Concept explainers
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
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:
- a. There were a total of 2,500 bows completed: 1,000 Deluxe models and 1,500 Econo models.
- 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.
- c. The Pattern Department experienced the following costs:
- 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:
Required:
- 1. Compute the unit cost for the handles produced by the Pattern Department, assuming that process costing is totally appropriate.
- 2. Compute the unit cost of each handle, using the separate cost information provided on materials.
- 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. 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.
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:
Particulars | Units |
Physical flow schedule: | |
Units, beginning work in process (BWIP) | 0 |
Units started | 2,800 |
Total units to account for | 2,800 |
Units completed and transferred out: | |
Started and completed | 2,500 |
From BWIP | 0 |
Units, ending work in progress (EWIP) | 300 |
Total units accounted for: | 2,800 |
Table (1)
Charge the costs to respective departments:
Particulars | Direct materials | Conversion cost | Total |
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:
Particulars | Direct materials | Conversion cost |
Units completed | 2,500 | 2,500 |
Add: Equivalent units in EWIP | 300 | 240 |
Total equivalent units | 2,800 | 2,740 |
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:
Thus, the cost per equivalent unit is $70.71.
2.
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.
- (a) Compute unit cost for the Econo model bow:
Step 1: Physical flow schedule:
Physical flow schedule | |
Particulars | Units |
BWIP units | 0 |
Units started | 1,600 |
Total units to account for | 1,600 |
Units completed and transferred out: | |
Started and completed | 1,500 |
From BWIP | 0 |
EWIP units | 100 |
Total units accounted for | 1,600 |
Table (4)
Step 2: Ascertain the direct material cost charged to the department:
Particulars | Direct materials |
Costs in BWIP | $ 0 |
Costs added by department | $ 30,000 |
Total costs | $ 30,000 |
Table (5)
Step 3: Determine the equivalent units:
Particulars | Direct materials |
Units completed | 1,500 |
Add: Equivalent units in EWIP | 100 |
Total Equivalent units | 1,600 |
Table (6)
Step 4: Compute the unit cost:
Therefore, the unit cost of Econo model is $48.75.
- (b) Compute unit cost for the Deluxe model bow:
Step 1: Physical flow schedule:
Physical flow schedule | |
Particulars | Units |
BWIP units | 0 |
Units started | 1,200 |
Total units to account for | 1,200 |
Units completed and transferred out: | |
Started and completed | 1,000 |
From BWIP | 0 |
EWIP units | 200 |
Total units accounted for | 1,200 |
Table (7)
Step 2: Ascertain the direct material cost charged to the department:
Particulars | Direct materials |
Costs in BWIP | $ 0 |
Costs added by department | $ 84,000 |
Total costs | $ 84,000 |
Table (8)
Step 3: Determine the equivalent units:
Particulars | Direct materials |
Units completed | 1,000 |
Add: Equivalent units in EWIP | 200 |
Total Equivalent units | 1,200 |
Table (9)
Step 4: Compute the unit cost:
Therefore, the unit cost of deluxe model is $100.
3.
Compare the unit costs computed in requirements 1 and 2 and whether K can able to justify the relationship of pure process-costing is not appropriate and recommend the most appropriate costing system with justification.
Explanation of Solution
Following are the unit costs in respective 3 cases:
Particulars | Amount ($) |
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.
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.
Want to see more full solutions like this?
Chapter 6 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- 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 handles. The limbs pass through four sequential processes before reaching final assembly: layup, molding, fabricating, and finishing. In the layup department, limbs are created by laminating layers of wood. In the molding department, the limbs are heat-treated, under pressure, to form strong resilient limbs. In the fabricating department, any protruding glue or other processing residue is removed. Finally, in the finishing department, 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 machines 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% 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 material input. Aaron: Your predecessor is responsible. He believed that tracking the difference in material cost wasnt worth the effort. He simply didnt 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 isnt 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 dont 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: a. There were a total of 2,500 bows completed: 1,000 Deluxe models and 1,500 Econo models. b. There was no BWIP; however, there were 300 units in EWIP: 200 Deluxe and 100 Econo models. Both models were 80% complete with respect to conversion costs and 100% complete with respect to materials. c. The pattern department experienced the following costs: d. On an experimental basis, the requisition forms for materials were modified to identify the dollar value of the materials used by the Econo and Deluxe models: Required: 1. Compute the unit cost for the handles produced by the pattern department, assuming that process costing is totally appropriate. Round unit cost to two decimal places. 2. Compute the unit cost of each handle, using the separate cost information provided on materials. Round unit cost to two decimal places. 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. 