BU8101 SEMINAR PRACTICE 7

Yude Geraldine Jian Yang Hanis

RECAP
Three types of Manufacturing costs
1. Direct Material (DM) Can be traced directly and conveniently to products
Employees who work directly on the goods being manufactured

2. Direct Labor (DL)

Includes the payroll cost of the direct workers

3. Manufacturing Overhead (MOH) All manufacturing cost other than direct materials and direct labor. Indirect material Indirect labor Overhead

RECAP
What are the three types of Inventories?
Raw material Inventory - Inventory on hand and available for use

Work in process Inventory -Partially completed goods

Finished goods Inventory - Completed goods awaiting sale

RECAP
Manufacturing Cost Flow
Material Inventory

Direct Material Purchase

$$$

$$$

Direct Material used

Work in Process Inventory

$$$

$$$

Direct labor & Manufacturing overhead

Finished Goods Inventory

Cost of Goods Sold

$$$

$$$

$$$

QUESTION 1
The flow of manufacturing costs through the ledger accounts of Superior Locks, Inc., in the current years is illustrated below in summarized form.

QUESTION 1
a. Purchases of Direct Materials

Material Inventory
Beg. Balance $13000
Purchases of DM

$269000

End Balance $17000

Purchase of Direct Material : $269000

QUESTION 1
b. Cost of Direct Materials used

Material Inventory
B. Balance $13000
Purchases of DM

$269000

?
Cost of Direct Material used

End Balance $17000

End Balance = Beg. Balance + Purchases of DM - Cost of Direct Material used Cost of Direct Material used = Beg. Balance + Purchase of DM End Balance = $13000 + $269000 - $17000 = $265000

QUESTION 1
c. Direct Labor costs assigned to production

Direct Labor
131300 134000 End Balance 2700 Direct Labor costs

Direct Labor costs assigned to production : $134000

QUESTION 1
d. The year-end liability for direct wages payable

Direct Labor
131300 134000 End Balance 2700
Direct Labor costs

End balance represent the amount owned to employee for work already performed. Therefore, its wages payable, a current liability

Direct wages payable : $2700

QUESTION 1
e. Total manufacturing costs charged to the Work in Process Inventory account during the current year.
Direct Material Beg bal. 13000 269000 265000

Work in Process Inventory

Beg. Balance $19000

$265000 $134000 $214400 $614400

End bal. 17000 Direct Labor 131300 134000

End bal. $2700 Manufacturing Overhead 214400 214400

End Balance

Manufacturing costs = Direct Material costs + Direct Labor costs + Manufacturing Overhead costs = $265000 + $134000 + $214400 = $613400

QUESTION 1
f. The cost of finished goods manufactured Work in Process Inventory Beg. Balance $19000

$265000
$134000 $214400 End Balance ? $614400

Cost of finished goods (Completed jobs)

Cost of finished goods = $614400

QUESTION 1
g. The year-end balance in the Work in Process Inventory account Work in Process Inventory

Beg. Balance $19000

Manufacturing Costs = DM cost + DL cost + MOH cost = 613400

$265000 $134000 $214400 $614400

End Balance

?
Cost of finished goods (Completed jobs)

Work in Process End Balance = Beg. Bal. + Manufacturing Costs Cost of finished goods

= $19000 + $613400 - $ 614400

= $18000

QUESTION 1
h. The cost of goods sold
Work in Process Beg bal. 19000

Finished Goods Inventory

265000
134000 614400 214400 End bal. 18000

Beg. Balance $46000 Cost of finished goods $614400

End Balance $53400

Cost of Goods Sold ? Cost of goods sold = Beg. Bal. + Cost of finished goods End Bal. = $46000 + $614400 - $53400 = $607000

QUESTION 1
i. The total amount of inventory listed in the year-end balance sheet

Material Inventory
Beg. Balance $13000 $269000 End Balance $17000 $265000

Work in Process Inventory

Beg. Balance $19000 $265000 $134000 $614400

$214400
End Balance $18000

Finished Goods Inventory

Beg. Balance $46000 $614400 End Balance $53400 $607000

Total amount of Inventory = 17000 + 18000 + 53400 = $88400

QUESTION 1
Overall flow of manufacturing costs Material Inventory
Beg. Balance $13000 $269000 End Balance $17000 $265000

Work in Process Inventory

Beg. Balance $19000 $265000 $134000 $614400

Direct Labor
$131300 $134000
End bal. $2700

$214400
End Balance $18000

Finished Goods Inventory

Beg. Balance $46000 $614400 $607000

Manufacturing Overhead
$214400 $214400

End Balance $53400

Cost of Goods Sold

$607000

QUESTION 2

QUESTION 2

Note: Entertainment and travelling expenses were incurred by Headquarter and Marketing staff.

