | 2 | Yellow | $33,600 | $17,000 | 140 | |
| Total | $145,300 | $71,500 | 540 | |||
Table (8)
| Green Paper | Material cost per ton (A ÷ C) | Conversion cost per ton (B ÷ C) | |
| Total direct material costs (A) | $158,800 | ||
| Total conversion costs (B) | $78,100 | ||
| Tons (C ) | 590 | 590 | |
| Cost per ton | $269.15 | $132.37 |
Table (9)
| Yellow Paper | Material cost per ton (A ÷ C) | Conversion cost per ton (B ÷ C) | |
| Total direct material costs (A) | $145,300 | ||
| Total conversion costs (B) | $71,500 | ||
| Tons (C ) | 540 | 540 | |
| Cost per ton | $269.07 | $132.41 |
Table (10)
| Particulars | Green Paper (A) | Yellow Paper (B) | Difference (A – C) |
| Material cost per ton | $269.15 | $269.07 | $0.08 |
| Conversion cost per ton | $132.37 | $132.41 | ($0.04) |
The outcomes are clear. Paper machine 1 has a considerably higher materials and conversion cost per ton in August. It appears that, the paper machine is over applying pulp. This is resultant in a growth in both the materials and conversion cost per ton. Paper machine No.2 is consecutively at a cost near out chronological cost per ton. There is no proof of a color delinquent. Both color papers are consecutively at or near the same materials and conversion cost per ton. Therefore, the requirement change for green has not performed to reason a problem in the papermaking operation. I
Please let me know if you need any more clarifications on this matter.
Regards,
LB
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Chapter 17 Solutions
Financial & Managerial Accounting
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