Question
NOVA Production uses a job order cost system. For a number of months, there has been an ongoing disagreement between the sales department and the
NOVA Production uses a job order cost system. For a number of months, there has been an ongoing disagreement between the sales department and the production department concerning a special-order product, VIDGET.
VIDGET is a seasonal product that is manufactured in batches of 1,000 units.
VIDGET is sold at cost plus a markup 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 VIDGET.
The production department maintains that each job order must be fully costed on the basis of the costs incurred during the period in which the goods are produced.
Production personnel maintain that the only real solution is for the sales department to increase sales in the slack periods.
TJ Parley, president of the company, asks you as the company accountant to collect quarterly data for the past year on VIDGET.
From the cost accounting system, you accumulate the following production quantity and cost data.
Quarter | ||||
Costs | 1 | 2 | 3 | 4 |
Direct Materials | $ 140,000 | $ 240,000 | $ 120,000 | $ 200,000 |
Direct Labor | $ 84,000 | $ 144,000 | $ 72,000 | $ 120,000 |
Manufacturing Overhead | $ 205,000 | $ 156,000 | $ 99,000 | $ 128,000 |
Total | $ 429,000 | $ 504,000 | $ 291,000 | $ 448,000 |
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Production in Batches | 7 | 12 | 6 | 10 |
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Unit Cost (rounded per batch) | $ 61,286 | $ 42,000 | $ 48,500 | $ 44,800 |
- What manufacturing cost element is responsible for the fluctuating unit costs? Why?
- What is your recommended solution to the problem of fluctuating unit cost?
- Using Excel, Google Sheets/Docs, restate the quarterly data using your recommended solution in step 2.
- What other creative ideas or thoughts might be suggested to the CEO that might improve financial performance results?
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