1. Orphan Ltd. supply Wilson Ltd with the organic denim used in their production. After discussions with Helen about the service she was getting from Good Numbers, the manager of Orphan Ltd decided to use Good Numbers to assist with their management decision making. Orphan Ltd produces three different weights of denim using two departments. In Department 1, machines weave the cloth. In Department 2 the cloth is dyed a variety of colors. Information for the combined use of resources in both departments for the three types of fabric is outlined below. Bolts are 30 meters each. All fabric is inspected during production. Robotic equipment inspects the fabric for obvious aws as the bolts are wound up. Each bolt spends about 8 minutes in the inspection process. 8 13 ounce 16 ounce Total units ounce Monthly production in units {bolts of fabric) 1,500 5,000 2,500 9,000 bolts Direct material cost 5 10,000 25,000 22,000 5?,00 S 0 Direct labor cost 5 800 1,500 1000 3,300 S Direct labor hours 40 2'0 50 160 hours Machine hours 600 1,500 1,800 3,900 hours Number of setups for dye color changes 15 50 30 95 set ups Inspection time 90 450 200 740 hours Combined overhead costs for the two departments follow: Cost to operate and maintain machines 5 50,000 Setup costs 5 12,000 Inspection costs 5 2000 Total 5 69000 Previously, Orphan Ltd used a costing system focused on processes. It allocated direct materials to each product separately but allocated direct labor and conversion costs as if they were incurred equally across the units produced. Under this costing system, the overhead cost for Department 1 is $20,000 and for Department 2 it is $40,000. Direct labor hours and costs in Department 1 are 65 hours at $1,800, and the remaining are in Department 2. Direct materials for Department 1 are 518,000 for 16 ounce denim, $20,000 for 13 ounce denim, and $8,000 for 8 ounce denim. The remaining direct materials are added in Department 2. No beginning or ending inventory or abnormal spoilage is recorded for Orphan Ltd this period. Solved: I. Use conventional process costing to allocate the direct materials and conversion costs per department to total bolts produced. Develop a cost per bolt for each type of fabric. ii. Using activitybased costing [ABC], develop a cost per bolt. iii. Compare the process costing and ABC results. identify the products with overstated costs and those with understated costs. Explain why the costs are misstated under traditional process costing. iv. How could the Orphan Ltd manager use the ABC information to improve operations? 2. Nelon has been using a standard cost system developed by Good Numbers and calculates the standard cost of a completed pair ofjeans as $90.00, as follows: Quantity Price 5 Unit Cost per pair of jeans 5 Denim fabric meters 3 15 {metre 45 Direct labour hours 4 30 {hour 120 Variable factory overhead 0.6 10 {hour 6 Fixed factory overhead 0.6 20 {hour 12 Total standard cost 183 The fixed overhead rate is based on an estimated 800 units per month. Direct labour is nearly a xed cost in this business. Selling and administrative costs are $5000 per month plus $3 per pair ofjeans sold. The following information is for production during October: U nits Number of pairs of jeans made 655 Jeans Purchase of 1200 metres of denim 15400 S Number of metres used 1280 metres Direct labour costs [1200 hours} 25800 S Variable factory overhead costs 2950 S Fixed factory overhead costs 4350 S Selling and administrative costs 3820 Company policy is to record materials price variances at the time materials are purchased
