LEARNING OBJECTIVES The pielerine of the depth dennd various functions in a simplement Determine predbe (3) Analyze the effectiveness of posting sim (1) Recommend the lates CANE SCENARIO Comp Ilackground The Precious Paper Factory (PPFis a local facturer of single product paper party hats. They sell primarily to specialty stores in the Midwest region of the United States. There are several other national and international manufacturers of similar product, therefore it very competitive marketplace. The market is very price sensitive small increases price can result in large decreases in product demand The PPE is a family owned company that employs approximately 100 people. The owner and CEO of the company is Brian Clark. 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 Chine think about value chain elements). Patrick Clark, the owner's son, presented his father with a business proposal to add a second product line-paper chains Dad, by adding paper chairs, we can expand our product line to our existing customer hase. For the most part our current sales and customer service structure can remain as Ys 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 lineWe have excess manufacturing capacity, skilled labor. and almost all 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 required to purchase some specialized curring machines, which will cost $180,000 and can be expected to last about five years. We'll also have to lease a bit more space. Brian Clark though it over for a few days. "Parrick, 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 its. This should be good for the both the product lines. 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 investigated the purchase of the cutting machines, and it seems that we will be able to finance the purchase at a low interest rate. However, I will implement your idea only if 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 theorie un procent A description of each department and a diagram of the factory luded in care descritos Vastag Derartments Panel And The PPF utilizes job order costing by assighing direct material, direct labor, and manufacturing Appendix Blank Job Cow Sheet Oven the simple, one-product nature of hond we cach individual job. The costs are accumulated using a Job Cost Sheet See Figure 2 the manufacturing and cost environment in the past, they have always used the following method in Direct material and direct laborare traced to cact job based on timecards and materials 21 Manufacturing Overheat 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 fine has been a great succes. During the six months that the company has officred the paper chains. demand his exceeded all of the initial projections. During September. PPF made and sold 80.000 paper chains, which is 50% higher than their initial projections Brian Clark is thrilled with his son's 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 fars lately? Your sales have been down for the past five month Maybe I should go out and hire another MBA 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. Matt explained. "I just can compete in the marketplace am moreMy unit costs keep rising and corporate forced to raise prices to our customers in order to cover our product costs and meel targeled selling price. My until costs were always around 50.75 per unit and now they are over 80 80 per unit. My previously loyal customers have switched to other lower cost providers I need to better understand the manufacturing process and talk 10 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 Material Handling Department. Materials Handling obtains the materials needed for cach job from the Warehouse stockroom and brings the materials to the appropriate department for the day's 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 har (4) Huts are placed on a table for inspection by Quality Control Ouality control also checks to ensure that the properes are included in the order The manufacturing process for paper chains is as follow 1) Paper is delivered by Meral Handling to the Cutting Department 12) Links are cut into 2 by 85strip