Thus,allocationof CHAPTER2
MEASURINGPRODUCTCOSTS
Questions,Exercises,Problems,andCases:AnswersandSolutions
2.1
Seetextorglossaryattheendofthebook.
2.2
Underajobcostingsystem,costsareaccumulatedbyjob.
these"costs"tooutputisrelativelysimplesincetheproductisawelldefined,
specific customer order. Under process costing, costs are accumulated by
departmentorproductionprocesses.Costsarethenspreadevenlyovertheunits
produced.
2.3
Service organizations do not have a tangible "good." Therefore, there is no
tangible item which would qualify as an inventory item. All of the costs of
servicepersonnelareconsideredexpiredasincurred.Theorganization'sproduct
serviceisprovidedintheperiodinwhichservicelaborcostsareincurred.
2.4
Aproductionoperationisastandardizedmethodofmakingaproduct thatis
repeatedlyperformed.
2.5
Operationcostinghascharacteristicsofbothjobcostingandprocesscosting,so
itiscalledahybridofthesetwo.
2.6
BeginningBalance+TransfersIn=TransfersOut+EndingBalance.
2.7
Assigningcoststothewrongjobsgivesmisinformationaboutthecostsofjobs.
Thismisinformationaffectstheevaluationoftheperformanceofjobsupervisors.
Itaffectsjobpricingifthejobispartiallyortotallycostpluspricing.Managers
use cost information about past jobs to estimate the costs, and therefore the
prices,offuturejobs.Misinformationaboutjobsaffectsthecostestimatesand
pricesoffuturejobs.
2.8
Weagreewiththecontrollerinthissituation.Often,jobcostingistoodetailed
andexpensivetooperateforroutinebatchesofhomogeneousgoods.
2.9
ForJITtobefeasible,acompanyshouldhavereliablesuppliersofproduction
inputs, customers who are predictable in placing orders, quality production,
workersskilledtoperformmultipletasks,andahighqualityworkethic.
21
Solutions
2.10
Justintimeallowscompaniestoreduceinventorylevelsandthetimebetween
production and delivery. Lower inventory levels and reduced delivery time
enablesaccountantstoexpensevirtuallyallcostsintheperiodinwhichtheyare
incurred,whichreducesrecordkeeping,particularlyforinventories. Buusing
JIT, companies have been known to save hundreds of thousands of journal
entrieseveryyear.
2.11
Both service and manufacturing companies need good managerial accounting
information; the difference in providing quality is in the timing. Service
organizations do not produce inventory but deliver the service directlyto the
customersothatdefectsarehardertoprevent. Manufacturingcompaniescan
checkthequalityofproductsbeforetheyareshippedtocustomerssoerrorscan
bedetectedandcorrected.
2.12
Acompanyusingoperationcostingwilltypicallyusedifferentmaterialsforeach
typeofproduct,whichissimilartojobcostingwhereeachjoborbatchisunique.
Thedifferentproductswillpassthroughoperationsinwhicheachproducthas
thesameworkdoneonitintheoperation.Forexample,acompanymayinstall
differentmaterialsasseatcoversinanautomobileleather,vinyl,orcloth.The
operationofinstallingseatcoverscouldbeessentiallythesameforeachtypeof
materialsotheapplicationoflaborandoverheadwouldbesimilartoprocess
costing. Inpractice,differencesinmaterialscouldaffecttheoperation. Itis
easy to imagine that particular materials would be harder to install, for
example. The essential costing system would still be operation costing,
nevertheless.
2.13
JITcansaveinventorycarryingcostsandaccountingrecordkeepingcosts. It
alsomayreducecostsofproductionproblemssuchaspoorqualitythatcanbe
hidden by keeping inventories and buffer stocks between production work
stations.
2.14
UsingJIT, production costsareimmediatelyexpensed through Cost ofGoods
Sold as those costs are incurred. If there are inventories at the end of a
reportingperiod,theaccountantscreditCostofGoodsSoldanddebitinventory
accountsto"backout"inventoryamountsfromCostofGoodsSold.
2.15
If a company maintains no inventories, it will have to shut down production
wheneverasupplierdoesnotdeliverthepropermaterialsofthespecifiedquality
attherighttime.
2.16
The manager of the Gravins Division reported overstated ending inventory
levels to increase profits. However, after one period, he was faced with the
dilemma of having to again overstate ending inventory so as to not reduce
profits. Thissituationcontinueduntiltopmanagementnoticedtheunusually
largeamountofendinginventoryanduncoveredthefraud.
Solutions
22
2.17
Somecompaniesthatmakeproductsusingprocessesare:
Husch(wine)
BethlehemSteel(steel)
Pillsbury(flourproducts)
Kellogg(cereal)
CommonGrounds(coffee)
Heinz(catsup)
MillerBrewingCompany(beer)
2.18
Somecompaniesthatproducejobsare:
Accenture(consulting)
GuyF.Atkinson(construction)
Bechtel(engineering)
Anyuniversity(researchgrants)
ThomsonSouthWesternpublishingcompany(thisbook)
Anyhospital(surgeries)
UniversalStudios(movies)
2.19
(Costflowmodel.)
Ingeneral,applythefollowingmodel:
BB+TI = TO+EB
Midwest:
BB+$200,000
BB
BB
Northeast:
$60,000+$200,000 = $220,000+EB
EB
= $60,000+$200,000$220,000
EB
= $40,000
Southeast:
BB+$160,000 = $150,000+$40,000
BB
= $150,000+$40,000$160,000
BB
= $30,000
=
=
=
23
$180,000+$60,000
$180,000+$60,000$200,000
$40,000
Solutions
2.20
(Costflowmodel.)
Ingeneral,applythefollowingmodel:
BB+TI = TO+EB
Lighter
Fluid:
$40,000+$180,000 =
EB
=
EB
=
$80,000+EB
$40,000+$180,000$80,000
$140,000
Waterproof
Matches:
$60,000+$340,000 =
EB
=
EB
=
$380,000+EB
$60,000+$340,000$380,000
$20,000
Burn
Ointment:
$60,000+$120,000 =
EB
=
EB
=
$140,000+EB
$60,000+$120,000$140,000
$40,000
FireplaceScreens:
Wecannotcomputebecausewehavetwounknownsinthebasiccostflow
equation.Werequireeitherthebeginningorendinginventorytosolvethis
partoftheproblem.
