12e_GNB_CH01_Solutions_Manual

12e_GNB_CH01_Solutions_Manual - Chapter 1 Managerial...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 1 Managerial Accounting and the Business Environment Solutions to Questions 1-1 Managerial accounting is concerned with providing information to managers for use within the organization. Financial accounting is concerned with providing information to stockholders, creditors, and others outside of the organization. 1-2 A strategy is a game plan that enables a company to attract customers by distinguishing itself from competitors. The focal point of a companys strategy should be its target customers. 1-3 Customer value propositions fall into three broad categoriescustomer intimacy, operational excellence, and product leadership. A company with a customer intimacy strategy attempts to better understand and respond to its customers individual needs than its competitors. A company that adopts an operational excellence strategy attempts to deliver products faster, more conveniently, and at a lower price than its competitors. A company that has a product leadership strategy attempts to offer higher quality products than its competitors. 1-4 Managers carry out three major activities in an organization: planning, directing and motivating, and controlling. Planning involves establishing a basic strategy, selecting a course of action, and specifying how the action will be implemented. Directing and motivating involves mobilizing people to carry out plans and run rou-tine operations. Controlling involves ensuring that the plan is actually carried out and is appropriately modified as circumstances change. 1-5 The Planning and Control Cycle involves formulating plans, implementing plans, measuring performance, and evaluating differences between planned and actual performance. 1-6 In contrast to financial accounting, managerial accounting: (1) focuses on the needs of managers rather than outsiders; (2) emphasizes decisions affecting the future rather than the financial consequences of past actions; (3) emphasizes relevance rather than objectivity and verifiability; (4) emphasizes timeliness rather than precision; (5) emphasizes the segments of an organization rather than summary data concerning the entire organization; (6) is not governed by GAAP; and (7) is not mandatory. 1-7 A person in a line position is directly involved in achieving the basic objectives of the organization. A person in a staff position provides services and assistance to other parts of the organization, but is not directly involved in achieving the basic objectives of the organization. 1-8 The Chief Financial Officer is responsible for providing timely and relevant data to support planning and control activities and for preparing financial statements for external users. 1-9 The three main categories of inventories in a manufacturing company are raw materials, work in process, and finished goods. 1-10 The five steps in the lean thinking model are: (1) identify value in specific products and services; (2) identify the business process that delivers value; (3) organize work arrangements around the flow of the business process; (4) create a pull system that responds to customer orders; and (5) continuously pursue perfection in the business process. 1-11 Successful implementation of the lean thinking model should result in lower inventories, fewer defects, less wasted effort, and quicker customer response times. 1-12 In a pull production system, production is not initiated until a customer order is received. Inventories are reduced to a minimum by purchasing raw materials and producing products only as needed to meet customer demand. 1-13 Some benefits from improvement efforts come from cost reductions, but the primary benefit is often an increase in capacity. At non-constraints, increases in capacity just add to the already-existing excess capacity. Therefore, improvement efforts should ordinarily focus on the constraint. 1-14 Six Sigma is a process improvement method that relies on customer feedback and fact-based data gathering and analysis techniques to drive process improvement. The goal is to reduce defect rates below 3.4 defects per million. 1-15 The five stages in the Six Sigma DMAIC Framework are (1) Define; (2) Measure; (3) Analyze; (4) Improve; and (5) Control. The goals for the define stage are to establish the scope and purpose of the project, to diagram the flow of the current process, and to establish the customers requirements for the process. The goals for the measure stage are to gather baseline performance data related to the existing process and to narrow the scope of the project to the most important problems. The goal in the analyze stage is to identify the root causes of the problems identified in the measure stage. The goal in the improve stage is to devel- op, evaluate, and implement solutions to the problems. The goals in the control stage are to ensure the problems remain fixed and to seek to improve the new methods over time. 1-16 An enterprise system is supposed to overcome the problems that result from having separate, unintegrated software applications that support specific business functions. It does this by integrating data across an organization in a single software system that enables all employees to have simultaneous access to a com- mon set of data. 1-17 If people generally did not act ethically in business, no one would trust anyone else and people would be reluctant to enter into business transactions. The result would be less funds raised in capital markets, fewer goods and ser- vices available for sale, lower quality, and higher prices. 1-18 Corporate governance is the system by which a company is directed and controlled. If properly implemented, the corporate gover- nance system should provide incentives for the board of directors and top management to pur- sue objectives that are in the best interests of the companys owners and it should provide for effective monitoring of performance. 