Question

Bouwens Corporation manufactures a solvent used in airplane maintenance shops. Bouwens sells the solvent to both U.S. military services and commercial airlines. The solvent is produced in a single plant in one of two buildings. Although the solvent sold to the military is chemically identical to that sold to the airlines, the company produces solvent for the two customer types in different buildings at the plant. The solvent sold to the military is manufactured in building 155 (B-155) and is labeled M-Solv. The solvent sold to the commercial airlines is manufactured in building 159 (B-159) and is labeled C-Solv.

B-155 is much newer and is considered a model work environment with climate control and other amenities. Workers at Bouwens, who all have roughly equal skills, bid on their job locations (the buildings they will work in) and are assigned based on bids and seniority. As workers gain seniority, they also receive higher pay.

The solvent sold to the two customers is essentially identical, but the military requires Bouwens to use a base chemical with a brand name, MX. The solvent for the commercial airlines is called CX. MX is required for military applications because it is sold by vendors on a preferred vendor list.

The company sells solvent for the market price to the airlines. Solvent sold to the military is sold based on cost plus a fixed fee. That is, the government pays Bouwens for the recorded cost of the solvent plus a fixed amount of profit. The cost can be computed according to "commonly used product cost methods, including job costing or process costing methods using either FIFO or weighted-average methods." Competition for the government business is very strong and Bouwens is always looking for ways to reduce the cost and the price it quotes the government.

Currently, Bouwens uses a job costing system in which each month’s production for each customer type is considered a "job." Thus, every month, Bouwens starts and completes one job in B-155 and one job in B-159. (There is never any beginning or ending work in process at Bouwens.) Recently, a dispute arose between Jack, the product manager for the military solvent, and Jill, the product manager for the commercial solvent, over the proper costing system.

Jack: It is ridiculous to use job costing for this. We are producing solvent. Everyone knows that the chemicals are the same. The fact the B-155 has high-cost labor is because all the senior employees want to work there. We could produce the same product with the employees in B-159. We should be using process costing and consider all the production, in both buildings for each month, as the batch.

Jill: Jack, the fact is that the military requires us to use a special chemical and their contracts require we keep track of the costs for their business. If we don’t separate the costing, we won’t know how profitable either business is.

The following is production and cost information for a typical month, July.

	M-Solv (B-155)			C-Solv (B-159)			Total
Units started		2,000			11,600			13,600
Materials cost	$	22,000		$	26,000		$	48,000
Conversion cost		32,000			105,000			137,000
Total	$	54,000		$	131,000		$	185,000

Required:

a. Compute the unit costs of M-Solv and C-Solv for July using the current system (job costing) at Bouwens.

b. Compute the cost of M-Solv and C-Solv for July if Bouwens were to treat all production as the same (combining B-155 and B-159 production).

c. Recommend a costing method that best reflects the cost of producing M-Solv and C-Solv.

d. For your recommended costing system, compute the cost of both M-Solv and C-Solv for July.
1. Compute the unit costs for materials and conversion costs separately.
2. Then compute conversion costs for the factory.
3. Now, compute the unit product cost.

Answer 1

a) Using the current system (job costing): M-Solv C-Solv (B-155) (B-159) Total product cost $54,000 $131,000 Units started 2,000 11,600 Unit product cost $27.00 $11.29 [M-Solv (B-155) = $54000 / 2000 = $27; C-Solv (B-159) = $131000 / 11600 = $11.29] b) Firm's total product cost (combined) Total units started (combined) Unit product cost (combined) $185,000 13,600 $13.60 ($185000 / 13600 = $13.6] Recommended costing method that best reflects the cost of producing M-Solv and C-Solv: Current system (Job costing) Reason: It considers both total cost as well as number of units produced for each job separately which is rational.

d1) M-Solv C-Solv (B-155) (B-159) Materials cost $22,000 $26,000 Units started 2,000 11,600 Unit material cost $11.00 $2.24 [M-Solv (B-155) = $22000 / 2000 = $11; C-Solv (B-159) = $26000 / 11600 = $2.240] Conversion cost $32,000 $105,000 Units started 2,000 11,600 Unit conversion cost $16.00 $9.05 [M-Solv (B-155) = $32000 / 2000 = $16; C-Solv (B-159) = $105000 / 11600 = $9.05] d2) Total conversion cost (combined) Total units started (combined) Unit conversion cost for factory $137,000 ($32000 + $105000] 13,600 [2000 + 11600] $10.07 ($137000 / 13600 = $10.07] d3) M-Solv (B-155) Unit material cost $11.00 (+) Unit conversion cost $16.00 Unit product cost $27.00 (For the recommended job costing system) C-Solv (B-159) $2.24 [Ref: Part-d1] $9.05 [Ref: Part-d1] $11.29