19 May QuestionAmerican Guitar Company manufactures tw
Question
American Guitar Company manufactures two different high quality acoustic guitars for retailers: beginner model and professional model. The company has two service departments: the maintenance department and the power department, and two manufacturing departments: the construction department and the finishing department. American Guitar chooses the reciprocal method to allocate service department costs. It uses operation costing to assign direct materials and conversion costs to its products, and absorption costing with normal costs for external reporting purposes.
In the Construction Department, the wooden guitars are built by highly skilled craftsmen and coated with several layers of lacquer. Then the units are transferred to the Finishing Department, where the bridge of the guitar is attached and the strings are installed. The guitars also are tuned and inspected in the Finishing Department[1]. American Guitar estimates to have an annual practical capacity of 6000 guitars (1500 units of professional model and 4500 units of beginner model). The budgeted sales for 2013 are 1300 units professional model and 4300 units of beginner model. The diagram below depicts the manufacturing process.
The following historical information has been collected from American Guitar’s accounting information systems:
| 2009 | 2010 | 2011 | 2012 | |
| Annual sales | 4146(B) & 1611(P) | 4456(B) & 1256(P) | 4668(B) & 1322(P) | 4075(B) & 1300(P) |
| July sales | 393(B) & 183(P) | 398(B) & 163(P) | 405(B) & 168(P) | 372(B) & 155(P) |
| 2012 | Total Overhead ($) | Total DLH of the two manufacturing departments[2] |
| January | 134,000 | 2,210 |
| February | 137,000 | 2,280 |
| March | 148,000 | 2,510 |
| April | 155,000 | 2,790 |
| May | 157,000 | 2,980 |
| June | 165,000 | 3,590 |
| July | 169,000 | 3,490 |
| August | 168,000 | 3,030 |
| September | 163,000 | 3,040 |
| October | 157,000 | 3,380 |
| November | 139,000 | 2,420 |
| December | 133,000 | 2,100 |
| Total | 1,825,000 | 33,820 |
American Guitar’s direct[3]and indirect MOH costs for the two service and two manufacturing departments in 2012:
| Power Department[4] | Maintenance Department[5] | Construction Department | Finishing
Department |
Total Amount | |
| Labor-hours | 2022 | 2032 | 18950 | 14870 | 37,874 |
| Kilowatt-hours | 2,000 | 7,000 | 40,800 | 30,200 | 80,000 |
| Maintenance hours | 140 | 60 | 800 | 1,000 | 2,000 |
| Direct fixed costs | $60,000 | $36,000 | $480,000 | $432,000 | $1,008,000 |
| Direct variable costs | $58,000 | $40,000 | $346,800 | $358,200 | $803,000 |
| Indirect fixed costs | $9,600 | ||||
| Indirect variable costs | $4,400 |
American Guitar does not expect significant changes in its manufacturing costs in 2013.
At the end of June 2013, the balance in American Guitar’s Materials Inventory account, which included 150 pounds of grade A veneered wood, was $2,640; the balance in the finished-goods inventory, which was valuated using the last-in, first-out (LIFO) method, consisted of 2 models, was $16,600.
| Quantity and Unit Cost | |
| Beginner model | 20 units @ $430 each |
| Professional model | 10 units @ $800 each |
The following pertains to the month of July.
- There were no beginning inventories in both manufacturing departments.
- American Guitar’s work-in-process inventory on July 31 consisted of two jobs: B0642 and P0642. The ending WIP inventories at the finishing department for B0642 and P0642 have 10 EU and 6 EU respectively.
- Additions to and requisitions from the materials inventory during the month of July included the following.
| Raw Materials | Purchased Parts | |
| Additions | 550 pounds of grade A veneered wood for $9,680
3300 pounds of grade B veneered wood for $41,580 |
100 set of premium bridges and strings for $1,840
400 set of regular bridges and strings for $6,560 |
| Requisitions | ||
| Job B0639 (120 beginner units) | 936 pounds of grade B wood | 125 regular sets |
| Job B0640 (100 beginner units) | 790 pounds of grade B wood | 103 regular sets |
| Job B0641 (150 beginner units) | 1170 pounds of grade B wood | 153 regular sets |
| Job B0642 (15 beginner units) | 118 pounds of grade B wood | 10 regular sets |
| Job P0640 (30 professional units) | 240 pounds of grade A wood | 31 premium sets |
| Job P0641 (35 professional units) | 273 pounds of grade A wood | 32 premium sets |
| Job P0642 (10 professional units) | 82 pounds of grade A wood | 6 premium s |
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