Khan Products Company uses a job order cost system. For several months, there has been an ongoing rift between the sales department and the production department concerning a special-order product TC-1. TC-1 is a seasonal product that is manufactured in batches of 1,000 units. TC-1 is sold at cost plus mark-up of 40% of cost. 

The sales department is unhappy because fluctuating unit production costs significantly affect selling prices. Sales personnel complain that this has caused excessive customer complaints and the loss of considerable orders for TC-1 

The production department maintains that each job order must be fully costed on the basis of the cost incurred during the period in which the goods are produced. Production personnel maintain that the only real situation is the for the sales department to increase sales in the slack period. 

Andrea Parley, president of the company, asks you as the company accountant to collect quarterly data for the past year on TC-1. From the cost accounting system, you accumulate the following production quantity and cost data: 

1. 
2. a) What manufacturing cost element is responsible for the fluctuating unit costs/ Why? (5 marks) 
3. b) What is your recommended solution to the problem of fluctuating unit costs? (10 marks) 
4. c) Restate the quarterly data on the basis of your recommended solution. (10 marks) 

 

Quarter 1 $100,000 $220,000 $80,000 $200,000 60,000 3 Costs Direct materials Direct labour Manufacturing overheads 105,000 153,000 97,000 125,000 Total Production in batches Unit cost (per batch) 2 4 132,000 48,000 120,000 $265,000 $505,000 $225,000 $445,000 5 $53,000 $45,909 $56,250 $44,500 11 4 10 +