Kota Mills supply Divine Denim with the organic denim used in their production. After discussions with Helen about the service she was getting from Good Numbers, the manager of Kota Mills decided to use Good Numbers to assist with their management decision making. Kota Mills produces three different weights of denim using two departments. In Department 1, machines weave the cloth. In Department 2 the cloth is dyed a variety of colours. Information for the combined use of resources in both departments for the three types of fabric is outlined below.
Bolts are 20 metres each. All fabric is inspected during production. Robotic equipment inspects the fabric for obvious flaws as the bolts are wound up. Each bolt spends about 5 minutes in the inspection process.
|8 ounce||13 ounce||16 ounce||Total||units|
|Monthly production in units (bolts of fabric)||1,000||4,000||2,000||7,000||bolts|
|Direct material cost $||8,000||24,000||20,000||52,000||$|
|Direct labour cost $||660||1,320||920||2,900||$|
|Direct labour hours||33||66||46||145||hours|
|Number of set-ups for dye colour changes||10||30||20||60||set-ups|
Combined overhead costs for the two departments follow:
|Cost to operate and maintain machines||$ 40,000|
|Set-up costs||$ 11,000|
|Inspection costs||$ 6,996|
Previously, Kota Mills used a costing system focused on processes. It allocated direct materials to each product separately but allocated direct labour and conversion costs as if they were incurred equally across the units produced. Under this costing system, the overhead cost for Department 1 is $19,332 and for Department 2 it is $38,664. Direct labour hours and costs in Department 1 are 55 hours at $1,100, and the remaining are in Department 2. Direct materials for Department 1 are $15,000 for 16 ounce denim, $16,000 for 13 ounce denim, and $6,000 for 8 ounce denim. The remaining direct materials are added in Department 2. No beginning or ending inventory or abnormal spoilage is recorded for Kota Mills this period.