In: Accounting
Hall Company produces synthetic materials from a chemical extrusion processes. Management has been concerned that material costs per pound are too high. Hall produces only a single product on four separate extrusion lines. The product is processed over two shifts per day. The following data have been collected for analysis:
January
Total materials costs............................................................................. $335,050
Total number of pounds produced....................................................... 50,400
Cost per pound..................................................................................... $6.65
Materials Costs by Production Line
Line 1 Line 2 Line 3 Line 4 Total
Shift 1................................... $36,000 $36,000 $40,300 $36,000 $148,300
Shift 2................................... 45,500 45,500 50,250 45,500 186,750
Total..................................... $81,500 $81,500 $90,550 $81,500 $335,050
Pounds Produced by Production Line
Line 1 Line 2 Line 3 Line 4 Total
Shift 1................................... 6,000 6,000 6,200 6,000 24,200
Shift 2................................... 6,500 6,500 6,700 6,500 26,200
Total..................................... 12,500 12,500 12,900 12,500 50,400
Assume you have interviewed the following individuals in an attempt to discover the problems causing material costs to be inflated: Juanita Marcos, shift 1 supervisor; Ed Curcek, shift 2 supervisor; and Hal Bundy, plant manager. A summary of their responses are given below.
Hal: I just received a directive from headquarters to increase my production rates. I talked to Ed and Juanita about kicking up our production from our old average of 6,000 pounds per shift. Juanita did not seem to think that this was a good idea. My bet is that our problems are with Juanita’s shift.
Juanita: I have decided to keep first-shift production on lines 1, 2, and 4 at 6,000 pounds per shift. That’s because I remember the last time we had our production rates increased. Our materials consumption shot through the roof. Therefore, I’m running a small experiment on Line 3 before increasing the speeds across the whole shift. I know Ed has increased production on the second shift, but he was just brought in from another plant that has new machinery. I don’t expect he’s had the historical experience with these older machines that I’ve had.
Ed: I’ve increased production rates on my shift, but it’s hard to tell how things are going. I thought the new directive made plenty of sense. Back at my previous plant location, we ran machines at 7,000 pounds per shift without any trouble. These older machines don’t seem to be running nearly as well as the machines back at my old place. I guess when we see the numbers at the end of the month we’ll have a good feel for it.
Provide an analysis of the data that will assist the management of Hall Company determine whether or not the increase in production rates is having a favorable impact on production costs.
The data that will be useful for the management will be shift wise analysis of data:
Line 1 | Line 2 | Line 3 | Line 4 | |
Materials cost at shift 1 | 36,000.00 | 36,000.00 | 40,300.00 | 36,000.00 |
Pounds produced | 6,000.00 | 6,000.00 | 6,200.00 | 6,000.00 |
Costs per pound | 6.00 | 6.00 | 6.50 | 6.00 |
% increase in cost | 11.94 | |||
% increase in pound | 3.33 | |||
% increase in cost per pound | 8.33 | |||
Line 1 | Line 2 | Line 3 | Line 4 | |
Materials cost at shift 2 | 45,500.00 | 45,500.00 | 50,250.00 | 45,500.00 |
Pounds produced | 6,500.00 | 6,500.00 | 6,700.00 | 6,500.00 |
Costs per pound | 7.00 | 7.00 | 7.50 | 7.00 |
% increase in cost | 10.44 | |||
% increase in pound | 3.08 | |||
% increase in cost per pound | 7.14 |
As we can see from the above tables, the percentage increase in materials cost in case of shift 1 is higher than the percentage increase in shift 2.
% increase in costs in shift 1 = (40300-36000)/36000 = 11.94%
% increase in costs in shift 2 = (50250-45500)/45500 = 10.44%
Thus it is clear that an increase of pounds produced by an amount of 200 brings about a larger increase in costs in shift 1 than in shift 2. Also when the costs are analyzed on a per pound basis the quantum of change in higher for shift 1 than shift 2. This is because of the old machinery being used in shift 1.
Clearly increase in production rates is not having a favorable impact on production costs as in both shifts 1 and 2 the percentage increase in costs are greater than percentage increase in pounds. However the effect is more pronounced for shift 1 due to its older machinery.