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    Cost Accounting for Product Grades

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    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.

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    Solution Summary

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