Professional Documents
Culture Documents
(a) Use in financial accounting: In financial accounting, product costs are needed to
determine the value of inventory on the balance sheet and to compute the costof-goods-sold expense on the income statement.
(b) Use in managerial accounting: In managerial accounting, product costs are
needed for planning, for cost control, and for decision making.
(c) Use in cost management: In order to manage, control, or reduce the costs of
manufacturing products or providing services, management needs a clear idea of
what those costs are.
(d) Use in reporting to interested organizations: Product cost information is used in
reporting on relationships between firms and various outside organizations. For
example, public utilities such as electric and gas companies record product
costs to justify rate increases that must be approved by state regulatory
agencies.
3-2
3-3
3-4
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
c. Job-cost record: A document on which the costs of direct material, direct labor,
and manufacturing overhead are recorded for a particular production job or
batch. The job-cost sheet is a subsidiary ledger account for the Work-in-Process
Inventory account in the general ledger.
3-5
3-6
3-7
3-8
3-9
The difference between actual and normal costing systems involves the procedure
for applying manufacturing overhead to Work-in-Process Inventory. Under actual
costing, applied overhead is the product of the actual overhead rate (computed at
the end of the period) and the actual amount of the cost driver used. Under normal
costing, applied overhead is the product of the predetermined overhead rate
(computed at the beginning of the period) and the actual amount of the cost driver
used.
McGraw-Hill/Irwin
Inc.
3-2
3-10
3-11
The benefit of using multiple overhead rates is that the resulting product-costing
information is more accurate and more useful for decision making than is the
information that results from using a single overhead rate. However, the use of
multiple cost drivers and overhead rates is more complicated and more costly.
3-12
3-13
3-14
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
3-15
Job-order costing concepts are used in professional service firms. However, rather
than referring to production jobs, such organizations use terminology that reflects
their operations. For example, hospitals and law firms assign costs to cases, and
governmental agencies often refer to programs or missions. It is important in
such organizations to accumulate the costs of providing the services associated
with a case, project, contract, or program. Such cost information is used for
planning, cost control, and pricing, among other purposes.
3-16
3-17
When direct material, direct labor, and manufacturing-overhead costs are incurred,
they are applied to Work-in-Process Inventory by debiting the account. When goods
are finished, the costs are removed from that account with a credit, and they are
transferred to Finished-Goods Inventory by debiting that account. Subsequently,
when the goods are sold, Finished-Goods Inventory is credited, and the costs are
added to Cost of Goods Sold with a debit.
3-18
Hospitals use job-order costing concepts to accumulate the costs associated with
each case treated in the hospital. For example, the costs of treating a heart patient
would be assigned to that patient's case. These costs would include the hospital
room, food and beverages, medications, and specialized services such as diagnostic
testing and X rays.
3-19
Some manufacturing firms are switching from direct-labor hours to machine hours
or throughput time as the basis for overhead application as a result of increased
automation in their factories. With increased automation comes a reduction in the
amount of direct labor used in the production process. In such cases, direct labor
may cease to be a cost driver that varies in a pattern similar to the way in which
manufacturing-overhead costs are incurred.
3-20
3-21
McGraw-Hill/Irwin
Inc.
3-4
3-22
A large retailer could use EDI to exchange such documents as purchase orders,
shipping and receiving notices, and invoices electronically with its suppliers.
Electronic data interchange (EDI) is the direct exchange of data via a computer-tocomputer interface.
3-23
An engineer could use bar code technology to record how she spends her time. Bar
codes would be assigned to her and to each of her activities. Each time she arrived
at work, left work, or changed activity at work, the engineer would scan her personal
bar code and the bar code of the appropriate action or activity. Examples of activities
are designing, redesigning, or testing a product; change orders; visiting the factory
floor; constructing a prototype; and being trained.
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
SOLUTIONS TO EXERCISES
EXERCISE 3-24 (10 MINUTES)
1.
Process
2.
Job-order
3.
4.
Process
5.
Process
6.
Job-order
7.
Process
8.
9.
Process
10.
Job-order
(a)
(b)
$100,000 +($.10)(200,000)
= $.60 per chicken
200,000
(c)
budgeted overhead
budgeted production volume
$100,000 +($.10)(300,000)
= $.43 per chicken (rounded)
300,000
McGraw-Hill/Irwin
Inc.
3-6
$100,000 +($.10)(400,000)
= $.35 per chicken
400,000
The predetermined overhead rate does not change in proportion to the change in
production volume. As production volume increases, the $100,000 of fixed overhead
is allocated across a larger activity base. When volume rises by 50%, from 200,000 to
300,000 chickens, the decline in the overhead rate is 28.33% [(.60 .43)/.60]. When
volume rises by 33.33%, from 300,000 to 400,000 chickens, the decline in the
overhead rate is 18.6% [(.43 .35)/.43].
5,480
Finished-Goods Inventory......................................................
Work-in-Process Inventory..........................................
5,480
4,600
680
200
5,480
$134,000
191,000
$325,000
124,000
$201,000
300,000
$501,000
2.
$501,000
180,000
$681,000
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
$681,000
235,000
$916,000
251,000
$665,000
4.
$125,000
665,000
$790,000
117,000
$673,000
Since the company accumulates overapplied or underapplied overhead until the end of
the year, no adjustment is made to cost of goods sold until December 31.
5.
$180,000
175,000
$5,000
McGraw-Hill/Irwin
Inc.
3-8
3.
