Solution Cost Carter Usry 13th Edition [PDF]

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Tnblgof Conrerur Part l-Costs: ConceptsandObjectives



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Management, theController, andCostAccounting CostConcepts lnformation System andthe Costaccounting CostBehavior Analysis



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Partl-Cost Accumulation 4. 5. 6. 7. 8.



CostSystems andCostAccumulation .... JobOrderCosting Process Costing TheCostof QualityandAccounting Losses forProduction Costing By-Products andJointProducts



6| 80 102 145 178



Part3-PlanningandControlof Costs Ma te ri a C l s:o n tro l l i nCgo,sti ng, ... andPlanning Just-in-Time andBackflushing . Labor: Controlling andAccounting forCosts. Factory Overhead: Planned, Actual,andApplied Factory Departmentalization Overhead: ActivityAccounting: Activity-Based Costing a n d A c t i v i t y - B a s e d M a n a.g. .e m e n t



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Part4-BudgetingandStandard Costs 15. Budgeting: Profits, Sales, Costs,andExpenses 16. Budgeting: Research and Capital Expenditures, Development Expenditures, andCash:PERT/Cost t 7 . ResponsibilityAccounting andReporting... 1 8 . Standard .... Variances Costing: Setting andAnalyzing Standards



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Standard Costing:lncorporating Standards into theAccountingRecords



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Part 5-Analyris of Costsand Profits DirectCostingandCost-Volume-Profit Analysis DifferentialCostAnalysis



Planning for CapitalExpenditures ... Economic Evaluation of CapitalExpenditures .... Decision-Making underUncertainty ProfitPerformance Measurements and lntracompany TransferPricing



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CHAPTER 1 DtscusstoN OUESTIONS Plrnnhg ir hl drvobprnrnt of e cqrrirron rl by of eglbnr. taaoutc.tr md mer'ur'm'ntt cm b' of obi'cilivtt which thr lchirvrmrnt Pbnnhg trkor hto eccornl thr irtrr' a.r.$.d botwren thr orgrni:atkxr errd itr rnvi' Etitlt tqln nl ir whrt'l|r b b br donr' Cqrtrol ir thr preolr by which trlrnrg"r grutl lhrt rr6urcrr rta obtrir'd rnd urd in rn ollbbnt and .ttactiw ttlrnn.r !o crtty ot',l ttrt pbn rnd rccornglirh thl orgrnizeti'cri'! obi'c' 'tr{lut.. tivor. Cotrtrol inpliot thrt prrlocnrrc' tn.ntr rto rrvilwod to drt.rmin. if corrrctivo rtbn ir nquircd Canttol Plennirg rnd cantrol rn htrnrbt'd' plrnnhg ortlblirhrd thr wilhh out ir crrrird tnrnrworl elrd rrrrrr !o ovrludo enfqnrrrcr obieclivor rto b th. Phn rc ttrd o,Fnirrtisd rfiirwd. Of -2. Shod.rrrge plenr ucully d.d with r plrird of e qu.ttar or I y..1, while long[nga plmr ururlly covrr thr.. to livo yern. Shon'rrngr Pbnt |'' of e csn' d.tdl.d rnangh b prrmit pnprntin Pl.l. l.l of finrnchl rtrt.moritt u cf r lulun dd., tiilb bng'nngo plenr cubnindr h r wry turnrnrrizrd rt ol lrpoc{rd ruultr or t hw qurrditie



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would disRefrainfrom engagingin or supportingany activity that in hircredit the profession.(Such peristent, systematic discrimination ing coutddiscreditthe profession') have been violated' but ff[e requirementdoes not ask which standards Because management iather, which on"" apply to Foxworthtssituation.) accountantsmay noi condone the commission of unethical acts by the ;ihd *ig,in ttreir organizations,all of the responsibilitieslisted in solutionto requirement(1) also applyto Foxworth'ssituation. In addition,the followingaPPIY: Managementaccountants have a responsibi|ityto: ConfiJentialitv:Refrain from disclosing confidential information acquiredin the couor of their work exceptwhen authorizedrunless legallyobligatedto do so. (Foxworth'ssuspicionsabout Dixon'sbehavior should not be disclosedinappropriately'See requirement(3)). gbiectivitv: Communicateinformation fairly and objectively' (poxworttris oOtigatedto make obiective hiring recommendationsto biron, in spite oitris belief that Dixonwill be prejudicedin acting on them.) Alternative(a),discussionwith the director of personnel, who is one of Dixonb peets, is inappropriateat this time. lf, however,Foxworth betievesthe directoi bt personnel is an obiective pafty, Foxworth may discuss the matter with the director, confidentialln to clarify the relevant conceptsand to obtain an understandingof possiblecoursesof action. Alternative(b), informal discussionwith a group of MAD senior management accountants,is inappropriate. Alternative(cl, piivate discussionwith the CFO,Dixon's superior, is appropriate.BecauseFoxworthhas atreadyapproachedhis immediate superior,Dixon,who is invotvedin the conflict, it is not necessaryfor Foxworthto inform him of this action. Fonarorthshouldfollow the company'sestablishedpoliciesfor dealing with this type of conflict, if such policies exist. lf policies do not exist' or if they are-unsuccessfutin resolvingthe conflict, Foxworth should discuss ihe issue with the CFO.tf the matter remains unresolved,discussions with successivelyhigher levels of management,includingthe audit committee and the board of directors, should follow. During these steps' Foxurorthmay discuss the matter confidentiallywith an obiective advisor to clarifythe relevantconceptsand to obtain an understandingof possible coursesof action. lf the matter remainsunresolvedafter exhausting all of these steps, Foxworthmay have no recourseother than to resign and submit an informativememorandumto an appropriaterepresentative of the company.Consultationwith one's personalattomeyis also appropriate.



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ffhe requirement does not ask lor a list of responsibllities Rodriguezhas viotated, merely which of the fifteen responsibilitiesapply to his situation.) Managementaccountants have a nesponsibilityto : Comoetence:Perform their professionalduties in accordance with relevant laws, regulations,and technical standards. ffhe figures Hodriguel is being asked to preparemight amount to fraud in the loan application.) Preparecomplete and clear reports and recommendationsafter appropriateanalysesof relevant and reliable information. flhe reliability of the information is in doubt, and the fact that certain sales figures are or are not sufficient to justify the bank loan are not relevant to preparation of the budget) lnteoritv: Refrain from either actively or passively subverting the attainment of the organization'slegitimate and ethical objectives. (There is a push to subvert legitimate objectives to the immediate need for a bank loan.) Recognizeand communicate professionallimitations or other constraints that would preclude responsiblejudgement or successful performance of an activity. (Rodriguezhas not expressedto Czeistathe conflict between his desire to be a team player and his ethical responsibilities.) Communicateunfavorableas well as favorable information and professional judgements or opinions. (Rodriguezis being asked to report information that reflects so favorably on the company that lt may not be justifiable.) Refrain from engaging in or supporting any activity that woutd discredit the profession.(Preparinga deliberately misleading budget as ' part of a loan application could amount to obtaining mon-y by iraud.) Obiectivitv: Communicate information fairly and objecfivety. (Rodriguezfeels pnessunedto abandon his objectivity in preparing the budget.) Disclosefully all relevant information that could reasonablybe expected to influence an intended user's understandingof the reports, commentsrand recommendationspresented. (A comparison of the new targeted sales figure with the actual sales of tlre coresponding periods of past years would be likely to influence the bank's understanding of just how large an increase in sares is being portrayed.) Rodriguezcoutd have clearly stated his concerns to Czeisla at each stage of the budget's creation and revision. He could have consulted with the marketingmanagerand productionmanager.i "r.ry stage, rather than only upon receivingthe initial budget olata.He coutd present the budget, or a summa ry of it, in a comparative form to highlight the differences between each guarterts budget and the actual resutts of the coresponding quarter of the preceding year, and he could even



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C1-4 (Concluded) calcutate the percentage increase being budgeted and compare it with actual perceniage increases that were achievedannually in the past. He could have conJulted with his staff superior at the headquartersof Norttrwestern(the parent company)- Gzeislais his line superior' according to the second sentence of the case' In addition to his ethical responsibiliUesto CD, Rodriquezhas ethical responsibiliUesto: (a) The banks (b) The managementaccounting profession ffhe requirement does not ask for a list of responsibilitiesJones has vioiated, merely which of the flfteen responslbilitiesapply to his situation.) Managementaccountants have a responsibi||tyto: ConfiJentialitv: Refrain from disclosingconfidentlal information acquirEAin the counseof their work except when authorized, unless legally obligated to do so. (lf Jones accepts the consulting engagement with Crimson, lt is tikely she will be asked to disclose confidential SMI information about the desired computer system')' Refrain from using or appearingto use confidential information acquired in the counseof their work for unethical or illegal advantage either personalty or through third parties, [The size of the consulting fee suggests Grimson is seeking to buy confidential information to help win the job.)lnteqritv: Avoid actual or apparent conflicts of interest and advise all approptiate parties of any potentiat conflict. (The consulting iob would constitute an apparent conflict of interest and probablyan actual one' because Jones has been named to the SMI committee that will evaluate and rank all the proposats,inctuding Crimson'sproposal,which she would have helped to write.) Refrain from engaging in any activity that would preiudice their ability to carry out their duUes ethically. (The consulting iob with Crimson would preiudice Jones'ability to evaluateand rank the proposalsfor SMl, because one of the proposatswould be Jones' own work.) Refuse any gift, favor, or hospitalitythat would influence or would appear to influence their actlons. (Regardlessof wbether the size of the consulting fee is construed as being a gift or favor, lt Is likely that other gifts, favors, or hospitality will be extendedto Jones by Grimson during the counseof the consulting engagement) Refrain from either actively or passivelysubvertingthe attainment of the organization'slegitimate and ethical objectives.(SMl'slegitimate obiective of obtaining the best computer system at the best price would be subvertedto Jones' personatneed for money,as a result of Jones' disctosingcrucial informationfor Crimsonto include in its proposal, especialty if Crimson might not deliver a system with the crucial attributes.)



chaDrcrt 12



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or other conRecognizeand communicate professionallimitations or sucoessful perforstraints that would precluJ" *=ponsible iudgmen-twould preclude mance of an activity. (Accepting-tfieconsutungiob proposalsfor SMI; on the responsibteiudgment in .rlfu"ting and ranking at SMI would the otheirr-anu,Lthicatllmitations-of Jones' employment for preclude successful performance of the consulting engagement lnformaleveal crucial Crimson,Liplcially li Crimson does expect her to prevent her from tion to fr"lp Lin ttre ioU-her ethical duty to SMI would delivering what Crimson is paying for)' disRefiin from engagin! in or supporting any activity-that would to a vendor credit ttre profession.(Sellingconfidential SMI information would be a discreditable act) (Jones Obiectivitv:Gommunicaie information fairly and obiectively. proposals lf would Ue unliLely to communicate obiective evaluationsof she had tretpeawrite one of ttrem') Disclosefully all relevant information that could reasonably be expected to influence an intended useCs understandingof the reports' the comments, and recommendaUonspresented. (JoneslPtt ln writing evalof her use Crimson pioposat would be relevant information in SMlts uations oi pioPosals.) or Jones might have disclosed, either orally or on her personal vita sheet SMI task force and iob application,the extent of her involvementon the the committee. Jones could have first investigatedall her caneeropportunities with firms that presented no potential conflict of interest of this kind, but for the sake of the arE,ument,it is reasonableto assume she did exactly that belore applyin! for a position at Crimson. Knowing that Crimson ls a supplier of computer systems, Jones might have revised her personal vita sheet and the wording of her application for this one iob interview to lessen the chances of Grimsonisbeing tempted to pursue an unethical plan. (Of course, her invotvementin SMt's upcoming purchase might have become known to Grimson anryay, or it might have been known to Grimsonfrom other sources before her interview or even before her application for the position.) In addition to her ethical responsibilitiesto SMI (and her financial responsibitityto the hospltal that provides treatment for her child)' Jones has ethical responsibilitiesto: (a) her family (b) the managementaccountingprofession (c) Crimson



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DrscussloN ouEsTloNs shouH preferably be avoided rr'hon rnak' hg relcrmce to Productbn coss(a) Orgattizatirr ccls arc tlnse cqsts that benefil the lirm for its entire perird ol exs' tcncs and aro most approprbtely classi' fiod ss a rsrcurcnt asset. When lherc is hilbl evijence that a firm's life is limiled' thc orgranizatbncosts Crould be allocalcd ovor the firm's lile a! an expeneo ot should bc amortized as a losg whrn a going conccm foresees terminalion. In praclice, however, orgranizalbn costs are oftcn writlen ofl in the early years of a firm's eristence. (5) Spoiled gods reaulling from normal menulacluring preessing shoub be lreal' cd as a cost of the prodwr rnanulastured. Whcn thc Producl is sold' tho cosl becomes an expongs. SPoiled goods rcrulling from an abnormal occurrenco shouldbe clrssilied as a kr-ss. a2-2. Cost objrts are unils for wlrich atr arrangement is mede lo accumulate and measure cosl. They are imporlant because ol thc need lor multiple dimensians ct dats (c.9., by produci' csltrasl" or departtnent) to accornplishthe varbus PutPoses of cost accounling, including cosl fhding' pbn' ning, ard contrcl. 02-3. (a) To ctassily costs as direst or indirct. the colt accounlanl musl lirst know lhe -Directly traced answensto lhe questlcns identified wilh and'lndirectly to what?' what?' Olherwise, there is no way lo assess the direct or indirect nature ol a cost. lt is the choice ol a cost obiecl lhat answers lhose lwo qugstbns. (b) For erample, lhe cost of a department's manager's salary cannot be cbssified as direct or indirecl without lelecting the cosl object first. lf the cost obiect is a prcduct unit produced in the manager's deparl' ment, thon the sabry is indirect. ll the cct object ir the departmonl, lhe salary is direcl. (a) The product unil, batch, or b is tho cost Q24. obiect. (8e careful about the lack cl cbrily of the term the product' when it is nol known whether il is intended to meen (a) a single unil, batch. or lol ol a Ptoducl. Bs oppced lo (b) any large number ol benti' cal unils. lt couH easily bc laken to meatr. say, Product 1321, as oPPosedto somo other item in the cornpany's catalog' ancl that could suggost the grand total ol ali identical pieces ol t321 produced during



CGt it lha curnnt nrnetary Yaluoc' @' nqnic tatou.cet givon uP or to bo givcn up in obtaining goodr and !'rvices' Ecgrqnb toloulE.! tnay bo given up by trandening cash or othcr propcrty, bsuitg capital stoih prrloming rrvbe, or ircurring liabilttbt. Coclc rrc classifird er unexpirod or at. aslet! and expired. Uncxpired sl! apply to tho produclict cl fulure r.venues. Erarnplet of uncrpired @sts at. invenlorira, prepaH exPent.E, plant and equip' ment. and invcstmcnts. Expircd corls' s'hi$ ngl costl bosnc eventually, are thosc that er. not applbable to tho pro' dus{bn ol luturr rcvonuos and are dodudrd lrom curtanl tevonues or charged agohst retahrd oamings. E:grncr in its broadesl gense hcludes expired catr; i.r., costl $'hich do not all havc any polential futurc cqlofiiic benelil A mar prrcire ddinition linits thc use cil the tcrm'axpcnlc'!o lhe et9ired cosls ariring from uring or con3uming goods and srrviccr in tho preesa ol oblaining rcvenuss: o.g.. co3l of goods sold and markelhg and adrninistrativeexpenses. (t) Cost of 9oo& soH is an cxpired cosl and may bc rclorred to ss atr erpensc in tho broad t.n!o of thc tcrm. On the incqnr stal.m.nt. it b most sften Uenti' ficd ar e co!|. lnvrnlory held lor sale which is destroyed by an abnotmal casual' ty strould be dssitied as a loss. (2) Urnollectble accounts exp€nse is usu' ally classilied as an exPenso. Howevcr, some aulhorilicr belicvc thal it is more desirablc to clasrify uncolleclibleaccounls as a direct reductiqr of sales revenuc (an oflset to rrvcnue). An uncollectible accounl whi:h was nct proviJod for in the annual adiustmcnt, such as bankruptcy of a maior drbtor, may be classified as a bes. (3) Dcprccialion .xpen!c lor planl rnachhcry is a corrpooent o{ factory overhead ard r.presrnts thc rectassifbationof a portlcn od thc mEdrinory cqsl to product cct (hventory). Whcn the producl ir sold, lho doprcciation bccomes a part of lho co$ ol gods rold which is an oxponso. Deprccbtian cl pbnt m*hinery durhg an unplannedatd unptoductive perir:dcl iClencss, suctr as during a slriko, should be classified as a lcs. The torm 'expense'



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Chapter 2



14 lhc onliro product lilc eycb. Thr rignili' csnc. o{ lhb dbthstion it thal sstr. cGls. eucn s! product dceign' Ptotoqping, 8nd hilial worker trahhg' arc dincl codr with rosPccl to th. tolal of all unitc tvct ptoducod, bul ero indirccl with tocPesl to e eingle uil, bdch' or bl') (b) A diaaggrcaatkrnof ovcrhcad would be uselul for lny ltudy of lpw to brttlr rnan' l'o b' age cost!. or ol what cau!'s €tl incurrrd. Rolalivrly lrw ol lho coele incurrod.,ina factory arc causld by lhe rqrthe proargin ol ale npre unit of qte producl. (c) (l) A bstch of Henlical vnits' (2) Th. rum o{ all Uenlical unils cver poduced. (3) An activity or proco3s carried out in prroduclicr. (4) A gtoup or 'ccll' ol machinos and workerc wilhin a d.Parimont(5) A departmcnt in which production GUnS. (6) A plant or clher produclion facility. (7) A etratcgic Aoal ol lhe firm (1.9.' inprovod qualny). O2-5. A cost system ir a combinalim of prcedures and rccordc dnignrd to providc the various types of informEtiqr reguired in thr conducl o{ the enterprise;includingcosl lhdhg, planning, and cqllrol. 02€. A gnod hformatinn rystem_reguires lhe crtab' lighment of (a) long.rangr obicclivcr; (b) an organizationphn rhoing dclegated rreponsibil' itier in dotail; (c) ddailcd phns for luture opera' tbna, botr bng and rhod-lem; 8nd (d) preedures for implomcnlingand controllinglhese plans. A2-7. A charl of accountr ia ncccraary to clarrify accounthg data, ro that thr data may bc uni-' formly rccordrd in irumals and posted to lhe ledger accountr. 02€. Advantagcr of tho rlectronic data processing lyllem for rccord keeping are: spced. larger !torag., ringb rntry ol mulliplo transaclions. aulomalic conlrol flaturel, and f lexibility in r.port lonrlats. O2-9. Thc ldbrrhg poceived weaknessos wore monlined h lh. text (a) Tnditionel m.rrur.r ettompl to rcrvc rniny purp€rg, arrd ar a rcault lhey arc not univorrslly rcanrdcd ar srrving any qt. purp6. iJcally. ( b ) T r e d i t i o n a lm e a . u r . l a r o r l l e c t c d b y accannting ctroicor that arc rrl ahrayr rolcvant to lh. purpo.. al hard; cramples od thrsr clrobcs aro c6l flow agsumptisrs and arbhraryfircd et allocatixrs. (c) Traditionalmeesuro! arr calculated by sy3lcns lhat aro ueually sbw to rospond to cfnn ging srditiorrs.



Tndhbnal m.lrurot of plenl uliliz'atton c8n t .m lo ancourago orrrrutilizatbn of caPritY' (e) Traditional m.ltuto! of officirncy err cilton rcPorted b bl.. ato t@ 899m9ai.4 lrd rt. .rry b mbhlrrPrct02-10. Nqtthancbt pcrlonnerrr rn aaur.t rr. basod an rinplr count! or clh.r phyrical date rathor dala. thry !n uncqltun dlocat.d eunlhg nocird to tho grnrral fhrrcial rccounlirg rystrn, and thoy en cfrorn to rrflcl me sPecifb alp-t ol Prdorrnrncr. O2-11. Four rrampbr ol nonlinancial prrlormancc mcasunrs givcn h tho lort and the a.rpects of portonnancr hry mi1t'tl b. ustd lo nsrits, an (a) rcrap woighl .s r p.tc.nlag. of lolel shppcd wcigfiB lo rnslitot cffbiency of a pariicr.rlarlycllbioncy of matcrial prs.s, u8a€l (b) proccring limo er r p.rc.ntaP of total timc; to nsrita qade etlicicnry or inv.nte rY vclcitY (c) dbtancc rrcvcd by a unil while insUc thr plant to nutitc rinplifbalbn of a prarrs (d) ruggcrlicnr P.r y.rt P.r cmployoe: lo rrr itor rnPryea ilotvrmrnl O2-12- Tht cfiallcngr poscd by lhr ircrrasod inlcrcrl h ' nqrfinanciel pldornam maarBurcsir to defho broadly cnough lo rob thc cost accountanl't irctude rEr. rnasuror that arr nol preceded by dolhr signs and thst at ncl thi lo the financial eccqlnting !)rrlsn. Q2-13. Cctr an most co,lutbnly claroified borrd st lhcir rcbtictshP to (a) thc produci (a ahgb bstch' lctt' or unit of tho gmdorrrubo); (b) thc Yolurnr od Elivity; (c) tho manulacturing dcparlmcnts, Ptsca!.t. o6t c||ltoili s othcr aubdivbixts: (d) thc accounthg Pctii; (e) a Propecd decbirr, Elitn, or cvalualbn. O2-t4. lrdircct rnstedab an thco rnslorials nroded for tho csnplotion of lhc product bul whorc con' aumptict is eithcr so amall or rc cornplex that thcir trestment ar dirccl nralorialr would no( bc foasible. For eramplo, nailr uerd lo mako the product arc irdirccl malorialr. 02.15. lndirrt labor. in csltrasl to direct labor, b labor rrponded lhat doo not efbc{ thr cqrrtrustiqt of tho lhirhrd Produc.t.For or thr snpoilion orarnple. thc labor of custodians ie indirct labor. 02-16. (a) A cervicr dcpartmont ir onc that ir not diroc'tly cngngod in production, brtrlrrndrra a partbular t!rp. of rrybo for the bonolit od otrcr drpartmcntr. Erarmhr cf rorvbo dopartmonl! aro rrceiving, ltor.rooms, mainlenancc, timekeeping,payroll, and calelcria(b) Produchg dcparimentr clauify thcir aharo of rorvice departmrnl .xpcnr.t ar indirccl ovorhoadcp.nac8. (d)



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t5 Cepital expcndilunr are irdended lo beno. lil nprt Oran ql. accounting pcricd. Thr oxprndiluru rhould lhoroforr br rccordrd by e cfrargr to an ac!.t ac@snt for dls' tin !o thc periodt bcncfiled. Fbvrnuo cxprnditurcr brncfil thr oporationc of |hr cunrnt perird mly. Thry rhould bo rocordrd by chargrr lo thr appmprialr ctp.ilta accounts. It e ccpilal elgcndituro ir irnproperty clar' rifird ar .n axpantc' 8tlelr, rrtainrd oamings, and hcsnr for thl perird will bo undrrstEted. In future pcrids, hqnr will br overstaled by any arnount thst would havr bcen arrpdiecd had thc epcndiluro born proprrly capitalizrd. Anrtr and rrtained eamings will bo undersialod st tulurc balanc. !h..13 by ruccoraivrly rrnaller amounts unlil the erct ha! becn fulty countebalrnced. lf a rovenuo elgonditurc ie improprrty capilali:ed, asset!. rclained earninS' and incqno for lhc period will br overstaled. lrsnc will bo underslated in subrcquent periodr as the impropedy c.Fitalized ilerrt b cfiarged to thr goratbns of thoc peri' ods. Agsets and retained earnings will cqrlinuc to be ov.rstatod in subscqucnt balance sheots by succesrively smaller



arnounlr until thc improperty capilalized ilom has bocn canplelely writlcn ofl. (c) Tho basic critrrkxt for classifying eutbys er rovonu. or capital cxpondituros is the prriod of brncfit. Thr amount ot detail n.cossary lo mairnah subsUiary rccotds. tfu rratcriality of lho ctgrnditurcs, and thc canrirtrncy wilh which vari(v,



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t



(t.atzX330.75 )f * #, (t,atzX3s4.zs )(r.ozz)



ooo - 3,5oo)2 * tz, 34,OOO,OOO



$106.35



P3-6 (1)



(a)



The hlgh and low polnts method:



Hlgh



aa..ta..""t"ttt"""""t"ttttttt'lt"tt"tttttt"t"ttt"t""'



LOW



aaaaaaa"lt"ttt"t""t""t"""tt""""""tt"lt"""ltt"l"



Dlfigrcnc9



.tttttttttttttt"""t"""tt'lt""t"t""ttr"t""'rt"



= Varlable rate = $f OO+ I;OOOBllletr $lO = 3260 Flred cost = $5Oo- Sl'1o r2r4OOBlllets) or = $260 Flxed cost = $4OO- (!l'lO x l,4OO Bllletr)



Cost :1500 400



4stlYttY 2r4OO l,4oo



Sloo



l.ooo



I



I b.



