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CHAPTER-3 SOLUTIONS TO EXERCISES EXERCISE 3-23 (10 MINUTES) 1. Process 2. Job-order 3. Job-order (contracts or projects) 4. Process 5. Process 6. Job-order 7. Process 8. Job-order (contracts or projects) 9. Process 10. Job-order EXERCISE 3-29 (25 MINUTES) JOB-COST RECORD Job Number



TB78



Date Started



4/1



Description



teddy bears



Date Completed



4/15



Number of Units Completed Date 4/1 4/5 Date 4/1 – 4/8 Date 4/15



Direct Material Requisition Number Quantity 101 400 108 500 Time Card Number Various time cards



Direct Labor Hours 500



Manufacturing Overhead Activity Base Quantity Direct-labor hours 500



1,000



Unit Price $.80 .30



Cost $320 150



Rate $12



Cost $6,000



Application Rate $2



Cost $1,000



Cost Summary Cost Item Total Direct Material Total Direct Labor Total Manufacturing Overhead Total Cost Unit Cost



Date 4/30



Amount $ 470 6,000 1,000 $7,470 $ 7.47



Shipping Summary Units Remaining Units Shipped In Inventory 700 300



Cost Balance $2,241*



*300 units remaining in inventory$7.47 = $2,241 EXERCISE 3-30 (30 MINUTES) 1.



CRUNCHEM CEREAL COMPANY SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED DECEMBER 31, 20X1 Direct material: Raw-material inventory, January 1 ..........................................$ 30,000 Add: Purchases of raw material .............................................. 278,000 Raw material available for use .................................................$308,000 Deduct: Raw-material inventory, December 31 ...................... 33,000 Raw material used .................................................................... Direct labor ........................................................................................ Manufacturing overhead Total manufacturing costs ................................................................ Add: Work-in-process inventory, January 1 .................................... Subtotal .............................................................................................. Deduct: Work-in-process inventory, December 31 ......................... Cost of goods manufactured ............................................................



$275,000 120,000 252,000 * $647,000 39,000 $686,000 42,900 $643,100



*Applied manufacturing overhead is $252,000 ($120,000210%). Actual manufacturing overhead is also $252,000, so there is no overapplied or underapplied overhead. 2.



Finished-goods inventory, January 1 ................................................................... $ 42,000 Add: Cost of goods manufactured ........................................................................ 643,100 Cost of goods available for sale ............................................................................ $685,100



Deduct: Finished-goods inventory, December 31 ............................................... 46,200 Cost of goods sold ................................................................................................. $638,900 EXERCISE 3-34 (15 MINUTES) NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant to the solution.



$997,500  $13.30 per hour 75,000 hours



1.



Predetermined overheadrate 



2.



To compute actual manufacturing overhead: Depreciation ............................................................................................... Property taxes............................................................................................ Indirect labor .............................................................................................. Supervisory salaries ................................................................................. Utilities ....................................................................................................... Insurance ................................................................................................... Rental of space .......................................................................................... Indirect material: Beginning inventory, January 1 ........................................................ $ 48,000 Add: Purchases .................................................................................. 94,000 Indirect material available for use ..................................................... $142,000 Deduct: Ending inventory, December 31 .......................................... 63,000 Indirect material used ........................................................................ Actual manufacturing overhead ............................................................... Overapplied Overhead



=



actual manufacturing overhead



=



$1,002,000 – ($13.3080,000*) = $62,000



–



$ 231,000 21,000 82,000 200,000 59,000 30,000 300,000



79,000 $1,002,000



applied manufacturing overhead



*Actual direct-labor hours. 3.



Manufacturing Overhead ........................................................... Cost of Goods Sold ..........................................................



62,000 62,000



EXERCISE 3-35 (20 MINUTES) NOTE: Budgeted sales revenue, although given in the exercise, is irrelevant to the solution.



1.