Total
manufacturing
cost
$2,500,000
work-in-process
+
inventory,
Jan.1
+
.75X
work-in-process
inventory,
Dec. 31
X
cost of
goods
manufactured
= $2,425,000
.25X = $2,500,000 $2,425,000
X = $300,000
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
TB78
Date Started
4/1
Description
teddy bears
Date Completed
4/15
Date
4/1
4/5
1,000
Unit Price
$.80
.30
Cost
$320
150
Rate
$12
Cost
$6,000
Direct Labor
Hours
500
Date
4/15
Date
4/15
Manufacturing Overhead
Activity Base
Quantity
direct-labor hours
500
Application Rate
$2
Cost
$1,000
Cost Summary
Cost Item
Total Direct Material
Total Direct Labor
Total Manufacturing Overhead
Total Cost
Unit Cost
Date
4/30
Amount
$ 470
6,000
1,000
$7,470
$ 7.47
Shipping Summary
Units Remaining
Units Shipped
In Inventory
700
300
Cost Balance
$2,241*
McGraw-Hill/Irwin
Inc.
3-10
$30,000
278,000
$308,000
33,000
$275,000
120,000
252,000*
$647,000
39,000
$686,000
42,900
$643,100
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
$42,000
643,100
$685,100
46,200
$638,900
Raw-Material Inventory
227,000
174,000
53,000
Wages Payable
324,000
Manufacturing Overhead
180,000
Work-in-Process Inventory
18,000
174,000
324,000
180,000
120,000
576,000
Sales Revenue
195,000
Finished-Goods Inventory
30,000
120,000
132,000
18,000
Accounts Receivable
195,000
2.
XXX
XXX
$53,000
576,000
18,000
McGraw-Hill/Irwin
Inc.
3-12
$195,000
132,000
$63,000
2.
Raw material:
Beginning inventory...................................................................................
Add: Purchases..........................................................................................
Deduct: Raw material used........................................................................
Ending inventory........................................................................................
$71,000
?
326,000
$81,000
$336,000
Direct labor:
Total manufacturing cost...........................................................................
Deduct: Direct material..............................................................................
Direct labor and manufacturing overhead................................................
3.
$686,000
326,000
360,000
=
=
=
$360,000
$360,000
$360,000
Direct labor
$360,000
1.6
Direct labor
$225,000
$ 80,000
686,000
?
$30,000
$736,000
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
$90,000
736,000
?
$110,000
$716,000
Percentage
25%
35%
40%
100%
Underapplied
Account
Overhead
Work in Process......................................$16,000*
Finished Goods....................................... 16,000
Cost of Goods Sold................................ 16,000
x
x
x
x
*Underapplied overhead =
$16,000 =
Percentage
25%
35%
40%
Calculation of
Percentage
35,250 $141,000
49,350 $141,000
56,400 $141,000
Amount Added
to Account
$4,000
5,600
6,400
Journal entry:
Work-in-Process Inventory............................................
Finished-Goods Inventory.............................................
Cost of Goods Sold........................................................
Manufacturing Overhead...............................................
McGraw-Hill/Irwin
Inc.
3-14
4,000
5,600
6,400
16,000
1.
2.
actual
manufacturing
overhead
$231,000
21,000
82,000
200,000
59,000
30,000
300,000
79,000
$1,002,000
applied
manufacturing
overhead
Manufacturing Overhead.......................................................
Cost of Goods Sold.....................................................
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
62,000
62,000
$364,000
10,000 machine hours
(b)
$364,000
20,000 direct-labor hours
(c)
$364,000
$280,000*
Actual
manufacturing
overhead
applied
manufacturing
overhead
overapplied or
underapplied
overhead
(a)
$340,000 (11,000)($36.40)
(b)
$340,000 (18,000)($18.20)
(c)
$340,000 ($270,000)(130%)
Work-in-Process Inventory......................................................
Manufacturing Overhead................................................
340,000
Work-in-Process Inventory......................................................
Manufacturing Overhead................................................
400,400
McGraw-Hill/Irwin
Inc.
3-16
340,000
400,400
3,500DM
6,000DM
9,600DM
19,100DM
Memorandum
Date:
Today
To:
President
From:
I.M. Student
Subject:
I recommend direct-labor hours as the best volume-based cost driver upon which to
base the application of manufacturing overhead. Since our products are made by
hand, direct labor is a very significant production input. Moreover, the incurrence of
manufacturing overhead cost appears to be related to the use of direct labor.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
Memorandum
Date:
Today
To:
President
From:
I.M. Student
Subject:
I recommend either machine hours or units of production as the most appropriate cost
driver for the application of manufacturing overhead. Since our production process is
highly automated, machine hours are the most significant production input. Also, our
chips are nearly identical, so the amount of overhead incurred in their production does
not vary much across product lines. The incurrence of manufacturing overhead cost
appears to be related closely both to machine time and units of production.
EXERCISE 3-40 (15 MINUTES)
Work-in-Process Inventory: Tanning Department...................................... 6,000a
Manufacturing Overhead...................................................................
6,000
a $6,000 = 100 sq. ft. per set 20 sets $3 per sq. ft.
540b
540
3,200
McGraw-Hill/Irwin
Inc.
3-18
airline:
(a)
(b)
(c)
(d)
(e)
(2)
restaurant
(a)
(b)
(c)
(d)
(e)
(3)
fitness club:
(a)
(b)
(c)
(d)
(e)
(4)
bank:
(a)
(b)
(c)
(d)
(e)
McGraw-Hill/Irwin
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Managerial Accounting, 5/e
hotel:
(a)
(b)
(c)
(d)
(e)
(6)
hospital:
(a)
(b)
(c)
(d)
(e)
McGraw-Hill/Irwin
Inc.
