SANDERS CYCLE COMPANY: PROCESS COSTING Sanders Cycle Company is a family-owned bicycle manufacturing company located in Stow, Ohio. It has two product lines, a road bike, the Tourist, and a high-end racing bike, the Racer. The design for Tourist bicycles is standard for all units. Because of the standard design and the high volume production of the Tourist line, the company uses a process costing system using the First-In-First-Out (FIFO) method to determine unit costs. Figure 1 provides the flowchart of the production process of Tourist bicycles. A narrative describing the production process is provided below. Figure 1: Tourist's Production Process Department 1 Cutting/Welding Sanding Department 1 Heat Treatment Department 1 Painting Department 2 Assembly Department 2 Packing The primary materials used in the Tourist's production process consist of steel tubing for bicycle frames and assembled components (e.g.. gear assemblies, pedals, wheels, etc.). The company's accounting system releases purchase orders on-line as needed, and the company receives material deliveries on a just-in-time basis. In Department 1, workers use a laser to precision cut all tubing based on the standard design. Workers then weld the precision cut pieces to form the bicycle frames and sand the joints to prepare the frames for painting. After sanding, workers hang the frames on an overhead conveyor that transports them through the next two processes. All bicycle frames undergo a high temperature heat-treating process to strengthen the tubing walls that are weakened during the welding process. After heat treatment, all frames are inspected. At this time. 100 percent of direct material and 70 percent of conversion work have been done. Defective frames are removed from the production process and destroyed. All frames passing this inspection will pass through an electrostatic painting process in which each frame receives an electrical charge that enhances paint adherence. The company's trademark color for the Tourist is purple. After painting. frames are sent to Department 2 for further processing. In Department 2, workers assemble the bicycles. Each bike is inspected when each unit has received 100 percent of assembled components and conversion work. All bikes passing the final inspection are packed in a box and sent to the Finished Goods warehouse. The product cost composition of the Tourist line consists of direct materials, direct labor, and manufacturing overhead. Each Tourist bike uses, on average, 2.5 direct labor hours in Department 1 and 1.5 direct labor hours in Department 2. www Manufacturing overhead are indirect costs to the product lines. Overheads are applied to production process in each department. The company has five overhead cost pools: (1) material handling. (2) labor-related, (3) heat treatment. (4) painting, and (5) quality control. Material handling: This cost pool is for all costs associated with ordering, receiving, and moving materials to the using departments. The number of parts in each Tourist is 15 (i.e., 1 steel tubing issued to Department 1 and 14 assembled components issued to Department 2). Material handling cost is applied to production at the rate $2 per part issued. Labor-related: This cost pool consists of overhead items such as utilities, equipment depreciation, butane, and indirect materials incurred to support the time consuming activities of cutting, welding, sanding, assembling, and packaging. Labor-related overhead is applied to production in each department at the rate of $12.75 per direct labor hour. Heat treatment. This cost pool includes utilities and depreciation of the furnace. Heat treatment cost is applied to production at the rate of $54 per treatment hour. Each frame unit requires 30 minutes of heat treatment. Painting: This cost pool includes the cost of painting frames and depreciation of painting equipment. Painting cost is incurred equally per bicycle and applied to production at the rate of $61.25 per bike. Quality control: This pool consists of the training cost of factory workers and the salary of factory supervisors and quality control inspectors. Quality control cost is applied to production in each department at the rate of $10.75 per bike inspected. The information for the fourth quarter (October-December) of the current year is presented below: Department 1: Units in Work-in-Process (WIP) inventory, October 1 250 $19,750, 100% complete $16,225, 40% complete (Conversion costs in the beginning inventory are comprised of direct labor, $3,000, Direct materials (steel tubing) costs Conversion costs and overhead applied, $13,225.) Units started Units completed and transferred to Dept. 2 2,300 2,180 Spoilage units at first inspection (from units started during the fourth quarter) Current costs added/applied during the quarter: Direct materials (steel tubing) costs Direct labor costs Overhead applied to production Overhead activity measures for the quarter: Material handling: Labor-related: Heat treatment: Quality control: Painting: Units in WIP inventory, December 31 Direct materials (steel tubing) costs Conversion costs Department 2: 80 $184,000 $66,480 ??? 2,300 parts 5,560 direct labor hours 1,130 treatment hours ??? bikes inspected 2,180 bikes painted ??? 100% complete 30% complete Units in WIP inventory, October 1 Prior department (Dept. 1) costs Direct materials (assembled components) costs Conversion costs 200 $48,600 $16,200, 70% complete $5,920, 40% complete (Conversion costs in the beginning inventory are comprised of direct labor, $1,440, and overhead applied, $4,480.) Units received from Department 1 Units completed and transferred to Finished Goods Spoilage units at second inspection (from units started during the fourth quarter) Current costs added/applied during the quarter: Prior department (Dept. 1) costs Direct materials (assembled components) costs Direct labor costs Overhead applied to production Overhead activity measures for the quarter: Material handling: Labor-related: Quality control: Units in WIP inventory, December 31 Direct material (assembled components) costs Conversion costs ??? 2,100 100 ??? $255,600 $39,120 ??? 30,100 parts issued 3,260 direct labor hours ??? bikes inspected ??? 50% complete 30% complete The production record for the fourth quarter of 2016 indicated that the spoilage units discovered at the first inspection point in Department 1 were considered normal, while those at the second inspection point in Department 2 were considered abnormal spoilage. The finished goods inventory of Tourist bicycles on October 1 consisted of 250 bikes with a total cost of $107,500. During the fourth quarter, 2,030 bikes were sold at 130 percent of their cost. The firm uses the perpetual inventory record and the first-in-first-out (FIFO) method to determine the balances on both Cost of Goods Sold and Finished Goods Inventory accounts. Required: 1. Prepare cost reports for the fourth quarter of the year for both production departments. Using the First-In-First-Out (FIFO) method, provide the following figures, with supporting calculations, for each department: a. Direct materials cost per equivalent unit b. Conversion cost per equivalent unit c. Prior department cost per equivalent unit (Note: This requirement applies to Department 2 only.) d. Total costs assigned to units transferred out e. Total costs assigned to spoiled units 2. What is the cost of goods sold recognized for the sale? What are the revenues generated during the fourth quarter? The finished goods inventory of Tourist bicycles on October 1 consisted of 250 bikes with a total cost of $107,500. During the fourth quarter, 2,030 bikes were sold at 130 percent of their cost. The firm uses the perpetual inventory record and the first-in-first-out (FIFO) method to determine the balances on both Cost of Goods Sold and Finished Goods Inventory accounts. Required: 1. Prepare cost reports for the fourth quarter of the year for both production departments. Using the First-In-First-Out (FIFO) method, provide the following figures, with supporting calculations, for each department: a. Direct materials cost per equivalent unit b. Conversion cost per equivalent unit c. Prior department cost per equivalent unit (Note: This requirement applies to Department 2 only.) d. Total costs assigned to units transferred out e. Total costs assigned to spoiled units 2. What is the cost of goods sold recognized for the sale? What are the revenues generated during the fourth quarter?