Example: Cost Management in Manufacturing
Company 200 sells bicycles with either a standard or custom two-tone paint finish. Depending upon the sales order, it paints adult and youth bicycle frames with either a standard finish or a custom two-tone finish. The company uses a standard cost for its painting. The paint work center calculates an additional 2 percent factor for rework as part of its 30 percent overhead factor. To determine whether the standard cost and rework factor are correctly allocated to each type of frame, the company wants to:
Count the number of bicycle frames painted and reworked.
Calculate the profit for each frame type.
Recalculate the inventory value for each frame type.
Adjust the standard cost for each frame type.
Adjust the overhead factor for the paint work center.
This managerial accounting scenario is designed to analyze the labor and machine costs to:
Paint a standard frame.
Paint a custom two-tone frame.
Rework frames.
Additionally, it calculates the number of bicycle frames that are painted and reworked by type of bicycle frame.
Transactions originate as follows:
Routing types - work orders.
Frame type - inventory.
Standard cost to paint frames - manufacturing.
Actual cost, at standard rate, to paint bicycle frames - cost analyzer.
Occasionally, the painted frame does not meet the inspection criteria, which creates rework to strip and repaint the bicycle frames. Because the company does not know the exact amount of rework, it includes a 2 percent rework factor as part of the 30 percent overhead factor for the work center.
Whenever frames are reworked, the process is assigned a new work order with a different routing type. However, the company does not know how many of its work orders are a result of a product that requires rework. Therefore, they cannot determine the percentage of products that require rework.
The company suspects that both the standard painting cost and the paint center overhead factor may be incorrect. It thinks the rework is due primarily to custom painting. If this assumption is correct, the company needs to:
Reallocate the costs of goods sold.
Reallocate the inventory cost.
Reduce the overhead factor for the paint center.
Increase the extra costs for custom painted frames.
The company wants to analyze the standard and actual costs. It wants to track and calculate the percentage of rework by item and product type for all of the bicycle frames that it paints so that it can calculate the actual rework cost.
As a result of using cost objects to identify product families and work order types, the company could associate these objects to the type of painting that is required for a bicycle frame, as well as determine actual cost, at standard rate, for the paint and rework process.
The following graphic illustrates the manufacturing process. Bold captions identify where cost objects are associated with product families and process steps.