QUESTION 2

Part a: Calculate the over/under application of overheads.

Part b: Prepare a schedule of cost of goods manufactured for the year ended 31 December 2009.

A)CALCULATE THE OVER/UNDER APPLICATION OF OVERHEADS.

Three Step Process:
Calculate

Predetermined Overhead Rate (POHR)

Apply

overhead rate

Reconcile

differences between actual and predetermined rate

A)CALCULATE THE OVER/UNDER APPLICATION OF OVERHEADS.

Step 1:

Budget Overhead: $1.2 Million Budgeted direct labor hours: 200,000 Overhead Rate = Estimated Annual Overhead Estimated Annual Activity Level = 1.2 Million 200,000 = 600% of direct labor cost Applied Overhead Rate in 2009: 600% x 180,000 = 1.08 Million

A)CALCULATE THE OVER/UNDER APPLICATION OF OVERHEADS.

Step 2:
Overhead Indirect labor cost Amount 485,000

Depreciation on plant equipment

Plant Maintainance Factory Insurance

102,000
90,000 78,000

Depreciation on building(75% for manufacturing)

Other factory overhead Rent for special production equipment Total

0.75x240,000=180,000
25,000 166,000 $1.126 Million

A)CALCULATE THE OVER/UNDER APPLICATION OF OVERHEADS.

Step 3:

Actual Overhead: $1.126 Million

>

Applied Overhead: $1.08 Million

Overhead is under applied by: 1.126 Million 1.08 Million = $46,000

ADDITIONAL QUESTION:

When overhead application is underapplied, the underapplied overhead would be:

A) Added

to COGS B) Subtracted to COGS Ans: A

B)PREPARE A SCHEDULE OF COST OF GOODS MANUFACTURED

Formula

for direct materials used in production of year 2009:

Beginning Materials Inventory

+ Purchases-

Ending Materials Inventory

Materials used in Production

Direct material used in production: 20,000+480,000-80,000=$420,000

B)PREPARE A SCHEDULE OF COST OF GOODS MANUFACTURED

Direct Materials Direct Labor Overhead 420,000 900,000 1.08 Million

Total Manufacturing cost Work in process, Jan 1 Work in Process, Dec 31 Cost of goods manufactured

$2.4 Million 150,000 (70,000) $2.48 Million

Note: Always use the estimated overhead and not the actual overhead in finding total manufacturing cost.

QUESTION 3

QUESTION 3

A. DETERMINE THE PRODUCTION COSTS ASSIGNED TO EACH JOB AT 30 APRIL, 2012 BY USING THE ABOVE TABLE FOR YOUR COMPUTATION.

Production Cost = Direct Material + Direct Labor + Manufacturing Overhead. In this question, predetermined overhead rate is 50% of Direct Labor Cost.

A. DETERMINE THE PRODUCTION COSTS ASSIGNED TO EACH JOB AT 30 APRIL, 2012 BY USING THE ABOVE TABLE FOR YOUR COMPUTATION.

Applied Overhead for Job 306: $85,000 x 0.5= $42,500

Applied Overhead for Job 307: $150,000 x 0.5= $75,000 Applied Overhead for Job 308: $105,000 x 0.5= $52,500

A. DETERMINE THE PRODUCTION COSTS ASSIGNED TO EACH JOB AT 30 APRIL, 2012 BY USING THE ABOVE TABLE FOR YOUR COMPUTATION.

Job 306: Beginning Bal. of April $29,000 + $20,000 + $10,000= $59,000 Cost During April $135,000+$85,000+$42,500=$262,500 Production Cost for Job 306 = $59,000+ $262,500 = $321,500

A. DETERMINE THE PRODUCTION COSTS ASSIGNED TO EACH JOB AT 30 APRIL, 2012 BY USING THE ABOVE TABLE FOR YOUR COMPUTATION.

Job 307: Beginning Bal. of April $35,000 + $18,000 + $9,000= $62,000 Cost During April $220,000+$150,000+$75,000=$445,000 Production Cost for Job 307 = $62,000+ $445,000 = $507,000

A. DETERMINE THE PRODUCTION COSTS ASSIGNED TO EACH JOB AT 30 APRIL, 2012 BY USING THE ABOVE TABLE FOR YOUR COMPUTATION.

Job 308: Cost During April $100,000+$105,000+$52,500=$257,500 Production Cost for Job 308 =$257,500

