Case#1: NELSON REPAIR SHOP.

Nelson is a small repair shop with a reputation for high quality repairs as a fair price. It is
run by the husband and wife team of William and Nicole Nelson. In addition to
themselves, they employ 4 skilled repair men earning a $50,000 salary per year and 2
service technicians who earn a $38,000 salary per year. These are long term and loyal
employees.
Nicole and William have been discussing the recent loss of order and declining profits over
recent months, in part they suspect due to some new and good quality competitors. They
price their work similar to most repair shops i.e. a markup on costs of 10%. Nicole
manages the accounting and is investigating to see if she can see any reason for the recent
decline in earning. William has said that if at all possible he does not want to reduce the
salaries of his staff as they are critical to the business and he wants them to remain happy.
In addition to the salaries of these 6 employees, all other costs, including the salaries of
William and Nicole total $178,450. The accounting system charges direct materials to each
job and then allocates all overhead on the basis of direct labour hours where all the 6 men
work 35 hours per week for 50 weeks annually.
In her review of the accounting records, Nicole has determined that about 65% of the jobs
require complex repairs and about 35% of the jobs are simple repairs. Approximately half
of the time is spent on complex jobs with the other half on simple jobs. She is just looking
at job #1246 which was recently lost to the competition. Their quote was $412 for a job
with 2 hours of complex work and 4 hours of simple work plus direct materials of $115.
The successful bid was $390.
Required:
Use the case approach to identify and solve the problem faced by the Nelson Repair Shop
Instructions:
Please solve the case in the space provided in the next page (template), everything written
outside the allotted space will NOT be marked
Note use ONLY the lines provided the margins are for the markers use. Work in the
margin WILL BE DELTED AND IGNORED FOR PUROSES OF MARKING!
Either point form (preferred) or sentences are acceptable space is a constraint. We are
looking for concise quality work not quantity.
Work MUST be legible IF I cannot read it, I cannot mark it.
You have 40 minutes to read, solve and write the solution in the next page, so please use
your time wisely.

Case Quiz #1 September 2014

Student name (Last then First) and number:___________________________________
Introduction 15%:
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Problem Statement 10%
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Analysis 60%
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________

Alternatives 5%
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Recommendation 10%
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Case#2: Sharp Corp. (A)
__________________________________________________________

Sharp Corporation manufactures a variety of parts for the food processing industry. The
company uses a job-order costing system with a plantwide predetermined overhead rate
based on direct labour-hours. On December 10, 2013, the companys controller made a
preliminary estimate of the predetermined overhead rate for 2014. The new rate was based
on the estimated total manufacturing overhead cost and the estimated total direct labourhours:
Predetermined overhead rate for 2014 = $3,402,000 / 63,000 hours
This new predetermined overhead rate was communicated to top managers in a meeting on
December 11th and it did not cause any comment because it was within few cents of the
overhead rate that had been used during 2013.
At a meeting in May 2014 a proposal was discussed by the production manager to purchase
an automated welding machine centre. It was argued that the new machine would increase
the capacity in an area that currently has excess capacity, but most importantly it would
allow the elimination of 6,000 direct labour-hours a year. The wage rate in the welding area
averages $32 per hour, but fringe benefits raise that figure to about $41 per hour, and in
addition we add the overhead rate at $54, then the total cost per each hour of direct labour
is about $95. A lease on the new machine will cost $348,000 per year but it would also
require a skilled technician/programmer who would have to be hired at a cost of $50,000
per year to maintain and program the equipment.
The production manager concluded his presentation indicating that the new machine will
reduce costs, but the controller disagreed saying that costs would increase and costs for all
jobs done would be distorted, negatively affecting pricing of bids and the long term
profitability of the company because the predetermined overhead allocation rate would
increase significantly.
Required:
Use the case approach to identify and solve the problem faced by Sharp Corporation.
Instructions:
Please solve the case in the space provided in the next page (template), everything written
outside the allotted space will not be marked.
You have 40 minutes to read, solve and write the solution in the next page, so please use
your time wisely.
Case: Sharp Corp. A
Introduction (relevant facts):

Student name and number:___________

__

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Problem Statement
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Analysis
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

Alternatives
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Recommendation
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Case #3: Sharp Corp. (B)

