Question

Decision Making Using Process Cost Data Hall Company produces synthetic materials from a chemical extrusion processes. Management has been concemed that material costs per pound are too high. Hall produces only a single product on four separate extrusion lines. The product is processed over two shifts per day. The following data have been collected for analysis: January Total materials costs $335,050 Total number of pounds produced. 50,400 Cost per pound. $6.65 Materials Costs by Production Line Line 2 $36,000 45.500 $81,500 Line 1 Line 3 $40,300 50.250 Line 4 $36,000 45.500 $81,500 otal $148,300 186.750 $335,050 Shift 1. Shift 2. $36,000 45,500 $81,500 Total. $90,550 Pounds Produced by Production Line Line 2 6,000 6.500 12,500 Assume you have interviewed the following individuals in an attempt to discover the problems causing material costs to be inflated: Juanita Marcos, shift 1 supervisor; Ed Curcek, shift 2 supervisor; and Hal Bundy, plant manager. A summary of their responses are given below. Line 1 6,000 6.500 12,500 Line 3 6,200 Line 4 6,000 6.500 12,500 Total Shift 1 24,200 26,200 50,400 Shift 2 6.700 Total. 12,900 Hal: I just received a directive from headquarters to increase my production rates. I talked to Ed and Juanita about kicking up our production from our old average of 6,000 pounds per shift Juanita did not seem to think that this was a good idea. My bet is that our problems are with Juanita's shift Juanita: I have decided to keep first-shift production on lines 1, 2, and 4 at 6,000 pounds per shift. That's because I remember the last time we had our production rates increased. Our materials consumption shot through the roof. Therefore, I'm running a small experiment on Line 3 before increasing the speeds across the whole shift. I know Ed has increased production on the second shift, but he was just brought in from another plant that has new machinery. I don't expect he's had the historical experience with these older machines that I've had Ed: I've increased production rates on my shift, but it's hard to tell how things are going. I thought the new directive made plenty of sense. Back at my previous plant location, we ran machines at 7,000 pounds per shift without any trouble. These older machines don't seem to be running nearly as well as the machines back at my old place. I guess when we see the numbers at the end of the month we'll have a good feel for it. Required: Did the increase in production rates is having a favorable impact on production costs? Why or why not? Provide specific examples using the data above.

Answer 1

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Material Cost by Production Line 2 Total Line 1 Line 2 Line 3 Line 4 36,000 $148,300 Shift 1 $ $ 40,300 $ 36,000 36,000 $ Shift 2 45,500 $ 50,250 $ 45,500 $ 45,500 186,750 81,500 $ 90,550 81,500 $335,0500 $81,500 Total 7 Pounds Produced by Production Line Total Line 1 Line 2 Line 3 Line 4 Shift 1 6000 6000 6200 6000 24200 Shift 2 1 6500 6500 6700 6500 26200 Total 2 12500 12500 12900 12500 50400 3 4 Material cost per pound produced Total 5 Line 1 Line 2 Line 3 Line 4 6.50 S 6.00 $ Shift 1 6 6.00 6.00 6.13 7.00 $ 7.50 $ 7.00 $ Shift 2 7,00 7.13 6.52 S 7.02 $ 6.52 $ Total 6.52 6.65 20 Material cost per pound production in Shift 1 is $6.13 where as in shift 2 production cost is $7.13. 1 It is evident that shift 2 also can not benefited even after higher consumption of material.Therefore, 2 management should not look into increase in prodution as it will further increase cost 3 et L LO N CO T