Calculator would be allowed) |. Lexington Company produces baseball bats and cricket paddles. It has two departments that p all products, During July, the beginning work in process in the cutting department was half comp as to conversion, and complete as to direct materials. The beginning inventory included $40,000 for materials and $60,000 for conversion costs. Ending work-in-process inventory in the cutting department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 80% complete as to conversion. Direct materials for finishing the units are added near the end of the process. Beginning inventories included $24,000 for transferred-in costs and $28,000 for conversion costs. Ending inventory was 30% complete. Additional information about the two departments follows: z Cutting Finishing | Beginning work-in-process units 20,000. 24,000 Units started this period 60,000 Units transferred this period 64,000 68000] Ending work-in-process units : aa 20,000 Material costs added i. | in STO $34,000 Conversioncoss 28,000 68,500 Transferred-out cost pone a 128,000 " a Required: Zs Fill up the following table, using FIFO method forthe finishing department (10 Marks) is % Units Value ($) Finished goods Produced in July ‘ WIP to be reported at 37.07 in Balance Sheet—Mark Holder, Controller, Safety Monitor- ing Devices, Inc. Safety Monitoring Devices, Inc. (SMD) was founded in Oxnard, California, in 1986 by Richard Chen. Richard, who had a degree in material sciences from the University of California at Santa Barbara, devel- ‘oped a portable gas safety monitor. SMD initially focused on manufacturing and selling portable oxygen, deficiency monitors. In 2001 it added other portable toxic gas monitors to its offerings. Even though com- ppetitors had entered the market and competition was intensifying, SMD still enjoyed a strong reputation for producing high quality, reliable portable safety moni- tors. SMD’ products were expensive, but Richard was proud that his company’s products saved lives by providing gas safety monitoring in places where Jarger, fixed units could not be taken. ‘Oxygen deficiency (OD) hazards are not just lim- ited to industrial settings; they also frequently occur at home and even at play. At work, OD concerns are present in virtually all industries, Waste treatment plant workers, tunnel cleaning crews, and ven farm- ers in their barns, just to name a few, all face potential OD hazards. At home, OD is mostly caused by heat- ing systems that are poorly vented in confined spaces, such as bathrooms, basements, and garages. And, at play, OD problems frequeritly occur at indoor siadi- ums, particularly those hosting automotive events. OD is highly dangerous and requires preventive mea- sures to avoid accidents. There is often little warning before OD inhibits a person's ability to seek safety. _ With such a wide range of applications, SMD had ‘experienced a steady increase in demand for its oxy- ‘deficiency detectors (ODDs) in almost every ts existence, except in the recession year of ‘mand for ODDs to continue to grow. hhad begun the development of its second line: toxic gas detectors (TGDs). The first of types of TGDs (carbon monoxide) went into prod tion in December 2001, followed by a staggered in- troduction of the other three (chlorine dioxide, nitro- gen dioxide, and sulfur dioxide) in approximately six-month increments. By mid-2003, all four TGDs were available for sale. SMD’: sales philosophy was to eam consistently solid margins. “We do not want to compete based on lowest price, so we rarely discount,” said Lourdes Sandino, VP Marketing & Sales. Prices were set to yield, roughly, a markup of 30 it on a full cost To estimate full product costs, Mark Holder, Controller, spread the totality of all to based on the products” usage of direct labor s in the production process. All four types of TGDs (carbon monoxide, chlorine dioxide, nitrogen. dioxide, and sulfur dioxide) incurred roughly the same direct material and labor costs, so for reporting purposes, cost data were grouped into the two prod- uct lines only: ODDs and TGDs. Budgeted produc- tion data; unit standard direct material and labor costs; and budgeted overhead costs for fiscal year 2005 are shown in Exhibits 1, 2, and 3, respectively. Based on these budget data and margin require- ments, the suggested unit sale