Sharp Corporation manufactures a variety of parts for the food processing industry. The
company uses a job-order costing system with a plantwide predetermined overhead rate
based on direct labour-hours. On December 10, 2013, the companys controller made a
preliminary estimate of the predetermined overhead rate for 2014. The new rate was based
on the estimated total manufacturing overhead cost and the estimated total direct labourhours:
Predetermined overhead rate for 2014 = $3,402,000 / 63,000 hours
This new predetermined overhead rate was communicated to top managers in a meeting on
December 11th and it did not cause any comment because it was within few cents of the
overhead rate that had been used during 2013.
At a meeting in May 2014 a proposal was discussed by the production manager to purchase
an automated welding machine centre. It was argued that the new machine would increase
the capacity in an area that currently has excess capacity, but most importantly it would
allow the elimination of 6,000 direct labour-hours a year. The wage rate in the welding area
averages $32 per hour, but fringe benefits raise that figure to about $41 per hour, and in
addition we add the overhead rate at $54, then the total cost per each hour of direct labour
is about $95. A lease on the new machine will cost $148,000 per year but it would also
require a skilled technician/programmer who would have to be hired at a cost of $50,000
per year to maintain and program the equipment.
The production manager concluded his presentation indicating that the new machine will
reduce costs, but the controller disagreed saying that costs would increase and costs for all
jobs done would be distorted, negatively affecting pricing of bids and the long term
profitability of the company because the predetermined overhead allocation rate would
increase significantly.
Required:
Use the case approach to identify and solve the problem faced by Sharp Corporation.
Instructions:
Please solve the case in the space provided in the next page (template), everything written
outside the allotted space will not be marked.
You have 40 minutes to read, solve and write the solution in the next page, so please use
your time wisely.
Case: Sharp Corp.
B
Introduction (relevant facts):

Student name and number:___________

__

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Problem Statement
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Analysis
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

Alternatives
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Recommendation
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Case #4: Flexible Corp.

The Flexible Corporation operates a job-order costing system and applies overhead
cost to jobs on the basis of direct labour cost. In the last minutes of the last working day of
December 2013 the controller found the documents from 2012 that reflected how the
overhead rate for the year 2013 was calculated. It was estimated a manufacturing overhead
cost of $126,000 and direct labour cost $84,000.
She needed that piece of data for her calculation of the cost of goods sold so she can
merge it with revenues to determine the net profit or loss of the year 2013. The company
data for 2013, that is about to end (this only can be said in a case, because in reality until
the period is closed we do not know the exact amount of costs incurred and value of
inventories) shows that the beginning balance in raw materials was $21,000, work in
process $44,000 and finished goods $68,000 while the ending balances were $16,000 for
raw materials, $40,000 for work in process and $60,000 for finished goods. In 2013 the
actual purchases of raw material amounted $133,000 and direct labour paid was $80,000.
During the same year the total overhead cost incurred was $7,000 for the factory insurance,
$18,000 for the depreciation of the equipment, $42,000 for indirect labour, $9,000 for
property taxes, $11,000 for maintenance and $36,000 for the rent of the building. By
midday she circulated a memo with the preliminary results (slim net profit) to all Flexible
managers; the report included as sales revenue all products that were scheduled for pick up
or shipment by the end of the day.
By 3pm an account representative jumped into the controllers office to ask her to
stop the sales manager from making a gross mistake that would affect the long term
relation with a customer. He was talking about a job that was quoted for $30,000 +/- 5%
depending on the actual use of material, labour and machine hours. The job started in
September, was finished last week and now the customer is in Flexibles premises to pick it
up and pay its price. The job required $8,100 in materials and $5,000 in direct labour costs.
The sales manager wants to charge the customary 40% (selling price is total costs plus a
mark-up of 40%) plus the overhead incurred but not allocated during 2013 as per the
controllers report that was circulated earlier in the day.
The account representative says that it is not correct to charge for overhead not used
by a job, but the sales manager says that all costs have to be paid by customers. The
controller asked both men to leave her office so she can think about it and do some
numbers. In 10 minutes she will meet them and will explain why a certain price has to be
charged but in the meantime she asked the account representative to take the customer for a
coffee at Flexibles expense.

Required:
Use the case approach to identify and solve the problem faced by Flexible Corporation.
This is a quantitative case, so please show your numbers. Hint: find the finished goods
completed during 2013 and transferred to cost of goods sold.
Instructions:
Please solve the case following the case template adopted for this course. Please limit your
report to 1 page (Times New Roman 12, single space, normal margins of 1 inch on each
side). Only 1 page will be marked. The file format can be Word or a .pdf

Case: Flexible Corp.