1-19 Enterprise risk management is a process used by a company to proactively identify the risks that it faces and to manage those risks. Exercise 1-1 (10 minutes) 1. Managerial accounting, financial accounting 2. Planning 3. directing and motivating 4. feedback 5. decentralization 6. line 7. staff 8. controller 9. budgets 10. performance report 11. Chief Financial Officer 12. precision; nonmonetary data Exercise 1-2 (20 minutes) 1. strategy 2. Six Sigma 3. business process 4. corporate governance 5. enterprise risk management 6. just-in-time 7. Internet 8. constraint 9. nonconstraint 10. value chain 11. enterprise system 12. supply chain management 13. lean thinking model; pulls 14. customer value proposition 15. budget 16. non-value-added activity 17. Theory of Constraints Exercise 1-3 (15 minutes) If cashiers routinely short-changed customers whenever the opportunity presented itself, most of us would be careful to count our change before leaving the counter. Imagine what effect this would have on the line at your favorite fast-food restaurant. How would you like to wait in line while each and every customer laboriously counts out his or her change? Additionally, if you cant trust the cashiers to give honest change, can you trust the cooks to take the time to follow health precautions such as washing their hands? If you cant trust anyone at the restaurant would you even want to eat out? Generally, when we buy goods and services in the free market, we assume we are buying from people who have a certain level of ethical standards. If we could not trust people to maintain those standards, we would be reluctant to buy. The net result of widespread dishonesty would be a shrunken economy with a lower growth rate and fewer goods and services for sale at a lower overall level of quality. Formatted: Text Left Chapter 2 Cost Terms, Concepts, and Classifications Solutions to Questions 2-1 The three major elements of product costs in a manufacturing company are direct materials, direct labor, and manufacturing over- head. 2-2 a. Direct materials are an integral part of a finished product and their costs can be conve- niently traced to it. b. Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience. c. Direct labor includes those labor costs that can be easily traced to particular products. Direct labor is also called touch labor. d. Indirect labor includes the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be convenient- ly traced to particular products. These labor costs are incurred to support production, but the workers involved do not directly work on the product. e. Manufacturing overhead includes all man- ufacturing costs except direct materials and di- rect labor. Consequently, manufacturing over- head includes indirect materials and indirect la- bor as well as other manufacturing costs. 2-3 A product cost is any cost involved in purchasing or manufacturing goods. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred. 2-4 The income statement of a manufactur- ing company differs from the income statement of a merchandising company in the cost of goods sold section. A merchandising company sells finished goods that it has purchased from a supplier. These goods are listed as purchases in the cost of goods sold section. Since a manu- facturing company produces its goods rather than buying them from a supplier, it lists cost of goods manufactured in place of purchases. Also, the manufacturing company identifies its inventory in this section as Finished Goods in- ventory, rather than as Merchandise Inventory. 2-5 The schedule of cost of goods manufac- tured lists the manufacturing costs that have been incurred during the period. These costs are organized under the three categories of direct materials, direct labor, and manufacturing over- head. The total costs incurred are adjusted for any change in the Work in Process inventory to determine the cost of goods manufactured (i.e. finished) during the period. The schedule of cost of goods manufac- tured ties into the income statement through the cost of goods sold section. The cost of goods manufactured is added to the beginning Finished Goods inventory to determine the goods availa- ble for sale. In effect, the cost of goods manu- factured takes the place of the Purchases ac- count in a merchandising firm. 2-6 A manufacturing company has three inventory accounts: Raw Materials, Work in Process, and Finished Goods. A merchandising company generally identifies its inventory ac- count simply as Merchandise Inventory. 2-7 Product costs are assigned to units as they are processed and hence are included in inventories. The flow is from direct materials, direct labor, and manufacturing overhead to Work in Process inventory. As goods are com- pleted, their cost is removed from Work in Process inventory and transferred to Finished Goods inventory. As goods are sold, their cost is removed from Finished Goods inventory and transferred to Cost of Goods Sold. Cost of Goods Sold is an expense on the income statement. 2-8 Yes, costs such as salaries and deprecia- tion can end up as part of assets on the balance sheet if these are manufacturing costs. Manufac- turing costs are inventoried until the associated finished goods are sold. Thus, if some units are still in inventory, such costs may be part of ei- ther Work in Process inventory or Finished Goods inventory at the end of a period. 2-9 Cost behavior refers to how a cost reacts to changes in the level of activity. 2-10 No. A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit of product. A fixed cost is fixed in total, but the average cost per unit changes with the level of activity. 2-11 When fixed costs are involved, the aver- age cost of a unit of product will depend on the number of units being manufactured. As produc- tion increases, the average cost per unit will fall as the fixed cost is spread over more units. Con- versely, as production declines, the average cost per unit will rise as the fixed cost is spread over fewer units. 2-12 Manufacturing overhead is an indirect cost since these costs cannot be easily and con- veniently traced to particular units of products. 2-13 A differential cost is a cost that differs between alternatives in a decision. An opportuni- ty cost is the potential benefit that is given up when one alternative is selected over another. A sunk cost is a cost that has already been in- curred and cannot be altered by any decision taken now or in the future. 