CASE SCENARIO Company Background The Paper Products Factory (PPF) is a local manufacturer of a single product: paper party hats. They sell primarily to specialty stores in the Mid Atlantic region of the United States. There are several other national and international manufacturers of similar products; therefore it is a very competitive marketplace. The market is very price sensitive; small increases in price can result in large decreases in product demand. The PPF is a family owned company that employs approximately 100 people. The owner and CEO of the company is Brian Clark. At this time no other family members are involved in the business. The company employs administrative staff including the president, vice presidents, and support staff; engineers who design and develop the products; sales representatives; manufacturing labor; distribution center employees; and customer service representatives. Patrick Clark, the owner's son, recently completed his M.B.A. Wanting to impress his father with his newly acquired skills, he presented his father with a business proposal to add a second product line - paper chains. "Dad, by adding paper chains, we can expand our product line to our existing customer base. For the most part, our current sales and customer service structure can remain as is since we will be selling more products to our existing customers. We would need to add an additional Production Manager to oversee the new product line. We have excess manufacturing capacity, skilled labor, and almost all of the manufacturing equipment necessary to make the chains. We can offer our hourly employees more steady work. The only additional costs will be the additional capital investment involved due to the purchase of some specialized cutting machines, which will cost $180,000 and can be expected to last about five years. We'll also have to lease a bit more space." Brian Clark though it over for a few days. "Patrick, your proposal makes sense to me. By adding a product line, we should be able to decrease our unit product costs because our fixed costs will be spread over many more units. This should be good for the new chain product line and the hat product line. I can get additional manufacturing space by moving our administrative offices out of our manufacturing site and into an office complex nearby. This will free up more space in the factory. I looked in to the purchase of the cutting machines and it seems that we will be able to finance the purchase at a low interest rate. There's only one more thing to consider. I will implement your idea only on the condition that you will join the company as the production manager for paper chains." Patrick agreed and is now the Paper Chain Production Manager reporting to the Director of Manufacturing. There are a variety of manufacturing departments that are involved in producing the products including: Warehouse, Materials Handling, Cutting, Assembly, Finishing, Quality Control, and Factory Supervisor. Supervision is provided throughout the process. Quality Control is provided at the end of the manufacturing process. A description of each department and a diagram of the factory floor is included in Figure 1 (Appendix) - Description of Manufacturing Departments Panel A and Panel B. The PPF utilizes job order costing by assigning direct material, direct labor, and manufacturing overhead to each individual job. The costs are accumulated using a Job Cost Sheet. See Figure 2 (Appendix) - Blank Job Cost Sheet. Given the simple, one-product nature of the manufacturing and cost environment in the past, they have always used the following method for determining job costs: (1) Direct material and direct labor are traced to each job based on time cards and materials requisition requests. (2) Manufacturing Overhead is applied using the total actual manufacturing overhead cost for the month divided by the number of units produced in the month. The selling price of each job is determined using a cost-plus pricing method. The final selling price is 115% of the cost determined on the job cost sheet. The introduction of the paper chain product line has been a great success. During the six months that the company has offered the paper chains, demand has exceeded all of the initial projections. During September, PPF made and sold 80,000 paper chains, which is 50% higher than their initial projections. Brian Clark is thrilled with his son's performance, but has been less impressed with the Paper Hats Product Manager, Matt Brady. Mr. Clark remarked, "Brady -- what is the problem with the sales for hats lately? Your sales have been down for the past five mouths. Maybe I should go out and hire another M.B.A. like Patrick. He sure knows how to bring in the sales and some fresh ideas." Matt Brady has been an excellent and loyal employee for over ten years. He has become frustrated with the decline in the sales of paper hats too. During September, PPF made and sold only 160,000 hats, which is far below their planned sales of 300,000 hats. "I just can't compete in the marketplace anymore. My unit costs keep rising, and corporate forced us to raise prices to our customers in order to cover our product costs and meet targeted selling price. My unit costs were always around $0.75 per unit and now they are over 50.80 per unit. My previously loyal customers have switched to other lower cost providers. I need to better understand the manufacturing process and talk to the cost accountants to see if they can help figure out why my costs keep rising." The Manufacturing Process At the beginning of each day, the Factory General Manager consults with the sales department and determines which jobs will be completed for the day. The General Manager forwards the Job Cost Sheet and the materials requisition to the Materials Handling Department. Materials Handling obtains the materials needed for each job from the Warehouse stockroom and brings the materials to the appropriate department for the day's manufacturing. Paper Hats are manufactured as follows: (1) Paper is delivered by Materials Handling to the Assembly Department. (2) Paper sheets are folded into a cone shape, taped and stapled in the Assembly Department. Finished hats are moved to the Finishing Department. (3) Hats are decorated in the Finishing Department using four stickers per hat. (4) Hats are placed on a table for inspection by Quality Control. Quality control also checks to ensure that the proper items are included in the order. The manufacturing process for paper chains is as follows: (1) Paper