Student name and number:___________

__

Introduction (relevant facts):

Problem Statement
Analysis
Alternatives
Recommendation

Case #5: Kroy Manufacturing

Kroy Manufacturing uses a job-order costing system. For a few months, there has
been an ongoing battle between the sales department and the production department
concerning YU-1, a product sold at cost plus a mark-up of 40% of cost.
The sales department is unhappy because fluctuating unit production costs
significantly affect selling prices. Sales personnel complain that this has caused excessive
customer complaints and the loss of many orders for YU-1.
The production department maintains that each job order must be fully costed based
on the costs incurred during the period in which the goods are produced. Production
personnel maintain that the only real solution to the problem is for the sales department to
increase sales in the slow periods.
Quarterly data for the past year on YU-1 are given below:
Quarter
Costs
1
2
3
4
Direct materials
$100 000 $220 000 $80 000 $200 000
Direct labour
60 000 132 000
48 000 120 000
Manufacturing overhead 105 000 153 000
92 000 140 000
Total
$265 000 $505 000 $220 000 $460 000
Units produced
Unit cost

500
$530

1 100
$459

400
$550

1 000
$460

Required:
Use the case approach to resolve the issue between the sales and the production
departments.

Case #6: Fantastic Fireworks

Fantastic Fireworks Inc. puts together large-scale fireworks displays. The company
assembles and orchestrates complex displays using pyrotechnic components purchased
from suppliers throughout the world.
The company builds its own launch platforms and its own electronic controls in its
fabrication and electronics shops. The company uses a job-order costing system, and its
relevant account balance as of January 1, the beginning of the current year, is given below.
Accounts Receivable $30,000
Raw Materials 16,000
Work in Process 21,000
Finished Goods 38,000
Prepaid Insurance 7,000
Buildings and Equipment 300,000
Accumulated Depreciation $128,000
Accounts Payable 60,000
Salaries and Wages Payable 3,000
The company charges manufacturing overhead costs to jobs on the basis of direct
labour-hours. (Each customer order for a complete fireworks display is a separate job.)
Management estimated that the company would incur $135,000 in manufacturing overhead
costs in the fabrication and electronics shops and would work 18,000 direct labour-hours
during the year.
The following transactions occurred during the year:
1. Raw materials, consisting mostly of skyrockets, mortar bombs, flares, wiring, and
electronic components, were purchased on account: $820,000.
2. Raw materials were issued to production: $830,000 ($13,000 of this amount was for
indirect materials, and the remainder was for direct materials).
3. Fabrication and electronics shop payrolls were accrued: $200,000 (70% direct labour and
30% indirect labour). A total of 20,800 direct labour-hours were worked during the
year.
4. Prepaid insurance expiring during the year was $40,000, of which $39,400 relates to the
fabrication and electronics shops because of the safety hazards involved in handling
fireworks, and only $600 relates to selling and administrative.
5. Depreciation charges for the year: $40,000 (70% relates to fabrication and electronics
shop assets, and 30% relates to selling and administrative assets).
6. Property taxes accrued on the shop buildings: $12,600 (credit Accounts Payable).
7. Manufacturing overhead cost was applied to jobs.
8. Jobs completed during the year had a total production cost of $1,106,000 according to
their job cost sheets.

10

9. Cost of Goods Sold (before any adjustment for underapplied or overapplied overhead):
$1,120,000.
Required:
1. Prepare journal entries for the above transactions.
2. Prepare T-account for each account listed above, and prepare new T-accounts as needed.
Enter the opening balances given above, Post journal entries to the T-accounts, and
calculate the ending balance in each account.
3. Is manufacturing overhead underapplied or overapplied for the year? Prepare the
necessary journal entry to close the balance in the Manufacturing Overhead account to
Cost of Goods Sold.
4. Prepare a statement of cost of goods manufactured and Cost of Goods Sold.
5. The company uses one company-wide manufacturing overhead rate. If you are the
managerial accountant in the company, do you want to use a company-wide
manufacturing overhead rate, use different manufacturing overhead rate for the two
shops? Why? Give reasons to support your answer.

11

Case #7: ABC Company

ABC company is a manufacturing firm and it uses a job-order costing system. The
company applies manufacturing overhead cost to jobs on the basis of the cost of direct
materials used in production. At the beginning of the current year, manufacturing overhead
cost for the whole year is estimated to be $248,000 and direct materials cost for the whole
year is estimated as $155,000. The following transactions took place during the year (all
purchases and services were acquired on account):
1. Raw materials purchased: $142, 000, and raw materials requisitioned for use in
production (all direct materials): $150,000.
2. Costs for salaries and wages were incurred as follows:
Direct labor. $216,000
Indirect labor $90,000
Selling and administrative salaries$145,000
3. Maintenance costs incurred in the factory: $36,000.
4. Depreciation recorded for the year: $50,000 (90% relates to factory assets, and the
remainder relates to selling and administrative assets).
5. Rental cost incurred on buildings: $90,000 (80% of the space is occupied by the factory,
and 20% is occupied by sales and administration).
6. Manufacturing overhead cost was applied to jobs.
7. Cost of goods manufactured transferred to finished goods for the year: $590,000, and
cost of goods sold before adjusted for over- or under- applied manufacturing overhead
is $600,000.
8. The balances in the inventory accounts at the beginning of the year were as follows:
Raw Materials $18,000
Work in Process $24,000
Finished Goods. $35,000