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 products advertising budget because its per-unit profit (selling price minus manufacturing cost) is so low. Given the results in Requirements 1 through 3, was Aaron justified in his position?arrow_forwardAKL Foundry manufactures metal components for different kinds of equipment used by the aerospace, commercial aircraft, medical equipment, and electronic industries. The company uses investment casting to produce the required components. Investment casting consists of creating, in wax, a replica of the final product and pouring a hard shell around it. After removing the wax, molten metal is poured into the resulting cavity. What remains after the shell is broken is the desired metal object ready to be put to its designated use. Metal components pass through eight processes: gating, shell creating, foundry work, cutoff, grinding, finishing, welding, and strengthening. Gating creates the wax mold and clusters the wax pattern around a sprue (a hole through which the molten metal will be poured through the gates into the mold in the foundry process), which is joined and supported by gates (flow channels) to form a tree of patterns. In the shell-creating process, the wax molds are alternately dipped in a ceramic slurry and a fluidized bed of progressively coarser refractory grain until a sufficiently thick shell (or mold) completely encases the wax pattern. After drying, the mold is sent to the foundry process. Here, the wax is melted out of the mold, and the shell is fired, strengthened, and brought to the proper temperature. Molten metal is then poured into the dewaxed shell. Finally, the ceramic shell is removed, and the finished product is sent to the cutoff process, where the parts are separated from the tree by the use of a band saw. The parts are then sent to the grinding process, where the gates that allowed the molten metal to flow into the ceramic cavities are ground off using large abrasive grinders. In the finishing process, rough edges caused by the grinders are removed by small handheld pneumatic tools. Parts that are flawed at this point are sent to welding for corrective treatment. The last process uses heat to treat the parts to bring them to the desired strength. In 20X1, the two partners who owned AKL Foundry decided to split up and divide the business. In dissolving their business relationship, they were faced with the problem of dividing the business assets equitably. Since the company had two plantsone in Arizona and one in New Mexicoa suggestion was made to split the business on the basis of geographic location. One partner would assume ownership of the plant in New Mexico, and the other would assume ownership of the plant in Arizona. However, this arrangement had one major complication: the amount of WIP inventory located in the Arizona plant. The Arizona facilities had been in operation for more than a decade and were full of WIP. The New Mexico facility had been operational for only 2 years and had much smaller WIP inventories. The partner located in New Mexico argued that to disregard the unequal value of the WIP inventories would be grossly unfair. Unfortunately, during the entire business history of AKL Foundry, WIP inventories had never been assigned any value. In computing the cost of goods sold each year, the company had followed the policy of adding depreciation to the out-of-pocket costs of direct labor, direct materials, and overhead. Accruals for the company are nearly nonexistent, and there are hardly ever any ending inventories of materials. During 20X1, the Arizona plant had sales of 2,028,670. The cost of goods sold is itemized as follows: Upon request, the owners of AKL provided the following supplementary information (percentages are cumulative): Gating had 10,000 units in BWIP, 60% complete. Assume that all materials are added at the beginning of each process. During the year, 50,000 units were completed and transferred out. The ending inventory had 11,000 unfinished units, 60% complete. Required: 1. The partners of AKL want a reasonable estimate of the cost of WIP inventories. Using the gating departments inventory as an example, prepare an estimate of the cost of the EWIP. What assumptions did you make? Did you use the FIFO or weighted average method? Why? (Note: Round unit cost to two decimal places.) 2. Assume that the shell-creating process has 8,000 units in BWIP, 20% complete. During the year, 50,000 units were completed and transferred out. (Note: All 50,000 units were sold; no other units were sold.) The EWIP inventory had 8,000 units, 30% complete. Compute the value of the shell-creating departments EWIP. What additional assumptions had to be made?arrow_forwardDevereaux Cycles makes three models of scooter: Commuter, Sport, and X-treme. The scooters are produced in four departments: Assembly, Detailing, Customization, and Packaging. All three models are started in Assembly, where all materials are assembled. The Commuter is then sent to Packaging, where it is packaged and transferred to finished goods inventory. The Sport is then transferred to Detailing. Once the detailing process is completed, the Sport models are transferred to Packaging and then finished goods. The X- Treme model is assembled and then transferred to Customization, and then Packaging. When packaged, it is transferred to finished goods. Data for February are shown in the following table. Conversion costs are allocated based on the number of units processed in each department. No work-in-process inventories are maintained in any department. Materials Conversion costs: Assembly Detailing Customization Packaging Total conversion costs Commuter Sport X-Treme Total $ 3,694,000…arrow_forward
