Starshine Company is in the process of analyzing and updating its cost information and pricing practices. Since the company’s product line changed from general paints to specialized marine coatings, there has been tremendous overhead growth, including costs in customer service, production scheduling, inventory control, and laboratory work. Factory overhead has doubled following the shift in product mix. Although some large orders are still received, most current business is generated from products designed and produced in small lot sizes to meet specifically detailed environmental and technical requirements. Management believes that large orders are being penalized and small orders are receiving favorable cost (and, thus, selling price) treatment.
a. Indicate why the shift in product lines would have caused such major increases in overhead.
b. Is it possible that management is correct in its belief about the costs of large and small orders? If so, why?
c. Write a memo to management suggesting how it might change the cost accounting system to reflect the changes in the business.