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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

Communication

Jamarcus Bradshaw, plant, manager of Georgia Paper Company's papermaking mill, was looking over the cost of production reports for July and August for the Papermaking Department. The reports revealed the following:

  July August
Pulp and chemicals $295,600 $304,100
Conversion cost 146,000 149,600
Total cost $441,600 $453,700
Number of tons + 1,200  + 1,130
Cost per ton $ 368 $ 401.50

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 i n 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 products—green pa per and yellow pa per. 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 differently. I don't have any data, but it 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 that is the case, the cost per ton would increase for green paper.

Leann also asked for a database printout providing greater detail on August's operating results. September 9 Requested  by: Leann  Brunswick Papermaking Department—August detail

images

Prior to preparing a report, Leann resigned from Georgia Paper Company to start her own business. You have been asked to lake 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 all calculations to the nearest cent.

To determine

Process costs

It is a method of cost accounting, which is used where the production is continuous, and the product needs various processes to complete. This method is used to ascertain the cost of the product at each process or stage of production.

To Prepare: The Memo to JM with a recommendation to management.

Explanation

Explanation:

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...

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