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Horngren's Cost Accounting: A Managerial Emphasis, 16th Global Edition Chapter 20 Questions and solutions Principles of Management Accounting (University of Queensland)

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CHAPTER 20 INVENTORY MANAGEMENT, JUST-IN-TIME, AND SIMPLIFIED COSTING METHODS 20-1 Why do better decisions regarding the purchasing and managing of goods for sale frequently cause dramatic percentage increases in net income? Cost of goods sold (in retail organizations) or direct materials costs (in organizations with a manufacturing function) as a percentage of sales frequently exceeds net income as a percentage of sales by many orders of magnitude. In the Costco retailer example cited in the text, cost of goods sold to sales is 86.9%, and net income to sales is 2%. Thus, a 10% reduction in the ratio of cost of goods sold to sales (86.9 to 78.2% equal to 8.7%) without any other changes can result in a 435% increase in net income to sales (2% plus 8.7% equal to 10.7%). 20-2 Name six cost categories that are important in managing goods for sale in a retail company. Six cost categories important in managing goods for sale in a retail company are the following: 1. purchasing costs 2. ordering costs 3. carrying costs 4. stockout costs 5. costs of quality 6. shrinkage costs 20-3 What assumptions are made when using the simplest version of the economic-orderquantity (EOQ) decision model? Five assumptions made when using the simplest version of the EOQ model are the following: 1. The same quantity is ordered at each reorder point. 2. Demand, ordering costs, carrying costs, and the purchase-order lead time are certain. 3. Purchasing cost per unit is unaffected by the quantity ordered. 4. No stockouts occur. 5. Costs of quality and shrinkage costs are considered only to the extent that these costs affect ordering costs or carrying costs. 20-4 Give examples of costs included in annual carrying costs of inventory when using the EOQ decision model. Costs included in the carrying costs of inventory are incremental costs for such items as insurance, rent, and obsolescence plus the opportunity cost of capital (or required return on investment). 20-5 Give three examples of opportunity costs that typically are not recorded in accounting systems, although they are relevant when using the EOQ model in the presence of demand uncertainty.

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Examples of opportunity costs relevant to the EOQ decision model but typically not recorded in accounting systems are the following: 1. the return forgone by investing capital in inventory 2. lost contribution margin on existing sales when a stockout occurs; 3. lost contribution margin on potential future sales that will not be made to disgruntled customers 20-6 What are the steps in computing the cost of a prediction error when using the EOQ decision model? The steps in computing the costs of a prediction error when using the EOQ decision model are: Step 1: Compute the monetary outcome from the best action that could be taken, given the actual amount of the cost input. Step 2: Compute the monetary outcome from the best action based on the incorrect amount of the predicted cost input. Step 3: Compute the difference between the monetary outcomes from Steps 1 and 2. 20-7 Why might goal-congruence issues arise when managers use an EOQ model to guide decisions on how much to order? Goal congruence issues arise when there is an inconsistency between the EOQ decision model and the model used for evaluating the performance of the person implementing the model. For example, if opportunity costs are ignored in performance evaluation, the manager may be induced to purchase in a quantity larger than the EOQ model indicates is optimal. 20-8

“JIT purchasing has many benefits but also some risks.” Do you agree? Explain briefly.

Just-in-time (JIT) purchasing is the purchase of materials (or goods) so that they are delivered just as needed for production (or sales). Benefits include lower inventory holdings (reduced warehouse space required and less money tied up in inventory) and less inventory obsolescence and spoilage. The risk in JIT purchasing is the risk of stockouts—delays in supply of materials (or goods) may result in materials (goods) not being available when needed for production (or sales). 20-9 What are three factors causing reductions in the cost to place purchase orders for materials? Factors causing reductions in the cost to place purchase orders of materials are the following:  Companies are establishing long-run purchasing agreements that define price and quality terms over an extended period.  Companies are using electronic links, such as the Internet, to place purchase orders.  Companies are increasing the use of purchase-order cards. 20-10 “You should always choose the supplier who offers the lowest price per unit.” Do you agree? Explain.

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Disagree. Choosing the supplier who offers the lowest price will not necessarily result in the lowest total purchase cost to the buyer. This is because the price or purchase cost of the goods is only one—and perhaps, most obvious—element of cost associated with purchasing and managing inventories. Other relevant cost items are ordering costs, carrying costs, stockout costs, quality costs, and shrinkage costs. A low-cost supplier may well impose conditions on the buyer —such as poor quality or frequent stockouts or excessively high inventories—that result in high total costs of purchase. Buyers must examine all the elements of costs relevant to inventory management, not just the purchase price. 20-11 What is supply-chain analysis, and how can it benefit manufacturers and retailers? Supply-chain analysis describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same company or in other companies. Sharing of information across companies benefits manufacturers and retailers because it enables a reduction in inventory levels at all stages of the supply chain, fewer stockouts at the retail level, reduced manufacture of product not subsequently demanded by retailers, and a reduction in expedited manufacturing orders. 20-12 What are the main features of JIT production, and what are its benefits and costs? Just-in-time (JIT) production is a “demand-pull” manufacturing system that manufactures each component in a production line as soon as, and only when, needed by the next step in the production line. It has the following features:  Organize production in manufacturing cells.  Hire and retain workers who are multi-skilled.  Aggressively pursue total quality management (TQM) to eliminate defects.  Place emphasis on reducing both setup time and manufacturing cycle time.  Carefully select suppliers who are capable of delivering quality materials in a timely manner. The benefits of JIT production include lower costs and higher margins from better flow of information, higher quality, and faster delivery, as well as simpler accounting systems. The cost of JIT production is the risk of stockouts—a production problem in any step of the manufacturing process will result in materials (goods) not being produced in time. 20-13 Distinguish inventory-costing systems using sequential tracking from those using backflush costing. Traditional normal and standard costing systems use sequential tracking, in which journal entries are recorded in the same order as actual purchases and progress in production, typically at four different trigger points in the process. Backflush costing omits recording some of the journal entries relating to the cycle from purchase of direct materials to sale of finished goods, i.e., it has fewer trigger points at which journal entries are made. When journal entries for one or more stages in the cycle are omitted,

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the journal entries for a subsequent stage use normal or standard costs to work backward to “flush out” the costs in the cycle for which journal entries were not made. 20-14 Backflush costing is comparable to cost accounting in a service firm. Discuss. Backflush costing: all manufacturing costs flow directly into the cost of good, because inventories are minimized (compare to JIT) and allocation of costs to the inventories of WIP and Finished Goods “disappear”. In this way it is comparable to a service organization, in which the inventories are minimal or zero. 20-15 Discuss the differences between lean accounting and traditional cost accounting. Traditional accounting systems calculate costs of individual products and distinguish product costs from selling, general, and administrative costs. Lean accounting costs the entire value stream instead of individual products. Rework costs, unused capacity costs, and common costs that cannot reasonably be assigned to value streams are excluded from value stream costs. In addition, many lean accounting systems expense material costs in the period they are purchased, rather than storing them on the balance sheet until the products using the material are sold.

20-16 The order size associated with the economic-order-quantity (EOQ) model will necessarily decline if: a. Ordering costs rise b. Storage costs rise c. Insurance costs for materials in storage fall d. Stockout costs rise SOLUTION Choice "b" is correct. Storage costs are a component of carrying costs. Since carrying costs are in the denominator of the EOQ model, a higher denominator means a lower order size. (Logically, if the cost of storing the item increases, you will keep less on hand, and the EOQ will decline.) Choice "a" is incorrect. Order costs are in the numerator of the EOQ model, so higher order costs will lead to a higher order size. Choice "c" is incorrect. If insurance costs (a form of carrying costs) fall, the denominator of the EOQ model will fall and the order size will rise.Choice "d" is incorrect. Stock‐out costs are not accounted for in the EOQ model. 20-17 Jack’s Tracks sells 24,000 custom-designed GoKarts per year. These GoKarts are sold evenly throughout the year. The manufacturer charges Jack a $50 processing cost per order, and Jack incurs a carrying cost of $240 per year including storing each GoKart at a local warehouse. 20-4 Downloaded by inazuma eleven go ([email protected])

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What is the economic order quantity for ordering materials? a. 100 b. 1,000 c. 2,000 d. 10,000 SOLUTION Choice "a" is correct. Jack sells 24,000 Go‐Karts per year (2,000 per month). The equation for economic order quantity is the square root of [(2 × annual sales × ordering cost)/annual carrying cost per unit]. 2 DP 2 24, 000 $50 = 100 Go-Karts per order EOQ   C 240 Choices "b", "c", and "d" are incorrect based on the above. 20-18 Jill’s Custom Bags manufacturers and sells 12,000 customer designer bags per year, each requiring three yards of a specially manufactured fabric. These bags are sold evenly throughout the year. The materials for these bags require two months’ lead time. Jill desires to maintain a safety stock of sufficient material to meet one month’s demand. What is Jill’s reorder point? a. 3,000 b. 6,000 c. 9,000 d. 12,000 SOLUTION Choice "c" is correct. Jill uses an average of 3,000 yards of fabric per month (12,000 units per year / 12 months × 3 yards per unit). Reorder Point = Safety Stock + (Purchase order lead time × Number of yards of fabric used per month). = 3,000 yards + (2 months × 3,000 yards per month) = 9,000 yards Choices "a", "b", and "d" are incorrect based on the above calculation. 20-19 Lyle Co. has only one product line. For that line, the reorder point is 500 units, the lead time for production is three weeks, and the sales volume is estimated at 50 units per week. Lyle has established which of the following amounts as its safety stock? a. 150 b. 350 c. 500 d. 650 SOLUTION Choice "b" is correct. The relevant formula for this calculation is as follows: Reorder Point = Safety Stock + (Purchase order lead time × Number of units sold per week). Substituting values for Reorder point, Purchase order lead time, and Number of units sold per week into this equation, we can solve for the safety stock as follows: 500 = Safety Stock + (3 × 50) Safety Stock = 500 – 150 = 350 units Choice "a" is incorrect. This answer choice only takes into account the lead time multiplied by the sales volume per week. Choice "c" is incorrect. This choice only reflects the reorder point of 500 units, without taking into account the lead time and the sales volume per week.

