2010 CMA Part 1 Section C Process Costing Anderson Company

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1 Estimated Time: 40 minutes is a mature firm that manufactures a variety of high quality sports clothing used by college and high school football programs throughout the country. During the last year, the company's profits have declined. Anderson has been using cost information that was developed nearly two years ago. In an effort to determine the causes of weakened earnings performance, Anderson's controller, Bill Rolland, has asked Amy Kimbell, senior cost analyst, to investigate the product costing at one of the company's largest plants in Lincoln, Nebraska. The Lincoln plant manufactures a high grade of insulated warm-up jackets that are produced in a continuous extended, one-department process. The process involves the basic assembly of sorted materials (Materials Packet #1 with insulated liner, outer jacket shell, hoods, pocket linings, and zippers or snap attachments). After completion of the basic assembly, which involves the expenditure of 70 percent of the conversion costs, the jackets are inspected. Jackets that pass this inspection point, enter a finishing stage to have Materials Packet #2 (school names, logos, monograms, and players' names) embroidered on the jackets. When this process is completed, the jackets are inspected again before being transferred to the finished goods inventory. Labor and manufacturing overhead (conversion costs) are applied continuously during the process. Anderson uses the weighted-average method to calculate unit costs at the Lincoln plant. Kimbell has traveled to the Lincoln operations to develop accurate unit cost information that will be used to determine whether aspects of the production process have to be changed or if a change in pricing structure may be justified for the jackets. The weighted-average equivalent unit cost that has been used by the management team at the Lincoln plant for planning, control, and pricing purposes is $75 per jacket. The jackets manufactured at the Lincoln plant have normally been sold for $125 each. When Kimbell arrived at the plant to review the production costs for the month of May, she developed the following information. The beginning work-in-process inventory had 560 units that were 25 percent complete as to conversion costs. The costs in inventory were as follows. Cost Materials - Packet #1 $12,500 Conversion 4,506 Total costs $17,006 During May, 7,600 jackets were started into production, and a total of 6,600 good jackets were completed during the month. Kimbell ascertained that Anderson monitors spoilage on an on-going basis during the basic assembly process. As a result of this on-going monitoring, 160 jackets, which had incurred 40 percent of their total conversion costs, were rejected prior to reaching the completion of the basic assembly process. An additional 500 jackets were removed from production during the month for failing to meet quality standards, of which 300 were rejected at the basic assembly completion inspection point, and 200 were rejected at the final inspection point. The 500 jackets removed at these two inspection points are considered normal spoilage. Management agreed with Kimbell that the 160 jackets at the 40 percent conversion cost point in the assembly process should be considered abnormal spoilage that could have been prevented. Due to the materials being used and the unique nature of the jackets, spoiled jackets are not reworked and have no significant salvage value. The units in process at the end of May consisted of 900 jackets that were 50 percent completed as to conversion costs.

2 May costs entered into production were as follows. Materials - Packet #1 $252,700 - Packet #2 74,120 Conversion costs 278,400 Total costs $605,220 Required A. Define normal spoilage and abnormal spoilage, and indicate the proper accounting treatment for such costs as they pertain to inventoriable costs. B. Develop a Production Cost Report for the month of May for 's Lincoln plant showing the following items. 1. The equivalent units of output for each of the three factors of production. Materials Packet #1. Materials Packet #2. Conversion costs. 2. The cost per equivalent whole unit for each of the three factors of production. Materials Packet #1. Materials Packet #2. Conversion costs. 3. The assignment of total production costs to the ending work-in-process inventory and to the good units completed during the month. 4. The weighted-average unit cost of the 6,600 good jackets completed and transferred to finished goods. C. Without prejudice to your answer in Requirement B. above, assume that the revised weightedaverage unit cost is $ Determine the revised unit price that must charge for each jacket in order to maintain the gross margin rate that management has used for planning, control, and pricing purposes.

3 Solution A. Spoilage represents unacceptable units that fail to meet quality standards and cannot be reworked; they are discarded or sold for net disposable proceeds. Normal spoilage is spoilage that arises under efficient operating conditions and is regarded as uncontrollable. Normal spoilage is an inherent result of a particular production process. Abnormal spoilage is spoilage that is not expected to arise under efficient operating conditions and is not an inherent part of the production process. Abnormal spoilage is regarded as controllable or avoidable and is the result of a system failure or a lack of management control. The cost of abnormal spoilage should be expensed as a period cost in the period that the spoilage is detected, and it is normally assigned to the department responsible for the control measure. The cost of normal spoilage is an inventoriable (product) cost and is typically assigned to the cost of work-in-process or to finished goods. B. B1. A Production Cost Report for the month of May for s Lincoln plant is presented below. Equivalent units of output for each Factor of production are as follows. May 1 beginning inventory (25%) 560 Units started in May 7,600 Total Units input 8,160 Production Cost Report Month of May Equivalent Units of Production Physical Flow Pack #1 Pack #2 Conversion Completed units transferred to finished goods inventory 6,600 6,600 6,600 6,600 Spoilage Normal first inspection (70%) Normal second inspection (100%) Abnormal (40%) May 31, work in process (50%) Total Units account for 8,160 Equivalent units of output 8,160 6,800 7,524 B2. The cost per equivalent whole unit for each factor of production is calculated as follows.

4 Production Costs Total Pack #1 Pack #2 Conversion May 1, work in process $ 17,006 $ 12, $ 4,506 Current costs added in May 605, ,700 74, ,400 Total costs to be accounted for $622,226 $265,200 $74,120 $282,906 Equivalent units of production 8,160 6,800 7,524 Cost per equivalent whole unit $ $32.50 $10.90 $37.60 B3. Costs are assigned to ending work-in-process inventory and goods completed during the month as follows. Production Costs Total Pack #1 Pack #2 Conversion Cost per equivalent whole unit $ $32.50 $10.90 $37.60 Loss due to abnormal spoilage x x 64 Loss to be expensed $7,606 $5, $2,406 Completed equivalent units Regular completed units 6,600 6,600 6,600 6,600 Normal spoilage 1 st inspection (70%) Normal spoilage 2 nd inspection (100%) Total equivalent units completed 7,100 6,800 7,010 Cost of completed units (units x cost per unit) Regular completed units $534,604 $214,500 $71,940 $248,164 Normal spoilage 1 st inspection 17,646 9, ,896 Normal spoilage 2 nd inspection 16,200 6,500 2,180 7,520 Total equivalent units completed $568,450 $230,750 $74,120 $263,580 Work-in-process, May 31 Equivalent units Cost to ending work-in-process $46,170 $29, $16,920 Total costs accounted for $622,226 $265,200 $74,120 $282,906 B4. The weighted-average unit cost of the 6,600 good jackets completed and transferred to finished goods inventory is $568,450 divided by 6,600, or $86.13.

5 C. Assuming the revised weighted-average unit cost is $88.50, the revised unit price that Anderson Company must charge for each jacket in order to maintain the gross margin rate that management has used for planning, control, and pricing purposes is $147.50, computer as follows. Current markup on cost = $125 selling price / $75 cost = New selling price = x $88.50 cost = $