Question

Brunswick Parts is a small manufacturing firm located in eastern Canada. The company, founded in 1947, produces metal parts for many of the larger manufacturing firms located in both Canada and the United States. It prides itself on high quality and customer service, and many of its customers have been buying at least some of their parts from Brunswick since the 1950s.

Production of the parts takes place in one of two plants. The older plant, located in Fredericton, was purchased when the company was founded, and the last major improvements to the plant took place in the 1970s. A newer plant, located in Moncton, was built in 1995 to take advantage of the expanding markets. The same part can be produced in either plant, and the final scheduling decision is based on capacity, transportation costs, and production costs.

At a weekly production meeting, Sara Hunter, the manufacturing manager expresses her frustration at trying to schedule production.

Something isn’t right. We build a new plant to take advantage of new manufacturing technology and we struggle to keep it filled. We didn’t have this problem a few years ago when we couldn’t keep up with demand, but with the current economy, marketing keeps sending orders to the old plant in Fredericton. I know manufacturing, but I guess I must not understand accounting.

The latest order that generated discussion among plant management was placed by Lawrence Machine Tool Company, a long-time customer. The order called for 1,000 units of a special rod (P28) used in one of its many products. The order was received by the marketing department. Following the established procedure at Brunswick, the marketing manager checked the product costs for both plants. Because quality and transportation costs would be the same from either plant, a decision was made to produce and ship from the Fredericton plant.

The cost system at Brunswick is a traditional manufacturing cost system. Plant overhead (including plant depreciation) is allocated to products based on estimated production for the period. Separate overhead rates are computed for each plant. Corporate administration costs are allocated to the plants based on the estimated production in the plant for purposes of executive performance measurement. Production is measured by direct labor-hours. Cost and production information for P28 follows.

Per unit of P28	Moncton	Fredericton
Direct material (1 kilogram @ $25)	$25	$25
Direct labor-hours	3 hours	4 hours
Direct labor wage rate	$11	$12

Corporate and plant overhead budgets are as follows:

	Corporate Administration				Moncton			Fredericton
Corporate
Marketing		$	235,000
R&D			185,000
Depreciation			185,000
General administration			235,000
Plant overhead (before corporate allocations):
Supervision					$	185,000		$	235,000
Indirect labor						285,000			382,000
Depreciation						1,100,000			135,000
Miscellaneous						185,000			235,000
Total		$	840,000		$	1,755,000		$	987,000
Estimated production (direct labor-hours):						117,000			141,000

Required:

a. What would be the reported product cost of P28 per unit for the two plants?

	Product Cost
Moncton	(Per Unit)
Frederiction	(Per Unit)

b. At what plant should the P28 units for the Lawrence order be produced?

• Moncton

• Fredericton

Answer 1

a) First,

Calculating the manufacturing overhead per unit:

Manufacturing Overhead per unit = overhead rate * direct labor hours

Now,

Overhead rate for Moncton plant is :

= 1,755,000 / 185,000 = 9.486 or

= $10 labor hrs.

Overhead rate for Fredericton plant is :

= 1987,000 / 235,000 = 8.455 or

= $ 9 labor hrs.

Calculating the manufacturing overhead for both the plants:

Manufacturing overhead for Moncton for $3 labor hrs is:

= $10 / 1 labor hr. * 3 labor hrs

= $30

Manufacturing overhead for Fredericton for $4 labor hrs is:

= $9 / 1 labor hr. * 4 labor hrs

= $ 36

Now,

Calculating the direct material for Moncton plant for the 3 labor hrs., given that direct labor wage is $11:

= $11 / 1 labor hr * 3 labor hrs

= $33

Calculating the direct material for Frediricton plant for the 4 labor hrs., given that direct labor wage is $12:

= $12 / 1 labor hr * 4 labor hrs

= $ 48

Given that direct material cost for Morcton and Frediricton is $25 and $25 respectively.

Calculating the product cost per unit for both the plants:

Moncton Plant: 25 + 33 + 30

= $88

Frediricton Plant: 25 + 48 + 36

= $109

b) On the basis of the calculation given above, the Moncton Plant is cheaper by $21 per unit in comparison to Frediricton plant. Thus, Morcton will be the plant to produce the order.