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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

Accounting for materials costs

In papermaking operations for companies such as International Paper Company, wet pulp is fed into paper machines, which press and dry pulp into a continuous sheet of paper. The paper is formed at very high speeds (60 mph). Once the paper is formed, the paper is rolled onto a reel at the hack end of the paper machine. One of the characteristics of papermaking is the creation of “broke" paper. Broke is paper that fails to satisfy quality standards and is therefore rejected for final shipment to customers. Broke is recycled hack to the beginning of the process by combining the recycled paper with virgin (new) pulp material. The combination of virgin pulp and recycled broke is sent to the paper machine for papermaking. Broke is fed into this recycle process continuously from all over the facility.

In this industry, it is typical to charge the papermaking operation with the cost of direct materials, which is a mixture of virgin materials and broke. Broke has a much lower cost than does virgin pulp. Therefore, the more broke in the mixture, the lower the average cost of direct materials to the department. Papermaking managers frequently comment on the importance of broke for keeping their direct materials costs down

a. How do you react to this accounting procedure?

b. What “hidden costs” are not considered when accounting for broke as described?

(a)

To determine

State the reaction to this accounting procedure.

Explanation

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.

These accounting procedures have the effect of fulfilling the production of broke. In the crux of the technique corresponds to effective employees that broke is a common portion of doing business...

(b)

To determine

Describe hidden costs, when the accounting for broke do not considered.

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