3 CHAPTER Product Costing and Cost Accumulation in a Batch Production Environment
ANSWERS TO REVIEW QUESTIONS
3-1 (a) Use in financial accounting: In financial accounting, product costs are needed to determine the value of inventory on the balance sheet and to compute the cost-of-goods-sold expense on the income statement. (b) Use in managerial accounting: In managerial accounting, product costs are needed for planning, for cost control, and for decision making. (c) Use in cost management: In order to manage, control, or reduce the costs of manufacturing products or providing services, management needs a clear idea of what those costs are. (d) Use in reporting to interested organizations: Product cost information is used in reporting on relationships between firms and various outside organizations. For example, public utilities such as electric and gas companies record product costs to justify rate increases that must be approved by state regulatory agencies. 3-2 In a job-order costing system, costs are assigned to batches or job orders of production. Job-order costing systems are used by firms that produce relatively small numbers of dissimilar products. In a process-costing system, production costs are averaged over a large number of product units. Process-costing systems are used by firms that produce large numbers of nearly identical products. Concepts of product costing are applied in service industry firms to inform management of the costs of producing services. For example, banks record the costs of producing financial services for the purposes of planning, cost control, and decision making.
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a. Material requisition form: A document upon which the production department supervisor requests the release of raw materials for production. b. Labor time record: A document upon which employees record the time they spend working on each production job or batch.
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c. Job-cost record: A document on which the costs of direct material, direct labor, and manufacturing overhead are recorded for a particular production job or batch. The job-cost sheet is a subsidiary ledger account for the Work-in-Process Inventory account in the general ledger. 3-5 Although manufacturing-overhead costs are not directly traceable to products, manufacturing operations cannot take place without incurring overhead costs. Consequently, overhead costs are applied to products for the purpose of making pricing decisions, in order to ensure that product prices cover all of the costs of production. The primary benefit of using a predetermined overhead rate instead of an actual overhead rate is to provide timely information for decision making, planning, and control. An advantage of prorating overapplied or underapplied overhead is that it results in the adjustment of all the accounts affected by misestimating the overhead rate. These accounts include the Work-in-Process Inventory account, the FinishedGoods Inventory account, and the Cost of Goods Sold account. The resulting balances in these accounts are more accurate when proration is used than when overapplied or underapplied overhead is closed directly into Cost of Goods Sold. The primary disadvantage of prorating overapplied or underapplied overhead is that it is more complicated and time-consuming than the simpler alternative of closing overapplied or underapplied overhead directly into Cost of Goods Sold. An important cost-benefit issue involving accuracy versus timeliness in accounting for overhead involves the use of a predetermined overhead rate or an actual overhead rate. Since an actual overhead rate is computed after costs have been incurred and activity has been recorded, it is more accurate than a predetermined rate. However, a predetermined overhead rate is more timely than an actual rate, since the predetermined rate is computed earlier and in time to be used for making decisions, planning, and controlling operations. The difference between actual and normal costing systems involves the procedure for applying manufacturing overhead to Work-in-Process Inventory. Under actual costing, applied
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overhead is the product of the actual overhead rate (computed at the end of the period) and the actual amount of the cost driver used. Under normal costing, applied overhead is the product of the predetermined overhead rate (computed at the beginning of the period) and the actual amount of the cost driver used.
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3-10 When a single volume-based cost driver is used to apply manufacturing overhead, the managerial accountant's primary objective is to select a cost driver that varies in a pattern similar to the pattern in which manufacturing overhead varies. Moreover, if a single cost driver is used, it should be some productive input that is common to all of the firm's products. 3-11 The benefit of using multiple overhead rates is that the resulting product-costing information is more accurate and more useful for decision making than is the information that results from using a single overhead rate. However, the use of multiple cost drivers and overhead rates is more complicated and more costly. 3-12 The development of departmental overhead rates involves a two-stage process. In stage one, overhead costs are assigned to the firm's production departments. First, overhead costs are distributed to all departments, including both service and production departments. Second, costs are allocated from the service departments to the production departments. At the end of stage one, all overhead costs have been assigned to the production departments. In stage two, the costs that have been accumulated in the production departments are applied to the production jobs that pass through the departments. 3-13 a. Overhead cost distribution: Assignment of all manufacturingoverhead costs to department overhead centers. b. Service department cost allocation: Allocation of service department costs to production departments on the basis of the relative proportion of each service department's output that is used by the various production departments. c. Overhead application (or overhead absorption): The assignment of all manufacturing overhead costs accumulated in a production department to the jobs that the department has worked on. These three processes are used in developing departmental overhead rates. 3-14 Job-order costing concepts are used in professional service firms. However, rather than referring to production jobs, such
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organizations use terminology that reflects their operations. For example, hospitals and law firms assign costs to cases, and governmental agencies often refer to programs or missions. It is important in such organizations to accumulate the costs of providing the services associated with a case, project, contract, or program. Such cost information is used for planning, cost control, and pricing, among other purposes.
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3-15 A cost driver is a characteristic of an event or activity that results in the incurrence of costs by that event or activity. A volume-based cost driver is one that is closely associated with production activity, such as the number of units produced, direct-labor hours, or machine hours. 3-16 When direct material, direct labor, and manufacturing-overhead costs are incurred, they are applied to Work-in-Process Inventory by debiting the account. When goods are finished, the costs are removed from that account with a credit, and they are transferred to Finished-Goods Inventory by debiting that account. Subsequently, when the goods are sold, Finished-Goods Inventory is credited, and the costs are added to Cost of Goods Sold with a debit. 3-17 Hospitals use job-order costing concepts to accumulate the costs associated with each case treated in the hospital. For example, the costs of treating a heart patient would be assigned to that patient's case. These costs would include the hospital room, food and beverages, medications, and specialized services such as diagnostic testing and X rays. 3-18 Some manufacturing firms are switching from direct-labor hours to machine hours or throughput time as the basis for overhead application as a result of increased automation in their factories. With increased automation comes a reduction in the amount of direct labor used in the production process. In such cases, direct labor may cease to be a cost driver that varies in a pattern similar to the way in which manufacturing-overhead costs are incurred. 3-19 Overapplied or underapplied overhead is caused by errors in estimating the predetermined overhead rate. These errors can occur in the numerator (budgeted manufacturing overhead), or in the denominator (budgeted level of the cost driver). 3-20 Overapplied or underapplied overhead can be closed directly into Cost of Goods Sold, or it can be prorated among Work-inProcess Inventory, Finished-Goods Inventory, and Cost of Goods Sold. 3-21 A large retailer could use EDI to exchange such documents as purchase orders, shipping and receiving notices, and invoices
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electronically with its suppliers. Electronic data interchange (EDI) is the direct exchange of data via a computer-to-computer interface. 3-22 An engineer could use bar code technology to record how she spends her time. Bar codes would be assigned to her and to each of her activities. Each time she arrived at work, left work, or changed activity at work, the engineer would scan her personal bar code and the bar code of the appropriate action or activity. Examples of activities are designing, redesigning, or testing a product; change orders; visiting the factory floor; constructing a prototype; and being trained.
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SOLUTIONS TO EXERCISES
EXERCISE 3-23 (10 MINUTES) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Process Job-order Job-order (contracts or projects) Process Process Job-order Process Job-order (contracts or projects) Process Job-order
EXERCISE 3-24 (15 MINUTES) 1. Predetermi overhead = ned rate (a ) budgeted overhead budgeted production volume
At 200,000 chicken volume: $100,000 + ($.10)(200 ,000) = $.60 er p chicken 200,000
Overhead = rate (b )
At 300,000 chicken volume: $100,000 + ($.10)(300 ,000) = $.43 er hicken pc (rounded) 300,000
Overhead = rate (c )
At 400,000 chicken volume:
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Overhead = rate
$100,000 + ($.10)(400 ,000) = $.35 er hicken pc 400,000
EXERCISE 3-24 (CONTINUED) 2. The predetermined overhead rate does not change in proportion to the change in production volume. As production volume increases, the $100,000 of fixed overhead is allocated across a larger activity base. When volume rises by 50%, from 200,000 to 300,000 chickens, the decline in the overhead rate is 28.33% [(.60 .43)/.60]. When volume rises by 33.33%, from 300,000 to 400,000 chickens, the decline in the overhead rate is 18.6% [(.43 .35)/.43].
EXERCISE 3-25 (5 MINUTES) Work-in-Process Inventory........................... Raw-Material Inventory........................ Wages Payable..................................... Manufacturing Overhead...................... Finished-Goods Inventory............................ Work-in-Process Inventory.................... 5,480 4,600 680 200 5,480 5,480
EXERCISE 3-26 (30 MINUTES) Job-order costing is the appropriate product-costing system for feature film production, because a film is a unique production. The production process for each film would use labor, material and support activities (i.e., overhead) in different ways. This would be true of or any type of film (e.g., filming on location, filming in the studio, or using animation).