Required:
1. Prepare journal entries to record the above data, and prepare an additional journal entry
to adjust balance in the Manufacturing Overhead account to the Cost of Goods Sold
account.
2. Post your entries to T-accounts, enter the opening inventory balances above and also
calculate the ending balances in the inventory accounts and in the Manufacturing
Overhead account.
3. Prepare a schedule of cost of goods manufactured and cost of goods sold.
4. Job N was started and completed during the year. The job required $3,600 in direct
materials, 400 hours of direct labor time at a rate of $11 per hour. If the job contained

12

500 units and the company billed at 75% above the unit product cost on the job cost
sheet, what price per unit would the company charged to the customer?
5. This company writes off over- or under-applied overhead to the Cost of Goods Sold
account. Another choice is to assign the over- or under-applied overhead pro-optionally
between Work-In-Process Inventory, Finished Goods Inventory and Cost of Goods
Sold. What criteria would you use to choose between these two approaches?

13

Suggested Ideal reports to prepare for each case

Case #1: NELSON REPAIR SHOP
Introduction
Nelson is a small repair shop with a reputation for high quality repairs as a fair price
They prices their work similar to most repair shops i.e. a markup on costs of 10%
With increased competition they are losing orders on the basis of price
suspected that poor pricing stems from incorrect costs
Problem Statement The firm has a flawed costing/pricing model that is causing it to lose
orders and consequently profits are declining
Analysis
A single overhead rate is used which is appropriate when all overhead is essentially similar
to all work but NOT appropriate where there can be significant differences between job
65% of the jobs are complex and 35% of the jobs are simple and the complex jobs
use a proportionally greater share of overhead
It follows that using a single rate will cross subsidize jobs with the simple jobs
being overcosted and the complex jobs under costed
Consequently competitors with more accurate costing information will be able to
underprice Nelson on simple jobs and as such Nelson will be losing simple jobs
Similarly Nelson will both under cost and under bid complex jobs and pass on
excess value to the customer that they could have retained as profit
Overhead Rate = 454,450/ 10,500 = 43.28
based on OH = Salaries (4 x 50,000 + 2 x 38,000) plus support costs of 178,450
total 454,450 and hours = 6 employee x 1,750 hours = 10,500
Job #1246 illustrates the impact of cross subsidization on costs and pricing

Review of Job
1246
Direct costs

Single Rate

Dual
Rate

454,450

Time spend
Overhead Rate

10,500
43.28

Direct materials
6 hours at single
rate
2 hours complex
4 hour simple
Cost

115.00

Complex
Repair
65
% 295,393
50
%
5,250
56.27

Simple Repair
35
% 159,057
50
%
5,250
30.30

115.00

259.68

374.68

112.54
121.20
348.74

a price difference is very

14

Selling price

412.15

383.61

significant - over costing is

losing orders

Alternatives
doing nothing is not a viable alternative action needs to be taken as orders are being lost
and profits are declining
work must be done to institute a dual rate overhead application with one rate for
complex jobs and one for simple jobs this will enable Nelson to competitively
price work in a competitive environment
Recommendation
Immediately implement a dual rate costing to provide cost estimates more in line
with economic reality to enable competitive pricing

15

Case #2: Sharp Corp. A

Introduction: mention 3 to 5 relevant facts
Problem Statement: the decision is the symptom, but the real
problem is how overhead rates are calculated and how they
distort the overhead charged to each job if treated as variable costs
Analysis: first students shall calculate the new overhead rate
Based on the controllers claim that costs will go up. .
The revised predetermined overhead rate is determined as follows:
Original estimated total manufacturing overhead
$3,402,000
Plus: Lease cost of the new machine
348,000
Plus: Cost of new technician/programmer
50,000
Estimated total manufacturing overhead
$3,800,000
Original estimated total direct labour-hours
63,000
Less: Estimated reduction in direct labour-hours
6,000
Estimated total direct labour-hours
57,000
New Predetermined overhead rate = $3,800,000 / 57,000 hours = $66.67 per DLH
The revised predetermined overhead rate is higher than the original rate because the
automated machine will increase the overhead for the year (the numerator in the rate) and
will decrease the direct labour-hours (the denominator in the rate). This double-whammy
effect increases the predetermined overhead rate.
Second students shall discuss the effect of the change in the overhead rate for the rest of
2014: Acquisition of the automated machine will increase the apparent costs of all jobs
not just those that use the new facility. This is because the company uses a plant-wide
overhead rate. If there were a different overhead rate for each department, this would not
happen. The predetermined overhead rate is now considerably higher than it was. This will
penalize products that continue to use the same amount of direct labour-hours. Such
products will now appear to be less profitable and the managers of these products will
appear to be doing a poorer job. There may be pressure to increase the prices of these
products even though there has in fact been no increase in their real costs.
While it may have been a good idea to acquire the new equipment because of its greater
capabilities, the calculations of the cost savings were in error. The original calculations
implicitly assumed that overhead would decrease because of the reduction in direct labourhours. In reality, the overhead increased because of the additional costs of the new
equipment. A differential cost analysis would reveal that the automated equipment would
increase total cost:
Increase in manufacturing overhead cost:
Lease cost of the new machine
$348,000
Cost of new technician/programmer
50,000
Less: labour cost savings (6,000 hours $41 per hour)
(246,000)
Net increase in annual costs
$152,000
Alternatives: buy the machine / do not buy the machine
Use plant-wide overhead rate / use departmental overhead rates
Recommendation: do not buy the machine and educate managers that overhead rates are
not variable costs. Or buy the machine but introduce departmental overhead rates to
properly reflect the use of technology

