a) What manufacturing cost element is responsible for the fluctuating unit costs? Why? Khan Products
Question:
a) What manufacturing cost element is responsible for the fluctuating unit costs? Why?
Khan Products Company uses a job order cost system. For several months, there has been
an ongoing rift between the sales department and the production department concerning
a special-order product TC-1. TC-1 is a seasonal product that is manufactured in batches
of 1,000 units. TC-1 is sold at cost plus mark-up of 40% of cost.
The sales department is unhappy because fluctuating unit production costs significantly
affect selling prices. Sales personnel complain that this has caused excessive customer
complaints and the loss of considerable orders for TC-1
The production department maintains that each job order must be fully costed on the
basis of the cost incurred during the period in which the goods are produced. Production
personnel maintain that the only real situation is the for the sales department to increase
sales in the slack period.
Andrea Parley, president of the company, asks you as the company accountant to collect
quarterly data for the past year on TC-1. From the cost accounting system, you
accumulate the following production quantity and cost data:
Quarter
Costs 1 2 3 4
Direct materials $100,000 $220,000 $80,000 $200,000
Direct labour 60,000 132,000 48,000 120,000
Manufacturing overheads 105,000 153,000 97,000 125,000
Total $265,000 $505,000 $225,000 $445,000
Production in batches 5 11 4 10
Unit cost (per batch) $53,000 $45,909 $56,250 $44,500
3
Required:
a) What manufacturing cost element is responsible for the fluctuating unit costs?
Why?
b) What is your recommended solution to the problem of fluctuating unit costs?
c) Restate the quarterly data on the basis of your recommended solution.