## Cost Accounting Concepts: Operate Job, Process, and Activity-Based Cost Sys

#### 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):

 WIP Inventory: Department T 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 The ending inventory is 5,500 units, which are 20 percent complete with respect to Department T costs and 100 percent complete for prior department costs.

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.

 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:

 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.

Complete the following:

1. Compute a predetermined overhead rate for year two for each cost driver using the estimated costs and estimated cost driver units prepared by the consultant. Also, compute a predetermined rate for year two using direct labor-hours as the allocation base.
2. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in Part 1.
3. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in Part 1. (Note: Do not assume that total overhead applied to products in January will be the same for activity-based costing as it was for the labor-hour-based allocation.)
4. Management has seen your numbers and wants an explanation for the discrepancy between the product costs using direct labor-hours as the allocation base and the product costs using activity-based costing. Write a brief response to management.
##### Assessment 3 Part 3: Quality Improvement

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 3 Scenario﻿

Bonded Fencing, Inc., produces metal gates in two processes: shaping, in which metal is bent to the correct shape, and fastening, in which the bent metal pieces are welded into gates. The shaping process has a capacity of 11,000 units per year; welding has a capacity of 15,400 units per year. Demand is high. At a sales price of \$550 per unit, the company can sell whatever output it can produce.

Bonded can start only 11,000 units into production in the shaping department because of capacity constraints. 1,650 units are found to be defective in the shaping department annually. Defective units are not detected until the end of production, at which time they are scrapped. Unit costs in the shaping department, including good and defective units, equal \$275 per unit, with an allocation of the total fixed manufacturing costs of \$825,000 per year to units.

 Direct Materials (variable) \$125 Direct Manufacturing, Setup, and Materials Handling Labor (variable) 50 Depreciation, Rent, and Other Overhead (fixed) 75 Total Unit Cost \$250

The fixed cost of \$75 per unit is the allocation of total fixed costs of the shaping department to each unit, whether the units are good or defective.

The good units from the shaping department are sent to the fastening department. Variable manufacturing costs in the fastening department are \$75 per unit and fixed manufacturing costs are \$550,000 per year. There is no scrap in the fastening department. Therefore, the company’s total sales quantity equals the shaping department’s good output. The company incurs no other variable costs.

The company’s designers have discovered that, by using a new type of direct material, the company could reduce scrap in the shaping department from 1,650 units to 550 units. Using the new material would increase the direct materials costs to \$180 per unit in the shaping department for all 11,000 units. Recall that only 11,000 units can be started each year.

Complete the following:

1. Should Bonded use the new material and improve quality? Assume that inspection and testing costs of \$132,000 per year will be reduced by \$22,000 with the new materials. Fixed costs in the shaping department will remain the same whether 8,500 or 9,500 units are produced.
2. What other nonfinancial and qualitative factors should Bonded management consider in making the decision?
##### Assessment 3 Part 4: Allocation Methods Comparison

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.

Part 4 Scenario﻿

Liberty Company has two service departments: administration and accounting, and two operating departments: domestic and international. Administration costs are allocated on the basis of employees and accounting costs are allocated on the basis of number of transactions. A summary of Liberty operations follows:

 Administration Accounting Domestic International Employees — 25 45 180 Transactions 27,500 — 22,000 88,000 Department Direct Costs \$396,000 \$158,400 \$1,029,600 \$3,960,000

Complete the following:

1. Allocate the cost of the service departments to the operating departments using the direct method.
2. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration.
3. Allocate the cost of the service departments to the operating departments using the reciprocal method.
4. Comment on the results.
##### Question Attachments

1 attachments —

• cf_assessment3_template.xlsx
Assigned To brittanymosher
18 Nov 2019
Due Date: 18 Nov 2019

1. ### Assessment 4

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