Making The Connection: Integrative Exercises Part 2 Chapters

Making The Connectionintegrative Exercisespart 2chapters 510beauvil

Analyze Beauville Furniture Corporation's manufacturing processes, cost management, and pricing strategies based on provided data. This includes allocating joint costs, comparing costing methods, calculating overhead rates, analyzing variances, setting transfer prices, and evaluating production and profit center setups. Apply appropriate costing techniques, perform variance analysis, and assess the financial impact of managerial decisions to improve profitability and bidding competitiveness.

Paper For Above instruction

Beauville Furniture Corporation operates within a complex manufacturing environment that involves multiple stages of production, cost accounting, and strategic decision-making. The company’s integrated operations—spanning a sawmill, fabric plant, and furniture assembly—require detailed analysis of their cost systems and managerial policies to identify areas of inefficiency and competitive disadvantage. This paper explores key aspects of cost allocation, variance analysis, and managerial decision-making pertinent to Beauville’s operations, emphasizing the importance of appropriate costing methods and performance evaluation techniques.

One fundamental issue facing Beauville is the allocation of joint costs incurred in the sawmill, where logs are processed into different grades of lumber—firsts and seconds, No. 1 common, No. 2 common, and No. 3 common. The company must allocate $900,000 of joint manufacturing costs across these grades to accurately determine product costs. Two primary methods are suitable: the physical units method and the sales-value-at-split-off method. The physical units method allocates costs based on the volume of output, which is straightforward but ignores variations in product value. Conversely, the sales-value-at-split-off method allocates costs based on the proportion of sales value at the split-off point, better reflecting the economic significance of each grade.

Using the physical units method, the costs are allocated proportionally based on the quantity produced—1,500,000 board feet of firsts and seconds, 3,000,000 of No. 1, 1,875,000 of No. 2, and 1,125,000 of No. 3. This results in each grade bearing a share of the $900,000 based on volume. Alternatively, the sales-value-at-split-off method considers the market prices for each grade. Given the prices: $300,000 per 1,000 board feet for firsts and seconds, and equivalent valuation for others, the costs are allocated proportionally based on their relative sales values, which typically results in higher costs assigned to the more valuable grades.

Deciding which method to use depends on managerial objectives. The sales-value-at-split-off method provides a more accurate reflection of product profitability and is generally preferred for strategic decision-making, especially when product sales margins vary significantly. The physical units method may underestimate the costs of higher-valued grades, leading to distorted product costing and pricing decisions.

The impact on subsequent jobs is significant. Switching from the physical units method to the sales-value-at-split-off method would likely increase the cost assigned to higher-value lumber, potentially raising the costs of jobs using these materials. For example, a large order for sofas utilizing No. 1 common lumber would see an increase in allocated costs, influencing bid prices and profit margins. Essentially, more accurate cost allocation supports better pricing strategies and profitability analysis.

Moving beyond joint costs, the company must analyze overhead applications within its plants. For the fabric plant, the overhead rate is determined based on actual overhead and direct labor hours. The budgeted overhead of $1,200,000 over a practical volume of 120,000 hours results in an overhead rate of $10 per direct labor hour. Actual overhead incurred was $1,150,000, indicating a slight overapplied overhead of $50,000, which should be adjusted during closing entries for accurate cost calculations.

For the fabric plant’s process costing, a weighted average method is suitable for calculating the cost per bolt of Fabric FB70. This method combines beginning inventory costs with current costs, averaging their impact across units produced. Calculations reveal that using standard costs—such as the proposed $325.80 per bolt—ensures consistent cost control and facilitates variance analysis. Variances in materials, labor, and overhead are crucial for managerial evaluation of efficiency, wastage, and cost containment.

In the furniture plant, the complexity of product diversity suggests that departmental overhead rates are preferable over a plantwide rate. Using machine hours for the Cutting Department and direct labor hours for Assembly allows for more precise cost assignment, especially given the observed variability—40 percent for the furniture plant and 90 percent for the fabric plant—indicating the level of product diversity and cost distortion risks. Applying departmental rates reduces cost distortion and enhances the accuracy of bid pricing, which is vital for competitiveness.

Gisela Berling’s analysis of two jobs—Job A500 (large sofa order) and Job B75 (special recliners)—demonstrates how different costing approaches influence bid competitiveness. Calculating costs using both plantwide and departmental overhead rates reveals that departmental rates produce more accurate estimates, reducing the risk of underbidding or overbidding. Given the company’s aggressive pricing policy—cost plus 50 percent—a refinement in overhead allocation directly affects bid profitability and strategic positioning.

Transforming the fabric plant into a profit center entails setting transfer prices that reflect market value—$400 per bolt. With internal demand and external sales possibilities, the maximum transfer price aligns with external market prices, ensuring that profit centers operate with an incentive to optimize profitability. The potential profit from internal transfers, when negotiated at market rates, could increase the fabric plant’s profits by the difference between transfer price and standard cost—supporting decisions that enhance overall company earnings.

In conclusion, Beauville’s operational and financial performance depends heavily on appropriate cost management practices. Accurate joint cost allocation using sales-value-at-split-off enhances cost transparency; departmental overhead rates improve product cost accuracy; and strategic decisions regarding profit center setups and transfer pricing can unlock additional profitability. These insights collectively enable the company to refine its pricing strategies, improve bidding success, and regain competitive advantage in the marketplace. Continuous application of variance analysis and cost control measures further supports sustainable operational excellence, critical for navigating the competitive furniture industry landscape.

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