Beauville Furniture Corporation produces sofas, recliners, and lounge chairs. Beauville is located in a medium-sized community in the southeastern part of the United States. It is a major employer in the community. Beauville operates a sawmill, a fabric plant, and a furniture plant in the same community. The sawmill produces lumber for the furniture plant.
The sawmill buys logs from independent producers and then processes the logs into four grades of lumber:
1.firsts and seconds.2.No. 1 common.3.No. 2 common.4.No. 3 common.
All costs incurred in the mill are common to the four grades of lumber. All four grades of lumber are used by the furniture plant. The mill transfers everything it produces to the furniture plant at cost. Trucks are used to transport the lumber from the mill to the furniture plant. Although no outside sales exist, the mill could sell to external customers. Beauville knows the selling prices of the four grades.
The fabric plant is responsible for producing the fabric that is used by the furniture plant. To produce three totally different fabrics (identified by the ID codes FB60, FB70, and FB80, respectively), the plant has three separate production operations-one for each fabric. The production of all three fabric occurs at the same time in different locations in the plant. Each fabric's production operation has two processes: (1) the weaving and pattern process and (2) the coloring and bolting process. In the weaving and pattern process, yarn is used to create yards of fabric with different designs. In the next process, the fabric is dyed, cut into 25-yard sections, and wrapped around cardboard rods to form 25-yard bolts. The bolts are transported by forklift to the furniture plant's Receiving Department. Currently, all of the output of the fabric plant is used by the furniture plant to produce sofas and chairs. For accounting purposes, the fabric is transported at cost to the furniture plant.
The furniture plant produces orders for customers on a special-order basis. The customers specify the quantity, style, fabric, lumber grade, and pattern. Typically jobs are large averaging 500 units. However, some jobs involving more difficult-to-produce items are smaller and more specialized. The plant has two production departments: Cutting and Assembly. In the Cutting Department, the fabric and wooden frame components are sized and cut. Other components are purchased from external suppliers and are removed from stores as needed for assembly. After the fabric and wooden components are finished for the entire job, they are moved to the Assembly Department. The Assembly Department takes the individual components and assembles the sofas or chairs.
During the past five years, Beauville has experienced eroding profits and declining sales. Bids were increasingly lost on the more popular models. On average, a bid on a typical job involving 500 units was running about $20 per unit, or $10,000 more than the winning bid. Yet the company was winning most of the bids on the more-difficult-to-produce items. Lance Hays, the Owner and Manager, had recently commissioned his Vice President of Finance, Gisela Berling, to cost analysis of the company's product lines. Her initial efforts showed that bids could become more competitive using standard costing instead of normal costing in the fabric plant (although the decision to switch to standard costing was still being considered). She also saw a potential business opportunity in converting the fabric plant to a profit center. Encouraged by the insights of these initial efforts, she began exploring the costing practices of the three plants in more depth, including a second look at the fabric plant. The fabric plant manager had suggested a simple restructuring that promised some immediate cost savings and she wanted to assess the proposal. As the first step, she wanted to review the current costing approach for fabrics.
Currently, the three types of fabrics are produced simultaneously in different locations of the plant using similar processes. Process costing methods are used to determine the unit cost of each fabric. Historically, the plant has never fully utilized any of the three processes. The maximum historical utilization of the capacity has been about fifty percent. John Hobbs, the fabric plant manager is confident that the three operations can be consolidated in a way that there would be sufficient capacity to produce all three fabrics while capturing significant savings by reducing labor and overhead costs. In fact, total direct labor and variable overhead costs would be reduced by 25 percent and fixed overhead costs by 50 percent. Production of the three fabrics can be managed by using a batch production approach; however, one problem is that the yarn used for each fabric differs significantly in cost. Conversion activity is the same for each fabric regardless of the type of yarn. The cost accounting manager has assembled the following budgeted annual data for each process that reflects the expected reductions:
Assignment: case StudyCh 5 is p Assig'lullelltscnre: Mum. an... new... m M for Gradl Questions magi-atop Activity: job order costinganrl mess Costing i '4 Quantum z 013 t 1' . n u t Preurous lleat t 2. 0 Step 1 ctecc My Wnlk (3 lemailmg) 3 0 Operation Costing Instructions: [lie the Iahj above In navigate back and forth between itells. objective: show how jnh costing and process costing can be blended. - Click here [0 refer tn the uuem'nn information. I lltradllcoll: Beauville rumiture Corporation produces sofas, recliners, and lounge chairs. eeauville is located in a mediumcsized community in the suutheastem part urthe united states. It is a major employer in the community. Deauuille operates a sawmill, a fabric plant, and a fumiture plant in the same community. The sawmill produces lumber for the fumiture plant. The sawmill huvs lugs (mill indeuendent Draduuers and than processes the logs into four glides uf lumber: L rsts and seconds. 2. up. 1 common. 3. No. 2 cummnn. 