Hilos is renowed for it's silk bedding. The company operates its three plants, Silk Plant, Fabric Plant...

Question 1 Hilos is renowned for its silk bedding. The company operates its three plants, Silk Plant, Fabric Plant and Bedding Plant in Phrae, a small town in northern Thailand. It is one of the few major employers in town and has been in business for nearly fifty years. The company's all-time favorite products are silk bedding products such as duvets, pillows and toppers. The Silk Plant buys raw silks from independent suppliers around Phrae and then processes them into three main grades of silk: Grade A, Grade B and Grade C. All costs incurred in the Silk Plant are common to the three grades of silk. The Silk Plant transfers all three grades of silk to the Bedding Plant at cost. Question 1 (continued) The Fabric Plant produces three types of fabric: Standard, Deluxe and Luxury. Each fabric is totally different and has its own production operation. Each fabric's production operation occurs in different locations in the Fabric Plant. Each production operation has two phases: Weaving and Dyeing. In Weaving, yarn is weaved into fabrics with different motifs. In Dyeing, fabrics are dyed and rolled into 50-yard per bolt. The Fabric Plant transfers all three types of fabric to the Bedding Plant at cost. The Bedding Plant produces orders for customers on a special-order basis. Customers specify the quantity, grade of silk and type of fabric for each order. The Bedding Plant's production has two phases: Layering and Quilting. In Layering, fabric and silk are sized, cut and then layered. In Quilting, fabric and silk are sewed and quilted to specified design according to customer orders. Other materials used in this plant are purchased from independent suppliers as and when they are needed. For the past three years, Hilos has been losing contracts to its competitors and the company's overall operating profit has been declining. Puzzled and frustrated, Joby Chng, the managing director of Hilos asked the newly hired financial controller, Calvin Teo, to investigate the efficiency of the company's operations. Joby wanted to know whether Hilos' operating costs were excessive and why the company's bids were higher than the winning bids by $50 per unit on average, especially for orders that required less customisation. During the investigation, Calvin gathered the following information regarding the three plants for last year. The Silk Plant used actual costing system as the output and production costs were fairly uniform throughout the years. The production costs were common to all three grades of silk and were assigned based on output in kilograms. However, Calvin noticed the differences in quality among the three grades of silk. Grade A is top grade silk that can be unraveled without silk floss breaking. It is pearly white with a healthy sheen to it and feels soft and light. Grade B may look similar in color compared with Grade A, but it contains clumps that create unevenness and air pockets in silk duvets. It also feels rough compared with Grade A and lacks a natural sheen. Grade C is the most inner layer of silk that is closest to the cocoon. It looks yellow and often has brown dots because it contains oil from silk worms. It is very rough to touch and feels cotton-like. Calvin also found that while currently no outside sales exist for the company, Hilos could sell the three grades of silk to the external market at lucrative prices. Silk Plant Production cost $1,200,000 Grade Output (kilograms) 2,000 4,000 4,000 Market Price (per kilogram) $200 $150 $100 Question 1 (continued) The Fabric Plant and the Bedding Plant used normal costing system. Both plants used plantwide overhead rate based on direct labour hour. Fabric Plant Budgeted Actual Manufacturing Overhead* $600,000 $526,500 Direct labour hours 100,000 hours Weaving Dyeing Standard 12,000 hours 10,500 hours Deluxe 16,000 hours 14,000 hours Luxury 24,000 hours 21,000 hours * Assume 50% fixed for both budgeted and actual amounts Calvin also found the following actual costs of production relating to Deluxe. Weaving 100,000 yards Dyeing ? bolts Fabric: Deluxe Output Production cost Direct material Direct labour Manufacturing overhead $800,000 $80,000 $20,000 $70,000 Calvin was concerned about the waste and the inefficiency that he observed in the Fabric Plant. He then developed a standard cost sheet for Deluxe in the Dyeing phase as shown below. The Fabric Plant: Dyeing From Weaving (50 yards x $10.00 per yard) Direct materials (30 litres x $0.30 per litre) Direct labour (5 hours x $5.50 per hour) Manufacturing overhead (5 hours x $5.50 per hour) Standard Cost Per Bolt $500.00 $9.00 $27.50 $27.50 In addition, Joby handed the following information relating to the Bedding Plant to Calvin. Bedding Plant Direct labour rate Manufacturing overhead Direct labour hour Machine hour Layering Quilting $8.00 $10.00 Budgeted $800,000 $1,600,000 160,000 40,000 20,000 80,000 Last week, Hilos received quotation request for two prospective jobs. Hilos' bidding policy is unit product cost plus 60 percent. Joby decided to examine the two prospective jobs and asked Calvin to review their costs. Calvin