Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 20, Problem 20.3CP
Textbook Problem

Expert Solution
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 of Solution

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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