RIRA Company makes attachments, such as backhoes and grader and bulldozer blades, for construction equipment. The company uses a job order cost system. Management is concerned about cost performance and evaluates the job cost sheets to learn more about the cost effectiveness of the operations. To facilitate a comparison, the cost sheet for job 206 (50 backhoe buckets completed in October) was compared with Job 228, which was for 75 backhoe buckets completed in December. The two job sheets follows:

Job 206

Item: 50 backhoe buckets

Direct Materials Quantity x Direct Materials Price = Amount

Materials:

Steel (tons) 105 1,200 $126,000

Steel components (pieces) 630 7 4,410

Total Materials $130,410

Direct Labor hours x Direct Labor Rate = Amount

Direct Labor:

Foundry 400 $22.50 $9,000

Welding 550 27.00 14,850

Shipping 180 18.00 3,240

Total Direct Labor 1,130 $27,090

Direct Total Labor hours x Factory Overhead Rate = Amount

Factory Overhead:

(200% of direct labor dollars) $27,090 x 200% $54,180

Total Cost $211,680

Total Units divided by 50

Units cost (rounded) $4,233.60

Job 228

Item: 75 backhoe buckets

Direct Materials Quantity x Direct Materials Price = Amount

Materials:

Steel (tons) 195 1,100 $214,500

Steel components (pieces) 945 7 6,615

Total Materials $221,115

Direct Labor hours x Direct Labor Rate = Amount

Direct Labor:

Foundry 750 $22.50 $16,875

Welding 1,050 27.00 28,350

Shipping 375 18.00 6,750

Total Direct Labor 2,175 $51,975

Direct Total Labor hours x Factory Overhead Rate = Amount

Factory Overhead:

(200% of direct labor dollars) $51,975 x 200% $103,950

Total Cost $377,040

Total Units divided by 75

Units cost (rounded) $5,027.20

Management is concerned with the increase in unit costs over the months from October to December. To understand what has occurred, management interviewed the purchasing manager and quality manager.

Purchasing manager: Prices have been holding steady for our raw materials during the first half of the year. I found a new supplier for our bulk steel that was willing to offer a better price than we received in the past. I saw these lower steel prices and jumped at them, knowing that a reduction in steel prices would have a very favorable impact on our costs.

Quality Manger: Something happened around mid-year. All of a sudden, we were experiencing problems with respect to the quality of our steel. As a result, weve been having all sorts of problems on the shop floor in our foundry and welding operation.

Analyze the two job cost sheets, and identify why the unit costs have changed for the backhoe buckets. Complete the following schedule to help you in your analysis:

Input Quantity per Input Quantity per

Item Unit- Job 206 Unit Job-228

Steel

Foundry Labor

Welding Labor

How would you interpret what has happened in light of your analysis and the interviews?