Question

Cost Data for Financial Reporting and Special Order Decisions

Friendly Greeting Card Company produces a full range of greetings cards sold through pharmacies and department stores. Each card is designed by independent artists. A production master is then prepared for each design. The production master has an indefinite life. Product designs for popular cards are deemed to be valuable assets. If a card sells well, many batches of the design will be manufactured over a period of years. Hence, Friendly Greeting maintains an inventory of production masters so that card may be periodically reissued. Cards are produced in batches that may vary by increments of 1,000 units. An average batch consists of 10,000 cards. Producing a batch requires placing the production master on the printing press, setting the press for the appropriate paper size, and making other adjustments for colors and so forth. Following are facility-, product-, and unit-level cost information:

Product design and production master per new card…………… $ 2,000.00

Batch setup (typically per 10,000 cards)………………………….       200.00

Materials per 1,000 cards…………………………………………..       100.00

Conversion per 1,000 cards………………………………………..         80.00

Shipping

   Per batch…………………………………………………………...         25.00

   Per card…………………………………………………………….           0.02

Selling and administrative

   Companywide…………………………………………………….. 200,000.00

   Per product design marketed……………………………………         500.00

Previous year

Products designs and masters prepared for new cards………..                90

Product designs marketed…………………………………………              120

Batches manufactured……………………………………………..              500

Cards manufactured and solid…………………………………….    5,000,000

Required

a.         Describe how you would determine the cost of goods sold and the value of any ending inventory for financial reporting purposes. (No computations are required.)

b.         You have just received an inquiry from Walgreens stores to develop and manufacture 20 special designs for sale exclusively in Walgreens stores. The cards would be sold for $1.50 each, and Walgreens would pay Friendly Greeting $0.35 per card. The initial order is for 20,000 cards of each design. If the cards sell well, Walgreens plans to place additional orders for these and other designs. Because of the preestablished sales relationship, no marketing costs would be associated with the cards sold to Walgreens. How would you evaluate the desirability of the the Walgreens proposal?

c.         Explain any differences between the costs considered in your answer to requirements (a) and the costs considered in your answers to requirements (b).

Answer 1

The financial reporting of the cost in this condition is related to the manufacturing unit of cards which includes various types of cost such as advertising, carriage cost both inward and outward, material cost, operational cost and others.

A.) In this case scenario while determining Cost of Goods Sold we will take many types of costs taking above example, In case of designing of new product the designing cast of $2000 will be included as the Fixed Cost. The batch setup cost of 10000 cards $200.00 will be included as the product is getting delivered, Direct material cost as the raw material will be included, Conversion and carriage outward cost will be included only if the delivery cost has been beared by the manufacturer, marketing cost will also be included as the clients are new and not existing, Selling and administratiive cost will be there. The above mentioned cost will be included in the case of new clients and not the existing ones.

B.) Getting an order from Walgreens is a priivelege for the manufacturing company as its a huge order for the comapny and on getting good response the company will be getting new orders. Currently Walgreens is an existing customer of the manufacturing company so the advertising and marketing cost will be excluded from the above costs and apart from that Design costing will be there of $2000 for each card and designing 20 new designs and than manufacturing 20000 each, selling and administrative cost will be included, Advertising cost will be excluded as Walgreens is exting client and doesn't require advertising again.

C.) In comparision to above cost Designing cost will not be inclued in Part A and advertising cost will be excluded in Part B because new products are not getting manufactured in Part A and Walgreens is existing client of the manufacturing company.