45



! !



I



ChsPwS



P3-6 (Qontinued)



a trend line fitted by insPection: A scattergraph wlth



(b) L



t500 Il b



:oo L



F



I



9300



E l-



o



ul $200 J lll



$too



30



trOOO



I



BILLETS = $260 Fixed cost detormlned by Inspection cogt + 12 months = $46O Average cogt = S5t52O total = 2'OOO total Blllets + 12 months Average aetlvtty = 24,OOO V a r|a b l e co a t=(g 4 6 0aver iagecost- s26ofixedcost) + 29oooave ftl ge agtlvl$ = $.1O Per Blllet



I I



g



I



Chapter 3



P3-6 (Continued) (5)



V-n



F-;l



lx-if



Cost DcviaUonr



llumbcr of Bllletr



Activity Devletionr



(a) Squrrcd



uonth



(4) r (21



Elccrriclty Cost



Jenurry,,.... Fcbrury.... Mrrch........ Aprf1....,.,.... 1fry............ Junc........... Ju1y........,... August....... Scptamber. Octobcr....,. ilovambcr.. Decomber..



O 4O'OOO t0'O0O 4O'O0O IO'OOO O . 3EO'OOO i0'OOO tlO'OOO 160'000 g0rOOO .3O,OOO



O 2'OOO 2'5OO 5,OOO I'OOO O 36'000 I'OOO 5'OOO iO'OOO 1O'5OO 2'OOO



25 tOO 625 625 lOO 2i25 3'8OO 'lOO



-999,099



gr.OOO



_8.950



f3)



l2l



y



(6)



(4)



x



(r)



(c)



(51



3455 450



2,OOO 1'8OO 1,900 2,2OO 2,1oO 2,OOO l,4OO l,9OO 1,8OO 2,4OO 2r3OO 2,2OO



ll0l (251 25 10 t5 (60) (f O)



{35 4S5 4?O 475 4OO 450 4:t5 5OO 495 47O



l25l 40 35 lO



Total...... 35.529



O (2OO) (l00l 2OO tOO O (8OOl (f O0l (2OO) .lOO 3OO 2OO



_?!.OOO ___9



_9



lx-rv-tl



rt)



lv-tr (21 Sguarcd



c,25 1'600 1r2i25 loo



f - zy + n - $5r52o + 12 - $460 i - L x + f t - 2 4 1 0 0 0 *1 2 - 2 rOO0



:(x - rXv.: f) - c o t u m n -6dd;66d'$'10125 variabte rate(b)Sq9 s tloFl o t a t il9 *7)' x(x



F i x e d c o s t (a ) - y - b i



-



($.rolzs Xz,ooo)



- $ 2 5 7 .5 0 (21



The coefficient of correlation (rl and the coofffclent of determlnation (F), using data from the answer in requlrement (lXcl tollow:



ftxr - x)ly, _ V) - l



-



- \ /



- \



V : ( xr - i ) ' z ( y , - y ) ' 1 2 - 1 . s s z ) 2- . 9 1 6



-



81'099--



J ( 8 o o ' o oXo8 ' e 5 o)



- .957



I I



L



I L



t



47



Ct8pr( 3



P3-O (Concluded)



!



(3)



(r) v



I



t



L



It L



Month



I



J8nuary.r.... Februaly....



L



M8J1Oh.r......'



Aprll r.......... i I



M8!.r.....r.r..



!



J1tJ|9........... Jlll!............



I



I I b



Au$ust....... September October...... NoYember.. Decamber.. Total..,..'. g' -



i \, I i !



I b



!



b



I



(21



Actual Electrlclty Gost $ 4{ts 4lto 4{ls 485 470 475 400 450 4it5 500 495 470 35.520



(3) ly'=a+Dx) Estimated Eleetriclty Cost $ 460 #o 4{to 480 470 460 399 450



x Number of Blllets 2,O00 1r 8OO 11900 2r2OO 2rlOO 2rO00 1r4O0 l r9OO 1r8O0 214OO 213O0 2r2AO 24,OOO



(4)



lv - v'l (1) - (3)



(s) 10



(1s) 5



o



lcolumn 5 total 12-2



(4) Squarsd 25 100 ?25 25



o



225 I



(5)



25 1 25 100



(r)



501 490 480 t15.520



U-vT



15 1



o



#o



(5)



5 '(10)



o



o



752



gt52 - $8.672 lo



The 9506 conlldsnce Interval level for electrlclty costs at the 2r2OO Blllets level of agttylty would O" 0","-a + D x * tesst"' .,/.t* * * "



Y



( t - f) ' =



>(r-i)'



$257.5o+ ($.rorzs)(z,zoo)' (2.?2s)($a.eze ) $48o.25 * (2.zza)($e,ozz)(t.oos) $48O .25 * $2O.58 or between a low of 3459.G7 and a high of SSOO.83,



Chapter 3



48



P3-7 (1)



Month 20A J!ll.'....... 3 Fcb....-... ll!1...-... APt- '..-... lhy--.., Juno.--. July --... Aug....-... Scp......... OcL........ NoY.-.-... Dcc...--.



(1) vi



t2l rl'.1-91



Dlffcroncr lrom Frctory Overhead Avcragc Coctr of 37,900 '{ 81600 gr9O0 81050 grOOO I'160 7'550 7,050 61450 6'900 7'5OO 7rl50 7'8OO



ooo 2r0oo 1,060 I rloo 25O



{3so) (8s0) (1/450) (t,0ool (4oo)



frso) (roo)



(3) xi



(4)



Fi-i)



8r7OO 9,3OO 9'.iOO 8,7OO 8,OOO 71650 61760 TrtOO 71350 Tr25,O TrtOO TpOO



800



lr4oo lr4OO 800 loo



(2rol (t,tgol (8ool (6s01 (cs0l (8ool (4ool



(6) lry rWi -h



rr) rq - vlz



Dlflcrencc



Dirrct lrbor Hourr



from Averagc (41 of 1'80O Squrrrd Hours



2rOOO 2,4O0 2r2OO 2,3OO 2rOOO lr0oo lr4OO I'OOO l'2oo lr7OO I'COO lr9OO



200 600 400 500 200



ro0 (4oo) (8oo) {600}



lro0) (2oo) 100



4p Jan.....,... Fcb.-...... Mrr......... Apa........ ifry,..--. June.....July........ Aug....--. Scp......... OcL........ !lov..,-... Dcc..-.-.



(61 lq -|12



2,1O0 2FOO 2.,.OO 2',,OO 2rOOO trSoo tr2oo tr3oo



r'5oo 'tr7oo rr5oo



lr8OO



300 500



aoo 4(}0 200



o (oo0l (5oo) (3oo) (ro0) f3oo) o



'(4)



r (2)



l2l Squarcd



360,000 4TOOOTOOO



4O,OOO S60'000



|2O,OOO l'2OO,OOO



t0orooo



{2oro0o



Irt02,5oo



2SO'OOO 4OTOOO IO'OOO



S5O'OOO 5O,OO0 f3SrOOOl



tr2lOrOOO 62,500 72i2,5OO



too,ooo



34o,ooo



72t2)5oo



640'000 360,000



lrl6OrOOO OOO,O0O



2tlO2rSOO ITOOO,OOO



to,ooo ao,ooo torooo



4o,ooo tSorooo (lorooo)



160,000 5o2,5oo to,ooo



84O,OOO 2/3O,O0O 90,ooo 250rO0O - TOOr0Oo I,060,000 1,060,000 680,000 t6o,ooo o4o,ooo S2orooo tSo,ooo IOTOOO 2OTOOO 4O,OOO c2r6oo 0 o C9OTOOO tr322,5OO 360,000 640,000 25O,OOO 4{tOrOOO 3o2"5oo l6li,ooo 0o,ooo 85,ooo 122,soo l0,ooo C4OTOOO 24O,OOo 9O,OOO



o



o



tbo,ooo



20c



_



Jrn......... Fcb...,..... Mer......... Apr....-... llty..-.... Juno....... July -...... Aug.-...... sop......... OsL........ Nov......... Dcc........



81600 g,3OO gr4OO 8r7OO SrtOO ?1600 Z'OOO 6,900 ?rloo Z,EOO Z,OOO Z,OOO



Total....... S2g4.4Oo



700 lraoo



2rOOO



1Foo



2r3OO 2,.OO 2,OOO



800 200



(3oo) (eoo)



2poo



t,8oo



lr3OO (1,OOO) 1,2O0 (8o0) lr3oo (4oo) 1,800 (ooo) 1,500 (3Oo) 1 , 9 O O o 64.800



200 500 600



.3O,OO0 25O,OOO 25O,OOO



!4O'OOO 7O0,OOO 75O,OOO



a9O'OOO 1,9OO,OOO 235O,OOO



t6o,ooo



320,ooo



c4o,ooo



200



4O,OOO



4O,OOO



4O,OOO



aoo o (5oo) (0oo) (5o0) o (3oo) 100



o



o 25O'OOO 360,000 25O,OOO



o



0



9o,ooo



45O,OOO 81O,OOO OOOTOOO ITOOO'OOO 4OO,OO0 84O,OOO



0



t8o,ooo



9O,OOO



27O,OO0



81O,OOO



l O,OOO



(3O,OO0)



9O,OOO



5.280,OO0 11,625.000



29.lA5.OOO



iL



I



L I



I lL



tI



P3-7 (Continued)



p -



z ( x t - x ) ( v t- l )



Column 6 total



x (x r - x ) '



Golumn 5 total



b



Slnce j



t



-



11'625'000 51280,0O0



- a + biand t ' I;yt * n and i



32.20 variable cost rate



' Xr 1 t rtt t h e n :



* 36) + 36) -, + ($z.zo)(o*'aoo (Sesa,4oo



I, \,



L



(9



qww3



tz ' eoo



,



: 3.tlfdT:.t



cost ovelhaad



The coefficlent of correlation and the coefficient of determination' using data from the regulnement(1) answen



(21



I i



x(r, - 7)(y, - Y)



b



c o t u m n6 t o t a t



I !



I



11r025,OO0



' @)



b



12 -(.ggzo)2 -..8280



I



b



I Lr



I



b



I



1 11625,O0O - . 9 3 7 0 11rA?S'@9: . v 1 5 3 , 9 3 8 , 4 O O , O O O , O O O 12r4O7 1191



chspttir3



fi



P3-7 (Continued) (3)



The standard omor of thc cstimate:



Month



(r) x1



Dlract Labor Houns



l2l lr



Actlsl Factory Overhead Gosts



(4) (3) luj= ?.+.brJ) Ui-vl



Predlcted Factory Overhead Costs



g JanualY...... FobruSrY'.'. M8FCh.r....... APrll ..........t M8! r........... J11JIo........... Jlll! .....'......



August....... September. OCtobOl......



November.. December..



ry



JanuatY...... Feblarary.... MdFGh,.....".



Aprll ........... M 8 ! . . . ' . . . . . , .. JUll€ '.......... Jlrl! '...........



August....... September. Ogtobor....,. November.. Decembgr.. 20c January...... February.... MihCh..'...... Aprll ...'..o.... M8!............ Jung..,........ Ju|y.,..........



A u g u s t . . . . . .. September. October...... N o v e m b e r .. December.. Total



2rO00



2'd,oo



2r2OO 2,3(X) 2,OOO 1,9O0 1,4(X) I,OOO



l,2oo



1 r7 O0 1 ,6 0 0 1 ,9 O0



8r5OO 9,9OO 8,95O I,OO0 8 rl 50 71550 7rO5O 6,45O 6,900 7,500 7 rl 50 7,80O



$



8,340 9]2i2O 8r780 I,OOO 8r34O 81120



7'p,zo 6rl40 6r58O 71680 7 1460 81120



lr3oo lrSoo l,7oo



7,650 6,75O 7 rl OO 7,3lio 7r?So



1,5OO 1,8O0



7,10o 7r5OO



8,5O0 I,OOO 8,78O 8r78O 8,34O 7,9OO 6,58O 6,8OO 7 t24O 7,680 71244 7r9OO



2,OOO 2,3OO 2,3OO 2,2OO 2,OOO 1 ,8 OO l r3 OO I,2 0 0 1 r3 O0 1,8O0 1,5OO l r9OO



8,60O 9r3OO 9,4O0 8,70O 8 ,1OO 7r60O 7,OOO 6,9OO 7,1OO 7,500 TrOOO 7,600



8,34O I,OO0 I,OOO 8,780 8,340 7r9Oo 6,8OO 6,580 6,8OO 7,9OO 7,24O 8,120



2r1O0 2,30O 2r2OO 2r2OO 2,OOO lr8OO 1 ,2 O0



ff,800



8,70o 9,3OO 9,300 8,7OO



8,0oo



s284.400



_ E284.4O9



(5)



tvi- vF



Prediction



Prudlction Error Emor Squared (21- (3) (Cl_Squarea It 160 680 170



o (1eo) (5701 30 3lo 320 (r 80) (31o) (320) 140 300 520 (80)



(34o) (250) 170 300 110 (43o) (r40)



(4oo) 260 300 400 (80) (240) (3o0) 200 320 300 (4o0) (240) (s20)



o



$



25,600 462,4OO 28,9OO



o



36,1OO 324,9OO 900 96,1O O



to2,40o



32,4OO 96,1O0 1O2,4O0 19,600 9O,OO0 27Or4OA 6,4OO I l5,600 62,5OO 28,9OO 9O,O0O 12,lO O 184,9OO l91600 l60,000 67,600 9O,OOo 16O,O(x) 6,4O0 571600



90rooo 40rooo



1O2|4AO 90,OOO 160,OOO 57,6OO 27O,4OO |x1.580.200



I



I iL



I I



Ps-T(concluded)



l_



= --



b



(4)



| r



I I



L



I



I b



* II



L



!t



) b



I



i



\



It-2



,



-s324



34



= zgsYoand the confi' Slncc a large sample ls usod In thls probtem, tgS% dcnce lnterval ls: Y't



i



l38, 78O t



tt



I



'\-6:z



zesyr9'



) (sspm * ($z.eo)(z,zoo )) t (t.eoo)($sze



t I



!



; $ i l , 5 6 o ' 2 o o- - [ r g a - z t 2



i > ( y , - y - ' , 1 2- , @ -



i



I I b



E



5t



chtPrer 3



!



$635



Cnsgter3 52



P3-8



(1) vt



(r)



(2)



ru-h



Maintenancc Coct Dovlrdon Cost Ug1!r (286) .lan, ZOe '.-.$'l'l05 (365) Feb.,2OA ,... l'110 Pf) fnar., 2OA ... tt39O F2) Oot., tOO.... l'449 t37 May, 2OA.'.' ItGtS U .tune,2OA .. lF?5 2Oo JulY, 2OA -.. 1'687 169 Arg.r 2OA ... I;OSO Sep., ZOI ... f 1595 o"t., ZOI .... 1t675 not.,2OA ... 1,405 o""., 2OA.." 1125.1



.,;;:;io" ..'



eso



ll/f 104 tt6) 1230)



(cgr)



;;;:, ro",.,.



I'175



(3oc)



"'



1/;?5



158)



"".,2O8



;;;:;ro'



"" r'5oo



""r, aOt "" .. ,;;,2o8 ,rit,'to" "" 2oB "' ;;;; ;;;.,2oB "' O",.r rO" "" *;".;2oB "' ;".: 2oB ..'



I'COB l'6s3 1'675 1'724 1'626 1]576 l'633 t,/tt'



Totsl.-..$$



(3) xi [.abor jloto 950 1rO24 1rlo0 'l,l€ 1r313 1,.C1 11552 11372 t,360 11455 tpl IrlSo 009 1)Oz2



25 127 172 tg4 243 145 04 172 (63)



J



1po r}283 r,&?9 r'260 lr44O



r}20o r1335 Irl64 1$73 11124 2,.JCO



tt) Vt-7Wr-h til-h" (6)



(5)



(4)



Fr-t)



ui-7f



(2) Squarsd



(4)



ActlvltY Dovlation (2e0) (210) (13r) (02) 73 21 312 132 128 216



Squarrd 82r94O 78,84O t1,921



84,1@ 46,656 l7,l6l 8,{d 61329



8,loo



43 00 lo 200 60 05



aoo 11849



eBOr loo 40,OOO



2"oo



ct6) 133



(1ro)



'



9rO25 51776 17,689 13,456 543.682



J



18,769 11936



921 c4..:72 22FOB r4,304 41r?to



68108t 471324



1zo)



I,O24



to,o0t



97rg 17,121 16}876 4,Sl?,l5 3C1



(24r) (2r8)



8128t



zo4



u1



(ro) (eo)



8i1796



133)225



12143'6



1t4/4 20'7OO 1271''71 06'708 Irl20 I1076 12$73 1'72O 38,8OO t2'150 t3r776



ct,t+0) 2i2,876 T,3S G51.300








! I



55



Clqter 3



+ I



I!



P3-8 (Cgncluded)



r



(a)



b



costat the1'1oomachine lor maintenance ffirfflffi:;|;ffi,T:"t""' -tl t { {rr - xl I + Y r ' -* -t 'gc;vs' *-S ' . , i 1+



II b



\



n



t(r,



-x)'



i



r -__-^-. i 9028.3tt+ (s.ezezl3)(r,1oo)r (e.ozl)(ze.rcarm)! , * * -



II I



t



31,505.48 * $80.26 I



!



I tt



I I



!



I



!



!



b



\, 1 >



I



:



(trtoo-1,o75)2



r,agsff



Cnapter 3



56



CASES



c3-1



(r)



W



=a+bS



= 5.062 + (.023)(1'20O) = 5.062 + 27.6 = 32.662 or about 33 total workens



33 10 23 Number of temporaryworkers needed' Regression 2 appoars to be better than Regrcsslon 1 because: excluded' thereby nemov' i"i- O"t outside the rclevant r.tnge have been ing anYbias. (b) fhe standard error of the estimate (s') for Regrcssion 2Js smaller than the standard error of the estimate for Begression 1 (.432 com' pared to 2.012). (c) The coefficieni of determinatlon (r2) ls hlgher for Regrcsslon 2 tfian the coefficient of determinatlon for Regrcssion t (.998 compared to .962). Jim Locter can use the legression in his plannlngfor tempolary workers lf the foltowing condltlons exist: (a) The forecasted dally shlpments are greater than 3oo and do rrot deviate too much from the agtual shlpments. (b) The amount of work to be done is dependentonly on the number of shipmentsto be made and does not change from shipment to shlpment. (c) Worlier productlvlty is erpected to remain approximately the same as that experienced during the period used to develop the negnession. (d) A strong cause and effect relationship exists between the dependent variableand the Independentvariable. (e) The time frame for a forecast ls short'term' The regression could be improved by the following: (a) Redeveloplngthe regressionusing the number of hours worked as the dependentvariable. (b) Performlng another analysis ll rush orders or deviations of actual otderc fiom forecasts occur wlth any degree of ragularlty. (c) tnvestigating the historical data used as a basis for the regrcssion to determine lf there aFeany further unusual circumstances that should be temoved from the data set. td) Redoingthe regressionafter a period of tlme' such as four to slx months,to discover lf thens have been any changes In the relatlon-



Total workgl.s negdgd ....,.........rr...............................r. LeSS pgnnanent WOfkgllS......'......................t"""""""



tzl



(3)



(4)



shlp between the dependent and the Independent varlables.



l I I



t Clnpter3



c3-2



( 1 ) T h e | n c t o a s e | n y a s s owtti-J;ilin c i a t e d w l t haa6'O'unitln"t"t"e un|tJncneasein x l sx. 5O0) l . 2 , Tinh ye r e f o r 11'2 x tn Soo-untttn"r""i"



(2)



[:i"T,::riJ"i?,1P."rr.



rsspurious'rhe rfthecorrararon unreriable



' a s s u m p t i o n i s t t r a t 1 ; # i " " powgr ] o g i * rand . L i "dirsct i i " " s hlabor' ipbetweenoutput and the use of efee#c at the time of th "onattions ii" undsr Ji"ble b; (b) rrre equa$onmay studv,butfconOltiJns-tt'"ng"'theresultsmaybeunreliable' unlts. limitJ i" " l'ige of 5oO.2'ooo (c) D"tj;;;;;(d}rts-assumeatrratastralght-||neassumption|sva||d. good(e)rrrecoemcbntofcorrelat|onlg"'""",'"ofttreextenttowhich n i" t t"railve m€asuneof ,;;i;ttiearty. ars two varlables ln yi" ttpl"lned by ora rugrcssion ness of fit. More or iil"-""tiatlon than'ior elbctrfc Powenthat ls' the egua*onfor direct f,rl]o,nours ts a uJtt"r flt ttan the equatlonfor esuatlonfor dlrsct ffi;; iiouo elecilric Power' ( 0 T h e s t a n d a r d e r o r o f t h e e s t l m a t e . l "tlon" s a m e att" s u nnot-alty e o t v a r | adlstrlbuted t|onfrom



the regrcsstonltne.li il; ;;t tne sGndarderrcr can be lnterpretaboutthe regrc"",on.qu"ii*, The stsndard entr ls "t"no"tu-i-"'r"uon' " it r"y'", ed ln tllresame tft"n In trs caso of elestric f'o'u-o i"Uo' ;id;; case the In gruater power' wtttr permisslon GGA-canada(adapted).Reprint



(1)



variusing time-as an IndePendent that ls A Alternative of An advantage posslble factors il; ;;;;ideqtlon all abte is a conyenl""i*"V to take Juring each period of depeidtnfvartaUrc the lnfluencing be rclationthat may A rs that there ls no loglcal time. A disadvantageof Alternatire shlp between years and rental expense' this method ls loglcal because that b-ts Atternatf"e of advantage An and, thus, rsntal exPense as rovenu"" tnciase, the stgryi lnrr""r", 6 t" that an estimate of ruvof eliernatfv" lncreases. A di;-d';tage



.n""il"J#[l;



carcurationr c is thatthe mathematicar of Arternative disadvantag mc-thod ls easy to underctand' A are relailvely eaiy and the oversrmptfica*on .rr-r"9" rs an of arternativ,diJ.ffi il; arnrrm"t. rchilonship between varlables' that does ,rot *r"oi;;;';;t



OuPter 3



C3-3 (Concluded) ioglcal' the coefficient of .;;;;;b |2|MotorcoGor?orationshouldse|ectA|ternativeBbecau.sethere|ation,"nt"l " riJt} ls low' rhtp between neyan,r" tt"ndard eqor of the estimate rental corrslafion ls hlgh, rnaiii" es*matins for



(3)



i" "'n-"pp-priati-ieirtoa attto Parts'A statistical A "t"ti#;iirr[iiq* cxpensebetorpi[otorro-;;ft.d"iTi'il;[" "o'"iation betweentre variables



ttrt a tcchnigueattemptsto--"""r"nA ttftA rclatlonshlp'and such fral]IE"it to pnesumeO trat aru "ttuauon' of cout:e' Motorco ls con' "iriiiirti" to appea* relailonship in *re hrstorrcardata wttt tnat-.rr=t neratl-J"iiJs any lssumrng that mav-wantto adiust the Management to tlnue ln ttre ftrturewnnout-ln;ig"' *irr"t"iu6 and Motorcomay wish rr"ip*tt i;i chang". -oit'tt variabtesfor qJantltative variables' uc-e i ntroo



c3-4



(r)



l2l



(3)



,,-gle""ion provides a rclational statement nther than a The phraso analysls ls used to determine a reg;"ion that means statementn causal cause-and'etfect relationship' A spe' relationshlp, but not nt"""sarffyi not imply that the lndepenclftc value for a negnession cosfficlent does d e n t v a r | a b |e (s1 ca -u se sa ch a ngeinthedependentvar iab|e. basic formula for a tegression The meaning of each of the "VtJb;i" in tt i oquatlon follows: the dependent variable' y'r = estlmateJ value of the lth observation of a=they.axls|nterceptorconstantterm(9.9.,thefiredportionofa semivariable exPense)' to the Independent varib = the rcgrcsston coefficient corresponding ab|er(e.g.gthevariabtecostelementassociatedwithaoneunit change in actlvlty r). varlable. x1 = the tth ou""r""tibn-of the first Independent lndependent vari' the to c = the regrcsslon coefficlenl iott""ponding ab|ez(e.9.,thevariab|ecoste|ementassociatedw}thaoneun|t change ln activity:). variable. 21 = the lth observatibn of the second independent with the lth observation. d = the error term associated for goodness of flt Statistical factors used to test a negrcssion equation include: the portion of (a) The coefficient of determination,;2, which lndicates lndepenthe by the varian"" i" the dependent variable erplained approaching I lndident variabtes. A coefficieni of determination cates a good llt.



