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One of your best friends has learned that you are taking a course in Managerial Accounting! Your friend is a guitarist, and he/she is considering opening a small factory in the town where you both live to produce and sell custom-made wood guitars. The selling price of each custom-made guitar will range from $500 to over $5,000. Your friend is going to name the Company “Custom Woods Guitars, Inc.” (aka. Custom).
Your friend is genuinely concerned about tracking the costs of producing each type of guitar to make sure that she/he charges a price for each guitar that is both market-competitive and results in a reasonable gross profit to the business.
Answer the following questions as part of your initial response.
- Describe the types of direct material costs Custom should track as Custom manufacturers each custom-made guitar.
- How should Custom deal with an item like spoilage as Custom manufacturers each custom-made guitar?
- What type of source document would support the cost of, for example, the guitar strings being charged to each job and related job cost sheet?
- Describe in some level of detail the types of direct labor costs Custom should track as Custom manufacturers each custom-made guitar.
- Should Custom, first, determine what their competition is selling each custom-made guitar for first, or should Custom first determine what the product cost will be for each custom-made guitar before setting their selling prices? Address the advantages and the disadvantages of both and include how job costing information and the related job cost sheets will potentially support either possibility.