2-14 No; differential costs can be either vari- able or fixed. For example, the alternatives might consist of purchasing one machine rather than another to make a product. The difference in the fixed costs of purchasing the two ma- chines would be a differential cost. 2-15 Direct labor cost (34 hours $15 per hour) .......... $510 Manufacturing overhead cost (6 hours $15 per hour) ........... 90 Total wages earned ...................... $600 2-16 Direct labor cost (45 hours $14 per hour) .......... $630 Manufacturing overhead cost (5 hours $7 per hour) .................. 35 Total wages earned ........................... $665 2-17 Costs associated with the quality of con- formance can be broken down into prevention costs, appraisal costs, internal failure costs, and external failure costs. Prevention costs are in- curred in an effort to keep defects from occur- ring. Appraisal costs are incurred to detect de- fects before they can create further problems. Internal and external failure costs are incurred as a result of producing defective units. 2-18 Total quality costs are usually minimized by increasing prevention and appraisal costs in order to reduce internal and external failure costs. Total quality costs usually decrease as prevention and appraisal costs increase. 2-19 Shifting the focus to prevention and away from appraisal is usually the most effective way to reduce total quality costs. It is usually more effective to prevent defects than to at- tempt to fix them after they have occurred. 2-20 First, a quality cost report helps manag- ers see the financial consequences of defects. Second, the report may help managers identify the most important areas for improvement. Third, the report helps managers see whether quality costs are appropriately distributed among prevention, appraisal, internal failure, and exter- nal failure costs. 2-21 Most accounting systems do not track and accumulate the costs of quality. It is particu- larly difficult to get a feel for the magnitude of quality costs since they are incurred in many departments throughout the organization. Exercise 2-1 (15 minutes) 1. The wages of employees who build the sailboats: direct labor cost. 2. The cost of advertising in the local newspapers: marketing and selling cost. 3. The cost of an aluminum mast installed in a sailboat: direct materials cost. 4. The wages of the assembly shops supervisor: manufacturing overhead cost. 5. Rent on the boathouse: a combination of manufacturing overhead, ad- ministrative, and marketing and selling cost. The rent would most likely be prorated on the basis of the amount of space occupied by manufac- turing, administrative, and marketing operations. 6. The wages of the companys bookkeeper: administrative cost. 7. Sales commissions paid to the companys salespeople: marketing and selling cost. 8. Depreciation on power tools: manufacturing overhead cost. Exercise 2-2 (15 minutes) Product (Inventoriable) Cost Period Cost 1. The cost of the memory chips used in a ra- dar set ...................................................... X 2. Factory heating costs ................................... X 3. Factory equipment maintenance costs ........... X 4. Training costs for new administrative em- ployees ..................................................... X 5. The cost of the solder that is used in as- sembling the radar sets ............................. X 6. The travel costs of the companys salesper- sons ......................................................... X 7. Wages and salaries of factory security per- sonnel ....................................................... X 8. The cost of air-conditioning executive offices ........................................ X 9. Wages and salaries in the department that handles billing customers ........................... X 10. Depreciation on the equipment in the fit- ness room used by factory workers ............ X 11. Telephone expenses incurred by factory management ............................................. X 12. The costs of shipping completed radar sets to customers ............................................. X 13. The wages of the workers who assemble the radar sets ............................................ X 14. The presidents salary................................... X 15. Health insurance premiums for factory per- sonnel ....................................................... X Exercise 2-3 (15 minutes) Mountain High Income Statement Sales ............................................................. $3,200,000 Cost of goods sold: Beginning merchandise inventory ................. $ 140,000 Add: Purchases ........................................... 2,550,000 Goods available for sale ............................... 2,690,000 Deduct: Ending merchandise inventory ......... 180,000 2,510,000 Gross margin ................................................. 690,000 Selling and administrative expenses: Selling expense ........................................... 110,000 Administrative expense ................................ 470,000 580,000 Net operating income ..................................... $ 110,000 Exercise 2-4 (15 minutes) Mannerman Fabrication Schedule of Cost of Goods Manufactured Direct materials: Beginning raw materials inventory.......... $ 55,000 Add: Purchases of raw materials ............ 440,000 Raw materials available for use .............. 495,000 Deduct: Ending raw materials inventory . 65,000 Raw materials used in production ........... $ 430,000 Direct labor ............................................. 215,000 Manufacturing overhead ........................... 380,000 Total manufacturing costs ........................ 1,025,000 Add: Beginning work in process invento- ry ......................................................... 190,000 1,215,000 Deduct: Ending work in process invento- ry ......................................................... 