I



lv



I



L.



l b



59



I



Clapter3



lb



l



-



C3-4 (Concluded)



I |-



(b)



I



b



(4)



L t,



(a)



(b)



I !



(c)



L



(d)



(e) I I



!



The standard orror of the estimate which measures the dispersion of the observed points about the regressionline. A standard error of the estimate approaching zeno Indicates a good flt. The term "linearl$l wlthln a relevant ranget'means that in a specific sltuation, a straight-line relationshipbetween the dependent variable and the independentvariablescan be assumed only within the range of historically observedvalues. The term rconstant variance (homoscedasticltyl"means that the distrlbution of the observations about the regression line is unlform for all values ol the independentvarlableswithin the observed rrangeof values. The term "serial correlation" refensto the lack of independence in a geries of successlve observations oyer tlme. The deviation of a value from the regressionline should be unrelated to the deviation of any other point from this line. The term 'normality" means that the ioint probabllity disHbution of Ure variables ls normally distributed (multlvariate normal). The frequency of the observatlonsshould approximatea norrnal curve. The term smultlcolllnearlty' refers to tfie correlatlon of lndependent variables. When Independent variables are hlghly correlated wltfl each other, the relationshlp(s)between the Independentvzrlablee may obscure the relationshipbetween the lndependentvarlables(s) and the dependent variable.



l !



c3-5 l :



(1)



b



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tzl



(a) D = (2.455+(.188X1,5OO,O0O 1 *O 0 1 O 0 0 ) )1xO , O O 0 u n l t s = (2.455 + 2,821x 1O,0OOunlts = 5.275 x 1O,OO0unlts = 82,750 unlts (bl D = (2,491 + (.441(12,OOO,OOO + 1,O0O1OO0)) r IO,OOOunlts = 12,491+ 5.28| x IO,OOOunlts = 7 ,7 7 1 r l O,OOOunlts = 77,71O unlts The 5o7o confidence interval for demand is calculated as follows: D = 104,160 unlts= {.59X,922x 10,OOOuntts) = 1 O4 r1 6 Ou n l ts * 6 ,361.8 unlts or between 97,798 unlts and 1 10,522 unlts.



Cl?€.pter3



&



c3-5 (Concluded) (3)



(4)



Eguation 4 ls the best The coefficient of correlatlon and the coefficient of determination arp the hlghest of ttre four equatlons. The coefficient of determination Indlcates that 70.3ohof the sample variance of automoblle sales ls explalned by the rcgrcssion. For predigtlve purposesr the standard arror gf the estlmate a|.922 is also tfie lowest of tfie four models' giving the tlghtest (smallestl phyrsicalconfidence Interval of any of the equatlons. Equation 3 assumes that factory rebates (R) are dependent on advertlsing funds (A).The rcsuJtsof the analysls show that factoly rcbates and advertlsing funds are almost totally independent andr ttrereforc' cannot be used to predict each othea The rcsults of Equatlon 3 lend credlblllty to the use of A and R ln Equatlon4. The Independenceof A and R leduces ttte posslble negative aspects of colllnearlty'



I !



S



CHAPTER 4 QUESTIONS DISCUSSION



I



'I



O4-1. The five Partsarc: (a) Direct nraterblg reqtbn (b) Direct lsbor ceclbn (c) Frlory ovefiead (O Work h Pr@oer hventories (c) Fhbhed grood hvmtorbr iho bahnc" rhoet ir t 3tal.ment ct finsncbl *2. pcrttbt; the hcqrr ctBternont b a dalement of sttYity. The incqne lbtement is ccnplementary in padicubr for to thc babnce sheet, munthg tho ctrange in hr prcprietary equrty Bs a resull of operatims during the year. In |hat respecl' the incornc atatemenl ir eeaentiallynothing more than a major rection of the retained eamings accounl. Thereforc, tht rsvenue and expense accounls in the income 3talemont have been lcrmed'cxplanatoqf ac@unl3, explainingthe cbb and lkrw of r.YcnueE and cxpensee lhat bod to thc new hcqno (or bce) and to the new rrtahed camhgs balancc h the balance sheet. O4-3. Thr ordinary babncr rhecl and incqne slatemenl aro htended to ptwkJe hlormalist as lo financial peilion and resulb of operation of a burinesl, in sctordancc wilh several assump' liqs that arc made h preparhg |he stalements. Frqn the standpoinl cil the criticisms rnade, the most important cil these assumptions are lhal cocl lost appropdale arnortization of cost mea' rurca unelgired cct, and that a business mey bo a$umod lo bc gohg to conlinue operatbns indclinilely into lhe future. Accountingstatemcntg sre usually prepared on lhe heory lhal a cale or gome other definite event is essenlial bcfore revenur is recognized.Basically,the aseot sUe of a balancc aheet coctaha a presontstbn o{ the anrounts cl cost incurred, which can b c p r e s u m e d l o b e n c fi t f u t u r e p e r i o d s . ' A n incornc slalement presents the srnounl of rovcnue recognizedas having been realized during thc period, less the podioo cl all cosls incuned thsl doe3 not appear to be lairly delerrablelo ftnurc perinds. Thc ircome staternonl is prirrnrity a m€asure cd what lres been camcd, and not a measure of 'camhg power.' For plant assots, the balance rheot b pdnarily a rnasure cl accountabilityfor cxp.nditureE,rhowing acguisitioncosls lees codr sllocalod to past operatbns. This rneasure of accounlability may br quile diflerent from 1rur velue.' To hcreese ilg usefuhess as one elemerd in judChC eaming porver, the ircsne stalement is picparcd with a dietinclion between operating and nonoperaling items. For the samo roason, c.rtain iterns may be climinoled frorn the incorne



slstomenl and shown in the statemont ol nrtained eemings. However, the effec-tof nmre' curring and nonoperaling transaclions is not entirelYeliminated. lnfonnalion revoaled by a serios of income 3tatcmentsb morc rignilinnt in iudghg eaming power than informatbn revcaled by ane hcqnc statcmstl. The incqne of a bushess rnay folbw or .Yen exaggetat€ the ups and downs ol the bueinesgcyclo and, therefore, lhe inccne of any crc year will ncl representeaming powor. Changes in law or local zoning ordinances may result in a marked change in lhe eaming powerol a bushess. Ukewise,changesin public taste, devebpment of new prodtrts' apPgarance ol new conrpetilion, acquisition ol subsiJiaries' changes in management and lhe like, all may change earning power and yet not be clearly rellecled, il reflected at all, ir one incorne stale' menl. The accounting use of historical. rather lhan curront, dollars in measuring depreciation and cost of goods sold may resull in distoding any view of earning power obtained frorn a single incorne statemenl. ln regnrd to plant ass€ls, il can be said lhat their value to a going concetn is usually depen' dent uPon the eaming power of the business. Such s value is not necessarilythe same as lQ' uidation value, cost, cost legs amortization. repbcement value, or any other kind of value' The phrase.true value'has no definileconnota' tion. O4-4. Actusldescribes the way cosls are measured. i.e., at actual historical arnounts; /ull absaption describos which elemenis of cost are allocaled to hvenlory accounls, i,e., all elements of rnanulacluring cost are fully allocated to hventories; p/ootss describes how cqsl infonnation is accu' mubted, i.e., costs are accumulatedfor each procossor deparlment in the laclory. O4-5. Prime costing systems albcate only lhe prime costs, direct material and direcl bbor, lo hventory accounts. Direct costing syst€ms, abo called variable costing syslems, albcale the variable manulacluringccts, direcl materbl, direci labor, and variable factory overhead lo lhe inventory accounts.Absorpticn costing systems albcate lo Ilvenlories parl or all of tixed frtory overhead, in addiliooto all varlrble manufacluringcosts. Actual costing m€asuros product costs at actual 04€. hislorical arnounts, while standard ceting measures product costs by ueing predetermined arnountsol resourceg to be coosurrnedand predeterminedpriceso{ those resources.



62 Q,4-7. Preess costing aicumulates costs fot oach pt@olts or department in the ladory end rnah' tains detailcd recordr and calculationr of the cotl of *ork h preest. Job order cting accumulales cotr lor oach irb, lc', balcfi' or contrasl and mEhtains detBilsd records and calculalbng od tho cost! of tork in prceas. BacHlush €st' ing accumulal.r coltr by working backwards through ihc availablc inlormatiqr afler producticn is cornpleted (i.e., at the end of the accounl' hg pori



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Chapter 9



218 I



P9.5 APPENDIX (1)



Fifo:



Date



Quantity



Unit Cost



Inveniory



lssued



Recelved Total Cost



Quantity



Unit Cost



Total Cost



40() s19.50 $ 7,800



600 $20.00sl2,ooo



5 12



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15O 350



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5OO 150 2AO



3,O0O 6,825



19.50 21.50



975 7,525



21.OO 11,55O



28 31



Balance



20.00



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975 19.so 50 35O 21.50 7,525 5OO 22.OO 11,000 50 350



550



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22.OO 11,0OO



22 26



Total Cost



150 20.00 3,000 4OO 19.5O 7,8OO 35tO 21.50 7,525 18,325



7,525



t5 18



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75O 32O.OO$15,OOO $15,OOO



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Ouantity



22.OO 11,000 21.0O 3,150



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19,500



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22,550



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Chapter9



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221



P9-6 APPENDIX (1)



Cost of the ending inventory under the fifo method when a periodic inventory system is used:



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Cost of the ending inventoryunder the lifo method: (a) When a periodic inventorysystem is used: 20ounits @ $tO = S2,000 100 @ 11 = 1,100 $3,100



(b) When a perpetualinventorysystem is used: Received Date



Quantity



Unit Cost



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Quan. tity



Unlt Cost



lnventory Total Cost



Jan. I 12



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100 9r r 1OO



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1,700



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Balance



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July 15



Unlt Cost



2OO $rO l OO



Feb. I April 16



Quantity



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r +



Chapter 9



222



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P9-7,APPENDIX (Continued) (b)



First-in, first-out method: Received



Dste



Quantity



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Ouantity



Unit Cost



500



s5



31



700



5



1,200



Total Cost



Quantity



Unit Cost



2,000



35



$2,500 t,500



5



7,500



800



5



4,OOO



8OO



s5 310,000



15



Feb.2



Inventory



6



3,500



7,2OO



15



600



28



200 700



5 5 6



3,000



8



12,0OO



t5 31 1,900 15



30



7



5



S e,ooo



6



7,2OO



11,2OO



20o 1,2OO



5 6



1,0oo 7,2OO



g,2oo



s00



6



5OO 1,5OO



6 g



6 I



3,000 800 1,4OO



800



8



6,40O



13,3OO



$10,ooo



1,2OO



s00 to0



DOr.2



Balance



1,0oo 4,2OO



Mar.2 1,500



Total Cost



3,OOO 3,OOO 12,0OO



.ts,(x)o



I



11,2OO



600



8



4,800



600 l,goo



I 7



4,800 l3,3OO



19,1(X)



600 100



8 7



4,8OO 700 1,800



7



t2,6OO



700



7



4,900 1 , 1 0 0



7



7,7OO



rI - tr t



Chapter I



224



P9-7APPENbIX(Concluded) (c) Last-in, first.out method: Received



Date Jan.2



Quantity 2,000



Unit Cost



lssued Total Cost



Quantity



Unit Cost



5OO



$5



31



700



5



1,200



6



600



28



600 300 1,5OO



g



600



31



15



30



8OO



t,goo



Unit Cost



2,OOO



35



$2,500 1,5OO



5



7,5(X'



800



5



4,OOO



8OO 1,200



5 6



S 4,0OO 7,2OO 11,200



800 600



5 6



s00



5



2,500



500 1,500



5 g



2,5OO 12,OOO 14,5OO



500 900



5 8



2,5OO 7r2OO



g,7OO



5OO 100



5 g



2,500 800



3,300



500 100 1,900



5 I 7



2,500 800 13,300



7



16,600



500 100 7,2OO



5 I 7



2,500 800 g,4OO



11,7OO



5 8 7



2,500 800 3,500



6,900



3,50O



6 5



3,600 3,6OO 1,5OO



12,000



15



Apr.2



6



8 8



4,800 6,400



13,300 7OO



70o



7



7



Total Cost



Quantity



7,2OO



15



Mar.2



Total Cost



S5 91O,0OO



15



Feb.2



Inventory



4,900



4,9OO 500 100 500



Balance |S|O,OOO



4,000 3,600



7,600



(21 Average



Fifo



S a l e s ( 5 ,5 0 0 u n i ts @ S IO) s55,000.00 s55,00o Cost of goods sotd: Purchases ........,... $42,5OO.O0 $42,500 Less inventory, Aprit 30.......... 7,805.60 7 r7OO s34,694.4O s34,gOO Gross profit s20,305.60 939199



Lifo $55,oOO $42,5OO 6,8OO



s35,7OO



El e,gqg



CGA Canada (adapted). Reprint with permission.



I



225



Chapter I



CASES



c9-1 (1)



(a) Topp Desk Gompanywould be attempting to minimize total setup cost and total carrying cost (b) Variablemanufacturingcosts per unit t



DirgCt



matgfials.'..............r...........r..................r.t..r.....o...



s30



14 Variablg factory overhead..,..........................,.,.,.......*.... 6 Total variable manufacturing cost per unit........ $50 Numbgr of dgsks destroyed,.........,r.,..............,................... x 1 2 DifgCt



|abOf.............................r........'..r..'rr....'.........r.......



Total setup cost..................r..r.r..r....r.,r'..r.......................r...



s600



Optimum production run: 1



=



$50' x 10.870



21,600,000



{4F66p6o = 2,ooo desks rVariablemanufacturingcost per unit (c)



Number of production runs per yean Annual demand



Optimumproductionrun



(21



=



€#



= 9 Productionruns



(a)



The following factors affect the desired size of the safety stock for ' any Inventory itemr (1) Variabilityof product demand (21 VariabiliU of lead time (3) Stockout costs (4) Carrying costs



(b)



The minimum safety stock level that could be maintainedwithout being worse off than being unable to fill orders equal to an average daytsdemand is the level at which the safety stock carrying cost equals the cost of a stockout, i.e., Stockout cost Per unit carrying cost



s2,295 S50 x 1O.B%



=ffi



=42sdesks



Chapter 9



226



c9-2 (1)



1



Equipment MaintenanceDepartmentcosts:



SalafieS (2 X 5 X $91 '.........r......'...............'..!...'..' $ 90.00



Employeebenefits($90x 2O%1.............-..'.......'. 1 8 . 0 0 $108.00 Production department costs: $rgz.so Salafigs(5 X 5 X $7.501.....................r........'........ Variablefactory overhead: Direct labor hours base (25 x $2.75).-..'.....-.... 68.75 Machinghours basg (1 x $5).....,.,-..-............,r. s.00 261.2s 150,00 - $50)....'..........'.............'..r..'.. Direct materials($ZOO s519.2s Estlmate of Model JE 40 setup costs...........,..........-,. Explanationof costs: (a) The full cost of the maintenancesalariesand employeebenefits ls included becausethe $1o.8o St9.0o+ ($9'00 x20%17incurred per labor hour is incurred solely for the purpose of effecting the changeover. (bl The other costs of the EquipmentMaintenanceDepartmentare not inctudedin the estimate becausethey are fixed costs of the department and will be incurred regardtessof the maintenanceworkers' activities. (c) The satariesof the 5 productionworkers for the full 5 hours each are included in the setup cost becausethey must be in attendance all of the time, though they are neededonly part of the time. lf the workers could have been assignedto other iobs during the changeover,then the full amount would not be charged to setup. (d) The variablefactory overheadcosts of the production department applled on the direct tabor hours base are incurred as a function of the direct labor hours; therefore,a full 25 hours of cost are assigned to the setup cost. (e) The variable factory overhead costs of the production department applied on the machine hours base are incurred as a function of the operation of the machineryltherefore, I hour is assignedto setup cost for the t hour the machineryis used in testing. (0 All production departmentfixed factory overheadcosts (both those applied on the basis of direct labor and those applied on the basis of machlne hours) are not included in the setup cost becausethey would be incurred regardlessof the activity in the departmenL (g) The net materials cost of $f SOis included because it representsthe portionof the materialsused for the setup and not unsalvageable for the production of a salable desk.



I I !



I



Chapter 9



\,



C9-2 (Concluded) (21



' ! , b '



cg-3 (11



Circumstancesnecessaryto shift raw materials inventory carrying costs (a) Reliabilityof the supplier.Will the supplier ship products on a mone rigoroustimetable and be willing to keep inventorywithin its own storagefacilities?



.



lf;:$ff""1H;i*:;iili,g,""""XXiii;i1""ff'il# traet terms.



(c) Carefulcontrol of inventoryrequirements.Are production schedules clearly defined to reduce the potential for stockouts?



*



>



The cost items that would be included In an estimate of Pointer Furniture Gompany'scost of carrying desks in inventory include: (a) All costs related to warehousing and handting the desks In Inventory that vary in amount by the number of items stored. The cost of the funds committed to the investment in inventory. tb)



\



!



(21



Gircumstancesnecessaryto shift finished goods inventory carrying costs to the customer include:



(a) (bl



b E



227



theriskor i.,?::[FT[il:;:?H'i;ffill=ll?lil?ll#:,'take



Closer production planning.Gan production schedulesbe refined to such an extent that delays in the sale and distribution of the finished inventory are minimized? (c) Garefulcontrot of inventoryreguirements.Are customer orders carefully monitoredand anticipatedto reduce the probabilityof finished goods stockouts?



CHAPTER10 DISCUSSIONQUESTIONS OlO-1.



010-2.



010-3.



Qt0-4.



Ql0-5.



. O10€.



010-7.



Ql0€.



The purpooecil a JIT system is to minimizethe levelc of raw malerials and work in process invcntory inverlmcnt!, while improvingthc werall rnanufacturingpr€oss. Thc htent b to pull inventory through the syslem mly as il is required. JIT seeks loleliminate all formr of wasle, including produclion losses such as defects. Successful reduclion of these problems contribules lo producl guality, and, so, is a part ol TOM. To avcid inventory buildup, the entire JIT system shuts down whenaver defecls are found; so to achieve a good rale of flow, lhe number of defects must be srnall. Theoretbally, h an ideaf JIT system the EOQ i! o.re; each time nrcre oulput is needed, one more part or unil is produced. Althougha zero inventorylevel is unattainable, JIT stimulates improvernentin the environmenlal condilions lhat cause inventory buildup, such as long seiup times, high selup costs, p@r guliy, and poorly bahnced work loads. The relalbnshipbetweenvelocityand WIP levels is an inverse relationship;doubling the vekrcity m€ans lnlving the WIP level, provided lhe outpul rate is held constiant.This is sirnilar, bul not irdentical, to the relationshipexpressed in lhe familiar inventoqytumover ratio used in f inancialstatem€ntanalysis. The stralegic advantageol improvingvelocity throughout lhe company, lrom product researchand devekrpmentto shipping,is that lhe company can then respond taster to any changing cuslomer need or to an opportunity for a new or altered product. Reducingthe level of WIP also reduceslha maximum numbsr ol detectives,il the defects are c{ a kind that will be discoveredal the nexl work staiion afler lhe unils are held waiting belween slalions. lf .l00 units are wailing b€tw€enstations,up to lOO detectivesmight be producedbefore the problemwould be dis.



228



covered; il 10 units ars heH waiting, no rpr. than 't0 delectives could b. produced before lhe prcblem would be discovered. Q10-9. A blanket purchasc order ir an agreement between buycr and seller slaling lho total quanlity exp€cled to be needed over a period ol three or six rnonthr. Ot0-10. In many JIT work cells, these distinctionrbetween dirrl and indirecl labor and between producingdeparlments and ssn6 service lunctions--do nol exist, because the sarne workers (lhe leam assigned to the cell) perlorm all these tasks. Q10-11. In bacldlushcosting,the work in processinvenlory accounl is not adjusled lhroughoul lhe period to rellect all lhe cosls of units in process;thore are no delailed subsidiary records mainlalned for work in process; and a single accounl may be used lor both raw malerials and work in process. 010-'12. In bacKlush costing, lhe rnaterialsand work in process inventoryaccounts mighl be cornbined into a single account because malerials might be pul irnmedialelyinlo productionwhen lhey are received. 010-13. Posldedusiionis the sublraslbn lrom the work in process accounl cil sorne or all elements d the cosl of completedwork, afler the work is completed. Q10-14. The periodicinventorymethodused by many m e r c h a n d i s i n gc o m p a n i e si s a n a l o g o u sl o backllushcoslingas used by manufacturers. 010-15. lf a backflushcostingsystemexp€nsesall conversion costs to the cost of goods sold account, tho corrgct arnounl of conversion co.sl is included in hventory accounts by making an e n d - o l - p e r i o da d j u s t m e n to f t h e i n v e n l o r y accounts' balances.The oflsetling entry is an adfustmentof lhe cost of goods sold accounl. The corracl amounl of sonversioncost to be includedin each inventoryaccountis estimaled when invenloriesare physicallycounled.



I



I



Chapter l0



EXERCISES



' b >



\'



v



Elo'lrhe:::ffi: :llt"ir:1H'""J,rr:ii'.'r'i;l:n',"r'J,'"ll"liiilS tollows: Carryingcost savings = = = =



2Oohr reduction in averagevariabtecost of Wlp ZOohr 3O7ox past averagevariablecost of Wlp . 2 x . 3 x ( 1 Or 3 O Ox S B O ) $14r4o} Savingsin cost of defects = $25 x reductionin numberof defectiveunits (reductionin (numberof out-ofnumberof = S25 x defectiveunits x control conditions producedper not discovered undiscovered immediately) out-of-control ondition) = $25 x l3O%x 3oO x S%l = $25 x 4.5 x 2QO = $22,500



\-



x



(1/3 x 600)



ElO-z The average lead time will be 26 days, calculated as follows: Re d u cti o n o f ve n d o r l ead tim e = 116x 18 days = 3 days Be ca u seth e ra te o f o utput will be unchanged,a r eduction of W lp to onethird of its present level will triple the velocity. The average order will then remain in wlP only one-third as long, saving two-thirds of time presently being spent in WIP: Reduction of time in WIP = 213of present time in Wlp = A3 x i2 days = g days New lead time = present lead time - reductions = 26 days



i



--



IH::iJffx""n.;:H: :ffs,:Tlillff :'xiJ":"J3::i:ff'.:il"i,i1 components of total lead time are known, as in this exercise, then the ne w l e a d ti me ca n b e calculatedby adding all its components:



( 5 / 6 x 1 8 ) 2+ + ( 1 1 3 x 1 2 ) + 2 + 3= 1 3 + Z + 4 + Z + 3 = 26 days



Chaptor 1O



2g



calculatedas follows: EIO-3 The expeited annualsavingsis S2,2OO,OOO, Doublingthe velocityof all tasks,from receipt of order to shipmentand from ordering materialsto issuing materialsto production, will reduce WIP and materials inventoriesby half' therefore: . Reductionin materials carryingcosts = Z}ohx materials reduction = 2Oohx(112 x $3,0O0'OOO) $3OO'0OO Reductionin wlP carrying costs = 2oohx wlP reduction = 2|oh x (712x $5,OOO'O0O} = $5OO,O0O This changewill also reducecustomerlead time from eight weeks to four weeks. Becausecustomersare willing to wait up to five weeks for There will no longer shipment,alt shipmentscan then be made-to-order. be a need for finishedgoodsinventory.Oncethe existingfinishedgoods inventoryis liquidatedby salesor scrapping,the annualsavingsfrom not carryingfinishedgoodswill be: Reductionin finishedgoodscarryingcosts = zloh x finishedgoodsreduction = zloh x (l OO%x $7'O0O'OOO) = sl,400,oo0 Totalsavings= s300,000+ s5o0,0oo+ sl,4oo,o0o - $2,200'OOO flhis exerciseis basedcloselyon an actual case of a partialJIT implementation.The name of the companyand dollaramountshavebeen altered.) E10-4 (1) (al



Equivalentproduction= 4,500+ (.5Ot-2gl = 4,51Ounits; s 3 O O , 7 4 O_ $66.683 per unit 4,51O



st,o9l?oo = (b) $i66.067per unit r-' 4r5OO



(c)



units started = 4,500 + 2O - 24 = 4,496 units;



s3oo,o0o= 4,496



(2)



566.726 per unit



5 6 6 7 , b eca u se 2 O x .5 Ox 5 6 6 .683 = $666.83. 5 6 6 7 , b eca u se 2 0 x .5 o x 5 6 6 .667 = 5666.67. S 6 6 7 , b eca u se 2 0 x .5 o x $ 6 6 .726 = $667' 26'



.\-



. -



i



-



Chapter l0



231



EIO-4. (Goncluded| (3) Consideringthat the results of requirement (2) wenethe same (to the nearest dollar)for all three methods,then method (il (b) would be recommended becauseof its ease and simplicity. Method-tii ttl is a ctose second choice,also becauseof easeand simpticity.The detiils of method (11(al may not be iustifiable in these circumstances. (41 Prccessingspeed is very fast, with the result that work in processinventory levefsanekept to a very low level-both in absolute terms and in ielation to totat productionactivity for a month. Elo-5 JournalentriesinvolvingRrp and/or finishedgoodsare: Raw and In Procgss............t.r....!..r!.......rr........,....... Accounts Payable .r......'................,.........r.o......



