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 material input.
Aaron : Your predecessor is responsible. He believed that tracking the difference in material cost wasn’t worth the effort. He simply didn’t believe that it would make much difference in the unit cost 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 abount 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 tract the costs for one week. At the end of the week, she had collected the following data from the Pattern Department.
a. Atotal of 2500 bows were completed: 1000 Deluxe models and 1500 Econo models.
b. There was no beginning work in process; however, there were 300 units in ending work in process: 200 Deluxe and 100 Econo models. Both models were 80 percent complete with respect to conversion cost and 100 percent complete with respect to materials.
c. The Pattern Department experienced the following costs:
Direct materials 114000
Direct labor 45667
d. On an experimental basis, the requisition forms for materials were modified to identify the dollar value of the materials used by the Econo and Deluxe models:
Econo model 30000
Deluxe model 84000
Required
1. Compute the unit cost for the handles produced by the Pattern Department as summing that process costing is totally appropriate.
2. Compare the unit costs of each handle using the separate cost information provided on materials.
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.
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 material input.
Aaron : Your predecessor is responsible. He believed that tracking the difference in material cost wasn’t worth the effort. He simply didn’t believe that it would make much difference in the unit cost 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 abount 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 tract the costs for one week. At the end of the week, she had collected the following data from the Pattern Department.
a. Atotal of 2500 bows were completed: 1000 Deluxe models and 1500 Econo models.
b. There was no beginning work in process; however, there were 300 units in ending work in process: 200 Deluxe and 100 Econo models. Both models were 80 percent complete with respect to conversion cost and 100 percent complete with respect to materials.
c. The Pattern Department experienced the following costs:
Direct materials 114000
Direct labor 45667
d. On an experimental basis, the requisition forms for materials were modified to identify the dollar value of the materials used by the Econo and Deluxe models:
Econo model 30000
Deluxe model 84000
Required
1. Compute the unit cost for the handles produced by the Pattern Department as summing that process costing is totally appropriate.
2. Compare the unit costs of each handle using the separate cost information provided on materials.
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.
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