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Cornerstones of Cost Management, Loose-Leaf Version, 4th + CengageNOWv2, 1 Term Printed Access Card (4th Edition) Chapter P2 Problem 10R

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Beauville Furniture Corporation produces sofas, recliners, and lounge chairs. Beauville is located in a medium-sized community in the southeastern part of the United States. It is a major employer in the community. In fact, the economic well-being of the community is tied very strongly to Beauville. Beauville operates a sawmill, a fabric plant, and a furniture plant in the same community.

The sawmill buys logs from independent producers. The sawmill then processes the logs into four grades of lumber: firsts and seconds, No. 1 common, No. 2 common, and No. 3 common. All costs incurred in the mill are common to the four grades of lumber. All four grades of lumber are used by the furniture plant. The mill transfers everything it produces to the furniture plant, and the grades are transferred at cost. Trucks are used to move the lumber from the mill to the furniture plant. Although no outside sales exist, the mill could sell to external customers, and the selling prices of the four grades are known.

The fabric plant is responsible for producing the fabric that is used by the furniture plant. To produce three totally different fabrics (identified by fabric ID codes FB60, FB70, and FB80, respectively), the plant has three separate production operationsone for each fabric. Thus, production of all three fabrics occurs at the same time in different locations in the plant. Each fabrics production operation has two processes: the weaving and pattern process and the coloring and bolting process. In the weaving and pattern process, yarn is used to create yards of fabric with different designs. In the next process, the fabric is dyed, cut into 25-yard sections, and wrapped around cardboard rods to form 25-yard bolts. The bolts are transported by forklift to the furniture plants Receiving Department. All of the output of the fabric plant is used by the furniture plant (to produce the sofas and chairs). For accounting purposes, the fabric is transferred at cost to the furniture plant.

The furniture plant produces orders for customers on a special-order basis. The customers specify the quantity, style, fabric, lumber grade, and pattern. Typically, jobs are large (involving at least 500 units). The plant has two production departments: Cutting and Assembly. In the Cutting Department, the fabric and wooden frame components are sized and cut. Other components are purchased from external suppliers and are removed from stores as needed for assembly. After the fabric and wooden components are finished for the entire job, they are moved to the Assembly Department. The Assembly Department takes the individual components and assembles the sofas (or chairs).

Beauville Furniture has been in business for over two decades and has a good reputation. However, during the past five years, Beauville experienced eroding profits and declining sales. Bids were increasingly lost (even aggressive bids) on the more popular models. Yet, the company was winning bids on some of the more-difficult-to-produce items. Lance Hays, the owner and manager, was frustrated. He simply couldnt understand how some of his competitors could sell for such low prices. On a common sofa job involving 500 units, Beauvilles bids were running $25 per unit, or $12,500 per job more than the winning bids (on average). Yet, on the more difficult items, Beauvilles bids were running about $60 per unit less than the next closest bid. Gisela Berling, vice president of finance, was assigned the task of preparing a cost analysis of the companys product lines. Lance wanted to know if the companys costs were excessive. Perhaps the company was being wasteful, and it was simply costing more to produce furniture than it was costing its competitors.

Gisela prepared herself by reading recent literature on cost management and product costing and attending several conferences that explored the same issues. She then reviewed the costing procedures of the companys mill and two plants and did a preliminary assessment of their soundness. The production costs of the mill were common to all lumber grades and were assigned using the physical units method. Since the output and production costs were fairly uniform throughout the year, the mill used an actual costing system. Although Gisela had no difficulty with actual costing, she decided to

explore the effects of using the sales-value-at-split-off method. Thus, cost and production data for the mill were gathered so that an analysis could be conducted. The two plants used normal costing systems. The fabric plant used process costing, and the furniture plant used job-order costing. Both plants used plantwide overhead rates based on direct labor hours. Based on her initial reviews, she concluded that the costing procedures for the fabric plant were satisfactory. Essentially, there was no evidence of product diversity. A statistical analysis revealed that about 90 percent of the variability in the plants overhead cost could be explained by direct labor hours. Thus, the use of a plantwide overhead rate based on direct labor hours seemed justified. What did concern her, though, was the material waste that she observed in the plant. Maybe a standard cost system would be useful for increasing the overall cost efficiency of the plant. Consequently, as part of her report to Lance, she decided to include a description of the fabric plants costing proceduresat least for one of the fabric types. She also decided to develop a standard cost sheet for the chosen fabric. The furniture plant, however, was a more difficult matter. Product diversity was present and could be causing some distortions in product costs. Furthermore, statistical analysis revealed that only about 40 percent of the variability in overhead cost was explained by the direct labor hours. She decided that additional analysis was needed so that a sound product costing method could be recommended. One possibility would be to increase the number of overhead rates. Thus, she decided to include departmental data so that the effect of moving to departmental rates could be assessed. Finally, she also wanted to explore the possibility of converting the sawmill and fabric plant into profit centers and changing the existing transfer pricing policy.

10. For each of the overhead rates computed in Requirement 9, calculate unit bid prices for Jobs A500 and B75. Round your answers to two decimal places.

	Unit Bid
Plantwide rates
Job A500		$fill in the blank 61
Job B75		$fill in the blank 62
Departmental rates.
Job A500		$fill in the blank 63
Job B75		$fill in the blank 64

Assume that the companys aggressive bidding policy is unit cost plus 50 percent. Did departmental overhead rates have any effect on Beauvilles winning or losing bids? What recommendation would you make? Explain. Round your answers to two decimal places.

Departmental rates

increasedecreasedecrease

the bid for the more

easilydifficult toeasily

produced Job A500 and

increasedecreaseincrease

the bid for the more

easilydifficult todifficult to

produce Job B75. This appears to be in the right direction. We would recommend using the

departmental ratesplantwide ratedepartmental rates

.

Now, adjust the costs and bids for departmental rate bids using the proposed standard costs for the Coloring and Bolting Department. Did this make a difference? What does this tell you? Round your answers to two decimal places. Enter all amounts as positive numbers.

Standard cost would

increasedecreasedecrease

the cost of Fabric FB70 for both jobs. For Job A500, prime costs will

increasedecreasedecrease

by $fill in the blank 72. And for Job B75, prime costs will

increasedecreasedecrease

by $fill in the blank 74. Thus, the bid for Job A500 will

increasedecreasedecrease

by $fill in the blank 76. Similarly, the bid for Job B75 will

increasedecreasedecrease

by $fill in the blank 78 This tells us that we

cancan notcan

apparently avoid including waste in our bid by using standard costs and

improveworseimprove

our bidding. It also tells us that we need to focus on becoming

morelessmore

efficient.