456,OOO 456,OOO



A-summary entry for all receipts of raw materials during the period. when direct materials are used, no entry is needed, be-ause the



materialsremainin RlP.



Finished Goods......t.....,..r....-...,................,...o........r Raw and In Procgss'...'.....'...r'r.................r....,.



4SSTOOO



455,000



To backflush material cost from Rfp to finished goods. This is a postdeduction, The calculation is: Material in May I Rlp ba1ance...,.....,.....,.,.S 19,OOO Ma te ri a l re ceiveddur ingMay.................... 456;OOO s475,OOO 2O,OOO $4SSpOO



Ma te ri a l i n May 31 RIR per physical count A mo u n t to b e backflushed..........



Co st o f Go o d s S o 1 d ...........................r ..........,........... 461r OOO F i n i sh g d Go o d s............,......................D..,......... 46i To backflush material cost from finished goods to cost of goods sold. This is a postdeduction. The calcutation is: Material in May I finished goods r......,....,. S 16,OOO Material backflushed to finished goods.... 4S5,OOO :_--



Material in May 31 finished goods, per



$471,00O



physical count..............r..........,.............



IOrOOO



A mo u n t to b e b a ckf!ushed.............r ......,..,....... $461,OOO



L



r OOO



,



I



i



Chapter l0



232



Eto-5 (Concluddd) COSI Ol GOOdS SO1d...t..............r......o.............'....t...'.



2,300



Raw and In Procgss.....o..... Finlsh



gd



Good3.....tt.t...........t""t""ttt"t""ttt"tt'



300 2,OOO



Conversioncost in RIP is adiusted trom the $2,3OOof May I to the at May 31. bonvsrsion cost In finished goods is $2'OOOosgmato aOjusteJtrom ttre $Sr5bOof May t to the $4'5Oo estimate at May 3i. The offsettlng ontry ls made to the cost ol goods sold account' where all conve*ion costs weno charged during May. El0-6 The Journalentries InvolvingRIP and/or finished good! 8r1o: 222'OOO '...... Baw and ln Ptlc8ss.........o......' Accounts



Payablg.....t""'r""'ot"""o"""""""""



222,OOO



A gummaryontry for all receipts ol raw materials during tho period. When direct maierials atu used, no entry is needed, becausethe materialsnBmainIn BlP. Finishgd GOOd3...r..r.r...............r........r....r....r......."r.. RaW and In PfOCSSS..............i....'........r..o.....'.!.



221r5OO 221 ,5OO



To backflush material cost from BIP to finished goods. This is'a postdeduction.The calculationls: MatgriatIn Jung I RIPbalanceo..'....r......i.I I O,5O0 MatgrialrBcEirgdduringJune r...............'. 222,AOO $232,5O0 11,OOO Material In June 30 RIR per physicalcount Amount to bg backflushlgd...........'.......""' s22t,5OO Cost of Goods Sotd.............................-..............r.tt.. 223t5OA 223r5OO Finishgd Goods....r.....o...........i.....................'... To backflush materlal cost from finished goods to cost of goods sold. This ls a postdeduction. Tho calculation is: Material in Juna I finished goods............' $ 8rO00 221r5oo MaterialbackflushedfromRlP.""""""""'



s229,500 Materialin June 30 finishedgoods' per



o,ooo physical cou!1t.......,....r,..............r....'.-.'. Amount to be backflushed ..........'....o..r'...' s223,5OO



I



I !



Clppter 1O



2s3



Elo-O (Concluded| Raw and In Process..........r.....................................r Finishgd Goods.....................D........r...r,.....r...... Gost of Goods Sold ;..........,.,..................,.!....r..



500 300 200



Gonversloncost In Rtp ls adjusted lrom tho $lr2oo of June I to the $lrT0oostimate at Juno 3o. convorsion cost in finished goods is adjustedfrom the 94rooogt June I to the $3rzoo estima.-te"i .1u"" 3o. The offsettingentry la made to the cost of goods sofd account, nfiero all conversioncosts wero charged durini June. Elo'7 Journal ontriss Involvingthe Rlp accounta arl': Raw and in Procgssr................r....................r.......... 20O,OO0 Accounts



Payable .r....'......r............r...r,,or.......,.



2OO,O0O



A-summaryentry for all receipts of raw materials during the period. when dlrect materiafsaro used, no entry is needed,belausJtrrev remaina part of RlP. Finlshed Good8....................r..........r.........o.....o........



Raw and in Process



rt



aa ao aaaaaaaaa



199,8OO



aa



199,8O0



To backflushmaterialcost from Rtp to FinishedGoods.This is a postdedugtion.The calcutationis: Material in March I RIP balance s I,OOO Materiaf rcceived during March,..........,..., 2OO,OOO s2O9,OOO Material in March 31 RIR per physical count 9,2OO Amountto be backflushed.,.....,...,,,........,. Si99,gOO Raw and in Procgss...........................................o...o, 3OO Cost of Goods So1d............,.......,........,.......,..,.



gOO



conversion cost in RIP is adjusted from the $1,ooo of March 1 to the $lr3OO estimate at March 31, The offisetting entry is made to the cost of goods sold account, where all conversion costs wene charged during March.



rI I I I



Y



-



-



)



.



:.



1 I



; !



ChapterlO



El0-8 Journalehtriesinvolvingthe RIPaccountsare: 367'000 Raw and in Process............ 367rO0O AgcountsPayab|e.r............,.,........................... A summaryentry for all receipts of raw materialsduring the period. When direct materialsare used, no entry is needed,becausethey remain a part of RlP.



. e



.'



365r4O0 Finishgd GOOdS,..............'.......o..........r................o....



Raw and in Process..,..



aaaaaa



a aoaa



365,4OO



at



To backflush material cost from RIP to Finished Goods' This is a post-deduction. The calculation is: Material in April I RIP ba1ance..................$ 291600 Ma te ri a l re ce i ve d d u ringApr il.........,.r ....... 36710OO $396,6O0 31,2OO Material in April 30 RIR per physical sount A mo u n tto b e b a ckf|u s hed........................ S365,4OO : Raw and in Process..........,...r,........,.. Cost of Goods So|d.,..... .........,..........



y



4OO 4OO



Conversion cost in RIP is adjusted from the $1,4OOof April I to the S1,8OOestimate at April 30. The offsetting entry is made to the cost of goods sold account, where all conversion costs wene charged during April. EIO-9 Journal entries involving the BIP accounts are: R a w a n d i n P ro ce ss............ Accounts Payable ..............



'



_,



246.000 246,OOO



A summary entry for all receipts of raw materials during the period. When direct materials are used, no entry is needed, because they remain a part of RlP. Cost of Goods So1d...................... ,........o...,. 24Z.OOO Raw and in Process........,.,. 247r0OO To backflush material cost from RIP to Cost of Goods Sold. This is a postdeduction. The calculation is: Ma te ri a l i n Ma y 1 R IP balance., Material received during May........ Ma te ri a l i n Ma y 3 1 R IR per physicalcount A m o u n tt o b e b a c k f l u s h e d . . . . . . . . . .



$ 11,000 246,000 $257,OOO lO,OOO S24Z,OOO



v



l ,/t



t-



1 ) V



I >-



I I



Chapter 10



235



EIO-9 (Concluded| ' Raw and in Process ,..........,...,.r. Cost of Goods So1d....,.......o,.......



1



800



800



conversion cost in RtP is adjustedfrom the $lr3oo of May I to the $2'1oo estimate at May 3r. The offsetting entry is madetb the cost of goods sold account,where all convercioncosts were charged during May.



Elo-lo (1)



The most recent purchaseinvolveda quantity greater than the total materialsin ending inventories,and that purchasegives a cost of materials of $42o'o0o/l,4oo, or $3oo per unit of output; t6erefore, Materialscost of finishedgoodsendinginventory = 50 units x $3OOper unit = $15'OOO



(21



The conversioncost per unit is calculatedby dividingthe total GoDV€rsion cost by (al the number of units startedrlb) the number "o.pl"t"d, or (cl the number completedplus the number oi partially "onu"tt"i units in the RIP ending inventory(not an equivalentunits calculation|: (l) $eSOrlSO + 3,OOO = $96.72conversioncost per unit (Ot $29Orl6O-r grlOO= 993.60conversioncost per unit (c) s29o'l6o + t,f 2o = $g3.ooconversioncost per unit



(3)



The three possibleamountsfor the conversioncost of the 5Ounits in finishedgoodsendinginventoryare: 5O units @$96.22= $4,93Oof conversioncost 5Ounits @$93.60= $4,690of conversioncost 5O units @S93.OO = $4,650of conversioncost



(41



b



L-owest= g15,OOO materials+ g4,650conversion= $19,650 Highest= $l5,OOomaterials+ $4,g36conversion= btg,ggb Dollardifference= $19,936- $19,650= $1gO Difference,to nearestl/1O percent= $1gO* $19,650= O.9%



7-1-



Chapter lO



2ffi



810-1|



r



(f l



A $3OOmaterialscost per unit was calculatedin requirement(lf of the pneviousexercise; therefore, Materialscost of RIP ending inventory= 22Ounits x S3OOFer unit = $66,OoO



(21



The three possibleamountsfor the conversioncost of the RIP ending lnventoly ol 20 units, SAohconverted,are: x $96.72 = $967.2Oof conversioncost 2O units x SOoh 20 units r SOTo r $gg.0O= $9gOof conversioncost 2O units x SOoh x $93.00 = 9990 of conversioncost It seems inconsistentto assign 50% conversioncosts to RIPwhen the units in RIPlyere countedas whole physicalunits in the denominatorof the conversioncost per unit calculationin requirement2(c)of EIO-IO, and when they were not countedat all in the denominatorof the calculaUon in requirement2(b)of El0-10. But the total dollardifference assignedto RIP is immaterial.Whateverthe amount of conversioncosts assignedto RIPand finished goods,the remainderof total conver':sion costs simplyremainsin cost of goodssold.



(3)



Lowest = $66,000 materials + S93Oconversion = $66,930 Highest = $66,OOOmaterials + $S0Z conversion = $66,967 Dollar difference = 566,967 - $66,93o = $37 Difference, to nearest 1/1O percent = $37 + $66,930 =.1oh



\



y \d



- t s



--



I



\-



L 1 l>



Clpptsl0



PROBLEMS



t I t



I



Pto-l (11 The erpected annual savings 8no$72OrooO,consisting of $gg4,ooo csnyIng costs savings and $336'O00savings in the cost of defects, calculateb ag follour: Carrying cogt savings = = = =



-



30% r redustlon In avoriagovariable cost of Wlp 3Oohr 4Ao/or past avoriagovariable cost of Wp ,3 r .4 x (4Or 2OOr $lOO1 $384,0OO Savingsin cost of delects = $60 r rsdustion in number of defeetive units



b



!



= $6O x



(reduction in number of defective units produced per undiscovered flaw)



= $60 r (4O%r 2OOr 2Oo/ol = $60r 19r350 = $33610OO



(2',



(31



x



(numberof flaws not discoveredimmediately|



x



(114r 1,4o0l



Likely benefits that are not assessablefrom the information given includs the following: (al Faster cycle time resulting from the higher velocity of VUlp.(Because the rate of final output will not change,velocity wiil change'inversely with the changein WIP levets.)The faster cytle time will imptove the speedwith which orders can be filled, thul increasingcusio;ne1. saUsfacUonand perhapsincreasingperceivedprcduct value so that prices can be raised(or price cuts delayedoravoided|. (bl lf, as a rasult of the shorter cycle time, total lead Ume becomes less than the Ume customensare willing to urait for an order, then the companywould no longer need to maintain a linished goods inventory. This possibilitywoutd resutt in additionalsavings in ffoor spaco and other Inventorycarryingcosts. flhe value of the floor spacg ireJo up by eliminating 4o7oof Wlp storage lc not an addltional benofig Inventory cirrying cosfi includa etorage costs, so the valua of the floor space is incluoed in the cirrying cJst s""Ingr calculatedIn requiroment1i;.| Costs and other negativesto be comparsd with (al Tho Increasedliketihoodof shutdowns duethe savings inctude: to work l6cations being gtarved for WIP; lower WIP levels at each staiion nepnesentlower safety stocks, so stockouts are monelikely at all toca-Uons, (bl The cost 9f -startinga larger nu-u"iof baiches oi lot" into produquon, which incrudesthe iost of processing.o* ;;* orderc, pro_



2fi



Chapter l0



Plo-l (Concluded) duction orders,and material requisitions.flo reduce averageWIP size, either smaller batches must be started at shorter intervals, or protracted stockouts must be allowed to occu6 otherwise, the averagssize of WIP will not drop.l (c) The cost of handlingmore loads of materials.lf lot sizes are small enoughto require only one load per lot both before and after the chanCe,then a larger number of lots will result in a largertotal numberof loads. (dl The cost of performinga larger number ol setups to permit running a larger number of batches or lots of smaller size. ldeally,as part of the JtT implementation,setup cost will be driven down to eliminate this problem. Pl0-2 (1) Protechcould achievean averageleadtime on these ordersof 42 days' calculatedas follows: Reductionof time in WIP = 314of presenttime in WIP = 314r (360 days + I O! = 314x 36 days = 27 days Reductionof vendor lead time = 113r27 days= 9 days New lead time = presentlead Ume- reductions = 78 days - 127days + 9 days) = 42 days Note: lt is not stated that Protechdefines WIP and WIP turnover in a way that excludesthe two days spent in receivingand the three days spent in linal inspection.To check that the averagecycle time of 360 days/lO, or 36 dalrs,does excludEthose steps (sothat there is no double-counting), note that a cycle time of 36 days,when added to the other intervals mentioned,givesthe stated total lead time of 78 days: 6 + 27 + 2 + 36 + 3+4=78. (21 The advantagesof shorter lead time inctude: (al The value of the floor space freed up by eliminatingthree-foudhs of WIP storage, (b) lmprovementin the speed with which orders can be filled, which should increasecustomer satisfactionand perhapsincreaseperceived product value so that prices can be raised (or price cuts delayedor avoided). (c) lf the new 42-daytotal lead time is less than the time customers are willing to wait for an order,ttren the companywould no longer need to maintaina finishedgoodsinventory.This possibilitywould resuJtin additionalsavingsin floor spaceand other inventorycarrying costs



.-



-



: -



"



:



-T



I



I i



rc



dnpW'10 I



Plo-2lConcludcd| Costs and other negatlver to bc compatrd rxlth Ste savlngs Includa: t3l (al The Incrsaged llkellhood of rhutdonmr duc to work tocations belng gtaryed for WIB lower WIP levelg rt cach ctatlon repnosontlower safety rtockr, so stockoutr erc mort llkely at alf locaUom. (bl Tha co;t of startlng r larger numbcr of bgtchee or totr Into producUon,wlrlch.lncludcr thr cort of pmccedng moncwork ordera, productlon ordan, and mgtorlal nqulgldonr (Beduclng averagc WIP rlza generally rcqulrca rtartlng rmaller batcher gt ghorter Intervals.) (cl Thc cogt of hendling morr loadr ol materlalr. ll lot sizac arc srnall enoughto rcqulra only onc load pcr fot both befgrc and after the change,then a larger number of lotr wlfl rosult ln a larger total numberol loads. (d) The cost of performlng e larger numbcr of eetups to permlt running a larger number ol batchcc, or lo'tr, ol rmaller 3lze. ldeatly, as part ol the JIT lmpfementatlon,lotup cogt wlll be driven do*m to eliminatc thlr problem. (el The tmc and eftort that may bc rcqulrcd to Induce yendors to reducc thelr lead Umc by onc-tlrlrd.



Pt o€ (1) (a) RawandIn Procasg



85O,OOO



AccOunts Payable ........o........................r.......r.



(bl



A summary entry lor all receipts of raw materials during the perlod.When dlrect materlalsaro used, no entry ls needed, becausethey rrmaln a psrt of RlP. FastoryOverheadGontrol l3,ooo Supplles ,..or.......



lndirest materials ara rccorded as used. (c)



(d)



4OO,OOO AcCru gd Payroll ................r...o.........r.....r......... 4OO,OOO ACCrugd Payrott .o...................r..r......................... 4OO,OOO r.ro....r...r....r-...r....r..oo.r........r.o..aa..............



4OO,OOO



cost ol Goods sold -......r.r........oo............o...,,.,..... 6O,OOO Factory overhead contro|.....D....o..,,,................... 120,OOO MarkeUng Erpenses Control ..................o.....o...o. l3orooo Admlnlstrauvg Expensgg contro|,.o............o.,.,... 9OTOOO P81rO11...............ro.rr..,...



(e)



13,OOO



Pa1rro11...........r.D....o..r...........D.rr..............o....o........



Gash



\



8so;ooo



4OO,OOO



Dirost labor ls crpenaed to thc cost of goods gold accounL Factory Overhead Gontrot......r........,.....t....,..r..,..6gi'OOO Accumulated DepreclaUon.,.....D..........,...r...... Oggrooo Prepald In9urance...............................o........,.. t3'OOO



r I



Chaptor l0



24)



PlO€ (Continuedl (fl FactoryOverheadContro1.o,................,......'. 83,OOO 54,OOO Cash 29,OOO AcCountsPayab1e................o.................... 897,OOO bl CoStof GoodsSo1d..............



897,OOO



FaetoryOverheadGontrol



(hl



Overheadls erpensed to the cost of goods sold account. 844,OOO FinlshedGoods 844,OOO Raw and In Process......r.. To backflush material cost lrom RIP to finished goods. This is a postdedustion. The calculatlon ls: Materlal in Juno 1 RIP balance '.'r.......r.. M a te ri a l re ce i ve d d u ri n gJune...............



$ 4OTOOO S5Or OOO $89O,oOO



Material In June 30 RIR per phyaical COUllt....r................r........o.......



46r OO0



Amounttobebackflushod.........'...........S844.OOO (il



Gost of GoodsSo|d,...........,..............'..r....,..' tt** 852IOOO



Finishgd Good3......oo....o...................o...t..'t



To backflush material cost from FinishedGoodsto Gost of Goods Sold. The calculation ls: Materialin June I FinishedGoods.,r....o $ lgor0oo 844'OOO Material cost transferred trom RlP..'..... slr034,OOO Materialin June 3Ofinishedgoods,per physical CoUtlt.....'r'......r.................'...



I 82tOOO



Amount to be backflush€d'......'..'.......... 3 852'Ooo 0l



Raw and in Procgs3...o.....,...o..r.....r.....,......... Cost of Goods So1d...,,....r..t......'..r..r..r........... Finishgd Goods.....'....!..........r...r.....".....r..



3oo 2r7OO 3IOOO



Conversion costs In tho inventoly accounts are adiusted to the estimates made in ths June 3O physical counl For RIR the adiustment is from the $11600of June I to $1r9OOon June 3Q for Finlshed Goods, the adiustment is from the $18O,OOO of Juno I to $177'OOOonJune 3O. The offsetting entry is made to the cost of goods sold account, where all conversion costs were charged during June.



:v \_/



. 242



Chapter 10



P1o-4 (Continued)



.



. -



(gl



656,000 Gost of Goods So1d..,.,.....,........... 656'000 Factory Overhgad Control ....,...................... Overheadis expensed to the cost of goods sold account.



(hl



6t 5rooo Finished Goods........rt..........................r....,....'. 615rooo Raw and In Process................o.................... To backflush material cost from RIP to Finished Goods. This is a post-deduction.The calculation is: Ma te ri a l i n Ma y 1 R IP ba1ance.,...........r .,o.. $ SO,OOO Ma te ri a l re ce i ve d d u ri ngMay..............,..... 620r OOO 5650,000 35,OOO Ma te ri a l i n Ma y 3 1 R IR per physicalcount A mo u n t to b e b a ckfl u shed.......... S615,OOO :



(i)



C o s t o f Go o d sS o |d ....... F i ni sh e dGo o d s...................



-



!



605,000 605,000



,.......r .



To backllush material cost from Finished Goods to Cost of Goods S o ld . T h e ca l cu l a ti o ni s: r v



Ma te ri a l i n Ma y 1 F i n i shedGoods.........,,.. S15O,0OO Material cost transferred from RIP ........... 615,OOO $765,O0O Ma te ri a l i n Ma y 3 1 F i n ishedGoods,Fer p h ysi ca lco u n t..... A mo u n t to b e b a ckfl u shed.......... 0)



160,000 $605,000



R a w a n d In P ro cg ss........,..............,.,....r ....,..... 800 F i n i s he dGo o d s.... 4,OOO C o s t o f Go o d sS o |d .......



4,8OO



Conversion costs in the inventory accounts are adjusted to the estimates made in the May 31 physical count. For BIR the adjustm e nt i s fro m th e $ 1 ,3 0 Oof May 1 to $2,10Oon May 31; for Finished Goods, the adjustment is from the S13O,OOO of May 1 to on May 31. The offsetting entry is made to the cost of S134,OOO goods sold account, where all conversion costs were changed during May.



i



Chaptar l0



I



24a



P l O -4 (Go n cl u d e d ) (21



The three completed accounts are



5t1 (al



(r) 5/31



511 (d) (g) (i) 5/31



Raw and in Process 3lr3OO (h) 615,OOO 62O,OOO 800 37,1OO



511 (h) 0 5/31



Finished Goods 28O,OOO (i) 605,000 6i5,OOO 4,OOO 294,OOO



Gost of Goods Sold -O50,000 656,000 605,000 1,306,200



Plo-5 (f )



I



I



I



Contribution margin of lost sales (2O,OOO units): R e ve n u e($ 1O,g OO - 900 units) ........,......,...........,....... 12.OO s Variable costs: Gost of sales (S4r050+ 9O0),.............................,.... s4.50 Marketing and administrative($gOO- 9O0).,.,........ 1.OO T o ta lva ri a b l gcost ...,.....,.............,.,,....r .....,......., $5.50 U n i t co n tri b u ti o nmar gin..........,....r .,,........................., $6.50 V o l u meo f l o st sa l e s ...,,. r 2O,OOO Total contribution margin of lost sales,...,.....,........ s(l3O,000) Overtime premiums (overtimecost is less than the. additional contribution margin of tost sales): 1 5 ,OOO x $ 6 .5 0 = 597,500 > $4O,OOO s (4O,OOO' R g n ta lsa vi n g s...,r..,............................r ...............,....,.. 6O,OO0 Rental income from owned warehouse (12 ,0 0 0 x .7 5 x S 1 .50)...,.................r ...,..,.,.,......,..... 13,5OO Elimination of insurance and property taxes 14,OOO Opportunity cost of funds released from inventory investment: Investment in inventory $6OO,OOO '1 . 2 0 1 20,000 In te re st b e l o re ta x i .tz \ 1-.40/



Estimated before-tax dollar savings I I



t>



9_q2tr9_



v



Chapter tO



PIO-S(Goncluded) l2l



.



Conditionsthat shouldexist in order for a companyto installjust-in-time inventorysuccessfullyincludethe following: (al Top managementmust be committedand providethe necessary leadershipsupportin orderto ensurea company-wide,coordinated effort. (bl A deQiled systemfor integratingthe sequentialoperationsof the manufacturingprocessneedsto be developedand implemented. Raw materialsmust arrivewhen neededfor each subassembly, so that the productionpnocesstunctionssmoothly. (cl Accuratesalesforecastsare neededfor effectivefinishedgoods planningand productionscheduling. (dl Productsshouldbe designedto use standardizedparts to reduce manufacturingtime and reducecosts, (el Reliablevendorswho can deliverqualityraw materialson time with minimumleadtime must be obtained.



.



