Assessment 3: Using Cost Accounting Concepts to Operate Job, Process, and Activity-Based Cost Systems

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Assessment 3 Part 1

Assessment 3 Part 1: Prepare a Production Cost Report: FIFO Method
Scenario
Lamar, Inc. provides the following information for one of its department’s operations for May (no new material is added in Department T):
WIP inventory—Department T
Beginning inventory (16,500 units, 60 percent complete with respect to Department T costs)
Transferred-in costs (from Department S)	$127,600
Department T conversion costs	58,465
Current work (38,500 units started)
Prior department costs	308,000
Department T costs	229,955
The ending inventory has 5,500 units, which are 20 percent complete with respect to Department T costs and 100 percent complete for prior department costs.
REQUIRED
Prepare a production cost report using the FIFO method.

Assessment 3 Part 2

Assessment 3 Part 2: Activity-Based Costing and Predetermined Overhead Allocation Rates

Scenario:
Bath Fixtures Supply, Inc. (BFSI), manufactures three types of fixtures: industrial, standard, and brass. It applies all indirect costs according to a predetermined rate based on direct labor-hours. A consultant recently suggested that the company switch to an activity-based costing system and prepared the following cost estimates for year 2 for the recommended cost drivers.
Activity	Recommended Cost Driver	Estimated Cost	Estimated Cost Driver Activity
Processing orders	Number of orders	$ 59,400	200 orders
Setting up production	Number of production runs	237,600	100 runs
Handling materials	Pounds of materials used	$396,000	132,000 pounds
Machine depreciation and maintenance	Machine-hours	316,800	13,200 hours
Performing quality control	Number of inspections	79,200	45 inspections
Packing	Number of units	158,400	480,000 units
Total estimated cost		$1,247,400
In addition, management estimated 7,500 direct labor-hours for year 2.
Assume that the following cost driver volumes occurred in January, year 2:
	Industrial	Standard	Brass
Number of units produced	66,000	26,400	9,900
Direct materials costs	$42,900	$26,400	$16,500
Direct labor-hours	450	450	600
Number of orders	12	9	6
Number of production runs	3	3	6
Pounds of material	16,500	6,600	3,300
Machine-hours	638	140	80
Number of inspections	3	3	3
Units shipped	66,000	26,400	9,900
Actual labor costs were $15 per hour.
REQUIRED			Answers
1. Compute a predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the consultant. Also compute a predetermined rate for year 2 using direct labor-hours as the allocation base.
2. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement (1).
3. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement (1). (Note: Do not assume that total overhead applied to products in January will be the same for activity-based costing as it was for the labor-hour-based allocation.)
4. Management has seen your numbers and wants an explanation for the discrepancy between the product costs using direct labor-hours as the allocation base and the product costs using activity-based costing. Write a brief response to management.

Assessment 3 Part 3

Assessment 3 Part 3: Quality Improvement
Scenario:
Bonded Fencing, Inc., produces metal gates in two processes: shaping, in which metal is bent to the correct shape, and fastening, in which the bent metal pieces are welded into gates. The shaping process has a capacity of 11,000 units per year; welding has a capacity of 15,400 units per year. Demand is high. At a sales price of $550 per unit, the company can sell whatever output it can produce. Bonded can start only 11,000 units into production in the shaping department because of capacity constraints.1,650 units per year are found to be defective in the shaping department. Defective units are not detected until the end of production. At that point, the defective units are scrapped. Unit costs in the shaping department including good and defective units equal $275 per unit, with an allocation of the total fixed manufacturing costs of $825,000 per year to units.
Direct materials (variable)	$125
Direct manufacturing, setup, and materials handling labor (variable)	50
Depreciation, rent, and other overhead (fixed)	75
Total unit cost	$250
The fixed cost of $75 per unit is the allocation of total fixed costs of the shaping department to each unit, whether good or defective. (The total fixed costs are the same whether the units produced in the shaping separtment are good or defective.)
The good units from the shaping department are sent to the fastening department. Variable manufacturing costs in the fastening department are $75 per unit and fixed manufacturing costs are $550,000 annually. There is no scrap in the fastening department. Therefore, the company’s total sales quantity equals the shaping department’s good output. The company incurs no other variable costs.
The company’s designers have discovered that by using a new type of direct material, the company could reduce scrap in the shaping department from 1,650 units to 550 units. Using the new material would increase the direct materials costs to $180 per unit in the Shaping Department for all 11,000 units. Recall that only 11,000 units can be started each year.
REQUIRED
1. Should Bonded Fencing Inc. use the new material and improve quality? Assume that inspection and testing costs of $132,000 per year will be reduced by $22,000 with the new materials. Fixed costs in the shaping department will remain the same whether 8,500 or 9,500 units are produced. Give your rationale for using or not using the new material based on the associated costs.
2. What other nonfinancial and qualitative factors should management of Bonded consider in making the decision? Provide a brief explanation of the other factors to consider and why they are important to this decision.

Assessment 3 Part 4

Assessment 3 Part 4: Comparison of Allocation Methods
Scenario:
Liberty Company has two service departments: administration and accounting, and two operating departments: domestic and international. Administration costs are allocated on the basis of employees and accounting costs are allocated on the basis of number of transactions. A summary of Liberty operations follows:
	Administration	Accounting	Domestic	International
Employees	—	25	45	180
Transactions	27,500	—	22,000	88,000
Department Direct Costs	$396,000	$158,400	$1,029,600	$3,960,000
REQUIRED
1. Allocate the cost of the service departments to the operating departments using the direct method.


2. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration.


3. Allocate the cost of the service departments to the operating departments using the reciprocal method.


4. Explain the results of your analysis.