220,000 Cost of goods manufactured ..................... $ 995,000 Exercise 2-5 (15 minutes) Cost Behavior Cost (Measure of Activity) Variable Fixed 1. The cost of small glass plates used for lab tests in a hospital (Number of lab tests performed) ......... X 2. A boutique jewelry stores cost of leasing retail space in a mall (Dollar sales) .............................. X 3. Top management salaries at FedEx (Total sales) .... X 4. Electrical costs of running production equipment at a Toyota factory (Number of vehicles pro- duced) .............................................................. X 5. The cost of insuring a dentists office against fire (Patient-visits) ................................................... X 6. The cost of commissions paid to salespersons at a Honda dealer (Total sales)............................... X 7. The cost of heating the intensive care unit at Swedish Hospital (Patient-days) .......................... X 8. The cost of batteries installed in trucks produced at a GM factory (Number of trucks produced) ...... X 9. The salary of a university professor (Number of students taught by the professor) ....................... X 10. The costs of cleaning supplies used at a fast-food restaurant to clean the kitchen and dining areas at the end of the day (Number of customers served) ............................................................. * X *May include a small variable element. Exercise 2-6 (15 minutes) Direct Indirect Cost Cost Object Cost Cost 1. The salary of the head chef The hotels restaurant X 2. The salary of the head chef A particular restaurant customer X 3. Room cleaning supplies A particular hotel guest X 4. Flowers for the recep- tion desk A particular hotel guest X 5. The wages of the door- man A particular hotel guest X 6. Room cleaning supplies The housecleaning de- partment X 7. Fire insurance on the hotel building The hotels gym X 8. Towels used in the gym The hotels gym X Note: The room cleaning supplies would most likely be considered an indirect cost of a particular hotel guest because it would not be practical to keep track of exactly how much of each cleaning supply was used in the guests room. Exercise 2-7 (15 minutes) Differential Opportunity Sunk Item Cost Cost Cost 1. Cost of the new flat-panel dis- plays .................................... X 2. Cost of the old computer terminals .................................. X 3. Rent on the space occupied by the registration desk ............. 4. Wages of registration desk personnel ............................. 5. Benefits from a new freezer .... X 6. Costs of maintaining the old computer terminals ............... X 7. Cost of removing the old computer terminals ..................... X 8. Cost of existing registration desk wiring .......................... X Note: The costs of the rent on the space occupied by the registration desk and the wages of registration desk personnel are neither differential costs, opportunity costs, nor sunk costs. These are costs that do not differ between the alternatives and are therefore irrelevant in the decision, but they are not sunk costs since they occur in the future. Exercise 2-8 (15 minutes) 1. No. It appears that the overtime spent completing the job was simply a matter of how the job happened to be scheduled. Under these circumstances, an overtime premium probably should not be charged to a customer whose job happens to fall at the tail end of the days schedule. 2. Direct labor cost: 9 hours $20 per hour ..........$180 General overhead cost: 1 hour $10 per hour .. 10 Total labor cost .........................................$190 3. A charge for an overtime premium might be justified if the customer requested that the work be done on a rush basis. Exercise 2-9 (15 minutes) 1. Prevention Costs Appraisal Costs Internal Failure Costs External Failure Costs a. Repairs of goods still under warranty ................. X b. Customer returns due to defects ......................... X c. Statistical process control ............................... X d. Disposal of spoiled goods ........................... X e. Maintaining testing equipment .................... X f. Inspecting finished goods ........................... X g. Downtime caused by quality problems X h. Debugging errors in software ....................... X i. Recalls of defective products ....................... X j. Training quality engineers ............................ X k. Re-entering data due to typing errors ................X l. Inspecting materials received from suppliers ..... X m. Audits of the quality system .............................. X n. Supervision of testing personnel .................... Rework labor ................... x 2. Prevention costs and appraisal costs are incurred to keep poor quality of conformance from occurring. Internal and external failure costs are incurred because poor quality of conformance has occurred. Exercise 2-10 (30 minutes) 1. a. Emblems purchased ...........................................35,000 Emblems drawn from inventory ................................31,000 Emblems remaining in inventory ...............................4,000 Cost per emblem .............................................. $2 Cost in Raw Materials Inventory at May 31 ....................$ 8,000 b. Emblems used in production (31,000 1,000) ............... 30,000 Units completed and transferred to Finished Goods (90% 30,000) ............................................27,000 Units still in Work in Process at May 31 ..................3,000 Cost per emblem ........................................... $2 Cost in Work in Process Inventory at May 31 ..............$ 6,000 c. Units completed and transferred to Finished Goods (above) ..................................................27,000 Units sold during the month (75% 27,000) .............. 20,250 Units still in Finished Goods at May 31 ...................6,750 Cost per emblem ........................................... $2 Cost in Finished Goods Inventory at May 31 ................$13,500 d. Units sold during the month (above) .....................20,250 Cost per emblem ......................................... $2 Cost in Cost of Goods Sold at May 31 ...................$40,500 e. Emblems used in advertising ..........................1,000 Cost per emblem ....................................... $2 Cost in Advertising Expense at May 31 ...............$ 2,000 2. Raw Materials Inventorybalance sheet Work in Process Inventorybalance sheet Finished Goods Inventorybalance sheet Cost of Goods Soldincome statement Advertising Expenseincome statement Exercise 2-11 (30 minutes) 1. Eccles Company Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, beginning ............. $ 8,000 Add: Purchases of raw materials .................. 132,000 Raw materials available for use ................... 140,000 Deduct: Raw materials inventory, ending ..... 