Question

Since 1962, members of the Plumbers Local have been dyeing the Chicago River green in honor of St. Patrick’s Day. Similar river dyeing occurs in Tampa, Austin, and elsewhere.

In 1961, the mayor of Chicago wanted to find out where raw sewage was being dumped into the Chicago River. He directed that a special green dye (fluorescein) would be added to the river to help highlight where the sewage was being dumped.

Upon seeing the Chicago River streaked green for this sewage-detection project, people got the idea that the river could be dyed green for St. Patrick’s Day. In 1962, members of the Plumbers Local in Chicago dumped 100 pounds of this leak detection dye into the river for St. Patrick’s Day. It turned the river green for a week. In later years, less dye was used so that the river would be green for less than one day.

Environmentalists then warned that the use of fluorescein might be damaging the river’s eco-system. A switch was then made to a powered, vegetable dye in 1966.

Although parade organizers will not disclose the exact ingredients of the dye used, it is probably similar to the Bright Dyes Water Tracer Dye produced by Kingscote Chemicals of Ohio. This Water Tracer Dye is an orange powder that turns bright green when it is put into the river. It is EPA-approved for uses related to public waterways. (The City of Tampa uses use this Bright Eyes dye for its river dyeing.)

When Kingscote produces this dye, it likely performs steps similar to the following:

• Mix together several chemicals in powder form;
• Add a liquid chemical to the mix;
• Heat and stir the mixture;
• Cool the mixture;
• Dry and grind the cooled mixture into a powder form.

The dye powder is made in large batches and is sold in 1 lb., 10 lbs, and 25 lb. containers. There are a variety of uses for the dry powder. In addition to dying rivers green, the dyeing powder is used for flow studies, leak detection, power plant piping, and drain connections.

Questions (Be sure to understand the following concepts before answering: Conversion Costs, Inventory, Job order costing, Process costing)

1. Would Kingscote Chemicals be likely to use job costing or process costing when it accounts for the manufacture of its powder Bright Dyes products? Explain.
2. List several conversion costs that might be incurred in the production of the Bright Dyes powder.
3. Describe the accounting for conversion costs at a manufacturer such as Kingscote Chemicals.
4. If Kingscote Chemicals routinely has little to no inventory at the end of each period, what effect would that lack of inventory have on its costing system?

Answer 1

Kingscote Chemicals is likely to use Job costing when it manufactures Bright Dyes. Job costing is used when there is customer specific order and the order is customised to customer needs. The following are the features of job costing

· The order is customer specific

· Cost is accumulated for each customer order

· The production is based on specification of customer

· The output is delivered to customer only

· Separate cost sheet is maintained for the job order

List of Conversion cost

Conversion cost is the sum of direct labor and manufacturing overheads applied in the manufacture.

The following are the conversion cost that might be incurred

· Direct labor incurred in manufacture and production

· Indirect material

· Indirect labor

· Factory supervisor charges

· Factory buildings and equipment depreciation

· Factory utliities

· Factory insurance , property taxes

· Factory rent

· Factory equipment rent

The manufacturing labor is applied based on actual labor hours in each process or department. The manufacturing overheads are applied based on the pre-determined overheads rates calculated at the beginning of the year and applied based on specific cost drivers like direct labor cost, direct labor hours or machine hours

There would be no need to calculate equivalent units in closing inventory and all the production units will be completed. There is no need to value the closing work in process inventory.