Question
1: (10 points) Adam is a management accountant at Park City Ltd., which manufactures and sells sports equipment. The company uses a job-order costing system.
1: (10 points) Adam is a management accountant at Park City Ltd., which manufactures and sells sports equipment. The company uses a job-order costing system. On January 15, 2020, Adam received a call from John, CEO of the company, concerning a special-order product, Flying V. Flying V is a seasonal product that is produced in batches of 100 units. There has been a fierce debate between the sales team and the production team about this product. Flying-V is sold at cost plus a 30% markup over cost. The sales team complains that fluctuating unit product costs significantly affect selling prices, which has caused substantial loss of customer orders for Flying V. However, the production team insists that each job order should be fully costed on the basis of the costs incurred during the period in which the products are manufactured and argues that the only solution to the problem is for the sales team to boost sales in slack periods. Per John's request, Adam collected the following quarterly data for 2019 on Flying V: No. of Batches Produced Q1 10 Q2 Q3 Q4 25 8 20 Direct materials $50,000 $125,000 $40,000 $100,000 Direct labor $30,000 $75,000 $24,000 $60,000 Manufacturing Overhead $52,690 $100,000 $46,000 $93,000 Total $132,690 $300,000 $110,000 $253,000 Unit product cost $13,269 $12,000 $13,750 $12,650 Required: (a) What manufacturing cost element is responsible for the fluctuating unit costs? Why? (4 points) (b) What is your recommended solution to the problem of fluctuating unit cost? Please restate the quarterly data following your recommended solution. (6 points)
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