Knotsberry Manufacturing, Inc. manufactures cooling and heating coils for several different industries. It has two plants, Jewett City Plant (JCP) is an older, labor intensive machine shop where skilled workers use tools to perform most of the work. Greenwich Plant (GP) is highly automated and uses computer numerically controlled (CNC) machines with a small number of highly paid workers. JCP manufactures a high tolerance coil (Pa) and finishes a second one (Pb). GP mass produces two standard coils, Pc and Pd, and performs basic operations on Pb before transferring it to JCP for finishing. Production takes place in batches. Each batch is made of one product.

The products are sold directly to manufacturers by a technical sales force. Product Pa is a customized product manufactured to order, and requires a lot of specifications and negotiation with customers. Product Pb is a modification of the standardized products Pc and Pd. It is finished to meet each customer’s specifications, and as a result has more exacting technical specifications than Pc and Pd, and is hence finished in JCP. Products Pc and Pd are standardized products produced for stock and sold off-the-shelf and do not require much sales effort in writing up orders.

Each plant has six production and service departments, receiving, cutting & assembly, heat treatment, testing, packing & shipping, and repairs & maintenance (Charts 2 and 3). Exhibit 1 includes descriptions of activities in each of these departments. In addition, there are three departments -- marketing, design & engineering support, and administration -- at the corporate level (Chart 4).

The present accounting system is a traditional financial reporting driven system. Manufacturing costs are classified as material, labor, and overhead. Overhead is charged to products based on labor hours with the two plants treated as one cost center. Marketing, design & engineering support, and administration are considered period costs and not charged to products.

The President of the Company held a meeting with senior executives including VP-Finance, VP-Manufacturing, and VP-Marketing (Chart 1) to discuss the 2021 budget (Schedules 1, 2, and 3). She was unhappy with the fact that Pa´s budgeted price of $45 is below its standard cost of $48.29. However, she was not sure if the costing system, which treats both plants as one cost center, accurately determines the costs of the different products. She pointed out that GP is a machine intensive plant while JCP is more labor intensive. Furthermore, the products are produced in different numbers of batches (Schedule 6), and affect batch-related costs (e.g. testing and heat treatment) differently. She told VP-Finance that she has heard of an alternative costing method that uses multiple cost centers/pools and different cost bases to charge indirect costs to products. She also questioned the treatment of technical support costs and marketing expenses as period costs. VP-Finance promised to investigate the President’s points and report back to the group.

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Summary of Knotsberry Manufacturings Costing Issue Knotsberry Manufacturing currently uses a traditional costing system with limitations Single Cost C... View the full answer