10,000 Raw materials used in production ............... $130,000 Direct labor ...................................... 90,000 Manufacturing overhead: Rent, factory building .............................80,000 Indirect labor .....................................56,300 Utilities, factory .................................9,000 Maintenance, factory equipment .................. 24,000 Supplies, factory .....................................700 Depreciation, factory equipment .................. 40,000 Total manufacturing overhead costs ............ 210,000 Total manufacturing costs .............................. 430,000 Add: Work in process, beginning .................... 5,000 435,000 Deduct: Work in process, ending .................... 20,000 Cost of goods manufactured .......................... $415,000 2. The cost of goods sold section would be: Finished goods inventory, beginning ............... $ 70,000 Add: Cost of goods manufactured .................. 415,000 Goods available for sale ................................ 485,000 Deduct: Finished goods inventory, ending ....... 25,000 Cost of goods sold ........................................$460,000 Exercise 2-12 (15 minutes) Cost Behavior Selling and Administrative Cost Product Cost Cost Item Variable Fixed 1.The costs of turn signal switches used at a General Motors plant ........................ 2. Interest expense on CBSs long-term debt ................... 3. Salespersons commissions at Avon Products ..................... 4. Insurance on one of Cincinnati Milacrons factory buildings 5. The costs of shipping brass fittings to customers in California ............................ 6.Depreciation on the book-shelves at Reston Bookstore .................................... 7. The costs of X-ray film at the Mayo Clinics radiology lab .... 8.The cost of leasing an 800 telephone number at L.L. Bean ..................... 9. The depreciation on the playground equipment at a McDonalds outlet ................ 10. The cost of the mozzarella cheese used at a Pizza Hut outlet .................... Exercise 2-13 (15 minutes) 1. Direct labor cost: 34 hours $12 per hour ...........$408 Manufacturing overhead cost: 6 hours $12 per hour . 72 Total cost ............................................$480 2. Direct labor cost: 50 hours $12 per hour .........$600 Manufacturing overhead cost: 10 hours $6 per hour =60 Total cost ......................................................$660 3. The company could treat the cost of fringe benefits relating to direct labor workers as part of manufacturing overhead. This approach spreads the cost of such fringe benefits over all units of output. Alternatively, the company could treat the cost of fringe benefits relating to direct labor workers as additional direct labor cost. This latter approach charges the costs of fringe benefits to specific jobs rather than to all units of output. Chapter 3 Systems Design: Job-Order Costing Solutions to Questions 3-1 By definition, manufacturing overhead consists of costs that cannot be practically traced to products or jobs. Therefore, if these costs are to be assigned to products or jobs, they must be allocated rather than traced. 3-2 Job-order costing is used in situations where many different products or services that require separate costing are produced each pe- riod. Process costing is used in situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods. 3-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost. 3-4 A predetermined overhead rate is used to apply overhead to jobs. It is computed before a period begins by dividing the periods estimated total manufacturing overhead by the periods es- timated total amount of the allocation base. The- reafter, overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base that is incurred for each job. The most common allocation base is direct labor-hours. 3-5 A sales order is issued after an agree- ment has been reached with a customer on quan- tities, prices, and shipment dates for goods. The sales order forms the basis for the production order. The production order specifies what is to be produced and forms the basis for the job cost sheet. The job cost sheet, in turn, is used to summarize the various production costs incurred to complete the job. These costs are entered on the job cost sheet from materials requisition forms, direct labor time tickets, and by applying overhead. 3-6 Some production costs such as a factory managers salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. In addition, some production costs such as indirect materials cannot be easily traced to jobs. If these costs are to be assigned to products, they must be allocated to the products. 3-7 If actual manufacturing overhead cost is applied to jobs, then the company must wait until the end of the accounting period to apply over- head and to cost jobs. If the company computes actual overhead rates more frequently to get around this problem, the rates may fluctuate widely. Overhead cost tends to be incurred somewhat evenly from month to month (due to the presence of fixed costs), whereas production activity often fluctuates. The result would be high overhead rates in periods with low activity and low overhead rates in periods with high activity. For these reasons, most companies use prede- termined overhead rates to apply manufacturing overhead costs to jobs. 3-8 The measure of activity used as the allo- cation base should drive the overhead cost; that is, the base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted. 3-9 Assigning manufacturing overhead costs to jobs does not ensure a profit. The units pro- duced may not be sold and if they are sold, they may not be sold at prices sufficient to cover all costs. It is a myth that assigning costs to prod- ucts or jobs ensures that those costs will be re- covered. Costs are recovered only by selling to customersnot by allocating costs. 3-10 The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead ap- plied will not be the same as the amount of actual cost incurred, since the predetermined overhead rate is based on estimates. 