16

Case #3: Sharp Corp. B

Introduction: mention 3 to 5 relevant facts
Problem Statement: the decision is the symptom, but the real
problem is how overhead rates are calculated and how they
distort the overhead charged to each job if treated as variable costs
Analysis: first students shall calculate the new overhead rate
Based on the controllers claim that costs will go up. .
The revised predetermined overhead rate is determined as follows:
Original estimated total manufacturing overhead
$3,402,000
Plus: Lease cost of the new machine
148,000
Plus: Cost of new technician/programmer
50,000
Estimated total manufacturing overhead
$3,600,000
Original estimated total direct labour-hours
63,000
Less: Estimated reduction in direct labour-hours
6,000
Estimated total direct labour-hours
57,000
New Predetermined overhead rate = $3,600,000 / 57,000 hours = $63.16 per DLH
The revised predetermined overhead rate is higher than the original rate because the
automated machine will increase the overhead for the year (the numerator in the rate) and
will decrease the direct labour-hours (the denominator in the rate). This double-whammy
effect increases the predetermined overhead rate.
Second students shall discuss the effect of the change in the overhead rate for the rest of
2014: Acquisition of the automated machine will increase the apparent costs of all jobs
not just those that use the new facility. This is because the company uses a plant-wide
overhead rate. If there were a different overhead rate for each department, this would not
happen. The predetermined overhead rate is now considerably higher than it was. This will
penalize products that continue to use the same amount of direct labour-hours. Such
products will now appear to be less profitable and the managers of these products will
appear to be doing a poorer job. There may be pressure to increase the prices of these
products even though there has in fact been no increase in their real costs.
While it may have been a good idea to acquire the new equipment because of its greater
capabilities, the calculations of the cost savings were in error. The original calculations
implicitly assumed that overhead would decrease because of the reduction in direct labourhours. In reality, the overhead increased because of the additional costs of the new
equipment. A differential cost analysis would reveal that the automated equipment would
decrease total cost:
Increase in manufacturing overhead cost:
Lease cost of the new machine
$148,000
Cost of new technician/programmer
50,000
Less: labour cost savings (6,000 hours $41 per hour)
(246,000)
Net decrease in annual costs
($48,000)
Alternatives: buy the machine / do not buy the machine
Use plant-wide overhead rate / use departmental overhead rates
Recommendation: do not buy the machine and educate managers that overhead rates are
not variable costs. Or buy the machine but introduce departmental overhead rates to
properly reflect the use of technology

17

Case#4: Flexible Corp.

Introduction: mention 3 to 5 relevant facts
Problem Statement: the decision is the symptom, but the real
problem is a lack of understanding of how overhead rates are calculated
and how they distort the price charged to each job if treated as variable costs
Analysis: first students shall calculate the cost of goods sold
Direct materials:
Raw materials inventory, beginning.......................................
Add purchases of raw materials..............................................
Total raw materials available..................................................
Deduct raw materials inventory, ending.................................
Raw materials used in production...........................................
Direct labour...............................................................................
Manufacturing overhead applied to work in process $80,000
x 150%....................................................................................
Total manufacturing cost............................................................
Add: Work in process, beginning...............................................
Deduct: Work in process, ending................................................
Cost of goods manufactured.......................................................
Finished good inventory, beginning...............................................
Goods available for sale.................................................................
Deduct: Finished goods inventory, ending.....................................
Cost of goods sold..........................................................................

