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Cost Accounting for Product Grades

Exhibit 1
Selected product grades with production and financial data

Product (Grade) Caliper Coated/Uncoated Slit Average Reels per Batch Material Cost per Reel Selling Price per Reel

A 0.013 Coated Yes 50 $4,800 $12,600
B 0.014 Uncoated No 2 $5,200 $13,500
C 0.015 Coated Yes 35 $5,600 $14,200
D 0.02 Coated No 175 $7,400 $19,500

Exhibit 2
Overhead Structure

Total Grade Change Slitting Net
Depreciation $800,000 $8,000 $70,000 $722,000
Labor $300,000 $3,000 $25,000 $272,000
Energy $500,000 $5,000 $80,000 $415,000
Other $198,470 $1,000 $20,000 $177,470
Unrecoverable Clay and Chemicals from Grade Changeovers $30,000 $30,000 $0 $0
Total $1,828,470 $47,000 $195,000 $1,586,470

Calculate the volume-based (traditional) cost per reel for grades A-D identified in Exhibit 1.

What is the cost for Forest Hill to conduct a grade change?

What is the cost for Forest Hill to slit a reel of paperboard? As shown in Exhibit 1, only products A and C are routinely slit. For purposes of your analysis, assume the slitting equipment must be set up and adjusted between each reel slit.

Calculate the new volume-based overhead rate after removing grade change and slitting costs.

Determine the activity-based costs for grades A-D

Prepare a table that illustrates the percentage change in costs between the volume-based system and the strategic activity-based system.


Solution Summary

The solution examines cost accounting for product grades. The volume-based cost per reel for grades is calculated.