EXERCISE 3-27 (20 MINUTES) 1. Raw-material inventory, January 1................................. Add: Raw-material purchases........................................ Raw material available for use......................................
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$134,00 0 191,000 $325,00 0
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Deduct: Raw-material inventory, January 31.................. 124,000 Raw material used in January........................................ $201,00 0 Direct labor.................................................................. 300,000 Total prime costs incurred in January............................ $501,00 0 2. Total prime cost incurred in January.............................. Applied manufacturing overhead (60% $300,000)....... Total manufacturing cost for January............................. $501,00 0 180,000 $681,00 0
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EXERCISE 3-27 (CONTINUED) 3. Total manufacturing cost for January............................. $681,00 0 Add: Work-in-process inventory, January 1.................... 235,000 Subtotal....................................................................... $916,00 0 Deduct: Work-in-process inventory, January 31.............. 251,000 Cost of goods manufactured.......................................... $665,00 0 $125,00 0 Add: Cost of goods manufactured.................................. 665,000 Cost of goods available for sale..................................... $790,00 0 Deduct: Finished-goods inventory, January 31............... 117,000 Cost of goods sold........................................................ $673,00 0 Since the company accumulates overapplied or underapplied overhead until the end of the year, no adjustment is made to cost of goods sold until December 31. 5. Applied manufacturing overhead for January................. $180,00 0 Actual manufacturing overhead incurred in January....... 175,000 Overapplied overhead as of January 31.......................... $ 5,000 The balance in the Manufacturing Overhead account on January 31 is a $5,000 credit balance. NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant to the solution.
4. Finished-goods inventory, January 1..............................
EXERCISE 3-28 (15 MINUTES) 1. Applied manufacturing overhead
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= total manufacturing costs 30%
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= $2,500,000 30% = $750,000 Applied manufacturing overhead = direct-labor cost 80%
Direct-labor cost = applied manufacturing overhead 80% = $750,000 .8 = $937,500
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EXERCISE 3-28 (CONTINUED) 2. Direct-material cost = total manufacturing cost direct labor cost applied manufacturing overhead = $2,500,000 $937,500 $750,000 = $812,500 3. Let X denote work-in-process inventory on December 31. Total manufacturi + ng cost $2,500,000 + work-inprocess inventory, Jan.1 .75X work-inprocess inventory, Dec. 31 X cost of = goods manufacture d = $2,425,000 .25X = $2,500,000 $2,425,000 X = $300,000 Work-in-process inventory on December 31 amounted to $300,000.
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EXERCISE 3-29 (25 MINUTES) JOB-COST RECORD Job Number Date Started TB78 4/1 Descripti on Date Completed Number of Units Completed Date 4/1 4/5 Date 4/1 4/8 Date 4/15 Direct Material Requisition Number Quantity 101 400 108 500 Direct Labor Time Card Number Hours Various time cards 500 Unit Price $.80 .30 Rate $12 teddy bears 4/15 1,000
Cost $320 150 Cost $6,000
Manufacturing Overhead Activity Base Quantity Application Rate Direct-labor hours 500 $2 Amount $ 470 6,000 1,000 $7,470 $ 7.47
Cost $1,000
Cost Summary Cost Item Total Direct Material Total Direct Labor Total Manufacturing Overhead Total Cost Unit Cost
Date 4/30
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Shipping Summary Units Remaining Units Shipped In Inventory 700 300
Cost Balance $2,241*
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*300 units remaining in inventory
$7.47 = $2,241
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EXERCISE 3-30 (30 MINUTES) 1. CRUNCHEM CEREAL COMPANY SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED DECEMBER 31, 20X1 Direct material: Raw-material inventory, January 1......... $30,000 Add: Purchases of raw material.............. 278,000 Raw material available for use............... $308,00 0 Deduct: Raw-material inventory, 33,000 December 31............................................... Raw material used................................. Direct labor................................................. Manufacturing overhead Total manufacturing costs........................... Add: Work-in-process inventory, January 1... Subtotal...................................................... Deduct: Work-in-process inventory, December 31............................................... Cost of goods manufactured........................
$275,00 0 120,000 252,000 * $647,00 0 39,000 $686,00 0 42,900 $643,10 0
*Applied manufacturing overhead is $252,000 ($120,000 210%). Actual manufacturing overhead is also $252,000, so there is no overapplied or underapplied overhead. 2. Finished-goods inventory, January 1............................. $42,000 Add: Cost of goods manufactured................................. 643,100 Cost of goods available for sale.................................... $685,10 0 Deduct: Finished-goods inventory, December 31.......... 46,200 Cost of goods sold....................................................... $638,90 0
3. In the electronic version of the solutions manual, press the CTRL key and click on the following link: BUILD A SPREADSHEET
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EXERCISE 3-31 (20 MINUTES) 1. Raw-Material Inventory 227,000 174,000 53,000 Work-in-Process Inventory 18,000 DM 174,000 DL 324,000 MOH 180,000 120,000 576,000 Finished-Goods Inventory 30,000 120,000 132,000 18,000 Cost of Goods Sold 132,000
Wages Payable 324,000 Manufacturing Overhead 180,000 Sales Revenue 195,000 Accounts Receivable 195,000 2.
REIMEL FURNITURE COMPANY, INC. PARTIAL BALANCE SHEET AS OF DECEMBER 31, 20X2 Current assets Cash.................................................................... Accounts receivable............................................. Inventory Raw material................................................... Work in process............................................... Finished goods................................................ REIMEL FURNITURE COMPANY, INC. PARTIAL INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X2 Sales revenue........................................................... ................................................................................ Less: Cost of goods sold............................................ Gross margin............................................................ ................................................................................ $195,00 0 132,000 $63,000 XXX XXX $53,000 576,000 18,000
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EXERCISE 3-32 (20 MINUTES) 1. Raw material: Beginning inventory................................................. Add: Purchases........................................................ Deduct: Raw material used....................................... Ending inventory...................................................... Therefore, purchases for the year were..................... 2. Direct labor: Total manufacturing cost.......................................... Deduct: Direct material............................................ Direct labor and manufacturing overhead................. Direct labor + manufacturing overhead Direct labor + (60%) (direct labor) (160%) (direct labor) = = = $686,000 326,000 360,000 $360,0 00 $360,0 00 $360,0 00 $360,0 00 1.6 $225,0 00 $71,000 ? 326,000 $81,000 $336,000
Direct labor
=
Direct labor 3. Cost of goods manufactured: Work in process, beginning inventory..................... Add: Total manufacturing costs.............................. Deduct: Cost of goods manufactured...................... Work in process, ending inventory.........................
=
$ 80,000 686,00 0 ? $ 30,000
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Therefore, cost of goods manufactured was............
$736,0 00
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EXERCISE 3-32 (CONTINUED) 4. Cost of goods sold: Finished goods, beginning inventory......................... Add: Cost of goods manufactured............................. Cost of goods available for sale. Deduct: Cost of goods sold....................................... Finished goods, ending inventory. Therefore, cost of goods sold was............................. $ 90,000 736,00 0 $826,0 00 ? $110,0 00 $716,0 00
EXERCISE 3-33 (20 MINUTES) Calculation of proration amounts: Account Amount Work in Process.................... $35,250 Finished Goods...................... 49,350 Cost of Goods Sold................ 56,400 Total..................................... $141,000 Underapplied Account Overhead x x x x Percenta ge 25% 35% 40% Percentage 25% 35% 40% 100% Calculation of Percentage 35,250 $141,000 49,350 $141,000 56,400 $141,000
Amount Added to Account $4,000 5,600 6,400
Work in Process.................... $16,000* Finished Goods......................16,000 Cost of Goods Sold................16,000
*Underapplied overhead = actual overhead applied overhead $16,000 = $157,000 $141,000
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Journal entry: Work-in-Process Inventory..................... 4,000 Finished-Goods Inventory...................... 5,600 Cost of Goods Sold................................ 6,400 Manufacturing Overhead.......................
16,000
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EXERCISE 3-34 (15 MINUTES) NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant to the solution. 1. 2. Predetermi overhead = ned rate $997,500 = $13.30 hour per 75,000 hours
To compute actual manufacturing overhead: Depreciation............................................................ Property taxes......................................................... Indirect labor........................................................... Supervisory salaries................................................. Utilities.................................................................... Insurance................................................................. Rental of space........................................................ Indirect material: Beginning inventory, January 1............... $48,000 Add: Purchases...................................... 94,000 Indirect material available for use........... $142,00 0 Deduct: Ending inventory, December 31.. 63,000 Indirect material used............................ Actual manufacturing overhead................... actual manufactur ing overhead applied manufactur ing overhead 80,000*) = $62,000 $ 231,000 21,000 82,000 200,000 59,000 30,000 300,000
79,000 $1,002,0 00
Overappli = ed overhead
= $1,002,000 ($13.30 *Actual direct-labor hours. 3.