Predetermined overhead rate



=



budgetedmanufacturing overhead budgetedlevelof cost driver



(a)



$364,000 = $36.40 per machine hour 10,000 machinehours



(b)



$364,000 = $18.20 per direct-labor hour 20,000 direct-laborhours $364,000 $280,000*



(c)



=



$1.30 per direct-labor dollar or 130% of direct-labor cost



*Budgeted direct-labor cost = 20,000$14 2.



Actual manufacturing overhead



–



applied manufacturing overhead



=



overapplied or underapplied overhead



(a)



$340,000 – (11,000)($36.40)



=



$60,400 overapplied overhead



(b)



$340,000 – (18,000)($18.20)



=



$12,400 underapplied overhead



(c)



$340,000 – ($270,000†)(130%)



=



$11,000 overapplied overhead



†Actual



direct-labor cost = 18,000$15



PROBLEM 3-52 (30 MINUTES) 1.



MARCO POLO MAP COMPANY SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE MONTH OF MARCH Direct material: Raw-material inventory, March 1 ............................. Add: March purchases of raw material ................... Raw material available for use ................................. Deduct: Raw-material inventory, March 31 ............. Raw materials used ..................................................



$ 17,000 113,000 $130,000 26,000 $104,000



Direct labor ..................................................................... Manufacturing overhead applied (50% of direct labor) Total manufacturing costs............................................. Add: Work-in-process inventory, March 1 ................... Subtotal ........................................................................... Deduct: Work-in-process inventory, March 31 (90%$40,000) ........................................ Cost of goods manufactured.........................................



160,000 * 80,000 $344,000 40,000 $384,000 36,000 $348,000



*Work upward from the bottom of the statement, using the information available. Direct labor + manufacturing overhead = total manufacturing costs – direct material cost = $344,000 – $104,000 = $240,000. Since manufacturing overhead = 50% of direct labor, then manufacturing overhead = $80,000 and direct labor = $160,000. †Cost



of goods manufactured = cost of goods sold + increase in finished-goods inventory = $345,000 + $3,000 = $348,000.



†



PROBLEM 3-52 (CONTINUED) 2.



MARCO POLO MAP COMPANY SCHEDULE OF PRIME COSTS FOR THE MONTH OF MARCH Raw material: Beginning inventory ................................................................... Add: Purchases .......................................................................... Raw material available for use ................................................... Deduct: Ending inventory .......................................................... Raw material used ............................................................................... Direct labor .......................................................................................... Total prime costs .................................................................................



3.



MARCO POLO MAP COMPANY SCHEDULE OF CONVERSION COSTS FOR THE MONTH OF MARCH Direct labor ............................................................................................ Manufacturing overhead applied (50% of direct labor) ...................... Total conversion cost ...........................................................................



PROBLEM 3-56 (45 MINUTES) 1.



$ 17,000 113,000 $130,000 26,000 $104,000 160,000 $264,000



Predetermined overhead rate:



Budgetedmanufacturing overhead $606,000*  Budgeteddirect-laborhours 120,000  $5.05 per direct-labor hour



$160,000 80,000 $240,000



*Budgeted manufacturing overhead = variable overhead + fixed overhead $606,000 = $390,000 + $216,000 2.



Cost of job 77: Cost in beginning work-in-process inventory .................................... Direct material....................................................................................... Direct labor (3,500 hours$24.00 per hour)* .................................... Applied manufacturing overhead (3,500 hours$5.05 per hour)....................................................... Total cost ..............................................................................................



*Direct-labor rate  3.



$ 54,000 45,000 84,000 17,675 $200,675



direct-labor wages $204,000   $24.00 per hour direct-labor hours 8,500



Manufacturing overhead applied to job 79: Direct-labor hourspredetermined overhead rate  2,000 hours$5.05 per hour



 $10,100



PROBLEM 3-55 (25 MINUTES) 1. Quarter 1st ................................................................. 2nd ................................................................ 3rd ................................................................. 4th .................................................................



