Question

Operation costing (chapter appendix). Farkas Shoes, a high-end shoe manufacturer, produces two lines of shoes for women. The shoes are identical in design, but differ in the materials used and the trim added to the shoes. The basic shoes are made from a synthetic leather, have a synthetic insole, and have plain buttons decorating the upper. The elaborate shoes are made from genuine leather, have a special insole, and have creative buttons applied to the upper. Each shoe is assumed to use an identical amount of conversion costs for a given operation. Work orders 10399 and 10400 are representative work orders for the two types of shoes.

 

Selected budget information for February follows:

 

Budgeted conversion costs for each operation for February follow:

 

1. Using budgeted pairs of shoes as the denominator, calculate the budgeted conversion-cost rates for each of the six operations.

2. Using the information in requirement 1, calculate the budgeted cost of goods manufactured for the two February work orders.

3. Based on the two representative work orders for February, calculate the budgeted cost of each pair ofshoes.

 

Answer 1

Operation costing 

1.        To obtain the overhead rates, divide the budgeted cost of each operation by the pairs of shoes that are expected to go through that operation.

	Budgeted Conversion Cost	Budgeted Pairs of Shoes	Conversion Cost per Pair of Shoes
Operation 1	$145,125	32,250	$4.50
Operation 2	58,050	32,250	1.80
Operation 3	4,275	2,250	1.90
Operation 4	67,725	32,250	2.10
Operation 5	13,500	30,000	0.45
Operation 6	2,025	2,250	0.90

2. 

	Work Order		Work Order
	10399		10400
Shoe type:	Basic		Elaborate
Quantity:	1,000		150
Direct Materials	$13,000		$4,200
Operation 1	4,500		675
Operation 2	1,800		270
Operation 3	0		285
Operation 4	2,100		315
Operation 5	450		0
Operation 6	0		135
Total	$21,850		$5,880

The direct materials costs per unit vary based on the type of shoe ($390,000 ÷ 30,000 = $13 for the Basic, and $63,000 ÷ 2,250 = $28 for the Elaborate). Conversion costs are charged using the rates computed in part (1), taking into account the specific operations that each type of shoe actually goes through.

3.         Work order 10399 (Basic shoes):                                Work order 10400 (Elaborate shoes):

            Total cost                                $21,850                               Total cost:                               $5,880

            Divided by number of                                                        Divided by number of

             pairs of shoes:          ÷ 1,000                                            pairs of shoes:                    ÷ 150

            Cost per pair of plain shoes:    $ 21.85                           Cost per pair of fancy shoes:  $39.20

Cost per pair of plain shoes:    $ 21.85                           Cost per pair of fancy shoes:  $39.20