Text: Horngren, Foster, Datar and Teall, Cost Accounting: A Managerial Emphasis, 3rd Canadian Edition, Prentice-Hall, Inc. 2003.
LOONIE CORPORATION:
The Loonie Corporation, a wholly-owned subsidiary of Alda Holding Inc., has been engaged in the manufacturing and distribution of a product called IRW-Press in the international market. Presently, sales of IRW-Press have been limited to their home market and the Canadian market, through an independent distributorship network. Since January 2002, when Loonie commenced exporting to the Canadian market, the sales of IRW-Press had captured 35% market share of the Canadian market. IRW-Press has been successful in the home market for over ten years and has strong customer loyalty with 65% of the home market. Lonnie has been selling IRW-Press at $3.25 per pound in the Canadian market and, because of strong customer loyalty, at $4.50 per pound in their home market. Just recently, a Canadian trade association has filed anti-dumping charges against Loonie for selling IRW-Press below cost in the Canadian market. Top management of Loonie has come to you for assistance in disproving the allegations. After your initial discussion and research you ascertained the following facts:
1. IRW-Press is the finished product of a continuous complex manufacturing process.
2. The manufacturing process is composed of three operations wherein 500 pounds of raw material, I3, is refined into two intermediary products, C3P and M3B, yielding 20 gallons of C3P and 30 gallons of M3B, respectively. (Refining I Department)
3. The C3P is further processed into IRW-Prime and a by-product known as IR-Dump is a result of the process. For every 20 gallons of C3P processed, 180 pounds of IRW- Prime is produced with 20 pounds of IR-Dump. IR-Dump is then sold at this point at $0.50 per pound. (Processing I Department)
4. IRW-Prime is then further refined yielding 150 pounds of IRW-Press and 30 pounds of normal spoilage. (Refining II Department)
5. M3B is sold in the open market at $42 per gallon, whereas, C3P, as an intermediary product, can be sold at $21 per gallon. The intermediary product IRW-Prime has no readily available market.
Preliminary discussions and negotiations between Loonie Corporation and Revenue Canada produced the following guidelines and stipulations:
1. That if the total unit cost of IRW-Press (including an allocation for marketing and administrative expenses plus a normal pre-tax profit) is higher than the price being charged in Canada, a 50% tariff will be charged.
2. That an eleven and one-half percent (11.5%) pre-tax profit must be used.
3. That a 25% charge on unit cost for marketing and administrative cost must be used.
4. That a randomly selected month in 2002 will be used as a test period for cost analysis.
5. September 2002 was the month selected.
Furthermore, the manufacturing process at Loonie Corporation is supported by two service departments: maintenance and material handling. An analysis of the work done by the service departments to production departments for the month of September, 2002 is as follows:
Used ________________
Supplied by Maintenance Mat’l Handling Refin. I Process. I Refin. II
Maintenance ------- 1,600 2,400 2,400 1,600
Mat’l Handling 200 ----- 900 450 450
All measures of work done is based upon the principle cost driver being direct labour hours.
Production and cost data for the facility is presented below:
Refining I Processing I Refining II
Raw material added 500,000 20,000 180,000 lbs.
WIP, Beginning -0- -0- 40,000 lbs. (50%)
WIP, Ending -0- -0- 20,000 lbs. (75%)
Spoilage ----- ------ 39,000 lbs.
Raw Materials Costs $500,000 N/A N/A
Conversion Costs $200,000 $50,000 $100,000
Beginning WIP:
Prior Dept. $59,200
All Other Costs $15,800
September 2002 total costs for the Maintenance and Material Handling Departments were $45,000 and $60,000, respectively.
Other Data:
1. The conversion costs for the three manufacturing departments (Refining I, Process I and Refining II) do not include any allocated costs from the two service departments.
2. No raw materials are added except at the beginning of the production process, Refining I.
3. The percentage completion figures for the WIP inventories for the Refining II department (given above, 50% and 75%) relate to conversion costs.
4. All inspection for spoilage is done at the end of production in the Refining II department.
5. All allocated costs should be treated as part of the production departments conversion costs.
Required:
Based on the information above, take on the task of obtaining a cost per unit figure the would hold up to the criteria proposed by Revenue Canada. This project will entail using several allocation methods and inventory techniques, which you will need to configure in multiple perspectives before you may find a satisfactory cost figure. The proper strategy would be to divide the possible permutations among the group members, program an Excel worksheet and sift through the possibilities. Once you have found a satisfactory cost figure, draft an answer letter to Revenue Canada to, hopefully, resolve the matter. In your letter you will provide a step by step chronicling of the allocation methods and all your calculations to show the price is acceptable. If, however, you are not able to provide a cost figure that will justify the current market price, present in your paper the procedures used to calculate your cost data and market price.
You are to prepare appropriate analysis of the data and prepare a written report to support your conclusions, along with supporting schedules. I suggest that the quantitative analysis be performed with Excel, as the number of options available are quite numerous and you will need to find the best combination of methods. The paper will be typed, using single spacing. The length of the paper is left to your discretion. I expect a concise discussion, without a lot of BS.