II. Andrex
Andrex, a UK subsidiary of Kimberly Clark, is the leading toilet paper (or loo roll) brand in Britain. Most of this is produced at Andrex’s factory in Northfleet, Kent. The Northfleet factory makes both commercial and household rolls. The factory has two departments – the Paper Department and the Rolling Department.
Paper Department: The Paper Department takes recycled paper, removes impurities, pulps and bleaches it, and converts it into large spools of toilet paper. These spools are 8 feet long, with a diameter of 6 feet. Recycled paper is added to the Paper Department at the start of the process, while Paper conversion costs are added evenly during the process. Note that at this point there is no difference between the commercial and household products. The two products only differ in how the spools are converted into rolls in the Rolling Department. Due to the nature of the Paper Department, it never has any work-in-process inventory.
Rolling Department: The Rolling Department converts spools of paper (produced by the Paper Department) into rolls of either commercial or household toilet paper. One spool will produce 5,000 rolls of commercial OR 4,000 rolls of household toilet paper. The rolls are then packaged. The material and conversion cost of rolling and packaging one roll is the same for commercial and household paper. Rolling conversion costs are added evenly during the process, but Rolling Department raw materials (all packaging related) are added at the end of the process.
Actual Results during May
In late April the Northfleet factory was shut down for maintenance, so at the start of May, there was no inventory of any kind at the plant. During May, the Paper Department converted 65,000 tons of recycled paper into 6,500 spools of toilet paper, all of which was transferred to the Rolling Department. The actual cost of recycled paper was £12 per ton. The Paper Department had 4,160 actual machine hours during the month of May.
The Rolling Department converted 3,500 spools of toilet paper into household rolls, all of which were completed and sold during the month of May. They converted a further 2,400 spools of toilet paper into commercial rolls, all of which were completed during the month of May. All of these commercial rolls, however, remained in finished goods inventory at the end of May. Finally, the last 600 spools of toilet paper were converted into commercial rolls, but these rolls were not yet completed at the end of May – they were only 80% through the Rolling Department. The Rolling Department had 5,680 actual machine hours during the month of May.
Total actual packaging material costs for the month were £260,000 and total actual factory conversion costs were £4,850,000.
Cost Allocation:
Raw materials (recycled paper in the Paper Department and packaging materials in the Rolling Department) are direct costs at the department level, and are allocated to individual units using actual costing based on the number of units (spools in the Paper Department and rolls in the Rolling Department).
Conversion costs are considered indirect at the department level and are allocated to the two departments based on actual machine hours (using a monthly pre-determined, or normal, overhead rate). Conversion costs include labor (for both the line workers and their supervisors), and depreciation and running costs (such as maintenance and utilities) for the building itself as well as the equipment inside of it. Any estimation errors are not pro-rated to inventory at the end of the period. Conversion costs are allocated from the departments to the product using actual costing, based on the number of units (spools in the Paper Department and rolls in the Rolling Department).
Budget for May
Raw Material
Recycled Paper (60,000 tons @ £10 per ton) £ 600,000
Packaging Materials (30 million rolls at £0.01 per roll) 300,000
Conversion Costs
Northfleet Factory (a) 4,500,000
Total Budgeted Cost £5,400,000
(a) The budget assumes that the Paper Department will use 4,000 machine hours and the Rolling Department will use 5,000 machine hours.
1. What is the total cost one spool of toilet paper transferred from the Paper Department to the Rolling Department during the month of May at the time that it is transferred? (10 points) __________
2. What is Northfleet’s total cost of the finished goods inventory at the end of May? (15 points) __________
3. What is Northfleet’s total cost of the work-in-process at the end of May? (10 points) __________
4. What is Northfleet’s final Cost of Goods Sold on their May income statement? (15 points) __________
5. As stated in the problem, the Northfleet factory uses machine hours as a driver to allocate the conversion costs to the two departments. If the goal is to accurately allocate the costs, specifically name one other driver that Northfleet might consider using, either instead of or in addition to machine hours, and briefly (one sentence should be sufficient) explain why this might improve the accuracy of the allocation. No calculations are necessary! (10 points)
Driver ______________________________