*



: -



s



I



I



L



CHAPTER11 DISCUSSIONQUESTIONS



I



!



,l b



Ol 1-'1. Yes, lo lhe exlentthat il is practicalto m€asure the r,ralueadded or the productivityof a worker. However, msasurement of lhe cootribution of each individualis never exacl. Also, a business cannot pay more for materials or labor than the sales price will recover.Materials,workers,and machines produce products and services. There must be a differencebelween revenue irnd oosts consumed;othenrvise, lhe business cannol sun/ive. Otl-2. Productivitymay be defined as the measuremenl of produclion performanceusing the expenditureof hurnanelfort as a yardstick.ln a broadersense,it may be describedas the etfi. ciencywith which resourcasare converledinto cornmoditiesancVorservicesthat people wanl. Ql 1-3. Productivityis importantto a lirm becausehigh productivityreducesthe unit cost ol the outpul a n d m a k e s i h e f i r m m o r e c o m p e l i t i v et.t i s importantto workersbecauselheir real earnings should be increasedwhen productivityis h i g h . P r o d u c t i v i t yi s i m p o r t a n l t o s o c i e t y bEcauseincreasedproductivityenablessociety to gel moro and better oulput from the basic resourcesof lhe econorny. Ql 1-4. To measurelabor efficiency,it is necessaryto e s l a b l i s ha s t a n d a r do f p e r f o r m a n c e T . his means determininghow much a workershould be able to produce,or how much a worKcr6w should be able lo produce.The standardis delerminedby time and motionstudy,lest runs by skilledworkers,and averagesoi past performanceby skilledworkers. Q11-5. The purposeof an incentivswage plan is to inducea workerlo producemore,iesultingin a higher wage and reducedconversioncosl oe, unit. Freguenily,machineoutpul is limitedby worker performance.lt employeeperlormance can be increased,machinecost per unit of produclion will decreasa.An incentivewage ptan m a y a t s o r e d u c el o a f i n g ,i n d i f f e r e n c ea, n d carelessness, and may generatea cost.consciouslaborforce. Ql 1-6. Generally,hourly earnings go up with increasedproduction,and laborco.-st per unit ol outpul is reduced.High productionrates also reduceoverheadcosl per unit of output,which is oftenthe mostsignificant savings. _ Ql 1-7. (a) Duringperiodsol curfailejactivity, it is iust as n€cessaryto keepcosls down as i t i s w h e n o p e r a t i n ga l f u l l c a p a c r t y , Assumingthat the incenlivewage plan r e s u l t e di n g r e a l e rl a b o re f f i c i e n c a yno lowercoslsper unit at full capacily,than the laborcost per unitshouldbe lowerin a slackperiodif the incentive wagescate



245



is conlinued, A shdrter workweek or sorne other syslem of sharing lhe work wouH be indicated. (b) Ordinarity,it is not a propiliour tine to hitiato an hcentive wagr ptan wtrena phnt is operating far below capacity,because the worker is alreadyfearful d sornething less than full employrnent.ll a ,easonable day's work is being receivedfor the going rate ol pay, po.stponementof the . incenlive plan is indicated. However, there is a nalural tendencyfor workerslo reduce output durhg such perlgds,thereby increasingcosls, wilh a lendencylo bring about further reductionin the volume lhat can be soH. With luft e4planalion and underslandhg of thc situation, the incentivewage could be htroduced with a planl operatingat 6006capacity. O11-8. In the straightpieceworkplan, each worker is paiC a certain amount for eadr unit produced, while being guaranteeda base hourlywage.ln the 100% bonus plan, €ach workor L pail0 l



F



il



?



ol l



s Et$rs



EF}FT



;u itOt O



< ' 3 C\|



II I



I



ChWtar ll



219



Ell\5 19A productivityratio = ' 194 standardhours for work done * 19A total actuardirsct and Indirect rabor hours = 943,823 + | $251324 = .422089 Hours neededfor i 98 productionat l gA productivityratio = 198 standard hours for work done -r i 9A productivity ratio = + t422o89



558t51o



..r.rr.........o.....r.r....o.....o...............................



Less l9B total actual direct and indirect labor hourt,...,....:.-, Hours



savgd



............-...o...........r...........r..r...r.r.......



113231204 1r2g4rgg3



38'227



Valueof wagessaved= hours savedr lgB svoriagehourly pay plus labor fringe benefits = 38,221r $i4.7O = $561,949 Employeegainsharingincentivetotaf = vafue of wagessavedr 5OZo= S561,849x SOoh = $28O,g24.5O Gainsharingincentiveper employee= total gainsharingincentiver- number of eligible employees= + 755 employees= $?Z2.Og $28Or924.5O Ef l-6



I batch ...r....,.....,.....,..t.,.............o.......... $60rooo



2 batches..........,...,...........,.............,..,.,, $lgroOO 4 batchgs..o.r.......................r.r................ Sggrcoo 8 batches....................,..........r...,.r.......,. $gorzzo 16 batches............r.,..........,........r............ $zorszg



lgo%of $6Oroogf igorhor Scgroooi iaoy" or $grcooi igow of $3or72o)



E11-7 Bridge Number I 2 4 I



x



Cumulative Average Required Weeks per Bridge 100 BO (1OOweeks r 8O%l 64 (8Oweeks r 8O%f 57.2 (64 weeks x 8O%)



7 additional bridges must be buitt in order to bring the cumulative BVB'age below 52 weeks. I



Y I



I



Chapter | 1



Ell-8 The schedule below demonstrates the 8O7olearning curve that the company expects to experienco in producing the time devices:



(f l



Cumulative x Lots I 2 4 8



'



l2l



Cumulative Average = Time hours 9O.OO 72.OO 57.60 46.08



Cumulative Time 9O.OOhours 144.OO 230.40 368.64



learningfactor,the cumulativetime to produce 8 lots At an SOoh should be 368.64 hours.At a standardlabor rate of $9 per direct tabor hour,the standardamount for total direct labor cost should be set at $3,317.76(368.64x S9). The companyshoutdestabtishthe standardfor direct labor time equal to the marginaldirect labor time requiredto producethe eighth lot' providing steady-stateproductionoccurc after the eighth lot. To assurethat this standardtime will be accurate,the companyshould: (al Keep accurate recordsthrough the first I tots to determine if an EOohlearningfactor is experienced. (bl Continueto keep accurate recordsfor each successiveproduction lot to providea basis for: 1. Conformanceto expectationsabout labor time (i.e.'steady state productionafter 8 lots)' or 2. Determiningwhen steady-stateproductiondoes occur.



E11-9 APPENDIX (1)



Overtimepremiumchargedto productionworked on duringthe overtime hours: Work in ProcgsS...,......,.....,..............,,.......,.................495 Payroll (4Ohours x $91 + (1Ohours x 1.5 x $9)..,,..,.



(21



495



Overtime premium charged to factory overhead: Work in Process (5Ohours x $91........,....,..,......o......... Factory Overhead Control (1Ohours x.5 x S9)........... Payroll.... .........,.....



450 45 495



I I



I



I



I



Chagter ll



25r



E11-1O APPENDIX Subsidiary Record



FactoryOvgrheadControt.........,................. Bonus Pg1|..................,....,.r.................l34.4Ot VaCatiOn P8f.......r........r...r.............o.... G7.ZOz Liability for 8onus..........r............r,........r. Liability for Vacation Pay .....o.r..........;.....



l-



" b



Dr. 201.60



Cr.



134.40 67.20



(9lO + g32l x 40 hours r 4 weeks = S6'Z20 + 5O weeks = 5134 .4O 2 ($fO + $32) x 4O hours x 2 weeks = g?,36O + 5O weeks = 67.20



EI 1.' 1 APPENDIX Factory Overhead Controt lgeS,OOox 2gTo1...,.... 9,8OO Marketing Expenses Gontrol (SgrOOO x Zg;/o1...... 2124O AdministraUve Erpenses Control ($7,ooo x 2a./"1 1,960 Liability for Pensions (S5OTOOO r T.go/o1..,...,,Liability for Other postretirement Benefits ($5o,ooo x 2.3o/o1.....r.r.,,...r......,...... FfCA Tax Payable (950,O0O r T.S%1..........,... Federal Unemployment Tax payable ($50,ooOx .g/ol ....r,....r.......r..................... State Unemployment Tar payable ($SO,OOOx 4.6Tol...,..........ro...............,....., Workerst Compensation Insurance payable



($5o,ooo r l%1.,.,.......,...



.....,......



Medical Insurance payable ($SO,OOO x 4%1..



3r go0 1,150 3,750 400 2r3OO 500 2,OOO



GGA-Canada(Adapted).Reprint with permission. El 1 . 1 2 A P P E N D IX



tl)



The entry to record the payrollliabilitp Payroll ...t..........r.....r....,..................



Employees Federal Income Tar payable .......... EmployeesState Income Tax payaL|o.......,...... Employees City Wage Tax payable .......,.,...,,.... llCA Tax Payab18....................,..... Accrued Payroll!.,...,,......



(21 l



l-



26r7OO.OO



The entry to distribute the payroll: Work in Process,....................,......,..,,........ 18,OOO.OO fac-tory Overhead Control ..,............ Marketing Erpenses Control ............................r... 3,OOO.OO Administrative ExpensesControl.............,....,..,... 4r2OO.OO 1,5OO.OO Payroll



2,5OO.OO



500.oo 267.OO 2rOA2.5O 2 1,430.50



26,7OO.OO



_\



Chagter | 1



252



E11-12APPENOfi (Concluded) (31



The entry to record the employer'spayrolltaxes: 2,394,OO FactoryOvgrhgadGontrol....................'...........--.. ........'....................... 478.80 COntrOl Markgting EXpenSgS ............or'.......... 1 7 1 . 0 0 Expenses Control Administrative



'



FICA TaI Payab19........'..r......'o.'................r.......



TaxPayab|g...............,..,. State Udemptoyment FederalUnemploymentTaxPayabl€....'.".........



2,O02.5O 854.40 186.90



IL



I



ChWter tt



253



L I I



PROBLEMS



P rl - 1 (fl



Present cost



I I



Direct labor per hour $10 Factoryoverheadper dirrct labor hour... 12 $22 -r 5 units per hour = $4.4Oconversioncost per unit



!



t l I



PcrWorkcr por 8-Hour Dey



!



unltrlrromblcd pcr &Hour Day



Plccowort Rrt



Dlrcct Labor



10



szoo



3 80.oo 05,40



rs9s.oo eo.00



110.00 12650 144.00



06.00 00.00 03.00



4ft 50 55 80



(21



b



2.12 z.2o e.3o z4o



Fectory Ovcrhead



Totaf convcrzlon Coot



Convcnbn Cal pcr Unlt



3176.00 101,40 20s.00 222.50 240.00



Sf.4o 1.8 1.12 .3.05



a.oo



lf a producuon rate above 4o units per employeo per g-hour day is noasonablyattainable by the worksr, the employeo oarnings wili increase under the pleceworkproposal,Since convercioncost per-unit decreases with increasedoutput, managementshould favor the iiecework proposal.



P11-2 (t) Boguhr Worksoot Employoe Clrnct D--...l,,ukon, T.--..&hott, J...-..... Totrl dnct



flrclt



b



lncrndyo lflagr Plan



Hourty Rrtr



WorlWork



Totrl l'bor Cort



!O.OO r 4O hn, E 32a0 B.OO r ,3Oh.!. r 320 I.0O r aO hrr e 280 hbor._._._.



- t8.fo r llog



_t&ao



hbor oori Incroor



Incrntlvr Pay Boe Pay (Unltr Producrd r (Boo Frtr r Wort Hourr) + InconUvo prrmlum)



lc.go r 4o hn = 't.to 5.5O r 4O hn 4.5O r 4O hn



-



2t2O



=



18O



#*



r



lO5 r $t,OO= 3to!t t iO5 r l.OO= t0tt 105 r l.0O = t0tl



Totrl dlnct lebor -



Proot:



Totrl Lrbor Coel



= 2g.2% trborcort



OO5 3S!t O45



tl,ql5 Incro'r



Chaptor | |



254



Pl1-2(Gonctudedl l2l



To assess properly the effectiveness of the new plan, it is nocessaryto anallze lts eftect on convorslon costs and not just on direct labor costs. Although dlrect labor cost per unit may rise, this Increase may be moro than offset by distributlng the overheadover a larger Yolume. A comparisonol the two pay plans and their effects on convsrsioncost per unit shows: Totrl bbor Cort



tncsntlvc wagc plan Stnfght hourly ratc



tl,o35 84O



Dtflcrcncc



lrbor Cort prr Ur*t



tA.Zt 5,OO



t .o7



Tctrl Frctory orrorhod



tlr2Oo IJIOO



Ovorlrerd por Unlt



J|ZZ 8.OO



l.El



Totrl Convotrlon Cott



t2,235 2,O4O



Unlt Corwonlon Cott



$1355r 13.002



9_1.09)nct decrearc



152,235+165=$13.55 2 $2,O4O + 150 = $i3.OO The decreasoIn conversioncost is minimat;however,the fact that customels can be s€ryed sooner might be worth additionallabor cost. Based on learningcuryo theory the productivityof the worker might increase sufficientlyto reach a more satisfactoryoutput and cost level.



'



I



t I



L



Chapter 11



255



sisl5 q q q i



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s ! 6 ;i E E q q



€ E r lE t t P I g € s3 l 3 3 3 S



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, ' , 8



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FEFI g F E i fi I 'qr t E



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$tl



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Pl l-3 (ConcludeUf Hours worked 40 Units produced 855 Standardprodugtion(20 units x 4O hours|..-.............. 800 (855 + Efficiency ratlo SOOI 1.06875 .aaaraaaaaaaa



Basewageper hour



$9.0o



Basewage plus bonus (1.O6875r $91...............o.....,..$9.91975 Wggklyearnings($9.9t975 r 4o hou1s1........r.............$384.75 Unit cost ($384.75 + 855 unltsl ..or.......t.....r....,....,r.o...



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P11-5



Straight Piecework



Units produced-regular tlme Piecework rate p3!r.......r.o.......................r........t..r....t..t....



PigCgWOfk



DowntimoPaY



p8!....r...........r....r....rr........r...r........o...........



OVgftime Total



l\r3$lB3 por



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.......ttt""""tt""to"""'rttt""tt"""t"'ttt"""' bookstt"ttt"ttt""ttt""rt"tt"'r"to""tt"t""""'



U n d efp aym OJ1t...............r......r.....i....o.r..



r.....o...........r..



Lowo Hare Dodd 370 410 400 .O6 .66 I .66 $ $ $264.00 $270.eo 9244.20 24'OO o 30.oo 54.OOr 36'00 o s294.OO$aZc,oo $304.20 284.OO 277.2A 302.20 $ IO.OO$ 47.40 $ 2.99 : = - z :



t6.r $6 x 15ooh= $54 Percentage Bonus Plan UnitS pfOdUCgd,o..r..r.........................'r....'.....'r.........'...."' Standafd pfOdUCtiOtl................'..o......'.......o......r.............. fatiO.o.....,o.r....rr...........r'......r....r..r...r.......t.."'r'



EffiCignCy RegUlaf



Wa993.......r.o..........D...................o..r..r...t....tr....t"'



8OnUS.................oo...r...r..r...........rr....r.r.......r....r.........."" TOtal WageS



wageS pef



.........................t""ttrtt"t""t'tt't""t"tt""""t"o bOOkS ..r.........r..r.........r...r..r.o.........r..o.r....r...t..



UndefpaymO;.1t......r...r.....r........r..r...r..............ro...r............



r25oh pnemiumx $24O regular wage = $60 or S6.00 hourly rate x .25 pnemium 51.5O bonus pay S1,5O x 4O hours = $60



125o/o



RuPP 180 200 gooh



280.OO



l71.OO



Ober



250 200



s240.oo S2oo.oo o 60.oo1 $3OO.OO $2oo.oo 20.oo s::z: 29.OO $ =:



I I



I



Chaptar 11



259



Pl l-5 (Concluded)



I



E



Emerson Efficienca System Suggs 240 300



b



Unitg produced..t.........r..



Standard production Efficigncy ratio..........



80o/o 20o/o



BOnUS lillt8 .......r..,.,....r...............



Rggular wago.r...or............r..........,......r..................r... Bon us'uraff o ...............r.r......r.....r.r...r...................r.r...



Downtime pay (2 houra x 35.60}. Totalwages............,..... b



aataoaaaaaaaaaaaraaaaa



Wages por books........r........,., Un d erp aym (!Dt....r..rr".........r........,.r.r.....r.r...... t



Ward 590 5701 103.5% 450h



i..........



6OOunits (standardproductionfor 4O hours )



5224,oo2 s2l2.go3



$ 44.90



95.76 11.20



s268,8O 233.20 :---$ 35.60



S319.76 2go.o0 $ sg.zo



= 15 units per hour



15 units per hour r 38 productivehours = 57O units (standardproduction for 3g hours) z4Ohours x $5.60 = $Z24,OO s38 hoursx $5.60 = S2i2.gO P11-6 (1)



Hoursworked (5 workersr 4Ohours)................,,.r...,,.........,... 200 Regularwage (2OOhoursr $61.........,.......... s1,2OO Units produced...........r...........r...........r.....D......,..r......r....r...r....



Bonus



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s52r $i,252



garnings.o....r......rr........r...................,...........,..o.......r... we-ekly unit labor cost Gtl1252 + 452),.....,.,..........r.....,...o........o..r....,..$2.7699 Unit factory overhead ($f r4O6 * 452).............r..r..,...,...o.r..,.r.., $.?.0973 Unit convgrsion coSt....'...................r..r......rr.......r.....r..r.......r..



$5.8672



t l-



b



452 unlts produced 4OO units standard _52 units abovestandard 52 units x $i workersrshare = $S2 bonus



I



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Chaptor | |



P11 - 6 ( C o n c l u d e d )



Unltl-...'......-.. Standardhoun for unltt.--..-.. Actual houn..Bonurr to r houn ttvcd..Total carnlngr. Unit labor cort. Unlt factory ovgrhcad ,....,.{ Unlt convcnion coat ,............,.-



72 361 . , 4



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171t2 10



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102



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152



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t 4Oounits per 40 hours= 10 units per hour 1Ounits per hour + 5 workerc= 2 units per hour 72 units produced+ 2 units per hour = 36 hoursstandardtime z lf the group bonus is computedfor the week, rather than daily' the bonus would be 36 x 2o hours saved,or $156. Then,$1,356+ 432 units = $3 unit + 452 units, or 9?.O973per unit. labor cost. Overheadcost would be S1,4OO P11 - 7 (1)



THOMAS INC. Quarterly Bonus Allotment At End of March



Employees Participating



Points Allowed for Each Employee



1 Works managgr....r...... 2 Produstion engineers., 5 Shop supervisot'tg......... 1 Storgkgopor.,.,..,....r...,. 5 Factory office clerks ... l5O Factoty workefs ......



250 200 200



loo 10 20



Total Points 250 400 l,0oo 100 50 3,O0O 4,8OO



ra



2 7 O , O O Ounits actual production 2 4 O , O O Ounits normal production 3 O , O O Ounits excess ovor normal



3 O , O O Ou n i t s r $ 5 O = $ 1 5 , O o O s 1 5 , O O O+ 4,8OOpoints = 33.125 qer point



Shara per Point s3.125r 3.725 3.125 3.125 3.725 3.125



Total Share



s



781.25 1,25O,00 3,125.0O 312.50 156.25 9,375.0O



9!9'o99.09



'



fl I



Chapter | 1



Pl1-8



(rl Gumulative



-Cumulative



Number



Numberof Units



of Lots



(Lot Size = 50) 50 lo0 2OO 4 OO 8OO



I 2 4 I 16



Time in Hours Cumulative Cumulative Time Average Time Per Unit 4.0000 360.00 (3.6000 x 1oo) 3.6000 (4.oooo x.9l 648.00 (3.24OOx 2OO) 3.24OO(3.60OOx .9! 1' 166.40 ( 2.9f 6O r 4OO) 2 .9 1 60 ( 3.240Ox.9l 2.6244 (2.916Ox .9) 2rO99.52 12.6244x 8OO)



DireCt tabOr hOUrS reqUired tO prOdUCethe firSt 8OO UnitS r..,............... 2tO99.52 Direct labor hours required to produce the first 2OO units .......'....o'...., 648.00 DireCt fabOr hoUrS feqUired tO prOduCethe next Ordet'.....,................... :11457.52 600 Numbgr of units in thg ngxt ordgt'....,.....................,............'......r......o... ---



DirectlaborhOUrsper unit for the nextorder(1'451.52 + 600).'.......... 2.4192 CatonicPart NumberPGB-31 Unit Costsand Pricesfor RexEngineeringCompany Estimates Incorporating a 9oohLearning Gurve S18O.OO Materials (2 ,4 1 9 La b o r a n d e m p l o ye eb e n e fi ts x $ 20) .,,.,............r ........, 48.38 24.19 Varia b l oo v e r h e a d(5 O%o f l a b o r),.......,,.......,............. Total variabtg coSt.,.......r,..r....i................,,..,....'..r...... 5252-5| 4O.0O ....r ....r Fi x g do v g r h e a d. . . ..................'..................,...' Fult cost. SZSZ.SZ .....!........ Profit contribution (1Oohof full cost) .,...........,...,.... . 29.26 Estimated contract price...........,.,. S321.83 l2l



The implications of an 80% learning curve as opposed to a gOohlearning curye are: (a) An 80% learning cunre indicates a greater effect of experience on efficiency. (b)



Most of the increase in efficiency (decreasein time and cost per unit) due to an SOohlearning curve occurs early in the production r u n ; t h u s, sa tu ra ti o ni n l e a rningis achievedear lier with an AOoh l e a r n in g cu n e .



'



fl I



Chapter | 1



Pl1-8



(rl Gumulative



-Cumulative



Number



Numberof Units



of Lots



(Lot Size = 50) 50 lo0 2OO 4 OO 8OO



I 2 4 I 16



Time in Hours Cumulative Cumulative Time Average Time Per Unit 4.0000 360.00 (3.6000 x 1oo) 3.6000 (4.oooo x.9l 648.00 (3.24OOx 2OO) 3.24OO(3.60OOx .9! 1' 166.40 ( 2.9f 6O r 4OO) 2 .9 1 60 ( 3.240Ox.9l 2.6244 (2.916Ox .9) 2rO99.52 12.6244x 8OO)



DireCt tabOr hOUrS reqUired tO prOdUCethe firSt 8OO UnitS r..,............... 2tO99.52 Direct labor hours required to produce the first 2OO units .......'....o'...., 648.00 DireCt fabOr hoUrS feqUired tO prOduCethe next Ordet'.....,................... :11457.52 600 Numbgr of units in thg ngxt ordgt'....,.....................,............'......r......o... ---



DirectlaborhOUrsper unit for the nextorder(1'451.52 + 600).'.......... 2.4192 CatonicPart NumberPGB-31 Unit Costsand Pricesfor RexEngineeringCompany Estimates Incorporating a 9oohLearning Gurve S18O.OO Materials (2 ,4 1 9 La b o r a n d e m p l o ye eb e n e fi ts x $ 20) .,,.,............r ........, 48.38 24.19 Varia b l oo v e r h e a d(5 O%o f l a b o r),.......,,.......,............. Total variabtg coSt.,.......r,..r....i................,,..,....'..r...... 5252-5| 4O.0O ....r ....r Fi x g do v g r h e a d. . . ..................'..................,...' Fult cost. SZSZ.SZ .....!........ Profit contribution (1Oohof full cost) .,...........,...,.... . 29.26 Estimated contract price...........,.,. S321.83 l2l



The implications of an 80% learning curve as opposed to a gOohlearning curye are: (a) An 80% learning cunre indicates a greater effect of experience on efficiency. (b)



Most of the increase in efficiency (decreasein time and cost per unit) due to an SOohlearning curve occurs early in the production r u n ; t h u s, sa tu ra ti o ni n l e a rningis achievedear lier with an AOoh l e a r n in g cu n e .



I



I



i



Chapter | 1



P11-a (Goncluded) ' (31 The degree of tearning that takes place in an industrial operation would be reduced by (al a low proportion of assembly labor to machine labor; (bl an operation ol low complerity; (cl high employoe turnoveq (dl tedium; (el poor working conditions. Pl 1-9 APPENDIX (11



Charge to work-in-pnocoss: Normal working houns = 40 houra r 2 = 80 hours LetX=overtimehours



X =



sr,r4o-(8or$r2)



($lz r r.5) X = 10 hours



l2l



Therefore, charge to work in process = gO r $lZ = $l,OgO Factory overhead charge for Emptoyee tloTl: Gompany benefits paid by employer....,, $273.20 Overtimg premium t............oo.................. 6O.O!t ($trf 40 _ Slrogol



s."9€9 (31



The cost of idlenessshould be chargedto the departmentaffactory overheadaccount



PI I.I O APPENDIX (l)



Apr. 7



Payroll,..,.......... ........,....r. 5,8gO.OO Accrugd Payro|1......r.....r...rr..................r. Employees lncome Tar payable (9.5olo).. FICA Tar payable (2.5|.,.....,....r..r,..,........