3-11 Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process invento- ry during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period. Underapplied or overapplied overhead is disposed of by either closing out the amount to Cost of Goods Sold or by allocating the amount among Cost of Goods Sold and ending inventories in proportion to the applied overhead in each account. The adjust- ment for underapplied overhead increases Cost of Goods Sold (and inventories) whereas the ad- justment for overapplied overhead decreases Cost of Goods Sold (and inventories). 3-12 Manufacturing overhead may be unde- rapplied for several reasons. Control over over- head spending may be poor. Or, some of the overhead may be fixed and the actual amount of the allocation base was less than estimated at the beginning of the period. In this situation, the amount of overhead applied to inventory will be less than the actual overhead cost incurred. 3-13 Underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold was un- derstated. Therefore, underapplied overhead is added to cost of goods sold. Likewise, overap- plied overhead is deducted from cost of goods sold. 3-14 Yes, overhead should be applied to value the Work in Process inventory at year-end. Since $6,000 of overhead was applied to Job A on the basis of $8,000 of direct labor cost, the compa- nys predetermined overhead rate must be 75% of direct labor cost. Thus, $3,000 of overhead should be applied to Job B at year-end: $4,000 direct labor cost 75% = $3,000 applied over- head cost. 3-15 Direct material .................................. $10,000 Direct labor ...................................... 12,000 Manufacturing overhead: $12,000 125% ........................... 15,000 Total manufacturing cost ................... $37,000 Unit product cost: $37,000 1,000 units .................... $37 3-16 A plantwide overhead rate is a single overhead rate used throughout all production de- partments in a plant. Some companies use mul- tiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another de- partment is labor intensive. 3-17 When automated equipment replaces direct labor, overhead increases and direct labor decreases. This results in an increase in the pre- determined overhead rateparticularly if it is based on direct labor. 3-18 When the predetermined overhead rate is based on the amount of the allocation base at capacity and the plant is operated at less than capacity, overhead will ordinarily be underapplied. This occurs because actual activity is less than the activity the predetermined overhead rate is based on. 3-19 Critics of current practice advocate dis- closing underapplied overhead on the income statement as Cost of Unused Capacitya period expense. This would highlight the amount rather than burying it in other accounts. Exercise 3-1 (10 minutes) a. Job-order costing b. Job-order costing c. Process costing d. Job-order costing e. Process costing* f. Process costing* g. Job-order costing h. Job-order costing i. Job-order costing j. Job-order costing k. Process costing l. Process costing * Some of the listed companies might use either a process costing or a job-order costing system, depending on the nature of their operations and how homogeneous the final product is. For example, a plywood manufacturer might use job-order costing if it has a number of different plywood products that are constructed of different woods or come in markedly different sizes. Exercise 3-2 (15 minutes) 1. The direct materials and direct labor costs listed in the exercise would have been recorded on four different documents: the materials requisi- tion form for Job ES34, the time ticket for Harry Kerst, the time ticket for Mary Rosas, and the job cost sheet for Job ES34. 2. The costs for Job ES34 would have been recorded as follows: Materials requisition form: Quantity Unit Cost Total Cost Blanks 40 $8.00 $320 Nibs 960 $0.60 576 $896 Time ticket for Harry Kerst Started Ended Time Completed Rate Amount Job Number 9:00 AM 12:15 PM 3.25 $12.00 $39.00 ES34 Time ticket for Mary Rosas Started Ended Time Completed Rate Amount Job Number 2:15 PM 4:30 PM 2.25 $14.00 $31.50 ES34 Job Cost Sheet for Job ES34 Direct materials ... $896.00 Direct labor: Harry Kerst ....... 39.00 Mary Rosas ...... 31.50 $966.50 Exercise 3-3 (10 minutes) The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead ....... $586,000 Estimated total direct labor hours (DLHs) .. 40,000 DLHs = Predetermined overhead rate .................... $14.65 per DLH Exercise 3-4 (15 minutes) a. Raw Materials ....................... 86,000 Accounts Payable .......... 86,000 b. Work in Process .................... 72,000 Manufacturing Overhead ........ 12,000 Raw Materials ............... 84,000 c. Work in Process .................... 105,000 Manufacturing Overhead ........ 3,000 Wages Payable ............. 108,000 d. Manufacturing Overhead ........ 197,000 Various Accounts .......... 197,000 Exercise 3-5 (10 minutes) Actual direct labor-hours .......................... 12,600 Predetermined overhead rate ................ $23.10 = Manufacturing overhead applied ........... $291,060 Exercise 3-6 (15 minutes) 1. Actual manufacturing overhead costs .............. $ 48,000 Manufacturing overhead applied: 10,000 MH $5 per MH .............................. 50,000 Overapplied overhead cost .............................. $ 2,000 2. Direct materials: Raw materials inventory, beginning .............. $ 8,000 Add purchases of raw materials .................... 32,000 Raw materials available for use .................... 40,000 Deduct raw materials inventory, ending ........ 7,000 Raw materials used in production ................. $ 33,000 Direct labor .................................................... 40,000 Manufacturing overhead cost applied to work in process ................................................... 50,000 Total manufacturing cost ................................ 123,000 Add: Work in process, beginning ..................... 6,000 129,000 Deduct: Work in process, ending ..................... 7,500 Cost of goods manufactured ........................... $121,500 Exercise 3-7 (20 minutes) Parts 1 and 2. Cash Raw Materials (a) 75,000 (a) 75,000 (b) 73,000 (c) 152,000 (d) 126,000 Work in Process Finished Goods (b) 67,000 (f) 379,000 (c) 134,000 379,000 (f) 379,000 (e) 178,000 379,000 (f) 379,000 Manufacturing Overhead Cost of Goods Sold (b) 6,000 (e) 178,000 (f) 379,000 (g) 28,000 (c) 18,000 351,000 (d) 126,000 (g) 28,000 28,000 Exercise 3-8 (10 minutes) 1. Actual direct labor-hours ......................... 