Leather Products Ltd manufactures leather goods. The company’s profits have declined during the past nine months. In an attempt to isolate the causes of poor profit performance, management is investigating the manufacturing operations of each of its products.
One of the company’s main products is leather belts. The belts are produced in a single, continuous process in the Elizabeth plant. During the process, leather strips are sewn, punched and dyed. The belts then enter a final finishing stage to conclude the process. Labour and overhead are applied continually during the manufacturing process. All materials are introduced at the beginning of the process. The firm uses the weighted average method to calculate its unit costs.
The leather belts produced at the Elizabeth plant are sold wholesale for $22.95 each. Management want to compare the current manufacturing costs per unit with the market prices for leather belts. Top management has asked the Elizabeth plant accountant to submit data on the cost of manufacturing the leather belts for the month of October. These cost data will be used to determine whether modifications in the production process should be initiated or whether an increase in the selling price of the belts is justified. The cost per belt used for planning and control is $11.50.
The work in process inventory consisted of 500 partially completed units on 1 October. The belts were 30 per cent complete as to conversion. The costs included in the inventory on 1 October were as follows:
Leather strips……………………….$1650
Buckles………………………………..350
Conversion costs…………………….2500
Total………………………………..$4500
During October, 8000 leather strips were placed into production. A total of 8100 leather belts were completed. The work in process inventory on 31 October consisted of 400 belts that were 40 per cent complete as to conversion.
The costs charged to production during October were as follows:
Leather strips……………………….$41,000
Buckles………………………………..8,000
Conversion costs…………………….55,320
Total………………………………$104,320
Required:
1. In order to provide cost data on the manufacture of leather belts in the Elizabeth Plant to the top management of Leather Products Ltd, calculate the following amounts for the month of October:
(a) Equivalent units for material and conversion.
(b) Cost per equivalent unit for material and conversion.
(c) Assignment of production costs to the 31 October work in process inventory and to goods transferred out.
(d) Weighted average unit cost of the leather belts completed and transferred to finished good.
2. Comment on the cost per belt of $11.50 which the company has used for planning and control.
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