21-27 Backflush costing, two trigger points, incentives. Raymore, a unit of Outdoor Unplugged, manu- factures a line of electric, cordless, lawn mowers. Senior management of Outdoor UnPlugged has noticed that Raymore has been producing more lawn mowers than it has been selling, and that the unit's inventory has been steadily increasing. Senior management of Outdoor Unplugged suspects that the bonus plan in place for the head of Raymore is behind this practice. Senior management of Outdoor Unplugged is con- templating to switch from the current sequential tracking to a backflush costing system in order to stop the overproduction at Raymore. Specifically, senior management of Outdoor Unplugged is considering a back- flush costing system with the following two trigger points: Purchase of direct materials Sale of finished goods Each mower takes 2 hours to assemble. There are no beginning inventories of materials or finished goods and no beginning or ending work-in-process inventories. The following data are for Raymore for March 2020: Direct materials purchased $1,550,000 Conversion costs incurred $901,000 Direct materials used $1,530,000 Conversion costs allocated $884,000 Raymore records direct materials purchased and conversion costs incurred at actual costs. It has no direct materials variances. When finished goods are sold, the backflush costing system "pulls through" standard direct materials cost ($90 per unit) and standard conversion cost ($52 per unit). Raymore produced 17,000 Required finished units in March 2020 and sold 16,800 units. The actual direct materials cost per unit in March 2020 was $90, and the actual conversion cost per unit was $53. Any under-or overallocated conversion costs are written off monthly to Cost of Goods Sold. 1. Following Exhibit 21-8, prepare summary journal entries for March 2020 and post the entries to ap- plicable T-accounts for both methods the current sequential tracking and the backflush costing that senior management of Outdoor Unplugged is considering. 2. Refer to your answer in requirement 1. How is operating income going to differ under backflush costing compared to the current sequential tracking? 3. Do you think that switching to the backflush costing system is going to accomplish the goal of Outdoor Unplugged's senior management to stop the overproduction at Raymore? 21-28 Backflush costing, two trigger points, operating income (continuation of 21-27). Refer to Exercise 21-27. Jose, the unit manager of Raymore, is concerned that switching to the backflush costing system will lower the operating income of his unit. The senior management at Outdoor Unplugged tells Jose that this will only be the case if the standard costs continue to be imprecise estimates of actual costs and that income will remain the same under the proposed backflush costing system if his team can better estimate standard costs. 1. Assume that Jose correctly estimates the standard conversion costs to be $53 and that conversion costs incurred and conversion costs allocated are both equal to $901,000; otherwise assume the same facts as in 21-27. Following Exhibit 21-8 prepare summary journal entries for March 2020 and post the entries to applicable T-accounts for both methods the current sequential tracking and the backflush costing that senior management of Outdoor Unplugged is considering. 2. Is the claim of the senior management at Outdoor Unplugged correct that Raymore's operating income will remain the same under the proposed backflush costing system as long as the standard costs are estimated correctly? 21-29 Backflush costing. Silicon Valley Computer (SVC), the producer of keyboards for personal com- puters, which is discussed in the chapter, is a subsidiary of El Camino Corporation. Each year, headquarters of El Camino provides a capital budget to each of their subsidiaries, the amount of which is determined by the size of the subsidiary's balance sheet. The senior management of SVC is considering to simplify their accounting and to move to one of the backflush costing systems in Exhibits 21-7, 21-8, or 21-9. Refer to exhibits 21-7, 21-8, and 21-9. Which of the backflush costing systems should the senior man- agement of SVC choose if they want to maximize the capital budget that they receive from headquarters? Show your calculations
