Khan 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 is for the sales department to increase sales in the slack periods. Andrea Parley, 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. Quarter
1 2 3 4
Costs
Direct materials $176,000 $242,000 $154,000 $88,000
Direct labor 80,000 110,000 70,000 40,000
Manufacturing
overhead 168,000 140,000 171,500 50,000
Total $424,000 $492,000 $395,500 $178,000
Production in
batches 8 11 7 4
Unit cost
(per batch) $53,000 $44,727 $56,500 $44,500
(A) What Manufacturing cost element is responsible for the flucturating unit costs? Why?
(B) What is your recommended solution to the problem of flucuating unit cost?
(C) Restate the Quarterly Data on the basis of your recommended solution.