Fre strips can be made from one sheet of paper Cut strips are moved to the Assembly Department (1) Each link is connected to the previous link and then loped and stapled in the Assembly (1) Chains are decorated in the Finishing Department using eight stickers per completed chain (59) 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 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. Assume that you are responsible for Job 101 that includes 15 paper hats and 10 paper chains. Assament: a) Identity the major elements of the value chain for the Paper Pepper Factory b) Identify the various costs involved in making the products. (Do not concern yourself with dollar amounts at this point) c) Separate the list of costs identified as product or period costs. Further classify product costs as direct material, direct labor, and manufacturing overhead d) Complete the Exhibit 2 - Partially Completed Job Cost Sheet using information from Exhibit 1 Cost and Assumptions c) Using number of units produced as the base (cost driver), allocate the overhead to each job. Complete the Job Cost sheets by identifying the total product cost for each job. Next compute the cost for a unit of paper hat and a unit of paper chain. What do you think is the cause of the increase in unit costs for paper hats? h) Matt Brady has asked you help him identify some other methods for allocating overhead in the determination of product cost. Identify at least one other possible way of allocating the overhead to each job. Recalculate the product cost and targeted selling price of each job and each unit using the method of allocating overhead that you just identified. i) What are the advantages and disadvantages of the method identified? Which method would you recommend D) Write a memo to Brian Clark summarizing your findings and recommendations, APPENDIX Recen Warehouse Figure ! Description of Manufacturing Departments and Building Layout and A Description of Manufacturing Departments Responsible for storing and distributing raw materials used in the manufacturing process Material Handling Responsible for requesting materials from Warehouse for the day's jobs. Also responsible for moving items in process between departments and keeping factory clean during downtime. Cutting Responsible for cutting the paper sheets used in products. Assembly Responsible for fastening the product parts. Finishing Responsible for decorating the products Quality Control Responsible for ensuring that products are made according to specification and checking the accuracy of the final jobs. Factory General Manager Responsible for setting the manufacturing schedule after consulting with the Sales Department, coordinating materials ordering with the Purchasing Department and supervising the manufacturing process Panel B - Building Laroul Warehouse Cutting Department Factory Offices - Supervisor, QC. etc. Assembly Department Finishing Department Figure 2 Blank Job Cost Sheet Job Amounts Ordered HATS CHAINS Date Started Date Completed CHAINS Cost per HATS cach Total Cost per cach Total Direct Material Papers Stickers Total Direct Material Direct Material Papers Stickers Total Direct Material Total Costh #hrs Cosuhr Total #hrs Direct Labor Cutting Labor Assembly Labor Finishing Labor Total Direct Labor Direct Labor Cutting Labor Assembly Labor Finishing Labor Total Direct Labor Cost/unit Total Total Cost driver Cost driver of cost driver Cost/unit of cost driver Mfg Overhead Mig Overhead Total Mfg Overhead Total Product cost Cost per unit Selling Price per unit Total Mfg Overhead Total Product cost Cost per unit Selling Price Per unit Overhead Calculation Exhibit Costs and Assumptions Con for the last of September 160,000 units 80.000 units 240.000 units Production and sales of Hats Production and sales of Chains Total Production and Sales for September Direct Material Sheets of paper used to make HATS I per unit Shorts of paper used to make CHAINS per unit stickers to make HATS stickers to make CHAINS per unit TOTAL DIRECT MATERIAL (SEPTEMBER 8 per unit 50.05 per sheet 50.05 per sheet $0.0 each $ 0,01 cch S 8,000.00 $4,000.00 