Insane Gator (IG) produces and sells gourmet potato chips in the Southeast Region of the U.S. Among regional players, the company is considered one of the up-and-coming snack food producers.

IG produces three flavors of chips: Original, Spicy Cajun, and Creole. The company utilizes a process costing system with three sequential departments: Sorting/Cleaning, Peeling/Slicing, and Cooking/Packaging. Potatoes are added during the Sorting/Cleaning process and, peanut oil, spices, and packaging are added during the Cooking/Packaging processes. These represent all direct materials (DM) found in the products. Conversion costs (CC) are incurred in all three processes and include direct labor, variable manufacturing overhead, and fixed manufacturing overhead.

Much of the overhead allocated to the three processing departments results from costs stemming from three factory support departments: Information Systems, Plant Maintenance, and Human Resources. These costs are allocated using the reciprocal allocation method. Actual computer hours used by the departments is used to allocate overhead from Information Systems, actual labor hours is used by the departments to determine the allocation from Plant Maintenance, and number of employees in departments is used to allocate Human Resources costs. Overhead incurred during July in each department, along with actual computer hours, labor hours, and numbers of employees are presented below:

Overhead Computer Labor # of

Costs Hours Hours Employees

Information Systems $15,700 - 100 10

Plant Maintenance 15,000 80 - 12

Human Resources 17,000 325 20 -

Sorting/Cleaning 6,000 250 210 35

Peeling/Slicing 7,500 260 300 50

Cooking/Packaging 8,200 250 280 62

Other select cost and unit data are presented below. Conversion costs below added in July include direct labor and some factory overhead (applied from direct labor hours). Factory overhead from the three processing departments (prior page) have not yet been added to conversion costs, and support department overhead (prior page) have not yet been allocated to the processing departments (You must make the proper additions and allocations and add these amounts to the conversion costs below before proceeding with the process costing work).

Sorting/Cleaning

DM (% Complete) CC(% Complete) Cases

Beginning Inv. $ 32,000 (100%) $ 900 (50%) 1,750

Added in July $167,000 $ 22,000 11,300

Ending Inv. (100%) (20%) 1,808

Peeling/Slicing

DM (% Complete) CC(% Complete) Trans In Cases

Beginning Inv. $ 0 (100%) $ 5,000 (40%) $ 33,700 2,700

Added in July $ 0 $ 27,200

Byproducts 150

Ending Inv. (100%) (70%)

Cooking/Packaging

DM (% Complete) CC(% Complete) Trans In Cases

Beginning Inv. $ 5,250 (100%) $ 2,700 (40%) $ 16,200 750

Added in July $141,500 $ 59,100 10,000

Ending Inv. (90%) (30%) 400

Currently, IG uses the weighted-average method in assigning costs. However, the controller is considering switching to FIFO. The 150 cases of potatoes labeled byproducts include rotten potatoes and potato peelings and are sold to a local hog farm as feed for $10 per case. There are no additional costs to process these byproducts. IG uses the production method to allocate for byproducts within the Peeling/Slicing department. In other words, the company reduces the total dollar amount transferred in to the Cooking/Packaging department by the revenue generated from the sale to the hog farm:

Example (no journal entries required for case)

Cash (proceeds from sale) XXX

WIP-Cooking/Packaging XXXXXXXX

WIP-Peeling/Slicing XXXXXXXX Case Requirements (All written commentary should be in the same location and not be longer than one page in length--structure and clarity graded):

• Allocate support department costs using the reciprocal method to the three processes using the information provided. You must use linear programming for this. Provide proper support from Excel (Solver add-in) or other software program. Use these figures for all process costing work required.

• Using the weighted-average method, summarize the costs for all three processes for July, and assign these costs to units completed (and transferred out) and to units in ending work in process. Include appropriate schedules for flow of costs and units, equivalent units, and a cost and unit reconciliation for each process.
• Using the FIFO method, duplicate the above requirement (Do not forget to assign the costs to finish units already in beginning inventory). Briefly comment on your results by addressing the merits of the weighted-average and FIFO process costing methods.
• The controller is arguing that the human resources department is not a support department, and that its costs should be classified as period costs. Prepare a separate report allocating support department costs (without human resources included) using the reciprocal method and algebraic substitution.
• Prepare a separate report allocating support department costs (including human resources) using the direct method. Allocate these costs also using the step method assuming that information systems provides support for all departments, plant maintenance provides support for all departments except information systems, and human resources provides support for only the three operating departments. Compare the results from this requirement (direct and step) with those of the first requirement above (reciprocal).
• The other overhead is allocated using a traditional method (labor hours). Most of the factory work is labor-intensive due to the small batches used for each product. The controller is debating the idea of switching to an ABC costing system. Do you think this is a good idea? Why or why not?
• Ethical issue: The controller is dubious about some of the percentages provided by the foreman in terms of level of completeness of ending inventories in the processing departments. She has asked you to investigate her concern. In questioning other employees on the factory floor and through your own observations, you get the impression that the foreman provides percentages based on only cursory inspections and may frequently overestimate percentages. Is this an ethical concern? If so, why? How might you gather further evidence to prove or disprove this?

Check figures (rounded to nearest dollar):

Total Cost to Account For (weighted average): $1,015,196

Total Cost to Account For (FIFO): $1,011,601

Reciprocal Method Allocation (no human resources) to Sorting and Cleaning: $15,164

Direct Method Allocation to Sorting and Cleaning: $19,199

Step Method Allocation to Sorting and Cleaning: $18,722