204 Chapter 5 Process Costing and Cost Allocation Case Shamrock Inc. You drive on it, walk...

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204 Chapter 5 Process Costing and Cost Allocation Case Shamrock Inc. You drive on it, walk on it, wear it, and even brush your teeth with it. What is it? Limestone. It's versatile natural resource found in asphalt highways, concrete sidewalks, cosmetics and tooth paste, to name a few things. Shamrock Inc. has been a primary supplier of quality limestone products since the mid-1950s. Over the years, the company has seen many changes as t business and the local economy have matured. Considered a commodity, limestone rock is extracted from underground mines located 350 feet below the surface. Limestone used to be mined on the surface, but the supply of quality surface rock has been exhausted. Engineers estimate that millions of tons of quality limestone rock still remain to be mined underground. To mine limestone, the rock is first blasted with dynamite charges to loosen it. The large pieces of limestone rocks are loaded into 35-ton capacity trucks for transport to rock-crush- ing plants. Shamrock operates 20 rock-crushing plants. Shamrock buys the large limestone pieces from several mines (quarries), and workers dump them into a crusher that breaks the rocks into smaller pieces. All rocks are processed in a relatively homogeneous way. These pieces are then loaded onto trucks for customers or moved to a storage pile away from the crushing plant. Pricing is very competitive, so Shamrock's managers keep a close eye on costs to ensure that the operations remain profitable. Major costs for the business include the cost of the large limestone rocks, depreciation on the equipment, labor, repairs, maintenance, and safety and environmental protection. Eugene Johnson is the corporate controller of Shamrock. Each plant uses a process- costing system. At the end of each year, each plant manager submits a production report and a production-cost report. The cost data have been particularly useful for identifying how well different plants have been managing their costs in the very competitive environment in which they operate. The production report includes the plant manager's estimates of the percentage of completion of (1) the ending work-in-process as to direct materials and conversion costs and (2) the limestone inventory in the storage pile. Johnson uses these estimates to com pare costs across plants by computing the equivalent units of work done in each plant and the cost per equivalent unit of work done for both direct materials and conversion costs in each year. Plants are ranked from 1 to 20 based on (a) cost per equivalent unit of direct materials and (b) cost per equivalent unit of conversion costs. Shamrock rewards the three- top-ranked plants in each category with a bonus and writes about their achievement in the company newsletter, Johnson has been pleased with the success of his benchmarking program. However, he has just received some unsigned letters stating that two plant managers have been manipulat ing their estimates of percentage of completion and limestone inventory in an attempt to obtain best-in-class status. Required 1. Do you agree with Shamrock Inc.'s use of a process-costing system? Why? Explain. 2. Why do you think Johnson was benchmarking one plant against another? 3. Why and how might plant managers manipulate their estimates of percentage of completion and limestone inventory? 4. Johnson's first reaction is to contact each plant controller and discuss the problem raised by the unsigned letters. Is that a good idea? 204 Chapter 5 Process Costing and Cost Allocation Case Shamrock Inc. You drive on it, walk on it, wear it, and even brush your teeth with it. What is it? Limestone. It's versatile natural resource found in asphalt highways, concrete sidewalks, cosmetics and tooth paste, to name a few things. Shamrock Inc. has been a primary supplier of quality limestone products since the mid-1950s. Over the years, the company has seen many changes as t business and the local economy have matured. Considered a commodity, limestone rock is extracted from underground mines located 350 feet below the surface. Limestone used to be mined on the surface, but the supply of quality surface rock has been exhausted. Engineers estimate that millions of tons of quality limestone rock still remain to be mined underground. To mine limestone, the rock is first blasted with dynamite charges to loosen it. The large pieces of limestone rocks are loaded into 35-ton capacity trucks for transport to rock-crush- ing plants. Shamrock operates 20 rock-crushing plants. Shamrock buys the large limestone pieces from several mines (quarries), and workers dump them into a crusher that breaks the rocks into smaller pieces. All rocks are processed in a relatively homogeneous way. These pieces are then loaded onto trucks for customers or moved to a storage pile away from the crushing plant. Pricing is very competitive, so Shamrock's managers keep a close eye on costs to ensure that the operations remain profitable. Major costs for the business include the cost of the large limestone rocks, depreciation on the equipment, labor, repairs, maintenance, and safety and environmental protection. Eugene Johnson is the corporate controller of Shamrock. Each plant uses a process- costing system. At the end of each year, each plant manager submits a production report and a production-cost report. The cost data have been particularly useful for identifying how well different plants have been managing their costs in the very competitive environment in which they operate. The production report includes the plant manager's estimates of the percentage of completion of (1) the ending work-in-process as to direct materials and conversion costs and (2) the limestone inventory in the storage pile. Johnson uses these estimates to com pare costs across plants by computing the equivalent units of work done in each plant and the cost per equivalent unit of work done for both direct materials and conversion costs in each year. Plants are ranked from 1 to 20 based on (a) cost per equivalent unit of direct materials and (b) cost per equivalent unit of conversion costs. Shamrock rewards the three- top-ranked plants in each category with a bonus and writes about their achievement in the company newsletter, Johnson has been pleased with the success of his benchmarking program. However, he has just received some unsigned letters stating that two plant managers have been manipulat ing their estimates of percentage of completion and limestone inventory in an attempt to obtain best-in-class status. Required 1. Do you agree with Shamrock Inc.'s use of a process-costing system? Why? Explain. 2. Why do you think Johnson was benchmarking one plant against another? 3. Why and how might plant managers manipulate their estimates of percentage of completion and limestone inventory? 4. Johnson's first reaction is to contact each plant controller and discuss the problem raised by the unsigned letters. Is that a good idea?

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Shamrock Inc Case Analysis 1 Process Costing System Yes Shamrock Incs use of a processcosting system is appropriate Heres why Homogeneous Production L... View the full answer