3-20
SOLUTIONS TO PROBLEMS
PROBLEM 3-43 (45 MINUTES)
1.
$10,100
39,000
$49,100
11,000
$4,900
29,000
3,800
2,100
6,000
2,400
3,600
3,100
$54,900
3,100
$38,100
79,000
58,000
$175,100
8,100
$183,200
8,300
$174,900
*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to
work in process. Therefore, the overapplied overhead, $3,100, must be added to total actual
overhead to arrive at the amount of overhead applied to work in process. If there had been
underapplied overhead, the balance would have been deducted from total actual
manufacturing overhead. The amount of overapplied overhead is found by subtracting
actual overhead, $54,900 (as computed above), from applied overhead, $58,000 (given).
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
$14,000
174,900
$188,900
15,400
$173,500
3,100
$170,400
*The cost of goods manufactured is obtained from the Schedule of Cost of Goods
Manufactured.
The company closes underapplied or overapplied overhead into cost of goods sold. Hence,
the balance in overapplied overhead is deducted from cost of goods sold for the month.
3.
McGraw-Hill/Irwin
Inc.
3-22
$205,800
170,400
$35,400
$13,800
2,500
1,200
1,700
4,000
23,200
$12,200
5,100
$7,100
2.
Journal entries:
(a)
(b)
(c)
(d)
(e)
(f)
Raw-Material Inventory...............................................
Accounts Payable.............................................
33,000
Work-in-Process Inventory.........................................
Raw-Material Inventory.....................................
460
Manufacturing Overhead............................................
Manufacturing-Supplies Inventory..................
100
Manufacturing Overhead............................................
Accumulated Depreciation: Building..............
8,000
Manufacturing Overhead............................................
Cash...................................................................
400
Work-in-Process Inventory.........................................
Wages Payable..................................................
34,000
33,000
460
100
8,000
400
34,000
20,400
20,400
To apply manufacturing overhead to work in process ($20,400 = 1,700 $12 per hour).
(g)
(h)
(i)
Manufacturing Overhead............................................
Property Taxes Payable....................................
910
Manufacturing Overhead............................................
Wages Payable..................................................
2,500
Finished-Goods Inventory..........................................
Work-in-Process Inventory..............................
14,400
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
910
2,500
14,400
Accounts Receivable..................................................
Sales Revenue...................................................
13,500
10,800*
13,500
10,800
*$10,800 = (9/12)($14,400)
McGraw-Hill/Irwin
Inc.
3-24
Accounts Payable
2,500 Bal. 1/1
136,500
135,000
1,000 Bal. 12/31
Finished-Goods Inventory
12,000
718,000 710,000
Bal. 12/31
20,000
Bal. 1/1
2.
(a)
80,000
Work-in-Process Inventory. ................................................. 130,800**
........................Wages Payable..................................
130,800
* $21,000 + $44,000 + $15,000 = $80,000
** $35,000 + $22,000 + $65,000 + $8,800 = $130,800
(b)
231,000
* (1,200 + 700 + 2,000 + 500) x $52.50 = $231,000
(d)
315,250
* Job 64: $84,000 + $21,000 + $35,000 + (1,200 x $52.50) = $203,000
Job 65: $53,500 + $22,000 + (700 x $52.50) = $112,250
$315,250 = $203,000 + $112,250
(e)
146,950
112,250
3.
5.
cost
2.
3.
The finished-goods inventory consisted of job no. 2143, which cost $351,500
[$156,000 + $85,000 + ($85,000 x 130%)].
4.
15,761,800
McGraw-Hill/Irwin
Inc.
3-26
Manufacturing Overhead..........................................
Cost of Goods Sold......................................
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
101,000
101,000
7.
0
15,761,800
$15,761,800
351,500
$15,410,300
101,000
$15,309,300
No, selling and administrative expenses are operating expenses of the firm and are
treated as period costs rather than product costs. Such costs are unrelated to
manufacturing overhead and cost of goods sold.
Percent
Traceable
Traceable
Cost
80%
60
90
90
50
$2,000,000
180,000
225,000
45,000
50,000
$2,500,000
HDKs overhead (i.e., the nontraceable costs) total $700,000 ($3,200,000 - $2,500,000).
2.
3.
McGraw-Hill/Irwin
Inc.
3-28
The total cost of the Martin Manufacturing project is $64,000, and the billing is
$76,800, as follows:
Professional staff salaries
Administrative support staff
Travel..
Photocopying
Other operating costs.
Subtotal
Overhead ($50,000 x 28%).
Total cost.
Markup ($64,000 x 20%).
Billing to Martin
$41,000
2,600
4,500
500
1,400
$50,000
14,000
$64,000
12,800
$76,800
5.
6.
Professional staff members are compensated for attending training sessions and
firm-wide planning meetings, paid vacations, and completion of general, non-clientrelated paperwork and reports. These activities benefit multiple clients, the
consultant, and/or the overall firm, making traceability to specific clients difficult if
not impossible.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
$ 56,000
97,530
$153,530
3.
4.
5.
The companys manufacturing overhead was overapplied by $119,000 ($129,000 $10,000). As a result, excessive overhead flowed from Work-in-Process Inventory, to
Finished-Goods Inventory, to Cost of Goods Sold, meaning that the Cost of Goods
Sold account must be decreased at year-end.
6.
7.
The firms selection of cost drivers (or application bases) seems appropriate. There
should be a strong correlation between the cost driver and the amount of overhead
incurred. In the Machining Department, much of the overhead is probably related to
the operation of machines. Similarly, in the Assembly Department, a considerable
portion of the overhead incurred is related to manual assembly (i.e., labor)
operations.