Manufacturing Overhead............................ Cost of Goods Sold..............................
62,000
62,000
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d.
In the electronic version of the solutions manual, press the CTRL key and click on the following link: BUILD A SPREADSHEET
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EXERCISE 3-35 (20 MINUTES) NOTE: Budgeted sales revenue, although given in the exercise, is irrelevant to the solution. 1. (a) (b) (c) Predetermined overhead rate = budgeted manufacturoverhead ing budgeted ofcost level driver
$364,000 = $36.40 per machine hour 10,000 achine m hours $364,000 = $18.20 per direct-labor hour 20,000 -labor direct hours $364,000 $1.30 per direct-labor dollar or = $280,000 130% * of direct-labor cost $14
*Budgeted direct-labor cost = 20,000 2. Actual manufacturi ng overhead (a) (b) (c)
applied overapplied or manufactur = underapplied ing overhead overhead = $60,400 overapplied overhead = $12,400 underapplied overhead
$340,000 (11,000) ($36.40) $340,000 (18,000) ($18.20)
$340,000 ($270,000) = $11,000 overapplied overhead (130%) $15
Actual direct-labor cost = 18,000
EXERCISE 3-36 (5 MINUTES) 1. Work-in-Process Inventory............................ Manufacturing Overhead....................... 2. Work-in-Process Inventory............................ 340,00 0 400,40
340,000
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Manufacturing Overhead........................ EXERCISE 3-37 (10 MINUTES)
0
400,400
Budgeted overhead rate = budgeted overhead / budgeted direct professional labor 160% = 400,000 euros / 250,000 euros Contract to redecorate mayors offices: Direct material.............................................................. Direct professional labor............................................... Overhead (160% 6,000 euros).................................... Total contract cost........................................................ 3,500 euros 6,000 euros 9,600 euros 19,100 euros
EXERCISE 3-38 (15 MINUTES) 1. Date: To: From: Subjec t: Today President I.M. Student Cost driver for overhead application Memorandum
I recommend direct-labor hours as the best volume-based cost driver upon which to base the application of manufacturing overhead. Since our products are made by hand, direct labor is a very significant production input. Moreover, the incurrence of manufacturing overhead cost appears to be related to the use of direct labor.
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EXERCISE 3-38 (CONTINUED) 2. Date: To: From: Subjec t: Today President I.M. Student Cost driver for overhead application Memorandum
I recommend either machine hours or units of production as the most appropriate cost driver for the application of manufacturing overhead. Since our production process is highly automated, machine hours are the most significant production input. Also, our chips are nearly identical, so the amount of overhead incurred in their production does not vary much across product lines. The incurrence of manufacturing overhead cost appears to be related closely both to machine time and units of production. EXERCISE 3-39 (15 MINUTES) Work-in-Process Inventory: Tanning Department........ 6,000a Manufacturing Overhead..................................... a $6,000100 q.ft. er 20sets $3 er q.ft. = s p set ps Work-in-Process Inventory: Assembly 540b Department............................................................... Manufacturing Overhead..................................... b $540 3machineours 20sets $9 er achine = h pm hour. Work-in-Process Inventory: Saddle Department.......... 3,200c Manufacturing Overhead..................................... c $3,20040directabor ours 20sets $4per = -l h directabor -l hour. 3,200 6,000
540
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EXERCISE 3-40 (10 MINUTES) Overhead distribution: Allocation of the hospital's building maintenance and custodial costs to all of the hospital's departments. Service-department cost allocation: Allocation of the hospital's Personnel Department costs to the direct-patient-care departments in the hospital. Overhead application: Assignment of the overhead costs in the maternity ward to each patient-day of care provided to new mothers. EXERCISE 3-41 (20 MINUTES) There are many key activities that can be suggested for each business. Some possibilities are listed below. After each activity, a suggested cost driver is given in parentheses. (1 ) airline: (a ) (b ) (c ) (d ) (e ) reservations (reservations booked) baggage handling (pieces of baggage handled) flight crew operations (air miles flown) aircraft operations (air miles flown) in-flight service (number of passengers) purchasing (pounds or cost of food purchased) kitchen operations (meals prepared) table service (meals served) table clearing (meals served) dish washing (dishes washed) front desk operations (number of patrons) membership records (number of records)
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(2 )
restauran (a t ) (b ) (c ) (d ) (e ) fitness club: (a ) (b
(3 )
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) (c ) (d ) (e ) (4 ) bank: (a ) (b ) (c ) (d ) (e )
personnel (number of employees) equipment maintenance (maintenance hours) fitness consultation (hours of service) teller window operations (number of customers) loan processing (loan applications) check processing (checks processed) personnel (number of employees) security (number of customers)
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EXERCISE 3-41 (CONTINUED) (5 ) hotel: (a ) (b ) (c ) (d ) (e ) (a ) (b ) (c ) (d ) (e ) front desk operations (number of guests) bell service (pieces of luggage handled) housekeeping service (number of guest-days) room service (meals delivered) telephone service (phone calls made) admissions (patients admitted) diagnostic lab (tests performed) nursing (nursing hours) surgery (hours in operating room) general patient care (patient-days of care)
(6 )
hospital:
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SOLUTIONS TO PROBLEMS
PROBLEM 3-42 (45 MINUTES) NOTE: The 12/31/x1 balances for cash and accounts receivable, although given in the problem, are irrelevant to the solution. 1. TWISTO PRETZEL COMPANY SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED DECEMBER 31, 20X1 Direct material: Raw-material inventory, 12/31/x0............ Add: Purchases of raw material............... Raw material available for use................ Deduct: Raw-material inventory, 12/31/x1..................................................... Raw material used.................................. Direct labor................................................. Manufacturing overhead: Indirect material.................................... Indirect labor......................................... Depreciation on factory building............. Depreciation on factory equipment......... Utilities.................................................. Property taxes....................................... Insurance............................................... Rental of warehouse space..................... Total actual manufacturing overhead... Add: Overapplied overhead*................ Overhead applied to work in process....... Total manufacturing costs........................... Add: Work-in-process inventory, 12/31/x0.... Subtotal...................................................... Deduct: Work-in-process inventory, 12/31/x1..................................................... Cost of goods manufactured........................
$10,100 39,000 $49,100 11,000 $38,100 79,000 $4,900 29,000 3,800 2,100 6,000 2,400 3,600 3,100 $54,900 3,100
58,000 $175,10 0 8,100 $183,20 0 8,300 $174,90 0
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*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in process. Therefore, the overapplied overhead, $3,100, must be added to total actual overhead to arrive at the amount of overhead applied to work in process. If there had been underapplied overhead, the balance would have been deducted from total actual manufacturing overhead. The amount of overapplied overhead is found by subtracting actual overhead, $54,900 (as computed above), from applied overhead, $58,000 (given).
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PROBLEM 3-42 (CONTINUED) 2. TWISTO PRETZEL COMPANY SCHEDULE OF COST OF GOODS SOLD FOR THE YEAR ENDED DECEMBER 31, 20X1 Finished-goods inventory, 12/31/x0.............................. $14,000 Add: Cost of goods manufactured*............................... 174,900 Cost of goods available for sale.................................... $188,90 0 Deduct: Finished-goods inventory, 12/31/x1................. 15,400 Cost of goods sold....................................................... $173,50 0 Deduct: Overapplied overhead .................................... 3,100 Cost of goods sold (adjusted for overapplied overhead) $170,40 0 *The cost of goods manufactured is obtained from the Schedule of Cost of Goods Manufactured. The company closes underapplied or overapplied overhead into cost of goods sold. Hence, the balance in overapplied overhead is deducted from cost of goods sold for the month.
3.
TWISTO PRETZEL COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1 Sales revenue..................................... Less: Cost of goods sold...................... Gross margin...................................... Selling and administrative expenses: Salaries.......................................... Utilities.......................................... Depreciation................................... Rental of office space..................... Other expenses.............................. Total.............................................. Income before taxes............................ Income tax expense............................ Net income......................................... $205,800 170,400 $35,400 $13,800 2,500 1,200 1,700 4,000 23,200 $12,200 5,100 $7,100
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PROBLEM 3-43 (20 MINUTES) 1. Predetermi overhead = ned rate budgeted manufacturoverhead ing budgeted -labor ours direct h $240,000 = = $12 er p hour (2,000) (10)
2.
Journal entries: (a) Raw-Material Inventory....................... Accounts Payable......................... (b) Work-in-Process Inventory................... Raw-Material Inventory................ (c) Manufacturing Overhead..................... Manufacturing-Supplies Inventory 33,000 460 460 100 8,000 8,000 400 400 34,000 34,000 100 33,000
(d) Manufacturing Overhead..................... Accumulated Depreciation: Building.............................................. (e) Manufacturing Overhead..................... Cash............................................ (f) Work-in-Process Inventory................... Wages Payable.............................
