Brunswick Parts is a small manufacturing firm located in eastern Canada. The company, founded in 1947, produces metal parts for many of the larger manufacturing firms located in both Canada and the United States. It prides itself on high quality and customer service and many of its customers have been buying at least some of their parts from Brunswick since the 1950s.
Production of the parts takes place in one of two plants. The older plant, located in Fredericton, was purchased when the company was founded, and the last major improvements to the plant took place in the 1970s. A newer plant, located in Moncton, was built in 1995 to take advantage of the expanding markets. The same part can be produced in either plant and the final scheduling decision is based on capacity, transportation costs, and production costs.
At a weekly production meeting, Sara Hunter, the manufacturing manager expresses her frustration at trying to schedule production.
Something isn't right. We build a new plant to take advantage of new manufacturing technology and we struggle to keep it filled. We didn't have this problem a few years ago when we couldn't keep up with demand, but with the current economy, marketing keeps sending orders to the old plant in Fredericton. I know manufacturing, but I guess I must not understand accounting.
The latest order that generated discussion among plant management was placed by the Lawrence Machine Tool Company, a long-time customer. The order called for 1,000 units of a special rod (P28) used in one of their many products. The order was received by the marketing department. Following the established procedure at Brunswick, the marketing manager checked the product costs for both plants. Because quality and transportation costs would be the same from either plant, a decision was made to produce and ship from the Fredericton plant.
The cost system at Brunswick is a traditional manufacturing cost system. Plant overhead (including plant depreciation) is allocated to products based on estimated production for the period). Separate overhead rates are computed for each plant. Corporate administration costs are allocated to the plants based on the estimated production in the plant for purposes of executive performance measurement. Production is measured by direct labor-hours. Cost and production information for P28 is presented on the shown below.

Corporate and plant overhead budgets are as follows:

a. What would be the reported product cost of P28 per unit for the two plants?
b. Where should the P28 units for the Lawrence order be produced?Why?

  • CreatedDecember 18, 2013
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