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Midterm Quiz – Flamingo Salt

ACCT 5002 - SMP

Fall A, 2022

Flamingo Salt is a “bulk supplier of high quality graded marine road de-icing salt (grit). We also supply in bulk, refined superior quality solar sea salt for the table, industrial use, bleach, dye and leather works, water softening etc.” – from Flamingo Salt’s web page.

Flamingo Salt’s main factory produces both road salt and table salt (using raw, unprocessed salt as an input).  During the month of September, Flamingo Salt completed:

12,000 metric tons of table salt.

18,000 metric tons of road salt.

There are three departments:

Crushing Department: The crushing department takes raw, recently mined salt as an input, crushes it, and removes the largest impurities.  All products pass through the crushing department.  Raw salt is added to the crushing department at the start of the process.  Assume that each metric ton of raw salt will produce one metric ton of finished product (i.e., the weight of the impurities screened out is immaterial).  Crushing conversion costs are added evenly during the process.

During September, 36,000 metric tons of raw materials were added to the crushing department (with a total actual cost of £1,260,000), and there was no work-in-process in the crushing department at either the start of September or at the end of September.  Thirty-six thousand metric tons were transferred out of the crushing department: 12,000 metric tons went to the purifying department and 24,000 metric tons went to the mixing department.

Purifying Department:  The purifying department converts crushed salt (produced by the crushing department) into table salt.  Road salt does NOT pass through the purifying department.  Purifying conversion costs are added evenly during the process.  There are no material costs in the purifying department.  The purifying department had no work-in-process inventory at either the start of September or at the end of September.

Mixing Department:  The mixing department converts crushed salt (produced by the crushing department) into road salt, by adding small amounts of grit and special chemicals.  Table salt does NOT pass through the mixing department.  Mixing department conversion costs are added evenly during the process.  There are no material costs in the mixing department (the grit and chemicals are considered part of the conversion cost).  The mixing department had no work-in-process inventory at the start of September.  Eighteen thousand metric tons of road salt are finished; the six thousand metric tons still in work-in-process at the end of September were 75% completed with respect to conversion costs.

Flamingo Salt had no finished goods inventory at the start of September.  During the month they sold all 12,000 metric tons of table salt for £120 per metric ton, but sold none of the road salt (the 18,000 metric tons finished are in finished goods inventory at the end of the month).

Conversion Costs

Conversion costs are considered indirect at the department level and are allocated based on actual labor hours (using a monthly pre-determined, or normal, overhead rate).  Conversion costs include labor and overhead.  Any estimation errors are not pro-rated to inventory at the end of the period.  All costs are allocated from the departments to the product based on actual costing, using metric tons of salt as the driver.

1.  What is the total cost of the 36,000 metric tons transferred out of the crushing department during the month, at the time that they were transferred out? (10 points)

2.  What is the total cost of work-in-process at the end of September? (20 points)

3.  What is the cost per metric ton for the road salt produced (i.e., finished) during the month?  (10 points)

4.  What was Flamingo Salt’s gross income (defined as revenues less cost of goods sold) for the month?  (10 points)

5.  The purifying department and the mixing department are both profit centers (i.e., they are evaluated by the amount of gross profit that they earn on their products) and are run by two vice-presidents, each of whom is hoping to be promoted later this year.

The variation between the estimated and actual numbers in the table on page 2 are almost entirely due to the fact that the VP-purifying made several large capital improvements during the month.  While these have increased overhead, they have led to substantial decreases in the amount of labor used by the purifying department.  The VP-purifying recently made a presentation to top management describing how his brilliant cost-cutting strategy has significantly improved the profitability of the purifying department (indeed, the department costs have been cut by 50% on a per unit basis!).  

Top management was very impressed with the presentation and it seems likely that the VP-purifying will get the promotion.  Briefly explain (4-5 sentences) why this is unfair. (10 points)