Flow of Cost in a manufacturing Firm
Hollywood Parts, Inc.
Hollywood Parts, Inc. (HPI), is a plastic parts manufacturer in southern California. It is one of eight companies in the region that supply filmmakers with unique plastic pieces that are used to make characters and objects that appear on the big screen. HPI has established itself as one of the premier specialty-plastic shops because it has the shortest design-to-delivery time in the business.
HPI’s founders and current owner, Dillan and Barbara Mills, are old-time-Hollywood movie junkies who have worked in the business for decades. At 18, Dillan was hired by one of the major film studios as a grip and worked hos way up to production assistant. In this capacity did everything in budget preparation constructing movie sets. He really enjoyed the latter activity. Barbara started as a cartoonist but later became involved in the design production of movie sets—which is where she was introduced to Dillam.
Soon after they met, Dillan and Barbara began dating and made every effort to be assigned to the same projects. They often worked together on movies involving science fiction creatures and outer-space adventures. These types of movies required specialty plastic parts and objects that had to be manufactured from scratch. Dillan and Barbara teamed up to design and produce these items Barbara doing the creative/design work and Dillan the construction.
After seven years of marriage, the couple decided they would like to work more independently, do they quit their jobs at the studios and formed HPI. Having already established themselves in the business, they had no trouble receiving monetary support from local financial institutions.
On average, HPI bid on 10 job a week. The order quantities ranged from 10 to 500 parts, and the average order was for 50 parts. Dillan did machining, and Barbara performed the necessary labor, which included designing and painting the product.
Dillan developed a bid from a process sheet that listed the activities required to make the final product. In some cases, material was provided by the customers; when it was not, Dillan purchased raw material and billed the client. Machine hours were billed out at a rate of $45 per hour, while the hourly billing rate for labor was $60. The final bid was based on the aforementioned rates. He added 25 percent for rush order.
At the beginning, HPI was very successful. The company’s early success was mostly due to Dillan and Barbara’s reputation and business contacts. However, the couple noticed over time that profit margins were declining. In fact, although HPI continued to win 50 percent of its bids, Dillan believed the firm was losing money on some jobs. Dillan and Barbara called in an outside consultant, Howard Cargill, to help them uncover the problem. Howard asked for job-cost information for HPI’s most recent jobs, and Dillan provided him with following list:
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Discussion Questions
1. Should the firm use job-order or process accounting?
2. With respect to your answer to question 1, what process features did you decide are attributable to the accounting method you selected?
3. List possible reasons for HPI’s falling margins.