Chapter 18, Problem 18.4CP

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

Memo

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	$248.07	$121.93

Table (5)

Particulars	Paper Machine No.1 (A)	Paper Machine No.2 (B)	Difference (A – C)
Material cost per ton	$290.54	$143.04	$147.50
Conversion cost per ton	$248.07	$121.93	$126.14

Table (6)

Product color analysis:

Production Run Number	Paper Machine	Color	Materials costs	Conversion costs	Tons
						1	1	Green	$40,300	$18,300	150
3	1	Green	$44,600	$22,500	150
5	2	Green	$38,300	$18,900	160
7	2	Green	$35,600	$18,400	130
Total			$158,800	$78,100	590

Table (7)

Production Run Number	Paper Machine	Color	Materials costs	Conversion costs	Tons
						2	1	Yellow	$41,700	$21,200	140
4	1	Yellow	$36,100	$18,100	120
6	2	Yellow	$33,900	$15,200	140
8	2	Yellow	$33,600	$17,000	140
Total			$145,300	$71,500	540

Table (8)

Green Paper	Material cost per ton (A ÷ C)	Conversion cost per ton (B ÷ C)
			Total direct material costs (A)	$158,800
Total conversion costs (B)		$78,100
Tons (C )	590	590
Cost per ton	$269.15	$132.37

Table (9)

Yellow Paper	Material cost per ton (A ÷ C)	Conversion cost per ton (B ÷ C)
			Total direct material costs (A)	$145,300
Total conversion costs (B)		$71,500
Tons (C )	540	540
Cost per ton	$269.07	$132.41

Table (10)

Particulars	Green Paper (A)	Yellow Paper (B)	Difference (A – C)
Material cost per ton	$269.15	$269.07	$0.08
Conversion cost per ton	$132.37	$132.41	($0.04)

The outcomes are clear. Paper machine 1 has a considerably higher materials and conversion cost per ton in August. It appears that, the paper machine is over applying pulp. This is resultant in a growth in both the materials and conversion cost per ton. Paper machine No.2 is consecutively at a cost near out chronological cost per ton. There is no proof of a color delinquent. Both color papers are consecutively at or near the same materials and conversion cost per ton. Therefore, the requirement change for green has not performed to reason a problem in the papermaking operation. I forecast that if we develop the process of paper machine No.1, we will be capable to run the department proximate the historic average cost per ton.

Please let me know if you need any more clarifications on this matter.

Regards,

LB