4. No. 3 common. All costs incurred in the mill are common to thefourgrades of lumber. All four grades of lumber are used by the furniture plant. The mill transfers everything it produces to the fumiture plant at cost. Trucle: are used to transport the lumber from the mill to the furniture plant. Although no outside sals exist, the mill could sell to external customers. Beauuille knows the set ng prices of the four grades. The fabric plant is responsible for producing the fabric that is used by the furniture plant. To produce three totally different fabrics (identied by the 1D codes F360, rpm, and Fear), respetiuely), the plant has three separate production operationsune for each fabn The production of all thrm fabric occurs at the same time in dierentlocatiuns in the plant. Each fabric's production operation has two processes: (1) the weav'lng and pattern process and (2) the coloring and bolting process. in the weauing and pattem process, yarn is used to create yards offabric with different designs. in the next process, the fabric is dyed. cut inbc Zryard sections, and wrapped around cardboard rods bofcrm Zrvard bolts. The bolts are transported by fprkli to the furniture plant's Receiving Department. currently. all ofthe output olthe fabric plant is used by the fumiture plant to Drudllce sofas and chairs. For accounting purposes. the fabric is transported at cost to the fumiture plant. The furniture plant produces orders for customers on a spea'aleurder basis. The customers spedfy the quantity, style, fabric, lumber grade, and pattern. Typically jobs are large averaging sub units. HDwevel, some jobs involving more difmltelacprodupe items are smaller and more specialized. The plant has two production departments: Cutting and Assembly. In the Cutting Department. the fabric and wooden frame components are sized and cut. other components are purchased from external suppliers and are removed from stores as needed for assembly. After the fabric and wood en components are finished for the entire job. they are moved to the Assembly Department. The Assent bly Department takes the individual components and assembles the sofas or chairs. During the past ve years. Eeauville has experienced eruding profits and declining sales. bids were increasingly lost on the more popular models. on average, a bid on a typical iob involving 500 units was running about $20 per unit, or $10,000 more than the winning bid. yet the company was winning must ofthe bids on the momcdifcultclpepmduce items. Lance Hays, the owner and Manager, had recently ccmmissioned his vice president of Finance, Gisela pening, to do a cost analysis of the company's product lines. Her initial efforts showed that bids could beoome more competitive using standard costing instead of normal costing in the fabric plant (although the decision to swildt to standard costing was still being considered). She also saw a potential business opportunity in converting the fabric plant to a profit center. Encouraged by the insights ofthese initial eflurts. she began exploring the costing practices of the three plants in more depth. including a second look at the fabric plant. The fabric plant manager had suggested a simple restructuring that promised mna immndintn met caornnc amt cna wanfarl m accacc not nrnnncal A: no. pm mm cna manfnrl tn what. "an nlrrnnf manna annmam fnrfaltrirc During the past ve years, Eeanville has experienced eroding prots and declining sales. bids were increasingly lost on the more pnpniar models. on average, a bid on a typiml job involving sno units was mnning about $20 per unit, or $10,000 more than the winning bid. Yet the company was winning must cvfthe bids on the morerdiicultrlsomduce items. Lance Hays, the Owner and Manager, had recently commissioned his Vine President of Finance, Gisela BerliIIg, to do a cost analysis of the company's nrnduct lines. Her initial efforts A showed that bids could beoome more Comoetitive using standard costing instead of normal casting in the fabric olant (although 'le decision to switoh to standard posting was still being considered). She also saw a potential business opportunity in converting the fabric plant to a Dmt oenter. Encouraged by the insights ofthese al enrts. she began exploring the costing nractioej of the three plaan in more depth' including a second look at the fabric plant. 'lhe fabric plant manager had suggested a simnle restructuring that pmmised some immediate Dost savings and she wanted to assess the proposal. As the first step, she wanted to review the current casting approach forfahrilra. Currently' the three types Uffibl'iti are produced simultanenuslv in dierentlucatiuns trf the plant using similar Drumses. Process Dusting methods are used to determine the unit cast df each fabric. Historically. the plant has never fully utilized any of the three processes. The maximum historical utilixation of the capacity has been about Fm Deant. John Hobbs, the fabric olant manager is oonfident that the three Doerations can be consolidated in a way that there would be suffioient capacity to produce all three fabrics while capturing signicant savings by reducing Iabarand overhead cam. In fact, total direct Iabnrand variable overhead Dasts would be reduced by 25 percent and xed uverhead costs by So percent. Production of the three fabrics can be managed by using a batch production anumach; however, one emblem is that the yarn used for each fabric differs signicantly in cost. Conversion activity is the same for each fabric regardless of the time nfyarn. The cost accounting manager has assembled the following hudgeced annual data for each pmcess that reects the expetxed reductiuns: conversion cost $900,001] $57n,IMIO Reunited: 1. Calculate the oonversiun rate for eadl pmcess using direct labor hours (round tn whole dollars]: Weaving and Patiem process: 4 |per hour coloring and setting process: 31 |per hour 2. Assume a batch af 400 bolts anB7D is pmduced. The Dust of Yarn reanisitinned for the batch is $4D,D. The batch used 2.55\" direct Iabnr hours in Weaving and Pattern and 1,290 hours in Cninring and Baiting. In Coloring and Editing another $10,000 of materials (dyes) were reouisitioned forthe baton. Calculate the owl Der bolt forthe production run of 4Du bolts (round intermediate commutation: and nal answerfor unit cost to nearest Dent. use the rounded answerin subseouent requirements. if reouired.) Cost per halt: til 3. Gisela wanted to know the effect of the oraoosed fabric olant changes on the cost of a typical job in tile fumiture plant. She decided to examine a recent prospective job, Job Asoti. Jul: Asou involved the production ofsoo sofas covered by Fabric r970, a frequently requested style. Bids on this type ofjolz were being lost more frequently to customers and would serve as a good test forthe new apprnach suggested forthe fahri: plant. Gisela assembled the following information on lab Asou, which used the ourrent costof Fabric FET. Direti materials Lnlnher (No. 1 common) 1,400 Total 592.000 cutting Dept. (400 hrs. @510) 4,000 Overhead
