Question

Golding Manufacturing, a division of Farnsworth Sporting, Inc., produces two different models of bows and eight models of knives. The bow-manufacturing process involves the production of two major subassemblies: the limbs and the handle. The limbs pass through four sequential processes before reaching final assembly: lay-up, molding, fabricating, and finishing. In the Lay-Up Department, limbs are created by laminating layers of wood. In Molding, the limbs are heat treated, under pressure, to form a strong resilient limb. In the Fabricating Department, any protruding glue or other processing residue is removed. Finally, in Finishing, the limbs are cleaned with acetone, dried, and sprayed with the final finishes.

The handles pass through two processes before reaching final assembly: pattern and finishing. In the Pattern Department, blocks of wood are fed into a machine that is set to shape the handles. Different patterns are possible, depending on the machine's setting. After coming out of the machine, the handles are cleaned and smoothed. They then pass to the Finishing Department where they are sprayed with the final finishes. In Final Assembly, the limbs and handles are assembled into different models using purchased parts such as pulley assemblies, weight adjustment bolts, side plates, and string.

Golding, since its inception, has been using process costing to assign product costs. A predetermined overhead rate is used based on direct labor dollars (60 percent of direct labor dollars). Recently, Golding has hired a new controller, Karen Jenkins. After reviewing the product costing procedures, Karen requested a meeting with the divisional manager, Aaron Suhr. The following is a transcript of their conversation:

KAREN: Aaron, I have some concerns about our cost accounting system. We make two different models of bows and are treating them as if they were the same product. Now I know that the only real difference between the models is the handle. The processing of the handles is the same, but the handles differ significantly in the amount and quality of wood used. Our current costing does not reflect this difference in direct material input.

AARON: Your predecessor is responsible. He believed that tracking the difference in direct material cost wasn't worth the effort. He simply didn't believe that it would make much difference in the unit cost of either model.

KAREN: Well, he may have been right, but I have my doubts. If there is a significant difference, it could affect our views of which model is more important to the company. The additional bookkeeping isn't very stringent. All we have to worry about is the Pattern Department. The other departments fit what I view as a process-costing pattern.

AARON: Why don't you look into it? If there is a significant difference, go ahead and adjust the costing system.

After the meeting, Karen decided to collect cost data on the two models: the Deluxe model and the Econo model. She decided to track the costs for one week. At the end of the week, she had collected the following data from the Pattern Department:

1. There were a total of 2,550 bows completed: 1,080 Deluxe models and 1,470 Econo models.
2. There was no beginning work in process; however, there were 380 units in ending work in process: 250 Deluxe and 130 Econo models. Both models were 70 percent complete with respect to conversion costs and 100 percent complete with respect to direct materials.
3. The Pattern Department experienced the following costs:

   Direct materials	$122,515
   Direct labor	53,504

4. On an experimental basis, the requisition forms for direct materials were modified to identify the dollar value of the direct materials used by the Econo and Deluxe models:

   Econo model	$30,080
   Deluxe model	92,435

Required:

1. Compute the unit cost for the handles produced by the Pattern Department, assuming that process costing is totally appropriate. Round intermediate calculations and your final answer to the nearest cent.

______ $ per unit

2. Compute the unit cost of each handle, using the separate cost information provided on materials. Round intermediate calculations and your final answers to the nearest cent.

	Unit Cost
Econo Model	$
Deluxe Model	$

3. Compare the unit costs computed in Requirements 1 and 2. Is Karen justified in her belief that a pure process-costing relationship is not appropriate? Describe the costing system that you would recommend.

4. In the past, the marketing manager has requested more money for advertising the Econo line. Aaron has repeatedly refused to grant any increase in this product's advertising budget because its per-unit profit (selling price less manufacturing cost) is so low. Given the results in Requirements 1 through 3, was Aaron justified in his position?

Answer 1

1)
Unit cost computation
Physical flow schedule:
Units, beginning work in process	-
Units started	2,930.00
Total units to account for	2,930.00
Units completed and transferred out:
Started and completed	2,550.00
From beginning work in process	0
Units, ending work in process	380.00
Total units accounted for	2,930.00
Costs charged to the department:
	Direct Materials	Conversion Costs	Total
Costs in beginning work in process	0	0	0
Costs added by department	$122,515	$         96,307.20	$218,822.20
Total costs	$122,515	$96,307	$218,822
Equivalent units calculation:
	Direct Materials	Conversion Costs	Total
Units completed	2,550.00	2,550
Add: Equivalent units in ending work in process	380.00	304.00
Total equivalent units	2,930.00	2,854.00
Unit cost =  Unit direct materials cost + Unit conversion costs
Unit cost =  $122,515/2930 + 96307/2854
Unit cost =  41.81  + 33.74	$       75.56
2)
Econo Model
Unit cost computation
Physical flow schedule:
Units, beginning work in process	-
Units started	1,600.00
Total units to account for	1,600.00
Units completed and transferred out:
Started and completed	1,470.00
From beginning work in process	0
Units, ending work in process	130.00
Total units accounted for	1,600.00
Costs charged to the department:
	Direct Materials
Costs in beginning work in process	0
Costs added by department	$30,080
Total costs	$30,080
Equivalent units calculation:
	Direct Materials
Units completed	1,470.00
Add: Equivalent units in ending work in process	130.00
Total equivalent units	1,600.00
Unit cost =  Unit direct materials cost + Unit conversion costs
Unit cost =  $30080/1600 + 33.74	$       52.54
Delux Model
Unit cost computation
Physical flow schedule:
Units, beginning work in process	-
Units started	1,330.00
Total units to account for	1,330.00
Units completed and transferred out:
Started and completed	1,080.00
From beginning work in process	0
Units, ending work in process	250.00
Total units accounted for	1,330.00
Costs charged to the department:
	Direct Materials
Costs in beginning work in process	0
Costs added by department	$92,435
Total costs	$92,435
Equivalent units calculation:
	Direct Materials
Units completed	1,080.00
Add: Equivalent units in ending work in process	250.00
Total equivalent units	1,330.00
Unit cost =  Unit direct materials cost + Unit conversion costs
Unit cost =  $92435/1330 + 33.74	$     103.24
3)
Unit cost for Econo model	$       52.54
Unit cost for Deluxe model	$     103.24
Unit cost for both together	$       75.56
Using pure process costing understates the cost of the Deluxe model and overstates the cost of the Econo model. The error is large, so Karen seems to be justified in her belief that a pure process-costing relationship is not appropriate. Process costing could be used for all departments other than the Pattern Department.
4)
The profitability of the Econo line was being understated by nearly $23, while that of the Deluxe line was overstated by over $28, producing an erroneous $51 difference in profitability under the current process-costing system. This easily could be enough difference to make the marketing manager’s request for additional advertising dollars is justified.