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Choice "d" is incorrect. This choice adds the lead time multiplied by sales per week to the reorder point, i.e. 500 + (3 × 50) = 650. The correct answer is 500 − (3 × 50) = 350. 20-20 Just-in-time inventory assumes all of the following, except: 1. Zero defects. 2. Resources will only be introduced as they are needed. 3. Just-in-time inventory presumes first-in, first-out costing. 4. Production of components only occurs only when requested further downstream in the manufacturing cycle. SOLUTION Choice "3" is correct. Just in time inventory methods make no assumptions regarding costing methods. Choice "1" is incorrect. Just in time inventory methods presume zero defects. Choice "2" is incorrect. Just in time inventory methods assume that resources will only be introduced as they are needed. Choice "4" is incorrect. Just in time inventory methods presume that production of components at intermediate intervals in the production process will only occur as they are needed. 20-21 Economic order quantity for retailer. RightTime (RT) Corporation operates a retail store featuring wristwatches. It maintains an EOQ decision model to make inventory decisions. Currently, it is considering inventory decisions for its TagMe wristwatches product line, which is a very popular product line. Data for 2017 are as follows: Expected annual demand for TagMe watches Ordering cost per purchase order Carrying cost per year

7,000 $300 $14 per wristwatch

Each watch costs RT $75, and sells for $200. The $14 carrying cost per jersey per year consists of the required return on investment of $9.00 (12% × $75 purchase price) plus $5.00 in relevant insurance, handling, and storage costs. The purchasing lead time is 10 days. RT is open 365 days a year. Required: 1. Calculate the EOQ for the TagMe product line. 2. Calculate the number of orders that will be placed each year. 3. Calculate the reorder point. SOLUTION (20 min.) Economic order quantity for retailer. 1.

D = 7,000 watches per year, P = $300, C = $14 per watch per year

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EOQ 

2 DP 2 7, 000 $300 = 547.72 ≅ 548 watches  C 14

2.

D 7, 000 Number of orders per year = EOQ = = 12.77 ≅ 13 orders 548

3.

Demand each working day

= Number of working days =

Purchase lead time

= 10 days

Reorder point

= 19.18  10

D

7, 000 = 19.18 watches per day 365

= 19.18  192 watches

20-22 Economic order quantity, effect of parameter changes (continuation of 20-21). MakeWatch (MW) manufactures the TagMe wristwatches that RightTime (RT) sells to its customers. MW has recently installed computer software that enables its customers to conduct “one-stop” purchasing using state-of-the-art Web site technology. RT’s ordering cost per purchase order will be $50 using this new technology. Required: 1. Calculate the EOQ for the TagMe wristwatches using the revised ordering cost of $50 per purchase order. Assume all other data from Exercise 20-21 are the same. Comment on the result. 2. Suppose MW proposes to “assist” RT by allowing RT customers to order directly from the MW Web site. MW would ship their product directly to these customers. MW would pay $20 to RT for every TagMe watch purchased by one of RT’s customers. Comment qualitatively on how this offer would affect inventory management at RT. What factors should RT consider in deciding whether to accept MW’s proposal? SOLUTION (20 min.) Economic order quantity, effect of parameter changes (continuation of 20-21). 1. D = 7,000 watches per year, P = $50, C = $14 per watch per year EOQ 

2 DP 2 7, 000 $50 = 223.61 watches ≅ 224 watches  C 14

The sizable reduction in ordering cost (from $300 to $50 per purchase order) has reduced the EOQ from 548 to 224.

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2. The MW proposal has both upsides and downsides. The upside is potentially higher sales. RT customers may purchase more online than if they have to physically visit a store. As a result of the proposal, RT would have lower administrative costs and would need to hold lower inventories (as more sales occur directly through MW’s Web site) resulting in lower inventory carrying costs. The downside is that MW could capture RT’s customers. Repeat customers to the MW Web site need not be classified as RT customers. RT would have to establish enforceable rules to make sure that it captures ongoing revenues from customers it directs to the MW Web site. There is insufficient information to determine whether RT should accept MW’s proposal. Much depends on whether RT views MW as a credible, “honest” partner. 20-23 EOQ for a retailer. The HomeServe Corporation provides a wide range of household essentials to householders. One of the products it offers is dotted paper rolls, used in kitchens and toilets. The supplier for the dotted paper rolls pays all incoming freight. No incoming inspection of the paper roll is necessary because the supplier has a track record of delivering high-quality merchandise. The purchasing officer of the HomeServe Corporation has collected the following information: Annual demand for dotted paper rolls

24,200 rolls

Ordering cost per purchase order

$175

Carrying cost per year

15% of purchase costs

Safety-stock requirements

None

Cost of dotted paper rolls

$10 per roll

The purchasing lead time is 4 weeks. The HomeServe Corporation is open 260 days a year (52 weeks for 5 days a week). Required: 1. Calculate the EOQ for dotted paper roll. 2. Calculate the number of orders that will be placed each year. 3. Calculate the reorder point for dotted paper roll. SOLUTION (15 min.) EOQ for a retailer. 1.

D = 24,200 rolls per year, P = $175, C = 15% × $10 = $1.50 per roll per year EOQ 

2 DP 2 24, 200 $175  2,377 rolls C $1.5

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2.

Number of orders per year:

3.

Demand each working day

D 24, 200  11 orders per year EOQ 2,377 = =

24, 200 260

= 93 rolls per day = 465 rolls per week (93 × 5 days per week) Purchasing lead time = 4 weeks Reorder point = 465 paper rolls per week × 4 weeks = 1,860 paper rolls 20-24 EOQ for manufacturer. Turfpro Company produces lawn mowers and purchases 4,500 units of a rotor blade part each year at a cost of $30 per unit. Turfpro requires a 15% annual rate of return on investment. In addition, the relevant carrying cost (for insurance, materials handling, breakage, etc.) is $3 per unit per year. The relevant ordering cost per purchase order is $75. Required: 1. Calculate Turfpro’s EOQ for the rotor blade part. 2. Calculate Turfpro’s annual relevant ordering costs for the EOQ calculated in requirement 1. 3. Calculate Turfpro’s annual relevant carrying costs for the EOQ calculated in requirement 1. 4. Assume that demand is uniform throughout the year and known with certainty so there is no need for safety stocks. The purchase-order lead time is half a month. Calculate Turfpro’s reorder point for the rotor blade part. SOLUTION (20 min.) EOQ for manufacturer. 1.

Relevant carrying costs per part per year: Required annual return on investment 15%  $30 = Relevant insurance, materials handling, breakage, etc. costs per year = Relevant carrying costs per part per year

$4.50 3.00 $7.50

With D = 4,500 parts per year; P = $75; C = $7.50 per part per year, EOQ for manufacturer is: 2 DP 2 4,500 $75 EOQ    300 units C 7.50

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2.

 Relevant annual =  D  Q  P ordering costs    4,500   $75  =  300  = $1,125 where Q = 300 units, the EOQ.

3. At the EOQ, total relevant ordering costs and total relevant carrying costs will be exactly equal. Therefore, total relevant carrying costs at the EOQ = $1,125 (from requirement 2). We can also confirm this with a direct calculation: Q  Relevant annual carrying costs =   C 2   300   $7.50  =  2  = $1,125 where Q = 300 units, the EOQ. 4.

Purchase order lead time is half a month. Monthly demand is 4,500 units ÷ 12 months = 375 units per month. Demand in half a month is  375 units or 188 units. Turfpro should reorder when the inventory of rotor blades falls to 188 units. 20-25 Sensitivity of EOQ to changes in relevant ordering and carrying costs, cost of prediction error. Endrino Bots’s annual demand for its only product, R2-T2, is 10,000 units. Endrino is currently analyzing possible combinations of relevant carrying cost per unit per year and relevant ordering cost per purchase order, depending on the company’s choice of supplier and average levels of inventory. This table presents three possible combinations of carrying and ordering costs.

Required: 1. For each of the relevant ordering and carrying-cost alternatives, determine (a) EOQ and (b) the annual relevant total costs. 2. How does your answer to requirement 1 give insight into the impact of changes in relevant ordering and carrying costs on EOQ and annual relevant total costs? Explain briefly. 3. Suppose the relevant carrying cost per unit per year was $20 and the relevant ordering cost per purchase order was $200. Suppose further that Endrino calculates EOQ after incorrectly estimating relevant carrying cost per unit per year to be $40 and relevant ordering cost per purchase order to be $100. Calculate the actual annual relevant total costs of Endrino’s EOQ

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decision. Compare this cost to the annual relevant total costs that Endrino would have incurred if it had correctly estimated the relevant carrying cost per unit per year of $20 and the relevant ordering cost per purchase order of $200 that you have already calculated in requirement 1. Calculate and comment on the cost of the prediction error. SOLUTION (20 min.) Sensitivity of EOQ to changes in relevant ordering and carrying costs. 1. A straightforward approach to the requirement is to construct the following table for EOQ at relevant carrying and ordering costs. Annual demand is 10,000 units. The formula for the EOQ model is: 2DP DP QC and for Relevant Total Costs (RTC) =  EOQ = C Q 2 where D = demand in units per year P = relevant ordering costs per purchase order C = relevant carrying costs of one unit in stock for the time period used for D (one year in this problem.