McGraw-Hill/Irwin
Inc.
3-30
1.
2.
Journal entries:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
Raw-Material Inventory......................................
Accounts Payable....................................
7,850
Work-in-Process Inventory................................
Raw-Material Inventory............................
180
Manufacturing Overhead...................................
Manufacturing-Supplies Inventory..........
30
Manufacturing Overhead...................................
Cash..........................................................
800
Work-in-Process Inventory................................
Wages Payable.........................................
75,000
1,800
Raw-Material Inventory......................................
Accounts Payable....................................
3,000
Accounts Payable...............................................
Cash..........................................................
1,700
Manufacturing Overhead...................................
Wages Payable.........................................
21,000
Manufacturing Overhead...................................
Accumulated Depreciation: Equipment..
7,000
Finished-Goods Inventory.................................
Work-in-Process Inventory......................
McGraw-Hill/Irwin
Inc.
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7,850
180
30
800
75,000
1,800
3,000
1,700
21,000
7,000
1,100
1,100
Work-in-Process Inventory................................
Manufacturing Overhead.........................
140,000*
140,000
Accounts Receivable..........................................
Sales Revenue..........................................
176,000
139,000
McGraw-Hill/Irwin
Inc.
3-32
176,000
139,000
HURON CORPORATION
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X2
Direct material:
Raw material inventory, 12/31/x1.......................
Add: Purchases of raw material...........................
Raw material available for use..............................
Deduct: Raw-material inventory, 12/31/x2...........
Raw material used.................................................
Direct labor....................................................................
Manufacturing overhead:
Indirect material.....................................................
Indirect labor..........................................................
Depreciation on factory building..........................
Depreciation on factory equipment......................
Utilities....................................................................
Property taxes........................................................
Insurance................................................................
Total actual manufacturing overhead............
Deduct: Underapplied overhead*...................
Overhead applied to work in process..................
Total manufacturing costs...........................................
Add: Work-in-process inventory, 12/31/x1..................
Subtotal.........................................................................
Deduct: Work-in-process inventory, 12/31/x2............
Cost of goods manufactured.......................................
$89,000
731,000
$820,000
59,000
$45,000
150,000
125,000
60,000
70,000
90,000
40,000
$580,000
2,500
$761,000
474,000
577,500
$1,812,500
-0$1,812,500
40,000
$1,772,500
*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to
work in process. Therefore, the underapplied overhead, $2,500, must be deducted from total
actual overhead to arrive at the amount of overhead applied to work in process. If there had
been overapplied overhead, the balance would have been added to total manufacturing
overhead.
The amount of underapplied overhead is found by subtracting the applied
manufacturing overhead, $577,500, from the total actual manufacturing overhead, $580,000.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
HURON CORPORATION
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X2
Finished-goods inventory, 12/31/x1.......................................................
Add: cost of goods manufactured..........................................................
Cost of goods available for sale.............................................................
Deduct: Finished-goods inventory, 12/31/x2.........................................
Cost of goods sold..................................................................................
Add: Underapplied overhead*................................................................
Cost of goods sold (adjusted for underapplied overhead)..................
$ 35,000
1,772,500
$1,807,500
40,000
$1,767,500
2,500
$1,770,000
*The company closes underapplied or overapplied overhead into cost of goods sold. Hence
the $2,500 balance in underapplied overhead is added to cost of goods sold for the month.
3.
HURON CORPORATION
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X2
Sales revenue...........................................................................................
Less: Cost of goods sold........................................................................
Gross margin............................................................................................
Selling and administrative expenses.....................................................
Income before taxes................................................................................
Income tax expense.................................................................................
Net income................................................................................................
$2,105,000
1,770,000
$335,000
269,000
$66,000
25,000
$41,000
$40,000. Since there was no work-in-process inventory at the beginning of 20x2, all of
the costs in the year-end work-in-process inventory were incurred during 20x2.
2.
The direct-material cost would have been larger, probably by roughly 20 percent,
because direct material is a variable cost.
3.
Depreciation is a fixed cost, so it would not have been any larger if the firm's volume
had increased.
McGraw-Hill/Irwin
Inc.
3-34
$17,000
113,000
$130,000
26,000
$104,000
160,000*
80,000
$344,000
40,000
$384,000
36,000
$348,000
*Work upward from the bottom of the statement, using the information available. Direct
labor + manufacturing overhead = total manufacturing costs direct material cost =
$344,000
$104,000 = $240,000. Since manufacturing overhead = 50% of direct labor, then
manufacturing overhead = $80,000 and direct labor = $160,000.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
3.
$17,000
113,000
$130,000
26,000
$104,000
160,000
$264,000
$160,000
80,000
$240,000
1.
2.
3.
4.
Underapplied overhead
$6,000
$26,000 $20,000
McGraw-Hill/Irwin
Inc.
3-36
6,000
6,000
(a)
Account
Work in Process
Finished Goods
Cost of Goods
Sold
Total
Explanation
Job P82 only
Job N08 only
Amount*
$2,500
12,500
Percentage
12.5%
62.5%
5,000
$20,000
25.0%
100.0%
Calculation
of Percentage
2,500 20,000
12,500 20,000
5,000 20,000
Account
Work in Process
Finished Goods
Cost of Goods Sold
Total
(b)
Underapplied
Overhead
$6,000
6,000
6,000
Percentage
12.5%
62.5%
25.0%
Amount Added
to Account
$ 750
3,750
1,500
$6,000
Journal entry:
Work-in-Process Inventory..................................................