To record direct-labor cost [(1,000 + 700) x $20]. Work-in-Process Inventory................... Manufacturing Overhead.............. 20,400 20,400
To apply manufacturing overhead to work in process ($20,400 = 1,700 $12 per hour). (g) Manufacturing Overhead..................... Property Taxes Payable................ (h) Manufacturing Overhead..................... Wages Payable.............................
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910 2,500
910 2,500
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Finished-Goods Inventory.................... Work-in-Process Inventory............ PROBLEM 3-43 (CONTINUED) (j) Accounts Receivable............................ Sales Revenue.............................. Cost of Goods Sold.............................. Finished-Goods Inventory............. *$10,800 = (9/12)($14,400)
(i)
14,400
14,400
13,500 13,500 10,800* 10,800
PROBLEM 3-44 (25 MINUTES) The completed T-accounts are shown below. (Missing amounts in problem are italicized.) Raw-Material Inventory Bal. 1/1 21,00 0 135,0 120,000 00 Bal. 36,00 12/31 0 Work-in-Process Inventory Bal. 1/1 17,00 0 Direct materi 120,0 al 00 Direct labor Mfg. overhe ad Bal. 12/31 150,0 718,000 00 450,0 00 19,00 0 Accounts Payable 2,500 Bal. 1/1 136,500 135,0 00 1,000 Bal. 12/31
Finished-Goods Inventory Bal. 12,000 1/1 718,0 710,0 Bal. 00 00 12/31 20,00 0
Cost of Goods Sold 710,000
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Manufacturing Overhead 452,5 450,000 00 Wages Payable 2,000 Bal. 1/1 147,0 150,0 00 00 5,000 Bal. 12/31
Sales Revenue 810,000 Accounts Receivable Bal. 1/1 Bal. 12/31 11,00 0 810,00 806,000 0 15,0 00
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PROBLEM 3-45 (35 MINUTES) 1. Predetermined overhead rate = budgeted overhead budgeted machine hours = $840,000 16,000 = $52.50 per machine hour (a) Work-in-Process Inventory......................... ........................Raw-Material Inventory ...........80,000...... 80,000*
2.
Work-in-Process Inventory......................... 130,800** ................................Wages Payable. 130,800... * $21,000 + $44,000 + $15,000 = $80,000 ** $35,000 + $22,000 + $65,000 + $8,800 = $130,800 Manufacturing Overhead........................... 238,500 ................Accumulated Depreciation. 34,000..............................Wages Payable ................60,000..............................Manufacturing Supplies Inventory.................................... 5,000...... Miscellaneous Accounts..................................... 139,500 (c) Work-in-Process Inventory......................... ................Manufacturing Overhead... 231,000 231,000* (b)
* (1,200 + 700 + 2,000 + 500) x $52.50 = $231,000 (d) Finished-Goods Inventory. ......................... ................Work-in-Process Inventory. 315,250... 315,250*
* Job 64: $84,000 + $21,000 + $35,000 + (1,200 x $52.50) = $203,000 Job 65: $53,500 + $22,000 + (700 x $52.50) = $112,250 $315,250 = $203,000 + $112,250 (e) Accounts Receivable 146,950* ........ Sales Revenue. ................................. 146,950
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* $112,250 + $34,700 = $146,950 Cost of Goods Sold.................................... Finished-Goods Inventory. ................. 112,250
112,250 3.
Job no. 66 and no. 67 are in production as of March 31: Job 66: $44,000 + $65,000 + (2,000 x $52.50) $214,000 Job 67: $15,000 + $8,800 + (500 x $52.50). 50,050 Total ................................................$264,050 PROBLEM 3-45 (CONTINUED) 4. Finished-goods inventory increased by $203,000 ($315,250 $112,250). 5. The companys actual overhead amounted to $238,500, whereas applied overhead totaled $231,000. Thus, overhead was underapplied by $7,500.
PROBLEM 3-46 (35 MINUTES) 1. Predetermined overhead rate = budgeted overhead budgeted direct-labor cost = $5,460,000 $4,200,000 = 130% of direct labor cost 2. 3. 4. Additions (debits) total $15,605,000 [$5,600,000 + $4,350,000 + ($4,350,000 x 130%)]. The finished-goods inventory consisted of job no. 2143, which cost $351,500 [$156,000 + $85,000 + ($85,000 x 130%)]. Since there is no work in process at year-end, all amounts in the Work-in-Process account must be transferred to Finished-Goods Inventory. Thus: Finished-Goods Inventory..................15,761,800* Work-in-Process Inventory......... .........................................................15,761,800
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*Beginning balance in Work-in-Process additions to the account: $156,800 + $15,605,000 = $15,761,800 5.
Inventory
+
Finlons applied overhead totals 130% of direct-labor cost, or $5,655,000 ($4,350,000 x 130%). Actual overhead was $5,554,000, itemized as follows, resulting in overapplied overhead of $101,000. Indirect materials used..................... Indirect labor................................... Factory depreciation........................ Factory insurance............................. Factory utilities................................ Total ........................................................ Manufacturing Overhead................... Cost of Goods Sold.................... 65,000 2,860,00 0 1,740,00 0 59,00 0 830,00 0 $5,554,00 0 $
101,000
101,000
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PROBLEM 3-46 (CONTINUED) 6. The companys cost of goods sold totals $15,309,300: Finished-goods inventory, Jan. 1. Add: Cost of goods manufactured.. Cost of goods available for sale... Less: Finished-goods inventory, Dec. 31.. Unadjusted cost of goods sold. Less: Overapplied overhead. Cost of goods sold... 7. $ 0 15,761,80 0 $15,761,80 0 351,50 0 $15,410,30 0 101,00 0 $15,309,30 0
No, selling and administrative expenses are operating expenses of the firm and are treated as period costs rather than product costs. Such costs are unrelated to manufacturing overhead and cost of goods sold.
PROBLEM 3-47 (30 MINUTES) 1. Traceable costs total $2,500,000, computed as follows: Total Cost Professional staff salaries Administrative support staff Travel . Photocopying .. Other operating costs
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Percent Traceab le 80% 60 90 90 50
Traceab le Cost $2,000, 000 180, 000 225, 000 45, 000 50, 000
$2,500, 000 300, 000 250, 000 50, 000 100, 000
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Total .
$3,200, 000
$2,500, 000
JLRs overhead (i.e., the nontraceable costs) total $700,000 ($3,200,000 - $2,500,000). 2. Predetermined overhead rate = budgeted overhead traceable costs = $700,000 $2,500,000 = 28% of traceable costs Target profit percentage = target profit total cost = $640,000 $3,200,000 = 20% of cost
3.
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PROBLEM 3-47 (CONTINUED) 4. The total cost of the Martin Manufacturing project is $64,000, and the billing is $76,800, as follows: Professional staff salaries Administrative support staff Travel .. Photocopying Other operating costs. Subtotal Overhead ($50,000 x 28%) . Total cost. Markup ($64,000 x 20%) . Billing to Martin 5. 6. $41,0 00 2,6 00 4,5 00 5 00 1,4 00 $50,0 00 14,0 00 $64,0 00 12,8 00 $76,8 00
Possible nontraceable costs include utilities, rent, depreciation, advertising, top management salaries, and insurance. Professional staff members are compensated for attending training sessions and firm-wide planning meetings, paid vacations, and completion of general, non-client-related paperwork and reports. These activities benefit multiple clients, the consultant, and/or the overall firm, making traceability to specific clients difficult if not impossible.
PROBLEM 3-48 (30 MINUTES) NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant to the solution.
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1. Machining Dept. overhead rate = budgeted overhead budgeted machine hours = $4,000,000 400,000 = $10 per machine hour Assembly Dept. overhead rate = budgeted overhead budgeted direct-labor cost = $3,080,000 $5,600,000 = 55% of directlabor cost
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PROBLEM 3-48 (CONTINUED) 2. The ending work-in-process inventory is carried at a cost of $153,530, computed as follows: Machining Department: Direct material Direct labor. Manufacturing overhead (360 x $10) Assembly Department: Direct material Direct labor. Manufacturing overhead ($58,600 x 55%).. Total cost... 3. $24,5 00 27,9 00 3,6 $ 00 56,000 $ 6,700 58,6 00 32,2 97,5 30 30 $153,5 30
Actual overhead in the Machining Department amounted to $4,260,000, whereas applied overhead totaled $4,250,000 (425,000 hours x $10). Thus, overhead was underapplied by $10,000 during the year. Actual overhead in the Assembly Department amounted to $3,050,000, whereas applied overhead totaled $3,179,000 ($5,780,000 x 55%). Thus, overhead was overapplied by $129,000. The companys manufacturing overhead was overapplied by $119,000 ($129,000 - $10,000). As a result, excessive overhead flowed from Work-in-Process Inventory, to Finished-Goods Inventory, to Cost of Goods Sold, meaning that the Cost of Goods Sold account must be decreased at year-end. The Work-in-Process account is charged with applied overhead, $7,429,000 or ($4,250,000 + $3,179,000). The firms selection of cost drivers (or application bases) seems appropriate. There should be a strong correlation between the cost driver and the amount of overhead incurred. In the
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4.
