Sanford and Son Yacht Company
Case 1 – Sanford and Son Yacht Company Before – The company had no way of organizing or classifying their costs over a given period of time. – Inaccurate journals due to no way to measure work-in-progress inventory versus finished goods inventory. – Managers may have been underestimating or overestimating costs when asked by customers for a selling price. The consequences of this for a business could be dire. For instance, if Sanford and Son underestimated the cost of the boat being manufactured, they may not earn the maximum profit (or possibly lose money) they could on the boat because they quoted a low selling price. On the other hand, if they overestimate the costs to produce the boat, they may quote too high of a selling price to the customer, which may end up losing business for the company. – Because no costs are assigned to Work-In-Process Inventory and instead assigned to Finish Good Inventory, the company had no reliable estimate of what goods are available for use. After – Improvements – Without job-order costing, the company had no way to tell the total cost (fixed and variable) of each of the three types boats they manufactured. Since that has been implemented, the company can determine the appropriate cost of each boat, which will in turn give it a better evaluation of each product in terms of sales revenue. For example, if boat type A costs more to produce than type B or C, the company may want to raise price to increase revenue and generate profit. They could do this by performing a break-even analysis. This analysis would not be accurate without job-order costing.
Example: Before job-order costing, total variable costs for boat type A may have been estimated at $20,000. If the selling price was quoted as $40,000, this would mean the contribution margin for boat A is $20,000. If total fixed costs for the company are $100,000, the company would have to sell 5 of boat type A to break-even. However, after job-order costing is instituted, the company finds the total variable costs for boat type A is actually $12,000. This means the actual contribution margin for boat type A is higher, at $28,000. Assuming fixed costs stay the same, the companys new break-even value in units is 3.5 (or 4 boats). – Prior to job-order costing, the company had no way of preventing part stockouts and production stoppages. This would end up costing the company more money in the long-run. Even though work and production may stop, rent on the manufacturing building must be paid, depreciation still accumulates and wages and salaries have to be paid to certain personnel. By instituting job-order costing, the company can better manage its time and work more efficiently. – The company has more accurate journal entries due to being able to keep track of work-in-progress inventory versus finished goods inventory. The following examples show what journal entries may have looked like before and after job-order costing.