Finished-Goods Inventory...................................................
Cost of Goods Sold..............................................................
Manufacturing Overhead...........................................
750
3,750
1,500
6,000
The next step that Jackson should take in resolving this conflict is to inform Brown
that he is planning to discuss the conflict with the next higher managerial level.
Jackson should pursue discussions with successively higher levels of management,
including the Audit Committee and the Board of Directors, until the matter is
satisfactorily resolved. At the same time, Jackson should clarify relevant concepts
by confidential discussion with an objective advisor to obtain an understanding of
possible courses of action. If the ethical conflict still exists after exhausting all
levels of internal review, Jackson may have no course other than to resign from the
organization.
McGraw-Hill/Irwin
Inc.
3-38
Predetermined
Overhead Rate
$4 per hour
5 per hour
4 per hour
5 per hour
Calculations
$100,000/25,000
$80,000/16,000
$50,000/12,500
$70,000/14,000
January
$100
300
April
$100
300
80
____
$480
100
$500
January
$480
48
$528
April
$500
50
$550
2.
Direct material.............................................
Direct labor..................................................
Manufacturing overhead:
20 hrs $4 per hr................................
20 hrs $5 per hr................................
Total cost.....................................................
3.
Total cost.....................................................
Markup (10%)...............................................
Price.............................................................
4.
Predetermined rate =
=
$300,000
= $4.44 per hour (rounded)
67,500
5.
Direct material...............................................
Direct labor...................................................
Manufacturing overhead (20 hrs $4.44)...
Total cost......................................................
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
January
$100.00
300.00
88.80
$488.80
April
$100.00
300.00
88.80
$488.80
Total cost......................................................
Markup (10%)................................................
Price...............................................................
$488.80
48.88
$537.68
Notice that with quarterly overhead rates, the firm may underprice its product in January
and overprice it in April.
PROBLEM 3-57 (45 MINUTES)
1.
3.
$54,000
45,000
21,000
17,675
$137,675
direct-labor wages
$51,000
=
= $6.00 per hour
direct-labor hours
8,500
McGraw-Hill/Irwin
Inc.
3-40
=
=
5.
= $42,925
6.
$12,000
15,000
6,000
6,400
8,100
$47,500
=
=
$47,500 $42,925
$4,575 underapplied
Former product-costing system: traditional system based on a single, volumerelated cost driver.
All Manufacturing Overhead
Overhead
application:
Overhead costs
are assigned to
production jobs.
Cost driver:
direct-labor hours
Production Jobs
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
Service Departments
Production
Support
Department
Overhead costs
are assigned to
production
departments
Manufacturing
Overhead
Distribution
Machinery
Department
Production Departments
Cutting
Fabrication
Assembly
Department
Department
Department
STAGE
TWO
Cost
driver:
machine
hours
Cost
driver:
parts
processed
Cost driver:
direct-labor
hours
Overhead
Application
Overhead
costs are
assigned to
production
jobs.
McGraw-Hill/Irwin
Inc.
3-42
Production Jobs
STAGE
TWO
Overhead
costs are
assigned to
production
jobs
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
Number of orders
Trimming Assembly
Direct-labor hours
Forming
Quality
control
Engineering design
specs
Trimming-machine
hours
Inspections
Number of parts
Cutting
Production runs
Orders received
Equip.
setup
Machine hours
Equip.
maintenance
Purchase orders*
Overhead
costs are
assigned to
productionrelated
activities
Material Engineerhandling
ing
Forming-machine hours
STAGE
ONE
Cutting-machine hours
3.
1.
2.
Journal entries:
(a)
(b)
(c)
Raw-Material Inventory......................................
Accounts Payable....................................
5,000
Raw-Material Inventory......................................
Accounts Payable....................................
4,000
Work-in-Process Inventory................................
Raw-Material Inventory............................
11,250*
5,000
4,000
11,250
*(250 sq. ft. $5 per sq. ft.) + (1,000 lbs. $10 per lb.)
Manufacturing Overhead**.................................
Manufacturing-Supplies Inventory..........
100
100
Work-in-Process Inventory................................
Manufacturing Overhead...................................
Wages Payable.........................................
34,000
13,000
Work-in-Process Inventory................................
Manufacturing Overhead.........................
35,700*
47,000
35,700
(f)
Manufacturing Overhead...................................
Accumulated Depreciation: Building and
Equipment..............................................
12,000
Manufacturing Overhead...................................
Cash..........................................................
1,200
McGraw-Hill/Irwin
Inc.
3-44
12,000
1,200
2002 The McGraw-Hill Companies,
Solutions Manual
(k)
(l)
(m)
Manufacturing Overhead...................................
Accounts Payable....................................
2,100
Manufacturing Overhead...................................
Cash..........................................................
2,400
Manufacturing Overhead...................................
Prepaid Insurance....................................
3,100
8,000
4,000
1,000
2,100
2,400
3,100
8,000
4,000
1,000
Finished-Goods Inventory................................
Work-in-Process Inventory....................
34,050*
34,050
$1,250
16,000
16,800
$34,050
Accounts Receivable........................................
Sales Revenue..........................................
*(76
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
2.
26,600*
26,600
.
17,025**
17,025
Bal
Accounts Payable
13,000
5,000
4,000
2,100
Bal
(a)
(b)
(g)
Accounts Receivable
21,000
26,600
Wages Payable
8,000
47,000
Bal.
(d)
Prepaid Insurance
5,000
3,100
Accumulated Depreciation:
Buildings and Equipment
102,000 Bal.