Predetermined Overhead Rate $4 per hour 5 per hour 4 per hour 5 per hour



Calculations $100,000/25,000 $80,000/16,000 $50,000/12,500 $70,000/14,000



January $100 300



April $100 300



80 ____ $480



100 $500



January $480 48 $528



April $500 50 $550



2. Direct material............................................. Direct labor ................................................. Manufacturing overhead: 20 hrs$4 per hr ................................ 20 hrs$5 per hr ................................ Total cost .................................................... 3. Total cost .................................................... Markup (10%) .............................................. Price............................................................. 4.



Predetermined rate  



annualbudgetedmanufacturing overhead annualbudgeteddirect-laborhours $300,000  $4.44 per hour (rounded) 67,500



5. Direct material............................................... Direct labor ................................................... Manufacturing overhead (20 hrs  $4.44) ... Total cost ......................................................



January $100.00 300.00 88.80 $488.80



April $100.00 300.00 88.80 $488.80



PROBLEM 3-55 (CONTINUED) 6.



Total cost ...................................................... Markup (10%) ................................................ Price...............................................................



$488.80 48.88 $537.68



Notice that with quarterly overhead rates, the firm may underprice its product in January and overprice it in April.



CHAPTER-2 EXERCISE 2-24 (10 MINUTES) The general formula for solving all three cases is as follows:



Beginning inventory of finished goods



+



Cost of goods manufactured during period



–



Ending inventory of = finished goods



Cost-ofgoods sold expense



Using this formula, we can find the missing amounts as follows:



Beginning inventory of finished goods................ Add: Cost of goods manufactured ....................... Subtract: Ending inventory of finished goods .... Cost of goods sold ................................................



I $ 84,000* 419,000 98,000 $405,000



Case II $12,000 95,000 8,000 $99,000*



III 7,000 318,000* 21,000 $304,000



EXERCISE 2-29 (25 MINUTES) 1.



ALEXANDRIA ALUMINUM COMPANY SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED DECEMBER 31, 20X1 Direct material: Raw-material inventory, January 1 ......................................... Add: Purchases of raw material ............................................. Raw material available for use ................................................ Deduct: Raw-material inventory, December 31 ..................... Raw material used ................................................................... Direct labor ....................................................................................



$ 60,000 250,000 $310,000 70,000 $240,000 400,000



Manufacturing overhead: Indirect material ....................................................................... Indirect labor ............................................................................ Depreciation on plant and equipment .................................... Utilities ...................................................................................... Other ......................................................................................... Total manufacturing overhead ................................................ Total manufacturing costs............................................................ Add: Work-in-process inventory, January 1 ............................... Subtotal .......................................................................................... Deduct: Work-in-process inventory, December 31..................... Cost of goods manufactured........................................................ 2.



$ 10,000 25,000 100,000 25,000 30,000 190,000 $830,000 120,000 $950,000 115,000 $835,000



ALEXANDRIA ALUMINUM COMPANY SCHEDULE OF COST OF GOODS SOLD FOR THE YEAR ENDED DECEMBER 31, 20X1 Finished-goods inventory, January 1 ............................................................ Add: Cost of goods manufactured ................................................................ Cost of goods available for sale .................................................................... Deduct: Finished-goods inventory, December 31 ........................................ Cost of goods sold ..........................................................................................



$150,000 835,000 $985,000 165,000 $820,000



EXERCISE 2-29 (CONTINUED) 3.



ALEXANDRIA ALUMINUM COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1 Sales revenue .................................................................................................. Less: Cost of goods sold ............................................................................... Gross margin ................................................................................................... Selling and administrative expenses ............................................................. Income before taxes........................................................................................ Income tax expense ........................................................................................ Net income .......................................................................................................



$1,105,000 820,000 $ 285,000 110,000 $ 175,000 70,000 $ 105,000



PROBLEM 2-42 (25 MINUTES) 1.



a.



