Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Textbook Question
Chapter 6, Problem 41P

Golding Manufacturing, a division of Farnsworth Sporting, Inc., produces two different models of bows and eight models of knives. The bow-manufacturing process involves the production of two major subassemblies: the limbs and the handle. The limbs pass through four sequential processes before reaching final assembly: lay-up, molding, fabricating, and finishing. In the Lay-Up Department, limbs are created by laminating layers of wood. In Molding, the limbs are heat treated, under pressure, to form a strong resilient limb. In the Fabricating Department, any protruding glue or other processing residue is removed. Finally, in Finishing, the limbs are cleaned with acetone, dried, and sprayed with the final finishes.

The handles pass through two processes before reaching final assembly: pattern and finishing. In the Pattern Department, blocks of wood are fed into a machine that is set to shape the handles. Different patterns are possible, depending on the machine’s setting. After coming out of the machine, the handles are cleaned and smoothed. They then pass to the Finishing Department where they are sprayed with the final finishes. In Final Assembly, the limbs and handles are assembled into different models using purchased parts such as pulley assemblies, weight adjustment bolts, side plates, and string.

Golding, since its inception, has been using process costing to assign product costs. A predetermined overhead rate is used based on direct labor dollars (80 percent of direct labor dollars). Recently, Golding has hired a new controller, Karen Jenkins. After reviewing the product costing procedures, Karen requested a meeting with the divisional manager, Aaron Suhr. The following is a transcript of their conversation:

KAREN: Aaron, I have some concerns about our cost accounting system. We make two different models of bows and are treating them as if they were the same product. Now I know that the only real difference between the models is the handle. The processing of the handles is the same, but the handles differ significantly in the amount and quality of wood used. Our current costing does not reflect this difference in direct material input.

AARON: Your predecessor is responsible. He believed that tracking the difference in direct material cost wasn’t worth the effort. He simply didn’t believe that it would make much difference in the unit cost of either model.

KAREN: Well, he may have been right, but I have my doubts. If there is a significant difference, it could affect our views of which model is more important to the company. The additional bookkeeping isn’t very stringent. All we have to worry about is the Pattern Department. The other departments fit what I view as a process-costing pattern.

AARON: Why don’t you look into it? If there is a significant difference, go ahead and adjust the costing system.

After the meeting, Karen decided to collect cost data on the two models: the Deluxe model and the Econo model. She decided to track the costs for one week. At the end of the week, she had collected the following data from the Pattern Department:

  1. a. There were a total of 2,500 bows completed: 1,000 Deluxe models and 1,500 Econo models.
  2. b. There was no beginning work in process; however, there were 300 units in ending work in process: 200 Deluxe and 100 Econo models. Both models were 80 percent complete with respect to conversion costs and 100 percent complete with respect to direct materials.
  3. c. The Pattern Department experienced the following costs:

Chapter 6, Problem 41P, Golding Manufacturing, a division of Farnsworth Sporting, Inc., produces two different models of , example  1

  1. d. On an experimental basis, the requisition forms for direct materials were modified to identify the dollar value of the direct materials used by the Econo and Deluxe models:

Chapter 6, Problem 41P, Golding Manufacturing, a division of Farnsworth Sporting, Inc., produces two different models of , example  2

Required:

  1. 1. Compute the unit cost for the handles produced by the Pattern Department, assuming that process costing is totally appropriate.
  2. 2. Compute the unit cost of each handle, using the separate cost information provided on materials.
  3. 3. Compare the unit costs computed in Requirements 1 and 2. Is Karen justified in her belief that a pure process-costing relationship is not appropriate? Describe the costing system that you would recommend.
  4. 4. In the past, the marketing manager has requested more money for advertising the Econo line. Aaron has repeatedly refused to grant any increase in this product’s advertising budget because its per-unit profit (selling price less manufacturing cost) is so low. Given the results in Requirements 1 through 3, was Aaron justified in his position?

1.

Expert Solution
Check Mark
To determine

Determine the unit cost for the handles manufactured by the Department P by supposing that process costing is totally suitable.

Explanation of Solution

Process Costing: Process costing is method of cost accounting in which all the costs that are incurred during production process are recorded. Output of one process becomes input for next process. This method is used to apply cot to similar products that are mass-produced in uninterrupted manner.

Ascertain the unit cost:

ParticularsUnits
Physical flow schedule: 
Units, beginning work in process (BWIP)0
Units started2,800
Total units to account for2,800
  
Units completed and transferred out: 
Started and completed2,500
From BWIP0
Units, ending work in progress (EWIP) 300
Total units accounted for:2,800

Table (1)

Charge the costs to respective departments:

ParticularsDirect materialsConversion costTotal
Costs in BWIP$ 0 $ 0 $ 0
Costs added by department$ 114,000 $ 82,200 $ 196,200
Total costs$ 114,000 $ 82,200 $ 196,200

Table (2)

Thus, the total cost for direct materials and conversion cost are $114,000 and $82,200 respectively.