B. SHOW HOW INVENTORIES WOULD BE REPORTED IN THE BALANCE SHEET AT 30 APRIL, 2012.

According to this figure,

B. SHOW HOW INVENTORIES WOULD BE REPORTED IN THE BALANCE SHEET AT 30 APRIL, 2012.

Raw Material: Beginning Balance =$80,000 Purchases= $500,000 Indirect Material= $50,000 Used material for Job 306, 307, 308 during April= $135,000 + $220,000 + $100,000 = $455,000 Left Over Material = $500,000 + $80,000 - $50,000 - $455,000 = $75,000

B. SHOW HOW INVENTORIES WOULD BE REPORTED IN THE BALANCE SHEET AT 30 APRIL, 2012.

Work In Process (Job 308)

=$100,000 + $105,000 + $52,500 =$257,500

B. SHOW HOW INVENTORIES WOULD BE REPORTED IN THE BALANCE SHEET AT 30 APRIL, 2012.

Finished Goods:
Beginning Balance of Job 307 = $35,000+ $18,000+ $9,000 = $62,000 Cost for Job 307 during April = $220,000 + $150,000 + $75,000= $445,000

Finished Goods but unsold at the end of April= $62,000+$445,000= $507,000

QUESTION 4
Watersport Company

Overhead rate: $13 per DLH Estimated manufacturing overhead: $143,000 Estimated DLH: 11,000 hours
Actual Operating Info 2010 For ABC

Question 4a

How?
Step

CALCULATE THE OVERAPPLIED OR UNDERAPPLIED MANUFACTURING OVERHEAD UNDER THE TRADITIONAL COSTING SYSTEM.

1: Calculate the applied overhead Step 2: Calculate the actual overhead Step 3: Compare

Question 4a
Recreation Canoe: Competition Canoe:

Step 1: Calculate the applied overhead

They take 10 hours per unit ($100 $10 per hour) They take 10 hours per unit ($100 $10 per hour) 20 hours

Actual Activity

Manufacturing overhead(Recreation Canoe) = Overhead Rate Actual Activity Level = $13 per DLH (10 800) DLH = $104,000 Manufacturing overhead(Competition Canoe) = Overhead Rate Actual Activity Level = $13 per DLH (10 200) DLH = $26,000 Total Applied Manufacturing overhead = $104,000+$26,000 = $130,000

Question 4a

Step 2: Calculate the actual overhead

Overapplied or Underapplied?

Total Actual Manufacturing overhead = $25,000+$20,000+$15,000+$10,000+$10,000+$20,000+$30,000 = $130,000 Step 3: Compare = $260,000 (Applied MOH)

Neither Overapplied nor Underapplied

Question 4b

CALCULATE THE GROSS PROFIT PER UNIT FOR RECREATION CANOE AND COMPETITION CANOE UNDER THE TRADITIONAL COSTING SYSTEM.
Sales Price Per Canoe

Gross Profit = Revenue-COGS (per unit)

How? Step 1: Calculate COGS (unit cost) Step 2: Calculate Gross Profit Per Unit

Question 4b
Recreation Canoe
Direct Materials Direct Labour Manufacturing Overhead: $13 per DLH 10 hours $13 per DLH 10 hours Total unit cost $380 $130 $150 $100

Step 1: Calculate unit cost

Competition Canoe
$200 $100

$130 $430
Step 2: Calculate gross profit per unit

Recreation Canoe:
Competition Canoe:

Gross profit per unit = Sales Price per Canoe Unit Cost = $500-$380 = $120
Gross profit per unit = $550-$430 = $120

Question 4c

How?

CALCULATE THE GROSS PROFIT PER UNIT FOR RECREATION CANOE AND COMPETITION CANOE UNDER THE ACTIVITY-BASED COSTING SYSTEM.

Similarly Step 1: Calculate COGS (unit cost) ABC:5-Step Computation

Step

2: Calculate Gross Profit Per Unit

ABC(RECAP)
Definition: A costing method that first assigns costs to activities & then to goods and services based on how much each good or services uses the activities.
Traditional Costing ABC

Same POHR for manufacturing overhead

(for the different cost pool in manufacturing overhead)

Multiple POHR

ABC(RECAP)

Question 4c
Step 1: Identify Activities Activity Cost Pool
Building Depreciation Equipment Depreciation Material Ordering Quality Control Maintenance & Security Setup & Drafting Supervision

Step 1: Calculate COGS (unit cost)

