Question

Namaste Company manufactures a unique yoga mat. The company began operations December 1, 2018. Its accountant quit the second week of operations, and the company is searching for a replacement. The company has decided to test the knowledge and ability of all candidates interviewing for the position. Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information. The information provided to each candidate is as follows.

Cost Items and Account Balances

Administrative salaries                                   $15,500

Advertising                                                     11,000

Cash, December 1                                               –0–

Depreciation on factory building                       1,500

Depreciation on office equipment                        800

Insurance on factory building                             1,500

Miscellaneous expenses—factory                      1,000

Office supplies expense                                         300

Professional fees                                                    500

Property taxes on factory building                        400

Raw materials used                                          70,000

Rent on production equipment                         6,000

Research and development                             10,000

Sales commissions                                            40,000

Utility costs—factory                                             900

Wages—factory                                                70,000

Work in process, December 1                            –0–

Work in process, December 31                          –0–

Raw materials inventory, December 1               –0–

Raw materials inventory, December 31            –0–

Raw material purchases                                   70,000

Finished goods inventory, December 1              –0–

Production and Sales Data

Number of mats produced                             10,000

Expected sales in units for December

($40 unit sales price)                                       8,000

Expected sales in units for January                10,000

Desired ending inventory                               20% of next month’s sales

Direct materials per finished unit                  1 kilogram

Direct materials cost                                       $7 per kilogram

Direct labor hours per unit                             .35

Direct labor hourly rate                                  $20

Cash Flow Data

Cash collections from customers: 75% in month of sale and 25% the following month.

Cash payments to suppliers: 75% in month of purchase and 25% the following month.

Income tax rate: 45%.

Cost of proposed production equipment: $720,000.

Manufacturing overhead and selling and administrative costs are paid as incurred.

Desired ending cash balance: $30,000.

Instructions

Using all the data presented above, do the following.

5. Identify the type of cost accounting system that Namaste Company is probably using at this time. Explain.

6. Under what circumstances might Namaste use a different cost accounting system?

Answer 1

Part 5)

The company is most likely to use the "Process Costing System". It is because, process costing is used when the company is engaged in the production of a large number of similar/ homogeneous products. In the given case, the company is producing yoga mats which would more or less have similar features/characterstics. Therefore, the company would be in a position to employ similar processing techinques for producing these mats. In other words, the mats would be produced using the same processes (from raw material conversion to finished goods) without any need for customization. In such a situation, process costing system would appear to be the most suitable costing technique.

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Part 6)

Namaste company can use "Job Costing System" if it decides to produce different models of yoga mats or produce mats according to specific customer requirements. In other words, the company will be able use to job costing if it moves from standardized production to customized production of yoga mats or produce mats which are substantially different from each other in terms of features/characterstics.