$ 21,000
133,000
154,000
16,000
$138,000
80,000
120,000
338,000
44,000
382,000
40,000
$342,000
$ 68,000
410,000
60,000
$350,000

Then students shall calculate the underapplied or overapplied overhead for 2013:
Predetermined = Estimated total manufacturing overhead cost
Overhead rate Estimated total amount of the allocation base
=
$126,000
= 150% Direct labour cost
$84,000 direct labour cost
Actual manufacturing overhead costs:
Insurance, factory..............................................................
Depreciation of equipment................................................
Indirect labour...................................................................
Property taxes....................................................................
Maintenance......................................................................
Rent, building....................................................................
Total actual costs...................................................................
Applied manufacturing overhead costs: $80,000 150%
Underapplied overhead

$ 7,000
18,000
42,000
9,000
11,000
36,000
123,000
120,000
$ 3,000

18

The final calculation is to estimate the price for the customer according to the account
representative and the sales manager:
Direct materials.................................................................................
$ 8,100
Direct labour......................................................................................
5,000
Overhead applied (150% 5,000).....................................................
7,500
Total manufacturing cost...................................................................
$20,600
$20,600 140% = $28,840 price to customer according to the account representative.
$28,840 + $3,000 = $31,840 price to customer according to the sales manager.
The controller shall explain to the sales manager and accounts representative that
Underapplied or overapplied overhead may be closed directly to Cost of Goods Sold or
allocated among Work in Process, Finished Goods, and Cost of Goods Sold in
proportion to the overhead applied during the year in the ending balance of each of
these accounts.
However, if the customer can tolerate a higher price as the sales manager seems to suggest,
then it is in Flexibles best interest in the long term to charge more than the customary
40%. May be if this is the case with the majority of the customers, then Flexible might
be interested in charging more, say 50%, to all jobs and then for some price-sensitive
customers offer a discount of no more than 10% to end up with a mark-up of 40% over
total costs.
Alternatives: 1)price $20,600, 2) price $31,500 or 3) any other price that reflect
market/customer conditions but not geared towards recovering the underapplied overhead.
Recommendation: charge a higher price if the customer can bear it and change the markup policy of Flexible. Educate managers that overhead rates are nor variable costs and that
underapplied overhead does not need to be recovered through higher prices and that
overapplied overhead does not need to be returned to customers through discounts.

Case #5: Kroy Manufacturing

19

Introduction
Fluctuating unit product costs at Kroy Manufacturing render the implementation of
its policy of cost-plus pricing problematic. Tension between the sales and the production
departments ensues.
Issue
To identify and rectify the source of fluctuating product costs in order to reduce or
eliminate the tension between the two departments. (That the pricing policy is to be left
undisturbed is assumed.)
Analysis
The use of actual costing by Kroy Manufacturing is the source of fluctuating unit
product costs, because manufacturing overhead is a mixed cost consisting of both variable
and fixed costs.
Quarter
1
2
3
4
Production units
500
1 100
400
1 000
Direct materials:
Total cost
$100 000 $220 000 $80 000 $200 000
Unit cost
$200
$200
$200
$200
Direct labour:
Total cost
$60 000 $132 000 $48 000 $120 000
Unit cost
$120
$120
$120
$120
Manufacturing overhead:
Total cost
$105 000 $153 000 $92 000 $140 000
Unit cost
$210
$139
$230
$140
From the above table, it is evident that unit overhead cost decreases from $230 at a
production volume of 400 units to $139 at a higher production volume of 1 100 units. The
decrease of unit overhead cost is explained by the fact that the fixed component of
overhead does not vary with production volume and, when production volume increases,
the fixed overhead is spread over more units, thereby reducing the unit overhead cost.
Conclusion
Under actual costing, the unit product costs are affected and distorted by production
volume.
Recommendation
Adopt normal costing.
Case #6: Fantastic Fireworks

20

1. (25 marks in total)

a. Raw Materials ............................................................................. 820,000 (2 marks)
Accounts Payable ............................................................... 820,000
b. Work in Process .......................................................................... 817,000 (3 marks)
Manufacturing Overhead............................................................. 13,000
Raw Materials..................................................................... 830,000
c. Work in Process .......................................................................... 140,000 (3 marks)
Manufacturing Overhead............................................................. 60,000
Salaries and Wages Payable ............................................... 200,000
d. Manufacturing Overhead............................................................. 39,400 (3 marks)
Insurance Expense....................................................................... 600
Prepaid Insurance ............................................................... 40,000
g. Manufacturing Overhead............................................................. 28,000 (3 marks)
Depreciation Expense.................................................................. 12,000
Accumulated Depreciation ................................................. 40,000
h. Manufacturing Overhead............................................................. 12,600 (2 marks)
Accounts Payable ............................................................... 12,600
i. Work in Process .......................................................................... 156,000 (5 marks)
Manufacturing Overhead .................................................... 156,000
$135,000 =$7.50 per DLH; 20,800 DLH $7.50 per DLH = $156,000.
18,000 DLH
j. Finished Goods....................................................................... 1,106,000 (2 marks)
Work in Process............................................................. 1,106,000
k. Cost of Goods Sold ................................................................ 1,120,000 (2 marks)
Finished Goods.............................................................. 1,120,000
2. (25 marks in total each transaction/balances recorded earnings 0.5 marks; transaction (j)
recorded in both WIP and overhead accounts each earning 2.5 marks.)
Raw Materials
Work in Process
Bal. 16,000
(b) 830,000
Bal. 21,000
(j) 1,106,000
(a) 820,000
(b) 817,000
(c) 140,000
(i) 156,000
Bal. 6,000
Bal. 28,000
Finished Goods
Bal. 38,000
(k) 1,120,000
(j) 1,106,000
Bal. 24,000
Buildings and Equipment
Bal. 300,000