12,000 (e)
4,000 (k)
10,000
1,200
2,400
8,000
1,000
Bal.
(n)
Bal.
Manufacturing-Supplies Inventory
Bal.
500
100
Bal.
(a)
(b)
Bal.
(c)
(d)
(d)
Raw-Material Inventory
149,000
5,000
11,250
4,000
Work-in-Process Inventory
91,000
11,250
34,050
34,000
35,700
McGraw-Hill/Irwin
Inc.
3-46
(f)
(h)
(j)
(l)
(i)
(c)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Manufacturing Overhead
100
35,700
13,000
12,000
1,200
2,100
2,400
3,100
(n)
(j)
(k)
(l)
(d)
(c)
(m)
Finished-Goods Inventory
220,000
34,050
17,025
(a)
Sales Revenue
26,600
(n)
(b)
(n)
Overapplied overhead
$ 100
13,000
12,000
1,200
2,100
2,400
3,100
$33,900
= $33,900 $35,700*
= $1,800 overapplied
*$35,700 = 1,700 direct-labor hours $21 per hour.
(c)
Manufacturing Overhead.........................................
Cost of Goods Sold........................................
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
1,800
1,800
$149,000
9,000
$158,000
146,750
$ 100
13,000
12,000
1,200
2,100
2,400
3,100
$33,900
1,800*
$ 11,250
34,000
35,700
$80,950
91,000
$171,950
137,900
$ 34,050
*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to
work in process. Therefore, the overapplied overhead, $1,800, must be added to actual
overhead to arrive at the amount of overhead applied to work in process during March.
McGraw-Hill/Irwin
Inc.
3-48
$220,000
34,050
$254,050
237,025
$17,025
1,800
$15,225
*The company closes underapplied or overapplied overhead into cost of goods sold. Hence
the balance in overapplied overhead is deducted from cost of goods sold for the month.
7.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
$26,600
15,225
$11,375
13,000
$(1,625)
T81
Date Started
March 5
Description
Trombones
Date Completed
March 20
Direct Material
Requisition Number
Quantity
112
250
Time Card Number
308-312
Unit Price
$5.00
Cost
$1,250
Rate
$20
Cost
$16,000
Direct Labor
Hours
800
Manufacturing Overhead
Activity Base
Quantity
Direct-labor hours
800
76
Application Rate
$21
Cost
$16,800
Cost Summary
Cost Item
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost
Date
March
Amount
$1,250
16,000
16,800
$34,050
$448.03*
Shipping Summary
Units Remaining
Units Shipped
In Inventory
38
38
Cost Balance
$17,025
*Rounded
$17,025 = $34,050 2
McGraw-Hill/Irwin
Inc.
3-50
$216,000
$19,000
$70,000
$38,000
$80,000
6.
7.
8.
9.
10.
$60,000
$150,000
$40,000
$15,000
Zero
Accounts Payable
12,000
81,000 70,000
1,000
Work-in-Process Inventory
Bal. 10/31
8,000
Direct
150,000
40,000
material
Direct
labor
80,000
Overhead 60,000
Bal. 11/30 38,000
Bal. 10/31
Bal. 11/30
Bal. 11/30
Finished-Goods Inventory
Bal. 10/31
35,000
150,000 180,000
Bal. 11/30
5,000
Cost of Goods Sold
180,000
Manufacturing Overhead
60,000 60,000
Wages Payable
1,000
79,500 80,000
1,500
Bal. 10/31
Sales Revenue
216,000
Accounts Receivable
Bal. 10/31
8,000
216,000 205,000
Bal. 11/30
19,000
Supporting Calculations:
1.
Sales revenue
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
3.
4.
$70,000
=
=
budgeted overhead
budgeted direct -labor hours
$720,000
48,000
$960,000
= 48,000
$20
5.
November credit to
wages payable
McGraw-Hill/Irwin
Inc.
3-52
7.
$80,000
= 4,000 hours
$20
beginning
balance in
work in
process
additions
+ during
November
ending
balance in
work in
process
9.
October 31 balance in
raw-material inventory
= $40,000 (given)
direct
+ material purchases
used
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
Department B
$320,000
200,000
$520,000
$80,000
200,000
$280,000
$800,000
2.
Product prices:
Total cost.....................................................................
Markup, 10% of cost....................................................
Price.............................................................................
3.
Basic
System
$1,100
110
$1,210
Advanced
System
$1,500
150
$1,650
Department A
Department B
$520,000
20,000
$280,000
20,000
$520,000
20,000
$280,000
20,000
$26 per
direct-labor
hour
$14 per
direct-labor
hour
McGraw-Hill/Irwin
Inc.
3-54
Direct material.............................................................
Direct labor..................................................................
Manufacturing overhead:
Department A:
Basic system 5 $26.......................................
Advanced system 15 $26..............................
Department B:
Basic system 15 $14.....................................
Advanced system 5 $14................................
Total
5.
Basic
System
$400
300
Advanced
System
$800
300
130
390
210
_ ____
$1,040
70
$1,560
Basic
System
$1,040
104
$1,144
Advanced
System
$1,560
156
$1,716
Total cost.....................................................................
Markup, 10% of cost....................................................
Price ............................................................................
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
TELETECH CORPORATION
Memorandum
Date:
Today
To:
From:
I. M. Student
Subject:
Until now the company has used a single, plantwide overhead rate in computing product
costs. This approach resulted in a product cost of $1,100 for the basic system and a cost of
$1,500 for the advanced system. Under the company's pricing policy of adding a 10 percent
markup, this yielded prices of $1,210 for the basic system and $1,650 for the advanced
system.