Relevant Carrying Costs per Unit per Year (C)

Relevant Ordering Costs per Purchase Order (P)

$10

$400

$20

$200

EOQ =

2 10, 000 $200 10,000 $200 447 $20 447, RTC=  $8, 944 $20 447 2

$40

$100

EOQ =

2 10, 000 $100 10,000 $100 224 $40 224, RTC=  $8, 944 $40 224 2

EOQ =

2 10, 000 $400 10,000 $400 895 $10 895, RTC=  $8, 944 $10 895 2

2. For a given demand level, as relevant carrying costs increase and relevant ordering costs decrease, EOQ becomes smaller. That is EOQ decreases to compensate for increases in carrying costs and to take advantage of decreases in ordering costs. That is, the EOQ offsets the effect on total costs of the increase in carrying costs and the decrease in ordering costs. In this example, the change in EOQ results in relevant total costs (RTC) being the same across all three cases. The fact that the total costs are the same is a function of the specific numbers chosen in this example. For example, in the last combination, if relevant carrying costs per unit per year were $35 instead of $40 and relevant ordering costs per purchase order remained at $100, the relevant total costs would equal $8,367. EOQ =

2 10, 000 $100 10,000 $100 239 $35 239, RTC=  $8,367 $35 239 2

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3. If Alpha estimates C = $40 per unit per year and P = $100 per order, then from requirement 1, EOQ = 224 units and Relevant Total Cost (RTC) = $8,944 For EOQ = 224 units, C = $20 per unit per year and P = $200 per order, DP QC  Relevant total costs (RTC) = Q 2 10, 000 $200 224 $20   224 2 = $8,929 + $2,240 = $11,169 The prediction error equals $11,169 – $8,944 = $2,225, which is 25% ($2,225 ÷ $8,944) of the relevant total cost had there been no prediction error. The error in prediction results in a significantly higher cost but is still limited, given that the estimate of the carrying cost was half the actual amount and the estimate of the ordering cost was twice the actual amount. The square root function dampens the effect of the errors. 20-26 JIT production, relevant benefits, relevant costs. The TieNeck Company manufactures men’s neckwear at its A1 plant. TieNeck is considering implementing a JIT production system. The following are the estimated costs and benefits of JIT production: a. Annual additional tooling costs would be $280,000. b. Average inventory would decline by 70% from the current level of $1,500,000. c. Insurance, space, materials-handling and setup costs, which currently total $300,000 annually, would decline by 30%. d. The emphasis on quality inherent in JIT production would reduce rework costs by 20%. TieNeck currently incurs $200,000 in annual rework costs. e. Improved product quality under JIT production would enable TieNeck to raise the price of its product by $4 per unit. TieNeck sells 80,000 units each year. TieNeck’s required rate of return on inventory investment is 20% per year. Required: 1. Calculate the net benefit or cost to TieNeck if it adopts JIT production at the A1 plant. 2. What nonfinancial and qualitative factors should TieNeck consider when making the decision to adopt JIT production? 3. Suppose TieNeck implements JIT production at its A1 plant. Give a few examples of the performance measures that TieNeck could use to evaluate and control JIT production. What would be the benefit of TieNeck implementing an enterprise resource planning (ERP) system? SOLUTION (20 min.) JIT production, relevant benefits, relevant costs.

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1. Solution Exhibit 20-26 presents the annual net benefit of $480,000 to the TieNeck Company of implementing a JIT production system. 2. Other nonfinancial and qualitative factors that TieNeck should consider in deciding whether it should implement a JIT system include: a. The possibility of developing and implementing a detailed system for integrating the sequential operations of the manufacturing process. Direct materials must arrive when needed for each subassembly so that the production process functions smoothly. b. The ability to design products that use standardized parts and reduce manufacturing time. c. The ease of obtaining reliable vendors who can deliver quality direct materials on time with minimum lead time. d. The willingness of suppliers to deliver smaller and more frequent orders. e. The confidence of being able to deliver quality products on time. Failure to do so would result in customer dissatisfaction. f. The skill level of workers to perform multiple tasks such as minor repairs, maintenance, quality testing and inspection. 3. Personal observation by production line workers and managers is more effective in JIT plants than in traditional plants. A JIT plant’s production process layout is streamlined: operations are not obscured by piles of inventory or rework. As a result, such plants are easier to evaluate by personal observation than are cluttered plants where the flow of production is not logically laid out. Besides personal observation, nonfinancial performance measures are the dominant methods of control. Nonfinancial performance measures provide the most timely and easy to understand measures of plant performance. Examples of nonfinancial performance measures of time, inventory, and quality include the following: ● Manufacturing lead time ● Units produced per hour ● Machine setup time ÷ manufacturing time ● Number of defective units ÷ number of units completed In addition to personal observation and nonfinancial performance measures, financial performance measures are also used. Examples of financial performance measures include the following: ● Cost of rework ● Ordering costs ● Stockout costs ● Inventory turnover (cost of goods sold average inventory) The success of a JIT system depends on the speed of information flows from customers to manufacturers to suppliers. The Enterprise Resource Planning (ERP) system has a single database and gives lower-level managers, workers, customers, and suppliers access to operating information. This benefit, accompanied by tight coordination across business functions, enables the ERP system to rapidly transmit information in response to changes in supply and demand so that manufacturing and distribution plans may be revised accordingly.

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[SOLUTION EXHIBIT 20-26] Annual Relevant Costs of Current Production System and JIT Production System for TieNeck Company Relevant

Relevant Items

Relevant Costs under Current Production System

Additional annual tooling costs

–

Costs under JIT Production System $280,000

Required return on investment: 20% per year × $1,500,000 of average inventory per year

$ 300,000

20% per year × $450,000a of average inventory per year

90,000

Insurance, space, materials handling, and setup costs

300,000

210,000b

Rework costs

200,000

160,000c (320,000)d

Incremental revenues from higher selling prices Total net incremental costs

$800,000

Annual difference in favor of JIT production a

$420,000

$380,000

$1,500,000 × (1 – 70%) = $450,000

b

$300,000 × (1 – 0.30) = $210,000

c

$200,000 × (1 – 0.20) = $160,000

d

$4 × 80,000 units = $320,000

20-27 Backflush costing and JIT production. Grand Devices Corporation assembles handheld computers that have scaled-down capabilities of laptop computers. Each handheld computer takes 6 hours to assemble. Grand Devices uses a JIT production system and a backflush costing system with three trigger points: 

Purchase of direct materials and incurring of conversion costs



Completion of good finished units of product



Sale of finished goods

There are no beginning inventories of materials or finished goods and no beginning or ending work-in-process inventories. The following data are for August 2013: Direct materials purchased

$2,958,000

Conversion costs incurred

$777,600

Direct materials used

$2,937,600

Conversion costs allocated

$806,400

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Grand Devices records direct materials purchased and conversion costs incurred at actual costs. It has no direct materials variances. When finished goods are sold, the backflush costing system “pulls through” standard direct material cost ($102 per unit) and standard conversion cost ($28 per unit). Grand Devices produced 28,800 finished units in August 2013 and sold 28,400 units. The actual direct material cost per unit in August 2013 was $102, and the actual conversion cost per unit was $27. Required: 1. Prepare summary journal entries for August 2013 (without disposing of under- or overallocated conversion costs). 2. Post the entries in requirement 1 to T-accounts for applicable Materials and In-Process Inventory Control, Finished Goods Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold. 3. Under an ideal JIT production system, how would the amounts in your journal entries differ from those in requirement 1? SOLUTION (30 min.) Backflush costing and JIT production. 1.

(a) Record purchases of direct materials (b) Record conversion costs incurred

(c) Record cost of good finished units completed

Materials and In-Process Inventory Control Accounts Payable Control Conversion Costs Control Various Accounts (such as Wages Payable Control) Finished Goods Controla Materials and InProcess

2,958,000

2,958,000 777,600

777,600 3,744,000

Inventory Controla 2,937,600 806,400 Conversion Costs a Allocated 3,692,000 Cost of Goods Soldb (d) Record cost Finished Goods of finished Control 3,692,000 goods sold a 28,800 × ($102 + $28) = $3,744,000; 28,800 × $102 = $2,937,600; 28,800 × $28 = $806,400 b 28,400 × ($102 + $28) = $3,692,000

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2.

