Road Tire Corporation makes several lines of automobile and truck tires. The company operates in a competitive marketplace, so it relies heavily on cost data from its FIFO-based process costing system. It uses that information to set prices for its most competitive tires. The company’s radial line has lost some of its market share during each of the past four years. Management believes that price breaks allowed by the company’s three biggest competitors are the main reason for the decline in sales.
The company controller has been asked to review the product costing information that supports pricing decisions on the radial line. In preparing her report, she collected the following data for last year, the most recent full year of operations:

Units started and completed last year totaled 80,400. Attached to the beginning Work in Process Inventory account were direct materials costs of $123,660 and conversion costs of $57,010. A review of the conversion costs revealed, however, an error in the production account. The correct conversion cost being charged to the production account should have been $2,129,616 instead of $2,401,200. This resulted in overly high overhead costs being charged to the production account.
The radial has been selling for $92 per tire. This price was based on last year’s unit data plus a 75 percent markup to cover operating costs and profit. The company’s three main competitors have been charging about $87 for a tire of comparable quality. The company’s process costing system adds all direct materials at the beginning of the process, and conversion costs are incurred uniformly throughout the process.
1. Identify what inaccuracies in costs, inventories, and selling prices result from the company’s cost-charging error.
2. Prepare a revised process cost report for 2014. (Round total costs to whole dollars.)
3. What should have been the minimum selling price per tire this year?
4. Suggest ways of preventing such errors in thefuture.

  • CreatedMarch 26, 2014
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