2.21
(Costflowmodel.)
Ingeneral,applythefollowingmodel:
BB+TI = TO+EB
Rubber
Rafts:
$160,000+$180,000 =
EB
=
EB
=
Rubber $60,000+$90,000
Duckies:
EB
EB
=
=
=
$240,000+EB
$160,000+$180,000$240,000
$100,000
$110,000+EB
$60,000+$90,000$110,000
$40,000
Galoshes: $60,000+$480,000 = $540,000+EB
EB
= $60,000+$480,000$540,000
EB
= $0
DivingEquipment:
Cannot compute because we have two unknowns in the basic cost flow
equation.Werequireeitherthebeginningorendinginventorytosolvethis
partoftheproblem.
Solutions
24
2.22
(Costflowmodel.)
Ingeneral,applythefollowingmodel:
BB+TI = TO+EB
tofindwhattheendinginventoryshouldbepertherecords.
Video
$20,000+$40,000
cassette
EB
Recorders:
EB
=
=
=
$35,000+EB
$20,000+$40,000$35,000
$25,000
$5,000(=$25,000$20,000physicalcount)worthofvideo
cassetterecordersismissing.
Televisions: $20,000+$50,000
EB
EB
=
=
=
$55,000+EB
$20,000+$50,000$55,000
$15,000
$10,000(=$15,000$5,000physicalcount)worthoftele
visionsismissing.
Compact
Disc
Players:
$15,000+$20,000
EB
EB
=
=
=
$25,000+EB
$15,000+$20,000$25,000
$10,000
Nodiscrepancyincompactdiscplayers.
25
Solutions
2.23
(Costflowmodel.)
Usethecostflowequation,
BB+TI = TO+EB
tofindwhattheendinginventoryshouldbepertherecords.
Computer
Chips:
$600,000+$1,600,000=$1,800,000+EB
EB =$600,000+$1,600,000$1,800,000
EB =$400,000
Thephysicalcountshows$200,000(=$600,000$400,000)more
thanintherecords.
Potato
Chips:
$160,000+$600,000 =$500,000+EB
EB =$160,000+$600,000$560,000
EB =$260,000
$20,000(=$260,000$240,000physicalcount)discrepancy
betweentherecordsandactualpotatochipsininventory.
PokerChips $60,000+$200,000 =$180,000+EB
EB =$60,000+$200,000$180,000
EB =$80,000
$30,000(=$80,000$50,000physicalcount)discrepancy
betweentherecordsandactualpokerchipsininventory.
Comment:Ingeneral,therearedifferencesbetweenwhatappearsonthebooks
andwhatexistsininventorybecauseofinventoryshrinkageduetotheft,
breakageorobsolescence.Also,therecouldbeerrorsinrecordinginventory,
suchasdebitinganinventoryaccountforproductAwhentheaccountfor
productBshouldhavebeendebited.Thesedifferencesbetweencountandthe
accountingrecordsappearlargefornormalshrinkage,especiallyforcomputer
chipsandpokerchips.Wewoulddoublecheckthephysicalcountforerrorsand
checktheaccountingrecordsforerrors.Ifnonearefound,thenthecompany
mighthaveamajorproblemwithinventorytheftorobsolescence.
Solutions
26
2.24
(Justintimemethodsandbackflushcosting.)
JournalEntries:
(1) CostofGoodsSold........................................................
AccountsPayableMaterials................................
AccountsPayableOtherManufacturing
Costs...................................................................
WagesPayable........................................................
Torecordcostsofproduction.
(2) FinishedGoodsInventory............................................
CostofGoodsSold..................................................
Torecordinventory.
80,000
50,000
20,000
10,000
16,000a
16,000
Taccounts:
Accountsand
WagesPayableAccounts
CostofGoodsSold
50,000
20,000
10,000
80,000
64,000
16,000
FinishedGoodsInventory
16,000
a$16,000=400unitsat$40perunit.($40=$80,000/2,000units.)
27
Solutions
2.25
(MemoryBank;justintimemethodsandbackflushcosting.)
JournalEntries:
(1) CostofGoodsSold........................................................
AccountsPayableMaterials................................
AccountsPayableOtherManufacturing
Costs...................................................................
WagesPayable........................................................
Torecordcostsofproduction.
(2) FinishedGoodsInventory............................................
CostofGoodsSold..................................................
Torecordinventory.
48,000
26,000
14,000
8,000
4,000a
4,000
Taccounts:
Accountsand
WagesPayableAccounts
CostofGoodsSold
26,000
14,000
8,000
48,000
44,000
4,000
FinishedGoodsInventory
4,000
a$4,000=100unitsat$40.00perunit.($40.00=$48,000/1,200units.)
Solutions
28
2.26
(Jobcostsinaserviceorganization.)
a.
JournalEntries:
(1)
(2)
WorkinProcessSpringsteenProduc
tions................................................................
WorkinProcessRCIRecords...........................
DirectLaborUnbillable....................................
WagesPayable.................................................
240,000
120,000
24,000
WorkinProcessSpringsteenProduc
tions................................................................
WorkinProcessRCIRecords...........................
Overhead(Applied).........................................
80,000
40,000
(3)
140,000
(4)
MarketingandAdministrativeCosts
WagesandAccountsPayable........................
20,000
(5a) AccountsReceivable
Revenue..........................................................
600,000
(5b) CostofServicesBilled
WorkinProcessSpringsteenProduc
tions............................................................
WorkinProcessRCIRecords.......................
b.
Overhead
WagesandAccountsPayable..........................
384,000
120,000
480,000
140,000
20,000
600,000
320,000
160,000
LOOMISANDASSOCIATES
IncomeStatement
FortheMonthEndingJanuary31
RevenuefromServices.................................................................. $ 600,000
LessCostofServicesBilled...........................................................
480,000
GrossMargin................................................................................. $ 120,000
Less:
DirectLaborUnbillable..........................................................
24,000
OverheadUnderapplied.........................................................
20,000a
MarketingandAdministrative.................................................
20,000
OperatingProfit.............................................................................
$ 56,000
a$140,000actual$120,000applied.
