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An explanation of how matters can be arranged in order to find the cost of the principle stages of manufacture, such as carding, spinning, weaving, etc. (The carding machines operate three shifts per day; the spinning machines, two shifts; and the weaving machines, one shift.)

Solution:

A: The principle advantages of installing a cost system are:

The ascertainment of unit costs of the various products. Unit costs are variable in determining minimum sales prices and in eliminating unprofitable lines.

Improvement in efficiency by comparison of cost details at regular intervals.

More adequate information, which is available for inventory costing.

Establishing control over production.

B: To operate a cost system, it would be necessary to amplify the accounting procedure by providing for:

More detailed analysis of disbursements.

Perpetual inventory records.

Monthly accumulation of detailed figures relating to costs of each operation and product.

C: Divide the factory into departments for cost accumulating purposes corresponding to the natural divisions, such as Carding Department, Spring Department, and Weaving Department. Break down the analysis of factory overhead according to these department departments. This automatically takes care of the differences in operating shifts.

Designing Cost Accumulation Procedures:

A client has asked advice as to a satisfactory system of factory costs for a factory that is divided into two main divisions:

Machine Shop: This division makes steel molds used in the manufacture to plastic articles. These molds require careful precision work; and frequently, one person is employed at machining one mold for several weeks. The finished molds are used by the Plastic Division of the company. In addition, some other machine work is done for customers, although this forms the smaller portion of the shop's output.

Plastic Division: This division manufactures plastic articles including ash trays, buttons, knobs, etc. The process of manufacture consists of placing chemical powders in a mold, which is then placed under a steam press where pressure is applied for a few minutes. The chemical powders are the only materials used and are not processed before being placed in the mold. After being processed, a certain amount of finishing and inspection labor is necessary to complete the articles.

It is ascertained that:

The company has had no previous cost records.

Production in both divisions is controlled by job order tickets.

Materials are kept in one place, but no record has been kept of withdrawals.

Labor is paid at hourly rates, and a time clock at the factory entrance is used for determining the hours worked in any day.

Employees have been preparing satisfactory time tickets showing the hours worked on each job and, in the case of the plastics division, the number of units produced; but this record has never been balanced against the wages paid nor the record of production.

Spoilage is a substantial factor in both divisions.

The machine shop and the plastic division are in separate parts of the one building.

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