Khan Products Company uses a job order cost system. For a number of months, there has been an ongoing rift between the sales department and the production department concerning a special-order product, TC-1. TC-1 is a seasonal product that is manufactured in batches of 1,000 units. TC-1 is sold at cost plus a markup of 40% of cost.
The sales department is unhappy because fluctuating unit production costs significantly affect selling prices. Sales personnel complain that this has caused excessive customer complaints and the loss of considerable orders for TC-1.
The production department maintains that each job order must be fully costed on the basis of the costs incurred during the period in which the
goods are produced. Production personnel maintain that the only real solution to the problem is for the sales department to increase sales in the slack periods.
Andrea Parley, president of the company, asks you as the company accountant to collect quar- terly data for the past year on TC-1. From the cost accounting system, you accumulate the follow- ing production quantity and cost data.
|
Quarter Costs
|
1
|
2
|
3
|
4
|
|
Direct materials
|
$100,000
|
$220,000
|
$ 80,000
|
$200,000
|
|
Direct labor
|
60,000
|
132,000
|
48,000
|
120,000
|
|
Manufacturing overhead
|
105,000
|
153,000
|
97,000
|
125,000
|
|
Total
|
$265,000
|
$505,000
|
$225,000
|
$445,000
|
|
Production in batches
|
5
|
11
|
4
|
10
|
|
Unit cost (per batch)
|
$ 53,000
|
$ 45,909
|
$ 56,250
|
$ 44,500
|
Instructions
With the class divided into groups, answer the following questions.
(a) What manufacturing cost element is responsible for the fluctuating unit costs? Why?
(b) What is your recommended solution to the problem of fluctuating unit cost?
(c) Restate the quarterly data on the basis of your recommended solution.