IPort Products makes cases for portable music players in two processes, cutting and sewing. The cutting process has a capacity of 115,000 units per year; sewing has a capacity of 150,000 units per year. Cost information follows. Inspection and testing costs $ 47,500 Scrap costs (all in the cutting dept.) 147,500 Demand is very strong. At a sales price of $15.00 per case, the company can sell whatever output it can produce. IPort Products can start only 115,000 units into production in the Cutting Department because of capacity constraints. Defective units are detected at the end of production in the Cutting Department. At that point, defective units are scrapped. Of the 115,000 units started at the cutting operation, 17,250 units are scrapped. Unit costs in the Cutting Department for both good and defective units equal $11.30 per unit, including an allocation of the total fixed manufacturing costs of $264,500 per year to units. Direct materials (variable) $ 6.60 Direct manufacturing, setup, and materials handling labor (variable) 2.40 Depreciation, rent, and other overhead (fixed) 2.30 Total unit cost $ 11.30 The fixed cost of $2.30 per unit is the allocation of the total fixed costs of the Cutting Department to each unit, whether good or defective. (The total fixed costs are the same whether the units produced in the Cutting Department are good or defective.) The good units from the Cutting Department are sent to the Sewing Department. Variable manufacturing costs in the Sewing Department are $1.60 per unit and fixed manufacturing costs are $37,500 per year. There is no scrap in the Sewing Department. Therefore, the company’s total sales quantity equals the Cutting Department’s good output. The company incurs no other variable costs. The company’s designers have discovered a new type of direct material that would reduce scrap in the Cutting Department to 5,750 units. However, using the new material would increase the direct materials costs to $6.85 per unit in the Cutting Department for all 115,000 units. Recall that only 115,000 units can be started each year. Required: a. Compute profit under each alternative. Assume that inspection and testing costs will be reduced by $14,500 if the new material is used. Fixed costs in the sewing department will remain the same whether 97,750 or 109,250 units are produced. b. Should IPort use the new material and improve quality
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.
IPort Products makes cases for portable music players in two processes, cutting and sewing. The cutting process has a capacity of 115,000 units per year; sewing has a capacity of 150,000 units per year. Cost information follows.
| Inspection and testing costs | $ | 47,500 | |
| Scrap costs (all in the cutting dept.) | 147,500 | ||
Demand is very strong. At a sales price of $15.00 per case, the company can sell whatever output it can produce.
IPort Products can start only 115,000 units into production in the Cutting Department because of capacity constraints. Defective units are detected at the end of production in the Cutting Department. At that point, defective units are scrapped. Of the 115,000 units started at the cutting operation, 17,250 units are scrapped. Unit costs in the Cutting Department for both good and defective units equal $11.30 per unit, including an allocation of the total fixed
| Direct materials (variable) | $ | 6.60 | |
| Direct manufacturing, setup, and materials handling labor (variable) | 2.40 | ||
| 2.30 | |||
| Total unit cost | $ | 11.30 | |
The fixed cost of $2.30 per unit is the allocation of the total fixed costs of the Cutting Department to each unit, whether good or defective. (The total fixed costs are the same whether the units produced in the Cutting Department are good or defective.)
The good units from the Cutting Department are sent to the Sewing Department. Variable manufacturing costs in the Sewing Department are $1.60 per unit and fixed manufacturing costs are $37,500 per year. There is no scrap in the Sewing Department. Therefore, the company’s total sales quantity equals the Cutting Department’s good output. The company incurs no other variable costs.
The company’s designers have discovered a new type of direct material that would reduce scrap in the Cutting Department to 5,750 units. However, using the new material would increase the direct materials costs to $6.85 per unit in the Cutting Department for all 115,000 units. Recall that only 115,000 units can be started each year.
Required:
a. Compute profit under each alternative. Assume that inspection and testing costs will be reduced by $14,500 if the new material is used. Fixed costs in the sewing department will remain the same whether 97,750 or 109,250 units are produced.
b. Should IPort use the new material and improve quality?
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