4,888.70 559.55 441.75



14 Payro11........................,..r....,......... 4,92O.OO Accrugd Pa1rclt.'..........r...............r......,.. Employees Income Tar payabfe ..,....,...,. FICA Tar payable ..,...,.......,.....,..,....,,.....



4r083.6O 467.4A 36g.OO



21



Payroll ......o...r..................,.t......,...............rsrgoo.oo Accrugd Pa1ro11......r.........r............r........ Employees Income Tar payabts.............



FlcA Tar payabto.............:.....................



I



l-



2A Payro!|.......r.......r........,..r. ...r.....,. 4rggo.oo Accnred payroll.... ,................... Employeeslnco^meTar payabfo............. FlcA Tar payable .............:.....................



4rggZ.OO 560.50



44z.so 4,O5O.4O 463.60 366.00



Chapter l1



264



Pl l-1 OAPPENDD((Goncluded|



t2l



Subsidiary Record Apa 3O Work In Procgss ..r........r..............o..... Factory Overhgad Gontrcl'...,....'....... lndirgct Labor .'.......r.........'..... 5,6OO



Dr. 16,400 5,6OO



22rOOO



Payro|1 tt...............................t........



Apa 30 Factory Ovgrhgad Gontrol ................. FlcA TaxlS22rOOOr 7.5o/o1.,.... 1 r 6 5 0 Federal Unemploymont Tax ($22rOOOx'8oh1..................... 17f, State Unemployment Tar ($2ZrOOOx 4oh1...,.................. 880 Vacation Pay l922rOOOx 8o/o1.. 1 , 7 6 0 FICA Tax Payab19"..................r..... Federal Unemployment Tar Payable State Unemployment Tar Payable Liability for Vacation Pay.......,......



(31 Apr. 7 14 21 28 30



Payroll 5189O Apr. I 4rg20 30 5,9OO 4188O 2164(, 24.23O



2r23O Apa I 7 22rOAO 24J,sO 14 21 28



Cr.



4r4eB



1,65O 176 880 1,760



Accnred Payroll 2r23O.OO Mar.31 Bal.2,23O.OO 4r888,7O 4r888.7O Apr. 7 4,083.60 14 4,O83.60 4r897.OO 21 4r897,OO 4'O5O.4O 2A 4,O5O.4O 30 2,04O.0O 20,149.7O 2e789.74 2,840.OO



2,640 2,640



I



I



I 265



Chapter 11



CASES



I



b I



ct 1-l b



(1)



I



(a)



!



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b



Arguments used by each proponent:



.



1,00O-pieces-per-hour-rate: {1} Studies show that machines can be operated at this rate. (21 Variances determined by this output rate will measure the inef'' fective use of the machines. (3) This rate can be a target level to be strived for, and the changing variances will show pnognesstoward this ta4get. (4) A goal of this natute will motivate the supervisor, and thereby the workers, to reach this rate of output. (b) 750-pieces-per-hour-rate; (1) This rate of output has been attained by some workers. (21 The IroOo-pieces-per-hour rate has not been attained, nor has any rate near to it been attained. (3) The 6oo-pieces-per-hour rate is an average of actual performance and does not represent good economical performance. (4) The standard cost should reflect production rates that can be attained when good economical performance occurs. The 75Opieces-per-hour rate, capable of being achieved by some workers, would seem to be such a per{ormance. (5) The variances would measunethe extent by which this economi. cal levef has been exceeded or the extent to which it has not been met. (6) lt should provide motivation for the supervisor to improve on the 60o-pieces-per-hour cunent rate and in turn motivate the employees to improve their performance. (c) 6OO-pieces-per-hourrate: (1) This rate has been achieved by the departments as a whole. The standard costs should be set to reflect the ability of the whole department. l2l The variances from standard cost based upon the 6Oo-piecesper-hour rate would measure the departures, favorabte and unfavorable, from the current effective level of operations. (31 For two thirds of the workers, the 75O-pieces-per-hour rate would be dlfficult lo attain and would tend to frustrate them, thus making even the present 6oo-pieces-per-hour rate difficutt to maintain. For all workens, the 1r0Oo-pieces-per-hourrate could not be attained' thus lowering the morale of the department and probably lowering output below current levels. (4) The 6oo-pieces-per-hour-rate, when passed down to the production worker, wourd be an appropriate goal for those three employees who are producing fewer than 6oo pieces per hour.



266



Chapter | |



C11-1(Concluded) The purposeof standardcosts and standardcost reporting is to measure l2l the performanceof a departmentagainsta level of cost incurrencethat nepnesents attainablegood economicalperformance.The variancesindiperiods cate the when the performancevaried (favorablyor unfavorably) from this acceptablelevel. To be used effectively,the rate to motivatethe supervisorand, thereby, the worker,sto improveperformancewould depend upon the perceptions as to what is attainable.lt would also dependupon the reward structures within the firm. Other variableswould also affect what output rate would motivate improvedperformances. The value picked(e,9.,ir00o, T5o,or 600)must be a compromise betweenthe level that witt havethe most effectivemotivationalresult and that which will be an effectiverepresentation of the costswhen the departmentis operatingat an acceptabteeconomicaflevel.The 1,OOOpieces-per-hour rate shouldbe reiectedbecauseit does not providethe basisfor a measureof an acceptablecost tevel.lt woutd also be of questionablevaluefrom a motivationalpoint of view,becauseit appearsto be unattainableby the productionworkers. The 75o-pieces-per-hour rate is a possiblechoice.lt is capabteof being achievedby some workers and as such may providemotivationto the supervisorto bring other workers up to that level,thus achievinga departmentaloutput of 750 piecesper hour.tt also may representthe appropriatebasisfor a standardcost becauseit is a possibleacceptable level of performance.tt may also be a suitabledepartmentaltarget establishedin connectionwith the introductionof the standardcost system. The 6oO-pieces-per-hour rate is also a possibtecandidate.The Punch PressDepartmenthas achievedthis tevef,and three of the six employees have been ableto achieveit. lt is, however,the currentlevel of ouiput and that may make it ineffectivein motivatingthe departmentand its workers to improvethe level of output.As the basis for standardcosts, it coufdrepresentan acceptablelevel of output;but it does not incorporate the possibleimprovementtikelyto be obtainedin connectionwith an introductionof a cost system. The 75o-pieces-per-hour rate seemsto be the best choice of the three alternatives.More informationaboutthe conditionsunder which the engineeringstudieswere done,the trainingand experienceof the workers' and the trend of worker and departmentoutput in recent periods would be necessarybeforethe numbercould bs chosenwith some assurancethat it would meet the statedobjectives.



;I Chapter 11 I I



S



c11-2 (1) '



I b



t !



l>



\,



I t



An advantage of the new payroll incentive plan is that it recognizes a problem' which should improve employee motivation. Action taken by management will be perceived as a positive effort to resotve a problem, and employees may feel more a part of the group and behave as team members. Some disadvantages,which could lower employee motivation, are that employees' files are open to scrutiny by peers, and that employees may feel that they have to be a part of the "in groupttto be assured-recognition for wage increases.The plan could degenerate into a popularity contest.



(21



some advantagesthat should improve employee productivity are the incentives the plan provides for employees to perform efficilnt|y and effectively,and the beneficial competition it promotes among employees, as long as it is in harmony with corporate goals. A disadvantagethat could lower employee productivity is that the plan could lead to collusion among groups of employees to keep productivity levels artificialty low. Employeescould approve each otherb'wage requests without appropriate merit. The plan also coutd resutt in inefficiencies, because employeeswho have had their wage increases turned down may not work up to capacity due to a loss of inierest.



(3)



some advantagesthat shoutd improve goal congruence between the employee and the company are that the plan indicates the company's interest in the needs of the employees,and that the plan may result in increased profit through improved productivity,which may lead to employees earning a larger income through increases in wages. S o me d i sa d va n ta g esthat could lower goal congr uencear e that e m pl oy - . e e s ma y mi stru st a w age plan suggestedand implementedby m anagement, and that there may be an overemphasison a limited range of performance measures.



(41



a



267



Some advantagesthat should improve administration of the plan are that procedures for requesting a wage increase and for its approvat are clear and unambiguous,and the plan allows for relatively quick positive feedba ck a n d p e e r re co g nition. Some disadvantagesthat could hamper plan administration are that there is a limited amount of management input and control, and that there will be additional record-keepingresponsibilities associated with the voting procedures and maintenanJe ot'empiov"" productivity records an d p e rso n n e lfi te s.



r I



I



2ffi



Chpter 1l



cl1-3



(rl



l2l (31



I



The basic premiseof the learningcurve is increasedproductivityas experienceis gainedin the performanceof repetitivetasks. Various lnputs to the productionprocessmay be used more efficienily as cumulative output increases,but in most productionprocessesthe maiority of cost savingsassociatedwith a learningphenomenoninvolvethe use of human labor. ( s , z o o+ 2 , 2 4 o ) + 1 6 = = BSohtearninsrate 3,200 + 8 ;;3 With a learning rate up to cumulativeoutput of 32 units, averagedirect labor hours usedto producethese 32 units shouldequal gs% of the averagedirect labor hours usedto producethe first 16 units. tn short, averagehours employedfor each unit when 32 units are completed shouldequal: 340 x .85 = 289 hoursper unit. This impliesa total of 289 x 32 = 9,249hoursused in the productionof the first 32 units, or 91248 - 3,200 - 2,240 = 31808 hours



usgd in the productionof units lz through 32.lf the averagehours per unit in this productionbatch is taken as the direct laborstandard,the standardper unit becomes: 3 ,8 O8 h o u rs



16 units



(41



238 hour s per unit



Bid price on order of 96 units:



s



1,500 5,95O 9,52O 16,97O 5,091



22rO61 x 9 6



(5)



FoT" applications of the tearning curve in the planning and controlling of business operations are setting performance siandardi, preparing cost estimates in competitive bidding, determining budget ailowances for l a b o r a n d l a b o r-re l a te dco sts, schedulinglabor r equir ements,and deter m i n i n g p e rfo rma n cee va tu a ti o n sin which per iodic pr ogr essr epor ts ar e c o m p a r e d w i th a cco mp l i sh me n tsexpectedunder the cur ve.



--I



Chapter | 1



cl1-4 Shoitcomings: (1) Actual payroll hours are not approved by production managernent. (21 There is inadequate segregation of duties within the Payroll Department. (31 Personnel Department should not have access to payroll checks. (4) Departmen-tsupervisors should not distribute the payroll checks. Suggested corrective action: (f l All incoming time cards should be signed by both the ernployeeand supervisor. (2'l The payroll clerk preparing the input for data processing should not do the reconciling, but rather a second clerk should reconcile the payroll journal to the time cards. (31 An employee of supervisory level should authorize voiding of computer, g e n e ra te dch e cks a n d the subsequentpr epar ationof a manuat r epl ac eme n t ch e ck. (4) R e p l a ce me n tch e cks should be pr ocessedfoltowing good inter na l c ontr ol p ro ce d u re s. (5) A l l p a yro l lch e cks, i n cludingunsignedr eplacem entchecks, shoul d then be given to the Accounting Department rather than to the Personnel Department for storage in a secure location until payday.No Accounting Department employee with payrotl recordkeepin g responsibility should have access to the undistributed checks. (6) On payday,checks should be distributed, preferabty by a Treasurerrs D e p a rtme n te mp l o ye eor by an Accounting Depaftm ent employeew ho d o e s n o t h a ve re co rd - keepingr esponsibilities. cl 1-5 fi fh e re q u i re me n td o e s not ask for a list of r esponsibilitiesOsbor n ehas vi o l a te d ,b u t, me re l y,which of the fifteen r esponsibilitiesapply to Osb o rn e ,ssi tu a ti o n .) Ma n a g e me n ta ccountantshave a r esponsibilityto: C o mo e te n ce : P repar ecom plete and ctear r epor ts and r ecomm end a ti o n s a fte r a p p ro p riateanalysesof r elevant and r etiableinfor m ati on. (Osborneknows that if he consents to Wallace's request, the resulting ma i n te n a n cej o b co st r epor ts would be m ater iatlymisstated and w oul d p re se n t fa l se a n d mi sleadinginfor mation.)



I



b



Integrity: Refrain from engaging in any activity that would prejudice t h e i r a b i l i tyto ca rry o ut their Outils ettr ically.( osbor ne is being as k ed to be a party to an activity that woutd erode hii abitity to carry out his duties ethically.) C o mmu n i ca teu n favor abteas well as favor abteinfor m ation and pr of e ssi o n a lj u d g me n ts o r opinions.( osbor ne is being asked to thwart c om mu n i ca ti o no f u n fa vo r ableinfor m ation.)



Chapter l1



Cl1-5 (Concluded) Refrainfrom engagingin or supportingany activity that woutd discredit the profession.(Preparingdeliberatelymisteadin! maintenancejob cost reports clearlywould be a discredit to the profession.) Obiectivity: Communicateinformationfairly and objectively. (Osbornewould violatethis responsibilityif the maintenancejob cost reports are,altered.) Disclosefulty all relevantinformationthat could reasonablybe expectedto influencean intendeduser'sunderstandingof the reports, presented.(Theshifting of cost among comments'and recommendations maintenanceiobs wouldviolatethis ethical responsibility.)



\



I



\ !



I



GH4pTgR 72 DISCUSSIONQUESTIONS 012-1.



Supervircrs' salaries, hdirect labor, overlimo prcrniurn, lupplier, indirrct nratorials, payroll tarq tactory hlurancc, and deprrciatian. Ql2-2. Thr nst inportant r.elon fa variatbn in faelory ovrfiead b tho pnroncc of lired and rarF ablo rrpenrer. Thordorc, ar prcduction volurno changs frqn nrnth to rrcrth, tho coCc will do likowicc. Howcvor, ovcrhead alco wifl '' cltrtgo bccause of inrprovcd or dccrcssed cflF ciencies and ctrangos in pricer paU for overhead ilrns LEh s! rupplies ard repairs. 012.3. Predclerminod ralcs aro ured when it beconres obvious that 8ny other melhod of charghg overhead resullr in inequilabfccocthg and delays tho reporthg ct firancisl results. Charghg aclual overhead io ic6s and producir can resufl h charging unreasonablearnounls of owrhead to varbur perirdr and in dehyed rcporling of corl data. Thc urr ol prcdclcrmined ralcs alao onhances control through analyria ol over. or underappliedlaclory overhead 012-4. Sir bases used for applying taciory overhead aro unitr prodrced, direst rnateriatr cost, direci labor cosl, direct labor houc, machhe hours, and transaclions. lmportant consideratioogin seleclhg a base are the relatbnship (conelation) ol the base used and lhe use d ovefiead items in manufacturingoperalbns, as woll as the clerical prac-ticability ol using a particuhr bge. 012-5. Predetermhedrde! are used to charge overhead and becornethe basis for determiningthe cost cil a lcb or producl.Thereforo,the reasonablenessof such costs is to a hrge exlent determhed by the reasonablenessol-the rat€. Shce these cqsts are used for costing hvenlo ries and play sn important ole h esiabtishing sales prices, the selectbn ol proper predetermined rates can be appreciated. Q12€. An objectivein seleciing the baso lor prede_ a lermined factory ovefiead rale b lo engurelhe application of factory overhead in reasonable proporikmto a benefbial or causal relatbnship lo jobr, producls, or work perlormed or lo be porformcd.i,c., for rrtimaling purpose!. Ordiurily, the base selostodehojj be'closety rolded to ttnctions represenledby the applioC overhcad cost. lf tactory overheadcosls are predorninantlylabq oriente4 such as supervisirt and indirect hbor, the proper base would probably be dirccl bbor hours. lf taclory overhead costs are predominantlyretated to the cosl incurredin the ownershipand operatbn ol thc madrinery, the proper base would probably be machhe hours.



271



\



Anotrer otriectivo in selecthg the base b to minimizo clericel st and dfort relativo to tho bonrlitr ottaincd. When two or more ber.s pro\rid. apprcximatcly thr rgrno applicrJ ovor_ hood cst to specilb unils 6t prodrrtbn, the rirplcsl ba$ lhouH be usrd. Q12-7. (a) Theqrfrcal capecity b actuslly tho nrarirnum produclion possible frorn e givon pbnl wit|r no allo*arrr rnade for ccsla. lion of operations for hotidays, wrok_ endr, malerials shorleges, or machino bnakdorns. (b) precticsl capacity ig theoretical capechy lege an ellow.ancefor interruptimr euch as brealdo*,na, delayr in recciving rup plict, and worker abgencer. prjcticsl capacily is usualty 75 to 85 pcrcent of theorelical capacity. (c) Erprctrd ectual caprcity ir prtctical capacity adjusted lor tho lach of autfbiont dcmrnd h a tinglo oporathg period and may br usod h building oporating bu+ gelr tdrcn expected capacity ditfen gub., stantially lun norrnel capaciV. (d) Normal.capacityis practical capacity adjusted to give consideratbn to t o toci of suflicient dernand over a pcrird bng enough lo hclude cyclical and reassral fluc.luatbns.This is usually the basis for l o n g - r a n g ep l a n n i n g . s l a n d a r d a ,a n d preferably for the determinalbn cJ owrhead rates. 012-8. The underappliedoverhead will be higher lf marinum capacity is used and bwer if normal is used. ll this cost is charged lo lhc currrnl perird, then nraxirnumcapacity will prcducr a krwer, and normal capacrty a higher, operating prcrtii. O12-9. (a) ldle capacity costs arisc from idlc employees and idte tacilitiec. ldle employeer give rise lo colte auch ar base wages paid, employor,r sharc of payroll laxes, and other lringo benefit cosls. ldle facilities cause capacity 6te due lo delerbratbn with time, apprehi n g o b a o l e o c o n c e c, o s t ! f o r u p k o r p , readiness,maintenance,repairs, lhelter, a n d p r o l e c t i o no f v a l u a b l e er u c h a r hsurance. (b) When iile capacity b prescnl, an dtenrpt should be made to regregalr idlo employees and idle lacilitier through proper recbssiticatbn. Tho rcurnula$on ol lhe cost attributabtelo theso Ulc worksrs or facililiec in excess _cla reasonablc budgnted arnounl migrht be in aorno ki,rd



t-



272 ol overhead account to be lreated separately aa e'rnanagemenl by erceplion' faclor. ldb capacily corlr should bt accounlod lor soparalely lor lhoro rea!ons: (1) to Pttv.nl dittortkn end srlurirr h thr rna[air of ptoduclin cctt; (2) to bililetr ircqne dclominalixt; (3) to csrtrol ogcraticts; 8nd (4) lo phn nrrt year'r hdget edrquatdy. (c) Exeorc crpe.*ty cod h8! bem iJentilhJ with thoo capacity.cootr thol rcrull frqn grealrr produclion capacily lhan lhc cqnpsny couH rvcr lrqe lo usa, or frcrn unbalancrd rquipmenl or machincry withh dcparUnenls.In creatng lhc fote casl budgrl, il ir irportanl lo bobto the .xc.r capacily cosl ro lhal managomcnl can bo made aware cil ilr responsibility rcaardng the excess invesUnentin labor and machhec. Q12-10. (a) Anaty":r and identifythe ovefiead transactisrs. (b) Joumali:,cthc lransrlisrs. (c) Enlcr transaclbnr in general and gubsktbry lodgen. Ol2-1 1. Ovefiead applicd lo prcduclicn ir enlered as a credil h |he lactory orerhead control accounL Aclual ovrrhrad it debiled lo lhc same



Chapter l2 accounl Therefore, ovefiead has beon oerapplied when lhc account lras a crcdil balanc.. Q12-1z- Ovcrhead cen br ovcrappliod beceuso (a) actual oveficad waa bss than budg.l.d; (b) capeity utli:.d war greetor |h8n that eslirnaF od h cnpdhg ovofirad rale; (c) lho wcrhcad cdinatc war lo hiCh (a mirtate); (d) lhr produclian ortimab wat l€ low (a mirtakc); (r) corn|liulkns of thr abor. Q12-13. Over. or undcrapplicd faclory ovcrhead may be proralod arrrcng work h proc.ss, finished goods, and cosl of goodr sold, or it may bc lrcaled rntirrly ar a period cogl. The firsl method would have a smsller effcl oo cct ct goods soH and |hcrelqc qr lho net ircorne for the pcriod. 012-14. Thr cxislcncc ol largc undcrabcorbed variancis doot nol necossarily mcan ihat unil costs ar. incorrecl. An analysis of thc underabsorbod figwer will irdlplc (a) whether actual ororhead ir loo high or whcthcr oxponseg havo been incorreclty estirnated; and (b) what part of thc underabsorplion is caused by unusod capacity. ll Eclual ovrhead is cmtiJered lo b. t@ high and thcro ic Ule capacity, unil coctr ccnpulcd ate morc rearcnablo lhan they would bc if overhead rale! wero cornputed to absorb all of the aclual overhead.



1



\-



;



Chapter 12



2n EXERCISES



I



E12-7 (l)



$l'75oro0o fixed overheadand $72o variable overheadper ton, calculated as follows: For both the ngrmal capacltyand expected actual capacity,the problem states the total budgeted overheadcost and the number oi ton" of activi' ty. The high'low method of estimating cost behavlor can be used to determine the overhead budget, usin-gthose two points: Activity Level Normal capacity Expected actual Difference



Tons 6,000 5,000 I,O0O



Budgeted Overhead $6,O7O,OOO 5,35OrOOO -s



720,Ooo .



Variable 5720,00O . overheadrate=ffi-=$72ovariab|eoverheadperton Budgeted fixed overhead = $5rg5O,0OOtotat overhead - ($ZeOx 5,000) variable overhead = 55,350,000 - S3,OOO,O0O = g1,75O,OOO or, budgeted fixed overhead = $6,070,000 total overhead - ($72Ox 6,000) variable overhead = $ 6,070,O0O - $4,320,OOO = gt,TSO,OOO



lv



\



274



Chapter12 I



E12-1(Concluded) (2'l The predeterminedrate at practical capaclty would be $895 per ton. Using the budget for fixed and variable overhead, a predetermined oyerhead rate can be calculated at any level of acUvity withln the relevant range.Assumingpractical capacity ls wlthln that range, Orecalculation is: Predetermined overhead rate at = Budgeted total overhead at practlcal capaelty practical capacity PracUcalcapaclty In tons (8,0OOtons ) Budgetedfixed overhead + Budgetedvariable overheadat 1O,O0O tons _ $1,7S0,000 + ($ZZOx lOr0OO) = {O'0 OOto n s



IO' OOOtons



_ 9 1 , 7 5 0 ,0 0 0 + $ 7 ,2 0 0 ,0 0 O) _ $8r 95Or OOO= $895 per ton {OTOOO tons IO' OOOtons



o\



$72o variable overhead per ton + ($trT5orooo/lorooo tons) = $72O per ton + $175 per ton = $895 per ton.



E12-2 Work in process balance, Septernb:r 3O........,....r........r...r.r.....,.........,.. $12,200 Lgss materials sti!l in procgss...,...,......,.,.....,..,.............................,,....r. 5,56O Factory overhead and dirgct labor sUlf in pnocgss...,.,.......,.r.,...........,..$ 6,6co



Chargedto V/ork In Process o/o Amount Factory overhead.......... Dire c t l a b o r , . . . ..........o ..,



dlolot 56



515,840 20,160



x x



$6,640 6,640



= =



s36,o0o 100% 's 15,8 4 0



* $36,o0o = 44oh (or)



S15,840-(factoryoverhead) * S2O,16O(direct tabor) =.7gST Let X = direct labor still in process Then,X+.7857X = S6,640 1 . 7 9 5 7 X = 5 6 ,6 4 0 X = $3,218.429T direct labor still in process .7857X = S2,g21.SZO2factory overhead stilt in process s6,639.9999



$2' 921.60 3t718.4O $6,g4O.Oo



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t_ ;



Chapter 12



275



I



l . I



El2-3' (11



135 peopter 8 hrs. per day r 5 days per w6ek r 4g weeks = 259r2OOdirect labor hm.



-



l2l



{35 peopler lo hrs. per day r 4 days per week r 49 weeks = 259,2OOdirect fabor hrs.



!