3. Under an ideal JIT production system, there would be zero inventories at the end of each day and each month. Entry (c) would be $3,692,000 finished goods production, not $3,744,000. Also, there would be no inventory of direct materials instead of $2,958,000 – $2,937,600 = $20,400. 20-28 Backflush costing, two trigger points, materials purchase and sale (continuation of 20-27). Assume the same facts as in Exercise 20-27, except that Grand Devices now uses a backflush costing system with the following two trigger points:  

Purchase of direct materials and incurring of conversion costs Sale of finished goods

The Inventory Control account will include direct materials purchased but not yet in production, materials in work in process, and materials in finished goods but not sold. No conversion costs are inventoried. Any under- or overallocated conversion costs are written off monthly to Cost of Goods Sold. Required: 1. Prepare summary journal entries for August, including the disposition of under- or overallocated con-version costs. 2. Post the entries in requirement 1 to T-accounts for Finished Goods Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold

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SOLUTION (20 min.) Backflush costing, two trigger points, materials purchase and sale (continuation of 20-27). 1. (a) Record purchases of direct Inventory Control 2,958,00 materials Accounts Payable Control 2,958,000 (b) Record conversion costs Conversion Costs Control 777,600 incurred Various Accounts (such as Wages Payable Control) 777,600 (c) Record cost of good No entry finished units completed (d) Record cost of finished Cost of Goods Solda 3,692,00 a goods sold Inventory Control 2,896,800 Conversion Costs Allocateda 795,200 (e) Record underallocated or Conversion Costs Allocated 795,200 over-allocated conversion Costs of Goods Sold costs 17,600 Conversion Costs Control 777,600 a

28,400 × ($102 + $28) = $3,692,000; 28,400 × $102 = $2,896,800; 28,400 × $28 = $795,200

2.

Cost of goods sold = $3,692,000 – $17,600 = $3,674,400. 20-17 Downloaded by inazuma eleven go ([email protected])

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20-29 Backflush costing, two trigger points, completion of production and sale (continuation of 20-27). Assume the same facts as in Exercise 20-27, except now Grand Devices uses only two trigger points:  Completion of good finished units of product  Sale of finished goods Any under- or overallocated conversion costs are written off monthly to Cost of Goods Sold. Required: 1. Prepare summary journal entries for August, including the disposition of under- or overallocated con-version costs. 2. Post the entries in requirement 1 to T-accounts for Finished Goods Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold. SOLUTION (20 min.) Backflush costing, two trigger points, completion of production and sale (continuation of 20-28). 1.

(a) Record purchases of direct materials (b) Record conversion costs incurred (c) Record cost of good finished units completed (d) Record cost of finished goods sold (e) Record underallocated or over-allocated conversion costs

No Entry Conversion Costs Control Various Accounts (such as Wages Payable Control) Finished Goods Controla Accounts Payable Controla Conversion Costs Allocateda Cost of Goods Soldb Finished Goods Control Conversion Costs Allocated Costs of Goods Sold Conversion Costs Control

a

777,600 777,600 3,744,00 2,937,600 806,400 3,692,00 3,692,000 806,400 28,800 777,600

28,800 × ($102 + $28) = $3,744,000; 28,800 × $102 = $2,937,600; 28,800 × $28 = $806,400 28,400 × ($102 + $28) = $3,692,000

b

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2.

Cost of goods sold = $3,692,000 – $28,600 = $3,663,400.

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20-30 EOQ, uncertainty, safety stock, reorder point. FootLove Shoe Co. produces and sells an excellent-quality walking shoe. After production, these shoes are distributed to 30 warehouses around the country. Each warehouse services approximately 120 stores in its region. FootLove uses an EOQ model to determine the number of pairs of shoes to order for each warehouse from the factory. Annual demand for Warehouse WH1 is approximately 180,000 pairs of shoes. The ordering cost is $200 per order. The annual carrying cost of a pair of shoes is $3.20 per pair. Required: 1. Use the EOQ model to determine the optimal number of pairs of shoes per order. 2. Assume each month consists of approximately 4 weeks. If it takes 1 week to receive an order, at what point should warehouse WH1 reorder shoes? 3. Although WH1’s average weekly demand is 3,750 pairs of shoes (180,000 ÷ 12 months ÷ 4 weeks), demand each week may vary with the following probability distribution: Total demand for 1 week Probability (sums to 1.00)

3,250 pairs 0.05

3,500 pairs 0.15

3,750 pairs 0.55

4,000 pairs 0.20

4,250 pairs 0.05

If a store wants shoes and WH1 has none in stock, WH1 can “rush” them to the store at an additional cost of $3.00 per pair. How much safety stock should Warehouse WH1 hold? How will this affect the reorder point and reorder quantity? SOLUTION (30 min.) EOQ, uncertainty, safety stock, reorder point. 1. EOQ 

2 DP 2 180, 000 $200  C $3.20

= 4,744 pairs of shoes 2.

Weekly demand = Monthly demand ÷ 4 = 15,000 ÷ 4 = 3,750 pairs of shoes per week Purchasing lead time = 1 week Reorder point = 3,750 pairs of shoes per week × 1 week = 3,750 pairs of shoes

3. Solution Exhibit 20-30 presents the safety stock computations for Warehouse WH1 when the reorder point excluding safety stock is 3,750 pairs of shoes. The exhibit shows that annual relevant total stockout and carrying costs are the lowest ($1,600) when a safety stock of 500 pairs of shoes is maintained. Therefore, Warehouse WH1 should hold a safety stock of 500 pairs. As a result, reorder point with safety stock = 3,750 pairs + 500 pairs = 4,250 pairs. Reorder quantity is unaffected by the holding of safety stock and remains the same as calculated in requirement 1. Reorder quantity = 4,744 pairs Warehouse WH1 should order 4,744 pairs of shoes each time its inventory of shoes falls to 4,250 pairs. 20-20 Downloaded by inazuma eleven go ([email protected])

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SOLUTION EXHIBIT 20-30 Computation of Safety Stock for Warehouse WH1 When Reorder Point is 3,750 Units Safety Stock Level in Units (1)

Demand Levels Resulting in Stockouts (2)

Stockout in Unitsa (3) = (2) – 3,750 – (1)

Probability of Stockouts (4)

Relevant Stockout Costsb (5) = (3) × $3.00

Number of Orders per Yearc (6)

0

4,000 4,250

250 500

0.20 0.05

$ 750 1,500

38 38

250 500

4,250 --

250 --

0.05 --

750 --

38 --

Expected Stockout Costsd (7) = (4) × (5) × (6) $5,700 2,850 $8,550 $1,425 $ 0f

Relevant Carrying Costse (8) = (1) × $3.20

$ 0 $ 800 $1,600

Relevant Total Costs (9) = (7) + (8)

$8,550 $2,225 $1,600

a

Demand level resulting in stockouts – Inventory available during lead time (excluding safety stock), 3,750 units – Safety stock. Stockout in units × Relevant stockout costs of $3.00 per unit. c Annual demand, 180,000 ÷ 4,744 EOQ = 38 orders per year. d Probability of stockout × Relevant stockout costs × Number of orders per year. e Safety stock × Annual relevant carrying costs of $3.20 per unit (assumes that safety stock is on hand at all times and that there is no overstocking caused by decreases in expected usage). f At a safety stock level of 500 units, no stockout will occur and, hence, expected stockout costs = $0. b

20-31 EOQ, uncertainty, safety stock, reorder point. Phillips Corporation is a major manufacturer of food processors. It purchases motors from Viking Corporation. Annual demand is 52,000 motors per year or 1,000 motors per week. The ordering cost is $360 per order. The annual carrying cost is $6.50 per motor. It currently takes 2 weeks to supply an order to the assembly plant. Required: 1. What is the optimal number of motors that Phillips’s managers should order according to the EOQ model? 2. At what point should managers reorder the motors, assuming that both demand and purchaseorder lead time are known with certainty? 3. Now assume that demand can vary during the 2-week purchase-order lead time. The following table shows the probability distribution of various demand levels:

If Phillips runs out of stock, it would have to rush order the motors at an additional cost of $5 per motor. How much safety stock should the assembly plant hold? How will this affect the reorder point and reorder quantity?

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SOLUTION (30 min.) EOQ, uncertainty, safety stock, reorder point. 1. EOQ 

2 DP 2 52, 000 $360  C $6.50

EOQ = 2,400 motors 2. Average weekly demand = 52,000 ÷ 52 weeks = 1,000 motors per week Purchasing lead time = 2 weeks Reorder point at each plant = 1,000 motors × 2 weeks = 2,000 motors 3. Solution Exhibit 20-31 presents the safety stock computations for a given assembly plant when the reorder point excluding safety stock is 2,000 motors. The exhibit shows that annual relevant total stockout and carrying costs are the lowest ($2,400) when a safety stock of 200 motors is maintained. Therefore, a given assembly plant should hold a safety stock of 200 motors. As a result, Reorder point with safety stock = 2,000 motors + 200 motors = 2,200 motors. Reorder quantity is unaffected by the holding of safety stock and remains the same as calculated in requirement 1. Reorder quantity = 2,400 motors A given assembly plant should order 2,400 motors each time its inventory falls to 2,200 motors. SOLUTION EXHIBIT 20-31 Computation of Safety Stock for the assembly plant when Reorder Point is 2,000 Units Safety Stock Level in Units (1)

Demand Levels Resulting in Stockouts (2)

Stockout in Unitsa (3) = (2) – 2,000 – (1)

Probability of Stockouts (4)

Relevant Stockout Costsb (5) = (3) × $5

Number of Orders per Yearc (6)

Expected Stockout Costsd (7) = (4) × (5) × (6)

Relevant Carrying Costse (8) = (1) × $6.50

Relevant Total Costs (9) = (7) + (8)

$4,400 2,200 $6,600 $1,100 $ 0f

$ 0 $1,300 $2,600

$6,600 $2,400 $2,600

0

2,200 2,400

200 400

0.20 0.05

$1,000 $2,000

22 22

200 400

2,400 --

200 --

0.05 --

$1,000 --

22 --

a

Demand level resulting in stockouts – Inventory available during lead time (excluding safety stock), 300 units – Safety stock. b Stockout in units × Relevant stockout costs of $9.00 per unit. c Annual demand, 52,000 ÷ 2,400 EOQ = 21.67 26  22 orders per year. d Probability of stockout × Relevant stockout costs × Number of orders per year. e Safety stock × Annual relevant carrying costs of $6.50 per unit (assumes that safety stock is on hand at all times and that there is no overstocking caused by decreases in expected usage). f At a safety stock level of 400 units, no stockout will occur and, hence, expected stockout costs = $0.