When departmental overhead rates are computed, it is apparent that the two
production departments have very different cost structures. Department A is a relatively
expensive department to operate, while Department B is less costly. It is important to
recognize the different rates of cost incurrence in the two departments, because our two
products require different amounts of time in the two departments. The basic system
spends most of its time in Department B, the inexpensive department. The advanced
system spends most of its time in Department A, the more expensive department. Thus,
using departmental overhead rates shows that the basic system costs less than we had
previously realized; the advanced system costs more. The revised product costs are $1,040
and $1,560 for the basic and advanced systems, respectively. With a 10 percent markup,
these revised product costs yield prices of $1,144 for the basic system and $1,716 for the
advanced system. We have been overpricing the basic system and underpricing the
advanced system.
I recommend that the company switch to a product costing system that incorporates
departmental overhead rates.
McGraw-Hill/Irwin
Inc.
3-56
Activity
Machine setup.........
Material
receiving...............
Inspection................
Machinery-related....
Engineering.............
Total overhead.........
2.
(b)
Activity
Cost Pool
$100,000
60,000
80,000
420,000
140,000
$800,000
80,000
1,600
60,000
7,000
lbs.
inspections
machine hrs.
engineering hrs.
$.75
$50
$7
$20
per lb.
per inspection
per machine hr.
per engineering hr
Overhead Assigned to
Activity
Basic System Line
Machine setup........ $25,000(50 setups $500)
Material receiving. . 22,500(30,000 lbs $.75)
Inspection.............. 35,000(700 inspections $50)
Machinery-related.. 140,000(20,000 machine hrs.
$7)
Engineering............ 60,000(3,000 eng. hrs. $20)
Total overhead....... $282,500
3.
(b) (c)
Cost Rate per Unit
of Cost Driver
$500 per setup
(c)
Quantity of
Cost Driver
200 setups
Overhead Assigned to
Advanced System Line
$ 75,000 (150 setups $500)
37,500 (50,000 lbs $.75)
45,000 (900 inspections
$50)
280,000 (40,000 machine hrs.
$7)
80,000 (4,000 eng hrs. $20)
$517,500
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
1,000 units)
1,000 units)
Comparison of total product cost assigned to each type of fax machine under three
alternative product costing systems:
Basic
System
$1,100.00
1,040.00
982.50
Advanced
System
$1,500.00
1,560.00
1,617.50
The assigned overhead as calculated in requirement (3) above, plus the direct
material and direct-labor costs given in the data for the preceding problem:
Basic system........................................................ $982.50 = $700.00 + $282.50
Advanced system................................................ $1,617.50 = $1,100.00 + $517.50
McGraw-Hill/Irwin
Inc.
3-58
SOLUTIONS TO CASES
CASE 3-64 (45 MINUTES)
1.
2.
3.
$250,000
$124,000
87,000
200,500
97,500
509,000
$759,000
$4,500,000
= $5 per machine hour
900,000 hours
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
Chair Units
19,400
15,000
34,400
21,000
13,400
$510,000
4.
$431,000
$3,000
10,800
43,200
22,000
79,000
$510,000
830,000
49,900
879,900
McGraw-Hill/Irwin
Inc.
3-60
$4,140,000
252,000
$4,392,000
2.
3.
4.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
$1,196,000
(1,185,000)
$ 11,000
6.
$55,000
4,000
12,000
15,000
$86,000
FiberComs Schedule of Cost of Goods Manufactured for the year just completed is
constructed as follows:
FIBERCOM COMPANY
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31
Direct material:
Raw-material inventory, 1/1...........................................
Raw-material purchases ($965,000 + $98,000)..............
Raw material available for use.......................................
Deduct: Indirect material used ($125,000 + $9,000)....
Raw-material inventory 12/31..........................
Raw material used..........................................................
Direct labor ($845,000 + $80,000).......................................
Manufacturing overhead:
Indirect material ($125,000 + $9,000).............................
Indirect labor ($345,000 + $30,000)................................
Utilities ($245,000 + $22,000)..........................................
Depreciation ($385,000 + $35,000).................................
Total actual manufacturing overhead...........................
Deduct: Underapplied overhead....................................
Overhead applied to work in process...............................
Total manufacturing costs.................................................
Add: Work-in-process inventory, 1/1................................
Subtotal...............................................................................
Deduct: Work-in-process inventory, 12/31*......................
Cost of goods manufactured.............................................
$ 105,000
1,063,000
$1,168,000
$134,000
85,000
$134,000
375,000
267,000
420,000
219,000
$949,000
925,000
1,196,000
11,000
$1,185,000
$3,059,000
60,000
$3,119,000
150,200
$2,968,800
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
D12-002
$37,900
20,000
37,500
______
$95,400
D12-003
$26,000
16,800
Total
$63,900
36,800
$12,000
$54,800
37,500
12,000
$150,200
ISSUE 3-67
"IT WORKED FOR TOYOTA. CAN IT WORK FOR TOYS?," FORTUNE, JANUARY 11, 1999,
ALEX TAYLOR III.
1. The Alexander Doll Company produced boxes of costume material and vinyl doll
parts. In fact, parts for more than 90,000 dolls were stored and nothing was built to
order. When an order came for 300 dolls only 117 could be produced from the parts
stored for the 90,000 incomplete dolls. This was Alexander's form of batch
processing.
2. TBM organized the workers into seven or eight person teams, each of which is
responsible for completing about 300 doll or wardrobe assemblies a day. The
amount of work in progress has been cut by 96% and orders can now be filled in one
or two weeks instead of two months.
