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Du Page Products Company: What manufacturing cost element is responsible for the fluctuating unit costs? Why? What is your recommended solution to the problem of fluctuating unit costs?
BYP2.1 Du Page Products Company uses a job order cost system. For a number of months
there has been an ongoing rift between the sales department and the production
department concerning a special.order product, TC.1. TC.1 is a seasonal product
that is manufactured in batches of 1,000 units. TC.1 is sold at cost plus a markup
of 40% of cost.
The sales department is unhappy because fluctuating unit production costs
significantly affect selling prices. Sales personnel complain that this has caused
excessive customer complaints and the loss of considerable orders for TC.1.
The production department maintains that each job order must be fully costed on
the basis of the costs incurred during the period in which the goods are produced.
Production personnel maintain that the only real solution to the problem is for the
sales department to increase sales in the slack periods.
Sandra Devona, president of the company, asks you as the company accountant
to collect quarterly data for the past year on TC.1. From the cost accounting system,
you accumulate the following production quantity and cost data.
Costs 1 2 3 4
Direct materials $100,000 $220,000 $80,000 $200,000
Direct labor 60,000 132,000 48,000 120,000
Manufacturing 105,000 123,000 97,000 125,000
Total 265,000 475,000 225,000 445,000 225,000
Production in 5 11 4 10
Unit cost (per $53,000 $43,182 $56,250 $44,500
With the class divided into groups, answer the following questions.
a. What manufacturing cost element is responsible for the fluctuating unit costs?
b. What is your recommended solution to the problem of fluctuating unit costs?
c. Restate the quarterly data on the basis of your recommended solution.
The problem is located in Chapter 2.