Part A: Process Costing and Spoilage
PerfectGrind is a New Zealand based company that manufactures iconic designed
pepper mills that are stocked by specialist kitchenware outlets. A pepper mill is an
essential tool in most kitchens to kick up the flavour factor. However, key to a
good pepper mill is a strong and stable grinding mechanism. Hence, PerfectGrind
manufactures its grinding mechanism with tough hardened steel.
The production process starts with steel sheets going through a machine that cuts
the steel into two predefined sized rings: the outer rings (large) and the inner rings
(small). The cuts are designed to maximize usage of each sheet and the residuals
are returned to the steel sheet manufacturer to be recycled. At the end of each
production run, $200 worth of scrap is returned to the manufacturer.
The rings are sorted according to size and transferred to the automated chiselling
tool. Here teeth are carved into the outer rings making a row of large ones to
crack the peppercorns and a row of small ones for the finer grinding. The inner
ring is the moving part of the mechanism. This is stamped with trademark
information before a tool edges teeth into it as well. They are designed to grind
freely against the outer ring without locking together.
Thick steel wire now uncoils and travels between rollers for straightening. There
is a quick rotating action as the rotating cutter slices it into smaller pieces. Each
one will become a drive shaft for a pepper mill. A tool slims and trims one end of
the shaft so that it will fit into the inner grinding part. Rolling cutters carve
threads into the other end for attaching it to the end of a manual mill. Robots
install the inner grinding part on the driving shaft. Next, pre-cut pieces of wood
are sculpted into the iconic shape recognized by pepper mill fans everywhere.
It is now time to assemble the outer ring, shaft and inner grinding device which
they press fit to the wooden pepper mill body. The mill is surrounded with a metal
ring and braced with a steel bracket.
Once assembled robotic arms grind the mechanisms for a number of times to
confirm this production run can handle the daily grind. Due to the nature of
production, 10% of the units are spoiled regardless of efficient running of the
production process. The company donates the spoiled units to a charity
organization who pull the pieces apart and recycle them or sell the scrap.
Each production run produces 1,000 pepper mills and incurs the following
Materials cost per run
Steel Sheets $ 2,800.00
Steel Coil $ 1,400.00
Pieces of wood $ 850.00
Metal ring $ 30.00
Steel bracket $ 20.00
Materials for each stage of production are added at the start of the relevant stage.
Conversion costs are added evenly during the production run and the table below
shows the % of conversion costs believed to have incurred at the end of each
stage of the production process
% of Conversion costs incurred at the end of process
Production of outer and inner rings 40%
Production of drive shafts 65%
Wood sculpting 85%
In April 2017, the company started 7 production runs and finished one run that
was 90% complete on 1st April. At the end of the month, 1 production run was
only 65% complete while 6,200 good units were completed and transferred out.
Conversion costs for the opening work in process was $2,900 while the
conversion costs for the production started in April equalled $23,200. An analysis
of the direct materials indicated there were no variances i.e. the costs were in line
with the expected material costs per run.
a) Draw a simple flow chart of the production process showing the activities
involved and the flow of costs.
b) Prepare a process cost report for the month of April using the weighted
(Hint: Your calculations should indicate how normal spoilage is treated in
a process cost system as well as the physical flow of units and the
equivalent unit calculations. You are also required to show the assignment
of costs to abnormal spoilage and ending work in process.).
c) Calculate the cost of good units completed and transferred out?
d) PerfectGrind has been struggling to make ends meet in the last few
months and the managers have been asked to come up with suggestions to
reduce costs. The production manager thinks they need to re-evaluate the
timing of their inspection point as he believes it can have a significant
impact on their resource usage. The production manager has asked for your
help to identify ideal times for inspection during the production process.
You are required to write a formal report, no longer than 2 pages, clearly
stating your recommendation and illustrating the impact of this change
using the above data. Your report should also include a discussion of other
considerations that should be taken into account in relation to the
inspection point decision.
Write a formal report for Jake, no longer than 3 pages long, explaining the ABC
technique. Your report should include the following:
a) The benefits of implementing ABC at I-Support
b) An explanation of cost hierarchies (Identify the level of activities for the costs
c) An explanation of the cost-allocation bases that would be most appropriate
for allocating indirect costs to the programmes at I-Support together with the
calculation for the indirect cost rates.
d) Detailed calculation of the budgeted cost for each programme and the cost of
each programme per patient.
e) An explanation of the factors other than cost that I-support should consider in
allocating resources to its programmes?