Wilmont Chemical Corporation

3 Pages Posted: 21 Oct 2008

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Richard Brownlee

University of Virginia - Darden School of Business

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Abstract

The Wilmont Chemical Corporation produces a variety of industrial products, including a specialty chemical called SC. The company uses an actual costing system and the LIFO inventory method. At the beginning of each year, the company's controller estimates the total direct cost (omitting any manufacturing overhead allocation) per unit of producing SC. Unfortunately, the market demand and selling price are difficult to predict, as are the raw material and direct labor costs. Monthly budgets are prepared in advance, and are subsequently compared with actual results. The controller is wondering if the company's financial statements would be more “managerially relevant” if the company changed to an estimated costing system, where raw material inventory is kept at estimated costs and finished goods inventory is kept at estimated production costs. The case provides information for comparing the actual operating results for a month with the budgeted amounts. Students are asked to prepare three monthly income statements: one using the company's actual costing system; one using an estimated costing system; and, one using a hybrid costing system that incorporates both actual and estimated costs. They are then asked to take a position as to which of the three income statements presents the most managerially relevant information.

Excerpt

UVA-C-2207

WILMONT CHEMICAL CORPORATION

The Wilmont Chemical Corporation produced a variety of industrial products, including a specialty chemical called SC. SC was packaged and sold by the company in 25-liter plastic containers. At the beginning of each year, the company's controller estimated the unit cost of SC for the coming year as one factor in the development of the product's pricing and promotion strategies. In addition, the estimated cost of SC was used as a benchmark against which to compare the actual cost of production. The estimated direct cost per unit (omitting any manufacturing-overhead allocation) of SC for the current year was as follows:

Raw material (10 pounds at $ 3.00/pound)

$ 30.00

Direct labor (0.5 hour at $ 12.00/hour)

. . .

Keywords: actual costing standard variance analysis

Suggested Citation

Brownlee, Richard, Wilmont Chemical Corporation. Darden Case No. UVA-C-2207, Available at SSRN: https://ssrn.com/abstract=908097

Richard Brownlee (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4800 (Phone)

HOME PAGE: http://www.darden.edu/faculty/Brownlee.htm

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