20-1
SOLUTION EXHIBIT 20-21
Annual Relevant Costs of Current Production System and JIT Production System
for Colonial Hardware Company
Relevant Items
Relevant
Costs under
Current
Production
System
Relevant
Costs under
JIT
Production
System
Annual tooling costs
–
$200,000
Required return on investment:
15% per year $2,000,000 of average inventory per year
$ 300,000
15% per year $400,000a of average inventory per year
60,000
Insurance, space, materials handling, and setup costs
600,000
450,000b
Rework costs
400,000
280,000c
Incremental revenues from higher selling prices
(320,000)d
Total net incremental costs
$1,300,000
$670,000
Annual difference in favor of JIT production $630,000
a $2,000,000 (1 – 80%) = $400,000
b$600,000 (1 – 0.25) = $450,000
c$400,000 (1 – 0.30) = $280,000
d$8 × 40,000 units = $320,000
20-22 (30 min.) 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:
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
20-2
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
1.
(a) Record purchases of
direct materials
Materials and In-Process Inventory Control
Accounts Payable Control
2,958,000
2,958,000
(b) Record conversion costs
incurred
Conversion Costs Control
Various Accounts (such as
777,600
Wages Payable Control)
777,600
(c) Record cost of good
finished units completed
Finished Goods Controla
Materials and In-Process
3,744,000
Inventory Controla
2,937,600
Conversion Costs Allocateda
806,400
(d) Record cost of finished
goods sold
Cost of Goods Soldb
Finished Goods Control
3,692,000
3,692,000
a28,800 × ($102 + $28) = $3,744,000; 28,800 × $102 = $2,937,600; 28,800 × $28 = $806,400
b28,400 × ($102 + $28) = $3,692,000
20-3
2.
Materials and In-Process
Inventory Control
Finished Goods Control
Cost of Goods Sold
Direct
Materials
(a) 2,958,000
(c) 2,937,600
(c) 3,744,000
(d) 3,692,000
(d) 3,692,000
Bal. 20,400
Bal. 52,000
Conversion Costs Allocated
(c) 806,400
Conversion
Costs
Conversion Costs Control
(b) 777,600
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.
20-4
20-23 (20 min.) Backflush costing, two trigger points, materials purchase and sale
(continuation of 20-22).
Assume the same facts as in Exercise 20-22, 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 conversion costs.
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
1.
(a) Record purchases of direct
materials
Inventory Control
Accounts Payable Control
2,958,000
2,958,000
(b) Record conversion costs
incurred
Conversion Costs Control
Various Accounts (such as
777,600
Wages Payable Control)
777,600
(c) Record cost of good
finished units completed
No entry
(d) Record cost of finished
goods sold
Cost of Goods Solda
Inventory Controla
3,692,000
2,896,800
Conversion Costs Allocateda
795,200
(e) Record underallocated or over-
allocated conversion costs
Conversion Costs Allocated
Costs of Goods Sold
795,200
17,600
Conversion Costs Control
777,600
a28,400 × ($102 + $28) = $3,692,000; 28,400 × $102 = $2,896,800; 28,400 × $28 = $795,200
20-5
2.
Inventory Control
Cost of Goods Sold
Direct
Materials
(a) 2,958,000
(d) 2,896,800
(d) 3,692,000
(e) 17,600
Bal. 61,200
Conversion Costs Allocated
(e) 795,200
(d) 795,200
Conversion
Costs
Conversion Costs Control
(b) 777,600
(e) 777,600
Cost of goods sold = $3,692,000 – $17,600 = $3,674,400.
20-6
20-24 (20 min.) Backflush costing, two trigger points, completion of production and
sale (continuation of 20-22).
Assume the same facts as in Exercise 20-22, except now Grand Devices uses only two trigger
points, Completion of good finished units of product and 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 conversion 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
1.
(a) Record purchases of direct
materials
No Entry
(b) Record conversion costs
incurred
Conversion Costs Control
Various Accounts (such as
777,600
Wages Payable Control)
777,600
(c) Record cost of good finished
units completed
Finished Goods Controla
Accounts Payable Controla
3,744,000
2,937,600
Conversion Costs Allocateda
806,400
(d) Record cost of finished
goods sold
Cost of Goods Soldb
Finished Goods Control
3,692,000
3,692,000
(e) Record underallocated or over-
allocated conversion costs
Conversion Costs Allocated
Costs of Goods Sold
806,400
28,800
Conversion Costs Control
777,600
a28,800 × ($102 + $28) = $3,744,000; 28,800 × $102 = $2,937,600; 28,800 × $28 = $806,400
b28,400 × ($102 + $28) = $3,692,000
20-7
2.
