Question

Cost Data for Financial Reporting and Special Order Decisions Friendly Greeting Card Company produces a full range of greetings cards sold through pharmacies and department stores. Each card is designed by independent artists. A production master is then prepared for each design. The production master has an indefinite life. Product designs for popular cards are deemed to be valuable assets. If a card sells well, many batches of the design will be manufactured over a period of years. Hence, Friendly Greeting maintains an inventory of production masters so that card may be periodically reissued. Cards are produced in batches that may vary by increments of 1,000 units. An average batch consists of 10,000 cards. Producing a batch requires placing the production master on the printing press, setting the press for the appropriate paper size, and making other adjustments for colors and so forth. Following are facility-, product-, and unit-level cost information:

Product design and production master per new card…………… $ 2,000.00

Batch setup (typically per 10,000 cards)…………………………. 200.00

Materials per 1,000 cards………………………………………….. 100.00

Conversion per 1,000 cards……………………………………….. 80.00

Shipping Per batch…………………………………………………………... 25.00

Per card……………………………………………………………. 0.02

Selling and administrative

Companywide…………………………………………………….. 200,000.00

Per product design marketed…………………………………… 500.00

Information from previous year...

Products designs and masters prepared for new cards……….. 90

Product designs marketed………………………………………… 120

Batches manufactured…………………………………………….. 500

Cards manufactured and solid……………………………………. 5,000,000

QUESTIONS:

a. Describe how you would determine the cost of goods sold and the value of any ending inventory for financial reporting purposes. (No computations are required.)

b. You have just received an inquiry from Walgreens stores to develop and manufacture 20 special designs for sale exclusively in Walgreens stores. The cards would be sold for $1.50 each, and Walgreens would pay Friendly Greeting $0.35 per card. The initial order is for 20,000 cards of each design. If the cards sell well, Walgreens plans to place additional orders for these and other designs. Because of the preestablished sales relationship, no marketing costs would be associated with the cards sold to Walgreens. How would you evaluate the desirability of the the Walgreens proposal?

c. Explain any differences between the costs considered in your answer to requirements (a) and the costs considered in your answers to requirements (b).

Answer 1

a. Cost of goods sold will be arrived at by considerting the following formula = Beginning inventory+costs incurred during the period to manufacture -ending inventory. The following are the costs incurred during the period to manufacture:

i) Cost of raw materials

ii) Costs of conversion

iii) Cost to set up batch

Ending inventory will be valued at the cost per unit of the above mentioned costs.

Product design costs falls under the gambit of R&D expenses. In the given case, the company treats product design as a valuable asset and hence cannot be added to the cost of the goods sold or inventory as they are used over a long period of time. The costs incurred can instead be capitalized and amortized over a period of time, depending on the life of the asset

b. The cost to design and manufacture new cards for Walgreens will be as follows:

Cost	Unit size	Cost	Cost of 20,000 cards
Product design cost	20	2000	40000
Batch set up	10000 cards, 2 batches	200	400
Materials	1000 cards	100	2000
Conversion	1000 cards	80	1600
Shipping	per card	0.02	400
Cost of production excluding design cost			4400
Expected revenue	0.35 per card		7000

The expected revenue is higher than the cost of production, hence the project can be undertaken

Workings:

Number of batches to be set up is 2 (20,000/10,000), cost of batch set up is $200*2 = 400

Cost of rawmaterials - For 1000 cards, its $100 for 20,000 cards it will be 20000*100/1000

Costs of conversion - For 1000 cards, its $80 for 20,000 cards it will be 20000*80/1000

Product design costs will be capitalized ans amortized over a period of time

c. The difference between a and b is that, shipping costs were added to the Walgreens estimated cost to find out the total cost incurred until the goods reached the customer. Cost of goods sold do not include the shipping costs as they are a part of selling expenses and are usually catergorized as operating expenses.