18.6.2: Illustrating an Operation-Costing System

Illustrating an Operation-Costing System

The Baltimore Clothing Company, a clothing manufacturer, produces two lines of blazers: those made of wool and those made of polyester. Wool blazers use better-quality materials and undergo more operations than polyester blazers. The operations information on Work Order 423 for 50 wool blazers and Work Order 424 for 100 polyester blazers follows:

	Work Order 423	Work Order 424
Direct materials	Wool	Polyester
	Satin full lining	Rayon partial lining
	Bone buttons	Plastic buttons
Operations
1. Cutting cloth	Use	Use
2. Checking edges	Use	Do not use
3. Sewing body	Use	Use
4. Checking seams	Use	Do not use
5. Machine sewing of collars and lapels	Do not use	Use
6. Hand sewing of collars and lapels	Use	Do not use

The cost data for these work orders, started and completed in March 2020, are as follows:

A table shows cost data for work orders 423 and 424

The table depicts number of blazers, direct materials cost, conversion costs allocated, and total manufacturing costs for work orders 423 and 424. The details of the table are as follows:

1. Number of blazers

Work order 423: 50
Work order 424: 100

2. Direct materials costs

Work order 423: 6,000 dollars
Work order 424: 3,000 dollars

3. Conversion costs allocated, Operation 1

Work order 423: 580 dollars
Work order 424: 1,160 dollars

4. Conversion costs allocated, Operation 2

Work order 423: 400 dollars
Work order 424: Blank

5. Conversion costs allocated, Operation 3

Work order 423: 1,900 dollars
Work order 424: 3,800 dollars

6. Conversion costs allocated, Operation 4

Work order 423: 500 dollars
Work order 424: Blank

7. Conversion costs allocated, Operation 5

Work order 423: Blank
Work order 424: 875 dollars

8. Conversion costs allocated, Operation 6

Work order 423: 700 dollars
Work order 424: Blank

9. Total manufacturing costs

Work order 423: 10,080 dollars
Work order 424: 8,835 dollars

As in process costing, all product units in any work order are assumed to consume identical amounts of conversion costs of a particular operation. Baltimore’s operation-costing system uses a budgeted rate to calculate the conversion costs of each operation. The budgeted rate for Operation 1 (amounts assumed) is shown below:

$\begin{array}{l} \begin{matrix} Operation 1 budgeted \\ conversion ‐ cost \\ rate for 2020 \end{matrix} & = & \frac{\begin{matrix} Operation 1 budgeted \\ conversion costs for 2020 \end{matrix}}{\begin{matrix} Operation 1 budgeted \\ product units for 2020 \end{matrix}} \\ = & \frac{$ 232,000}{20,000 units} \\ = & $ 11 . 60 per unit \end{array}$

The budgeted conversion costs of Operation 1 include labor, power, repairs, supplies, depreciation, and other overhead of this operation. If some units have not been completed (so all units in Operation 1 have not received the same amounts of conversion costs), the conversion-cost rate is computed by dividing the budgeted conversion costs by the equivalent units of the conversion costs, as in process costing.

As the company manufactures blazers, managers allocate conversion costs to work orders processed in Operation 1 by multiplying the $11.60 conversion cost per unit by the number of units processed. Conversion costs of Operation 1 for 50 wool blazers (Work Order 423) are $11.60 per $blazer \times 50 blazers = $ 580$ and for 100 polyester blazers (Work Order 424) are $11.60 per $blazer \times 100 blazers = $ 1,160$ . When equivalent units are used to calculate the conversion-cost rate, costs are allocated to work orders by multiplying the conversion cost per equivalent unit by the number of equivalent units in the work order. The direct materials costs of $6,000 for the 50 wool blazers (Work Order 423) and $3,000 for the 100 polyester blazers (Work Order 424) are specifically identified with each order, as in job costing. The basic point of operation costing is this: Operation unit costs are assumed to be the same regardless of the work order, but direct materials costs vary across orders when the materials for each work order vary.