Question
Northern Rail is a small railway that recently began running a route between a large mine in Norther Ontario and Minnesota in the United States.
Northern Rail is a small railway that recently began running a route between a large mine in Norther Ontario and Minnesota in the United States. The railway is current in the process of upgrading the routes to handle heavier trains by replacing old wooden Sleepers with cement Sleepers (a sleeper is a large piece of wood or cement that rests on the railbed and supports the train tracks). Northern Rail operates a separate Sleeper Manufacturing Division, and uses 95% of sleepers for their operations. The remaining 5% are sold to others.
Cement Sleepers are manufactured by pouring cement into batches of 100 Sleepers per batch, and then curing (or harden) over a period of time. Curing is a long process that involves constant monitoring. Cement makes up 90% of the material costs and is added at the beginning of the process. Metal clips, the only other materials, are added to the Sleepers when 20% cured.
At the beginning of the month, there were three batches of Sleepers that were 10% cured (with a material value of $2,000 and a cured value of $4,000). During the month, 120 new batches were started, and costs of $90,000 were incurred ($40,000 in materials and $50,000 in curing costs). Normally, 4% of Sleepers started are defective these defects are not detected until the Sleepers are 100% cured. In the past month, there were 6 bad batches of sleepers. At the end of the month, there were 4 batches of sleepers that were 30% cured. Northern Rail uses modified FIFO
Required: What is the value of the ending WIP, Cost of Goods Sold and Spoilage Expense. (8 marks)
Required: Should the Sleeper Manufacturing Division be assessed as a profit centre, cost centre or revenue centre? Briefly explain your answer (2 marks)
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