Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 35

Operation Costing: Ethical Issues

Brokia Electronics manufactures three cell phone models, which differ only in the components included: Basic, Photo, and UrLife. Production takes place in two departments, Assembly and Special Packaging. The Basic and Photo models are complete after Assembly. The UrLife model goes from Assembly to Special Packaging and is completed there. Data for July are shown in the following table. Conversion costs are allocated based on the number of units produced. There are no work-in-process inventories.

	Total	Basic (40,000 units)	Photo (30,000 units)	UrLife (10,000 units)
Materials	$2,240,000	$480,000	$1,200,000	$560,000
Conversion costs:
Assembly	$1,400,000
Special Packaging	400,000
Total conversion costs	$1,800,000

a.What is the cost per unit transferred to finished goods inventory for each of the three phones in July?

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b.The UrLife model is sold only to the government on a cost-plus basis. The marketing vice president suggests that conversion costs in Assembly could be allocated on the basis of material costs so he can offer a lower price for the Basic model.

1. What cost would be reported for the three models if the marketing vice president’s suggestion is adopted?

2. Would this be ethical?

Step 1 of 3

a.

Material costs are incurred individually on each model of phone. The conversion costs consist of Assembly Department costs and Special Packaging department costs. Assembly department costs are allocated on the basis of total units of three models of phones manufactured. Special packaging is only done for U model of phone and hence, the entire department cost is allocated to Ur life model of phone.

Statement showing cost per unit for the three phones:

Particulars	B	P	U	Total
Materials (M)	480,000	1,200,000	560,000	2,240,000
Conversion Costs
Assembly Department (Working Note 1)	700,000	525,000	175,000	1,400,000
Special Packaging	0	0	400,000	400,000
Total Conversion Costs (C)	700,000	525,000	575,000	1,800,000
Total Costs (T) = (M) + (C)	1,180,000	1,725,000	1,135,000	4,040,000
Number of units (N)	40,000	30,000	10,000	80,000
Cost per unit (U) = (T)/(N)	29.5	57.5	113.5

Working Note 1

Allocation of Assembly Department costs to three models:

Particulars	B	P	U	Total
Total costs by Assembly Department (a)				1,400,000
Number of units	40,000	30,000	10,000	80,000
Ratio (b)	4/8	3/8	1/8
Allocation of costs to departments (a) × (b)	700,000	525,000	175,000	1,400,000