Springsteen Company Manufactures Two Customized Ac

Springsteen Company Manufactures Two Different Customized Acoustic Gui

Springsteen Company manufactures two different customized acoustic guitars: beginner and professional models. The company has support departments (maintenance and power) and production departments (construction and finishing). Support department costs are allocated only to the producing departments. The company uses a job-order normal cost system in the production departments. The production process involves building the guitars in the construction department, then transferring them to the finishing department for attaching the bridge, installing strings, tuning, and inspection. The company estimates an annual capacity of 6,000 guitars: 1,500 professional and 4,500 beginner models. Springsteen is considering implementing standard costing for improved cost control, establishing standards based on task analysis. The standards include material usage, material costs, labor hours, and labor rates for both departments and models. The company has collected historical financial and operational data, including sales, inventories, costs, and actual expenses for July. The questions involve calculating budgets, journal entries, variances, and preparing financial statements using normal and standard costing methods.

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Springsteen Company's operations and cost accounting methods provide a comprehensive case study of applying both normal and standard costing systems in a competitive manufacturing environment. This analysis explores the detailed mechanisms of cost allocation, variance analysis, and financial reporting as they pertain to the production of customized acoustic guitars. An in-depth examination of budget formulation, departmental cost rates, journal entries, and variance management offers valuable insights into effective cost control and managerial decision-making.

Budgeted Manufacturing Overhead and Predetermined Overhead Rates

To calculate the budgeted total manufacturing overhead for each department, we sum the variable and fixed costs based on the estimated activity levels. For the construction department, the variable costs amount to $25,500, and the fixed costs are $10,000, totaling $35,500. The finishing department has variable costs of $26,000, with fixed costs of $15,000, totaling $41,000. Assuming activity levels align with practical capacity, the budgeted overhead rates are computed by dividing these totals by the practical capacity in activity units. For the construction department, with an estimated capacity of 15,000 direct labor hours (3 hours per beginner model and 5 hours per professional model), the predetermined overhead rate is $35,500 / 15,000 hours = approximately $2.37 per hour. For the finishing department, with an estimated capacity of 4,220 hours (2 hours for beginners and 5 hours for professionals), the rate is $41,000 / 4,220 hours ≈ $9.71 per hour.

Journal Entries Using Normal Costing

To record July transactions, journal entries are made to allocate direct materials, direct labor, and overhead. For example, raw materials purchased are debited to materials inventory, and requisitions to production are credited from materials inventory. Wages paid to workers are debited to work-in-process and factory wages payable accounts, with manufacturing overhead applied based on departmental rates. Overhead applied is calculated by multiplying actual labor hours by predetermined rates. Actual overhead costs are recorded separately, and the difference between applied and actual overhead results in over- or underapplied overhead, which is closed through proration to work-in-process, finished goods, and cost of goods sold accounts.

Overapplied or Underapplied Overhead

The difference between total manufacturing overhead applied and actual overhead incurred determines over- or underapplied overhead. For July, the applied overhead is computed by summing the overhead applied in both departments (department hours multiplied by departmental rates) and comparing this with the actual overhead costs. If applied exceeds actual, the excess is overapplied; otherwise, it is underapplied. The proration method allocates the over- or underapplied amount proportionally among inventory, cost of goods sold, and work-in-process, adjusting costs accordingly.

Cost of Goods Manufactured and Cost of Goods Sold

The schedule of cost of goods manufactured begins with direct materials requisitioned, adds direct labor, and applied manufacturing overhead, resulting in total manufacturing costs. Adjustments are made for beginning and ending work-in-process inventories. The cost of goods manufactured is then used to determine the cost of goods sold, which considers inventory valuation methods, such as LIFO, to calculate the cost of units sold during July.

Income Statement for July

The income statement synthesizes sales revenue, cost of goods sold, gross profit, and operating expenses, resulting in net income. Revenue is derived from unit sales multiplied by the unit prices. Cost of goods sold is based on the schedule of cost of goods sold, and operating expenses include selling, administrative, and other expenses. This statement provides insights into profitability under the normal costing system.

Standard Costing Calculations

Implementing standard costing involves establishing standard materials, labor, and overhead costs per unit, based on efficiency and rate standards. Variances are computed by comparing actual costs to these standards. Material variances include price and usage variances; labor variances include rate and efficiency variances; overhead variances include variable and fixed overhead rate variances. The calculation of standard costs for each model helps in performance evaluation and cost control. Standard rates for variable and fixed manufacturing overhead are derived from budgeted total costs divided by budgeted activity levels.

Journal Entries Using Standard Costing

Journal entries under standard costing recognize standard costs for materials, labor, and overhead applied to work-in-process. Variances are recorded in separate accounts. Variance closing entries allocate the total variances to inventory and cost of goods sold based on the proration method, to reflect actual costs and maintain accurate inventory valuation.

Variance Analysis and Cost Control

Variance analysis involves identifying significant deviations from standards, analyzing reasons, and implementing corrective actions. Favorable variances indicate efficiencies or cost savings, while unfavorable variances suggest inefficiencies or increased costs. Effective variance management helps managers make informed decisions to improve operational efficiency and profitability.

Conclusion

The detailed analysis of Springsteen Company's manufacturing processes demonstrates the critical role of cost accounting in controlling and managing manufacturing costs. Both normal and standard costing systems offer valuable tools for budgeting, planning, and performance evaluation. Proper application of these systems enhances managerial decision-making, cost control, and competitive positioning in a challenging marketplace.

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