Craik Veneer Case Study

Topics: Variable cost, Costs, Revenue Pages: 5 (930 words) Published: July 30, 2006
Executive Summary

The full costing method associates fixed manufacturing costs with units of production and the amount of fixed manufacturing cost offset against revenue varies with the relationship between the number of units produced and the number sold. If production temporarily exceeds unit sales, some fixed manufacturing costs are deferred to future periods, and responsibility margin will be higher than would be reported under variable costing. If fewer units are produced during the period than are sold, fixed costs deferred in prior periods are offset against current revenue as inventory is drawn down. Thus, responsibility margin reported for the current period will be lower than would result from variable costing.

Under variable costing, the level of production has no effect on responsibility margin, because all fixed manufacturing costs are offset against revenue as they are incurred, regardless of the level of production.

A manufacturing company typically has departments specializing in purchasing, production, sales, shipping, accounting, finance, and personnel. Production departments and sales departments often are further subdivided along different product lines or geographical areas. Many companies produce multiple products from common raw materials and a shared production process. In such manufacturing processes, two business issues arise. One is how to allocate joint cost among the various types of products manufactured. The second incremental type of decision is whether some types of products should be processed further to create an even more valuable finished good.

Case Context:

Groton Company offered Craik Veneer Company $20 per thousand feet for 1 million feet per month of sound backs in 1/24-inch birch veneer for the next 12 months. The production manager did not want to accept the offer based on the argument that the cost of production per thousand feet is at least $24.44. He arrived at this figure by dividing the joint cost of the birch block in proportion with the number of faces and backs produced. So selling backs at $20 per thousand would not even cover the cost of the material. On the other hand, the sales manager countered the production manager's argument and suggested that the proper procedure was to allocate cost of the block in proportion to the amounts for which the products are sold because the backs are not as valuable as the faces.

Problem Definition:

Should Craik Veneer Company accept Groton Company's offer to of $20 per thousand feet of 1/24 -inch backs?

Framework

Evaluate Groton Company's offer using both the production manager's and the sales manager's methods of allocating costs.

1. Production Manager's Method of Cost Allocation

Weight Method

2. Sales Manager's Method of Cost Allocation.

Sales Value Method

By-Product Costing Method

Analysis

Cost and Other Information

Craik Veneer is able to produce 18,000 surface feet of 1/24-inch veneer per 1,000 board feet cut which produces an average of 50% faces and 50% backs

Labor and factory overhead costs together averaged $24 per thousand surface feet of veneer.

Labor and factory overhead costs through clipping averaged $20.25 per 1,000 surface feet of veneer and those for drying and later operations averaged $3.75

Selling costs averaged $4.

Selling price for 1/24-inch birch faces 84 inches to 98 inches long was $ 88 per thousand surface feet.

Price of backs fluctuated widely. A selling price of $25 per thousand feet led to the accumulation of heavy inventory of backs.

A. If Craik will follow the Production Manager's method of allocating cost and set the selling price of backs at $ 25 per thousand:

Grade 1/24-inch Veneer in Feet Sales Revenue per 1000 feet Total Sales Revenue Joint Cost Per 1000 feet Total Cost of Raw Materials Labor and Overhead Costs Selling Costs Profit

Faces 9,000 $88 $792 $24.44 $219.96 $216 $36 320.04

Backs 9,000 $25 $225 $24.44 $219.96 $216...
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