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 (32,000 units)			UrLife (8,000 units)
Materials	$	2,000,000		$	488,000		$	1,208,000		$	304,000
Conversion costs:
Assembly	$	1,884,000
Special Packaging		608,000
Total conversion costs	$	2,492,000

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.

Answer 1

a. Cost per unit transferred to finished goods inventory in July
Models	Basic	Life	UrLife	Total
Production (No. of units)	40,000	32,000	8,000	80,000
a. Materials                       $	488000	1208000	304000	2000000
b. Conversion costs:
Assembly                   $	942000	753600	188400	1884000
special Packing         $	0	0	608000	608000
Total cost	1430000	1961600	1100400	4492000
c. Cost per unit       $	35.75	61.30	137.55
b. cost per unit (allocation of conversion cost on the basis of materials cost)
Models	Basic	Life	UrLife	Total
Production (No. of units)	40000	32000	8000	80000
a. Materials                $	488000	1208000	304000	2000000
b. Conversion costs:
Assembly                   $	459696	1137936	286368	1884000
special Packing         $	0	0	608000	608000
Total cost                $	947696	2345936	1198368	4492000
c. Cost per unit        $	23.69	73.31	149.80
1. cost per unit would be reported if the marketing vice president's suggestion adopted
Models	Basic	Life	Urlife
Cost per unit            $	23.69	73.31	149.80
2.Conversion cost are production costs, other than the cost of a product's direct material cost Assumingthat the conversion costs are not related to material dollors, it is not ethical to allocate conversion cost on the basis of material cost to products.