Silver Company uses one raw material, silver ore, for all of its products. It spends considerable time getting the silver from the ore before it starts the actual processing of the finished products, rings, lockets, etc. Traditionally, the company made one product at a time and charged the product with all costs of production, from ore to final inspection. However, in recent months, the cost accounting reports have been somewhat disturbing to management. It seems that some of the finished products are costing more than they should, even to the point of approaching their retail value. It has been noted by the accounting manager that this problem began when the company started buying ore from different parts of the world, some of which require difficult extraction methods. Can you explain how the company might change its accounting system to reflect the reporting problems better? Are there other problems with the purchasing area?

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sjclifton3827 sjclifton3827

12-02-2020
Business

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Silver Company uses one raw material, silver ore, for all of its products. It spends considerable time getting the silver from the ore before it starts the actual processing of the finished products, rings, lockets, etc. Traditionally, the company made one product at a time and charged the product with all costs of production, from ore to final inspection. However, in recent months, the cost accounting reports have been somewhat disturbing to management. It seems that some of the finished products are costing more than they should, even to the point of approaching their retail value. It has been noted by the accounting manager that this problem began when the company started buying ore from different parts of the world, some of which require difficult extraction methods. Can you explain how the company might change its accounting system to reflect the reporting problems better? Are there other problems with the purchasing area?

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mirianmoses mirianmoses · Answer 1 · 2020-02-13T16:31:19+01:00

Answer:

Explanation:

From the question, it seems that the existing accounting method does not take into account all or some of the extraction costs. Some batches of the raw material may be very expensive as they are procured through some expensive extraction process. So, to overcome this issue the accountant can assign all extraction costs to a joint-cost category. In this way the extraction costs of the raw material procured from some are would be shared such it will average out on the finished product.

There could be some problems with the purchase department as well and not just the accounting system. It can help the company if it can look at some expert advice in its purchasing department.