8,250 Predetermined overhead rate ............... $21.40 = Manufacturing overhead applied ........... $176,550 Less: Manufacturing overhead incurred .... 172,500 $ 4,050 Manufacturing overhead overapplied ........ $4,050 2. Because manufacturing overhead is overapplied, the cost of goods sold would decrease by $4,050 and the gross margin would increase by $4,050. Exercise 3-9 (30 minutes) 1. Since $320,000 of studio overhead cost was applied to Work in Process on the basis of $200,000 of direct staff costs, the apparent predeter- mined overhead rate was 160%: Studio overhead applied$320,000= Total amount of the allocation base$200,000 direct staff costs=160% of direct staff costs 2. The Krimmer Corporation Headquarters project is the only job remaining in Work in Process at the end of the month; therefore, the entire $40,000 balance in the Work in Process account at that point must apply to it. Recognizing that the predetermined overhead rate is 160% of di- rect staff costs, the following computation can be made: Total cost added to the Krimmer Corporation Headquarters project ..... $40,000 Less: Direct staff costs ................................ $13,500 Studio overhead cost ($13,500 160%) ........................... 21,600 35,100 Costs of subcontracted work ............... $ 4,900 With this information, we can now complete the job cost sheet for the Krimmer Corporation Headquarters project: Costs of subcontracted work ........... $ 4,900 Direct staff costs ............................ 13,500 Studio overhead ............................. 21,600 Total cost to January 31 ................. $40,000 Exercise 3-10 (30 minutes) 1. a. Raw Materials Inventory ......................... 210,000 Accounts Payable ................................ 210,000 b. Work in Process ..................................... 152,000 Manufacturing Overhead ........................ 38,000 Raw Materials Inventory ...................... 190,000 c. Work in Process ..................................... 49,000 Manufacturing Overhead ........................ 21,000 Salaries and Wages Payable ................. 70,000 d. Manufacturing Overhead ........................ 105,000 Accumulated Depreciation .................... 105,000 e. Manufacturing Overhead ........................ 130,000 Accounts Payable ................................ 130,000 f. Work in Process ..................................... 300,000 Manufacturing Overhead ...................... 300,000 75,000 machine-hours $4 per machine-hour = $300,000. g. Finished Goods ...................................... 510,000 Work in Process ................................... 510,000 h. Cost of Goods Sold ................................. 450,000 Finished Goods .................................... 450,000 Accounts Receivable ............................... 675,000 Sales .................................................. 675,000 $450,000 1.5 = $675,000 2. Manufacturing Overhead Work in Process (b) 38,000 (f) 300,000 Bal. 35,000 (g) 510,000 (c) 21,000 (b) 152,000 (d) 105,000 (c) 49,000 (e) 130,000 (f) 300,000 6,000 Bal. 26,000 (Overapplied overhead) Exercise 3-11 (30 minutes) 1. Williams Chandler Nguyen Designer-hours ........................... 200 80 120 Predetermined overhead rate ....... $45 $45 $45 Overhead applied ........................ $9,000 $3,600 $5,400 2. Williams Chandler Direct materials cost .................... $ 4,800 $1,800 Direct labor cost .......................... 2,400 1,000 Overhead applied ........................ 9,000 3,600 Total cost ................................... $16,200 $6,400 Completed Projects ..................... 22,600* Work in Process ..................... 22,600* * $16,200 + $6,400 3. The balance in the Work in Process account consists entirely of the costs associated with the Nguyen project: Direct materials cost ............................... $ 3,600 Direct labor cost ..................................... 1,500 Overhead applied ................................... 5,400 Total cost in work in process ................... $10,500 4. The balance in the Overhead account is determined as follows: Overhead Actual overhead costs 16,000 18,000 Applied overhead costs 2,000 Overapplied overhead As indicated above, the credit balance in the Overhead account is called overapplied overhead. Exercise 3-12 (30 minutes) Note to the instructor: This exercise is a good vehicle for introducing the concept of predetermined overhead rates. This exercise can also be used as a launching pad for a discussion of the appendix to the chapter. 1. As suggested, the costing problem does indeed lie with manufacturing overhead cost. Since manufacturing overhead is mostly fixed, the cost per unit increases as the level of production decreases. The problem can be solved by using a predetermined overhead rate, which should be based on expected activity for the entire year. Many students will use units of product in computing the predetermined overhead rate, as fol- lows: Estimated total manufacturing overhead costPredetermined=overhead rateEstimated total amount of the allocation base$840,000= 200,000 units=$4.20 per unit. The predetermined overhead rate could also be set on the basis of di- rect labor cost or direct materials cost. The computations are: Estimated total manufacturing overhead costPredetermined=overhead rateEstimated total amount of the allocation base$840,000= $240,000 direct labor cost=350% of direct labor cost. Estimated total manufacturing overhead costPredetermined=overhead rateEstimated total amount of the allocation base$840,000= $600,000 direct materials cost=140% of direct materials cost. Exercise 3-12 (continued) 2. Using a predetermined overhead rate, the unit costs would be: Quarter First Second Third Fourth Direct materials ................. $240,000 $120,000 $ 60,000 $180,000 Direct labor ....................... 96,000 48,000 24,000 72,000 Manufacturing overhead: Applied at $4.20 per unit, 350% of direct la- bor cost, or 140% of di- rect materials cost .......... 336,000 168,000 84,000 252,000 Total cost ......................... $672,000 $336,000 $168,000 $504,000 Number of units produced . 