Tracking Manufacturing Costs on a Continuous Flow of Identical Products Version 2,991 William Black is a creative,
Question:
Tracking Manufacturing Costs on a Continuous Flow of Identical Products |
William Black is a creative, entrepreneurial type who is constantly working on unique and innovative solutions to everyday problems and annoyances. He developed several interesting products and even garnered a limited number of online sales. But none of his inventions has taken off – until now. |
William recently developed an electronic device, BallBoy, which locates golf balls above ground, in ground, and under water. The built-in technology is powerful enough to search and detect balls within a radius the length of a soccer field. BallBoy is a holster that holds smart phones of various sizes and models. It is activated once the short cable on the device is plugged into the phone. BallBoy gives walking directions to golf balls visually on the phone screen as well as via audio instructions. BallBoy is inexpensive to produce, but due to its unique design, is difficult to replicate. William is particularly pleased with BallBoy, realizing it is his best idea yet. He has a patent pending to protect the functionality and use of his invention. |
William and his parents made and packaged 1,500 units of BallBoy in their garage and offered the product for sale online for US$99 per unit. William posted photos, videos, and information about BallBoy on his ecommerce site; the response was overwhelming. Within a week, orders exceeded 3,600 units! He shipped the available units and advised the remaining customers of the backorder. Customers posted rave reviews for quality, value, and functionality! |
William began hiring employees and expanded into the basement and backyard to scale the size of his operations. Orders continued to roll in at a pace he never imagined, and the team was barely able to keep up with the growing demand. |
William had neither the capacity nor the capital to expand his production. He was denied loans at several banks due to his inexperience and unproven financial track record, and his family and friends did not have money to spare. The good news is he was contacted to appear on Spark Bank, a television show where entrepreneurs present new business ideas and products to five self-made billionaires who invest in those they find appealing. |
On the show, the Spark Bank investors/judges were impressed with BallBoy and its potential to generate significant profit. Mike Peruvian and “Mr. Fantastic”, partnered with William for a 10 percent equity stake in the business and offered adequate funding to finance inventory and a production facility. |
Mike Peruvian wanted to be sure that William was well-versed in process costing as a cost allocation technique for identical items that are manufactured in a continuous sequence. He saw this as a test of William’s ability to be a good product manager. He asked William to allocate anticipated production costs for both fully and partially completed units for three consecutive months in the Assembly Department using the FIFO method of process costing. Mr. Peruvian expected William to be able to determine the cost for each unit in each of three months, explain how one period’s production data feed into the next in a continuous flow, and analyze the progress of the business over time. |
“Mr. Fanatic's” perspective was “Show me the money!” He wanted William to investigate ways to reduce production costs over time to increase profitability. The first month’s production costs would be a baseline, and William should locate less expensive suppliers, labor, and/or overhead items to reduce unit costs in the second and third months. This would involve decision points for William since a change in one cost might impact another cost. |
William begins by thinking about the production process. He determines that it will be most efficient if he moves materials from the stockroom as infrequently as possible, particularly since there is sufficient space in the production area to stage all materials needed to fully assemble items as they enter the Assembly department. He estimates that units will spend no more than three weeks in the Assembly Department and recognizes that conversion costs will be incurred throughout this period. The first month of operations in the new facility will be June, and William analyzes costs for June, July, and August in his pro-forma analyses. |
Based on sales projections in good-weather conditions, William estimates he will need to produce the following numbers of new units per month: June, 41,300; July, 54,200; August, 71,100. He realizes not all of the new units started in a month will be completed the same month. He estimates how many partially completed units will remain in Work in Process at the end of each month: |
William realizes not all of the new units started in a month will be completed the same month. He estimates how many partially completed units will remain in Work in Process at the end of each month, as follows: |
June 5,600 units; 30% of the conversion completed |
July 7,100 units; 90% of the conversion completed |
August 8,900 units; 60% of the conversion completed |
He estimates the following expenditures for June: direct materials, US $716,555; direct labor costs, US $276,612; factory overhead, US $149,520. |
In July, William projects factory overhead cost per equivalent unit will decrease since some initial overhead costs in June pertained to the first month only. He also believes that the materials cost per unit will increase due to political decisions regarding the NAFTA trade agreement. |
In August, direct labor will likely increase per equivalent unit based on the contractual rate increase after the 60-day probationary period. William chooses the better of the two options below regarding materials and overhead in August: |
1. Direct materials, US $1,239,984; direct labor, US $518,700; factory overhead, US $266,175 |
2. Direct materials, US $1,235,007; direct labor, US $518,700; factory overhead, US $273,000 |
Version 2,991 |
William develops a spreadsheet (see Figure 1) to analyze cost data for the three months. |
1. (a) How much did the materials cost per unit change between June and July? |
(b) How much did the conversion cost per unit change between June and July? |
2. Which is the optimal choice of material and factory overhead costs in August? Why? |
3. On a FIFO basis, what are the percent changes in the cost per completed unit from one group to the next over the three-month period? |
What may have caused these differences? |
Engineering Economic Analysis
ISBN: 9780195168075
9th Edition
Authors: Donald Newnan, Ted Eschanbach, Jerome Lavelle