Question

Backflush Costing, Conversion Rate

Southward Company has implemented a JIT flexible manufacturing system. John Richins, controller of the company, has decided to reduce the accounting requirements given the expectation of lower inventories. For one thing, he has decided to treat direct labor cost as a part of overhead and to discontinue the detailed direct labor accounting of the past. The company has created two manufacturing cells, each capable of producing a family of products: the radiator cell and the water pump cell. The output of both cells is sold to a sister division and to customers who use the radiators and water pumps for repair activity. Product-level overhead costs outside the cells are assigned to each cell using appropriate drivers. Facility-level costs are allocated to each cell on the basis of square footage. The budgeted direct labor and overhead costs are as follows:

	Radiator Cell		Water Pump Cell
Direct labor costs		$170,940		$95,830
Direct overhead		671,550		334,110
Product sustaining		248,270		108,780
Facility level		154,660		77,700
Total conversion cost		$1,245,420		$616,420

The predetermined conversion cost rate is based on available production hours in each cell. The radiator cell has 40,700 hours available for production, and the water pump cell has 25,900 hours. Conversion costs are applied to the units produced by multiplying the conversion rate by the actual time required to produce the units. The radiator cell produced 72,800 units, taking 0.50 hour to produce one unit of product (on average). The water pump cell produced 87,000 units, taking 0.25 hour to produce one unit of product (on average).

Other actual results for the year are as follows:

Direct materials purchased and issued	$1,631,000
Direct labor costs	266,770
Overhead	1,595,070

All units produced were sold. Any conversion cost variance is closed to Cost of Goods Sold.

Required:

1. Calculate the predetermined conversion cost rates for each cell. If required, round your answers to the nearest cent.

Radiator Cell	$	per hour
Water Pump Cell	$	per hour

Answer 1

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Southward Company	Radiator Cell	Water Pump Cell
Total conversion cost	1,245,420.00	616,420.00	A
Available production hours	40,700.00	25,900.00	B
Conversion rate per hour	30.60	23.80	C=A/B