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20-32 MRP, EOQ, and JIT. Tech Works Corp. produces J-Pods, music players that can download thousands of songs. Tech Works forecasts that demand in 2017 will be 48,000 J-Pods. The variable production cost of each J-Pod is $54. In its MRP system, due to the large $10,000 cost per setup, Tech Works plans to produce J-Pods once a month in batches of 4,000 each. The carrying cost of a unit in inventory is $17 per year. Required: 1. Using the MRP system, what is the annual cost of producing and carrying J-Pods in inventory? (Assume that, on average, half of the units produced in a month are in inventory.) 2. A new manager at Tech Works has suggested that the company use the EOQ model to determine the optimal batch size to produce. (To use the EOQ model, Tech Works needs to treat the setup cost in the same way it would treat ordering cost in a traditional EOQ model.) Determine the optimal batch size and number of batches. Round up the number of batches to the nearest whole number. What would be the annual cost of producing and carrying J-Pods in inventory if it uses the optimal batch size? Compare this cost to the cost calculated in requirement 1. Comment briefly. 3. Tech Works is also considering switching from its MRP system to a JIT system. This will result in producing J-Pods in batch sizes of 600 J-Pods and will reduce obsolescence, improve quality, and result in a higher selling price. Tech Works will reduce setup time and setup cost. The new setup cost will be $500 per setup. What is the annual cost of producing and carrying JPods in inventory under the JIT system? 4. Compare the models analyzed in the previous parts of the problem. What are the advantages and disadvantages of each? SOLUTION (25 min.) MRP, EOQ, and JIT. 1.

Under a MRP system: Annual cost of producing and carrying J-Pods in inventory = Variable production cost + Setup cost + Carrying cost = $54 × 48,000 + ($10,000 × 12 months) + [$17 × (4,000 ÷ 2)] = $2,592,000 + $120,000 + $34,000 = $2,746,000

2.

Using an EOQ model to determine batch size: EOQ 

2 48,000 $10, 000 2 DP  C $17

= 7,515 J-Pods per batch Production of 48,000 per year divided by a batch size of 7,515 would imply J-Pods would be produced in 6.4 batches per year. Rounding this up to the nearest whole number yields 7 batches per year, which means a production size of 48,000 ÷ 7 or 6,857 J-Pods per batch. 20-23 Downloaded by inazuma eleven go ([email protected])

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Annual Cost of producing and carrying J-Pods in inventory = Variable production cost + Setup cost + Carrying cost = $54 × 48,000 + ($10,000 × 7) + [$17 × (6,857 ÷ 2)] = $2,592,000 + $70,000 + $58,285 = $2,720,285 The costs of producing and carrying J-Pods in inventory decrease, but not by a lot. The square root in the EOQ formula reduces the effect of errors in computing optimal batch size. 3.

Under a JIT system Annual Cost of producing and carrying J-Pods in inventory = Variable production cost + Setup cost + Carrying cost = $54 × 48,000 + ($500 × 80 a) + [$17 × (600 ÷ 2)] = $2,592,000 + $40,000 + $5,100 = $2,637,100 a

Production of 48,000 per year divided by a batch size of 600 would imply 80 setups per year. 4. The JIT model resulted in the lowest costs because set up and carrying costs were lower than for the EOQ model. The EOQ model also limits production to almost once every two months. This would not allow managers to react quickly to changing market demand or economic conditions. The JIT model provides management with much more flexibility. JIT systems might also lead managers to improve processes, reduce costs and increase quality. 20-33 Effect of management evaluation criteria on EOQ model. CompTech Solution purchases one model of computer at a wholesale cost of $400 per unit and resells it to end consumers. The annual demand for the company’s product is 500,000 units. Ordering costs are $1,000 per order and carrying costs are $80 per computer, including $30 in the opportunity cost of holding inventory. Required: 1. Compute the optimal order quantity using the EOQ model. 2. Compute (a) the number of orders per year and (b) the annual relevant total cost of ordering and carrying inventory. 3. Assume that when evaluating the manager, the company excludes the opportunity cost of carrying inventory. If the manager makes the EOQ decision excluding the opportunity cost of carrying inventory, the relevant carrying cost would be $50, not $80. How would this affect the EOQ amount and the actual annual relevant cost of ordering and carrying inventory? 4. What is the cost impact on the company of excluding the opportunity cost of carrying inventory when making EOQ decisions? Why do you think the company currently excludes the opportunity costs of carrying inventory when evaluating the manager’s performance? What could the company do to encourage the manager to make decisions more congruent with the goal of reducing total inventory costs?

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SOLUTION (30 min.) Effect of management evaluation criteria on EOQ model. 1. EOQ 

2 DP 2 500,000 $1,00  C $80

= 3,536 computers 2. Number of orders per year =

D 500, 000 = = 142 orders EOQ 3,536

  500, 000  Total relevant  D ordering costs =  Q  P  =  3,536  $1,000  = $142,000  Q   3,536 Total relevant carrying costs =  2  C  =  2  $800  = $141,440 Relevant total costs = $141,403+ $141,440 = $282,843

3. EOQ 

2 DP 2 500, 000 $1,000  C $50

= 4,473 computers Total relevant  D  P  =  500, 000  $1,000  = $111,782   4, 473  ordering costs =  Q   

   4, 473 Total relevant  Q carrying costs =  2  C  =  2  $800  = $178,920 Relevant total costs = $111,782 + $178,920 = $290,702 4. Because managers will choose to order 4,473 computers instead of 3,536, the cost to the company will be $7,859 ($290,702 – $282,843) higher than it would be if managers were evaluated based upon all carrying costs. The EOQ quantity and relevant total costs are higher if the company ignores holding costs when evaluating managers, but only by about 2.78% ($7,859 ÷ $282,843). The square root in the EOQ model reduces the sensitivity of the ordering decision to errors in parameter estimates. CompTech Solution probably does not include the opportunity costs of carrying inventory because it is not tracked by the financial accounting system. The company could change the evaluation model to include a cost of investment in inventory. Even though this

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would involve an additional calculation, it would encourage managers to make optimal decisions, more congruent with the goal of reducing total inventory costs. 20-34 JIT purchasing, relevant benefits, relevant costs. (CMA, adapted) The KateSteel Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. KateSteel’s inventory of raw steel averages $400,000. Keith Abbott, president of KateSteel, and Shaun Silvio, KateSteel’s controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Silvio identifies the following effects of adopting a JIT inventory program to virtually eliminate steel inventory: ▪

▪

Without scheduling any overtime, lost sales due to stockouts would increase by 25,000 units per year. However, by incurring overtime premiums of $30,000 per year, the increase in lost sales could be reduced to 15,000 units per year. This would be the maximum amount of overtime that would be feasible for KateSteel. Two warehouses currently used for steel bar storage would no longer be needed. KateSteel rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of $60,000. The other warehouse is owned by KateSteel and contains 16,000 square feet. Three-fourths of the space in the owned warehouse could be rented for $3.00 per square foot per year. Insurance and property tax costs totaling $10,000 per year would be eliminated.

KateSteel’s required rate of return on investment is 15% per year. KateSteel’s budgeted income statement for the year ending December 31, 2017, (in thousands) is: Revenues (1,000,000 units) Cost of goods sold Variable costs Fixed costs Total cost of goods sold Gross margin Marketing and distribution costs Variable costs Fixed costs Total marketing and distribution costs Operating income

$15,000 $6,380 $2,820 9,200 5,800 $2,010 750 2,760 3,040

Required: 1. Calculate the estimated dollar savings (loss) for the KateSteel Corporation that would result in 2017 from the adoption of JIT purchasing. 2. Identify and explain other factors that KateSteel should consider before deciding whether to adopt JIT purchasing.

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SOLUTION (30 min.) JIT purchasing, relevant benefits, relevant costs. 1. Solution Exhibit 20-34 presents the $36,850 cash savings that would result if KateSteel Corporation adopted the just-in-time inventory system in 2017. 2. Conditions that should exist in order for a company to successfully adopt just-in-time purchasing include the following: • •

• • • •

Top management must be committed and provide the necessary leadership support to ensure a company-wide, coordinated effort. A detailed system for integrating the sequential operations of the manufacturing process needs to be developed and implemented. Direct materials must arrive when needed for each subassembly so that the production process functions smoothly. Accurate sales forecasts must be available for effective finished goods planning and production scheduling. Products should be designed to maximize the use of standardized parts to reduce manufacturing time and costs. Reliable vendors who can deliver quality direct materials on time with minimum lead time must be obtained. Reduce stockouts because stock outs could have adverse effects on longer-term reputation.