5.
6. 7.
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Machining Department, much of the overhead is probably related to the operation of machines. Similarly, in the Assembly Department, a considerable portion of the overhead incurred is related to manual assembly (i.e., labor) operations.
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PROBLEM 3-49 (25 MINUTES) 1. Predetermi overhead = ned rate budgeted manufacturoverhead ing budgetedachineours m h $1,464,000 = = $20 er achine r pm hou 73,200
2.
Journal entries: (a ) (b ) (c ) Raw-Material Inventory................. Accounts Payable................... Work-in-Process Inventory............. Raw-Material Inventory.......... Manufacturing Overhead............... Manufacturing-Supplies Inventory...................................... (d ) (e ) Manufacturing Overhead............... Cash...................................... Work-in-Process Inventory............. Wages Payable....................... 1,800 1,800 3,000 3,000 1,700 1,700
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7,850 7,850 180 180 30 30 800 800 75,000 75,000
(f) Selling and Administrative Expense Prepaid Insurance.................. (g ) (h ) Raw-Material Inventory................. Accounts Payable................... Accounts Payable.......................... Cash......................................
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(i) Manufacturing Overhead............... Wages Payable....................... (j) Manufacturing Overhead............... Accumulated Depreciation: Equipment..................................... Finished-Goods Inventory.............. Work-in-Process Inventory...... PROBLEM 3-49 (CONTINUED) (l) Work-in-Process Inventory............. Manufacturing Overhead........ (k)
21,000 7,000
21,000 7,000
1,100 1,100 140,000*
140,000
*Applied manufacturing overhead = 7,000 machine hours $20 per hour. (m ) Accounts Receivable...................... Sales Revenue........................ Cost of Goods Sold........................ Finished-Goods Inventory....... 139,000 139,000 176,000 176,000
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PROBLEM 3-50 (45 MINUTES) 1. HURON CORPORATION SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED DECEMBER 31, 20X2 Direct material: Raw material inventory, 12/31/x1... Add: Purchases of raw material........ Raw material available for use......... Deduct: Raw-material inventory, 12/31/x2............................................... Raw material used........................... Direct labor.......................................... Manufacturing overhead: Indirect material.............................. Indirect labor.................................. Depreciation on factory building...... Depreciation on factory equipment. . Utilities........................................... Property taxes................................. Insurance........................................ Total actual manufacturing overhead............................................. Deduct: Underapplied overhead*. Overhead applied to work in process Total manufacturing costs.................... Add: Work-in-process inventory, 12/31/x1............................................... Subtotal............................................... Deduct: Work-in-process inventory, 12/31/x2............................................... Cost of goods manufactured.................
$89,000 731,000 $820,000 59,000 $761,000 474,000 $45,000 150,000 125,000 60,000 70,000 90,000 40,000 $580,000 2,500 577,500 $1,812,500 -0$1,812,500 40,000 $1,772,500
*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in process. Therefore, the underapplied overhead, $2,500, must be deducted from total actual overhead to arrive at the amount of overhead applied to work in process. If there had been overapplied overhead, the balance would have been added to total manufacturing overhead.
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The amount of underapplied overhead is found by subtracting the applied manufacturing overhead, $577,500, from the total actual manufacturing overhead, $580,000.
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PROBLEM 3-50 (CONTINUED) 2. HURON CORPORATION SCHEDULE OF COST OF GOODS SOLD FOR THE YEAR ENDED DECEMBER 31, 20X2 Finished-goods inventory, 12/31/x1......................... Add: cost of goods manufactured............................ Cost of goods available for sale............................... Deduct: Finished-goods inventory, 12/31/x2............ Cost of goods sold.................................................. Add: Underapplied overhead*................................. Cost of goods sold (adjusted for underapplied overhead)............................................................... $ 35,000 1,772,500 $1,807,500 40,000 $1,767,500 2,500 $1,770,000
*The company closes underapplied or overapplied overhead into cost of goods sold. Hence the $2,500 balance in underapplied overhead is added to cost of goods sold for the month. 3. HURON CORPORATION INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X2 Sales revenue......................................................... Less: Cost of goods sold.......................................... Gross margin.......................................................... Selling and administrative expenses....................... Income before taxes............................................... Income tax expense................................................ Net income............................................................. $2,105,000 1,770,000 $335,000 269,000 $ 66,000 25,000 $ 41,000
4. In the electronic version of the solutions manual, press the CTRL key and click on the following link: BUILD A SPREADSHEET PROBLEM 3-51 (15 MINUTES) 1. $40,000. Since there was no work-in-process inventory at the beginning of 20x2, all of the costs in the year-end work-in-process inventory were incurred during 20x2.
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2. 3.
The direct-material cost would have been larger, probably by roughly 20 percent, because direct material is a variable cost. Depreciation is a fixed cost, so it would not have been any larger if the firm's volume had increased.
PROBLEM 3-51 (CONTINUED) 4. Only the $30,000 of equipment depreciation would have been included in manufacturing overhead on the Schedule of Cost of Goods Manufactured. The $30,000 of depreciation related to selling and administrative equipment would have been treated as a period cost and expensed during 20x2.
PROBLEM 3-52 (30 MINUTES) 1. MARCO POLO MAP COMPANY SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE MONTH OF MARCH Direct material: Raw-material inventory, March 1........ Add: March purchases of raw material Raw material available for use........... Deduct: Raw-material inventory, March 31............................................... Raw materials used........................... Direct labor........................................... Manufacturing overhead applied (50% of direct labor) Total manufacturing costs..................... Add: Work-in-process inventory, March 1 Subtotal................................................ Deduct: Work-in-process inventory, March 31 (90% $40,000)............... Cost of goods manufactured..................
$17,000 113,000 $130,000 26,000 $104,000 160,000 * 80,000 $344,000 40,000 $384,000 36,000 $348,000
*Work upward from the bottom of the statement, using the information available. Direct labor + manufacturing overhead = total manufacturing costs direct material cost = $344,000 $104,000 = $240,000. Since manufacturing overhead = 50% of direct labor, then manufacturing overhead = $80,000 and direct labor = $160,000.
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Cost of goods manufactured = cost of goods sold + increase in finished-goods inventory = $345,000 + $3,000 = $348,000.
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PROBLEM 3-52 (CONTINUED) 2. MARCO POLO MAP COMPANY SCHEDULE OF PRIME COSTS FOR THE MONTH OF MARCH Raw material: Beginning inventory....................................... Add: Purchases.............................................. Raw material available for use....................... Deduct: Ending inventory............................... Raw material used............................................... Direct labor......................................................... Total prime costs................................................. 3. MARCO POLO MAP COMPANY SCHEDULE OF CONVERSION COSTS FOR THE MONTH OF MARCH Direct labor.......................................................... Manufacturing overhead applied (50% of direct labor)................................................................... Total conversion cost............................................ $160,000 80,000 $240,000
$17,000 113,000 $130,000 26,000 $104,000 160,000 $264,000
PROBLEM 3-53 (30 MINUTES) 1. budgeted manufacturoverhead ing budgetedachineours m h $235,000 = = $5per achine m hour 47,000 Calculation of applied manufacturing overhead: Predetermi overhead = ned rate Applied manufacturing overhead = machine hrs. used x predetermined overhead rate $20,000 = 4,000 hrs. x $5 per hr. 3. Underapplied overhead $6,000
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2.
= =
actual overhead applied overhead $26,000 $20,000
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4.
Cost of Goods Sold.................................. Manufacturing Overhead..................
6,000 6,000
PROBLEM 3-53 (CONTINUED) 5. (a ) Calculation of proration amounts: Calculation of Percentage 2,500 20,000 12,500 20,000 5,000 20,000
Account Work in Process Finished Goods Cost of Goods Sold Total
Explanation Job P82 only Job N08 only Job A79 only
Amount* $2,500 12,500 5,000 $20,000
Percentage 12.5% 62.5% 25.0% 100.0%
*Machine hours used on job Underappli ed Overhead $6,000 6,000 6,000
predetermined overhead rate. Amount Added to Account $ 750 3,750 1,500 $6,000
Account Work in Process Finished Goods Cost of Goods Sold Total (b )
Percentage 12.5% 62.5% 25.0%
Journal entry: Work-in-Process Inventory......................... Finished-Goods Inventory.......................... Cost of Goods Sold.................................... Manufacturing Overhead.................... 750 3,750 1,500 6,000
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PROBLEM 3-54 (40 MINUTES) 1. In accordance with the IMA Statement of Ethical Professional Practice, the appropriateness of Marc Jacksons three alternative courses of action is described as follows: (a) Follow Brown's directive and do nothing further. This action is inappropriate as Jackson has ethical responsibilities to take further action in accordance with the following standards of ethical conduct.