Total prime costs: Direct material ................................................................................... Direct labor: Wages ............................................................................................ Fringe benefits .............................................................................. Total prime costs ..............................................................................



$ 2,100,000 485,000 95,000 $ 2,680,000



PROBLEM 2-42 (CONTINUED) b.



Total manufacturing overhead: Depreciation on factory building ..................................................... Indirect labor: wages ........................................................................ Production supervisor's salary ....................................................... Service department costs ................................................................ Indirect labor: fringe benefits .......................................................... Fringe benefits for production supervisor ..................................... Total overtime premiums paid ......................................................... Cost of idle time: production employees ........................................ Total manufacturing overhead ........................................................



c.



$2,100,000 580,000 534,000 $3,214,000



Total period costs: Advertising expense......................................................................... Administrative costs ........................................................................ Rental of office space for sales personnel ..................................... Sales commissions .......................................................................... Product promotion costs ................................................................. Total period costs .............................................................................



2.



$ 580,000 534,000 $1,114,000



Total product costs: Direct material ................................................................................... Direct labor........................................................................................ Manufacturing overhead .................................................................. Total product costs ..........................................................................



e.



115,000 140,000 45,000 100,000 30,000 9,000 55,000 40,000 $ 534,000



Total conversion costs: Direct labor ($485,000 + $95,000) .................................................... Manufacturing overhead .................................................................. Total conversion costs .....................................................................



d.



$



$



99,000 150,000 15,000 5,000 10,000 $ 279,000



The $15,000 in rental cost for sales office space rental is an opportunity cost. It measures the opportunity cost of using the former sales office space for rawmaterial storage.



PROBLEM 2-57 (25 MINUTES) 1.



Output (.75 liter bottles) 10,000 15,000 20,000



Calculation $177,000/10,000 $195,500/15,000 $214,000/20,000



Unit Cost $17.70 $13.03 (rounded) $10.70



The unit cost is minimized at a sales volume of 20,000 bottles. 2.



Output Sales (.75 liter bottles) Revenue 10,000 $180,000 15,000 225,000 20,000 240,000



Total Costs Profit $177,000 $ 3,000 195,500 29,500 214,000 26,000



Profit is maximized at a production level of 15,000 bottles of wine. 3.



The 15,000-bottle level is best for the company, since it maximizes profit.



4.



The unit cost decreases as output increases, because the fixed cost per unit declines as production and sales increase. A lower price is required to motivate consumers to purchase a larger amount of wine.



CHAPTER-3 Schedule of Cost of Goods Manufactured Direct material: Raw material inventory, beginning Add: Raw material purchases Raw material available for use Deduct: Raw material, ending Raw material used



$xxx xxx $xxx xxx $xxx



Direct labor Manufacturing overhead Indirect material Indirect labor Other actual overhead charges Total actual manufacturing overhead Add: Overapplied overhead or Deduct: Underapplied overhead Overhead applied to work-in-process Total manufacturing costs Add: Work-in-process inventory, beginning Subtotal Deduct: Work-in-process inventory, ending Cost of goods manufactured



xxx



$xxx xxx xxx $xxx xxx xxx $xxx xxx $xxx xxx $xxx



Schedule of Cost of Goods Sold Finished goods inventory, beginning Add: Cost of goods manufactured* Cost of goods available for sale Deduct: Finished goods inventory, ending Cost of goods sold Add: Underapplied overhead or Deduct: Overapplied overhead Cost of goods sold (adjusted)



$xxx xxx $xxx xxx $xxx xxx $xxx



* From Cost of Goods Manufactured Schedule



CHAPTER-4 SOLUTIONS TO EXERCISES EXERCISE 4-16 (10 MINUTES) The general formula for all three cases is the following:



Work-in-process, beginning



+



Units started during month



–



Units completed during month



=



Work-in-process, ending



Using this formula, the missing amounts are: 1.



12,000 units



2.