Step 2: Assign Cost to Cost Pools Overhead Cost For Activity

$25,000 $20,000 $15,000 $10,000 $10,000 $20,000 $30,000

Step 3: Identify Cost Driver Cost Driver

Square Footage Machine Hours No. of Orders No. of Inspections Square Footage No. of Setups Dir. Labour Costs

Units of Activity
5,000 4,000 300 250 5,000 50 100%

Rate
$5 per square footage $5 per machine hour $50 per order $40 per inspect. $2 per square footage $400 per setup $3 per DLC

Question 4c

Step 1: Calculate COGS (unit cost)

Units of Activity = Activity Level For Recreation Canoe + Activity Level For Competition Canoe Activity Cost Pool
Building Depreciation Equipment Depreciation Material Ordering Quality Control Maintenance & Security Setup & Drafting Supervision

Overhead Cost For Activity

$25,000 $20,000 $15,000 $10,000 $10,000 $20,000 $30,000

Cost Driver
Square Footage Machine Hours No. of Orders No. of Inspections Square Footage No. of Setups Dir. Labour Costs

Units of Activity
5,000 4,000 300 250 5,000 50 100%

Rate
$5 per square footage $5 per machine hour $50 per order $40 per inspect. $2 per square footage $400 per setup $3 per DLC

Question 4c

Step 1: Calculate COGS (unit cost)

Rate = Overhead Cost For Activity Units of Activity

Activity Cost Pool
Building Depreciation Equipment Depreciation Material Ordering Quality Control Maintenance & Security Setup & Drafting Supervision

Step 4: Compute POHR Rate

$5 per square footage $5 per machine hour $50 per order $40 per inspect. $2 per square footage $400 per setup $3 per DLC

Overhead Cost For Activity

$25,000 $20,000 $15,000 $10,000 $10,000 $20,000 $30,000

Cost Driver
Square Footage Machine Hours No. of Orders No. of Inspections Square Footage No. of Setups Dir. Labour Costs

Units of Activity
5,000 4,000 300 250 5,000 50 100%

Question 4c

Step 5: Allocate cost to Product

Step 1: Calculate COGS (unit cost)

Cost Allocated to Product = Rate Actual Units of Activity

Activity Cost Pool

Rate

Competition Canoe COST COST ACTUAL ACTUAL UNITS OF ALLOCATED UNITS OF ALLOCATED ACTIVITY TO PRODUCT ACTIVITY TO PRODUCT 4,000 3,400 200 $20,000 $17,000 $10,000 1,000 600 100 $5,000 $3,000 $5,000

Recreation Canoe

Building Depreciation Equipment Depreciation Material Ordering

$5 per square footage $5 per machine hour $50 per order

Quality Control
Maintenance & Security Setup & Drafting Supervision
Total Overhead

$40 per inspection

$2 per square footage $400 per setup $3 per DLC

160
4,000 20 90%

$6,400
$8,000 $8,000 $27,000 $96,400

90
1,000 30 100%

$3,600
$2,000 $12,000 $3,000 $33,600

Question 4c
Recreation Canoe COST ALLOCATED TO PRODUCT Total Overhead $96,400

Step 1: Calculate COGS (unit cost)

Competition Canoe COST ALLOCATED TO PRODUCT $33,600

Overhead Costs Assigned to Products: Recreation Canoe = $96,400 800 Units = $120.50 Competition Canoe = $33,600 200 Units = $168 Recreation Canoe Competition Canoe

Direct Materials
Direct Labor Manufacturing Overhead Total Unit Cost

$150
$100 $120.50 $370.50

$200
$100 $168 $468

Question 4c
Recreation Canoe
Direct Materials Direct Labor Manufacturing Overhead Total Unit Cost $150 $100 $120.50 $370.50

Step 2: Calculate Gross Profit Per Unit

Competition Canoe
$200 $100 $168 $468

For Recreation Canoe : Gross Profit per unit = $500 - $370.50 = $129.50 For Competition Canoe:
Gross Profit per unit = $550 - $468 = $82

Question 4c

Question 4d

DISCUSS HOW THE ACTIVITY-BASED COSTING SYSTEM WOULD AFFECT THE PRICING DECISION OF WATERSPORTS FOR THE TWO PRODUCTS.
Traditional Costing
Recreation Competition $130 $120 Recreation $120.50 $129.50

ABC
Competition $168 $82

Overhead Cost Per Unit Gross Profit Per Unit

$130 $120

By using ABC, the low-volume, specialized products would have greater overhead costs.
Hence, in order for the company to cover this higher overhead costs, it would have to set a higher selling price for the Competition Canoe.