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 owners 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. Well also have to lease a bit more space. Brian Clark thought 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 into the purchase of the cutting machines and it seems that we will be able to finance the purchase at a low interest rate. Theres 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.

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. 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

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projections. Brian Clark is thrilled with his sons 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 months. 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 cant compete in the marketplace anymore. My unit costs keep rising, and corporate forced us to raise prices to our customers in order to cover out product costs and meet targeted selling price. My unit costs have shot up significantly lately. 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 days 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 2by 8.5 strips. Five strips can be made from one sheet of paper. Cut strips are moved to the Assembly Department.

(3) Each link is connected to the previous link and then taped and stapled in the Assembly Department. Each chain is made of 5 links. 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.

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The Product Costing Process

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 materials and direct labor are traced to each job based on the information obtained from the materials requisition requests and factory employee timecards. (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 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.

Additional Information:

Direct Labor Hours	Hats	Chains	Total
Cutting	-0-	1,500	1,500
Assembly	2,500	3,000	5,500
Finishing	2,500	1,500	4,000
Total for September	5,000	6,000	11,000

Cost Element	September Costs in US$
Quality Control	12,800
Supervisor	21,600
Stockroom, Materials Handling, etc	14,400
Depreciation on Tape machines	1,000
Depreciation on stapling machines	2,000
Depreciation on cutting machines	3,000
Rent and taxes on the factory	10,000
Utilities	1,500
Staples	100
Tape	150
Total for September	66,550

Department	Square Footage Consumption of Factory Space
Assembly	25%
Finishing	25%
Cutting	16.67%
Other	33.33%

Requirements:

1. 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 product cost and targeted selling price of each job and

each unit using ONE of the two methods of allocating overhead that you just identified.