5,300 kilograms



3.



750,000 gallons



EXERCISE 4-18 (15 MINUTES) 1.



6,000 equivalent units (refer to (a) in the following table)



2.



4,400 equivalent units (refer to (b) in the following table) CALCULATION OF EQUIVALENT UNITS: RAINBOW GLASS COMPANY Weighted-Average Method



Work in process, October 1 .... Units started during October .. Total units to account for ........ Units completed and transferred out during October ........... Work in process, October 31 .. Total units accounted for ........ Total equivalent units ..............



Physical Units 1,000 5,000 6,000 4,000 2,000 6,000



Percentage of Completion with Respect to Conversion 60%



100% 20%



Equivalent Units Direct Material



Conversion



4,000 2,000 _____ (a) 6,000



4,000 400 ____ (b) 4,400



EXERCISE 4-24 (25 MINUTES) TULSA PAPERBOARD COMPANY Weighted-Average Method Direct Material Conversion Work in process, February 1 ................... $ 5,500 $ 17,000 Costs incurred during February ............. 110,000 171,600 Total costs to account for ....................... $115,500 $188,600 Equivalent units ....................................... 110,000 92,000 Costs per equivalent unit ........................ $ 1.05 $ 2.05



Total $ 22,500 281,600 $304,100 $



3.10



1. Cost of goods completed and transferred out during February:



 number of units  total cost per      .......................  transferred out   equivalent unit 2.



90,000$3.10



$279,000



Cost remaining in February 28 work in process: Direct material (20,000*$1.05) . Conversion (2,000*$2.05) ........ Total .............................................. Total costs accounted for ................



$ 21,000 4,100 25,100 $304,100



*Equivalent units in February 28 work in process:



Total equivalent units (weighted average) ....................... Units completed and transferred out ............................... Equivalent units in ending work in process ....................



Direct Material 110,000 (90,000) 20,000



Conversion 92,000 (90,000) 2,000



PROBLEM 4-36 (30 MINUTES) 1.



a.



Tax Returns (physical units) Returns in process, February 1 ..... 200 Returns started in February ........... 825 Total returns to account for ........... 1,025 Returns completed during February ........................ 900 Returns in process, February 28 ... 125 Total returns accounted for ........... 1,025 Total equivalent units of activity ...



Percentage of Completion with Respect to Conversion (labor and overhead) 25%



100% 80%



Equivalent Units Labor Overhead



900 100 ____ 1,000



900 100 ____ 1,000



Overhead £ 2,500 45,000 £47,500 1,000 £47.50



Total £ 8,500 134,000 £142,500



b. Returns in process, February 1 ................... Costs incurred during February .................. Total costs to account for ............................ Equivalent units ............................................ Costs per equivalent unit ............................. 2.



Labor £ 6,000 89,000 £95,000 1,000 £95.00



£142.50



Cost of returns in process on February 28: Labor:



equivalent unitscost per equivalent unit 100£95.00 .......................................................



£ 9,500



Overhead: equivalent unitscost per equivalent unit 100£47.50 ....................................................... Total cost of returns in process on February 28 .........................................



4,750 £14,250



CHAPTER-5 An activity-based costing system is a two-stage process of assigning costs to products. In stage one, activity-cost pools are established. In stage two a cost driver is identified for each activity-cost pool. Then the costs in each pool are assigned to each product line in proportion to the amount of the cost driver consumed by each product line. A cost driver is a characteristic of an event or activity that results in the incurrence of costs by that event or activity. In activity-based costing systems, the most significant cost drivers are identified. Then a database is created that shows how these cost drivers are distributed across products. This database is used to assign costs to the various products depending on the extent to which they use each cost driver. 5-5



The four broad categories of activities identified in an activity-based costing system are as follows: (a)



Unit-level activities: Must be done for each unit of production.



(b)



Batch-level activities: Must be performed for each batch of products.