29
Solutions
2.27
(Jobcostsinaserviceorganization.)
a.
JournalEntries:
(1) WorkinProcessMountainViewCompany.......
WorkinProcessPalatineProductions...............
DirectLaborUnbillable......................................
WagesPayable..................................................
120,000
72,000
8,000
(2) WorkinProcessMountainViewCompany.......
WorkinProcessPalatineProductions...............
Overhead(Applied)...........................................
90,000
54,000
(3) Overhead...............................................................
Variousaccounts(e.g.,Wagesand
AccountsPayable).............................................
140,000
(4) MarketingandAdministrativeCosts...................
Variousaccounts(e.g.,Wagesand
AccountsPayable).............................................
60,000
(5a)
(5b)
b.
200,000
144,000
140,000
60,000
AccountsReceivable.........................................
Revenue($200,000fromPalatineand
and$100,000fromMountainView)........
300,000
CostofServicesBilled......................................
WorkinProcessMountainViewCom
pany..........................................................
WorkinProcessPalatineProduc
tions..........................................................
336,000
300,000
210,000
126,000
INTERNETDESIGNS
IncomeStatement
FortheMonthEndingNovember30
RevenuefromServices................................................................ $ 300,000
LessCostofServicesBilled.........................................................
336,000
GrossMargin................................................................................ $ (36,000)
LessDirectLaborUnbillable....................................................
8,000
PlusOverheadOverapplied......................................................
4,000a
LessMarketingandAdministrativeExpense.............................
60,000
OperatingProfit(Loss).................................................................
$ (100,000)
a$4,000 = $144,000 applied to jobs and expensed as part of the cost of
servicesbilled$140,000actualoverheadincurred.
Solutions
210
2.27continued
c.Bothjobsshowlossesasfollows:
MountainView:Grossmargin=$200,000$210,000=$(10,000).
PalatineProductions:Grossmargin=$100,000$126,000=$(26,000).
Granted,thereissomeoverappliedoverheadthatincreasesthecostofservices
billed,butnotenoughtocreatethenegativegrossmargins.
211
Solutions
2.28
(Jobcostsinaserviceorganization.)
a.
Wagesand
WorkinProcess:
Costof
AccountsPayable
EGadgets
ServicesBilled
160,000
100,000
40,000
(1) (1)
(3) (2)
(4)
90,000
54,000
144,000 (5b) (5b)
224,000
WorkinProcess:
Marketingand
Overhead
EShop
AdministrativeCosts
(3) 100,000
84,000
(2) (1)
(2)
30,000
18,000
48,000 (5b) (4)
40,000
WorkinProcess:
AccountsReceivable
EFood
Revenues
(5a) 280,000
(1)
(2)
20,000
12,000
32,000 (5b)
280,000(5a)
DirectLabor
Unbillable
(1)
20,000
Entries:
(1)
(2)
(3)
(4)
(5)
b.
Laborcostsat$100perhour.
Overheadat$60perbillablehour.
OverheadactuallyincurredinJune.
Marketingandadministrativecosts.
Servicesbilled.
COMPUTERSYSTEMS,INC.
IncomeStatement
FortheMonthEndingJune30
RevenuefromServices............................................................................ $ 280,000
LessCostofServicesBilled......................................................................
224,000
GrossMargin............................................................................................ $
56,000
Less:
DirectLaborUnbillable....................................................................
20,000
OverheadUnderapplied....................................................................
16,000a
MarketingandAdministrative...........................................................
40,000
OperatingProfit(Loss).............................................................................
$ (20,000)
Solutions
212
a$100,000actual$84,000applied.
213
Solutions
2.29
(Jobcostsinaserviceorganization.)
a.
Wagesand
WorkinProcess:
AccountsPayable
FranklinGroceries
165,000
70,000
20,000
(1) (1)
(3) (2)
(4)
50,000
20,000
Costof
ServicesBilled
70,000 (5b) (5b) 210,000
WorkinProcess:
Marketingand
Overhead
TrumanTrust
AdministrativeCosts
(3)
70,000
60,000
(2) (1) 100,000
(2)
40,000
140,000 (5b) (4)
20,000
DirectLabor
AccountsReceivable
Unbillable
Revenues
(5a)300,000
Entries:
(1)
(2)
(3)
(4)
(5)
b.
(1)
15,000
300,000(5a)
Laborcostsat$50perhour.
Overheadat$20perbillablehour.
OverheadactuallyincurredinMarch.
Marketingandadministrativecosts.
(5a) Franklin Groceries billed for $100,000 and Truman Trust billed for
$200,000.(5b)Costofservicesbilled:Franklin$70,000;Truman$140,000
CRAFTYIDEAS
IncomeStatement
FortheMonthEndingMarch31
RevenuefromServices............................................................................. $ 300,000
LessCostofServicesBilled......................................................................
210,000
GrossMargin............................................................................................ $
90,000
Less:
DirectLaborUnbillable....................................................................
15,000
OverheadUnderapplied....................................................................
10,000a
MarketingandAdministrative...........................................................
20,000
OperatingProfit........................................................................................
$ 45,000
a$10,000 = $70,000 actual overhead incurred $60,000 applied to jobs and
expensedaspartofthecostofservicesbilled.
c.Franklinhasagrossmarginof$30,000andTrumanhasagrossmarginof
$60,000.Theratioofgrossmargintorevenueisthesame(30%)forboth,sothey
Solutions
214
appearequallyprofitable.Ifwehadtochoosebetweenthetwo,wewouldchoose
Trumanbecauseitgeneratesthehighesttotalgrossmargin
2.30
(Appendix2.1)(Computingequivalentunits.)
ToCompleteBeginningInventory:[(1.0.60)X
60,000Units)]...........................................................
StartedandCompleted..................................................
InEndingInventory:.30X40,000Units.......................
Total .....................................................................
2.31
24,000E.U.
160,000E.U.
12,000E.U.
196,000E.U.
(Appendix2.1)(Computingproductcostswithincompleteproducts.)
Unitstoaccountfor:
BeginningWIP
Started&Completed
EndingWIP
Total
Coststobeaccountedfor:
BeginningWIP
CurrentPeriodCosts
Totalcoststobe
accountedfor
PhysicalUnits
60,000
160,000
40,000
260,000
%Completed
DuringPeriod
40%
100%
30%
Equivalent
Units
24,000
160,000
12,000
196,000
$ 80,000
300,000
$ 380,000
Costper
Unit
$1.53061perE.U.