gathered the following information about the two jobs. Question 1 Hilos is renowned for its silk bedding. The company operates its three plants, Silk Plant, Fabric Plant and Bedding Plant in Phrae, a small town in northern Thailand. It is one of the few major employers in town and has been in business for nearly fifty years. The company's all-time favorite products are silk bedding products such as duvets, pillows and toppers. The Silk Plant buys raw silks from independent suppliers around Phrae and then processes them into three main grades of silk: Grade A, Grade B and Grade C. All costs incurred in the Silk Plant are common to the three grades of silk. The Silk Plant transfers all three grades of silk to the Bedding Plant at cost. Question 1 (continued) The Fabric Plant produces three types of fabric: Standard, Deluxe and Luxury. Each fabric is totally different and has its own production operation. Each fabric's production operation occurs in different locations in the Fabric Plant. Each production operation has two phases: Weaving and Dyeing. In Weaving, yarn is weaved into fabrics with different motifs. In Dyeing, fabrics are dyed and rolled into 50-yard per bolt. The Fabric Plant transfers all three types of fabric to the Bedding Plant at cost. The Bedding Plant produces orders for customers on a special-order basis. Customers specify the quantity, grade of silk and type of fabric for each order. The Bedding Plant's production has two phases: Layering and Quilting. In Layering, fabric and silk are sized, cut and then layered. In Quilting, fabric and silk are sewed and quilted to specified design according to customer orders. Other materials used in this plant are purchased from independent suppliers as and when they are needed. For the past three years, Hilos has been losing contracts to its competitors and the company's overall operating profit has been declining. Puzzled and frustrated, Joby Chng, the managing director of Hilos asked the newly hired financial controller, Calvin Teo, to investigate the efficiency of the company's operations. Joby wanted to know whether Hilos' operating costs were excessive and why the company's bids were higher than the winning bids by $50 per unit on average, especially for orders that required less customisation. During the investigation, Calvin gathered the following information regarding the three plants for last year. The Silk Plant used actual costing system as the output and production costs were fairly uniform throughout the years. The production costs were common to all three grades of silk and were assigned based on output in kilograms. However, Calvin noticed the differences in quality among the three grades of silk. Grade A is top grade silk that can be unraveled without silk floss breaking. It is pearly white with a healthy sheen to it and feels soft and light. Grade B may look similar in color compared with Grade A, but it contains clumps that create unevenness and air pockets in silk duvets. It also feels rough compared with Grade A and lacks a natural sheen. Grade C is the most inner layer of silk that is closest to the cocoon. It looks yellow and often has brown dots because it contains oil from silk worms. It is very rough to touch and feels cotton-like. Calvin also found that while currently no outside sales exist for the company, Hilos could sell the three grades of silk to the external market at lucrative prices. Silk Plant Production cost $1,200,000 Grade Output (kilograms) 2,000 4,000 4,000 Market Price (per kilogram) $200 $150 $100 Question 1 (continued) The Fabric Plant and the Bedding Plant used normal costing system. Both plants used plantwide overhead rate based on direct labour hour. Fabric Plant Budgeted Actual Manufacturing Overhead* $600,000 $526,500 Direct labour hours 100,000 hours Weaving Dyeing Standard 12,000 hours 10,500 hours Deluxe 16,000 hours 14,000 hours Luxury 24,000 hours 21,000 hours * Assume 50% fixed for both budgeted and actual amounts Calvin also found the following actual costs of production relating to Deluxe. Weaving 100,000 yards Dyeing ? bolts Fabric: Deluxe Output Production cost Direct material Direct labour Manufacturing overhead $800,000 $80,000 $20,000 $70,000 Calvin was concerned about the waste and the inefficiency that he observed in the Fabric Plant. He then developed a standard cost sheet for Deluxe in the Dyeing phase as shown below. The Fabric Plant: Dyeing From Weaving (50 yards x $10.00 per yard) Direct materials (30 litres x $0.30 per litre) Direct labour (5 hours x $5.50 per hour) Manufacturing overhead (5 hours x $5.50 per hour) Standard Cost Per Bolt $500.00 $9.00 $27.50 $27.50 In addition, Joby handed the following information relating to the Bedding Plant to Calvin. Bedding Plant Direct labour rate Manufacturing overhead Direct labour hour Machine hour Layering Quilting $8.00 $10.00 Budgeted $800,000 $1,600,000 160,000 40,000 20,000 80,000 Last week, Hilos received quotation request for two prospective jobs. Hilos' bidding policy is unit product cost plus 60 percent. Joby decided to examine the two prospective jobs and asked Calvin to review their costs. Calvin gathered the following information about the two jobs