Et24



: I



Factory overhead rates: b



(11Units of production: $225,000+ 5y000 units = S45 (2f Materialscost



* $SoO,oOO =,{5 = 45oh $ZeS,OOo



(3| Direct labor hours: $225,OOO + 56,25ODLH = 34 (41Direct labor cost:



$225,oo0 + (56,2s0 DLH r $81= .5o = soo/o



(5| Machine houns:



+ 75,OO0machine houns= i3 $225,OOO



El2-5 (fl



Assumingnormal capaclty: (al The factory overheadrate: (90OO,OOO + 5O,OOO| + $6.69 = $14.69 (bl The fired part of the factory overhead rate: $e6o,ooO+ 5o,ooo = 38



l2l



Assuming erpected aetual capacitln (al The factory overheadrate: 1$lOo,oOo+ 4oroo0!+ $6.89 = $i6;69 (bl The lixed parf of the factory overheadrata: $lbo,ooo + .to,Ooo= $lo



El2€ b



Actual



\-a -



! ,:



ovgrhgad



r.......'.r...r.....r.....r,...r...,.............,..!......r..r,........



AppliedllAoty factory overhead(S2rSoO machinehours r



SZZgTOOO



$5.iOrt..............r... 267.TSo



r"se'sPP"tttl underapplied l.lgtClry overneao factory ovgrhgad tor period ......,..........r,......r............ for tne thg pgrlod ......,..........r......,r......... $ 1j1r?54



t$255,o0o +



5oro0o budgeted machine hours = $s.1o



Chapter l2 I



El2 - 7 (1l



Work in Process.'.'..............................o......o................1 ,45OrOOO Matef|a18..........r..r.........r.......o.....o....rrr.o.....o........



Work in Procgs,.....,......o...o...



l r45OrOOO



928,OOO



Pa1rc!|......



928,OOO



Factory OverheadContrcl... ......i.... Materials, Palnoll, Accruals, and Various Credlts



563tOOO



Work In Process



551,OOO



563,OOO



Applled Factory Ovgrhgad,..........,.........,.......,...r Appfied Factory Overhgad .r.................'.,......'rj-,r.rorr Factory



Overhead rato :



Ovgrhgad



551,OOO S5lrOOO



551,OOO



Contrcl...or......,..o.,rrr-ooooorrroiror



Estimated factoly overhead Estimatedproduction



$57O,OOO $19 per dr ill 30,OOO



Underapplied factory overhead: $563,000 . $ 5 5 1 , 0 O O= $12' OOO



l2l E12 - 8



Agtual factory ovgrh gad r.....t.......r......!.................t..... Applied tactory oyerhead (4rlO0 units x $2.46)r..,....r.



$ 9,5OO 10.086 (586) s



Overappligd ovgrhead....?.......o......o..r,,.,..,.......r......,.... *



va tiabl g facto ry ovgrh gad fiito .......,...........,r....,..r.o.... Fired fastory overhead rate ($ir44O + 4'OOO units)....



$2.10 .36



Total fa ctory overhead rilto ......,.r,...........r......rr.....,..,.



92.46



E12-9 (f l



Applied factory oyerhosds sl6,92O = $ .47 lired portion of rate 36,OOOmachinehours 2.7O variableportion of rate _S2€I



total rate



$2.57 x 2,7OAmachine hours = g6,939 apptied factory overhead



t2l



Actual tactory overhead ........................,... Applied factory overhead U n d e r a p p l i e do ve rh e a d



57,4OO 6.939 s 46,1



I



I I*



L Chagter12



L. I I I



277



Et2-10 Agtual factory ovorhoSd ..D.....................r'................r..!....o..,... -iio.ooo Appliedfactoryovarhoad (2ro,ooomachinehoursr tt.:::::. $836rooo



o1rgrappliedfactory overhe8d............'.................,................. s ta.ooot



b



E72-17 I I



\-



(11



Fixed portion of the factory overhead application rate:



st50,ooo



I



tOOTOOOmachine hours



(21



variable portlon of the factory overheadapplication rate: 1OO,0OO machinehours



(31



= $1.50 per machinahour



= $2.5O per machinehour



Actual factory overhead .........r...........$4i {,OOO -654 Appliedfactoryoverhead (lOS,ooo x S4.oo1.....:::::::::: Overappliedfactory overhead... r.........r(9€oo)



E72-12 fctu--altactory overhgad .........'........r...........r......................... Applied factory overhead (2Oo%of $gri lZ) .........,...,.,,...,.....$141334 16.234 overapplied ovgrhg?d.........,...,..........................,....r..,.ro.r...... E_f:.gggl



:t Chapter12



278 812-13



Regulrements(11& (21 Account Percentage Applled Percentage Overhead of Total of Total Balance 4% $ 2,ooo 5 % $ 6,000 Work in process ..'o""'r"t""' 32% 16,000 31 zgoh 38,00O Finishgd $ood8..,.....t"""""" 64oh 32rOOO 76,OOO 631noh Cost ol goods 8old.-.....,...... ch $50,ooo 1oo%. Tota1...............r...................$12OtOO]9 t00



(11



work in Procesz l5o/oof $8r0oo),.......,......r.......'..'r....r 300 1,9OO FinishgdGOOdS 131ZnohOf $8rOO0)............'......,...'o'.. 3,8OO cost of Goodssold 1631nohof $610001.....,................ FaCtOfy OVefhgad GOntfOl.,,.,..'...,..,....'....'..r'o.....



(21



FaCtOfy OVgfhgad Contt!|........,......'.............r..'....'.r"' Work in Process (5% of $6t000|""""""""""'t"'t Finishod Goods 131 znoh ol $6'0OO)""-""""'o""



o,ooo 300 l r9OO 3r80O



Gost of GoodsSotd (63 lnoh of $6tooo1"""""""



(31



WOfk in PfOCgSSl4o/oOf $6rOO0|.'...,...'..'r..............t.." Finished Goods l32o/oof 361000)""""""""""""""""' Cost of Goods Sotd lA4% of $61000!"""""""""""""' Factory Ovgrhgad Contt!1 """" """"""t"""t"""'



o,ooo



240 1,920 3r84O



6,O0o



' v



L I



Ll I-



Chaptu 12



279



I I



lF



PROBLEMS ) b



I I



P72-7



(rl



-



Agtual oVorhead lpcurred .........'...'....'...........r.r...r,.r..........r..... $3r3g5,OOO Applied ovorhoadt..........................r.....r.........t......,.o............... Underapplied ovgrhgad r.......'.........'..............r..tr..D......r..........rs



I I



3.325.000 60.000



'acrr3!It41_t_ prodoterminsd rate based on expected astual capacity = 9,5OOMH x ($3,500,000/lO,00O MH) = 9,5OOMH x $35O per MH = $3,325,OOO



i-



!



E



(21



The predetorminedrate at practicafcapacity would be $316.67 per machino hour (MHl,calculatedas follonrs: Flrsg find thc budgeted total lired oyorhoad and the budgeted variable ovorheadrato par MH. The problem states both the total budgetedoverhead cost and thc number of MH of actlvity,at both the normil capacity and orpected astual capacitylevels,so the high-low method of estimaiing cost behaviorcan bE used: Machine



Astivlty Level Erpected actual Normal capacity Differsnce



Hours



lo,ooo I,OOO 2,OOO



Budgeted Overhead $3r5OO,OOO _ 3TOOOTOOO $ 5OO,OOO



V a ri a b l e $ 5 OO,OOO= a $25Ovariableoverhead perMH or"rf,""J'i"t" = frffi



l-



b a



I



Budgetedfixed overhead = S3,50O,O00 total overhead - ($2SOx 1O,OOO| varfableoverhead = s?r500,ooo- $2r500,ooo= $l,ooo,ooo or, budgeted fired overhead = $3,ooo,oo0totat overhead - (S2SOr I,O00f variable ovorhead = $3,0001000 - $2rooo,ooo= $l,ooo,ooo Then,usingthe budgetfor fixed and variableoverhead,a predetermined overheadrate can be calculatedat any level of activitywithin the relevant range.Assumingpracticalcapacityis within that range,the calculation is:



7



--'1



Chapter 12



2W I



P12-1 (Goncluded| Predetermined overhead rate at = Budgetedtotal overheadat practical capacity practical capacity Practlcal capacity in MH (15,OOOMHI Budgeted fired overhead + BUdgetedvariable overheadat 15'OOOMH _ Sl,ooo,ooo+ ($25o x 15,OOO} 1 5 ,OOOMH 1 5 , O o OM H $ 1 , 0 OO,0 0 O+ $ 3 ,7 5 O,OOO 1 5 , O O OM H



$4,750,oOO =



$ 1 5 , O O OM H



$316.67 per MH



+ 15,OOO MHf ot'r $25o variableoverheadper MH + ($f TOOO,OOO = $25Oper MH + $66.67 per MH = $.?16.67per MH. (31



yyereunderappliedby $1O,OOO, then lt the actual overheadol $?,405,O0O - Slor0o0, Applied Overheadwould have a credlt balance of $3r4O5rOoO or 33,395,000.The closing entries ane: 3r395rO0O Applied Overhgad.....r.......,.,......................r...o...... 3r395rOOO Factory Ovgrhgad Control r...,,.........r.,.......... Gost of Goods So|d....... ..,...........r........'.. Factory Overhead Control .r.............r........t...



(41



1or00o



Account Balance Work in process ............o...r.r.,r....... Finishgd goods..................or.,...,.....



Cost of goods sold Total



$ 2oo,ooo 4OO,OOO 7,4OOrOOO



IOrOOO



Percentags of Total 2.5% 5.O% 92.50h



100.ooh



_s8,ooo,oo9



Work in Process (2.5 % of $lOr0Oo)...........r......r...r..... Finished Goods,.,.



Gost of GoodsSold Factory OYgrhgad GonttD1..............r...'..........t.....



250 500 9r25O



1O,OO O



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Chwter t2



P12-3 (f l



Total cost of Job 50: Work In process, December I December costs: Matorlal8..... Direct labor ($lO2,OOO+ 8,5OO|r 3,5OO| Factory overhead (34.50 r 3,5OO|



3 54,OOO 45,OOO 42|OOO 15,750 $156,750



aaaaaaaaaraaataaaraaaaaaaatataaaraaaa



(21



Factory overheadcosts applied to Job 52 during Decemben $l.SOx2,O0O=$9,OOO



(3)



Total factory overheadcosts applied during Decomben $4.5Ox8r5OO=$.?8r25O



(4)



Actual Decemberfactory overhsadincured: Supplies



a ataaaa



aa aaaaaa



aaaaaaaaa



ataataa



Indirect labor lygftos....,...



$ 3,soo 15,00o



Supervisory sa!ari|B3.........r....or..........oo......r......r......r.r.....rr...... Building occupanqy costs..t.................'r,...'....r...............o......r Factory equipment costs...o.....'...........o.............................r.o... Othgr factory costs...r...........r....r..................r'r..........'.r...r......



6rOOO 3r5OO 6,OOO 5rOOO



$3e,999



(s)



An insignificant amount of ovep or undsrapplied factory overhead woutd



be treated as a period cost.



(61



Agtual



ovgrhgad....r.....r...r...r......rr...r.r....r.rr.....r...r'.......r......tr..



Applied overhead Underappliedoverhead



$39,OOO 38,25O



$



75o



I



Clnpts 12



283



P724, (11



Actual factory overtread: Indlrect materlalg and supp1ies....................................o.,...,.r.. $ 18,O0o



lndlrggt



1abor....t....r........r...............r..o......r.o.r........................r.



Employec benefits.....................r...............r,.............r.............. 5 3 , 0 O o Depreciatroll Supgrvisioll



23,00O {2,OOO 20.o00



tttt.t............r.....r....r............t........1.............r...r...... "tttt...o.'..r.o.r......................1..rrrr.t1..r.......r.....o.r.......



fl?s'qaa I



l2l



Ovep or undoriapplledfactory ov€rhead! Totaf dlrect labor, 2o-



r.r.............r........'......r...........r.....rr......o Factoryoyerheadrato per direct rabor dofraro......,,.....,......r.,. s 7o,0oo 1600h



Applied factory ovgrhgad .........o..........o.. Actua I factory oygrh ea d ..........o,.,.r,,.......



st 12,OO0 126.OOO Underapptigd factory overhe3d...........,.o,...........r.,........r.......,. s 14.000



(31



Amount included in cost of goodssold for Job 1376: Beginning



ba1ance..r.....r......rr....................r..............r...r.......rr.



Matgriafs



and labor r 20-



..r.Drr.....r.....r......................r.......r....,.



Appf ied factory overhead, 2O-- (S7,OOOx l6O%)



$ 72,5OO 8,OOO 11,2OO



9_91,?og (41



Gost assigned to the work in process account at the end of 2o-z Beginning



balance (Job i376)...,..,.,.....o.......,......r Cost charged to work in process, 2O-: Materialg ..........rr...................r...................o..



$ 72,500



$ 43,ooo



7O,OOO Appfied'factoryovgfi ead .....r,...................... 1l2,ooo 225,OOO $297,5OO Less cost of Job i376, wtrich was completed L€bor



and



a..aaaaaar-.aaa..o.a.a.a.a.-aa.........aa...aa.aa.arra..a..a



so|d.......r....r.....o-..-.r.o.....rrr..........r......r...



91,7O0



s205,8OO



--



2U



Ctlpter 12



P12-5 (11



Predetermined factory overfisad rate based on nonnal capacitln $29 t25o



4sroooTF $ 1 8 ,OOO



6o,o00TH .-(21



'



-r-r-r--r!^= S.65 variable portion of rate for erpected actual and normalcapaclty



=



Predeterminad factory overhead rate based on expected actual capacitr s29t25o



4s,ooo MH $18'OOO



r - L r - portion -^r!-= $ .65 variabte of rate for erpected actuat and normal capaclty



A5^oooitH =



(31



fired portion ol rate based on norrnal capacity =.19 $.95 total rate based on normal capaclty



.4o



of ratebasedon expectedactual



H:,rffon 9!.Og totalratebasedon erpestedactualcapacity



Amount of-factoryoverheadchargedto production if the company used the normal capacity rate: 47,OOO MH r $.9S = $44,650



(4)



Amount of factory overheadchargedto production if the company used the expeeted actual capacity ratel 47,OO0MH r $1.05 = $4g,3SO



(5)



Actual factory ovgrhgad.........o..................,..r..r...o....r....,......... Applied oyerhead(from (3) normal capacity ratel r......,........... $42,1oo 44.650 Underappligd overhgad '............'......................rr.o....roo...r....r...



(61



Actual factory ovgrhgad ....o..'..r........o.o..........D..r....r................,



Applied overhead(fmm (4f erpected actuat capacity;i;t..,..



Overappligd ovgrhgad ...'..............'...r.........,.i........r......o,.o..,...r



$ 2.4so $42,1 oo



4e.3so $(?€gA)



I



I



I



Chapter12



285



Pl2-q (11



b



Work in Process:



Flnished Goods:



Dfrect materialg ....,.. $ g,ooo Dlrect 1abor.............. 161000 Factory overhead (2'OOO x $3.601..... 7r2OO



Dlreet materials r.....,... $ 1 O , O O O Dltuct labor,........,....... 4O,OOO Factory overhead (5r0OOr $3.601 r.....r. l8,0oo



Total .........,..r....



s32,2OO



Total



s68,OOO



\-



(21



s t7,5OO 29,050 23,goo



Heat, light, and power Depreciatlon-fa ctonr bull dlngs



zqpp



4,00o sOoo Depreciation-factory eguipment... Miscellaneousfastory overhead..



6,5.O0 8,250 7r5OO aaaaattaaaaaa



aDaataaaaa



Total actual factory ovgrhgad r.,............................r!.,r..,...



(3)



Agtual ovgrhgad ........r.......................... Applled ovgrhEad r...o.................r.o.....r...................,..............r..



Underappliedoverhead



i-



9,goo



9r.z,oog $l l7,ooo 115,200



9_1999



ChWter 12



2ffi



P12-O(Concluded) COLUMBUSCOMPA}|Y Cogt of GoodgSold Statsment For January



(41



Materialc: Inventory January I Purchasar Lggt tlturng



$ 2l,ooo $1O8,OOO



to rupplleJ''t!,..........r...........



Matgrialsava11ab1c................................. lnventory Janualy 3l Dlract labor Applied factory January manufacturlng cost..,........,............r Add work in procesr, Janualt 1................... Lgss work in process, January 3l ,........,...,.. Cost of goods manufactured Add finished goods, Januaql I Gost of goods availablg for galc.......,.,......... Less finishgd goodq January 3l ......,......!.... Cost of goods sold gt normal ...r...r............... Add underapplled factory overhead .......D..o.. Cost ol goods gold at 8ctua|........................r



61050



lO2r95O



$123r95O 9'OOO $114,950 25O,OOO 115,2OO $488r15O 32r50O



$5l8,6lio 32r20O



s



-



9080,450



l8,ooo $so4,lso o8,ooo s436,45O lrSoo $438,25O



' -



I



Cluptcr 12



287



CASES cl2-1



(tl High..aa.......r....................a.1...........r......a,



!ow Differsnce



Dlres{ l.abor Hours



Factory OverheadGosts



217601000 hours 2rl60'000



334r5OO,OOO 2grggo,000 $- 4,620,000 '



600,000 hours



varlabfc rate = ${ro2orooo + 30oroo0hours = $7.7O per dlrect labor hour Total



OOSt



......r...r....rrr'xlr.aarar..lraal.r....lrr..............



Variablecost $!Z.ZOper dlrcct labor hourl......... Firgd elem gnt ......1.....1.......r.r...r..-.....r...............r.



Estlmatedtotal fagtory oyerheadfor next yoan Total yariable factory overhead(zr3o0;o00r



High $34r599r999 2lr252rOOO $l3,24g.ooo -



$7.70).....,........



Total firgd fagtory ovgrhgad .........,.,.......r....o.r..,..D.......r..r......



Total factory oygrhead,................,...,..........



(21



Low



s29rgg0,0oo lor632,000 $13,249,0oo . -



SlT,zlorooo l3,24g,ooo s3O,g5g,ooo -



Utility ol cost behavior Informailon: (al EYalustlonot product pricing decisions-Tha calculation of the fac. tory overheadrate requfredthe company to esUmatethe variable fagtory overhaadcost. tn short-term-priie-cutting srtuations, the price get should cover at least the varlable materials, labor, facto'/ ovarhead,and nonmanufacturingcost8. For the longer toil, tfr" total cost asslgnedto the various products may pnovide some basis for price dlfferentials among the ltems. (bl cost control eYaluation-Tho calculauon of the factory overhead rate rcqulrsd the companyto estimate tho fired t*b;y-;;rhead cost and thc varlable lactory overhead eost per direct labor hour. The amounts arc esumatesbt what ttro cost shoufd or witl be during t" let! yoar. Thc amounts can be used aJtnr uasis roi prsparagon of a budget alforvancelor actual activity to U" compared to actual cost incunrd. Any drftenancobetween ine ruoget amounts ano actral cogt woufd be I moasunoof the ereaivJness or ractory ovorhead cost contlol. (c) Developmentof budgets-The estimates of fixad factory cost and the.variablefactoryov_erhead"o"t p"l' direct overhead tabor hour aro usefur In budget deveropment.They p.rriith" "o,np"nito carbu_ late thc estlmated factory overheal iost roioirerent that arc berngconsrderedas the budget tsteveroped.activity levels



e



CHAPTER13 DISCUSSIONQUESTIONS Departmentalovefiead ralot aro prcfrrrrd to a sirgle talc becausc they irprovr tre cmlrcl of orcfiead by deparlnenl headr rosponrbb for csrtrollablr ovrrtrrad, and lhry incroar lhr ' accuracy ol product and job corting whcn productr or iobt rovo througfi variql prduch9 depsdmonb. 01$2. Deparlmrnlalizing faclory ovrrhrad ir an exlension of mclhodt used in ralablishing a single ralc becausr (a) an application baso musl be selected and crtimaled; (b) ovefiead estlnales musl bo rnadc; and (c) adual werhead musl be accwnubl.d sd cqnparod with applied overhead.Thcsc rteps an reguiredfor each producing deparimenl, whereas wilh a single rale, mly tolal factory dale ere neccrsary. Ot3-3. The surn cil departnatal over- or underapglied ovefiead would be diflerent. Every direct labor hour *ouH havc thc sarno arnount of applied overhead whcn a planl-wiJr ovrfiead rato b used, assuming lhal thr applicatbn base ir direcl labor hours. However,tho usc crfdepartmenlal ralec resulls in ditlcrcnt amounts ol applied ovorhoad, depending on thr labor houn in cach dcparlmcnl and tho indivirJual departmenlal ovcrhead ratos. For cxarnple, a firm wilh an ovorall ratc ol $2 would have S20,0@ ol applierJovefiead la 10,000 hours; the seme firm wilh departmcntal rates ol 9l and $3 lor its twe produchg dopartnents could have more or lcss applied orerheed, depcnding an the breakdown c, labor houn receivhg lhe S't ard 33 overheadcharge. Thc lotsl cet cf gmdr lold ard tdsl hvcntory rtould also be differerd, becausr departmental rate! could cauro diffrrcnt unil cogts. Thereforc, invenlory and cost of gods sold would be hfluenced by productssr 6 8



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e3-5-4 Basedon variablemanufacturingcost to producethe cushionedseat and the Offics Division'sopportunity cost, tho transler price is 911869for a 1OO-unitlot or $18.69 per seat, computedas follorvs: Slr329 VafiabteCOSt,....,.o....'....'....................' 54O Opportunitycost"'or""""""o"""""""' Thansfgrprice........"""'o"""""'o""'o"' 91t899'



(1)



This transfer price was derived as follows: '



VariableGost: GushionedMaterial: Padding.....r.............,......".-'-.-..D.r.'r Vinyl 't......o.......r."'.""""'o"""""""' Totalcushionmaterial.....---r....,.'.'.. Costincreass llO%r..-.-...r.-..'.,".....



32.40 4'0O S6.40 xl'1O



I 7.04 Cost of cushiongdseat.,.................,.......,.'....'.'.. Cushionfabricationlabor cost [$7.5O r .5 DLH]..,.......r.r.,r.,..,.......,.....,,.,......,.



3.75



Variablefactory overhead' ($5.0Oper DLHx .5 DLH)............'..........""""' 2.50 Totalvariablecost per cushionedseat....'..-r...-.. 913.2e sl,329 Totalvariablecost per 1O0-unitlot.... 'Variable overhead for 3O0,OOO hours: ...'....r'..r...,.o......r.. SU p pli eS .,................... '.r'.rD lndirgCt labOr ....r..'...'..r..'.ro......'..'.'...'.r........'.........o.'.. .



POWef



aaraaaa.raaaai.aaaa..roa.arra.raroar..ra..ra....a..tttl..tt...t...ttt.tt.



42O,OOO 375,OOO 18 O,OOO



Employeobenefits: 2Aohof direct labor and indirect labor (excluding zoohof supemisors'salarywhich is a fixed cost) - (2O%r $25Or000)) (S575rO0O ........'....'......'.'r....... 52 5,OOO direct labor hours slEoo,ooo Totalvariableoverheadat 3OO'OO0 Variableovertteadper DLH ($l15ooroo0+ 3o0roooDLF4...,,...o.,.o,...,.'....'..r...'. 35.oo per DLH



\ 1



700



Chapter25



P25-4 (Goncluded)



Opportunlty cost Labor hour constraint Labor hours to make a 10O.unitlot of defuxe office stools (1.5oDLH r 1(x) unlts).....'.'..,........r..,.,.. 1so hours Less labor hours to make a loo-unlt ]ot of cushionedseats (,5 DLH x 100 unlts)......,.,,...., SO hours Labor hours avallablefor economy office stoor ,,, J66 ho,ro Labor hours required to make one economy officg stool ..r.r...r..r...r..............r'.r..........r......r... .8 hour Use of extra labor devoted to economy office stool production(100 hours + ,8 hour)....,.D...o.r.,.,,..o. 125 stools



Selling price per unit......,......., Less manufacturing costs:



Deluxe Office Stool ,...,.,....,...



ss8.50



M a tg ri a l s '...r...." '....'....r tr .........' o...........,..,.o..,.. $14.s5 L a b o n (S 7 .5 0 x 1 '5 D L H) ,.' .....o...............,,...... 11.2s



($z.sox .8 DLH) Variablefactory overhead:



.....,.,..o...,..,,.



Economy Office Stool



s41.60 S15.76



6.oe 7.50



4.00



s33.30



$25.76



s2s.20



s15.84 x 125



x1OO



$2,520 Opportunlty cost of shifting production to the economyoffice stool ($Z,S2O- $t,gg0),...,......