Prepaid Insurance
Bal. 7,000
(e) 40,000
(e) 38,000
Bal. 5,000
Accumulated Depreciation
Bal. 128,000
(g) 40,000
Bal. 168,000

21

Manufacturing Overhead
(b) 13,000
(i) 156,000
(c) 60,000
(e) 39,400
(g) 28,000
(h) 12,600
Bal. 3,000
Salaries & Wages Payable
(m) 348,000
Bal. 3,000
(c) 200,000
(d) 150,000
Bal. 5,000
Cost of Goods Sold
(k) 1,120,000

Depreciation Expense
(g) 12,000

Accounts Payable
(m) 970,000
Bal. 60,000
(a) 820,000
(f) 100,000
(h) 12,600
Bal. 77,400
Insurance Expense
(e) 600

3. (10 marks)
Manufacturing overhead is overapplied by $3,000 for the year (5 marks). The entry to close
this balance to Cost of Goods Sold would be: (entry 3 marks and dollar amount in the entry
2 marks)
Manufacturing Overhead ........................................................... 3,000
Cost of Goods Sold............................................................ 3,000
4. (25 marks)
Fabric Fireworks, Inc.
Schedule of Cost of Goods Manufactured and Cost of Goods Sold
Cost of Goods Manufactured (1 marks)
Direct materials: (1 marks)
Beginning raw materials inventory (1 marks) ............. $ 16,000
Add: Purchases of raw materials (1 marks)................. 820,000
Raw materials available for use ................................... 836,000
Deduct: Ending raw materials inventory (1 marks)..... 6,000
Raw materials used in production................................
$ 830,000
Deduct: Raw material used in manufacturing overhead (3 marks) $ 13,000
Direct material (1 marks) $ 817,000Direct labour(1 marks) ............ $140,000
Manufacturing overhead Applied to WIP (3 marks)....... ..$156,000
Total manufacturing costs (1 marks).............................................. $1,113,000
Add: Beginning work in process inventory (1 marks) ... $21,000 $1,124,000
Deduct: Ending work in process inventory (1 marks)..... 28,000
Cost of goods manufactured (1 marks) .........................
$1,106,000
Cost of Goods Sold (1 marks)

22

Finished goods inventory, beginning (1 marks) .......... $38,000

Add: Cost of goods manufactured (1 marks).......
$1,106,000
Deduct: Finished goods inventory, ending (1 marks).. 24,000
Unadjusted Cost of goods sold (1 marks).............. . $1,120,000
Deduct: Overapplied overhead (3 marks)................................................. 3,000
Unadjusted Cost of goods sold (1 marks)........................................ $1,117,000
5. (15 marks)
The decision to use a plant-wide rate versus separate rates for each shop depends on cost
versus benefit analysis.
Using a plantwide rate is cheaper and involves less effort since the costs of gathering and
analyzing information are lower, but may result in less accurate cost or income
information, and mislead management decision making, e.g. in job bid. (5 marks, a
combination of benefits and advantage; can give marks for other reasonable answers)
Using a separate rate is more expensive and involves more effort, but it provides more
accurate cost and profit information, especially when the activities that drive overhead
costs differ among departments or jobs.
It also improves decision making, which can justify the added costs of gathering separate
departmental overhead data. (5 marks, a combination of benefits and advantage; can give
marks for other reasonable answers)
Decision for Fantastic Fireworks Inc and justify your decision. (5 marks)

