Complete a four-part assessment in which you will prepare a production cost report, allocate overhead using estimated costs and cost drivers,

Complete a four-part assessment in which you will prepare a production cost report, allocate overhead using estimated costs and cost drivers,

Complete a four-part assessment in which you will prepare a production cost report, allocate overhead using estimated costs and cost drivers,
Complete a four-part assessment in which you will prepare a production cost report, allocate overhead using estimated costs and cost drivers,

Complete a four-part assessment in which you will prepare a production cost report, allocate overhead using estimated costs and cost drivers, use cost analysis in the decision-making process, and compare the results of cost allocation processes.

Introduction

In the operation of a process cost accounting system, many manufacturing companies will uniformly apply materials, labor, and overhead, throughout the production process period. This is not necessarily true for other product and service companies whose production process requires adding materials at different points in the process. For these companies, cost calculation for each department in the production process is slightly more complex.

In some industries that use a manufacturing process operation, some units will always be lost due to shrinkage, spillage, or defects. These normal losses are expected as a necessary cost of producing high-quality products. They must be accounted for in the cost-of-production summary report. It is also possible—particularly when the process involves a liquid product— that units will be gained during production. This situation must also be accounted for and summarized in the production summary report.

Before beginning this assessment, take time to review the following topics:

Production cost report.

Activity-based costing.

Predetermined overhead allocation rates.

Quality improvement.

Allocation of service department costs.

Complete a four-part assessment in which you prepare a production cost report, allocate overhead using estimated costs and cost drivers, use cost analysis in the decision-making process, and compare the results of cost allocation processes.

Preparation

Use the Assessment 3 Template [XLSX] to complete the following four parts. Each part is a different tab in the template.

Part 1: In the template, prepare a production cost report using the FIFO method. Show all calculations and explain briefly.

Part 2: Compute overhead rate for each cost driver and production costs for each product, and compare to the consultant’s recommendations for cost drivers to explain the discrepancy between the two different approaches to product costing to management. Show all calculations.

Part 3: Compute and explain the rationale for using or not using the proposed new material based on the associated costs. Give other factors that should also be taken into consideration for this decision. Show all calculations.

Part 4: Allocate the cost to the service department using all three methods: direct, step, and reciprocal. Then comment on your findings in a paragraph. Show all calculations.

Instructions

Assessment 3 Part 1: Prepare a Production Cost Report: FIFO Method

In the template, prepare a production cost report using the FIFO method. Show all calculations and explain briefly.

Part 1 Scenario

Lamar, Inc. provides the following information for one of its department’s operations for May (no new material is added in Department T):

Lamar, Inc.: WIP Inventory: Department T

Item

Value

Beginning Inventory (16,500 units, 60% complete with respect to Department T costs)

Transferred-in Costs (from Department S)

$127,600

Department T Conversion Costs

$58,465

Current Work (38,500 units started)

Prior Department Costs

$308,000

Department T Costs

$229,955

Complete the following:

Prepare a production cost report using the FIFO method. Include an introduction.

Assessment 3 Part 2: Activity-Based Costing and Predetermined Overhead Allocation Rates

Compute overhead rate for each cost driver, production costs for each product, and compare to the consultant’s recommendations for cost drivers to explain the discrepancy between the two product costing approaches to management. Show all calculations.

Part 2 Scenario

Bath Fixtures Supply, Inc. (BFSI), manufactures three types of fixtures: industrial, standard, and brass. It applies all indirect costs according to a predetermined rate based on direct labor-hours. A consultant recently suggested that the company switch to an activity-based costing system and prepared the following cost estimates for year two for the recommended cost drivers.

BFSI: Costing System

Activity

Recommended Cost Driver

Estimated Cost

Estimated Cost Driver Activity

Order Processing

Number of orders

$59,400

200 orders

Production Setup

Number of production runs

$237,600

100 runs

Materials Handling

Pounds of materials used

$396,000

132,000 pounds

Machine Depreciation and Maintenance

Machine-hours

$316,800

13,200 hours

Quality Control

Number of inspections

$79,200

45 inspections

Packing

Number of units

$158,400

480,000 units

Total Estimated Cost

$1,247,400

In addition, management estimated 7,500 direct labor-hours for year two.

Assume that the following cost driver volumes occurred in January, year two:

BFSI: Cost Driver Volumes

 

Industrial

Standard

Brass

Number of Units Produced

66,000

26,400

9,900

Direct Materials Costs

$42,900

$26,400

$16,500

Direct Labor-Hours

450

450

600

Number of Orders

12

9

6

Number of Production Runs

3

3

6

Pounds of Material

16,500

6,600

3,300

Machine-Hours

638

140

80

Number of Inspections

3

3

3

Units Shipped

66,000

26,400

9,900

Actual labor costs were $15 per hour.

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