- Godoarrow_forwardScribners Corporation produces fine papers in three production departments—Pulping, Drying, and Finishing. In the Pulping Department, raw materials such as wood fiber and rag cotton are mechanically and chemically treated to separate their fibers. The result is a thick slurry of fibers. In the Drying Department, the wet fibers transferred from the Pulping Department are laid down on porous webs, pressed to remove excess liquid, and dried in ovens. In the Finishing Department, thedried paper is coated, cut, and spooled onto reels. The company uses the weighted-average method in its process costing system. Data for March for the Drying Department follow: No materials are added in the Drying Department. Pulping cost represents the costs of the wet fibers transferred in from the Pulping Department. Wet fiber is processed in the Drying Department in batches; each unit in the above table is a batch and one batch of wet fibers produces a setamount of dried paper that is passed on to the…arrow_forwardScribners Corporation produces fine papers in three production departments—Pulping, Drying, and Finishing. In the Pulping Department, raw materials such as wood fiber and rag cotton are mechanically and chemically treated to separate their fibers. The result is a thick slurry of fibers. In the Drying Department, the wet fibers transferred from the Pulping Department are laid down on porous webs, pressed to remove excess liquid, and dried in ovens. In the Finishing Department, the dried paper is coated, cut, and spooled onto reels. The company uses the weighted-average method in its process costing system. Data for March for the Drying Department follow: Percent Completed Units Pulping Conversion Work in process inventory, March 1 3,500 100 % 80 % Work in process inventory, March 31 7,500 100 % 60 % Pulping cost in work in process inventory, March 1 $ 1,085 Conversion cost in work in process inventory, March 1 $ 350 Units transferred to the…arrow_forward
- Scribners Corporation produces fine papers in three production departments—Pulping, Drying, and Finishing. In the Pulping Department, raw materials such as wood fiber and rag cotton are mechanically and chemically treated to separate their fibers. The result is a thick slurry of fibers. In the Drying Department, the wet fibers transferred from the Pulping Department are laid down on porous webs, pressed to remove excess liquid, and dried in ovens. In the Finishing Department, the dried paper is coated, cut, and spooled onto reels. The company uses the weighted-average method in its process costing system. Data for March for the Drying Department follow: Units Percent Completed Pulping Conversion Work in process inventory, March 1 4,000 100% 80% Work in process inventory, March 31 8,000 100% 75% Pulping cost in work in process inventory, March 1 $ 2,860 Conversion cost in work in process inventory, March 1 $ 800 Units transferred to the next production…arrow_forwardI need the answer as soon as possiblearrow_forwardFerdon Watches, Inc., makes four models of watches, Gag-Gift, Commuter, Sport, and Retirement. Ferdon manufactures the watches in four departments: Assembly, Polishing, Special Finishing, and Packaging. All four models are started in Assembly where all material is assembled. The Gag-Gift is transferred to Packaging, where it is packaged and transferred to finished goods inventory. The Commuter and Sport are assembled, then transferred to Polishing. Once the polishing process is completed, they are transferred to Packaging and then finished goods. The Retirement model is assembled and then transferred to Special Finishing, and then Packaging. When packaged, it is transferred to finished goods. Data for October are shown in the following table. Conversion costs are allocated based on the number of units processed in each department. Total Gag-Gift(5,000 units) Commuter(10,000 units) Sport(13,000 units) Retirement(2,000 units) Materials $ 321,000 $ 15,000 $ 90,000…arrow_forward
- Ferdon Watches, Inc., makes four models of watches, Gag-Gift, Commuter, Sport, and Retirement. Ferdon manufactures the watches in four departments: Assembly, Polishing, Special Finishing, and Packaging. All four models are started in Assembly where all material is assembled. The Gag-Gift is transferred to Packaging, where it is packaged and transferred to finished goods inventory. The Commuter and Sport are assembled, then transferred to Polishing. Once the polishing process is completed, they are transferred to Packaging and then finished goods. The Retirement model is assembled and then transferred to Special Finishing, and then Packaging. When packaged, it is transferred to finished goods. Data for October are shown in the following table. Conversion costs are allocated based on the number of units processed in each department. Materials Conversion costs: Assembly Polishing Special Finishing Packaging Total conversion costs Gag-Gift Commuter > Answer is complete but not entirely…arrow_forwardFerdon Watches, Inc., makes four models of watches, Gag-Gift, Commuter, Sport, and Retirement. Ferdon manufactures the watches in four departments: Assembly, Polishing, Special Finishing, and Packaging. All four models are started in Assembly where all material is assembled. The Gag-Gift is transferred to Packaging, where it is packaged and transferred to finished goods inventory. The Commuter and Sport are assembled, then transferred to Polishing. Once the polishing process is completed, they are transferred to Packaging and then finished goods. The Retirement model is assembled and then transferred to Special Finishing, and then Packaging. When packaged, it is transferred to finished goods. Data for October are shown in the following table. Conversion costs are allocated based on the number of units processed in each department. Total Gag-Gift(9,000 units) Commuter(14,000 units) Sport(21,000 units) Retirement(6,000 units) Materials $ 371,000 $ 18,000 $…arrow_forwardScribners Corporation produces fine papers in three production departments-Pulping, Drying, and Finishing. In the Pulping Department, raw materials such as wood fiber and rag cotton are mechanically and chemically treated to separate their fibers. The result is a thick slurry of fibers. In the Drying Department, the wet fibers transferred from the Pulping Department are laid down on porous webs, pressed to remove excess liquid, and dried in ovens. In the Finishing Department, the dried paper is coated, cut, and spooled onto reels. The company uses the weighted-average method in its process costing system. Data for March for the Drying Department follow: Work in process inventory, March 1 Work in process inventory, March 31 Pulping cost in work in process inventory, March 1 Conversion cost in work in process inventory, March 1 Units transferred to the next production department Pulping cost added during March Conversion cost added during March Complete this question by entering your…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning