Concept explainers
To Prepare: The Memo to JM with a recommendation to management.
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
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- Communications Jamarcus Bradshaw, plant manager of Georgia Paper Companys papermaking mill, was looking over the cost of production reports for July and August for the Papermaking Department. The reports revealed the following: Jamarcus was concerned about the increased cost per ton from the output of the department. As a result, he asked the plant controller to perform a study to help explain these results. The controller, Leann Brunswick, began the analysis by performing some interviews of key plant personnel in order to understand what the problem might be. Excerpts from an interview with Len Tyson, a paper machine operator, follow: Len: We have two papermaking machines in the department. I have no data, but I think paper machine No. 1 is applying too much pulp and, thus, is wasting both conversion and materials resources. We haven't had repairs on paper machine No. 1 in a while. Maybe this is the problem. Leann: How does too much pulp result in wasted resources? Len: Well, you see, if too much pulp is applied, then we will waste pulp material. The customer will not pay for the extra product; we just use more material to make the product. Also, when there is too much pulp, the machine must be slowed down in order to complete the drying process. This results in additional conversion costs. Leann: Do you have any other suspicions? Len: Well, as you know, we have two productsgreen paper and yellow paper. They are identical except for the color. The color is added to the papermaking process in the paper machine. I think that during August these two color papers have been behaving very differently. I don't have any data, but it just seems as though the amount of waste associated with the green paper has increased. Leann: Why is this? Len: I understand that there has been a change in specifications for the green paper, starting near the beginning of August. This change could be causing the machines to run poorly when making green paper. If this is the case, the cost per ton would increase for green paper. Leann also asked for a database printout providing greater detail on Augusts operating results. September 9 Requested by: Leann Brunswick Papermaking DepartmentAugust detail Prior to preparing a report, Leann resigned from Georgia Paper Company to start her own business. You have been asked to take the data that Leann collected, and write a memo to Jamarcus Bradshaw with a recommendation to management. Your memo should include analysis of the August data to determine whether the paper machine or the paper color explains the increase in the unit cost from July. Include any supporting schedules that are appropriate. Round any calculations to the nearest cent.arrow_forwardStandard unit cost and journal entries The normal capacity of Algonquin Adhesives Inc. is 40,000 direct labor hours and 20,000 units per month. A finished unit requires 6 lb of materials at an estimated cost of 2 per pound. The estimated cost of labor is 10.00 per hour. The plant estimates that overhead (all variable) for a month will be 40,000. During the month of March, the plant totaled 34,800 direct labor hours at an average rate of 9.50 an hour. The plant produced 18,000 units, using 105,000 lb of materials at a cost of 2.04 per pound. 1. Prepare a standard cost summary showing the standard unit cost. 2. Make journal entries to charge materials and labor to Work in Process.arrow_forwardUse the following information for Brief Exercises 2-19 and 2-20: Slapshot Company makes ice hockey sticks. Last week, direct materials (wood, paint, Kevlar, and resin) costing 32,000 were put into production. Direct labor of 28,000 (10 workers 200 hours 14 per hour) was incurred. Manufacturing overhead equaled 60,000. By the end of the week, the company had manufactured 500 hockey sticks. Brief Exercise 2-20 Prime Cost and Conversion Cost Refer to the information for Slapshot Company on the previous page. Required: 1. Calculate the total prime cost for last week. 2. Calculate the per-unit prime cost. 3. Calculate the total conversion cost for last week. 4. Calculate the per-unit conversion cost.arrow_forward
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