Chapter 1: Exercise 1-14 Opportunity Costs

Given:
Incremental revenue per day
Less incremental costs:
Labor
$700
Parts
500
Transportation
100
Office Staf
200

$2,500

$1,500

Net

$1,000

Opportunity Cost is $1,000 per day.

$52,000 for 52 days
Rent and depreciation are not included in the calculation of the opportunity
cost. This is because these costs are not incremental. Rent and depreciation
will be incurred whether or not Ken decides to stay open on Saturday.
Problem 1-2 Incremental Analysis
a.) The variable costs are as follows:
Production
Ingredient cost
Labor cost
Total

25,000 Jars of Salsa

$20,000
12,000
$32,000

So, if total variable cost is 32,000 divide it by 25,000 jars of salsa to

get $1.28 per jar of salsa. Thus, the incremental cost of producing an
extra 50,000 jars of salsa is $64,000 that is $1.28 multiplied by 50,000.

b.) The incremental revenue associated with a price reduction of $0.40 is

$100,000 as follows:
Original Revenue (325,000 x $5)
$1,625,000
Revenue with price change (375,000 x $4.60)
1,725,000

Incremental Revenue associated with price change

$ 100,000
c.) The price should be lowered because the incremental cost of this
action is less than the incremental revenue.
Problem 1-4 Performance Reports
a.) $75,000 / $700,000 = 0.107 or 10.7%
$80,000 / $350,000 = 0.228 or 22.8%
$ 8,000 / $ 70,000 = 0.114 or 11.4%
Sales exceeded the budget by 10.7%. The cost of merchandise
increased by 22.8% and salaries increased by only 11.4%. Therefore,
the investigation should focus on cost of merchandise since a 22.8%
increase is incommensurate with the increase in sales.
b.) Electricity is not a controllable cost for the managers of sporting goods.
Including it on a performance report for sporting goods would not be
useful.

Chapter 2: Exercise 2-9 Recording Labor Cost in Job-Order Costing

a.)
Job 201
110 hrs. x $10/hr.
90 hrs. x $21/hr.
40 hrs. x $12/hr.

$1,100
1,890
480

Total

---------$3,470

Job 202
50 hrs. x $20/hr.

$1,000

Job 203
70 hrs. x $18/hr.

$1,260

LaborfortheMonthbyJob:
Job

TimeTicket

Hours

Rate

Cost

201
201
201

2101
2102
2103

110 $
90 $
40 $
240

10.00
21.00
12.00

$
$
$
$

1,100.00
1,890.00
480.00
3,470.00

202

2104

50 $

20.00

1,000.00

203

2105

70 $

18.00

1,260.00

5,730.00

Total Labor Charges

Journal Entry:
Workin Process Inventory
WagesPayable
b.)

5,730
5,730

Exercise 2-12 Allocating Manufacturing Overhead to Jobs

a.) Overhead rates:

Allocation Base
Direct labor hours
Direct labor cost
Machine hours
Direct material cost

Overhead Rate
$1,000,000/ $40,000DLH=$25per direct labor hour
$1,000,000/ $625,000=$1.60per dollar of direct labor cost
$1,000,000/ 20,000machine hours=$50per machine hour
$2,000,000/ $800,000=$1.25per dollar of direct material

b.) Cost of Job 253

Cost

DLH

Direct Materials(DM)
Direct Labor (DL)
ManufacturingOverhead
Total

3,000.00
1,800.00
3,750.00
8,550.00

DLCost
$

MH

3,000.00
1,800.00
2,880.00
7,680.00

3,000.00
1,800.00
7,500.00
12,300.00

DM Cost
$

3,000.00
1,800.00
3,750.00
8,550.00

To get the Manufacturing Overhead:

Overhead Rates x actual activity
$25/DLH x 150 hrs = $3,750
$1.60 x $12/hr x 150 hrs = $2,880
$50 x 150 hrs = $7500
$1.25 x $3,000 = $3,750

Problem 2-1 Cost of Goods Manufactured, Cost of Goods Sold, and

Income
a.)
Satterfield'sCustomGlass
Schedule of Cost of GoodsManufactured
For the Year Ended December 31, 2014
Beginningbalance in workin processinventory
Add current manufacturingcosts:
Direct material
$ 2,500,000
Direct labor
3,000,000
Manufacturingoverhead
1,700,000
Total
Less endingbalance in workin process inventory
Cost of goods manufactued

b.)

210,000

7,200,000
7,410,000
300,000
$ 7,110,000

Satterfield'sCustomGlass
Income Statement
For the Year Ended December 31, 2014
Sales
Less cost of goodssold:
Beginningfinished goodsinventory
Add cost of goodsmanufactured
Cost of goodsavailable for sale
Less endingfinished goodsinventory
GrossProfit
Lssnonmanufacturingexpenses:
Selling& admin. Expenses
Net Income

$ 8,500,000
$ 500,000
7,110,000
7,610,000
400,000

7,210,000
1,290,000

800,000
490,000

Problem 2-6 Job Costs Using Different Overhead Rates

a.) Overhead rate based on direct labor cost:

b.)

$200,000 $300,000 labor cost = $0.67 per labor dollar

Overhead rate based on direct labor hours:

$200,000 25,000 hours = $8.00 per labor hour

Overhead rate based on machine hours:

$200,000 8,000 machine hours = $25 per machine

Overhead based on Labor Cost

Job 9823
Direct Material
$ 1,000
Direct Labor
1,400
Overhead
938
Total
$ 3,338

Job 9824
$ 2,000
1,400
938
$ 4,338

Overhead based on Labor Hours

Job 9823
Material
$ 1,000
Labor
1,400
Overhead
1,200
Total
$ 3,600

Job 9824
$ 2,000
1,400
1,040
$ 4,440

Overhead based on Machine Hours

Job 9823
Material
$ 1,000
Labor
1,400
Overhead
3,250
Total
$ 5,650

Job 9824
$ 2,000
1,400
6,750
$ 10,150

c.) I would say that the allocation based on machine hours is reasonable
given that depreciation on equipment accounts for 75% of applied
overhead costs. But it should be kept in mind that the applied
overhead portion of the job cost is not an incremental cost.