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Godiva Chocolate company (Godiva) was founded in 1919, in Brussels, Belgium, and produces fine chocolates.Godiva's mixing department produces the bulk chocolate, some of which is sold to other high-end chocolatiers, and some of which is passed on to Godiva's finishing department, which produces the retail chocolates sold in Godiva's store and online.

At the start of August, Godiva has no inventory anywhere in its factory because the factory was shut down for two weeks in late July and early August for maintenance.

Mixing Department: During August, 500 kilograms of chocolate was started in the mixing department, 375 kilograms of which were completed and transferred out of the mixing department.Two hundred twenty-five of the completed kilograms were sold to other chocolatiers (as bulk chocolate), and the other 150 completed kilograms were transferred into the finishing department.The ending work-in-process in the mixing department is 60% complete, on average.

Finishing Department: Each kilogram of bulk chocolate transferred in from the mixing department can be turned into ten boxes of retail chocolate. During August, 1400 boxes were completed and sold.No boxes were held in finished goods inventory at the end of the month.The ending work-in-process in the finishing department is 50% complete, on average.

There are two types of costs at Godiva's which are included in Cost of Goods Sold.Note that Godiva's uses normal costing to assign costs to the two departments, but then allocates costs within each department based on actual unit volume using actual costing.

Raw Materials: All raw materials are added to the mixing department, there are no raw materials in the finishing department.

Conversion Costs: Conversion costs are indirect to the two departments.Godiva allocates these costs to the two departments using a pre-determined (normal) overhead rate based on machine hours.Any over- or under-applied overhead is charged directly to cost of goods sold at the end of each month.

Raw materials are allocated at the start of the mixing process, while conversion costs are added continuously during the production process in each department.Information for the month of August is as follows:

Budgeted Actual

Raw Materials - mixing department $12,000 $14,000

Conversion Costs $60,000 $72,000

Machine hours - mixing department 100 hours. 123 hours

Machine hours - finishing department. 300 hours. 377 hours

1. How much conversion cost is allocated to the mixing department for the month? (10 points)

2.What is the per kilogram cost of goods sold for the bulk chocolate sold to independent chocolatiers by the mixing department?(10 points)

3.What is the per box cost for the retail chocolates remaining in the finishing department's inventory at August 31?(15 points)

4. What number will appear in cost of goods sold on the August income statement?(15 points)

Godiva's finishing department actually consists of two processes.First, highly trained craftsmen decorate the chocolates with designs and colors.Afterwards, the chocolates are dried and hardened (this second process is almost entirely automated, and is exactly the same for each chocolate).Decorating and drying occur only in the finishing department, and not in the mixing department.Assume that the costs and volumes of the decorating and drying parts of the finishing department are fairly constant from month to month.

The owner's nephew, just back from getting an American MBA, has suggested breaking the finishing department into two departments (decorating and drying), for purposes of cost accounting.

5. Assume that the cost of the decoration varies significantly among the different types of chocolates that Mary sells.Under this assumption, what effect (if any) does the current cost system have on each of the following?For each, circle one of the three choices (10 points)

Total cost of goods sold Understate No distortion Overstate

Total cost of bulk chocolates Understate No distortion Overstate

Total cost of retail chocolates Understate No distortion Overstate

Cost of retail chocolates which Understate No distortion Overstate

require a lot of decoration

Cost of retail chocolates which Understate No distortion Overstate

require little decoration

No distortion means the cost per unit from the existing cost system is approximately correct.

Understate (Overstate) means the cost per unit from the existing cost system is LOWER (HIGHER) than the actual cost per unit.

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