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Beauville Furniture Corporation produces sofas, recliners, and lounge chairs. Beauville is located in a medium$-$sized community in the southeastern part of the United States. It is a major employer in the community. In fact, the economic well$-$being of the community is tied very strongly to Beauville. Beauville operates a sawmill, a fabric plant, and a furniture plant in the same community.

The sawmill buys logs from independent producers. The sawmill then processes the logs into four grades of lumber: firsts and seconds, No$.1$ common, No$.2$ common, and No$.3$ common. All costs incurred in the mill are common to the four grades of lumber. All four grades of lumber are used by the furniture plant. The mill transfers everything it produces to the furniture plant, and the grades are transferred at cost$.$ Trucks are used to move the lumber from the mill to the furniture plant. Although no outside sales exist, the mill could sell to external customers, and the selling prices of the four grades are known.

The fabric plant is responsible for producing the fabric that is used by the furniture plant. To produce three totally different fabrics $($identified by fabric ID codes FB$60,$ FB$70,$ and FB$80,$ respectively$),$ the plant has three separate production operations$$one for each fabric. Thus, production of all three fabrics occurs at the same time in different locations in the plant. Each fabric's production operation has two processes: the weaving and pattern process and the coloring and bolting process. In the weaving and pattern process, yarn is used to create yards of fabric with different designs. In the next process, the fabric is dyed, cut into $25-$yard sections, and wrapped around cardboard rods to form $25-$yard bolts. The bolts are transported by forklift to the furniture plant's Receiving Department. All of the output of the fabric plant is used by the furniture plant $($to produce the sofas and chairs$).$ For accounting purposes, the fabric is transferred at cost to the furniture plant.

The furniture plant produces orders for customers on a special$-$order basis. The customers specify the quantity, style, fabric, lumber grade, and pattern. Typically, jobs are large $($involving at least $500$ units$).$ The plant has two production departments: Cutting and Assembly. In the Cutting Department, the fabric and wooden frame components are sized and cut. Other components are purchased from external suppliers and are removed from stores as needed for assembly. After the fabric and wooden components are finished for the entire job, they are moved to the Assembly Department. The Assembly Department takes the individual components and assembles the sofas $($or chairs$).$

Beauville Furniture has been in business for over two decades and has a good reputation. However, during the past five years, Beauville experienced eroding profits and declining sales. Bids were increasingly lost $($even aggressive bids$)$ on the more popular models. Yet, the company was winning bids on some of the more$-$difficult$-$to$-$produce items. Lance Hays, the owner and manager, was frustrated. He simply couldn't understand how some of his competitors could sell for such low prices. On a common sofa job involving $500$ units, Beauville's bids were running $$25$ per unit, or $$12,500$ per job more than the winning bids $($on average$).$ Yet, on the more difficult items, Beauville's bids were running about $$60$ per unit less than the next closest bid. Gisela Berling, vice president of finance, was assigned the task of preparing a cost analysis of the company's product lines. Lance wanted to know if the company's costs were excessive. Perhaps the company was being wasteful, and it was simply costing more to produce furniture than it was costing its competitors.

Gisela prepared herself by reading recent literature on cost management and product costing and attending several conferences that explored the same issues. She then reviewed the costing procedures of the company's mill and two plants and did a preliminary assessment of their soundness. The production costs of the mill were common to all lumber grades and were assigned using the physical units method. Since the output and production costs were fairly uniform throughout the year, the mill used an actual costing system. Although Gisela had no difficulty with actual costing, she decided to explore the effects of using the sales$-$value$-$at$-$split$-$off method. Thus, cost and production data for the mill were gathered so that an analysis could be conducted. The two plants used normal costing systems. The fabric plant used process costing, and the furniture plant used job$-$order costing. Both plants used plantwide overhead rates based on direct labor hours. Based on her initial reviews, she concluded that the costing procedures for the fabric plant were satisfactory. Essentially, there was no evidence of product diversity. A statistical analysis revealed that about $90$ percent of the variability in the plant

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