(21



t



-Sl,ggo



g4O



variable manufacturing cost plus opportunity cost woutd be the best transfer price system to use because lt woufd allow the supptying division to be indifferent between selling the product internatlyio another division or selting the product in thelxternal market This transfer price method assures-thatthe supplying division's contribution to profit woutd be the same under either alternative. The sum of fhe variable manufacturing cost and the opportunlty cost repnesentsthe effort put forth by supplying division to the overalt weil-being of the company. appropriate transfer price must attempt to futfitf the company objectivesof autonomy,Incentive,and goal congruence.while no one transfer price can necessaritysatisfy each of these objectivesfully in atl situations,the variable manufacturingcost ptus opportunitycost transfer price should be the most appropriate method for meeting these obfectives in most situations,



701



ChaPter25



j-5



(rl



the cole Division ln orderto marimizdshod-runcontributionmargin' conclusionis sup' silourosccoptthe contractfrom warescompany.This portedby the followingcalculations: Colo Divisiontransferto DiamondDivision



ffi'ooounitsr$1,5oooach}..'.'....'...'........



Variablecost: Division -fgrooo from BaYrside -Purchaso $l t8ootOoo ......"""""' oach) x units $iloO Division processingcost In Cole --(Crooo'unlts Variabte l'5o0'oo9 x$sbo each)....."""""" Gontribution margifl .'...............



$4'5OO,OOO



3,3OOr0OO



sl,20o,ooo



Gole Divisionsalesto Wales9ompany each)o...............'.....-..t$4'375'ooo Variablecost: Purchasefrom BaYsideDivision (3,5OOunits x $5OOeach)..,..,...."""' sl,75O,OOO Variabteprocessingcost in Gole Division 3r15O'OOO l,4oo,o0o " (3r5oOunits r $400 gachl ...."""""" Contribution margiJl .."""""'o""""""""r



Conclusion: contribution margin from transfer to DiamondDivision Contributionmarginfrom sales to WalesCompany"""" Differencein favor of WalesCompanycontract"""""""



$1,225,ooo



$1,20o,ooo 1.225,OOO 25,OOO $



*{ -\ t! i



702



Chapter25



P25-S (Goncluded)



l2l



Cole Divisionb decision to accopt the contract from Wales Company is in the best Interest of Robert Products Inc. because the decision increases the overall corporationb contribution margin. This conclusion is supportod by the following cafculations: RevenuEsand cost savingsto Robert Products Inc.: Sales by Cole Divisionto Wales Gompany (3r50Ounlts r $1r25O9ach1................o.34r375rOOO Sales by Bayslde Divisionto london Company(3r0OO units r $COOoach)..... t',2oO,OoO Cost savings (variablecosts avoided by not accepting the Diamond Division order): BaysideDivision'ssavings (3r00Ounits r $30Oeach).D.,..,.r... 9OOTOOO Cole Divisionbsavings (3rO0Ounits r $50O each) ...ro.,..o,.



i TSOO,OOO $7rg75,OOO



Erpenditures incurred by Roberts products Inc.: Variablecost incured for the Wafes Companyorden Cola Divislon(3r5OO units r $400 each) $i,4oo,oo0 BaysideDivision (3,500 units r $25O OaCh)...t....rr.or......r........o.r......r...D.....;



875rOOO



Variablecost incurred for Diamond Division purchase from London Company (3,OOO units r $ir5OOeach).....,.,.....,.... 4,SOO,OOO Variablecost incurred for LondonCompany order from the BaysideDivision (3'OOOunits x $ZOO each).......o....o.'rjooo



7,375 ooo



600,000



PosiUveoverall contribution margin for Robert Produgts



111G.........'....r.....'...r....r.rr,......r.,..rrr..,....r............



$



6oOrOOO



703



. ChaPter25



CASES c25,-1 (rl



l2l



tho The return on capital employedhas definite limitations for evaluating performanco ol ths Dexter PlanL Too many fastors used to compute the pon return are not within the control of plant managemenl A significant Uon of the "return''gide of the measunols determined by the action of higher tevel managament-+ales and allocated costs. The plant management appsars to have effestive control ovor only a part of the costs incurred at the ptant levet, and the same Is true for tho asset baso. Corporateand dirislon assets are altocatedto tho plant' In additionr it qven though appearsthat specific assets rnay be charged to the ptant tho decisionwas made at a higher level' The case states that recommendationslor promotions and salary increasesfor plant manageniare influencedby the cornparisonof the budgeted return on capital emptoyedto tho actuai return. lt appears that this ptant manager is reacting in direct response to this measunement syrstem.T\ro evJnts have occurred outside his control (the sales decline and extra tand charges|,which will reduce his return on capital employed measure.He has respondedby influencingthose componentsof the measurethat he controts and that will improve this measure.The reduced costs-traini ng, maintenance,nepair, and certain labsr-wo uld not affect sales volume in the short run. lt is also likely that reduction of inventorytevetswill not inftuencethe sales in the short run. Through these actions hs has improvedhis return for 2oA, but it may well be at the erpense of 2oB, or later Yea|:i.



c25-2



(11



Tho shortcomings,or possibleinconsistencies,of using rate of return on capital employedas the sole criterion to evatuatedivisionalmanagement performanceinclude the following: i") Rateof return on capitatemployedtends to emphasizeshort-run performanceat the expenseof long-run profitability.In order to improveshort-run profits, managersmay make decisions that are not in the best interest of tho companyover the long run. (bl Rate of return on capital emptoyedis not consistent with cash llow modelsused lor capital oxpenditureanalysisand, therefore,ffiaY not be comparabtofor divisionsthat uso different accountingmethods or that havo assetspurchasedin different periods. (c) Rato of return on capital employedmay not be controllableto ths same ertent by all divisionmanagers,i,e.,the divisionsmay sell in differentmarketswith different degreesol product development' compeUtion, and consumerdemand.



t\ :V a



:



704



Chapter25



C25-2 (Concluded)



l2l



(3)



(d) The use of a single measuroof performance,such as rate of return on capital employed,may result in a firation on improvingthe componentsof the ono measureto the neglect of needed attention to other desirable acUviUes-research and development, employee development,and improvementol market position. The advantagesof using mulUplemeasuresii evaluatingdivisionalmansgement performanceincludethe following: (al Multiple performancomeasunesprovidea monecomprehensivepicture of performanceby consideringa wider range of management responsibilities. (b) Multiple performancemoasunesemphasizenonquantitativeas well as quantitativeaspects of performance,thereby providingan incentive for divisionalmanagersto engagein desirableactivities,such as, researchand development,employeedevelopment,and improvementof market position,as well as to seek profitability. (c) Multiple performance measuneswill mitigate the problem of trying to compare divisionalperforrnancewith a single measunethat may be computedon different basesin each division. (d) Multipleperformancsmeasunesinclude long-term as welt as shortterm incentives,thereby emphasizingtotal performancerather than just short-term profit maximization, The problems or disadvantagesof impfementing a system of multiple performancemeasuresincludethe following: (al The measurementcriteria are not all equally quantifiableand, therefore, it may be difficult to comparethe overaltperformanceof one division with another. (b) Centralmanagernentmay have difficuttyapplyingthe criteria on a consistentbasis.Some criteria may be subjectivelymore heavily weightedthan other criteria at different points in time, and some criteria may be in conflict with other criteria. [c] A multiple performancemeasurementsystem may be confusingto divisionmanagen;,thereby resultingin diffusion of effort and instability in performance.



*-\



705



i cnapterzs



,3



(r)



(al



Avorage oporating assets omploved: """r" Batance at 12131120F"""" 1'05)" / " """'r Balance' at 12131l2OE (512'600'000



BeginningPlus ending balances Average batanco ($24'600'000 * 2l'



$12,goo,ooo I2TOOO'OOO $24r600,OOO $t 2,3OO,OOO



Ineometrom operationsbeforetaxes @issetsemPloYed



Rate ol return on capital emPloYed



$2,460,0OO



$lZrgOo,ooo = 2ooh (bl



Income from operations bgfore taxgs o,..il.'D.."'r.rt'..'.



s 2,460,000



Minimum return: Average operating assets employod $12,30O,ooo 1r845,OOO 15oh Ghargefor invested capital '..--...'...'.. x ReSidUal



inCOme...rrr..or...rr....rr..o..........r.o........'.r.'.....



$



#=:



615,ooo



Yes. Presserb managementprobably wOuld have accepted the invest' ment lf residual income wenBused. The investment opportunity would have lowered presser's 2OFrate of return on capital employed because historical returns the expected return (16%) was lower than the divisionls_ Management as well as its actual2OF rale (2Ooh). (f 9.3% to 22.1o/") reiected the investment because bonuses ane based in part on the rate of return performanso measure. lf residual incomo weno used as a performance measuno(and as a basis for bonusesl' managemont would accept any and all investments that wsuld incroase rssidual income (i.e.' a doliar amount rather than a pencentagel,including the investment opportunity it had in 2OF'



(31



presser must controt atl ltems related to protit (revenuesand expenses) and investment if it is to be evatuatedfairty as an investment center by either the rate of return on capitat employedor the residual income per' formanco measunes.Presser must controt all elements of the business except the cost of invested capital, which is controlled by Lavvton Industries.



:-\ ;f



1



706



Chapter25 i



c25-4.



(r)



($oOoomitted) Marine Airline Plastics Divisional plofit......-...r.............orr.....o.......... $ 5 , 1 O O S 1 , O 5 O$ 9 , 3 6 0 3,4sO lfsq s70 Add corporate headquarters allocatiolt ...... j_gg gr,r* $ r,ro Adiusted divisional profit s2O,4OO s5,0OO S36,OOO Divisionalcapltal employed. allocaUon 970 252 corporate headquarteni 941 Deduct



Adjusteddivisionalcapltalemployed.......,. _9!9,430 g!,?49 J35,999 Adiusteddlvlslonalrate of return on capltal employed _!:q"n_ _ 47% ____Ze% 8,550 $2,235 S 9 ,930 Adjusted divisionalpro _$ Less 20oh of adiusted divisional capital employed(minimumlevel of income).. 3,886 950 7,O12 R e s i d u a l i n co mo



n*^



-gl'664



sl,285



S 2,918



t2l



All three divisions have a reported rate of return on capital emptoyed in oxcess of the 2Oo/o target rate. However,Marine Division management apparently turned down its Investment opportunity because tho investment had a lower rate of return than the division (24ohfor the investment yersus 25ohfor t:lls division|, which if accepted would havE lowered the divisionb rate lor the year, thereby lowering the annual bonus. Similarly, Airline Division management appears to have avoided fleet replacement tor the samo neason(i.e.,fleet replacementrEturn is 16% versus 21ohlor the divisionfor the year).Plastic Divisionb managementhas achieved the marimum bonus allowableunder the current bonus system and therefore had no incentive to increase profit (which may have been viewed as something that could simply increase next yearb budget). The levised liguras indicate that all three divisions are performlng welt; however' Marine Division's residual income is greater than the other two divisions combined.



(31



Airline Divisionls making an adjusted profit of $2,235,OOO and residual income ol $1'285'OOO. The adjusted rate of return on capital employed is 47oh,which suggeststhat the target rate should be rovised in order to properly evaluate it. Nevertheless,since the division is achieving mono than double the present target rate of 2Oohand more than either of the other two divisions, it appears to be a very good investment. Howover, fleet replacementshould be examinedalong with the computation ol a new adjusted rate of return on capital employedand residual incomg, Assumingthat the $25,OOO,OOO capitat investment does not inctude any corporate headquartersallocationand that the otd fixed assets have a book value equal to market value,tho recomputationfollows:



707



Chapter25 l



-4 (Concluded) lnCfgm gntal diViSiOn pf0fit o........'........r......r..'...r'...."o""' Add COfPOfato he adqUafte fS all OCaUOJl'....',"""""""oo"" AdiU5tgd InCfgmental diViSiOn pnOfit r.'...r..............'......."



$ 4,ooo,ooo 135,OOO



$ 4r135,ooo 2,235|OOO Ad-dadiustod divislonal profit without fleet replacemsnt Adjusted divisional profit with fleet replacefllsllt'..i.....'.. $ 6,370,000 $ 2r748,ooo DiViSiOn CUfnont aSSOt3...r'..-o.....r.'..t............t...t.......tttt"t (tleet feplagemgnt COSI}""""""""' DiViSiOnllXed aSSOtS Adtusted divislonal capital employed with fleet nOplaCOm€J1t..r......-........D.....r.ro.oo..r.............tt........t.....



Adiusted rato of noturn on capital employ€d"""""""'ro"



25,OOO,OOO



E?ulgfoo 230h



AdjUSted diVisiOnal pfOtit'.......r"..r.o'.....'.,'.ro....D.'..........dt$ 6,370,000



Less zlohof incrgmgntalcapital gmploygd'.'................. 5r549,600



AdiUStgd InCfgmgntal fgsidUal inCOme..'..'......'.......r.o..o..s__82o49



(41



(5)



Even when adjusted, the rate of return on capital omployed is above the corporatetarget level and the incrementalresidual income is positive. Furthermore,assuming that profits do not fall in the future' the roturn on assots employed should rise in the future because the amount of assets employed witi Oeclinodue to depreciaUon.As a result' it appoansthat from a quantitative perspective tho airline should not be soid. Nevertheless,the investment required to replace the fleet should be evaluatedusing ono of the capital expenditureevaluationtechniques that considersthe time valuo of money (e.9.,the net present value method or the discountedcash flow rate of return method). Frorn a qualitative perspective, factors such as spill-over businesst offering a futl line to customers, ulUmato profitability vvhenthe economy improvls, possiblo advantags to a competitor from tho sate of the division, €tc,, may override quantitative analysis. Tho bonus schemo should bo basod on nesidualincomo rather than rate of return on capital employedin order to avoid the problem of manageF; making suboptimal decisions from the corporationb overall perspective. The divisionalperformancemeasuresshould be computed without allo' cations of corporate headquarters costs or assets, because such allocations are arbitraryand divisionalmanagerscannot control such costs or the uss of such assets.Also, capital investments(such as the ones faced by the Marine Divisionand the Airtine Division)should be evaluatedby using the capital budgetingevaluationmethods (such as the net present value method or tho internal rate of return method)' CGA-Canada (adapted). Reprint with pei-mission'



7



Chapter25 i



708



c25-5, (l)



(21



(3)



(4)



\*



. psrformance in selecUng measunes Generaf crfteria that should be used to evaluateoperatlngmanagorsIncludo tho following: (al The measunesshould be controllableby the manager and reflect the scfions and docisions made by the managor in the current period. (bl The measunesshould be mutually agreed upon, clearly understood, and accepted by all the parties Involved. (c) The measunosshould (ll reward long-term performance; (2) tie incentive compensation to achieving strateglc (nonfinancial)goals, such as target market share, productivity levels, improvement in product quallty, product development, and personnel developmeng and (3) evaluate opsraUng profits before gains from financiaf transactions; before deductions for approved erpenditures on research and development,quality fmprovements,and preventive maintenance;and before deductionsfor the ifcremental amount of accelerated depreciation, A major expansionof Star Paperb plant was compfeted in April, 2oA. Thls erpansionincluded addiUonsto the production-line machinery and the replacementof obsoleteand fully depreciatedequipmenl As a result, the value of the divisionb asset base increased considerably. Whlfe productivity undoubtedly increased during the first year in the erpanded plant, the increaso was not immediate nor sufficient to offset the Increase In the value of the capital employed, .Apparent weaknesses in the performance evaluation pnocessat Royal Industries include the following: (al There was no mutual agreementon the use of return on capital employedas the only measurementof perforrnance. (bl The feedback from Fortner was insufficient Fortner indicated that Harris would receive feedback about the questions raised concerning the appropriatenessof using the return on capital employed to evaluate performance, but feedback was not prtrvided. (c) There is only one single measureof performance that may give a distorted picture of actual performance at Star Paper. A single rtoasuro could oncouragedivision managementto make decisions that could lmprove short-run return at the expense of long-nrn profits. Examplesinclude deferring maintenance,avoiding plant modernization, eliminatingemployeetraining, discontinuing research and development,etc. Multiple performanceevaluationcriteria woutd be appropriate for the evaluation of the Star Paper Division. The criteria suggested by Harris take into account more of the results of the key decision being made by the manager'angnot in conflict with each other, and emphasizethe batanco of profits with the control of current assets. These thrse measunes are controllableby division managersand, in conjunction with return on capital omployed,provido a monocomplete picture of business success.



25 .Chapter



709



,-('



(1)



(21



The 2oB bonus pool availablefor the managementteams of each division follow: Meyera Service Company Bonus Pool = l0oh r income belore income tar and bonuses = .1OI S417,OOO = S41r7OO Wellington Products lnc. Bonus Pool = loh r (Revenue- Cost of Product| - $4,95010001 = .01 I ($10,0001000 = .Ol I $5r05Or0OO = S50'5OO TVyoof the advantagesand two of tho disadvantagesto Renslen Inc. of the bonus pool incentiveplan at Meyers SeruiceCompanl follow: Advantaoes (al The managementteam will bs moUvatedby tho bonus plan because they have the opportunity to earn addiUonalcompensation lf they work hard as a team and take some risks for the company. (bl Becausemanagementsharos in the benefits of efficient operations, there is an incenUveto control all costs (product costs as well as overhead costs) and to promote sales. Disadvantaqes (al The plan may rnotivate managementto increase tho rbottom line" only and concentrate on the short run. The pfan may encourage managersto sacrifice quality or avoid new product developmentfor the sake of curent profits. (b) Managementmay postponenecessaryexpenditunossuch as maintenance or nessarchand developmentin order to increase currsnt net Incomo. TVvoof the advantagesand two of the disadvantagesto Renslon Inc. of tho bonus pool incentivoptan at WellingrtonProducts Inc. follovn Advantages (al Tho managementteam will be motivated by the bonus plan because each managerhas the opportunityto earn additional compensation by working hard and taking some risks for the company. (bl The managerswifl be encouragedto sell the most profitable mix of products. Disadvantages (al The plan omits accountabilityfor all costs except lor production costs. Therefore, manager:i may leel no obligation to control the costs that aro shown below tho gross profit line. (bl The ptan may cause managersto focus all energiesto maximizing currsnt sales and production regardlessof the impact this could have on the manufacturingplanL There is a strong motivationto defer maintenance,employeetraining, quality improvement,etc., becausethe incentiveis to producoand sell high volume.



Chapter 25 :



7lo C25-G (Goncluded)



(3)



\



Having two differont incontive plans lor the two operating divisions ' coutd result In behavioralproblems and may reduce teamwork/synergy between the two divisionsif the managers of either division ' believe they are belng trsated untairly. ThemanagementteamatMeyersServicomaybe|ievethatthey havo to work harder to achievetheir bonusos because they are responslble for all costs and must achieve overall efficient operations to earn substantialbonuses. The managementteam at Wellington Products may believe that they have less of an opportunltyto affect the size of the bonuses they receive becauseonty changes in sales and/or product costs will increaso the gross ProfiL These perceptionsof Ineguitycoul4lead to decreased motivation that could'result in decreaseddivisionalperformanco, (b) In order to justlfy having dlfferent IncenUve plans for the two divisions, Renslenmanagementcould argue the foflowing: (f l The goals and products of the two buslnesses are different (one is a servlce organizationwhile the other is a manufacturing organizationl and, therefore, should be measured on different crite' ria. For example, the control of manufacturing costs and improved productivity may be the most important factor in maintaining Wellington Prcducts'competitiveness, while lt may be critical for Meyers Service to control all costs to maintain profitability. (21 The plans wenoIn place when the businesseswere acquired and had proved satisfactory previously. (a)



Chapter25



7fl



'>-7



(rl



l2l



(l



f



prob' ln termg ol what is best for the total company in the long run, omar aUtygt,ould not supply Defco with Electrical Fitting X1726for ths 55 Per unii pri"". In this ;s;, I appears that Omar and Defco 6erve different opermiriets and do not represent closely related operating units. Omar interates at capacity;Defco does not. No mention is made of any other probably betis divisionatbusiness, In the long run, Gunnco Gorporation ter served lf omar is permitted to continue dealing with its regular cus' tomers at the market price. lf Delco is having difficulties, the solution p-uiury doeg not lie with temporary help !f" sxpenso of another divi' "! purposed iion, *ttos" gales to regular custorners could be lost' The greater longcourso of acuon should not be toltowed unless it will yield a run pront for the total company (Gunnco)T"n will any o-theralternative. ' Gunnco would be $5.5o better oif, in the short run, if Omar supptied Defco Electrical Fitting 11726tor $5 and sold the brake unit for 949'5O' Assuming that the $s ier unit for fixed factory overhead and administraUve erpensos r"pr"r"nts an allocation of tho costs Delco incurs, regardless of the brake unit order, Gunncowould lose $2.50 in cash flow for oach fitting sotd to Defco, but would gain $B from each brake unit sold by Defco. ln tha short nrn, there ls an advantagoto Gunnco of transferring Efectrical Fitting 11726at the SS price and, thus, selling the brake unit for $49.50. To ilafe this happen, Gunnco witt have to overrule the decision ol Omarb managomenl This action would be counter to the purposes of decentralizeddecision making.lf such action wens necessaryon a regular basis,the decentralizeddecision making inherent in the divisionaliied organizationwould be a sham. Then the organizationalstructure is inappropriatefor the situation. On the other hand, if this is an occurnenceof relative infrequency'tha interventionof corporate managementwill not indicate inadequateorganizational structuro. lt may, however,create problems with division man' agements,tn the case at hand, if Gunnco managementrequires that Electrical Fitting 11726 be transferred at $5r the result will be to enhanceDefcob operatingresutts at the sxpense of Omar.This certainly is not in keeping with the concept that a managerb performanceshould be measuredon tho results achievedby the decision he or she controls. Omar is operatingat capacity and wouid lose S2.5O(S7'5O- 35) for eachtitting sold to Defco.The managementperformanceof Omar is measured by reiurn on investmentand doitar profits. Sellingto Defco at 35 per unit would adversely affect thoso performanco measures'



7



= .,h



I



Chapter25



712



c25-8 (1)



Thc Lorar ElegtricCompanywlll earn higher profits lf the necessaryint. gratodcircutts$Cs)aro sold to the SystomsDivision rather than to regulgr customors.Ttrelimprovedproftt will be $l.OOper clock systemas rhown belor* Contrlbutlonmargln from clock gystem: Propogedgalea prlcc



$7.50



rtattaaaaaa



Less varlabloProducUoncosts: Intcgratedclrcutts 1C378(5 O S-f q ..-.-.-..-' Outsldcoompono11t8 "...."........."'o""""""" Clrcuh bOard otchlng.'...D.....D...'.......oD."'.."'



Argemb$ tesUng,iackgglnlf"'.'.-..'F......-marginpor'unlton clock system ContrfbutJon ContrlbutionmarginforgoneIn DevicesDivision: Salgg price of lC 378..........',..r.',....o..'.......'D.D..



$ '75 2.75 ,40 1,35



; i



f3)



5.2s s2.25



$ .ao



,15 Variablg production costs..'.'r....D..'......-.'.'.,..... CorrtrlbuUonmargin per clrcult...Dr.D.'..o..'...'.'.. $ ,25 Unlts tor clOck Eystem....r.'F"...'.'......".o.'D....... r 5 Contrl b utl on m a rg| !l Io9t..'.-.......r..r.......oo..r.'.... Net advantagcto Lorax Companylf clock system le producgd by SytstemsDlvlsion..r""..D,...r'....r



f2)



i



'r-.



b



1,25 :



$l.OO/unit



lnteruention by cxccutivo msnagsment generally ls not advisable' oxcept In unugual clrcumstances, becausc h takes aytay the delegated decision powor glven to dlvision managementand influences the measunesused to ludgc the pcrfornancc of dlvlsion managemenl h conflicts with Important objectivce of decentralizaUon-division auton o my ovor o p eratIng declalons and doclslons made by those closest to the operating rccnc. Such lnterfercncc cgn rcsult in lower moralc and poorer performancc by dlvlslon mansgement because they will be evaluated uslng moaauncsthat arc not substantlally within their control. However, a divi' clon should ns,tbo allowed to make a decislon that ls not in the best Interest ol thc total compsny oyor tre long nrn. Thc descrlbed policy would avoid the need lor lntervention by erecutive msnsgsmont or an arbiffiion committee, Howeyer,the polisy is undesir' abfe becauac other unfavorable consequsnces outweigh this benelit. With thc described policy, there would be no analysis to determine the most profitable use of an ltem raquired to be transferred at variable cosL In sddltion, e division managerwould have less control over the divisionb operaUons,and there would be an "uncontrollable'influencoon the managerbporformancomoasure;this could result In lower moral tor msnagora.



a