Question

This chapter’s opener featured Jeff Kearl and his company Stance.

Required

1. Sock makers like Stance typically use several different processes, including knitting, design imprinting, washing and drying, inspection, and packaging/shipping. What are some benefits of using separate process cost summary reports for each process?

2. Jeff tries to order raw materials just-in-time for their use in production. How does holding raw materials inventories increase costs? If the items are not used in production, how can they impact profits? Explain.

3. How can companies like Stance use yield to improve their production processes?

Short answer

1. Separate process cost summary reports can be useful in indicating where the production process is operating efficiently or inefficiently.
2. The company will have spent cash on items in storage and may not have enough cash to acquire the necessary materials, labor, and overhead to produce their product.
3. Stance can use yield to check and improve the efficiency of the production processes.

Step-by-step solution

Meaning of Process Costing

Process costing is a technique used to determine the costs of a product manufactured by various production processes.

(1) Explaining some benefits of using separate process cost summary reports for each process

Managers can better comprehend costs and make decisions using individual process cost summary reports for each process. For instance, Stance adds most of its ingredients (such as the polyester-nylon material used in its socks) in the first phase and a few others (such as ink) in the second. Managers will be able to control expenses of these different raw materials better using separate process cost summary reports. Separate process cost summary reports might help identify areas of the production process that are functioning efficiently or inefficiently because each step probably consumes a distinct amount of labor and overhead. It would hide the specific data if the business relied on a process cost summary report.

(2) Explaining how items can impact profits

Unnecessarily holding inventory will make a company less profitable than one that maintains the right quantities of raw material inventory. The inventory first demands expenditures for storage space. Second, increased inventory levels raise the danger of employee or consumer theft of inventory. (Industry with perishable inventory must incur greater costs to maintain freshness. These perishable goods may spoil or degrade over time.)

Even if inventory items aren't used right away in production, their impact on earnings is still possible. The business may not have enough money to pay for the supplies, labor, and overhead required to make its product because it will have spent money on products currently in storage. Even though goods remain in stock and have no direct impact on revenues, businesses that purchase and maintain high volumes of needless inventory will eventually become less lucrative.

(3) Explaining how can companies like Stance use yield to improve their production processes

Stance can use yield to determine how effectively its processes operate, a ratio of raw material outputs to inputs. When the yield is lower than anticipated, it may indicate that Stance must resolve issues within the production process.