Bastrop Prison

Bastrop Prison, located in Bastrop, Texas is a Federal Correctional Institution, housing lowsecurity inmates. One way for inmates to eam "special privileges" is for them to work in the prison's license plate manufacturing facility.

Bastrop uses standard costing, and allocates overhead based on the number of plates produced.

Bastrop uses abSOl1Jtion costing and weighted average. Any estimation eITor is closed to cost of goods sold at the end of each month .

At the start of March, Bastrop has no W]P, and finished goods inventory of 2,000 plates. Each plate in beginning inventory has $2 of variable cost and $1 offixed overhead.

During March, Bastrop expects to produce 1,000 plates, and has expected costs of $2,000 (variable costs) and $1,300 (fixed overhead). All of these expectations are met, except that March's fixed overhead costs are actual1y $1,900.

At the end of March, Bastrop has] ,500 units in finished goods inventory and no WIP.
1. What will be the value of Bastrop's finished goods inventory at the end of March? What would be the value if Bastrop used variable costing instead?

2. How much will be recorded as cost of goods sold on Bastrop's income statement for March?
How much would be recorded if Bastrop used variable costing instead?

3. Kin Lei is in charge of production, and gets to determine the actual number of plates produced in June. He must aJU10unce this in advance (so that planned production will equal actual production), and he has no control over any other numbers. Would it be easier for Kin Lei to increase June's gross margin per plate sold under an absorption costing system or under a vmiable costing system?
     Absorption           Variable
Briefly explain (3-4 sentences):

4. Geoff Skelling is in charge of sales, and can detennine the actual number of plates sold in .Tune (by accelerating sales from July or deferring sales to July). Would it be easier for Geoff Skelling to increase .Tune's gross margin per plate sold under an absorption costing system or under a variable costing system?

                     Absorption              Variable
Briefly explain (3-4 sentences) (*):

(*) Your answer should include:

a) an explanation of why the system you chose will help achieve the objective

b) an explanation of why the system you DID not chose would not help

c) a specific plan of action (e.g., produce as much as possible; sell exactly as much as was produced, etc.) under your preferred cost system. No numbers are necessary!

5. The sum oftbe four variances computed above IS NOT equal to the difference between the actual costs and the static budget costs. Explain why not. Be blief (two-three sentences). It is sufficient to point out which items included (if any) should not have been included, and which items excluded (if any) should have been included.

6. What does your answer to part one prove about the average salaries paid to the training staff?
Circle one:
a. It proves that, on average, they were paid more than the £300,000 budgeted.
b. It proves that, on average, they were paid less than the £300,000 budgeted.
c. It does not prove whether they were paid more or less than budgeted.

Briefly (two-three sentences) explain your answer.

In June, Bastrop's license plate facility "acquired" two new employees. The warden wants to maximize gross marbrin per plate (defined as revenue less cost of goods sold, divided by the number of plates sold), and each of the new employees wants to impress the warden with June's results. Neither is worried about next month, and neither trusts the other to improve results (in other words, each will do whatever they can to increase June's gross margin per plate on their own). This being a prison, ethics don't enter into their decisions.