CostperE.U.done
thisperiod$300,000196,000E.U.
Costsassignedtounitstransferredout:
CostsfrombeginningWIP
Currentcostsaddedtocomplete
beginningWIP($1.53061X24,000E.U.)
Currentcostsofunitsstarted&completed
($1.53061X160,000)
Totalcoststransferredout
244,898
$ 361,633
CostsassignedtoendingWIP:
($1.53061X12,000E.U.)
$ 18,367
Totalcostsaccountedfor:
$ 380,000
215
$
80,000
36,735
Solutions
2.32
(Actualcostsandnormalcosts.)
a.
ActualCosts
DirectMaterials..........................................................................
DirectLabor................................................................................
VariableManufacturingOverhead............................................
FixedManufacturingOverhead.................................................
TotalCost....................................................................................
b.
NormalCosts
DirectMaterials..........................................................................
DirectLabor................................................................................
VariableManufacturingOverhead............................................
FixedManufacturingOverhead.................................................
TotalCost....................................................................................
a$18,000=200%X$9,000.
b$27,000=300%X$9,000.
2.33
(Appliedoverheadinabank.)
a.
Totaloverheadapplied.
Quarter
1st
2nd
3rd
4th
b.
NormalOverhead
200millionX$0.01= $ 2,000,000
200millionX$0.01= $ 2,000,000
200millionX$0.01= $ 2,000,000
100millionX$0.01= $ 1,000,000
EstimatedoverheadfortheYear:
800millionX$0.0l=$8,000,000
Solutions
216
$
5,000
9,000
20,000
26,000
$ 60,000
$
5,000
9,000
18,000a
27,000b
$ 59,000
2.34
(Analyzingcostsinajobcompany.)
Wilson
AccountBalanceasofFebruary1:
DirectMaterials
DirectLabor
Overhead
$
3,000
12,000
9,600
$ 24,600
Baker
$
2,400
9,600
7,680
$ 19,680
AddedinFebruary:
DirectMaterials
DirectLabor
Overhead
$
0
3,600
2,880
$ 6,480
$ 31,080
TotalCostofJob
Ottley
$
0
6,000
4,800
$ 10,800
$ 30,480
$ 18,000a
4,800
3,840
$ 26,640
$ 26,640
aThedirectmaterialscanbefoundusingthebasiccostflowmodel.
BB + TI
= TO + EB
$6,000 + $12,000 = TO + $0
TO
= $18,000
2.35
(Jobcostingforthemovies.)
a.
Carrying flops in inventory causes studios to report overstated assets.
Writingdownthefloptoitsmarketvaluewilldecreasebothinventoryin
theassetsectionofthebalancesheet,andprofitsintheincomestatement
asthecostsofthefilmarenolongerheldininventorybutexpensed.
b.
Inventoryshouldbereportedatthelowerofcostormarket.Wheneverthe
marketvalueofaproductisknowntobebelowitscost,theproductshould
be written down to its market value. The amount of the writedown is
expensedintheperiodincurred.
217
Solutions
2.36
(Comparingjobcoststomanagementsexpectations.)
Job478:
BeginningBalance
Labor
OverheadApplied
Total
JobCosts
ManagementsExpectations
$ 19,600
300
(=.6x$300)
180
$ 20,080
$20,000
Comment:Thetotaljobcostisasclosetomanagementsexpectationsasone
canexpect.
Job479:
BeginningBalance
Labor
OverheadApplied
Total
JobCosts
ManagementsExpectations
$ 9,400
2,600
1,560(=.6x$2,600)
$ 13,560
$13,000
Comment: The$560 overrunis(morethan) 4%ofthe expectedjobcosts.
Although4%isasmallpercentoftheexpectedtotaljobcosts,itislikelya
largepercentofcompanyprofits. Imaginethattheprofitsonthisjobare
10%ofjobcosts.Thenthecostoverrunis40%(=4%/10%)ofthoseprofits.
Although apparently small, this cost overrun warrants examination and
correctioninfuturejobs.
Job480:
BeginningBalance
Materials
Labor
OverheadApplied
Total
JobCosts
ManagementsExpectations
$ 5,000
600
7,800
4,680(=.6x$7,800)
$ 18,080
$15,000
Comment: The jobs cost overrun is 21% of managements expected costs.
Thisisamajorproblemthatmustbecorrectedinfuturejobs..
Job481:
Materials
Labor
OverheadApplied
Total
JobCosts
ManagementsExpectations
$ 4,200
5,900
3,540(=.6x$5,900)
$ 13,640
$10,000
Comment: Cost overrun is 36% of managements expected costs. (This
problemisevenbiggerthantheoverrunonJob480.)
Solutions
218
2.36continued
Job482:
Materials
Labor
OverheadApplied
Total
JobCosts
ManagementsExpectations
$ 1,020(=.6x$1,700)
2,600
1,700
$ 5,320
$4,000
Comment: Thecostoverrunis34%ofmanagements expectedcosts. (See
commentforJob481.)
Note that actual overhead for the month ($12,000) is higher than overhead
appliedof$10,980(=$180+$1,560+$4,680+$3,540+$1,020).Therefore,an
adjusting entry must be made to the overhead account to transfer the
underappliedoverheadamounttocostofgoodssoldasfollows:
Dr.CostofGoodsSold..................................................
Cr.Overhead...............................................................
($12,000$10,980=$1,020underapplied)
1,020
1,020
Itisimportanttonotetherelationofcoststoworkdone.Ifbothcostsandwork
doneexceedexpectations,thentheCompanymightnothaveaproblem. The
Augustdataappeartosupportmanagementsconcerns,however.
Aspartofitsefforttoreducecosts,managementshouldidentifyoverhead
costdrivers;thatis,thosethingsthatcauseoverheadcosts.Itisunlikelythat
laboristheonlycostdriverforoverhead,forexample.Also,examinematerials
costs.Materialscostsinconstructionarevolatile.Augustishurricaneseason.
Have there been storms that caused destruction which required a lot of
materialstorebuildbuildingsandinfrastructure?