SOLUTION EXHIBIT 20-34 Annual Relevant Costs of Current Purchasing Policy and JIT Purchasing Policy for KateSteel Corporation Relevant Costs under Current Purchasing Policy Required return on investment 15% per year $400,000 of average inventory per year 15% per year $0 inventory per year Annual insurance and property tax costs Warehouse rent Overtime costs No overtime Overtime premium Stockout costs No stockouts $6.61b contribution margin per unit 15,000 units Total incremental costs Difference in favor of JIT purchasing

Relevant Costs under JIT Purchasing Policy

$ 60,000 10,000 60,000

$ 0 0 (36,000)a

0 30,000 0 $130,000

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99,150 $93,150 $36,850

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a

$(36,000) = Warehouse rental revenues, [(75% 16,000) Calculation of unit contribution margin Selling price ($15,000,000 ÷ 1,000,000 units) Variable costs per unit: Variable manufacturing cost per unit ($6,380,000 ÷ 1,000,000 units) Variable marketing and distribution cost per unit ($2,010,000 ÷ 1,000,000 units) Total variable costs per unit Contribution margin per unit

$3.00].

b

$15.00

$6.38 2.01 8.39 $6.61

Note that the incremental costs of $30,000 in overtime premiums to make the additional 10,000 units are less than the contribution margin from losing these sales equal to $66,100 ($6.61  10,000). KateSteel would rather incur overtime than lose 10,000 units of sales. 20-35 Supply-chain effects on total relevant inventory cost. ClearPic Television Co. outsources the production of picture-tubes for its televisions. It is currently deciding which of two suppliers to use: X or Y. Due to differences in the product failure rates in the two companies, 7.5% of picture-tubes purchased from X will be inspected and 20% of picture-tubes purchased from Y will be inspected. The following data refer to costs associated with X and Y: X Number of orders per year 60 Annual picture-tubes demanded 12,000 Price per picture-tube $98 Ordering cost per order $15 Inspection cost per unit $5 Average inventory level 150 Expected number of stockouts 120 Stockout cost (cost of rush order) per stockout $5 Units returned by customers for replacing picture-tubes 80 Cost of replacing each picture-tube $25 Required annual return on investment 12% Other carrying cost per unit per year $5.00 Required 1. What is the relevant cost of purchasing from X and Y? 2. What factors other than cost should ClearPic consider?

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Y 60 12,000 $96 $12 $5 150 270 $7 600 $25 12% $5.00

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SOLUTION (25 min.) Supply chain effects on total relevant inventory costs. 1.

The relevant costs of purchasing from X and Y are: Cost Category X Purchase costs 12,000 tubes × $98 per tube $1,176,000 12,000 tubes × $96 per tube Ordering costs 60 orders × $15 per order 900 60 orders × $12 per order Inspection costs 12,000 tubes × 7.5% × $5 per tube 4,500 12,000 tubes × 20% × $5 per board Required annual return on investment 150 tubes × $98 per tube × 12% 1,764 150 tubes × $95 per tube × 12% Stock out costs 120 tubes × $5 per tube 600 270 tubes × $7 per tube Return costs 80 tubes × $25 per tube 2,000 600 tubes × $25 per tube Other carrying costs 150 tubes × $5.00 per tube per year 750 150 tubes × $5.00 per tube per year Total Cost $1,186,514

Y

$1,152,000

720

12,000

1,728

1,890

15,000

750 $1,184,088

2. Although Y will save ClearPic $2,426 ($1,186,514 − $1,184,088), ClearPic may still choose to use X for the following reasons: a. The savings are less than 1% of the total cost of the picture-tubes. b. With 7.5 times the number of returns, Y will probably have a negative effect on ClearPic’s reputation. c. With Y’s higher stockouts, ClearPic’s reputation for availability and on time delivery will be affected. The increased number of inspections may necessitate the hiring of additional personnel and the need for additional factory space and equipment. 20-36 Supply-chain effects on total relevant inventory cost. Smart Jeans orders high-quality denim fabric from two different suppliers: Shine Fabrics and Soft Cotton. Smart Jeans would like to use only one of the suppliers in the future. Due to variations in quality, Smart would need to inspect 15% of Shine Fabrics’ 30-yard bolts (rolls) and 40% of Soft Cotton’s. The following data refer to costs associated with the two suppliers.

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Shine Fabrics Number of orders per year Annual bolts demanded Price per bolt Ordering cost per order Inspection cost per bolt Average inventory level Expected number of stockouts Stockout cost of rush order Estimated number of jeans returned by customers because of defective fabric Cost of fixing jeans returned by customers because of defective fabric Opportunity cost of investment Other carrying costs per bolt per year

100 3,200 $170 $200 $25 40 20 $25 150

Soft Cotton 100 3,200 $160 $250 $25 40 20 $20 250

$30

$30

12% $15

12% $15

Required 1. What is the relevant cost of purchasing from Shine Fabrics and Soft Cotton? 2. What factors other than cost should Smart Jeans consider? SOLUTION (25 min.) Supply chain effects on total relevant inventory costs. 1.

The relevant costs of purchasing from Shine Fabric and Soft Cotton are: Cost Category Shine Fabric Purchase costs 3,200 bolts × $170 per bolt $544,000 3,200 bolts × $160 per bolt Ordering costs 100 orders × $200 per order 20,000 100 orders × $250 per order Inspection costs 3,200 bolts × 15% × $25 per bolt 12,000 3,200 bolts × 40% × $25 per bolt Opportunity cost of investment 40 bolts × $170 per bolt × 12% 816 40 bolts × $160 per bolt × 12% Stockout costs 20 bolts × $25 per bolt 500 20 bolts × $20 per bolt Return costs 150 bolts × $30 per bolt 4,500 250 bolts × $30 per bolt

Soft Cotton

$512,000

25,000

32,000

768

400

7,500

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Other carrying costs 40 bolts × $15 per bolt 40 bolts × $15 per bolt Total Cost

600 $582,416

600 $578,268

2. Soft Cotton will save Smart Jeans’ $4,148 ($582,416 − $578,268). However, Smart Jeans may still consider using Shine Fabrics for the following reasons: a. The style of the product may be different and be perceived differently by the customer. If Shine Fabric is preferred by consumers, the Smart Jeans may lose business in the future if it switches to Soft Cotton’s product. In addition, the Smart Jeans may be able to charge more for its products if customers prefer the Shine Fabric brand. b. The additional returns of jeans due to defective Soft Cotton products may result in additional lost sales that cannot be quantified. 20-37 Backflush costing and JIT production. The Grand Meter Corporation manufactures electrical meters. For August, there were no beginning inventories of direct materials and no beginning or ending work in process. Grand Meter uses a JIT production system and backflush costing with three trigger points for making entries in the accounting system:  Purchase of direct materials and incurring of conversion costs  Completion of good finished units of product  Sale of finished goods Grand Meter’s August standard cost per meter is direct materials, $25, and conversion cost, $20. Grand Meter has no direct materials variances. The following data apply to August manufacturing: Direct materials purchased $550,000 Number of finished units manufactured

21,000

Conversion costs incurred

20,000

$440,000 Number of finished units sold

Required 1. Prepare summary journal entries for August (without disposing of under- or overallocated conversion costs). Assume no direct materials variances. 2. Post the entries in requirement 1 to T-accounts for Materials and In-Process Inventory Control, Finished Goods Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold SOLUTION (20 min.) Blackflush costing and JIT production. 1. (a) Record purchases of direct materials (b) Record conversion costs

Materials and In-Process Inventory Control Accounts Payable Control Conversion Costs Control

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550,000 550,000 440,000

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incurred (c) Record cost of good finished units completed

(d) Record cost of finished goods sold

Various Accounts (such as Wages Payable Control) Finished Goods Controla Materials and In-Process Inventory Controla Conversion Costs Allocateda Cost of Goods Soldb Finished Goods Control

a

21,000 × ($25 + $20) = $945,000; 21,000 × $25 = $525,000; 21,000 × $20 = $420,000 b 20,000 × ($25 + $20) = $900,000

2.

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440,000 945,000 525,000 420,000 900,000 900,000

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20-38 Backflush, two trigger points, materials purchase and sale (continuation of 20-37). Assume that the second trigger point for Grand Meter Corporation is the sale—rather than the completion—of finished goods. Also, the inventory account is confined solely to direct materials, whether these materials are in a storeroom, in work in process, or in finished goods. No conversion costs are inventoried. They are allocated to the units sold at standard costs. Any under- or overallocated conversion costs are written off monthly to Cost of Goods Sold. Required 1. Prepare summary journal entries for August, including the disposition of under- or overallocated con-version costs. Assume no direct materials variances. 2. Post the entries in requirement 1 to T-accounts for Inventory Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold. SOLUTION (20 min.)

Backflush, two trigger points, materials purchase and sale (continuation of 20-37).

1.

(a) Record purchases of direct materials (b) Record conversion costs incurred (c) Record cost of good finished units completed (d) Record cost of finished goods sold (e) Record underallocated or overallocated conversion costs a

Inventory Control Accounts Payable Control Conversion Costs Control Various Accounts (such as Wages Payable Control) No entry

550,000

Cost of Goods Solda Inventory Controla Conversion Costs Allocateda Conversion Costs Allocated Cost of Goods Sold Conversion Costs Control

900,000

20,000 × ($25 + $20) = $900,000; 20,000 × $25 = $500,000; 20,000 × $20 = $400,000

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550,000 440,000 440,000

500,000 400,000 400,000 40,000 440,000

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2.