(c)



Product-sustaining activities: Needed to support an entire product line.



(d)



Facility-level (or general-operations-level) activities: Required for the entire production process to occur.



Product-costing systems based on a single, volume-based cost driver tend to overcost high-volume products, because all overhead costs are combined into one pool and distributed across all products on the basis of only one cost driver. This simple averaging process fails to recognize the fact that a disproportionate amount of costs often is associated with low-volume or complex products. The result is that low-volume products are assigned less than their share of manufacturing costs, and high-volume products are assigned more than their share of the costs.



The pool rate is calculated by dividing the budgeted amount of an activity cost pool by the budgeted total quantity of the associated cost driver. The pool rate is the cost of a particular activity that is expected per unit of the associated cost driver.



SOLUTIONS TO EXERCISES EXERCISE 5-21 (15 MINUTES) 1.



Material-handling cost per lens:



$50,000  200  $1,000 [(25)(200)  (25)(200)]* *The total number of direct-labor hours. An alternative calculation, since both types of product use the same amount of the cost driver, is the following: $50,000  $1,000 50*



*The total number of units (of both types) produced. 2.



Material-handling cost per mirror = $1,000. The analysis is identical to that given for requirement (1).



3.



Material-handling cost per lens: $50,000 † 5 (5  15) *  $500 25



*The total number of material moves. †The number of material moves for the lens product line. 4.



Material-handling cost per mirror: $50,000  15 * (5  15)  $1,500 25



*The number of material moves for the mirror product line.



EXERCISE 5-22 (15 MINUTES) 1.



a.



Quality-control costs assigned to the Satin Sheen line under the traditional system: Quality-control costs = 14.5%  direct-labor cost Quality-control costs assigned to Satin Sheen line = 14.5%  $27,500 = $3,988 (rounded)



b.



Quality-control costs assigned to the Satin Sheen line under activity-based costing: Quantity for Activity Pool Rate Satin Sheen Incoming material inspection....... $11.50 per type ..... 12 types ........ In-process inspection ................... .14 per unit ...... 17,500 units .. Product certification ..................... 77.00 per order .... 25 orders ....... Total quality-control costs assigned ..........................................................



2.



The traditional product-costing system undercosts the Satin Sheen product line, with respect to quality-control costs, by $525 ($4,513 – $3,988).



PROBLEM 5-32 (30 MINUTES) 1.



Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours = $800,000 ÷ 25,000* = $32 per direct labor hour *25,000 budgeted direct-labor hours = (3,000 units of Standard)(3 hrs./unit) + (4,000 units of Enhanced)(4 hrs./unit)



Direct material……………. Direct labor: 3 hours x $12………… 4 hours x $12………… Manufacturing overhead: 3 hours x $32………… 4 hours x $32………… Total cost…………………. 2.



Assigned Cost $ 138 2,450 1,925 $4,513



Activity-based overhead application rates:



Standard



Enhanced



$ 25



$ 40



36 48 96 $157



128 $216



Activity Cost Driver Activity



Application Rate



Cost



Order processing



$150,000



÷



500 orders processed (OP)



=



$300 per OP



Machine processing



560,000



÷



40,000 machine hrs. (MH)



=



$14 per MH



Product inspection



90,000



÷



10,000 inspection hrs. (IH)



=



$9 per IH







A product (or service) costing system accumulates the total cost of making products and facilitates the calculation of a per-unit cost. Applications exist in:







A cost driver is any event or activity that causes costs to be incurred. Possible examples include labor hours in manual assembly work and machine hours in automated production settings.







The higher the degree of correlation between a cost-pool increase and the increase in its cost driver, the better the cost management information.



 . Managerial accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization’s goals. *



Line personnel are directly involved in carrying out the mission of the organization (e.g., assembly workers in a factory, doctors in a hospital, teachers in a school).



*



Staff personnel (accountants, lawyers, personnel directors, and other administrative positions) provide support for the organization’s mission.