Chapter 4 Case Study Laredo Leather Company

Laredo Leather Company manufactures high-quality leather goods. The companys profits have declined during the past nine months. In an attempt to isolate the causes of poor profit performance, management is investigating the manufacturing operations. of each of its products.

One of the companys main products is leather belts. The belts are produced in a single, continuous process in the Dalla Plant. During the process, leather strips are sewn, punched, and dyed. the belts then enter a final finishing stage to conclude the process. Labor and overhead are applied continuously during the manufacturing process. All materials, leather strips, and buckles are introduced at the beginning of the process. The firm uses the weighted-average method to calculate its unit cost.

The leather belts produced at the Dallas Plant are sold wholesale for $9.95 each. Management wants to compare the current manufacturing costs per unit with the market prices for leather belts. Top management has asked the Dallas plant controller to submit data on the cost of the manufacturing the leather belts for the month of October. These cost data will be used to determine whether modifications in the production process should be initiated or whether an increase in the selling price of the belts is justified. The cost per belt used for planning and control is $5.25.

The work-in-process inventory consisted of 400 partially completed units on October 1. The belts were 25 percent complete as to conversion. The cost included in the inventory on October 1 were as follows:

Leather strips.. $ 990

Buckles $260

Conversion costs . $300

Total ..$1,550

During October, 7,600 leather strips were placed into production. A total of 7,000 leather belts were completed. The work-in-process inventory on October 31 consisted of 1,000 belts, which were 50 percent complete as to conversion.

The costs charged to production during October were as follows:

Leather strips.. $ 19,900

Buckles $ 5,250

Conversion costs . $20,700 Total ..$45,850

Required:

In order to provide cost data regarding the manufacture of leather belts in the Dallas Plant to the top management of Laredo Leather Company, compute the following amounts for the month of October.

1. The equivalent units for material and conversion.
2. The cost per equivalent unit of material and conversion.
3. The assignment of production costs to the October 31 work-in-process inventory and to goods transferred out.
4. The weighted-average unit cost of leather belts completed and transferred to finish goods. Comment on the companys cost per belt used for planning and control.
5. Laredo Leather Companys production manager, Jack Murray, has been under pressure from the company president to reduce the cost of conversion. In spite of several attempts to reduce conversion costs, the have remained more or less constant. Now Murray is faced with an upcoming meeting with the company president, at which he will have to explain why he has failed to reduce conversion costs. Murray has approached his friend, Jeff Daley, who is the corporate controller, with the follow request: Jeff, Im under pressure to reduce costs in the production process. There is no way to reduce material cost, so Ive got to get the conversion costs down. If I can show just a little progress in next weeks meeting with the president, then I can buy a little time to try some other cost-cutting measures Ive been considering. I want you to do me a favor. If we raise the estimate of the percentage of completion of Octobers inventory to 60 percent, that will increase the number of equivalent units. Then the unit conversion cost will be a little lower. By how much would Murrays suggested manipulation lower the unit conversion cost? What should Daley do? Discuss the situation, citing specific ethical standards for managerial accountants.