Cost of goods sold = $900,000 + $40,000 = $940,000 20-39 Backflush, two trigger points, completion of production and sale (continuation of 2037). Assume the same facts as in Problem 20-38 except now there are only two trigger points: Completion of good finished units of product and Sale of finished goods. Required 1. Prepare summary journal entries for August, including the disposition of under- or overallocated con-version costs. Assume no direct materials variances. 2. Post the entries in requirement 1 to T-accounts for Finished Goods Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold. SOLUTION (20 min.) Backflush, two trigger points, completion of production and sale (continuation of 20-37). ( a)Re c or dpur c has e sof di r e c tma t e r i al s (b) Record conversion costs incurred

No Entry Conversion Costs Control Various Accounts (such as

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440,000

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(c) Record cost of good finished units completed (d) Record cost of finished goods sold (e) Record underallocated or overallocated conversion costs

Wages Payable Control) Finished Goods Controla Accounts Payable Controla Conversion Costs Allocateda Cost of Goods Soldb Finished Goods Controlb Conversion Costs Allocated Cost of Goods Sold Conversion Costs Control

a

21,000 × ($25 + $20) = $945,000; 21,000 × $25 = $525,000; 21,000 × $20 = $420,000 b 20,000 × ($25 + $20) = $900,000

2.

Cost of goods sold = $900,000 + $20,000 = $920,000

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440,000 945,000 525,000 420,000 900,000 900,000 420,000 20,000 440,000

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20-40 Lean accounting. Steadfast Security Devices (SSD) has introduced a just-in-time production process and is considering the adoption of lean accounting principles to support its new production philosophy. The company has two product lines: Mechanical Devices and Electronic Devices. Two individual products are made in each line. Product-line manufacturing overhead costs are traced directly to product lines and then allocated to the two individual products in each line. The company’s traditional cost-accounting system allocates all plant-level facility costs and some corporate overhead costs to individual products. The latest accounting report using traditional cost accounting methods include the following information (in thousands of dollars):

Sales Direct material (based on quantity used) Direct manufacturing labor Manufacturing overhead (equipment lease, supervision, production control) Allocated plant-level facility costs Design and marketing costs Allocated corporate overhead costs Operating income

Mechanical Devices Product W Product X $1,800 $1,300 400 250 400 200 200 270 140 200 50 410

Electronic Devices Product Y Product Z $2,150 $1200 500 200 500 150 420 220

100 100 40 340

180 220 80 250

80 90 20 440

SSD has determined that each of the two product lines represents a distinct value stream. It has also determined that out of the $500,000 ($140,000 + $100,000 + $180,000 + $80,000) plantlevel facility costs, product W occupies 24% of the plant’s square footage, product X occupies 20%, product Y occupies 34%, and product Z occupies 12%. The remaining 10% of square footage is not being used. Finally, SSD has decided that in order to identify inefficiencies, direct material should be expensed in the period it is purchased, rather than when the material is used. According to purchasing records, direct material purchase costs during the period were as follows:

Direct material (purchases)

Mechanical Devices Product W Product X $450 $250

Electronic Devices Product Y Product Z $550 $200

Required 1. What are the cost objects in SSD’s lean accounting system? 2. Compute operating income for the cost objects identified in requirement 1 using lean accounting principles. What would you compare this operating income against? Comment on your results.

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SOLUTION (20 min.) Lean accounting. 1. The cost object in lean accounting is the value stream, not the individual product. SSD has identified two distinct value streams: Mechanical Devices and Electronic Devices. All direct costs are traced to the value streams. However, not all plant-level overhead costs are allocated to the value streams when computing operating income. Value streams are only charged for the percentage of space they actually use; only 90% of the $500,000 plant facility costs are charged to the two value streams. The remaining 10%, or $50,000, is not used to compute value stream profits, and neither are other corporate-level overhead costs. In addition, SSD’s lean accounting system accounts for direct materials as expenses in the period the materials are purchased. 2.

Operating income under lean accounting are the following (in thousands of dollars):

Sales ($1,800 + $1,300; $2,150 + $1,200) Costs Direct materials purchased ($450 + $250; $550 + $200) Direct manufacturing labor ($400 + $200; $500 + $150) Equipment lease, supervision, prod. control ($200 + $270; $420 + $220) Design and marketing costs ($200 + $100; $220 + $90) Plant facility costs ($500,000 × 44%; $500,000 × 46%) Total value-stream costs Value stream operating income

Mechanical Devices $3,100

Electronic Devices $3,350

700

750

600

650

470

640

300

310

220 2,290 $ 810

230 2,580 $ 770

I would compare the operating income under lean accounting with computation. Mechanical Devices Sales ($1,800 + $1,300; $2,150 + $1,200) $3,100 Costs Direct materials purchased ($450 + $250; $550 + $200) 700 Direct manufacturing labor ($400 + $200; $500 + $150) 600 Equipment lease, supervision, prod. control ($200 + $270; $420 + $220) 470 Design and marketing costs ($200 + $100; $220 + $90) 300

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the following income Electronic Devices $3,350

750 650 640 310

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Plant level facility costs ($140 + $100; $180 + $80) Total plant-level costs Plant-level operating income

240 2,310 $ 790

260 2,610 $ 740

For Mechanical Devices, the total plant-level costs are $2,310,000, while the total value stream costs are $2,290,000 (99.13% of $2,310,000). For Electronic Devices, the total plant-level costs are $2,610,000, while the total value stream costs are $2,580,000 (98.85% of $2,610,000). The difference between the total value-stream costs and the total plant-level costs is very small, indicating that the main opportunity for improving efficiency to reduce costs and improve profitability is reducing unused plant-level facility costs. The value-stream operating income as a percentage of revenues for Mechanical Devices is 26.1% ($810,000 ÷ $3,100,000) and for Electronic Devices is 23% ($770,000 ÷ $3,350,000). Mechanical Devices has higher value stream operating income as a percentage of revenue than Electronic Devices, but both value streams can improve profitability by being more efficient in their purchases of direct materials. Mechanical Devices purchases $50,000 ($700,000 − $650,000) more direct materials than it uses while Electronic Devices purchases $50,000 ($750,000 − $700,000) more. If Mechanical Devices had purchased $50,000 less direct materials, its value-stream operating income would be $860,000 ($810,000 + $50,000) and its profitability percentage would be 27.7% ($860,000 ÷ $3,100,000). If Electronic Devices had purchased $50,000 less direct materials, its value-stream operating income would be $820,000 ($770,000 + $50,000) and its profitability percentage would be 24.5% ($820,000 ÷ $3,350,000). Given that Electronic Devices is less profitable than Mechanical Devices, it is more urgent for Mechanical Devices to make efficiency improvements. Value-stream operating income analyses ignore allocated corporate overhead costs because these costs cannot be controlled or influenced by plant-level managers. The following factors explain the differences between traditional operating income and lean accounting income for the two value streams (in thousands of dollars): Mechanical Devices Traditional operating income ($410 + $340; $250 + $440) Additional cost of direct materials purchased over direct materials used ($700 − $400 – $250; $750 − $500 – $200) Decrease in allocated plant-level overhead ($140 + $100 – $220; $180 + $80 – $230) Add back allocated corporate overhead costs ($50 + $40; $80 + $20) Value stream operating income

Electronic Devices

$750

$690

(50)

(50)

20 90 $810

30 100 $770

20-41 JIT production, relevant benefits, relevant costs, ethics. Perez Container Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $4,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s

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operations manager, Jim Ingram, is opposed to the idea of a new JIT system because he is concerned that the new system (a) will be too costly to manage; (b) will result in too many stockouts; and (c) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Sue Winston, is in favor of the new system because of its likely cost savings. Jim wants Sue to rework the numbers because he is concerned that top management will give more weight to financial factors and not give due consideration to nonfinancial factors such as employee morale. In addition to the reduction in inventory described previously, Sue has gathered the following information for the upcoming year regarding the JIT system: 1. Annual insurance and warehousing costs for inventory would be reduced by 60% of current budgeted level of $700,000. 2. Payroll expenses for current inventory management staff would be reduced by 15% of the budgeted total of $1,200,000. 3. Additional annual costs for JIT system implementation and management, including personnel costs, would equal $440,000. 4. The additional number of stockouts under the new JIT system is estimated to be 5% of the total num- ber of shipments annually. Ten thousand shipments are budgeted for the upcoming year. Each stockout would result in an average additional cost of $500. 5. Perez’s required rate of return on inventory investment is 10% per year. Required 1. From a financial perspective, should Perez adopt the new JIT system? 2. Should Sue Winston rework the numbers? 3. How should she manage Jim Ingram’s concerns? SOLUTION (20 min.) JIT production, relevant benefits, relevant costs, ethics. 1. Solution Exhibit 20-36 presents the annual net benefit of $210,000 to Perez Container Corporation of implementing a JIT production system. 1. As part of the IMA’s Standards of Ethical Professional Practice, Sue Winston, the company controller, has an obligation under the competence standard to “provide decision support information and recommendations that are accurate, clear, concise and timely.” Therefore, Sue must provide the cost benefit analysis to Perez’s senior management in a timely fashion, even if it could result in layoffs for some employees. The credibility standard also requires Sue to disclose any relevant information that could be expected to influence an intended user’s decision. This would indicate that Sue has an ethical obligation to disclose the potential cost/benefits of the new JIT system to management.

