ACCY 122 – Fall 2009 Strategic Costing #2 – Miscellaneous Costing Methods

Topic #1 Relevant Costing

Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are:

Direct materials $ 12Direct manufacturing labor 60Variable manufacturing overhead 24Fixed manufacturing overhead 32 Total $128

Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts the supplier’s offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated.

Required:a. What is the relevant per unit cost for the original part?b. Which alternative is best for Lewis Auto Company? By how much?

Here is the per-unit relevant cost – NOTE THAT THE $180,000 IS NOT INCLUDED AS IT IS NOT A PER UNIT COST BUT A LUMP SUM.

Direct materials $12Direct manufacturing labor 60Variable manufacturing overhead 24Avoidable fixed manufacturing overhead 20 Total relevant per unit costs $116

Here is the alternative analysis: NOTE THAT WE DO THIS IN COLUMS WITH THE DIFFERENCES INCLUDED AS A COLUMN

Make Buy Effect of Buying 1 Purchase price $1,200,000 $(1,200,000)Savings in space (180,000) 180,000 Direct materials $120,000 120,000Direct manufacturing labor 600,000 600,000Variable overhead 240,000 240,000Fixed overhead saved (200,000) 200,000 Totals $960,000 $820,000 $140,000

Topic #2: Cost Allocation for Joint Product and Byproducts1. Terms

a. Joint costb. Splitoff pointc. Separable costsd. Byproducts

2. Need to cost out inventory so we need a number3. Methods – Two market based and one physical – in order of general preference:

1 This is the differential cost – the cost differences between the two options.

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ACCY 122 – Fall 2009 Strategic Costing #2 – Miscellaneous Costing Methods

a. Sales value methods if there is a sales value that can be determined at the splitoff pointb. Net realizable value method if the separable cost are high and different relative to other costs

The difference between a. and b. is that a. use the separable costs to get the NRV:NRV = Final sales price – separable cost vs. Sales price at the splitoff point.

c. Allocate on pounds, gallons and the like – works of products are similar after the splitoff pointYakima Manufacturing purchases trees from Cascade Lumber and processes them up to the splitoff point where two products (paper and pencil casings) are obtained. The products are then sold to an independent company that markets and distributes them to retail outlets. The following information was collected for the month of November:Trees processed: 50 trees (yield is 30,000 sheets of paper and 30,000 pencil casings and no scrap)Production: paper 30,000 sheets and pencil casings 30,000Sales: paper: 29,000 at $0.04 per page and pencil casings:30,000 at $0.10 per casingThe cost of purchasing 50 trees and processing them up to the splitoff point to yield 30,000 sheets of paper and 30,000 pencil casings is $1,500.

Yakima’s accounting department reported no beginning inventories and an ending inventory of 1,000 sheets of paper.

A. What is the sales value at the splitoff point for paper?Paper: 30,000 sheets x $0.04 = $1,200.00

B. What is the sales value at the splitoff point of the pencil casings?Pencils: 30,000 casings x $0.10 = $3,000.00

C. If the sales value at splitoff method is used, what are the approximate joint costs assigned to ending inventory for paper?

$1,200/($1,200 + $3,000) = 28.57% so 28.57% x $1,500 x 1,000/30,000 = $14.29

D. If the sales value at splitoff method is used, what is the approximate production cost for each pencil casing?

$3,000/($1,200 + $3,000) x $1,500 = $1,071 so $1,071/30,000 casings = $0.0357

E. What are the paper's and the pencils' approximate weighted cost proportions using the sales value at splitoff method, respectively? (35,000 x $0.04) + (30,000 x $0.10) = $4,400 so $1,400/$4,400 = 31.82% and $3,000/$4,400 = 68.18%

Byproducts: either contra-costs or additional revenue

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ACCY 122 – Fall 2009 Strategic Costing #2 – Miscellaneous Costing Methods

. The Carolina Company prepares lumber for companies who manufacture furniture. The main product is finished lumber with a byproduct of wood shavings. The byproduct is sold to plywood manufacturers. For July, the manufacturing process incurred $332,000 in total costs. Eighty thousand board feet of lumber were produced and sold along with 6,800 pounds of shavings. The finished lumber sold for $6.00 per board foot and the shavings sold for $0.60 a pound. There were no beginning or ending inventories. Prepare an income statement showing the byproduct (1) as a cost reduction during production, and (2) as a revenue item when sold.

Cost reductionwhen produced

Revenuewhen sold

Sales: Lumber Shavings

$480,000 $480,0004,080

Total Sales: $480,000 484,080Cost of Good Sold:Total manufacturing costsByproduct

$332,0004,080

$332,0000

Total COGS 327,920 332,000Gross Margin $152,080 $152,080

Topic #3: Normal Spoilage or Shrinkage, Abnormal Spoilage, Rework and Scrap

1. Normal Spoilage or Shrinkage included in Cost of Goods Manufactured on a set rate

2. Abnormal Spoilage accounted for in a loss account

3. The above items are usually found in process-costing, the following two are found in job-costing.

4. Rework – similar to spoilage accounting

5. Scrap – usually a contra-cost account

Topic #4 – Capital Budgeting – on class web page

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