219
Solutions
2.37
(Analyzingcostsinajobcompany.)
Reed
Family
Thompson
AccountBalanceasofJune1:
DirectMaterials
DirectLabor
Overhead
$ 1,000
5,000
5,000
$ 11,000
$
800
3,200
3,200
$ 7,200
AddedinJune:
DirectMaterials
DirectLabor
Overhead
$
0
1,200
1,200
$ 2,400
$ 13,400
TotalCostofJob
Sparks
$
0
2,000
2,000
$ 4,000
$ 11,200
$ 6,000a
1,600
1,600
$ 9,200
$ 9,200
aThedirectmaterialsusedinJunecanbefoundusingthebasiccostflowmodel.
BB + TI
= TO + EB
$2,000 + $4,000 = TO + $0
TO
= $6,000
Solutions
220
2.38
(Comparingjobcoststomanagementsexpectations.)
Job15:
BeginningBalance
Labor
OverheadApplied
Total
JobCosts
ManagementsExpectations
$ 45,000
13,000
7,800(=.6x$13,000)
$ 65,800
$70,000
Comment: The job cost is lower than managements expectations. This
appearstobegoodnews;managementshouldfindthecauseofthedifference
andusethisinformationforfuturebiddingpurposes.
Job16:
BeginningBalance
Labor
OverheadApplied
Total
JobCosts
ManagementsExpectations
$ 18,000
8,500
5,100(=.6x$8,500)
$ 31,600
$30,000
Comment:Costoverrunis5%ofmanagementsexpectedcosts.Investigation
ofoverrunswouldbeprudentbecausethiscouldstillbealargepercentofthe
expectedprofitsonthejob. Forexample,ifthecompanymakesaprofitof
10%ofexpectedjobcosts,thenthis5%overrunis50%ofthat10%profit.
Job17:
BeginningBalance
Materials
Labor
OverheadApplied
Total
JobCosts
ManagementsExpectations
$ 37,000
23,000
10,500
6,300(=.6x$10,500)
$ 76,800
$60,000
Comment: Costoverrunis28%ofmanagementsexpectedcosts. Thisisa
significant percentage requiring further investigation and correction to
preventsuchoverrunsonfuturejobs.
Job18:
Materials
Labor
OverheadApplied
Total
JobCosts
ManagementsExpectations
$ 15,500
26,000
15,600(=.6x$26,000)
$ 57,100
$60,000
Comment:Costsareabitlowerthanmanagementsexpectations.
221
Solutions
2.38continued
Job19:
Materials
Labor
OverheadApplied
Total
JobCosts
ManagementsExpectations
$ 29,000
34,500
20,700(=.6x$34,500)
$ 84,200
$80,000
Comment:Costoverrunis5%ofmanagementsexpectedcosts.Seecomment
onJob16.
Note that actual overhead for the month ($70,352) is higher than overhead
appliedof$55,500(=$7,800+$5,100+$6,300+$15,600+$20,700).Therefore,
an adjusting entry must be made to the overhead account to transfer the
underappliedoverheadamountof$14,852tocostofgoodssoldasfollows:
Dr.CostofGoodsSold..................................................
Cr.Overhead...............................................................
14,852
14,852
Thisexcessofactualoverappliedissubstantialandshouldbeinvestigated.
Usingappliedoverhead,thecostofjobsisunderstated.Costoverrunsarelikely
higheronjobsthanstatedabove.
Itisimportanttonotetherelationofcoststoworkdone.Ifbothcostsandwork
doneexceedexpectations,thentheCompanymaynothaveaproblem.The
Novemberdataappeartosupportmanagementsconcerns,however.
Aspartofitsefforttoreducecosts,managementshouldidentifyoverheadcost
drivers;thatis,thosethingsthatcauseoverheadcosts.Itisunlikelythatlabor
istheonlycostdriverforoverhead,forexample.
Solutions
222
2.39
(Comparejustintimetoatraditionalaccountingsystem.)
Taccountswillshowthefollowingentries.
a.
BackflushCosting
WagesandAccounts
WorkinProcess
PayableAccounts
CostofGoodsSold
Inventory
500,000
250,000
800,000
0
1,550,000465,000
(M)
(L)
(O.H.)
155,000*
155,000
FinishedGoods
Inventory
0
310,000*
310,000
*$155,000=.10x$1,550,000and$310,000=.20x$1,550,000.
b.TraditionalCostingSystem
WagesandAccounts
WorkinProcess
PayableAccounts
MaterialsInventory
Inventory
500,000
250,000
800,000
(M)
(L)
(O.H.)
0
500,000500,000
FinishedGoods
Inventory
(M)
0
500,000
(L) 250,0001,395,000
(O.H.)
800,000
155,000
CostofGoodsSold
0
1,395,000
1,085,000
310,000
1,085,000
223
Solutions
2.40
(Comparejustintimetoatraditionalaccountingsystem.)
a.
BackflushCosting
WagesandAccounts
WorkinProcess
PayableAccounts
CostofGoodsSold
Inventory
100,000
45,000
75,000
220,00055,000
(M)
(L)
(O.H.)
0
11,000*
11,000
FinishedGoods
Inventory
0
44,000*
44,000
*$11,000=.05x$220,000and$44,000=.20x$220,000.
b.
TraditionalCostingSystem
WagesandAccounts
WorkinProcess
PayableAccounts
MaterialsInventory
Inventory
100,000 (M)
45,000
(L)
75,000
(O.H.)
0
100,000100,000
0
(M)
100,000
(L) 45,000 209,000
(O.H.)
75,000
11,000
FinishedGoods
Inventory
0
209,000
165,000
44,000
Solutions
224
CostofGoodsSold
165,000
2.41
(Appendix2.1) (SanchezCompany;computingequivalentunitsand
costflowsunderprocesscosting.)
Physical
Units
Accountingforunits:
BeginningWIP
20,000
EndingWIP
Total
CostsperE.U.
thisperiod:
Totalcoststransferredout
$
70,000
40%
$2,959,00098,000
12,000
100%
$
296,000
2,959,000
$ 3,255,000
Costsassignedtounitstransferredout:
CostsfrombeginningWIP
Currentcostsaddedtocomplete
beginningWIP($30.194X12,000)
Currentcostsofunitsstarted&completed
($30.194X70,000)
Equivalent
Units
60%
70,000a
40,000b
130,000
Started&completed
Accountingforcosts:
BeginningWIP
Currentperiodcosts
Total
%Completed
DuringPeriod
16,000
98,000
Costper
Unit
$30.194perE.U.
