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 (25,000 units)			UrLife (10,000 units)
Materials	$	2,450,000		$	497,000		$	1,217,000		$	736,000
Conversion costs:
Assembly	$	2,205,000
Special Packaging		617,000
Total conversion costs	$	2,822,000

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.

Complete this question by entering your answers in the tabs below.

	Cost Per Unit Basic Photo UrLife

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.

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

	Cost Per Unit Basic Photo UrLife

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.

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

-Ethical

-not ethical

Answer 1

SOLUTION:

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

CALCULATION OF COST PER UNIT OF FINISHED INVENTORY:

Particulars	Ratio	Basic	Photo	Urlife	Total
Units		40000	25000	10000
Materials (a)	Given	497000	1217000	736000	2450000
Conversion Cost Assembly (b)	8:5:2	1176000	735000	294000	2205000
(In the ratio of Units)		(2205000*8/15)	(2205000*5/15)	(2205000*2/15)
Special Packaging (c)	Urlife Only	-	-	617000	617000
Total Cost (A=a+b+c)		1673000	1952000	1647000	5272000
Units (B)		40000	25000	10000
Per Unit Cost (C=A/B)		41.825	78.08	164.7

Note:

Special packaging cost incurred specifically for Urlife. Hence It is allocated only to it.

Basic and Photo completed after assembly department. Hence Only assembly cost is apportioned to them.

b.

Allocation of cost based on costs

Marketing vice president suggestion

Particulars	Ratio	Basic	Photo	Urlife	Total
Materials	Given	497000	1217000	736000	2450000
Conversion Cost Assembly	497 : 1217 : 736	447300	1095300	662400	2205000
(In the ratio of Costs)		(2205000*497/2450)	(2205000*1217/2450)	(2205000*736/2450)
Special Packaging	Urlife Only			617000	617000
Total Cost (A)		944300	2312300	2015400	5272000
Units (B)		40000	25000	10000
Per Unit Cost (C=A/B)		23.6075	92.492	201.54

	Basic	Photo	Urlife
Cost per Unit	41.825	78.08	164.7
As per Marketing Vice President's suggestion	23.6075	92.492	201.54

If manufacturer accepts Marketing Vice President's suggestion, It can sell Basic at lower rate whereas it can get more sale consideration for Photo as it sell to Government at Cost Plus Margin Basis.

It will not be ethical to accept suggestion of Marketing Vice President as conversion costs are not linked with material costs. In modern cost methods, conversion costs are apportioned based on cost drivers which is very essential to decide proper costing.

The Pricing decisions are very important to entity for long run operations. If suggestion of Marketing Vice President is accepted, it will lead into disastrous pricing technique.