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. In fact, the economic well$-$being of the community is tied very

strongly to Beauville. Beauville operates a sawmill, a fabric plant, and a furniture plant in the

same community.

Fabric Plant

The fabric plant is responsible for producing the fabric that is used by the furniture plant.

To produce three totally different fabrics $($identified by fabric ID codes FB$60,$ FB$70,$ and FB$80,$

respectively$),$ the plant has three separate production operations$$one for each fabric. Thus,

production of all three fabrics occurs at the same time in different locations in the plant.

Each fabric's production operation has two processes:

$1.$ Weaving and pattern process

a$.$ In the weaving and pattern process, yarn is used to create yards of fabric with

different designs.

$2.$ Coloring and bolting process

a$.$ In the next process, the fabric is dyed, cut into $25-$yard sections, and wrapped

around cardboard rods to form $25-$yard bolts.

b$.$ The bolts are transported by forklift to the furniture plant's Receiving Department.

All of the output of the fabric plant is used by the furniture plant $($to produce the sofas and

chairs$).$

For accounting purposes, the fabric is transferred at cost to the furniture plant.

$2$

$2024,$ Jennifer K Howard. All rights reserved.

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 $($involving

at least $500$ units$).$

The plant has two production departments:

$1.$ Cutting

a$.$ In the Cutting Department, the fabric and wooden frame components are sized

and cut.

b$.$ Other components are purchased from external suppliers and are removed from

stores as needed for assembly.

c$.$ After the fabric and wooden components are finished for the entire job, they are

moved to the Assembly Department

$2.$ Assembly

a$.$ The Assembly Department takes the individual components and assembles the

sofas $($or chairs$).$

Problem

Beauville Furniture has been in business for over two decades and has a good reputation.

However, during the past five years, Beauville experienced eroding profits and declining sales.

Bids were increasingly lost $($even aggressive bids$)$ on the more popular models. Yet, the

company was winning bids on some of the more$-$difficult$-$to$-$produce items.

Lance Hays, the owner and manager, was frustrated. He simply could not understand how some

of his competitors could sell for such low prices. On a common sofa job involving $500$ units,

Beauville's bids were running $$25$ per unit, or $$12,500$ per job more than the winning bids $($on

average$).$ Yet, on the more difficult items, Beauville's bids were running about $$60$ per unit less

than the next closest bid.

Gisela Berling, vice president of finance, was assigned the task of preparing a cost analysis of the

company's product lines. Lance wanted to know if the company's costs were excessive. Perhaps

the company was being wasteful, and it was simply costing more to produce furniture than it was

costing its competitors.

Gisela prepared herself by reading recent literature on cost management and product costing and

attending several conferences that explored the same issues. She then reviewed the costing

$3$

$2024,$ Jennifer K Howard. All rights reserved.

procedures of the company's mill and two plants and did a preliminary assessment of their

soundness.

Preliminary assessment

The two plants used normal costing systems.

The fabric plant used process costing, and the furniture plant used job$-$order costing.

Both plants used plantwide overhead rates based on direct labor hours.

Based on her initial reviews, she concluded that the costing procedures for the fabric plant were

satisfactory. Essentially, there was no evidence of product diversity.

A statistical analysis revealed that about $90$ percent of the variability in the plant's overhead cost

could be explained by direct labor hours. Thus, the use of a plantwide overhead rate based on

direct labor hours seemed justified.

What did concern her, though, was the material waste that she observed in the plant. Maybe a

standard cost system would be useful for increasing the overall cost efficiency of the plant.

Consequently, as part of her report to Lance, she decided to include a description of the fabric

plant's costing procedures$$at least for one of the fabric types $($FB$70).$ She also decided to

develop a standard cost sheet for the chosen fabric $($FB$70).$

The furniture plant, however, was a more difficult matter. Product diversity was present and

could be causing some distortions in product costs. Furthermore, statistical analysis revealed that

only about $40$ percent of the variability in overhead cost was explained by the direct labor hours.

She decided that additional analysis was needed so that a sound product costi