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PROBLEM 3-54 (CONTINUED) Competence: Maintain an appropriate level of professional expertise by continually developing knowledge and skills. Perform professional duties in accordance with relevant laws, regulations, and technical standards. Provide decision support information and recommendations that are accurate, clear, concise, and timely. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. Integrity: Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. Abstain from engaging in or supporting any activity that might discredit the profession. Credibility: Communicate information fairly and objectively. Disclose all relevant information that could reasonably be expected to influence an intended users understanding of the reports, analyses, or recommendations. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.
(b) Attempt to convince Brown to make the proper adjustments and to advise the external auditors of
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her actions. This action is appropriate as Jackson has taken the ethical conflict to his immediate superior for resolution. Unless Jackson suspects that his superior is involved, this alternative is the first step for the resolution of an ethical conflict.
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PROBLEM 3-54 (CONTINUED) (c) Tell the Audit Committee of the Board of Directors about the problem and give them the appropriate accounting data. This action is not appropriate as a first step since the resolution of ethical conflicts requires Jackson to first discuss the matter with his immediate superior. 2. The next step that Jackson should take in resolving this conflict is to inform Brown that he is planning to discuss the conflict with the next higher managerial level. Jackson should pursue discussions with successively higher levels of management, including the Audit Committee and the Board of Directors, until the matter is satisfactorily resolved. At the same time, Jackson should clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible courses of action. If the ethical conflict still exists after exhausting all levels of internal review, Jackson may have no course other than to resign from the organization.
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PROBLEM 3-55 (25 MINUTES) 1. Quarter 1st............................................ 2nd........................................... 3rd............................................ 4th............................................ 2. Direct material......................... Direct labor.............................. Manufacturing overhead: 20 hrs $4 per hr............. 20 hrs $5 per hr............. Total cost................................. 3. Total cost................................. Markup (10%).......................... Price........................................ 4. Predetermi rate= ned = 5. Direct material.......................... Direct labor............................... Manufacturing overhead (20 hrs $4.44)...................................
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Predetermine d Overhead Rate $4 per hour 5 per hour 4 per hour 5 per hour
Calculations $100,000/25,00 0 $80,000/16,000 $50,000/12,500 $70,000/14,000 April $100 300 100 $500
January $100 300 80 ____ $480
January $480 48 $528
April $500 50 $550
annualudgeted b manufacturoverhead ing annualudgeted -labor b direct hours $300,000 = $4.44er our p h (rounded) 67,500 January $100.00 300.00 88.80 April $100.00 300.00 88.80
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Total cost..................................
$488.80
$488.80
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PROBLEM 3-55 (CONTINUED) 6. Total cost.................................. Markup (10%)........................... Price......................................... $488.80 48.88 $537.68
Notice that with quarterly overhead rates, the firm may underprice its product in January and overprice it in April. PROBLEM 3-56 (45 MINUTES) 1. Predetermined overhead rate: Budgeted manufacturoverhead $606,000 ing * = Budgeted -labor ours direct h 120,000
= $5.05 per direct-labor hour
*Budgeted manufacturing overhead = variable overhead + fixed overhead $606,000 = $390,000 + $216,000 2. Cost of job 77: Cost in beginning work-in-process inventory.......... Direct material..................................................... Direct labor (3,500 hours $24.00 per hour)*...... Applied manufacturing overhead (3,500 hours $5.05 per hour)........................ Total cost............................................................. *Direct-labor rate = 3. direct-labor wages $204,000 = = $24.00 per hour direct-labor hours 8,500 $54,000 45,000 84,000 17,675 $200,675
Manufacturing overhead applied to job 79: Direct-labor hours predetermined overhead rate = 2,000 hours $5.05 per hour = $10,100
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PROBLEM 3-56 (CONTINUED) 4. Total manufacturing overhead applied during November: Total direct-labor hours 8,500 hours $5.05 predetermined overhead rate =
= $42,925
5.
Actual manufacturing overhead incurred during November: Indirect material (supplies)....................................... Indirect-labor wages................................................. Supervisory salaries................................................. Building occupancy costs, factory facilities................ Production equipment costs...................................... Total........................................................................ $12,000 15,000 6,000 6,400 8,100 $47,500
6.
Underapplied overhead for November: Actual manufacturing overhead applied manufacturing overhead = $47,500 $42,925 = $4,575 underapplied
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PROBLEM 3-57 (75 MINUTES) 1. Predetermi overhead = ned rate budgeted manufacturoverhead ing budgeted -labor ours direct h $426,300 = = $21 er p directlabor hour 20,300
2.
Journal entries: (a ) (b ) Raw-Material Inventory................. Accounts Payable................... Raw-Material Inventory................. Accounts Payable................... (c ) Work-in-Process Inventory............. Raw-Material Inventory.......... *(250 sq. ft. $5 per sq. ft.) + (1,000 lbs. 11,250* 11,250 $10 per lb.) 100 4,000 4,000 5,000 5,000
Manufacturing Overhead**............ Manufacturing-Supplies Inventory......................................
100
**Valve lubricant is an indirect material, so it is considered an overhead cost. (d ) Work-in-Process Inventory............. Manufacturing Overhead............... Wages Payable....................... Work-in-Process Inventory............. Manufacturing Overhead........ 34,000 13,000 35,700* 35,700 47,000
*Applied manufacturing overhead = 1,700 direct-labor hours $21 per hour.
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(e )
Manufacturing Overhead............... Accumulated Depreciation: Building and Equipment...........................
12,000
12,000 1,200 1,200 2,100 2,100 2,400 2,400 3,100 8,000 8,000 4,000 4,000 1,000 1,000 34,050* 34,050 3,100
(f) Manufacturing Overhead............... Cash...................................... PROBLEM 3-57 (CONTINUED) (g ) (h ) Manufacturing Overhead............... Accounts Payable................... Manufacturing Overhead............... Cash...................................... (i) Manufacturing Overhead............... Prepaid Insurance.................. (j) Selling and Administrative Expenses Cash...................................... (k) Selling and Administrative Expenses Accumulated Depreciation: Buildings and Equipment........................... Selling and Administrative Expenses Cash...................................... Finished-Goods Inventory............. Work-in-Process Inventory..... *Cost of Job T81: Direct material (250
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(l) (m )
$5). .
$ 1,250
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Direct labor (800
$20).....
Manufacturing overhead (800 $21)........................ Total cost............................
16,00 0 16,80 0 $34,0 50 26,600* . 17,025** 17,025 26,600
(n) Accounts Receivable..................... Sales Revenue........................ *(76 2) $700 per trombone
Cost of Goods Sold....................... Finished-Goods Inventory....... **17,025 = $34,050 2 PROBLEM 3-57 (CONTINUED) 3. Bal T-accounts and posting of journal entries: Cash 10,0 00 1,200 2,400 8,000 1,000 Accounts Receivable 21,0 00 26,6 00
(f) (h) (j) (l)
Accounts Payable 13,00 0 5,000 4,000 2,100
Bal (a) (b) (g)
Bal. (n)
Wages Payable 8,000 47,00 0
Bal . (d)
Bal.
Prepaid Insurance 5,00 0
Accumulated Depreciation: Buildings and Equipment 102,0 Bal 00 .
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3,100
(i)
12,00 (e) 0 4,000 (k) Manufacturing Overhead (c) 100 35,70 (d) 0 (d) 13,00 0 (e) 12,00 0 (f) 1,200 (g) 2,100 (h) 2,400 (i) 3,100 (n) Cost of Goods Sold 17,02 5
Manufacturing-Supplies Inventory Bal. 500 100 (c)
Raw-Material Inventory Bal. 149,00 0 (a) 5,000 11,250 (b) 4,000
(c)
Work-in-Process Inventory Bal. 91,000 (c) 11,250 34,050 (m) (d) 34,000 (d) 35,700 PROBLEM 3-57 (CONTINUED) Finished-Goods Inventory Bal. 220,0 00 (m) 34,05 17,025 (n) 0 4. (a)
Selling and Administrative Expenses (j) 8,000 (k) 4,000 (l) 1,000
Sales Revenue 26,60 0
(n)
Calculation of actual overhead: Indirect material (valve lubricant)................ Indirect labor............................................... Depreciation: factory building and equipment $ 100 13,000 12,000
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Rent: warehouse.......................................... Utilities....................................................... Property taxes............................................. Insurance.................................................... Total actual overhead.................................. (b) Overapplied overhead
1,200 2,100 2,400 3,100 $33,900
manufactur applied ing manufactur ing actual = overhead overhead = $33,900 $35,700* = $1,800 overapplied
*$35,700 = 1,700 direct-labor hours (c) Manufacturing Overhead................... Cost of Goods Sold.....................