McGraw-Hill/Irwin
Inc.
3-64
ISSUE 3-68
"PRICELINE FOUNDER CLOSES ONLINE BIDDING SITE FOR GAS AND GROCERIES," THE
WALL STREET JOURNAL, OCTOBER 96, 2000, JULIA ANGWIN.
1. When deciding how low a price to accept on its Chicago-to-LA flight, United Airlines'
management would ask questions such as:
Will it be profitable?
Does it build brand loyalty?
Will it undermine brand loyalty?
Will it promote repeat business?
2. Cost information is relevant to the decision making process in regards to how well
the ticket price competes in the market and if the invested capital makes more of a
profit in this venture than another venture in which it could be used.
ISSUE 3-69
"THERE'S A NEW ECONOMY OUT THERE, AND IT LOOKS NOTHING LIKE THE OLD ONE,"
THE WALL STREET JOURNAL, DECEMBER 31, 1999, THOMAS PETZINGER, JR.
1. Managerial accounting information would serve the same five objectives described
in Chapter 1 in the new business world discussed in the article. There would,
however, be less integration across those functions if companies are broken up into
smaller, more independent businesses.
2. Managerial accounting information would be just as valuable to companies under the
suggested future for the structure of business.
3. Job-order costing systems would serve the same role in product costing, but would
concentrate more on the outsourcing and supply chain management functions.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
ISSUE 3-70
"GUSTY WIND FORCES ANOTHER LAUNCH DELAY FOR DISCOVERY," THE ASSOCIATED
PRESS, OCTOBER 10, 2000, MARCIA DUNN.
1. Firms employing the services of the shuttle would use job costing, just as NASA
uses job costing. Each launch's costs are computed independently with substantial
costs incurred before each launch. Therefore, a canceled launch increases the costs
of firms employing the shuttle's services.
2. It would be important to determine a cost figure for a delay as mentioned above.
3. Determining a cost for delays is critical so the project can be properly and fully
costed.
ISSUE 3-71
"AUDITING MANUFACTURING COSTS, "INTERNAL AUDITOR, JUNE 2000, TERESA
KILPATRICK.
Most manufacturing systems contain numerous reports that may be designed for
production and material requirements planning. Once the auditor has identified report
sources, information can be imported for analysis. IDEA utilizes open database
connectivity drivers that convert a wide range of common spreadsheet and text formats.
Using IDEA's file-extraction summarization techniques, auditors can perform several
tests to verify the integrity of the data itself, as well as the calculation extensions and
totals in each report.
Auditors can use IDEA to import files that contain cost calculation fields such as quantity
of raw material components, raw material prices, labor hours per piece, and machine
rates. The equation editor can perform an independent calculation of cost. IDEA can then
automate the process of comparing this item cost file with the system item cost through
its file comparison feature.
Proper data analysis can provide an objective view of the collection and allocation of
overhead costs to products. For example, auditors can analyze prices paid for raw
material by importing the accounts payable file into IDEA and then using the equation
editor. Using data analysis, auditors can also perform a simple test to compare a file of
work-in-process valued items with finished goods items.
McGraw-Hill/Irwin
Inc.
3-66
ISSUE 3-72
"DON'T GET TRAPPED, " STRATEGIC FINANCE, NOVEMBER 1999, DAPHNE MAIN AND
CAROLYN L. LOUSTEAU.
1. Entrapment is the inability to eliminate an albatross project. There are four
psychological reasons that can lead to entrapment. They are: over-optimism/illusion
of control, self-justification, framing, and sunk costs. Over-optimism occurs when
managers feel the need to sell their project. As a result, the projections are almost
always rosy, which lead to inflated expectations for a project. Research has shown
that people consistently overestimate revenues and under estimate costs. People
also think they can control what happens to their decisions once they are in place.
External factors, such as weather or changes in economic conditions, are beyond
the control of project managers. Managers tend to commit more resources to a
losing project in order to justify their initial investment. They tend to search for
evidence that suggests the project should be continued but disregard evidence to
the contrary. This self-justification leads to entrapment. How a decision is perceived
can lead to entrapment. When thinking in terms of saving jobs, managers tend to be
more conservative in decision making; on the other hand, if a decision is perceived
in terms of losing jobs, managers tend to be more likely to make risky decisions.
When justifying the decision to continue a project, managers tend to argue that they
should not waste money already sunk into a project. In fact, money already spent on
a project should not influence decisions if entrapment is to be avoided.
2. The four psychological reasons leading to entrapment should be avoided when
making sound business decisions concerning project continuance. Not doing so
will lead to unsound business practices. Managerial accounting information can
help managers avoid entrapment by clarifying the costs in involved in a situation and
by clearly identifying any sunk costs.
ISSUE 3-73
BOEING WEIGHS GIVING JAPAN 747X WING JOB, THE WALL STREET JOURNAL,
JANUARY 2, 2001, JEFF COLE.
1. Outsourcing and supply chain management are important management tools in
acquiring the raw materials and components needed to manufacture products.
The costs of outsourced components are included as a product cost along with
raw material in a job-order costing system.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 5/e
2. Mitsubishi would incur close to $900 million of the four billion dollars in
development costs, Boeing's startup costs of the 747 would in effect be
transferred to direct material costs on a job-order production basis. Although
Boeing would allow Mitsubishi to share in this high value market for its initial
startup investment, the advantage to Boeing would be to delay significant costs
to the time the market for the aircraft matures.
McGraw-Hill/Irwin
Inc.
3-68