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2. It is understandable that Jim Ingram, the company’s operations manager, would be concerned about potential layoffs in his department and the resulting morale issues. However, recommendations could include (1) fully engaging the production staff in the upcoming changes to minimize negative morale issues; (2) retraining existing staff to manage the new JIT production and purchasing system so as to avoid as many potential layoffs, as possible; (3) and relocating existing staff to other production and or administrative positions wherever possible to minimize layoffs. As for Jim’s other concerns, the new system will be costly to implement and maintain and there is a likelihood for additional stock outs, but the financial benefits clearly outweigh the costs. SOLUTION EXHIBIT 20-36 Annual Relevant Costs and Benefits of new JIT Production System for Perez Container Corporation

Relevant Items Annual additional costs for JIT system implementation and management Additional expected stock out costs 10,000  5%  $500 Required return on investment: 10% per year  $4,000,000  75% of average inventory Insuranceand warehousing costs 60% per year  $700,000 Reduction in payroll expense for current inventory management staff 15% per year  $1,200,000 Total net incremental benefits/costs Annual difference in favor of JIT production

Relevant Benefits under JIT Production System

Relevant Costs under JIT Production System $440,000 250,000

$300,000 420,000 180,000 $900,000

--$690,000 $210,000

Try It 20-1 Solution 1. Substituting D = 52,000, P= $250 per order, and C = $6.50 per unit per year in the EOQ formula EOQ 

2 DP C

2 52,000 $250  4, 000, 000 $6.50 2, 000 units 

2. The number of deliveries each period (1 year in this example) is: D 52, 000  26 deliveries EOQ 2, 000 D  Q  Recall the annual relevant total costs (RTC)  P    C   Q  2

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For Q 2, 000 units , 52, 000 $250 2, 000 $6.50  2,000 2 $6,500  $6,500 $13, 000

RTC 

3. Reorder point 

Number of units sold Purchase-order  per time period lead time

Suppose the purchase-order lead time for iPhone covers is 1 week: Economic order quantity

2,000 units

Number of units sold per week

1,000 units per week (52, 000 units 52 weeks)

Purchase-order lead time

1 weeks

Reorder point 1, 000 units per week 1 week 1, 000 units

Try It 20-2 Solution We can calculate the cost of this “prediction” error using a three-step approach. Step 1: Compute the Monetary Outcome from the Best Action That Could Be Taken, Given the Actual Amount of the Cost Input (Cost per Purchase Order). This is the benchmark—that is, the decision the manager would have made if the manager had known the correct ordering cost against which actual performance can be measured. Using D 52, 000 units of UX1 per year , P $250 , and C $6 per unit per year , the best action is to purchase 2,000 units in each order as follows: EOQ 

2 DP C

2 52, 000 $250  4,333,333 $6 2, 081.66 units  2082 units 

Wyndham’s annual relevant total costs when the EOQ = 2082 units are: DP QC  Q 2 52, 000 $250 2, 082 $6   2, 082 2 $6, 244  $6, 246 $12, 490

RTC 

Step 2: Compute the Monetary Outcome from the Best Action Based on the Incorrect Predicted Amount of the Cost Input (Cost per Purchase Order). In this step, Wyndham’s manager calculates the order quantity based on the prediction (that later proves to be wrong) that the ordering cost, P = $160, D = 52,000 units of UX1 per year, and C = $6 per unit per year. 20-41 Downloaded by inazuma eleven go ([email protected])

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EOQ 

2 DP C

2 52, 000 $160  2, 773,333 $6 1, 665.33 units  1665 units 

However, the actual cost of the purchase order is $250. Consequently, the actual annual relevant total costs when D 52, 000 units per year , Q 1, 665 units , P $250 , and C $6 per unit per year are as follows: 52, 000 $250 1, 665 $6  1,665 2 $7,808  $4,995 $12,803

RTC 

Step 3: Compute the Difference Between the Monetary Outcomes from Step 1 and Step 2. Monetary Outcome Step 1

$12,490

Step 2

12,803

Difference

$ (313)

The cost of the prediction error, $313, is 2.5% of the relevant total costs of $12,490. The annual relevant-total-costs curve is somewhat flat over the range of order quantities from 1,665 to 2,498 units. That is, the annual relevant cost is roughly the same even if misestimating the relevant carrying and ordering costs results in an EOQ of 2,082 minus 20% (1,665). The same is true if the EOQ is 2,082 plus 20% (2,498). The square root in the EOQ model diminishes the effect of estimation errors because it results in the effects of the incorrect numbers becoming smaller.

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Try It 20-3 Solution Annual Relevant Costs of Current Purchasing Policy and JIT Purchasing Policy for Bradshaw Corporation Relevant Relevant Costs under Costs under Current JIT Purchasing Purchasing Policy Policy Required return on investment 20% per year  $300,000 of average inventory per year $ 60,000 20% per year  $0 inventory per year $ 0 Annual insurance and property tax costs 7,000 0 Warehouse rent 45,000 (11,250)a Overtime costs No overtime 0 Overtime premium 20,000 Stockout costs No stockouts 0 $3.25b contribution margin per unit 20,000 units 65,000 Total incremental costs $112,000 $73,750 Difference in favor of JIT purchasing $38,250 $(11,250) = Warehouse rental revenues, [(75%  12,000)  $1.25]. Calculation of unit contribution margin Selling price ($5,400,000 ÷ 900,000 units) Variable costs per unit: Variable manufacturing cost per unit ($2,025,000 ÷ 900,000 units) $2.25 Variable marketing and distribution cost per unit ($450,000 ÷ 900,000 units) 0.50 Total variable costs per unit Contribution margin per unit

a

b

$6.00

2.75 $3.25

Note that the incremental costs of $20,000 in overtime premiums to make the additional 15,000 units are less than the contribution margin from losing these sales equal to $48,750 ($3.25  15,000). Bradshaw would rather incur overtime than lose 15,000 units of sales. Try It 20-4 Solution The instructor should point out some typos in some versions of the textbook. Requirement 1b should read “Post the entries in requirement 1a to T-accounts for…” Requirement 2b should read “Post the entries in requirement 2a to T-accounts for…” Requirement 3b should read “Post the entries in requirement 3a to T-accounts for…”

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1a. (a) Record purchases of direct materials (b) Record conversion costs incurred (c) Record cost of good finished units completed

(d) Record cost of finished goods sold

Materials and In-Process Inventory Control Accounts Payable Control Conversion Costs Control Various Accounts (such as Wages Payable Control) Finished Goods Controla Materials and In-Process Inventory Controla Conversion Costs Allocateda Cost of Goods Soldb Finished Goods Control

550,000 550,000 440,000 440,000 945,000 525,000 420,000 900,000 900,000

a

21,000 × ($25 + $20) = $945,000; 21,000 × $25 = $525,000; 21,000 × $20 = $420,000 b 20,000 × ($25 + $20) = $900,000

1b. Materials and In-Process Inventory Control

Direct Materials

(a) 550,000

(c) 525,000

Bal. 25,000

Finished Goods Control (c) 945,000

(d) 900,000

Bal. 45,000

Conversion Costs Allocated (c) 420,000

Conversion Costs Conversion Costs Control (b) 440,000

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Cost of Goods Sold (d) 900,000

lOMoARcPSD|8513263

2a. (a) Record purchases of direct materials (b) Record conversion costs incurred (c) Record cost of good finished units completed (d) Record cost of finished goods sold (e) Record underallocated or overallocated conversion costs a

Inventory Control Accounts Payable Control Conversion Costs Control Various Accounts (such as Wages Payable Control) No entry

550,000

Cost of Goods Solda Inventory Controla Conversion Costs Allocateda Conversion Costs Allocated Cost of Goods Sold Conversion Costs Control

900,000

(a) 550,000

440,000

Cost of Goods Sold (d) 500,000

(d) 900,000

Bal. 50,000

Conversion Costs Allocated (e) 400,000

(d) 400,000

(e) 40,000 940,000

Conversion Costs Conversion Costs Control (b) 440,000

440,000

400,000 40,000

2b.

Direct Materials

440,000

500,000 400,000

20,000 × ($25 + $20) = $900,000; 20,000 × $25 = $500,000; 20,000 × $20 = $400,000

Inventory Control

550,000

(e) 440,000

Cost of goods sold = $900,000 + $40,000 = $940,000

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3a. (a) Record purchases of direct materials (b) Record conversion costs incurred (c) Record cost of good finished units completed

(d) Record cost of finished goods sold (e) Record underallocated or overallocated conversion costs

No Entry Conversion Costs Control Various Accounts (such as Wages Payable Control) Finished Goods Controla Materials and In-Process Inventory Controla Conversion Costs Allocateda Cost of Goods Soldb Finished Goods Controlb Conversion Costs Allocated Cost of Goods Sold Conversion Costs Control

440,000 440,000 945,000 525,000 420,000 900,000 900,000 420,000 20,000 440,000

a

21,000 × ($25 + $20) = $945,000; 21,000 × $25 = $525,000; 21,000 × $20 = $420,000 b 20,000 × ($25 + $20) = $900,000

3b. Finished Goods Control

Cost of Goods Sold

Direct Materials

(c) 945,000

(d) 900,000

(d) 900,000

Bal. 45,000

Conversion Costs Allocated (e) 420,000

(c) 420,000

(e) 20,000 920,000

Conversion Costs Conversion Costs Control (b) 440,000

(e) 440,000

Cost of goods sold = $900,000 + $20,000 = $920,000

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