56,400.00 56,400.00 $ 24,800.00 Hats Total 1.300 5.500 4.000 11.000 Chains 1.500 3.000 1,500 6,000 2.500 2.500 5,000 Total Hats Chains Direct Labor Direct Laber HOURS Cutting labor hours Assembly labor hours Finishing labor hours TOTAL DIRECT LABOR HOURS (SEPTEMBER) Direct Labor COSTS Cost per hour Cutting labor $ 15.00 Assembly labor 5 15.00 Finishing labor $ 15.00 TOTAL DIRECT LABOR COSTS $ 37.500 $37.500 $ 22,500 $ 45.000 $ 22.500 $ 22,500.00 $ 82,500.00 $ 60.000.00 $ 165,000.00 $ 40.00 per hour $ 60,00 per hour $ 15.00 per hour S-12,800.00 $ 21.600.00 $ 14,400.00 Manufacturing Overhead (TOTALS) Quality control hours 320 hours Indirect labor. Supervisor 360 hours Other indirect labor (stockroom, materials 960 hours handling) Depreciation on tape machines $1,000 per month Depreciation on stapling machines $2,000 per month Depreciation on cutting machine $3,000 per month Rent and taxes on the factory $10,000 per month Utilities $1.500 per month Staples Tape TOTAL MANUFACTURING OVERHEAD (SEPTEMBER) TOTAL PRODUCT COSTS FOR SEPTEMBER $ 1,000.00 $ 2.000.00 S 3.000.00 $ 10.000.00 $1,500.00 $ 100.00 $ 150.00 $ 66,550.00 S 256.350.00 Fshibit 2 Partially Completed Job Cost Sheet 101 Job Amounts Ordered HATS CHAINS Date Suured Date Completed 15 10 CHAINS HATS Cost per Cost per cach DOS 0.01 Total 1000S 0 0.01 Total 1500S 600 Direct Material Papers Stickers Total Direct Material cach DOS O 10 80 15 60 Direct Material Papers Stickers Total Direct Material Total Total Cost/hr SIS 13 0 Direct Labor Cutting Labor Assembly Labor Finishing Labor Total Direct Labor #hrs 0 0.25 0.25 0.5 1 #hrs 0.15 0.3 0.15 0.6 Direct Labor Cutting Labor Assembly Labor Finishing Labor Total Direct Labor Cosuhr 15 15 15 15 15 15 Total Total Cost driver Cost driver Cost/unit of cost driver Cost/unit of cost driver 10 IS Mfg Overhead Mfg Overhead Total Mfg Overhead Total Product cost Cost per unit Selling Price per unit Total Mfg Overhead Total Product cost Cost per unit Selling Price Per unit Overhead Calculation POHR=566550/240000 F2 Bank Job Sheet Amos Ordered CHAINS Date staned Dale Cooper CHAINS HATS Cost pet cach Total Com per each Total Direct Material Papers Sticker Total Direct Material Direct Me Paper Sticker Total Direct Stateral hr Cosuhr Total Costhur Total Direct Labor Cutting Labor Assembly Labor Finishing Labor Total Direct Laber Direct Labor Cutting Labor Assembly Labor Finishing Labor Total Direct Labor Total Cost driver Costunit of cost driver Cost driver CostunitTotal of cosa driver Mr Overhead Mie Overhead Total Mfg Overhead Total Product cost Cost per unit Selling Price per unit Total M: Overhead Total Product cost Cost per unit Selling Price Per unit Overhead Calculation CM Sumur 160.000 30.000 Production and sales of Chaine Yocal Production and Sales for Seber Dioc Matdal Sheet ornarodom HATS porn Shoper used to me CHAINS tickets to make HATS per unl sticken somako CHAINS per mit TOTAL DIRECT ALATERAL SEPTEMBER 500 per het 505 per bal Soch sool coch SROO000 $ 4,000.00 56.400.00 56 400.00 $348000 Total 1.500 5.500 4.000 11,000 Chale 1.500 3,000 1.500 6,000 3.500 2300 5.000 Total Claims Hats Direct Labor Diner Labor HOURS Cutting labor hours Assembly tabor hours Finishi tabor hour TOTAL DIRECT LABOR HOURS (SEPTEMBER) Direct Labor COSTS hour Cutting labor SI5.00 Assembly labor $15.00 Finishing labor $15.00 TOTAL DIRECT LAHOR COSTS Cost per 537500 $17.500 523500 $ 45,000 5 23.500 $ 22.500.00 $ $2.500.00 560.000.00 $ 165,000.00 $ 40,00 per hour 560.00 per hour $ 15.00 per hour $ 12.800.00 $ 21,600.00 $ 14,400.00 Manufacturing Overhead (TOTALS Quality control hours 320 Hours Indirect labor - Supervisor 360 hours Other indirect labor(stock com, materials 960 hours handling) Depreciation on tape machines $1.000 per month Depreciation on stapling machines $2.000 per month Depreciation on cutting machine $3,000 per month Rent and taxes on the factory $10,000 per month Utilities $1,500 per month Staples TOTAL MANUFACTURING OVERHEAD (SEPTEMBER) $ 1.000.00 $ 2,000.00 $3,000.00 S 10.000.00 $ 1.500.00 $ 100.00 $ 150.00 $ 66,550.00 Tape S 256.350.00 TOTAL PRODUCT COSTS FOR SEPTEMBER