is delivered by Materials Handling to the Cutting Department. (2) Links are cut in to 2"by 8.5" strips. Five strips can be made from one sheet of paper. Cut strips are moved to the Assembly Department. (3) Bach link is connected to the previous link and then taped and stapled in the Assembly Department. Completed chains are moved to the Finishing Department. (4) Chains are decorated in the Finishing Department using eight stickers per completed chain. (5) Chains are placed on a table for inspection by quality control. Chains are then inspected by Quality Control before being packed for shipment with the completed job. The following raw materials are used in order to manufacture these products: colored paper, staples, tape, and stickers. The following "manufacturing equipment" is used in this factory simulation: stapler, tape dispenser, and scissors. ac Your instructor will demonstrate the manufacture of each product and will walk through each of the job descriptions before you begin. Your role is twofold. Initially, you will be part of the manufacturing organization. Later you will assume the role of a cost accountant responsible for determining the cost of each product and job. Your instructor will serve as the Factory General Manager. Assignment 1 (a) Complete the manufacture of Job 101 (or the job assigned by your instructor). (b) Identify the major elements of the value chain for the Paper Products Factory. (c) Identify the various costs involved in making the products. (Do not concern yourself with dollar amounts at this point.) (d) Separate the list of costs identified as product or period costs. Further classify product costs as direct material, direct labor, and manufacturing overhead. The Product Costing Process IBCA The next step is to determine the cost to produce each job and each unit. PPF uses a job costing system, whereby each job is the cost object. Costs are accumulated by job as follows:(1) Direct material and direct labor are traced to each job based on the information obtained from the materials requisition requests and factory employee time cards (2) The company accumulates factory overhead into one Manufacturing Overhead cost pool. At the PPF, Manufacturing Overhead is applied using an application rate based on the total actual manufacturing overhead for the month divided by the total number of units produced. This rate is then applied to each job by multiplying the rate times the units for each job. The Paper Products Factory targets its selling price at 115% of product cost. Your instructor will hand out cost information and a partially completed job cost sheet for your use in completing Assignment 2. Actual levels of production and total manufacturing costs for the month of September are included on Exhibit 2-Costs and Cost Assumptions. A partially completed job cost sheet is included in Exhibit 3-Partially Completed Job Cost Sheet. Assignment 2 (a) Trace the direct material and direct labor amounts used for each job and mark it on the Job Cost sheet. Your job consisted of 15 Hats and 10 Chains. The amounts of materials for the job can be found on the Materials Requisition Report (not included) and the Labor is found on the Labor time records (not included). These amounts have been input onto the Job Cost Sheet for you. See Exhibit 3-Partially Completed Job Cost Sheet. Journal of Business Cases and Applications (b) Using one overhead cost pool and units as the cost driver, allocate the overhead to each job. (c) Why is the process of allocating overhead different from tracing direct material and direct labor costs? (d) Complete the Job Cost sheets by identifying the total product cost for each job. Next compute the cost for a unit of paper hats and a unit of paper chain. (e) What do you think is the cause of the increase in unit costs for paper hats? (f) Matt Brady has asked you help him identify some other methods for allocating overhead in the determination of product cost. Identify at least two other possible ways of allocating the overhead to each job. Recalculate the produt cost and targeted selling price of each job and each unit using the two methods of allocating overhead identified in (e). (g) What are the advantages and disadvantages of the methods identified? Which method would you recommend? (h) Write a memo to Brian Clark summarizing your findings and recommendations. JBCA Figure 1 Description of Manufacturing Departments and Building Layout Panel A - Description of Manufacturing Departments Receiving/Warehouse Materials Handling Cutting Assembly Finishing Quality Control Factory General Manager Panel B - Building Layout Warehouse Responsible for storing and distributing raw materials used in the manufacturing process Responsible for requesting materials from Warehouse for the day's jobs. Also responsible for moving items in process between departments and keeping factory clean during downtime. Responsible for cutting the paper sheets used in products. Responsible for fastening the product parts. Responsible for decorating the products. Responsible for ensuring that products are made according to specification and checking the accuracy of the final jobs. Responsible for setting the manufacturing schedule after consulting with the Sales Department, coordinating materials ordering with the Purchasing Department, and supervising the manufacturing process. IDCA Cutting Department Factory Ofoes- Supervisor, Q, etc. Using a hands-on exercise Assembly Department Finishing Departmen. Using a hands-on exercise B C D E F G J K 3 2 Job # Amounts Ordered: 101 4 HATS: 15 5 CHAINS: 10 6 Date Started 2/20/23 7 Date Completed 2/20/23 Job cost sheet using units as a cost driver 8 9 10 Hats Chains Cost per 11 Direct Material # Cost per each 12 Paper 15 0.05 $ Total $ 0.75 Direct Material # each Total $ Paper 10 0.05 $ 0.50 13 Stickers 60 0.01 $ 0.60 Stickers 80 0.01 $ 0.80 14 Total Direct Material Total Direct Material 15 #Hrs Cost/hr. Total $ #Hrs Cost/hr. Total $ 16 Cutting Labor 0 $15 $ Cutting Labor 0.15 15 2.25 17 Assembly Labor 0.25 $15 $ 3.75 Assembly Labor 0.3 15 4.5 18 Finishing Labor 0.25 $15 $ 3.75 Finishing Labor 0.15 15 2.25 19 Total Direct Labor 0.5 $15 $ 7.50 Total Direct Labor 0.6 15 9 20 21 22 Mfg Overhead* 23 24 25 26 27 Total Cost for Job-HATS 28 29 Cost per unit 30 Selling Price per Unit 31 32 33 34 35 Overhead Calculation: 36 37 38 Cost/unit Cost driver Cost/unit of cost driver Total $ Cost driver of cost driver Total $ Mfg Overhead* Job Cost Sheet + Ready Total Cost for Job- Chains Cost per unit Selling Price per Unit