296,000
362,328
2,113,580
$ 2,771,908 $30.80d
CostsassignedtoendingWIP:
($30.194X16,000)
$ 483,104
Totalcostsaccountedfor:
$ 3,255,012c
a70,000units=90,000completed20,000completedfrombeginning
inventory.
b40,000EndingWIP=20,000BeginningInventory+110,000startedin
September90,000completed.
c$12differenceduetorounding.
d$30.80=$2,771,908(20,000units+70,000units).
225
Solutions
2.42
(Appendix2.1)(Equivalentunits;solvingforunknowns.)
a.
Physical
Units
TocompleteBeginningInventory
1,000
UnitsStarted&Completed.......
4,000
EndingInventory.......................
3,000
%
Completed
thisPeriod
40%(2)
100%
40%
Equivalent
Units
400(1)
4,000
1,200
5,600
(1)400=5,6004,0001,200.
(2) 40%=400 1,000. Therefore, BeginningInventorymusthavebeen
60%complete.
b.
Equivalent
Units
TocompleteBeginningInventory.......................
4,200
UnitsStarted&Completed.................................
6,000
EndingInventory.................................................
2,000
TotalPeriodConversionCosts........................
Conversion
Costs
$ 18,270(1)
26,100(2)
8,700
$ 53,070
First, compute unit conversion costs from what we know about ending
inventory:$8,7002,000E.U.=$4.35perE.U.
(1)$18,270=4,200X$4.35.
(2)$26,100=6,000X$4.35.
Solutions
226
2.43
(AlamedaCompany;completingmissingdata.)
Theanswersappear(onthefollowingpage)asfootnotestotheseTaccounts.
AccountsPayable
6,000
4/1
40,000
42,000b
8,000
4/30
DirectMaterialsInventory
4/1
12,000
42,000b
43,000f
4/30
WorkinProcessInventory
4/1
4,500
43,000f
11,000g
89,000
Overhead
Actual
Applied
14,800
15,600c
FinishedGoodsInventory
4/1
11,000
d
84,000
89,000
4/30
16,000
CostofGoodsSold
15,600c
800e
WagesPayable
31,200
84,000
d
31,200
a
4/30
5,300
(=2,600hrs.
X$12)
Under/OverappliedOverhead
e
800
227
Solutions
2.43continued.
Note:PredeterminedOverheadRate =$180,000/30,000directlaborhours
=$6perDirectLaborHour.
aWorkinProcessInventory:
DirectMaterials.................................................................................
DirectLabor($12X150hours)..........................................................
Overhead($6X150hours).................................................................
Total...............................................................................................
$ 2,600
1,800
900
$ 5,300
bDirectMaterialsPurchased =$40,000+$8,000$6,000
=$42,000.
cOverheadApplied
=$6X2,600directlaborhours
=$15,600.
dCostofGoodsSold
=$11,000+$89,000$16,000
=$84,000.
eOverappliedOverhead =$15,600$14,800
=$800.(Note:CreditmaybetocostofGoodsSold
insteadofUnder/OverappliedOverhead.)
fDirectMaterialsUsed
=$89,000+$5,300$4,500$15,600$31,200
=$43,000.
gEndingDirectMaterialsInventory =$42,000+$12,000$43,000
=$11,000.
Solutions
228
2.44
(PremierPrinting,Inc.;incompletedatajobcosting.)
The following information should be included (in summary) in a report to
management.
WorkinProcess
CostofGoodsSold
Cash
JobNo.11
JobNo.11
M 4,000* 4,000
L 19,200*38,400
O3 9,600 19,200
6/1 32,800
L1 19,200
O4 9,600
0
9,200*
M
L
O2
4,000*
38,400
19,200
61,600*
WagesPayable
JobNo.12
JobNo.12
M5 6,000 6,000
L6 24,00024,000
O7 12,00012,000
0
64,000*
M
L
O
6,000
24,000
12,000
42,000
Overhead
Overhead
JobNo.13
Adjustment
Actual Applied
40,000*32,000
8,000 10
9
M 3,200*
L 20,800*
O8 10,400
6/30 34,400
8,00010
Note:Seefootnotesonfollowingpage.
229
Solutions
2.44continued.
FootnotestoProblem2.44.
Mreferstodirectmaterials.
Lreferstodirectlabor.
Oreferstomanufacturingoverhead.
*Numbersgivenintheproblem.
1
Labortocompletejobis$19,200sincethebeginninginventorywas50%complete.
2
Appliedoverhead
=$61,600$4,000materials$38,400directlabor.
=$19,200
Appliedoverhead
=$19,200/$38,400=0.50timeslabordollars.
3
Overheadinbeginninginventory=0.50X$19,200=$9,600.
4
OverheadappliedinJune=0.50X$19,200=$9,600.
5
MaterialsforJobNo.12
=PurchasesmaterialsforJobNo.13
=$9,200$3,200
=$6,000
6
LaborforJobNo.12
=TotaldirectlaborcostsLaborforJobNo.11Labor
forJobNo.13
=$64,000$19,200$20,800
=$24,000
7
OverheadforJobNo.12=0.50X$24,000=$12,000.
8
OverheadforJobNo.13=0.50X$20,800=$10,400.
9
AppliedOverhead
10
=$9,600+$12,000+$10,400=$32,000.
UnderappliedOverhead
=ActualApplied
=$40,000$32,000=$8,000.
Solutions
230
2.45
(MidwestInsuranceCompany;evaluatingcostsystemsusedinfinancialservice
companies.)
a.
Mr. Frank's decision regarding the most appropriate type of accounting
system actually involves two decisions which are somewhat independent.
