Bouwens Corporation manufactures a solvent used in airplanemaintenance shops. Bouwens sells the solvent to both U.S. militaryservices and commercial airlines. The solvent is produced in asingle plant in one of two buildings. Although the solvent sold tothe military is chemically identical to that sold to the airlines,the company produces solvent for the two customer types indifferent buildings at the plant. The solvent sold to the militaryis manufactured in building 155 (B-155) and is labeled M-Solv. Thesolvent sold to the commercial airlines is manufactured in building159 (B-159) and is labeled C-Solv.
B-155 is much newer and is considered a model work environmentwith climate control and other amenities. Workers at Bouwens, whoall have roughly equal skills, bid on their job locations (thebuildings they will work in) and are assigned based on bids andseniority. As workers gain seniority, they also receive higherpay.
The solvent sold to the two customers is essentially identical,but the military requires Bouwens to use a base chemical with abrand name, MX. The solvent for the commercial airlines is calledCX. MX is required for military applications because it is sold byvendors 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 fixedfee. That is, the government pays Bouwens for the recorded cost ofthe solvent plus a fixed amount of profit. The cost can be computedaccording to "commonly used product cost methods, including jobcosting or process costing methods using either FIFO orweighted-average methods". Competition for the government businessis very strong and Bouwens is always looking for ways to reduce thecost and the price it quotes the government.
Currently, Bouwens uses a job costing system in which eachmonth’s production for each customer type is considered a "job".Thus, every month, Bouwens starts and completes one job in B-155and one job in B-159. (There is never any beginning or ending workin process at Bouwens.) Recently, a dispute arose between Jack, theproduct manager for the military solvent, and Jill, the productmanager for the commercial solvent, over the proper costingsystem.
1. Jack:
It is ridiculous to use job costing for this. We are producingsolvent. Everyone knows that the chemicals are the same. The factthe B-155 has high-cost labor is because all the senior employeeswant to work there. We could produce the same product with theemployees in B-159. We should be using process costing and considerall the production, in both buildings for each month, as thebatch.
2. Jill:
Jack, the fact is that the military requires us to use a specialchemical and their contracts require we keep track of the costs fortheir business. If we don’t separate the costing, we won’t know howprofitable either business is.
The following is production and cost information for a typicalmonth, July:
| M-Solv (B-155) | C-Solv (B-159) | Total |
| Units started | | 1,800 | | | 11,300 | | | 13,100 | |
| Materials cost | $ | 20,000 | | $ | 40,000 | | $ | 60,000 | |
| Conversion cost | | 34,000 | | | 115,000 | | | 149,000 | |
| Total | $ | 54,000 | | $ | 155,000 | | $ | 209,000 | |
|
Required:
a. Compute the unit costs of M-Solv and C-Solvfor July using the current system (job costing) at Bouwens.(Round "Unit cost" to 2 decimal places.)
b. Compute the cost of M-Solv and C-Solv forJuly if Bouwens were to treat all production as the same (combiningB-155 and B-159 production). (Round "Unit cost" to 2decimal places.)
c. Recommend a costing method that best reflectsthe cost of producing M-Solv and C-Solv.
| Job costing |
| Operations costing |
| Process costing |
d. For your recommended costing system, computethe cost of both M-Solv and C-Solv for July. (Round "Unitcost" to 2 decimal places.)
Compute the unit costs for materials and conversion costsseparately.
Then compute conversion costs for the factory: (Round"Unit cost" to 2 decimal places.)
Now, compute the unit product cost: (Round your answersto 2 decimal places.)