Compute Equivalent units:

ParticularsDirect materialsConversion cost
Units completed2,5002,500
Add: Equivalent units in EWIP 300  240
Total equivalent units2,8002,740

Table (3)

Therefore, the total equivalent units of direct materials and conversion cost are 2,800 units and 2,740 units respectively.

Determine unit cost:

Unit cost = unit direct materials cost + unit conversion costs=Cost of diect materialEquivalent units of direct material+conversion costEquivalent units of conversion cost=$114,0002,800units+$82,2002,740units=$40.71(Rounded)+$30.00=$70.71per equivalent unit 

Thus, the cost per equivalent unit is $70.71.

2.

Expert Solution
Check Mark
To determine

Ascertain the unit cost of each handle, by using the separate cost information provided on materials.

Explanation of Solution

Note: The material cost will change because the conversion activity is common for both bows. Therefore, the material cost per unit is ascertained and then added to the unit conversion costs.

  1. (a) Compute unit cost for the Econo model bow:

Step 1: Physical flow schedule:

Physical flow schedule
ParticularsUnits
BWIP units0
Units started1,600
Total units to account for1,600
  
Units completed and transferred out: 
Started and completed1,500
From BWIP0
EWIP units100
Total units accounted for1,600

Table (4)

Step 2: Ascertain the direct material cost charged to the department:

ParticularsDirect materials
Costs in BWIP$ 0
Costs added by department$ 30,000
Total costs$ 30,000

Table (5)

Step 3: Determine the equivalent units:

ParticularsDirect materials
Units completed1,500
Add: Equivalent units in EWIP100
Total Equivalent units1,600

Table (6)

Step 4: Compute the unit cost:

Unit cost = Unit direct materials cost + unit conversion costs=Cost of direct materialEquivalent units of direct materials+Unit conversion costs=$30,0001,600+$30.00=$48.75

Therefore, the unit cost of Econo model is $48.75.

  1. (b) Compute unit cost for the Deluxe model bow:

Step 1: Physical flow schedule:

Physical flow schedule
ParticularsUnits
BWIP units0
Units started1,200
Total units to account for1,200
  
Units completed and transferred out: 
Started and completed1,000
From BWIP0
EWIP units200
Total units accounted for1,200

Table (7)

Step 2: Ascertain the direct material cost charged to the department:

ParticularsDirect materials
Costs in BWIP$ 0
Costs added by department$ 84,000
Total costs$ 84,000

Table (8)

Step 3: Determine the equivalent units:

ParticularsDirect materials
Units completed1,000
Add: Equivalent units in EWIP200
Total Equivalent units1,200

Table (9)

Step 4: Compute the unit cost:

Unit cost = unit direct materials cost + unit conversion costs=Cost of direct materialEquivalent units of direct materials+unit conversion costs=$84,0001,200+$30=$100

Therefore, the unit cost of deluxe model is $100.

3.

Expert Solution
Check Mark
To determine

Compare the unit costs computed in requirements 1 and 2 and whether K can able to justify the relationship of pure process-costing is not appropriate and recommend the most appropriate costing system with justification.

Explanation of Solution

Following are the unit costs in respective 3 cases:

ParticularsAmount ($)
Unit cost for Econo model$ 48.75
Unit cost for Deluxe model$ 100.00
Unit cost for both together$ 70.71

Table (10)

The application of pure process costing reveals cost of deluxe model as understated and cost of the Econo model as overstated. Since the error is highly significant and thereby K may substantiate that a pure process-costing relationship is not suitable. Process costing is appropriate for all departments except pattern department. In the pattern department, the cost of direct materials should be tracked by batch, but the process-costing procedures can be applied for conversion costs.

4.

Expert Solution
Check Mark
To determine

Explain the significance of the decision taken by A to decline the repeated requests of the additional amount requested by the marketing manager for advertising is justifiable or not.

Explanation of Solution

The profitability under current process-costing shows an erroneous $51 difference in profitability, that arises due to the understated profitability of $22 in the case Econo line and an overstated profitability of $29 in case of deluxe line. Thus, the difference is significant to request for additional advertising dollars by marketing managers. Since A is using the wrong cost information his decision regarding the decline of the granting of additional amount request was quite wrong. Therefore, this case point out the importance of an accurate costing system. 

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Chapter 6 Solutions

Cornerstones of Cost Management (Cornerstones Series)

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    Cost Accounting - Definition, Purpose, Types, How it Works?; Author: WallStreetMojo;https://www.youtube.com/watch?v=AwrwUf8vYEY;License: Standard YouTube License, CC-BY