Midwestcurrentlyusestheequivalentofajobordersystembasedonactual
costs,whichisbeingcomparedwithNorthern'ssystem,effectivelyaprocess
costsystem(withinthethreecategoriesofloans)basedonstan
231
Solutions
2.45a.continued.
dardcosts.Thedecisionstobemadetheninvolvethefollowingdimensions:
1. Thedegreetowhichaccountingdataisaccumulatedtoa specificunitof
outputasopposedtogroupsofunits(jobordervs.processcost),and
2. Thedegreetowhichactualcostdataisusedtosatisfytherequirements
oftheusersofaccountingdataasopposedtousing predetermineddatato
satisfytheserequirements.
Inpractice,thenatureofthebusinesswillsuggestthetypeofsystemtobe
used, but the decisions are by no means absolutemany different
combinationsandvariationscananddoexist.
Severalspecificcharacteristicsoftheproduct(service)andbusinessare
helpfulinguidingthedecisionbetweenpotentialsystems.Theseinclude:
1. Homogeneityofoutputstandarddataandprocesscostingaregenerally
betterinsituationswhereoutputisrelativelyuniform.
2. Nature/knowledge of demandin order to use predetermined rates
(especially overhead), volume and mix of demand must be somewhat
predictable.
3. Performance measurementstandard costs provide a (hopefully
realistic)benchmarkforevaluatingperformance,butactualdatamust
becollectedtoallowcomparison.
4. Impactofvarianceswherevariancescanbesignificantandmorethan
temporary, the additional detail provided in actual and joborder
systemsmaywarranttheiruse.
5. Estimating/billingwhere this must be performed for individual
customers,detaileddataareusuallyrequired.
Summarizingthesetwosystemsintermsoftheadvantages/disadvantages,
Midwest's system provides detailed data which may be beneficial in
performancemeasurementandprojectionofcostchangesifthemixofloan
types varies in the future, with the disadvantage of additional record
keepingandclericalcosts.Northern'ssystemhastheobviousadvantageof
beinginexpensiveandprovidingastandardforperformancemeasurement,
but maynot providethedetail tomake this measurement meaningful or
allow effective variance analysis. In addition, Northern's overhead
allocationschememayrelyonarelativelyconsistentmixofloantypes.
Solutions
232
2.45a.continued.
Althoughtheabovecharacteristicswouldsuggest achoiceofsystems
givenequalcostsoftheaccountingsystems,thecost/benefitquestionmust
beaddressedduetothefactthatcostsoftheaccountingsystemsare not
equal.Theadditionalrecordkeepingandclericalcostsinherentinthejob
order/actualsystem,whicharecurrentlyofprimaryconcerntoMr.Frank,
shouldnotbeincurredunlesstheyarejustifiedbythebenefitsprovidedby
greatercostvisibility.
In the case of the Northern and Midwest systems, the following
differences between the two are important in making the choice of an
appropriatesystem:
Both the average cost and the variability of Midwest's loan
processingcostsaremuchgreaterthanthoseofNorthern.
The components of Midwest's loan processing costs can be
significantly different from loan to loan (e.g., some loans involve
travelcostswhileothersdonot).
Midwestapparentlyreceivesloansonanindividualbasisratherthan
asapackage.
Midwest's processing costs include outside services such as
consulting over which it may have very little control or ability to
predict.
Inlightoftheforegoing,Midwestshouldprobablystayforthemostpart
withitspresentsystemofusingactualcosts,sincethevariabilityinitsloan
processing costs would make it very difficult to develop meaningful
standardsinthefirstplace.Itwouldbeverydifficulttoestimateinadvance
theprocessingcostsforaspecificloan,andperformancemeasurementbased
onstandardcostsmaynotcarrymuchmeaning, especiallyintheareaof
outsideservices.ItwouldalsobedifficultforMidwesttoallocateoverhead
costs, since not all loans entail the same overhead cost components and
there does not seem to be a rational basis for allocation of these costs.
Midwest could,however,batchsomeoftheloanstogetheriftherewereno
specific"needtoknow"thecostofprocessingaparticularloan. Midwest
probablylooksatoverallloanprocessingcostsindevelopinganinterestrate
orfeechargedtobanksandotherfinancialinstitutions,and,ifso,should
notbeoverlyconcernedwithprocessingcostsonindividualloans.Although
Midwest'sMortgageDivisionmanagerpointstovariabilityasanargument
against standards, he does not mention any benefit related to collecting
costsforeachloan.
233
Solutions
2.45continued.
b.
Exhibit1showsthecostflowsundertherespectivesystems. Underboth,
totalcostsareinitiallyaccumulatedinvariousPayablesaccounts. Under
Northern'ssystem,a"product"isaloancategory,withaDirectLaborand
anOverheadaccountmaintainedundereachcategory. Costsarerecorded
intheotheraccounts(otherthanPayables)atstandard,withthedifferences
collectedinVarianceaccounts. Thus,Northernmaintainsatotalofeight
accounts exclusive of Payables. Midwest, of course, does not require
Variance accounts, but maintains up to six accounts for each loan and,
hence,mustmaintainasignificantlygreaternumberoftotalaccounts.
Exhibit1
ComparativeCostFlows
Standard/ProcessCosting
NorthernInsurance
VariousPayables
FHA/VALoans
58,172 (1)
DirectLabor
Overhead
74,626 (2) (1)
4,200
(2)
5,460
ConventionalLoans
DirectLabor
Overhead
(1)
31,160
(2)
40,508
DevelopmentLoans
DirectLabor
Overhead
(1) 20,440
(2) 26,572
Direct
LaborVariance
(1)
2,372
OverheadVariance
(2)
2,086
Solutions
234
235
Solutions
2.45b.continued.
Exhibit1(cont.)
Actual/JobOrderCosting
MidwestInsurance
VariousPayables
Loan#A4810136
47,291(1)
DirectLabor
Telephone
Travel
4,843 (2) (1) 1,184
(2)
113
(3)
415
2,739 (3)
11,800 (4)
9,950 (5)
Appraisal
Legal
Other
1,470(6) (4) 1,500
Loan#A4811237
DirectLabor
Telephone
Travel
(1) 3,631
(2)
42
Appraisal
Legal
Other
(4) 2,300
Loan#B4219361
DirectLabor
Telephone
Travel
(1)
814
(2)
78
Appraisal
Legal
Other
(5) 1,500
(6)
150
Loan#C3921341
DirectLabor
Telephone
Travel
(1) 4,191
(2)
240
(3)
110
Appraisal
Legal
Other
(5) 2,200
Note: Debitsdonotequalcreditsforeachentrybecausethisisonlyapartiallistingof
loansprocessedinJulyasshowninthetextExhibit2.12.