$21 per hour. 1,800 1,800
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PROBLEM 3-57 (CONTINUED) 5. SCHOLASTIC BRASS CORPORATION SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE MONTH OF MARCH Direct material: Raw-material inventory, March 1....... Add: March purchases of raw material................................................ Raw material available for use.......... Deduct: Raw-material inventory, March 31............................................... Raw material used............................ Direct labor........................................... Manufacturing overhead: Indirect material............................... Indirect labor................................... Depreciation on factory building and equipment............................................. Rent: Warehouse.............................. Utilities............................................ Property taxes.................................. Insurance......................................... Total actual manufacturing overhead............................................... Add: overapplied overhead*.......... Overhead applied to work in process. Total manufacturing costs..................... Add: Work-in-process inventory, March 1 Subtotal................................................ Deduct: Work-in-process inventory, March 31............................................... Cost of goods manufactured.................
$149,000 9,000 $158,000 146,750 $ 11,250 34,000 $ 100 13,000 12,000 1,200 2,100 2,400 3,100 $33,900 1,800 35,700 $ 80,950 91,000 $171,950
137,900 $ 34,050
*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in process. Therefore, the overapplied overhead, $1,800, must be added to actual overhead to arrive at the amount of overhead applied to work in process during March.
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Cost of Job T81, which was completed during March.
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PROBLEM 3-57 (CONTINUED) 6. SCHOLASTIC BRASS CORPORATION SCHEDULE OF COST OF GOODS SOLD FOR THE MONTH OF MARCH Finished-goods inventory, March 1........................... Add: Cost of goods manufactured............................. Cost of goods available for sale................................ Deduct: Finished-goods inventory, March 31............. Cost of goods sold................................................... Deduct: Overapplied overhead*................................ Cost of goods sold (adjusted for overapplied overhead) $220,00 0 34,050 $254,05 0 237,025 $17,025 1,800 $15,225
*The company closes underapplied or overapplied overhead into cost of goods sold. Hence the balance in overapplied overhead is deducted from cost of goods sold for the month. 7. SCHOLASTIC BRASS CORPORATION INCOME STATEMENT FOR THE MONTH OF MARCH Sales revenue.......................................................... Less: Cost of goods sold........................................... Gross margin........................................................... Selling and administrative expenses........................ Income (loss)........................................................... $26,600 15,225 $11,375 13,000 $ (1,625)
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PROBLEM 3-58 (20 MINUTES) JOB-COST RECORD Job Number Date Started T81 March 5 Descripti on Date Completed Number of Units Completed Date 3/5 Date 3/8 to 3/12 Date 3/8 to 3/12 Direct Material Requisition Number Quantity 112 250 Direct Labor Time Card Number Hours 3-08 through 3-12 800 Unit Price $5.00 Rate $20 Trombones March 20 76
Cost $1,250 Cost $16,000
Manufacturing Overhead Activity Base Quantity Application Rate Direct-labor hours 800 $21 Cost Summary
Cost $16,800
Cost Item Total direct material Total direct labor Total manufacturing overhead Total cost Unit cost
Amount $1,250 16,000 16,800 $34,050 $448.03*
Date March
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Shipping Summary Units Remaining Units Shipped In Inventory 38 38
Cost Balance $17,025
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*Rounded
$17,025 = $34,050 2
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PROBLEM 3-59 (55 MINUTES) The answers to the questions are as follows: 1. 2. 3. 4. 5. $216,000 $19,000 $70,000 $38,000 $80,000 6. 7. 8. 9. 10 . $60,000 $150,000 $40,000 $15,000 Zero
The completed T accounts, along with supporting calculations, follow. Raw-Material Inventory Bal. 15,0 10/31 00 70,0 40,000 00 Bal. 45,0 11/30 00 Work-in-Process Inventory Bal. 8,00 10/31 0 Direct 150,00 0 mater 40,0 ial 00 Direct labor 80,0 00 Overhe 60,0 ad 00 Bal. 38,0 11/30 00 Manufacturing Overhead 60,0 60,000 00 Accounts Payable 12,00 Bal. 0 10/31 81,00 70,00 00 1,000 Bal. 11/30 Finished-Goods Inventory Bal. 35,00 10/31 0 150,0 180,0 00 00 Bal. 5,000 11/30 Cost of Goods Sold 180,0 00
Sales Revenue 216,0 00
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Wages Payable 1,000 Bal. 10/31 79,5 80,000 00 1,500 Bal. 11/30 Supporting Calculations: 1. Sales revenue
Bal. 10/31 Bal. 11/30
Accounts Receivable 8,000 216,0 205,0 00 00 19,00 0
= cost of goods sold = $180,000 = $216,000 120%
120%
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PROBLEM 3-59 (CONTINUED) 2. Ending balance in accounts receivable = beginning balance + sales revenue collections = $8,000 + $216,000 $205,000 = $19,000 3. Purchases of raw material Addition to accounts payable = = = = 4. November 30 balance in work-in-process inventory addition to accounts payable ending balance + payments beginning balance $1,000 + $81,000 $12,000 $70,000
= direct + dire + manufacturing mater ct overhead ial labo r = $20,500 + (500)($20) + (500)($15*) = $38,000 budgeted overhead budgeted -labor direct hours $720,000 48,000
*Predetermined overhead rate
=
=
= $15 per direct-labor hour Budgeted direct-labor hours
=
budgeted -labor direct cost $960,000 = = 48,000 $20 directabor -l rate November credit to wages payable
5.
Addition to work in process for direct labor November credit to wages payable
=
= ending balance + payments beginning balance = $1,500 + $79,500 $1,000
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= $80,000
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PROBLEM 3-59 (CONTINUED) 6. November applied overhead = direct labor hours overhead rate = 4,000* = $60,000 Direct labor hours = = addition worknprocess direct to i for labor directabor -l rate $80,000 = 4,000 hours $20 $15 predetermined
7.
Cost of goods completed during November
beginning = balance in work in process
ending additio + balance in ns work in during process Novem ber = $8,000 + ($40,000 + $80,000 + $60,000) $38,000 = $150,000
8.
Raw material used in November October 31 balance in raw-material inventory
=
November credit to = $40,000 (given) raw-material inventory direct + mater purchas ial es used
9.
November 30 = balance in rawmaterial inventory = $15,000
= $45,000 + $40,000 $70,000
10 Overapplied or underapplied overhead . applied overhead
= actual overhead
= $60,000 $60,000 =0
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PROBLEM 3-60 (50 MINUTES) 1. Schedule of budgeted overhead costs: Departmen Departme tA nt B Variable overhead A 20,000 $16.............................. B 20,000 $ 4.............................. Fixed overhead.................................... Total overhead..................................... Grand total of budgeted overhead (A + B): Predetermi overhead = ned rate $320,000 200,000 $520,000 $80,000 200,000 $280,000
$800,000
total udgeted b overhead rate total udgeted -labor ours b direct h $800,000 = = $20 er p hour 40,000
2.
Product prices: Basic System $1,100 110 $1,210 Advanced System $1,500 150 $1,650
Total cost............................................ Markup, 10% of cost............................ Price................................................... 3. Departmental overhead rates:
Departmen Departme tA nt B Budgeted overhead (from requirement 1)........................ Budgeted direct-labor hours................ Predetermined overhead rates............ $520,000 20,000 $520,000 20,000 $26 per directMcGraw-Hill/Irwin Inc. 3-80
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labor hour
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PROBLEM 3-60 (CONTINUED) 4. New product costs: Basic System $400 300 130 390 210 _ ____ $1,040 Advanced System $800 300
Direct material.................................... Direct labor......................................... Manufacturing overhead: Department A: Basic system 5 $26.................. Advanced system 15 $26......... Department B: Basic system 15 $14................ Advanced system 5 $14........... Total 5. New product prices:
70 $1,560
Total cost............................................ Markup, 10% of cost............................ Price...................................................
Basic System $1,040 104 $1,144
Advanced System $1,560 156 $1,716
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PROBLEM 3-60 (CONTINUED) 6. TELETECH CORPORATION Memorandum Date: To: From: Subject: Today President, TeleTech Corporation I. M. Student Departmental overhead rates
Until now the company has used a single, plantwide overhead rate in computing product costs. This approach resulted in a product cost of $1,100 for the basic system and a cost of $1,500 for the advanced system. Under the company's pricing policy of adding a 10 percent markup, this yielded prices of $1,210 for the basic system and $1,650 for the advanced system. When departmental overhead rates are computed, it is apparent that the two production departments have very different cost structures. Department A is a relatively expensive department to operate, while Department B is less costly. It is important to recognize the different rates of cost incurrence in the two departments, because our two products require different amounts of time in the two departments. The basic system spends most of its time in Department B, the inexpensive department. The advanced system spends most of its time in Department A, the more expensive department. Thus, using departmental overhead rates shows that the basic system costs less than we had previously realized; the advanced system costs more. The revised product costs are $1,040 and $1,560 for the basic and advanced systems, respectively. With a 10 percent markup, these revised product costs yield prices of $1,144 for the basic system and $1,716 for the advanced system. We have been overpricing the basic system and underpricing the advanced system. I recommend that the company switch to a product costing system that incorporates departmental overhead rates.
