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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Job order decision making and rate deficiencies

RIRA Company makes attachments such as backhoes and grader and bulldozer blades for construction equipment. The company uses a job order cost system. Management is concerned about cost performance and evaluates the job cost sheets to learn more about the cast effectiveness of the operations. To facilitate a comparison, the cost sheet for Job 206 (50 backhoe buckets completed in October) was compared with Job 228, which was for 75 backhoe buckets completed in December. The two job cost sheets follow:

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Management is concerned with the increase in unit casts over the months from October to December. To understand what has occurred, management interviewed the purchasing manager and quality manager.

Purchasing Manager: Prices have been holding steady for our raw materials during the first half of the year. I found a new supplier for our bulk steel that was willing to offer a better price than we received in the past. I saw these lower steel prices and jumped at them, knowing that a reduction in steel prices would have a very favorable impact on our costs.

Quality Manager: Something happened around mid-year. All of a sudden, we were experiencing problems with respect to the quality of our steel. As a result, we've been having all sorts of problems on the shop floor in our foundry and welding operation.

1. Analyze the two job cost sheets and identify why the unit costs have changed for the backhoe buckets. Complete the following schedule to help in your analysis:

Item Input Quantity per Unit—Job 206 Input Quantity per Unit—Job 228
Steel    
Foundry labor    
Weld inn labor    

2. How would you interpret what has happened in light of your analysis and the interviews?

(1)

To determine

Job order costing

Job order cost system provides a separate record of each particular quantity of product that passes through the factory. Each quantity that is manufactured in the business is known as job. Job order costing is used when the products produced are significantly different from each other.

To analyze: The two job cost sheets and identify the reason of change in unit cost.

Explanation

The unit cost are mainly influenced by price and quantity of inputs. With respect to price, the cost of steel has declined from $1,200 to $1,100 per ton of steel. This results in purchase manager decision to reduce the cost of raw materials by shifting to new vendor. There were no input prices being observed, but there is significant change in input quantities. The inputs for components were unchanged between two jobs.

Job 206:

 
  Direct material / Labor hour (1) Number of backhoe buckets completed (2) Input quantity per unit
(3) = (1) ÷ (2)
Steel input 105 tons 50 units 2.10 Tons
Foundry labor 400hours 50 units 2...

(2)

To determine

To interpret: the results and analysis of changes in unit cost.

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