Solutions
236
2.46
(OklahomaHardware,Inc.;reconstructmissingdata.)
Thisisachallengingproblem.Weputtheworkinprocessaccountontheboard
forthebigpicture,thensolveforeachitemintheaccountasfollows:
WorkinProcess
BeginningBalance
(a) 86,200
53,500 (d) Transferredto
DirectMaterials
(b) 70,314
FinishedGoods
DirectLabor
(c) 67,700
204,014 (f) DisasterLoss
OverheadApplied
(e) 33,300
EndingBalance
0
The calculations are shown below. We usually present these using both T
accountsandthefollowingformulas.
(a) Given.
(b) DirectMaterials
=BeginningInventory+PurchasesEnding
InventoryIndirectMaterials
a
a
a
=$49,000 +$66,400*$43,000 $2,086 =
$70,314
*Purchases
=AccountPayable,Ending+CashPayments
AccountsPayable,Beginning
a
a
a
=$50,100 +$37,900 $21,600 =$66,400
(c) DirectLabor
=PayrollIndirectLabor
a
a
=$82,400 $14,700 =$67,700
(d) Cost Transferred to Finished Goods = Finished Goods, Ending + Cost of
GoodsSoldFinishedGoods,Beginning
a
a
a
=$37,500 +($396,600 $348,600 )$32,000
a
=$53,500
(e) OverheadApplied =EndingManufacturingOverheadBeginning
ManufacturingOverhead+OverappliedOverhead
a
a
a
=$217,000 $184,900 +$1,200 =$33,300
(f)
Loss
a
=$86,200 +$70,314+$67,700+$33,300
$53,500
=$204,014
Note:Theinsurancecompanymaydisputepayingthe$1,200
overappliedoverhead.
a
Givenintheproblem.
237
Solutions
2.47
(Jobcostingandethics.)
a. ItwouldbeunethicalforAndretofalsifyjobcostreportsby
improperlyassigningcoststotheCanadiangovernmentjob
whichwereactuallypartofthecostoftheGeneralElectric
job. SinceAndresbosssuggestedthiscourseofaction,he
should approach higher levels of management with the
problem. Given the potential illegality and other possible
negative ramifications of this problem (such as lost
reputation),itislikelythatmanagementwilldecidetowrite
offthecostoverrunsinsteadoffalselyreportingthem.
b. The fact that Andres company is reimbursed on the
Canadiangovernmentcontractmakesitparticularlyenticing
tochargetheexcesscoststothisproject.However,sincethe
Canadiangovernmentcontractisbasedoncosts,itmaybe
an illegal action for the company to misrepresent costs
charged to this project. If this action is discovered and
provenincourt,thecompanycouldbeliablefortheexcess
charges,interestandpunitivedamages.Andreandhisboss
couldbeheldresponsibleforcivilandcriminalpenaltiesnot
tomentionthelossoftheirjobsandtheirreputations.
2.48
(ComparisonofjustintimeintheU.S.andJapan.)
Japanese companies have been at the forefront in utilizing justintime
techniques(particularlyintheautomobileindustry),andthereforehavemore
experiencewithJITthanU.S.companies. Japanalsohaslimitedresourcesin
terms of land and storage, which leads to higher storage costs than for U.S.
companies. Further, transportationdistances aregreater intheU.S.making
reliable delivery more difficult. Thus, it is not surprising that the chemical
industryinJapanismoreeffectivelyimplementingjustintimetechniques.
2.49
(CusterManufacturing;jobcostingusingequivalentunits.)
a.
Cost of WIP inventory on December 31, Year 1 for four
departments:
FabricatingDepartment
Plastic
$12.75per
Square
Foot
Costper
Equivalent
Unit
Direct
Materials
$12,750/100
=$127.50
CostofEndingInventory:
Solutions
238
Direct
Labor
$1,424/89
=$16
Overhead
$.45X855/95
=$4.05
($127.50X12)+($16X6)+($4.05X12)+($12.75X50)=$2,312.10
239
Solutions
2.49a.continued.
TestingDepartment
Costper
Equivalent
Unit
Transferin
Costs
$127.50+$16+$4.05
=$147.55
Direct
Labor
$444/74
=$6
Overhead
$301.92/74
=$4.08
CostofEndingInventory:
($147.55X7)+($6X7)+($4.08X7)=$1,103.41
AssemblyDepartment
Transferin
Costs
Costper
$147.55+$6
Equivalent
+$4.08
Unit
=$157.63
Frames
$408.52
Direct
Labor
$612/51
=$12
Overhead
$232.56/51
=$4.56
CostofEndingInventory:
($157.63X18)+($408.52X31)+($12X8)+($4.56X8)=$15,633.94
ShippingDepartment
Transferin
Costs
Costper
$157.63+$408.52
Equivalent
+12+$4.56
Unit
=$582.71
Packing
Material
$75
Direct
Labor
$256/32
=$8
Overhead
$64/32
=$2
CostofEndingInventory:
($582.71X19)+($75X16)+($8X8)+($2X8)=$12,351.49
b.
CostofGoodsSoldfor23UnitsShipped:
($582.71X23)+($75X23)+($8X23)+($2X23)=$15,357.33
c.
CostofUnitsSpoiled:
TestingDepartment
ShippingDepartment
($147.55X15)+($6X6)+($4.08X6)+($582.71X1)+($75X1)+($8X1)+($2X1)
=$2,941.44
Solutions
240
2.49dcontinued
d.Thecostofunitssold=$688(=$15,357/23units),whichislessthanthetarget
of$700perunit.Thespoilageof$2,941.44isgreaterthan10%ofthecostofgoods
sold(CGS=$15,357).Socostsofgoodunitsareslightlylowerthantarget(whichis
good)andthecostofspoilageisgreaterthantarget(whichisbad).Eveniftheunit
hadnotbeendroppedinshipping,thespoilagecostswouldhavebeengreaterthan
10%ofcostofgoodssold.Spoilageappearstobeanareaofconcern.
241
Solutions