For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters.The chief engineer has recommended against this move, however, pointing out that the cost to produce thestarters would be greater than the current $8.40 per unit purchase price:Per Unit TotalDirect materials ............................... $3.10Direct labor ...................................... 2.70Supervision ..................................... 1.50 $60,000Depreciation .................................... 1.00 $40,000Variable manufacturing overhead ... 0.60Rent ................................................ 0.30 $12,000Total production cost ....................... $9.20A supervisor would have to be hired to oversee production of the starters. However, the company hassufficient idle tools and machinery that no new equipment would have to be purchased. The rent chargeabove is based on space utilized in the plant. The total rent on the plant is $80,000 per period. Depreciation is due to obsolescence rather than wear and tear.Required:Prepare computations showing how much profits will increase or decrease as a result of making thestarters.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters.
The chief engineer has recommended against this move, however, pointing out that the cost to produce the
starters would be greater than the current $8.40 per unit purchase price:
Per Unit Total
Direct materials ............................... $3.10
Direct labor ...................................... 2.70
Supervision ..................................... 1.50 $60,000
Variable manufacturing
Rent ................................................ 0.30 $12,000
Total production cost ....................... $9.20
A supervisor would have to be hired to oversee production of the starters. However, the company has
sufficient idle tools and machinery that no new equipment would have to be purchased. The rent charge
above is based on space utilized in the plant. The total rent on the plant is $80,000 per period. Depreciation is due to obsolescence rather than wear and tear.
Required:
Prepare computations showing how much profits will increase or decrease as a result of making the
starters.
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