Question

In: Accounting

Hall Company produces synthetic materials from a chemical extrusion processes. Management has been concerned that material...

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.

Solutions

Expert Solution

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.


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