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PROBLEM 3-61 (30 MINUTES) 1. Cost rates per unit of each cost driver. (a) Activity Machine setup. Material receiving...... Inspection....... Machineryrelated............ Engineering..... Total overhead 2. (b) Activity Cost Pool $100,000 (c) Quantity of Cost Driver 200 setups (b) (c) Cost Rate per Unit of Cost Driver $500 per setup
$.75 per lb. $50 per inspection 420,000 60,000 machine $7 per machine hrs. hr. 7,000 engineering $20 per 140,000 hrs. engineering hr $800,000
60,000 80,000 lbs. 80,000 1,600 inspections
Overhead assigned to each product line:
Overhead Assigned to Activity Basic System Line Machine setup $25,000(50 setups $500) Material 22,500(30,000 receiving........ lbs $.75) Inspection...... 35,000(700 inspections $50)
Overhead Assigned to Advanced System Line $ 75,000 (150 setups $500) 37,500 (50,000 lbs $.75) 45,000 (900 inspections $50) Machinery140,000(20,000 machine 280,000 (40,000 related........... hrs. machine hrs. $7) $7) Engineering.... 60,000(3,000 eng. 80,000 (4,000 eng hrs. $20) hrs. $20) Total $282,500 $517,500 overhead........ 3. Overhead assigned per unit of each type of fax machine:
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Basic system.................................... $282.50 ($282,500 1,000 units) Advanced system............................. $517.50 ($517,500 1,000 units)
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PROBLEM 3-61 (CONTINUED) 4. Comparison of total product cost assigned to each type of fax machine under three alternative product costing systems: Basic System Plantwide overhead rate*................ Departmental overhead rate**......... Activity-based costing..................... $1,100.0 0 1,040.00 982.50 Advance d System $1,500.0 0 1,560.00 1,617.50
*From the data given in the preceding problem. **From the solution to the preceding problem. The assigned overhead as calculated in requirement (3) above, plus the direct material and direct-labor costs given in the data for the preceding problem:
Basic system.................................. $982.50 = $700.00 + $282.50 Advanced system........................... $1,617.50 = $1,100.00 + $517.50
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SOLUTIONS TO CASES
CASE 3-62 (45 MINUTES) 1. A job-order costing system is appropriate in any environment where costs can be readily identified with specific products, batches, contracts, or projects. This situation typically occurs in a manufacturing setting when relatively small numbers of heterogeneous products are produced. 2. The only job remaining in CompuFurns work-in-process inventory on December 31 is job PS812. The cost of job PS812 can be calculated as follows: Job PS812 balance, 11/30.................. December additions: Direct material .................................. Purchased parts................................. Direct labor........................................ Manufacturing overhead (19,500 machine hrs $5*) Work-in-process inventory, 12/31.............. $4,500,000 = $5per achine m hour 900,000 hours $124,00 0 87,000 200,500 97,50 0 $250,0 00
509,00 0 $759,0 00
*Manufacturoverhead = ing rate
3. The cost of the chairs remaining in CompuFurns finished-goods inventory on December 31 is $455,600, calculated as follows: Units of chairs in finished-goods inventory on December 31: Finished-goods inventory, 11/30.................... Add: Units completed in December................. Units available............................................... Deduct: Units shipped in December................ Finished-goods inventory, 12/31....................
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Chair Units 19,400 15,000 34,400 21,000 13,400
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CASE 3-62 (CONTINUED) Since CompuFurn uses the first-in, first-out (FIFO) inventory method, all units remaining in finished- goods inventory were completed in December. Unit cost of chairs completed in December: Work in process inventory, 11/30....... December additions: Direct material.............................. Purchased parts............................ Direct labor................................... Manufacturing overhead (4,400 machine hrs $5) Total cost.......................................... $431,000 $3,000 10,800 43,200 22,000
79,000 $510,00 0
Unit cost =
$510,000 total cost = = $34 per unit units ompleted 15,000 c = unit cost quantity = $34 13,400 = $455,600
Cost of finished-goods inventory
4. Overapplied overhead is $7,500, calculated as follows: Machine hours used: January through November................................... December............................................................. Total............................................................... 830,000 49,900 879,900
Applied manufacturing overhead = 879,900 machine hours $5 = $4,399,500 Actual manufacturing overhead: January through November................................... $4,140,000 December............................................................. 252,000 Total............................................................... $4,392,000
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Overapplied overhead
= applied overhead actual overhead = $4,399,500 $4,392,000 = $7,500
CASE 3-62 (CONTINUED) 5. If the amount of overapplied or underapplied overhead is not significant, the amount is generally treated as a period cost and closed to Cost of Goods Sold. If the amount is significant, the amount is sometimes prorated over the relevant accounts, i.e., Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
CASE 3-63 (50 MINUTES) 1. Manufacturers use predetermined overhead rates to allocate to production jobs the production costs that are not directly traceable to specific jobs. As a result, management will have timely, accurate job-cost information. Predetermined overhead rates are easy to apply and avoid fluctuations in job costs caused by changes in production volume or overhead costs throughout the year. The manufacturing overhead applied through November 30 is calculated as follows: Machine hours predetermined = overhead applied overhead rate 73,000 3. $15 = $1,095,000
2.
The manufacturing overhead applied in December is calculated as follows: Machine hours predetermined = overhead applied overhead rate 6,000 $15 = $90,000
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4.
Underapplied manufacturing overhead through December 31 is calculated as follows: Actual overhead ($1,100,000 + $96,000).................... Applied overhead ($1,095,000 + $90,000).................. Underapplied overhead.............................................. $1,196,0 00 (1,185,0 00) $ 11,000
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CASE 3-63 (CONTINUED) 5. The balance the Finished-Goods Inventory account on December 31 is comprised only of Job No. N11-013 and is calculated as follows: November 30 balance for Job No. N11-013................. December direct material.......................................... December direct labor............................................... December overhead (1,000 $15)........................... Total finished-goods inventory............................. $55,000 4,000 12,000 15,000 $86,000
6.
FiberComs Schedule of Cost of Goods Manufactured for the year just completed is constructed as follows: FIBERCOM COMPANY SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED DECEMBER 31 Direct material: Raw-material inventory, 1/1................... Raw-material purchases ($965,000 + $98,000).................................................. Raw material available for use............... Deduct: Indirect material used ($125,000 + $9,000)................................................. Raw-material inventory 12/31...... Raw material used................................. Direct labor ($845,000 + $80,000)............ Manufacturing overhead: Indirect material ($125,000 + $9,000).... Indirect labor ($345,000 + $30,000)....... Utilities ($245,000 + $22,000)................ Depreciation ($385,000 + $35,000)........ Total actual manufacturing overhead..... $134,00 0 85,000 $ 105,000 1,063,00 0 $1,168,0 00 219,000 $ 949,000 925,000
$134,00 0 375,000 267,000 420,000
1,196,00
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Deduct: Underapplied overhead............. Overhead applied to work in process........ Total manufacturing costs........................ Add: Work-in-process inventory, 1/1......... Subtotal................................................... Deduct: Work-in-process inventory, 12/31* Cost of goods manufactured..................... *Supporting calculations follow.
0 11,000 $1,185,0 00 $3,059,0 00 60,000 $3,119,0 00 150,200 $2,968,8 00
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CASE 3-63 (CONTINUED) *Supporting calculations for work in process 12/31: Direct material........ Direct labor............. Applied overhead: 2,500 hrs. $15. 800 hrs. $15.... Total............... D12-002 $37,900 20,000 37,500 ______ $95,400 D12-003 $26,000 16,800 $12,000 $54,800 Total $63,900 36,800 37,500 12,000 $150,20 0
FOCUS ON ETHICS (See page 109 in the text.)
Did Boeing exploit accounting rules to conceal cost overruns and production snafus? According to the circumstances alleged in the Business Week article cited in the text (page 105), Boeing did not handle its cost overruns, production problems, and the merger with McDonnellDouglas in a transparent manner. Boeing allegedly acted to conceal its worsening operational problems through earnings management to ensure that the merger would be approved by the stockholders of both companies. While the method of program accounting is common in the aircraft industry, in this rather extreme case that accounting method did not result in a fair portrayal of the companys financial and operational situation. As a result, the merger was approved on the basis of alleged misleading information, and it is the investors who will bear the brunt of this action. The companys top executives and their accountants must share the responsibility for these actions, the former for providing the data and the latter for approving it for public release. No accounting system should be used as a tool to cover up operational problems and mislead shareholders. One wonders also what the auditors were doing to assess the accuracy of the accounting information.
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