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    Cost of production and Absorption & Variable Cost

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    E17-27 Cost of production Report: No beginning inventories

    Oregon Paper Company produces newsprint paper through a special recycling process using scrap paper products. Production and cost data for October 2009, the first month of operations for the company's new Portland plant, follow:

    Units of products started in process during October .90,000 tons
    Units completed and transferred to finished goods 75,000 tons
    Machine hours operated 10, 000
    Direct materials costs incurred $486,000
    Direct labor costs incurred..$190,530

    Raw materials are added at the beginning of the process for each unit of product produced, and labor and manufacturing overhead are added evenly throughout the manufacturing process. Manufacturing overhead is applied to Work-in-Process at the rate of $24 per machine hour. Units in process at the end of the period were 65 percent converted.

    Prepared a cost of production report for Oregon Paper Company for October

    E17-29 Absorption and variable costing comparisons: Productions equals sales

    Assume that Heinz manufactures and sells 15,000 cases of catsup each quarter. The following data are available for the third quarter of 2009.

    Total fixed manufacturing overhead $30,000
    Fixed selling and administrative expenses 10,000
    Sales price per case 30
    Direct materials per case 12
    Direct labor per case 6
    Variable manufacturing overhead per case 3

    a. Compute the cost per case under both absorption costing and variable costing.
    b. Compute net income under both absorption costing and variable costing.
    c. Reconcile ant differences in income. Explain.

    MA17-43 Cost Data for Financial Reporting and Special Order Decisions

    Friendly Greeting Card Company produces a full range of greetings cards sold through pharmacies and department stores. Each card is designed by independent artists. A production master is then prepared for each design. The production master has an indefinite life. Product designs for popular cards are deemed to be valuable assets. If a card sells well, many batches of the design will be manufactured over a period of years. Hence, Friendly Greeting maintains an inventory of production masters so that card may be periodically reissued. Cards are produced in batches that may vary by increments of 1,000 units. An average batch consists of 10,000 cards. Producing a batch requires placing the production master on the printing press, setting the press for the appropriate paper size, and making other adjustments for colors and so forth. Following are facility-, product-, and unit-level cost information:

    Product design and production master per new card $ 1,500.00
    Batch setup (typically per 10,000 cards) 150.00
    Materials per 1,000 cards 100.00
    Conversion per 1,000 cards 80.00
    Per batch 20.00
    Per card 0.01
    Selling and administrative
    Companywide 200,000.00
    Per product design marketed 500.00
    Products designs and masters prepared for new cards 90
    Product designs marketed 120
    Batches manufactured 500
    Cards manufactured and solid 5,000,000

    You may need to review materials in Modules 15 and 16 to complete the requirements.

    a. Describe how you would determine the cost of goods sold and the value of any ending inventory for financial reporting purposes. (No computations are required.)
    b. You have just received an inquiry from Mall-Mart department stores to develop and manufacture 20 special designs fro sale exclusively in Mall-Mart department stores. The cards would be sold for $1.50 each, and Mall-Mart would pay Friendly Greeting $0.30 per card. The initial order is for 20,000 cards of each design. If the cards sell well, Mall-Mart plans to place additional orders for these and other designs. Because of the pre-established sales relationship, no marketing costs would be associated with the cards sold to Mall-Mart. How would you evaluate the desirability of the Mall-Mart proposal?
    c. Explain any differences between the costs considered in your answer to requirements (a) and the costs considered in your answers to requirements (b).

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    Solution Summary

    The solution answers following questions..E17-27 Cost of production; E17-29 Absorption and variable costing; MA17-43 Cost Data.