Finished Goods Control
Cost of Goods Sold
Direct
Materials
(c) 3,744,000
(d) 3,692,000
(d) 3,692,000
(e) 28,800
Bal. 52,000
Conversion Costs Allocated
(e) 806,400
(c) 806,400
Conversion
Costs
Conversion Costs Control
(b) 777,600
(e) 777,600
Cost of goods sold = $3,692,000 – $28,600 = $3,663,400.
20-8
20-25 (30 min.) EOQ, uncertainty, safety stock, reorder point.
Chadwick Shoe Co. produces and sells an excellent-quality walking shoe. After production, the
shoes are distributed to 20 warehouses around the country. Each warehouse services approximately
100 stores in its region. Chadwick uses an EOQ model to determine the number of pairs of shoes
to order for each warehouse from the factory. Annual demand for Warehouse OR2 is
approximately 120,000 pairs of shoes. The ordering cost is $250 per order. The annual carrying
cost of a pair of shoes is $2.40 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 OR2 reorder shoes?
3. Although OR2’s average weekly demand is 2,500 pairs of shoes (120,000 ÷ 12 months ÷ 4
weeks), demand each week may vary with the following probability distribution:
If a store wants shoes and OR2 has none in stock, OR2 can “rush” them to the store at an additional
cost of $2 per pair. How much safety stock should Warehouse OR2 hold? How will this affect the
reorder point and reorder quantity?
SOLUTION
1.
2 DP 2 120,000 $250
EOQ C $2.40
==
= 5,000 pairs of shoes
2. Weekly demand = Monthly demand ÷ 4
= 10,000 ÷ 4 = 2,500 pairs of shoes per week
Purchasing lead time = 1 week
Reorder point = 2,500 pairs of shoes per week × 1 week = 2,500 pairs of shoes
3. Solution Exhibit 20-25 presents the safety stock computations for Warehouse OR2 when
the reorder point excluding safety stock is 2,500 pairs of shoes. The exhibit shows that annual
relevant total stockout and carrying costs are the lowest ($1,080) when a safety stock of 250 pairs
of shoes is maintained. Therefore, Warehouse OR2 should hold a safety stock of 250 pairs. As a
result, Reorder point with safety stock = 2,500 pairs + 250 pairs = 2,750 pairs. Reorder quantity is
unaffected by the holding of safety stock and remains the same as calculated in requirement 1.
Reorder quantity = 5,000 pairs
Warehouse OR2 should order 5,000 pairs of shoes each time its inventory of shoes falls to 2,750
pairs.
20-9
SOLUTION EXHIBIT 20-25
Computation of Safety Stock for Warehouse OR2 When Reorder Point is 2,500 Units
Safety
Stock
Level
in Units
(1)
Demand
Levels
Resulting
in
Stockouts
(2)
Stockout
in Unitsa
(3) =
(2) – 2,500 –
(1)
Probability
of
Stockouts
(4)
Relevant
Stockout
Costsb
(5) =
(3) × $2
Number
of
Orders
per Yearc
(6)
Expected
Stockout
Costsd
(7) =
(4) × (5) ×
(6)
Relevant
Carrying
Costse
(8) =
(1) × $2.40
Relevant
Total
Costs
(9) =
(7) + (8)
0
2,750
250
0.20
$ 500
24
$2,400
3,000
500
0.04
1,000
24
960
$3,360
$ 0
$3,360
250
3,000
250
0.04
500
24
$ 480
$ 600
$1,080
500
—
—
—
—
—
$ 0f
$1,200
$1,200
aDemand level resulting in stockouts – Inventory available during lead time (excluding safety stock), 2,500 units –
Safety stock.
bStockout in units × Relevant stockout costs of $2.00 per unit.
cAnnual demand, 120,000 ÷ 5,000 EOQ = 24 orders per year.
dProbability of stockout × Relevant stockout costs × Number of orders per year.
eSafety stock × Annual relevant carrying costs of $2.40 per unit (assumes that safety stock is on hand at all times and
that there is no overstocking caused by decreases in expected usage).
fAt a safety stock level of 500 units, no stockout will occur and, hence, expected stockout costs = $0.
20-10
20-26 (30 min.) EOQ, uncertainty, safety stock, reorder point.
Stewart Corporation is a major automobile manufacturer. It purchases steering wheels from Coase
Corporation. Annual demand is 10,400 steering wheels per year or 200 steering wheels per week.
The ordering cost is $100 per order. The annual carrying cost is $13 per steering wheel. It currently
takes 1.5 weeks to supply an order to the assembly plant.
Required:
1. What is the optimal number of steering wheels that Stewart’s managers should order according
to the EOQ model?
2. At what point should managers reorder the steering wheels, assuming that both demand and
purchase-order lead time are known with certainty?
3. Now assume that demand can vary during the 1.5-week purchase-order lead time. The
following table shows the probability distribution of various demand levels:
If Stewart runs out of stock, it would have to rush order the steering wheels at an additional
cost of $9 per steering wheel. How much safety stock should the assembly plant hold? How
will this affect the reorder point and reorder quantity.