prices were set at $300 for ODDs and $330 for TGDs. =z Since SMD "moved into the new facility in 2001, Lourdes found herself addressing increasingly quent requests from sales reps to discount ODDs. few of the requests were made for large ders, but more frequently the rationale SMD’s price-quality proposition forODD = Oxygen deficieny detectors TOD = Toe pas diets 6) The budget assumes no change invertors and hence, production volumes (unis) ane budgeted abe equa to les ‘olumes ants) EXHIBIT 2 Safety Monitoring Devices, Inc.: 2005 Standard Direct Material . and Labor Costs per Unit Materials Handling 12st Machine Setup 180 ‘Supervision 225, Quality Control. 195 210 = $1,570 noticed similar pressures to discount TGDs, and de- es, from 28,350 units in 2001 to.an expected it hhad caused Lourdes to bevomele) There arc five Product Types: (1) Oxyeen {Q) Carbon Monoxide; (3) Chlorine Dioxide; 4) Nivogen Dioxide: and (5) Sulu Dioxide, remarkable given the relatively recent introduction of the TGD product lines. Lourdes had developed several hypotheses about ‘what might have caused the price pressure on ODDs. Product costing was one possible factor she had considered. Tam naturally not a gifted numbers person. { still remember vividly, or should I say horribly, how I struggled in my cost accounting class during my MBA days in terms of actually applying the con- cepisto the casesand figuring out whichnumbers to work with. But 1 do remember the punch line of many of these cases: How product costing distor- tions could lead to Nawed product and pr ing decisions and, in som ail Tsure hope SMD is not headed in th Perhaps unfortunately, Mark He controller], who maintains direct responsibility for ‘our cost accounting systems, is very defensive to even the slightest questioning of our current prod- uiet costing method. And because I’m not an expert accounting, 1 don’t want to go too far with the ‘questioning because I know he will either belittle ‘my accounting savvy or, worse, blame the com- pany’s performance problems on the sales organi ‘There are two Prodect Lincs: (1) Oxy Deficiency Detstion (ODD) snd (2 Tose Gas Detzction (TOD) company had some exceptional growth targets for the next several years. I asked if it might be in the best interest of the company to make sure: to understand the “true costs” of our various products. Mark said that only when we introduce many more products might it make sense to have a more elaborate cost system. 1 wondered though whether it wouldn’t be easier to initiate a new cost system sooner, rather than later, when We have even more products and more variables to worry about? His response was that the way we track costs is neither right nor wrong; it is really just company policy. That is where we left the 005 executive meeting, Greg J that he thought the pould be 2 toward what he called ‘an activity-based cost (ABC) system. As Greg de= seribed it, the essence of an ABC system is to iden- tify the major activities that cause the company’s overhead costs to be incurred and then to apply those costs to products based on the products’ consumption of cach of those activities. Greg’s key point was that using a single, standard overhead rate and applying to all the products did not make sense bee clearly, there are differences in volume and resPinan ncsiralisuctszaie Meer Retr Reet omer ances a Purchasing $120 Ms “Materials Handling 125 DMs taachine Setup 180 Machine Hours _ Supervision 2s Machine Hours, Quality Control 195 ‘Machine Hours Packaging & Shipping 210 Machine Hours Machine Depreciation 165 Machine Hours Plant finch Upkeep, Depreciation, Property Tax 4 Machine Hours and Insurance) Miscellaneous (e.g , ndirest ) ) Machine Hours Total Manufocturing Overbeod Costs $1,570 BgMcoMmiyeovimIAD budgeted production costs were “Ilexed” to reflect actual production volume it happened to deviate from bude clues. For example, using the budget data in Exhibits 1 and 2 for fiscal year 2005, Greg would be considered to Mattarget, or better, if actual manufacturing costs for 2005 would equal (25,000 unis» $152) + (12,500 units + 1,570,000 » 7,557,500, oF less. I, however, actual production volumes in 2005 were to have been 20,000 units 16,000 units for TGD, then the target would be revised or “Mlexed” to (20,000 units» $152) + (16,000 units + 37,500) 1,570,000} = 7,410,000.