Question 2

Leather Craft Sdn Bhd manufactures leather goods. The Companys profits have been declining over the past few months. Management is concern over the decline in profits and is examining each of its product line closely to determine the reason for the decline.

One of the Companys main product is leather belts. The belts are produced in a single continuous process in its factory in Kajang. During the manufacturing process, the leather strips are sewn, punched and dyed. The belts then enter a final finishing stage to conclude the manufacturing process. Labor and overheads are continually applied during the manufacturing process. All materials are added at the beginning of the process and the company uses a weighted-average method to calculate unit cost.

The leather belts produced at the Kajang Factory are sold to wholesalers at a price of RM 14.50 Management wants to compare the current manufacturing cost to the wholesale price. Management has a policy to earn at least 25% margin above cost to ensure that the overall profitability of the Company is maintained. Currently, the cost per belt used for planning and control purposes is RM 11.50.

Top management has asked the factory accountant in Kajang to submit the relevant data on the cost of manufacturing the leather belts for the month of October.

These cost data will be used to determine whether modifications in the production process should be initiated or whether an increase in selling price is justified.

The factory accountant submitted the following data:

The work in process inventory consist of 500 partially completed units on 1^stOctober. The belts were 30% complete as to conversion. The cost included in the Inventory on 1^stOctober is as follows:

	RM
Leather strips	1,650
Buckles	350
Direct labor	500
Manufacturing Overhead	2,000
Total Cost	4,500

During the month of October, 8,000 leather strips were started into production. A total of 8,100 leather belts were completed. The work-in-process inventory on 30^thOctober consisted of 400 belts that were 40% complete as to conversion.

The costs charged to production during the month of October is as follows:

	RM
Leather strips	41,000
Buckles	8,000
Direct labor	15,800
Manufacturing Overhead	39,520
Total Cost	104,320

Required

1.In order to provide cost data on the manufacture of leather belts in the Kajang factory to top management, calculate the following amounts for the month of October:

(a) Equivalents units of material and conversion cost.

(5 marks)

(b)Cost per equivalent units for material; conversion cost and total unit cost.

(6 marks)

(c) Assignment of production cost to leather belts completed and transferred out and to the October 31 ending work in process.

(4 marks)

(d) Compare the total unit cost for the leather belt and the current selling price. Draft a MEMO to the CEO of Leather Craft and include the following:

(i) Why the profits of the company has been declining.

(ii) The proposed revised new selling price for leather belts.

(iii) Recommendations.