23

Case #7: ABC Company

1. (30 marks)
a. Raw Materials........................................................... 142,000 (2 marks)
Accounts Payable .............................................. 142,000
b. Work in Process........................................................ 150,000 (2 marks)
Raw Materials.................................................... 150,000
c. Work in Process........................................................ 216,000 (3 marks)
Manufacturing Overhead.......................................... 90,000
Salaries Expense ....................................................... 145,000
Salaries and Wages Payable .............................. 451,000
d. Manufacturing Overhead.......................................... 36,000 (2 marks)
Accounts Payable .............................................. 36,000
e. Manufacturing Overhead.......................................... 45,000 (3 marks)
Depreciation Expense ............................................... 5,000
Accumulated Depreciation ................................ 50,000
f. Manufacturing Overhead.......................................... 72,000 (3 marks)
Rent Expense ............................................................ 18,000
Accounts Payable .............................................. 90,000
g. Work in Process........................................................ 240,000 (5 marks)
Manufacturing Overhead................................... 240,000
Estimated total manufacturing overhead cost $248,000 =
Estimated direct materials cost $155,000 = 160% of direct materials cost.
$150,000 direct materials cost 160% = $240,000 applied.
h. Finished Goods......................................................... 590,000 (2 marks)
Work in Process................................................ 590,000
i. Cost of Goods Sold .................................................. 600,000 (2 marks)
Finished Goods ................................................. 600,000
j Cost of Goods Sold ............................................................... 3,000 (6 marks)
Manufacturing Overhead ............................................. 3,000
2. (26 marks. Each number 0.5 marks, except that (g) and (j) related 4 transactions each 3
marks)
Raw Materials
Bal. 18,000 (b) 150,000
(a) 142,000
Bal. 10,000

Work in Process
Bal. 24,000
(h) 590,000
(b) 150,000
(c) 216,000
(g) 240,000
Bal. 40,000

Finished Goods
Bal. 35,000
(i) 600,000
(h) 590,000
Bal. 25,000

24

Manufacturing Overhead
(g) 240,000
(c) 90,000
(j) 3000
(d) 36,000
(e) 45,000
(f) 72,000

Accounts Payable
(a) 142,000
(c) 15,000
(e) 130,000
(f) 90,000

Accumulated Depreciation
(e) 50,000

Depreciation Expense
(e) 5,000

Salaries & Wages Payable

(c) 451,000

Salaries Expense
(c) 145,000

Rent Expense
(f) 18,000

Cost of Goods Sold

(i) 600,000
(j) 3000

3. (21 marks)
ABC Company
Schedule of Cost of Goods Manufactured and Cost of Goods Sold
Cost of Goods Manufactured (1 marks)
Direct materials: (1 marks)
Raw materials inventory, beginning (1 marks)............................................ $ 18,000
Purchases of raw materials (1 marks)........................................................ . 142,000
Materials available for use ............................................................................. 160,000
Raw materials inventory, ending (1 marks)................................................
10,000
Materials used in production (1 marks) ...................................................... $150,000
Direct labour (1 marks)................................................................................... 216,000
Manufacturing overhead applied to work in process (3 marks)..................... 240,000
Total manufacturing cost (1 marks) .............................................................. 606,000
Add: Work in process, beginning (1 marks) .................................................... 24,000
630,000
Deduct: Work in process, ending (1 marks).................................................... 40,000
Cost of goods manufactured (1 marks) ...................................................... $590,000
Cost of Goods Sold: (1 marks)
Finished goods inventory, beginning (1 marks)..................................
Add: Cost of goods manufactured (1 marks).......................................
Goods available for sale..........................................................................
Finished goods inventory, ending (1 marks)........................................
Unadjusted cost of goods sold (1 marks).............................................
Add underapplied overhead (3 marks).................................................
Adjusted cost of goods sold (1 marks).................................................

$ 35,000
590,000
625,000
25,000
600,000
3,000
$603,000

25

4. (15 marks)
Direct materials (1 marks)................................................................................ $ 3,600
Direct labour (400 hours $11 per hour) (1 marks).............................. ............ 4,400
Manufacturing overhead cost applied (160% $3,600) (3 marks) ................... 5,760
Total manufacturing cost (2 marks)................................................................. 13,760
Add markup (75% $13,760) (3 marks) ......................................................... 10,320
Total billed price of Job 218 (2 marks) .......................................................... $24,080
$24,080 500 units = $48.16 per unit (3 marks).
5. (8 marks)
When choosing the method for eliminating under- or over-applied overhead the guiding
principle should be materiality (2 marks).
Writing off the under- or over-recovered overhead to COGS should be chosen (3 marks),
Unless the under- or over-recovered amount AND / OR the WIP or FG inventory amounts
are material. (3 marks).
Other reasonable answer include Only if the total $ amount of the under- or over-applied
overhead is material, pro-ration would be justified. (3 marks). Only if the $ balance on
either WIP or FG inventory were material would pro-ration be justified. (3 marks),.
Also give marks for other reasonable answers, but the total cannot be over 8 marks. .

26