Chapter 2, Problem 4TIF

RIRA Company makes attachments such as backhoes and grader and bulldozer blades for construction equipment. The company uses a job order cost system. Management is concerned about cost performance and evaluates the job cost sheets to learn more about the cost effectiveness of the operations. To facilitate a comparison, the job cost sheets for Job 206 (for 50 backhoe buckets completed in October) and Job 228 (for 75 backhoe buckets completed in December) were pulled and presented as follows:

Management is concerned about the increase in unit costs over the months from October to December. To understand what has occurred, management interviewed the purchasing manager and quality manager.

Purchasing Manager: Prices have been holding steady for our raw materials during the first half of the year. I found a new supplier for our bulk steel that was willing to offer a better price than we received in the past. I saw these lower steel prices and jumped on them, knowing that a reduction in steel prices would have a very favorable impact on our costs.

Quality Manager: Something happened around mid-year. All of a sudden, we were experiencing problems with respect to the quality of our steel. As a result, we’ve been having all sorts of problems on the shop floor in our foundry and welding operation.

1. a. Analyze the two job cost sheets and identify why the unit costs have changed for the backhoe buckets. Complete the following schedule to help in your analysis:

1. b. How would you interpret what has happened in light of your analysis and the interviews?