Decision Making for Process Costing

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Decision Making Using Process Cost Data

Hall Company produces synthetic materials from a chemical extrusion processes. Management has been concerned that material costs per pound are too high. Hall produces only a single product on four separate extrusion lines. The product is processed over two shifts per day. The following data have been collected for analysis:

January

Total materials costs.............................................................................$335,050

Total number of pounds produced........................................................50,400

Cost per pound......................................................................................$6.65

Materials Costs by Production Line

Line 1Line 2Line 3Line 4Total

Shift 1

Shift 1$36,000$36,000$40,300$36,000$148,300

Shift 2.................45,50045,50050,25045,500186,750

Total................... $81,500$81,500$90,550$81,500$335,050

Pounds Produced by Production Line

Line 1Line 2Line 3Line 4Total

Shift 1.............6,0006,0006,2006,00024,200

Shift 26,5006,5006,7006,50026,200

Total....12,50012,50012,90012,50050,400

Assume you have interviewed the following individuals in an attempt to discover the problems causing material costs to be inflated: Juanita Marcos, shift 1 supervisor; Ed Curcek, shift 2 supervisor; and Hal Bundy, plant manager. A summary of their responses are given below.

Hal:I just received a directive from headquarters to increase my production rates. I talked to Ed and Juanita about kicking up our production from our old average of 6,000 pounds per shift. Juanita did not seem to think that this was a good idea. My bet is that our problems are with Juanita's shift.

Juanita:I have decided to keep first-shift production on lines 1, 2, and 4 at 6,000 pounds per shift. That's because I remember the last time we had our production rates increased. Our materials consumption shot through the roof. Therefore, I'm running a small experiment on Line 3 before increasing the speeds across the whole shift. I know Ed has increased production on the second shift, but he was just brought in from another plant that has new machinery. I don't expect he's had the historical experience with these older machines that I've had.

Ed:I've increased production rates on my shift, but it's hard to tell how things are going. I thought the new directive made plenty of sense. Back at my previous plant location, we ran machines at 7,000 pounds per shift without any trouble. These older machines don't seem to be running nearly as well as the machines back at my old place. I guess when we see the numbers at the end of the month we'll have a good feel for it.

Required:Provide an analysis of the data that will assist the management of Hall Company determine whether or not the increase in production rates is having a favorable impact on production costs.