Question

Background:

As the senior accountant at Technology on Demand (TOD), which manufactures flip phones, smartphones, notebooks, and smartwatches, you are responsible for assisting with employee related questions.

TOD manufactures mobile technology such as flip phones, smartphones, notebooks, and smartwatches in bulk quantity on the same type of product with no variations. However, Michael Clark, sales department manager, is considering taking special orders in an effort to further advance sales. If this is possible, he would like to begin with the smartphones as a pilot project. The smartphones itself would remain the same; however, the client would have the option of customizing certain features such as technology options and potentially other add on features, which may call for another department within the production department.

Michael has asked you:

• Can you explain if it is possible for production and accounting to manage the smartphone pilot project? What type of costing system would this be called? Explain the process.
• What would the difference in the costing system be, if any, from what it is now?
• What additional documentation would be needed for the custom work?
• Would you have any thoughts or concerns on this type of change in processing?

In consideration of the background, prepare a memo in a Word document to submit to the sales department manager, Michael Clark, with a cc to the controller.

Answer 1

Yes, it is possible for production and accounting to manage the Smartphone pilot project. This pilot project would need job order costing system

There is separate identity of this pilot project which has customised feature in the smart phone. Hence it is unique and not a regular mass production. Hence job order costing system should be applied. The job order should be maintained with a separate job cost sheet with details of customer.

· The material used for pilot project should be separately accounted based on Material requisition slip

· Direct labor hours should be charged based on labor hours spent on the project and record of time sheet should be maintained for the same.

· Overheads incurred should be accounted based on pre-determined rate or any specific overhead incurred for the project should be recorded

The current costing system is Process costing system since there is mass production without customisation of the production according to the customer needs. In Process costing cost is accumulated at process or department level. The cost per unit is calculated at the end of the month.

Additional documentation needed for the custom work

· Material requisition slips

· Time sheets

· Invoices of specific overheads incurred for the project

There is no concern in change in processing for this special order. The job order costing is need for accounting specific projects.

Memo to

Michael Clark

Sales department manager

Cc: To Controller

With reference to your need for accounting for special orders for further advancing the sales, I have attached herewith the detailed notes on how to account for the project .If you need any further clarifications kindly get in touch with me.

Regards