Exercise 1

Lawn Inc. implemented a JIT manufacturing system.After one year of using JIT the company wants to compare product under the JIT system with product cost under the old system.Lawn Inc. makes 2 products weed eaters and lawn edgers.The unit prime cost under the old system are as follows:

Weed Eaters Lawn Edgers

Direct materials$12 $45

Direct Labor430

Under the old manufacturing system, the company operated 3 service centers(Maintenance, Materials handling, and Building and grounds) and 2 production departments (Machining and Assembly).

Overhead was applied using departmental overhead rates.The direct overhead costs associated with each department.

for the year preceding the installation of JIT are as follows:Maintenance$110,000

Materials handling 90,000

Building and grounds150,000

Machining 281,800

Assembly175,000

Total$806,800 Under the old system, the overhead costs of the service departments were allocated directly to the producing departments using the direct method.

The overhead rate for the Machining Department was based on machine hours, and the overhead rate for assembly

was based on direct labor hours.During the last year of operations for the old system

Machining department used 80,000 machine hours

Assembly Department used 20,000 direct labor hours

Each weed eater required 1 machine hour in Machining and 0.25 direct labor hour in Assembly

Each lawn edger required 2 machine hour in Machining and 0.5 direct labor hour in Assembly

Bases for allocation of service costs are as follows:

Machine hoursNumber of Material MovesSquare Feet of Space

Machining80,000 90,000 70,000

Assembly20,000 60,000 30,000

Total 100,000 150,000 100,000

Upon implementing JIT, a manufacturing cell for each product was created to replace the departmental structure. Maintenance and materials handling were both decentralized to the cell level.

Cell workers were trained to operate the machines in each cell, assemble the components, maintain the machines, and move the partially completed units from one point to the next within the cell.

The company produced and sold20,000Weed Eaters

30,000Lawn Edgers

The following costs have been assigned to the manufacturing cells:

Weed Eater CellLawn Edger Cell

Direct materials $185,000 $1,140,000

Direct labor66,000 660,000

Direct overhead99,000 350,500

Allocated overhead75,00075,000

Total$425,000 $2,225,500

Required:

1.Calculate the allocation ratios you need to develop using the direct method.I have set up a table like we used in AC321 Cornerstone 7.3page 336 #1.Please remember that Cost accounting is a prerequisite for this course, so I assume you have this prior knowledge that we are building on.

Proportions of Driver Used under Direct Method

MaintenanceMaterials HandlingBuilding GroundsMachiningAssembly

Maintenance---

Materials handling---

Building grounds---

2.Using the direct method, allocate the costs of the Maintenance, Materials Handling, and Building grounds departments to the Machining and Assembly departments.

Support departmentsProducing Departments

MaintenanceMaterials HandlingBuilding Grounds Machining Assembly

Direct costs $110,000 90,000 150,000 281,800 175,000

Allocate:

Maintenance

Materials handling

Building grounds

Total after allocation

3.Compute the departmental overhead rates for machiningand assembly departments based on the cost drivers provided.In the narrative it was stated that machining department use machine hours and assembly used direct labor hours.

Machining Per machine hour

Assembly Per direct labor hour

4.Allocate the departmental overhead from machining and assembly to the two products Weed eater and lawn edger based on a unit of each of these products.

Weed Eater

Lawn Edger

5.Compute the unit cost for each product under the old manufacturing system. Weed EaterLawn Edger

Direct Material

Direct Labor

Overhead

Unit cost

6.Compute the unit cost for each product under the JIT system.

Weed Eater

Lawn Edger

7.Which of the unit costs is more accurate?Provide a detailed explanation, which should also include in your explanation of how the computational approaches differ between the two approaches.

8.Calculate the decrease in total overhead costs under JIT in comparison to what was the overhead prior to JIT implementation.In addition, provide at least 2 possible reasons that explain the decrease.