Question

Brokia Electronics manufactures three cell phone models, which differ only in the components included: Basic, Photo, and UrLife. Production takes place in two departments, Assembly and Special Packaging. The Basic and Photo models are complete after Assembly. The UrLife model goes from Assembly to Special Packaging and is completed there. Data for July are shown in the following table. Conversion costs are allocated based on the number of units produced. There are no work-in-process inventories.

	Total			Basic (40,000 units)			Photo (20,000 units)			UrLife (10,000 units)
Materials	$	2,440,000		$	500,000		$	1,220,000		$	720,000
Conversion costs:
Assembly	$	2,220,400
Special Packaging		620,000
Total conversion costs	$	2,840,400

Required:

a. What is the cost per unit transferred to finished goods inventory for each of the three phones in July?

b. The UrLife model is sold only to the government on a cost-plus basis. The marketing vice president suggests that conversion costs in Assembly could be allocated on the basis of material costs so he can offer a lower price for the Basic model.

1. What cost would be reported for the three models if the marketing vice president's suggestion is adopted?

2. Would this be ethical? Assume the conversion costs are not related to material dollars.

Answer 1

Computation of cost per unit transferred to finished goods inventory

b. The UrLife model is sold only to the government on a cost-plus basis. The marketing vice president suggests that conversion costs in Assembly could be allocated on the basis of material costs so he can offer a lower price for the Basic model.

1. What cost would be reported for the three models if the marketing vice president's suggestion is adopted?

2. Would this be ethical? Assume the conversion costs are not related to material dollars.

This would be not ethical. As the Assembly costs should be allocated on the basis of no. of units assembled.