80,000 40,000 20,000 60,000 Estimated unit product cost ............................... $8.40 $8.40 $8.40 $8.40 Exercise 3-13 (15 minutes) 1. Item (a): Actual manufacturing overhead costs for the year. Item (b): Overhead cost applied to work in process for the year. Item (c): Cost of goods manufactured for the year. Item (d): Cost of goods sold for the year. 2. Manufacturing Overhead ............................. 30,000 Cost of Goods Sold ................................ 30,000 3. The overapplied overhead will be allocated to the other accounts on the basis of the amount of overhead applied during the year in the ending balance of each account: Work in process ................................ $ 32,800 8 % Finished goods .................................. 41,000 10 Cost of goods sold ............................ 336,200 82 Total cost ......................................... $410,000 100 % Using these percentages, the journal entry would be as follows: Manufacturing Overhead ........................... 30,000 Work in Process (8% $30,000) .......... 2,400 Finished Goods (10% $30,000) ......... 3,000 Cost of Goods Sold (82% $30,000) .... 24,600 Exercise 3-14 (30 minutes) 1. The overhead applied to Ms. Miyamis account would be computed as follows: 2005 2006 Estimated overhead cost (a) ............................. $144,000 $144,000 Estimated professional staff hours (b) ............... 2,400 2,250 Predetermined overhead rate (a) (b) .............. $60 $64 Professional staff hours charged to Ms. Miyamis account ..................................... 5 5 Overhead applied to Ms. Miyamis account ......... $300 $320 2. If the actual overhead cost and the actual professional hours charged turn out to be exactly as estimated there would be no underapplied or overapplied overhead. 2005 2006 Predetermined overhead rate (see above) ......... $60 $64 Actual professional staff hours charged to clients accounts (by assumption) ................... 2,400 2,250 Overhead applied ............................................. $144,000 $144,000 Actual overhead cost incurred (by assumption) .. 144,000 144,000 Under- or overapplied overhead ........................ $ 0 $ 0 3. If the predetermined overhead rate is based on the professional staff hours available, the computations would be: Estimated overhead cost (a) ............................... $144,000 $144,000 Professional staff hours available (b) ................... 3,000 3,000 Predetermined overhead rate (a) (b) ............... $48 $48 Professional staff hours charged to Ms. Miyamis account .......................................................... 5 5 Overhead applied to Ms. Miyamis account .......... $240 $240 Problem 3-14 (continued) 4. If the actual overhead cost and the actual professional staff hours charged to clients accounts turn out to be exactly as estimated over- head would be underapplied as shown below. 2005 2006 Predetermined overhead rate (see 3 above) (a) ... $48 $48 Actual professional staff hours charged to clients accounts (by assumption) (b) ............... 2,400 2,250 Overhead applied (a) (b) ................................ $115,200 $108,000 Actual overhead cost incurred (by assumption) .... 144,000 144,000 Underapplied overhead ...................................... $ 28,800 $ 36,000 The underapplied overhead is best interpreted in this situation as the cost of idle capacity. Proponents of this method of computing predeter- mined overhead rates suggest that the underapplied overhead be treated as a period expense that would be separately disclosed on the income statement as Cost of Unused Capacity. Exercise 3-15 (15 minutes) 1. Milling Department: Estimated total manufacturing overhead costPredetermined=overhead rateEstimated total amount of the allocation base$510,000==$8.50 per machine-hour60,000 machine-hours Assembly Department: Estimated total manufacturing overhead costPredetermined=overhead rateEstimated total amount of the allocation base$800,000==125% of direct labor cost$640,000 direct labor cost 2. Overhead Applied Milling Department: 90 MHs $8.50 per MH .. $765 Assembly Department: $160 125% ............. 200 Total overhead cost applied ........................... $965 3. Yes; if some jobs require a large amount of machine time and little labor cost, they would be charged substantially less overhead cost if a plant- wide rate based on direct labor cost were used. It appears, for example, that this would be true of Job 407 which required considerable machine time to complete, but required only a small amount of labor cost. Exercise 3-16 (30 minutes) 1. The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead costPredetermined=overhead rateEstimated total amount of the allocation base$170,000==$2.00 per machine-hour85,000 machine-hours 2. The amount of overhead cost applied to Work in Process for the year would be: 80,000 machine-hours $2.00 per machine-hour = $160,000. This amount is shown in entry (a) below: Manufacturing Overhead (Utilities) 14,000 (a) 160,000 (Insurance) 9,000 (Maintenance) 33,000 (Indirect materials) 7,000 (Indirect labor) 65,000 (Depreciation) 40,000 Balance 8,000 Work in Process (Direct materials) 530,000 (Direct labor) 85,000 (Overhead) (a) 160,000 3. Overhead is underapplied by $8,000 for the year, as shown in the Manufacturing Overhead account above. The entry to close out this balance to Cost of Goods Sold would be: Cost of Goods Sold ................................8,000 Manufacturing Overhead ........................... 8,000 Exercise 3-16 (continued) 4. When overhead is applied using a predetermined rate based on machine-hours, it is assumed that overhead cost is proportional to machine-hours. When the actual level of activity turns out to be 80,000 machine-hours, the costing system assumes that the overhead will be 80,000 machine-hours $2.00 per machine-hour, or $160,000. This is a drop of $10,000 from the initial estimated total manufacturing overhead cost of $170,000. However, the actual total manufacturing overhead did not drop by this much. The actual total manufacturing overhead was $168,000a drop of only $2,000 from the estimate. The manufacturing overhead did not decline by the full $10,000 because of the existence of fixed costs and/or because overhead spending was not under control. These issues will be covered in more detail in later chapters. ...
View Full Document

Ask a homework question - tutors are online