September 9 Requested by: Alicia Sparks — Duran Orr plant manager Meridian Paper Company papermaking mill was looking over

Duran Orr, plant manager of Meridian Paper Company’s papermaking mill, was looking over the cost of production reports for July and August for the Papermaking Department. The reports revealed the following:

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Duran was concerned about the increased cost per ton from the output of the department. As a result, he asked the plant controller to perform a study to help explain these results. The controller, Alicia Sparks, began the analysis by performing some interviews of key plant personnel in order to understand what the problem might be. Excerpts from an interview with Josh Wilson, a paper machine operator, follow:

Josh: We have two papermaking machines in the department. I have no data, but I think paper machine 1 is applying too much pulp, and thus is wasting both conversion and materials resources. We haven’t had repairs on paper machine 1 in a while. Maybe this is the problem.

Alicia: How does too much pulp result in wasted resources?

Josh: Well, you see, if too much pulp is applied, then we will waste pulp material. The customer will not pay for the extra weight. Thus, we just lose that amount of material. Also, when there is too much pulp, the machine must be slowed down in order to complete the drying process. This results in a waste of conversion costs.

Alicia: Do you have any other suspicions?

Josh: Well, as you know, we have two products—green paper and yellow paper. They are identical except for the color. The color is added to the papermaking process in the paper machine. I think that during August these two color papers have been behaving very differently. I don’t have any data, but it just seems as though the amount of waste associated with the green paper has increased.

Alicia: Why is this?

Josh: I understand that there has been a change in specifications for the green paper, starting near the beginning of August. This change could be causing the machines to run poorly when making green paper. If this is the case, the cost per ton would increase for green paper. Alicia also asked for a database printout providing greater detail on August’s operating results.

September 9 Requested by: Alicia Sparks

Papermaking Department—August detail

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Assuming that you’re Alicia Sparks, write a memo to Duran Orr with a recommendation to management. You should analyze the August data to determine whether the paper machine or the paper color explains the increase in the unit cost from July. Include any supporting schedules that are appropriate.

SOLUTION:

To: Duran Orr

From: Alicia Sparks

Re: Analysis of August Increase in Unit Costs for Papermaking Department

The increase in the unit costs from July to August occurred for both the conversion and materials (pulp and chemicals) costs in the Papermaking Department, as indicated in the table below.

July August

Materials cost per ton $250.00 $266.96

Conversion cost per ton 125.00 133.04

Total $375.00 $400.00

An analysis was done to isolate the cause of the increased cost per ton. My interviews indicated that there were two possible causes. First, we changed the specification of the green paper in early August. This may have altered the way the paper machines process the green paper. Thus, it is possible that the paper machines have improper settings for the new specification and are over applying materials. Secondly, there is some question as to whether paper machine 1 is in need of some repairs. It is possible that our problem is due to lack of repairs on this machine.

Fortunately, we run both colors on paper machine 1. Thus, we can separate the analysis between these two possible explanations. I have provided the following cost per ton data for the two paper machines and the two product colors:

Paper machine analysis: