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PRINCIPLES OF
COST ACCOUNTING
Sixteenth Edition
Edward J. VanDerbeck
Professor Emeritus; Xavier University
________________________________________________________________________________
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TABLE OF CONTENTS
CHAPTER 1 ...................................................................................................................................... 1
CHAPTER 2 .................................................................................................................................... 37
CHAPTER 3 ................................................................................................................................... 81
iii
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CHAPTER 1
QUESTIONS
1. The function of cost accounting is to provide c. The manufacturer will incur some costs
the cost accounting information that is the peculiar to this type of industry, such as
basis for planning and controlling current machine maintenance, materials handling,
and future operations. It provides the cost and inspection of manufactured goods.
figures and analyses that management The two types of operations are similar in
needs in order to find the most efficient that they are both concerned with purchas-
methods of operating, achieving control of ing, storing, and selling goods; they must
costs, and determining selling prices. have efficient management and adequate
2. Originally issued for companies marketing sources of capital; and they may employ
products in Europe, a set of international many workers.
standards for quality management, known 7. Cost accounting information is used by
as the ISO 9000 family, was designed by the management in the following ways:
International Organization for Standardiza- a. Determining product costs which are
tion. Obtaining ISO 9000 is important be- necessary for: determining cost of
cause many companies will only contract goods sold and valuing inventories; de-
with ISO 9000 suppliers. termining product selling price; meeting
3. A company meeting the requirements of ISO competition; bidding on contracts; and
14000 has an environmental management analyzing profitability.
system that (1) identifies and controls the b. Planning by providing historical costs
environmental impact of its activities, prod- that serve as a basis for projecting data.
ucts, or services, (2) improves its environ-
c. Controlling operations by providing cost
mental performance continually, and (3) im-
data that enable management to period-
plements a systematic approach to setting
ically measure results, to take corrective
environmental objectives and targets.
action where necessary, and to search
4. Reasons given by U.S. companies for for ways to reduce costs.
reshoring their manufacturing operations 8. Unit cost information is important to man-
include (1) Chinese wages and shipping agement because the unit costs of one peri-
costs have risen sharply in the past few od can be compared with those of other pe-
years, (2) frustration with the sometimes riods, and significant trends can be identified
poor quality of goods made by foreign con- and analyzed. Unit costs are also used in
tractors, (3) the desire to bring production making important marketing decisions relat-
managers and assembly-line workers closer ed to selling prices, competition, bidding,
to engineers, suppliers, and customers, (4)
9. For a manufacturer, the planning process
an effort to protect a companys intellectual
involves the selection of clearly defined ob-
property, and (5) weariness from midnight
jectives of the manufacturing operation and
phone calls and multiple annual trips to the development of a detailed program to
Asian producers. guide the organization in reaching the objec-
5. Manufacturers convert purchased materials tives. Cost accounting provides historical
into finished goods by using labor, technolo- cost information that is used as the basis for
gy, and facilities. Merchandisers purchase planning future operations.
completed products for resale. Service busi- 10. In a manufacturing concern, effective control
nesses or agencies sell or provide services is achieved in the following ways:
rather than products.
a. Responsibility must be assigned for each
6. A manufacturer differs from a merchandiser detail of the master production plan.
in these ways:
b. There must be a periodic measurement
a. The merchandiser buys items to sell of the actual results as compared with
while the manufacturing business must predetermined objectives.
make the items it markets. c. Management must take corrective action
b. Usually the manufacturer has a greater as necessary to improve or eliminate inef-
investment in physical facilities. ficient and unprofitable operations.
1
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2 Chapter 01, VanDerbeck
11. Responsibility accounting is the assigning of Board to provide oversight of the accounting
accountability for costs or production results profession; prohibiting a public accounting
to those individuals who have the authority firm from providing many nonauditing ser-
to influence costs or production. It involves an vices to a company that it audits; requiring
information system that traces these data to the that a companys annual report contain
managers who are responsible for them. managements opinion on the effectiveness
12. The criteria for a cost center are: of its internal controls; placing the responsi-
a. A reasonable basis on which manufac- bility for hiring, compensating, and terminat-
turing costs can be allocated. ing the audit firm in the hands of the board
b. A person who has control over and is of directors audit committee; criminal penal-
accountable for many of the costs ties for the destruction or alteration of busi-
ness documents and for retaliating against
13. The requirements for becoming a CMA in-
whistleblowers.
clude a four-year college degree, two years
of relevant work experience, and passing a 19. Financial accounting focuses upon financial
rigorous two-day examination. statements which meet the decision-making
14. The four major categories of ethical conduct needs of external parties, such as investors,
that must be adhered to by management creditors, and governmental agencies, and
accountants include competence, confiden- to some extent the needs of management.
tiality, integrity, and objectivity. Management accounting focuses on both
historical and estimated data that manage-
15. The steps that should be taken by the man- ment needs to conduct ongoing business op-
agement accountant include: erations and do long-range planning. Cost ac-
a. Discuss the problem with the immediate counting includes those parts of both finan-
supervisor except when it appears that cial and management accounting that
the supervisor is involved, in which case collects and analyzes cost information. It
it should be taken to the next higher provides the product cost data required for
management level. special reports to management (manage-
b. Clarify relevant ethical issues by confi- ment accounting) and for inventory costing in
dential discussion with an objective ad- the financial statements (financial accounting).
visor. 20. With regard to methods for computing the
c. Consult your own attorney as to legal cost of goods sold, the difference between
obligations and rights. a manufacturer and a merchandiser is in
d. If the ethical issue still exists after ex- the determination of the cost of goods
hausting all levels of internal review, available for sale. Since the manufacturing
there may be no other recourse on sig- business makes the products it has availa-
nificant matters than to resign from the ble for sale, the cost of goods manufac-
organization. tured must be determined and added to
16. Corporate governance is the means by which beginning finished goods inventory to de-
a company is directed and controlled. Good termine the cost of finished goods available
corporate governance is important to all for sale. Since the merchandiser purchases
rather than makes goods to sell, the cost of
stakeholders because, due to recent account-
purchases is added to beginning merchan-
ing scandals, the need for ethical conduct in
dise inventory to compute the cost of goods
managing corporate affairs has never.
available for sale.
17. The recent accounting scandals where
21. Finished Goodsthis is an inventory ac-
management, including controllers and chief
count reflecting the total cost incurred in
financial officers, has cooked the books to
manufacturing goods on hand that are ready
make reported financial results seem better
for sale to customers.
than actual created the need for the Sar-
banes-Oxley Act. To help curb future abus- Work in Processthis inventory account
es the act holds CEOs and CFOs account- includes all of the costs incurred to date in
able for the accuracy of their firms financial manufacturing goods that are not yet com-
statements. pleted.
18. Key elements of the Sarbanes-Oxley Act Materialsthis account represents the cost
include: certification by the CEO and CFO of materials on hand that will be used in the
that the financial statements fairly reflect the manufacturing process.
results of operations; the establishment of
the Public Company Accounting Oversight
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VanDerbeck, Chapter 01 3
22. Manufacturers, such as aircraft producers cost but required an inordinate amount of
and home builders, make tangible products time to trace directly to the products being
by applying labor and technology to raw ma- manufactured.
terials. They may have as many as three in- 27. Prime cost is the cost of direct materials and
ventory accounts: Finished Goods, Work in direct labor; it represents cost specifically
Process, and Raw Materials. Merchandisers, identified with the product.
such as wholesalers and department stores, Conversion cost is the cost of direct labor and
purchase tangible products in finished form factory overhead; it is the expense incurred to
from suppliers. They have only one inventory
convert raw materials into finished goods.
account, Merchandise Inventory. Service
businesses, such as airlines and sports fran- No, one of the component costs, direct labor,
chises, provide intangible benefits such as would be added twice. The cost of manufactur-
transportation and entertainment. They have ing includes direct materials, direct labor, and
no inventory account. factory overhead. Both prime cost and conver-
23. A perpetual inventory system involves main- sion cost include the cost of direct labor.
taining a continuous record of purchases, is- 28. Costs for direct materials and direct labor are
sues, and new balances of all goods in charged directly to the work in process ac-
stock. Under a periodic inventory system no
count, while the factory overhead costs are
attempt is made to record the cost of mer-
chandise sold at the time of sale. At the end first accumulated in the factory overhead ac-
of the accounting period a physical inventory count and are then transferred to the work.
is taken for the purpose of determining the 29. Cost of goods sold represents the total
cost of goods sold and the ending inventory. manufacturing cost of the goods sold during
24. The basic elements of production cost are: a given accounting period, while the cost of
a. Direct materials. goods manufactured represents the total
b. Direct labor. manufacturing cost of all goods that were
c. Factory overhead. finished during the accounting period.
25. Direct materialsthe cost of those materi- 30. Non-factory costs are charged to selling or
als which become part of the item being general administrative expense accounts
manufactured and can be readily identified and do not affect the determination of manu-
with it. facturing costs. Costs which benefit both
Indirect materialsthe cost of those items factory and non-factory operations must be
which are necessary for the manufacturing allocated in some equitable manner.
process but cannot be identified specifically 31. A mark-on percentage is a percentage of the
with any particular item manufactured, and
total manufacturing cost that is added to the
the cost of those materials which do become
a part of the manufactured product but manufacturing cost to establish a selling
whose cost is too insignificant to track to in- price that covers the products share of sell-
dividual jobs. ing and administrative expenses and earns
Direct laborthe labor cost for employees a satisfactory profit.
who work directly on the product manufac- 32. Job order costing is appropriate when the
tured. output of an enterprise consists of custom-
Indirect laborthe cost of labor for those made or specially ordered goods. Manufac-
employees who are required for the manu- turers such as machine shops and ship-
facturing process but who do not work di- builders, merchandisers such as computer
rectly on the item being manufactured. retailers, and service firms, such as CPAs
Factory overheadincludes all costs relat- and architects, all use job order costing.
ed to the manufacturing process except di- 33. Process costing is appropriate when an en-
rect materials and direct labor, such as indi-
terprises operations involve the continuous
rect materials, indirect labor, and all other
factory expenses. or mass production of large quantities of ho-
mogeneous items. Manufacturers such as
26. As manufacturing processes have become
increasingly automated, direct labor cost as chemical producers and candy makers, mer-
a percentage of total product cost has de- chandisers such as newspapers and agricul-
creased for many companies. In the case of tural wholesalers, and services such as hos-
Harley-Davidson, it was only 10% of product pital X-ray departments and airlines all use
process costing.
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4 Chapter 01, VanDerbeck
34. An advantage of accumulating costs by de- 36. Standard costs are reasonably attainable
partments (process costing) or by jobs ( j ob costs which are estimated by management
order costing) is that the information provid- in advance of production. Standard costs
ed aids management in achieving control of are then compared with actual costs, and
costs. With a process cost system, man- differences called variances are calculated
agement can make departmental compari- and analyzed. A standard cost system is not
sons of current period costs with prior period a separate cost accounting system but is
costs and can take corrective action as applied in conjunction with either process
needed. If costs were accumulated for the costing or job order costing to increase cost
factory as a whole, management would have control effectiveness.
difficulty identifying specific sources of ex- 37. Square footage occupied by each of the ar-
cessive costs and inefficiencies. The infor- eas would be a good cost allocation base to
mation provided by a job order cost system use in allocating the depreciation expense
aids management in the determination of between the factory operations and the sell-
selling prices, the profit on each job, and ing and administrative function. This distinc-
costs applicable to similar jobs produced in tion is important because the depreciation
future periods. allocated to factory operations is a manufac-
35. A job cost sheet is a form on which all of the turing expense that becomes part of invento-
individual costs applicable to a job are rec- ry cost and eventually cost of goods sold,
orded. Since the job cost sheets show de- whereas the portion allocated to selling and
tailed costs and gross profit for each job, administrative expense is a period cost that
they are useful to management in bidding on is always expensed in the period incurred.
similar jobs in the future.
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VanDerbeck, Chapter 01 5
EXERCISES
E1-1
The variances for kitchen wages and utilities were favorable for September,
whereas the variances for food and supplies were unfavorable. On a year-to-
date basis, the only expense that did not have the same pattern as September
was utilities which had a $120 F variance for the month, but an $850 U year-to-
date variance.
E1-2
No, the performance report should not be prepared just once a year. It should be
furnished to managers at regular intervals, in this case monthly, on a timely ba-
sis. If it is not provided in a timely fashion, it will not be effective in controlling fu-
ture operations.
E1-3
E1-4
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6 Chapter 01, VanDerbeck
E1-5
Selling &
Direct Direct Factory Admin.
Items Materials Labor Overhead Expense
E1-6
When direct materials and supplies are purchased, the materials account is debited.
When direct materials and supplies are issued to the factory, the materials account is
credited, Work in Process is debited for the cost of the direct materials, and the factory
overhead account is debited for the cost of indirect materials.
When labor costs are distributed, the payroll account is credited, Work in Process is
debited for the cost of direct labor, and Factory Overhead is debited for the cost of indi-
rect labor.
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VanDerbeck, Chapter 01 7
As other costs related to manufacturing are recorded, the factory overhead account is
charged. The debit to Work in Process for factory overhead is made by allocating over-
head expenses to this account. At the same time, the factory overhead account is cred-
ited. The total cost of goods completed is recorded by debiting Finished Goods and
crediting Work in Process. When units are sold, Cost of Goods Sold is debited and Fin-
ished Goods is credited.
E1-7
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8 Chapter 01, VanDerbeck
E1-8
Viejas Manufacturing Co.
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 20
a. Materials:
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VanDerbeck, Chapter 01 9
E1-9
E1-10
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10 Chapter 01, VanDerbeck
E1-11
b.
Direct Direct Total
Jobs Materials Labor Factory Production
Completed Cost Cost Overhead Cost
d.
Unit Cost
Job 1040 ($9,200 400) .................................. $23.00
Job 1065 ($5,880 240) .................................. $24.50
Job 1120 ($4,180 200) .................................. $20.90
e.
Selling Price Per Unit
Job 1040 ($23.00 140%) ............................... $32.20
Job 1065 ($24.50 140%) ............................... $34.30
Job 1120 ($20.90 140%) ............................... $29.26
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VanDerbeck, Chapter 01 11
E1-12
b.
Direct Direct Total
Jobs Materials Labor Factory Production
Completed Cost Cost Overhead Cost
d.
Unit Cost
Job 1100 ($18,200 500) ................................ $36.40
Job 1200 ($16,000 400) ................................ $40.00
Job 1300 ($13,300 300) ................................ $44.33
e.
Selling Price Per Unit
Job 1100 ($36.40 150%) ............................... $54.60
Job 1200 ($40.00 150%) ............................... $60.00
Job 1300 ($44.33 150%) ............................... $66.50
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12 Chapter 01, VanDerbeck
E1-13
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VanDerbeck, Chapter 01 13
PROBLEMS
P1-1
P1- 2
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14 Chapter 01, VanDerbeck
P1-3
P1-4
1.
Kokomo Furniture Company
Statement of Cost of Goods Manufactured
For the Month Ended November 30, 2013
Direct materials:
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VanDerbeck, Chapter 01 15
P1-4 Continued
2.
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16 Chapter 01, VanDerbeck
P1-4 Concluded
3.
Assets
Current assets:
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VanDerbeck, Chapter 01 17
P1-5
2.
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18 Chapter 01, VanDerbeck
P1-5 Concluded
Assets
Current assets:
Cash ...................................................................... $ 18,200
Accounts receivable ................................................... 12,600
Inventories:
Finished goods ....................................................... $ 19,300
Work in process ..................................................... 0
Materials................................................................. 4,700 24,000
Total current assets ................................................ $ 54,800
Plant and equipment:
Building .................................................. $400,000
Less accumulated depreciation .......... 4,000 $ 396,000
Machinery and equipment ...................... $ 66,000
Less accumulated depreciation .......... 1,650 64,350
Total plant and equipment ............................................... 460,350
Total assets ..................................................................... $ 515,150
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VanDerbeck, Chapter 01 19
P1-6
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20 Chapter 01, VanDerbeck
P1-6 Continued
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VanDerbeck, Chapter 01 21
P1-6 Continued
2.
Materials Building
4/30 18,000 (b) 62,000 4/30 480,000
(a) 58,000
76,000
14,000
Accumulated
DepreciationBuilding Factory Equipment
4/30 72,000 4/30 220,000
(d) 2,000
74,000
Accumulated
DepreciationFactory
Equipment Office Equipment
4/30 66,000 4/30 60,000
(d) 1,833
67,833
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22 Chapter 01, VanDerbeck
Accumulated
DepreciationOffice Equipment Accounts Payable
4/30 36,000 (j) 158,000 4/30 95,000
(d) 1,000 (a) 58,000
37,000 (e) 11,000
164,000
6,000
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VanDerbeck, Chapter 01 23
P1-6 Continued
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24 Chapter 01, VanDerbeck
P1-6 Concluded
Assets
Current assets:
Cash ............................................................... $164,000
Accounts receivable ....................................... 82,000
Inventories:
Finished goods ........................................... $ 23,000
Work in process .......................................... 58,683
Materials ..................................................... 14,000 95,683
Total current assets ........................................ $341,683
Plant and equipment:
Building ......................................................... $ 480,000
Less accumulated depreciation .................. 74,000 $ 406,000
Factory equipment .......................................... $ 220,000
Less accumulated depreciation .................. 67,833 152,167
Office equipment ............................................ $ 60,000
Less accumulated depreciation .................. 37,000 23,000
Total plant and equipment .............................. 581,167
Total assets ........................................................ $922,850
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VanDerbeck, Chapter 01 25
P1-7
1. Materials........................................................................... 55,000
Accounts Payable ....................................................... 55,000
2. Work in Process (Materials) ............................................. 45,500
(Beginning balance + Purchases Ending balance =
$6,000 + $45,000 $5,500)
Factory Overhead (Indirect Materials) .............................. 9,900
(Beginning balance + Purchases Ending balance =
$800 + $10,000 $900)
Materials ..................................................................... 55,400
3. Payroll ............................................................................. 65,000
Wages Payable ........................................................... 65,000
4. Work in Process (Labor)................................................... 50,000
Factory Overhead (Indirect Labor) ................................... 15,000
Payroll ......................................................................... 65,000
5. Wages Payable...................................................................... 65,000
Cash................................................................................ 65,000
6. Factory Overhead ............................................................ 42,000
Accounts Payable ....................................................... 42,000
7. Factory Overhead ............................................................ 10,000
Various Credits (Prepaid Insurance,
Accumulated Depreciation, etc.) ................................. 10,000
8. Work in Process (Factory Overhead) ............................... 76,900
(Indirect materials + Indirect labor + Factory
overhead paid + Factory overhead recorded =
$9,900 + $15,000 + $42,000 + $10,000)
Factory Overhead ....................................................... 76,900
9. Finished Goods ................................................................ 169,400
(Work in process, beginning balance +
Materials + Labor + Factory overhead
Work in process, ending balance =
$3,500 + $45,500 + $50,000 + $76,900 $6,500)
Work in Process .......................................................... 169,400
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26 Chapter 01, VanDerbeck
P1-7 Concluded
10. Cost of Goods Sold .......................................................... 168,200
(Finished goods, beginning balance + Goods
finished during the month Finished goods,
ending balance = $12,000 + $166,400 $13,200)
Finished Goods........................................................... 168,200
P1-8
1.
Dennis Manufacturing Company
Statement of Cost of Goods Manufactured
For the Month Ended July 31, 20
Direct materials:
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VanDerbeck, Chapter 01 27
2.
Dennis Manufacturing Company
Schedule to Compute Prime Cost
For the Month Ended July 31, 20
e
Direct materials used ........................................................................ $ 104,000
f
Direct labor incurred.......................................................................... 160,000
Prime cost incurred during July ......................................................... $ 264,000
3.
Dennis Manufacturing Company
Schedule to Compute Conversion Cost
For the Month Ended July 31, 20
f
Direct labor incurred.......................................................................... $ 160,000
g
Factory overhead .............................................................................. 80,000
Conversion cost incurred during July ................................................ $ 240,000
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28 Chapter 01, VanDerbeck
P1-9
Supporting Computations:
a
Factory overhead: 27% total manufacturing cost (27% $1,000,000) = $270,000
b
Direct labor: 75% of direct labor equals $270,000, so direct labor was $360,000
($270,000 75%)
c
Direct materials used equals total manufacturing cost less direct labor and factory
overhead [$1,000,000 ($360,000 + $270,000)]
d
Work in process inventories:
Let X = ending work in process inventory
$1,000,000 + 0.4X X = $970,000
X = $50,000
0.4 X = $20,000
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VanDerbeck, Chapter 01 29
P1-10
1.
Job 101 Job 102 Job 103 Job 104 Total
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30 Chapter 01, VanDerbeck
P1-10 Concluded
*Completed **Billed
Job 101 ..................... $ 6,100 $ 6,100
Job 102 ..................... 14,500 14,500
Job 103 ..................... 20,100
$40,700 $20,600
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VanDerbeck, Chapter 01 31
P1-11
c.
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32 Chapter 01, VanDerbeck
P1-12
2. a. Sales
$900,000
Materials $ 138,000
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P1-12 Concluded
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34 Chapter 01, VanDerbeck
P1-13
2.
Direct Direct Total
Materials Labor Factory Production
Job Cost Cost Overhead Cost
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VanDerbeck, Chapter 01 35
P1-13 Concluded
4.
Adirondack Manufacturing Co.
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 20
Direct materials used ........................................................................ $ 98,500
Direct labor ....................................................................................... 155,000
Factory overhead .............................................................................. 120,000
Total manufacturing cost ................................................................... $ 373,500
Less work in process inventory, January 31 ................................. 30,500
Cost of goods manufactured ............................................................. $ 343,000
MINI-CASE
1. The ethical standards which apply to this case are competency, integrity, and objec-
tivity. Competency requires that Gates perform his professional duties in accordance
with relevant laws, regulations, and technical standards. Integrity requires that Gates
refrain from either actively or passively subverting the attainment of the organizations
legitimate and ethical objectives. Objectivity requires that Gates communicate infor-
mation fairly and objectively.
2. Gates should first explain to Allen that recording the revenue in 2013 would be a vio-
lation of generally accepted accounting principles (GAAP). If Allen persists, Gates
should report the matter to the corporate controller. If there is no support from top
management, Gates should resign.
INTERNET EXERCISE 1
INTERNET EXERCISE 2
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CHAPTER 2
QUESTIONS
1. The two major objectives of materials con- The anticipated usage requirement should
trol are (1) physical control or safeguarding be founded upon the number of units ex-
the materials and (2) control of the invest- pected to be completed daily and the quanti-
ment in materials. ty of material each completed unit will re-
2. The controls established for safeguarding quire.
materials include limiting access to the ma- The lead time interval involves the typi-
terials area, segregating the duties of em- cal period of time required between placing
ployees involved with materials, and assur- the order and receiving the shipment.
ing that materials records are being main- The safety stock is the minimum stock
tained accurately. on hand needed to prevent running out of
Limiting access involves placing inven- stock due to errors in calculations of usage,
tories in storage areas that can be entered delivery delays, poor quality of merchandise
only by authorized personnel and restricting received, and so on.
the release of any material or finished goods 6. The economic order quantity (EOQ) is the
to individuals who have properly authorized calculated size of an order which minimizes
documents. Control procedures that limit the total cost of ordering and carrying the in-
access to work in process areas should be ventory over a specified period of time. It is
established within each department or pro- a function of the cost of placing an order, the
duction station. number of units required annually, and the
The segregation of duties involves as- carrying cost per unit of inventory
signing different people to different func- 7. The cost of placing an order, the number of
tions. Employees assigned to purchasing units required annually, and the annual car-
should not also be assigned to receiving, rying cost per unit in inventory are the items
storage, or recording functions, etc. needed to calculate the economic order
The accurate recording of purchases quantity.
and issuances of materials facilitates com- 8. The cost of an order includes the salaries
paring the recorded materials on hand to the and wages of employees who purchase, re-
actual materials on hand. If a substantial dif- ceive, and inspect materials; the expenses
ference between the recorded and actual incurred for telephone, fax usage, postage,
quantities is discovered, it can be quickly and forms; and the accounting and record
determined and investigated. keeping associated with inventories.
3. Management should consider production 9. The carrying cost of materials inventory includes
and working capital requirements along with the cost of storage and handling; the amount of
alternative uses of available funds which interest lost on alternative investments; the
might yield a greater return. Consideration losses due to obsolescence, spoilage, and theft;
should also be given to the cost of materials the cost of insurance and property taxes; and
handling, storage, and insurance protection the cost of maintaining accounting records and
against fire, theft, and other casualty losses. controls over the inventory.
In addition, the possibility of loss from dam-
age, spoilage, and obsolescence should not 10. The supply chain is the system that links a
be overlooked. manufacturer with its suppliers. If the system is
especially lean, in an effort to be cost effi-
4. Order point is the time to place an order for
cient, it is quite possible that parts may not be
additional material because the level of
available when needed due to work stoppages,
stock has reached a predetermined mini-
strikes, or natural disasters.
mum established by management.
5. In order to determine an order point, the in- 11. a. Purchasing agent duties include:
formation available should include the: (1) Coordinating materials requirements
(1) anticipated daily usage of the material, with production to prevent delays in
(2) lead time interval, and production due to inadequate materi-
(3) safety stock required. als supply on hand.
37
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38 Chapter 02, VanDerbeck
(2) Compiling and maintaining a vendor 14. Many manufacturing firms use forms some-
file from which materials can be what similar to those shown in the text;
promptly obtained at the best avail- however, most firms design forms to meet
able prices. (Note to Instructor: You their specific requirements. These specially
may take this opportunity to explain designed forms usually perform the same
to the student that the lowest price functions as those depicted in the text but
may not always be the best price.) may vary in appearance. For example, a
The purchasing agent should also purchase order will provide for recording all
consider the quantity to be ordered essential information to obtain materials
at one time to get a lower unit price, from selected vendors, regardless of the de-
the quality of the material, the time sign or format. Also, many firms now use
lapse before delivery, the credit terms, electronic data interchange to communicate
and the reliability of the vendor. with suppliers and expedite the receipt of
(3) Placing purchase orders for materi- orders.
als needed. 15. The internal control procedures established
(4) Supervising the purchase order pro- for incoming shipments should provide the
cess until materials are received. following safeguards:
(5) Verifying purchase invoices and a. A receiving report prepared by the re-
approvals for payment. ceiving clerk authenticates the quantity of
specific items ordered and verifies that
b. The receiving clerk is responsible for
they were received in good condition.
supervising the receipt of incoming
shipments. These duties include check- b. A copy of the receiving report should
ing the quantity and quality. At times, the accompany the materials received when
they are moved from the receiving area
assignment may include checking the
to the storeroom. As materials are
process.
placed in location, the storeroom keeper
c. The storeroom keepers usual duties should review and substantiate the
include properly storing all materials re- quantities received per the receiving re-
ceived, issuing materials only when port.
proper authorization is presented, and c. The cost and quantity of each item on
keeping the purchasing agent informed the approved invoice are independently
of the quantities on hand. recorded in the materials ledger.
d. The production supervisor is responsi- d. The total of the invoice is independently
ble for maintaining production and for recorded in the purchases journal to be
preparing or approving requisitions for subsequently posted to the appropriate
the quantities and kinds of materials general ledger accounts.
needed for current production. e. The invoice for materials purchased
12. A purchase requisition is used by the store- should not be approved for payment un-
room keeper to provide the purchasing til the purchasing agent reviews and ap-
agent with information concerning the mate- proves the following details on the in-
rials to be ordered. A purchase order is a voice:
document completed by the purchasing (1) The unit prices and materials de-
agent and sent to a vendor to order the ma- scriptions on the invoice are com-
terials. pared with similar data on the pur-
13. The purchasing agent compares the ven- chase order.
dors invoice to the purchase order to ascer- (2) The extensions of unit prices and
tain that there is agreement between the totals are verified.
description of the materials, the prices, and (3) The terms of payment and any other
the terms of purchase. The method of ship- charges are verified with the pur-
ment and the date of delivery are checked to chase order.
see that they conform with the instructions (4) The method of shipment and date of
on the purchase order. delivery are verified.
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VanDerbeck, Chapter 02 39
16. The purpose of a debit-credit memorandum paid than if some other method were used.
is to inform the vendor that an adjustment Since LIFO leaves the earlier costs of pur-
has been made to the vendors account. chases in inventory, the overall value of the
The information on the memo includes the material on hand at the end of a period will
amount of the adjustment, the reason for the be more conservatively stated than if FIFO
adjustment, and the type and quantity of were used. This lower valuation of materials
materials involved. inventory, which affects both the income
17. The originators of the various forms are: statement and the balance sheet, may be an
Forms Source advantage or a disadvantage depending on
a. Purchase requisition Storeroom keeper the use made of the balance sheet. The
lower valuation is an advantage when prop-
b. Purchase order Purchasing agent
erty taxes are assessed on the dollar
c. Receiving report Receiving clerk amount of inventory on hand. However, it
d. Materials requisition Production may be a disadvantage if the financial
supervisor statements are to be used with a loan appli-
e. Debit-credit Purchasing agent cation and a larger dollar value of inventory
memorandum would add to the appearance of the compa-
18. A materials ledger is a subsidiary ledger in nys financial position.
which individual accounts are kept for each Many companies, when prices are ris-
item of material carried in stock. The materi- ing, adopt LIFO to minimize the income tax
als account in the general ledger is the con- effects and believe that in such economic
trol account for the materials ledger. trends the costs charged against sales more
accurately depict reality.
19. a. First-in, first-out: It is assumed that ma-
terials issued are from the oldest mate- 21. Entries Source of Data
rials in stock. They were the first pur- a. Debits in materials Receiving
chased and are costed at the prices ledger to record report
paid for these earliest purchases. The materials purchased
cost of the ending inventory will reflect b. Credits in materials Materials
the most recent prices paid for the most ledger to record requisition
recent purchases. materials requisitioned form
b. Last-in, first-out: It is assumed that c. Debits in job cost Materials
materials issued are from the most re- ledger to record requisition
cent stock. The last purchased will be materials placed in form
the first used at the prices paid for these process
latest purchases. The ending inventory 22. In a just-in-time manufacturing system, ma-
will be costed at the prices paid for the terials are not received from suppliers until
earliest purchases. they are ready to be put into process. The
c. Moving average: Under this method, no work is not done in one department until the
attempt is made to identify the materials subsequent department is ready to work on
issued as to the time of purchase. The it. This approach differs from a traditional
average unit price of all materials in manufacturing system where materials are
stock is maintained; therefore, materials ordered and stored well in advance of pro-
issued are costed on a basis of average duction, and departments stockpile partially
prices. Unit cost changes each time unit completed units until the next department is
purchase prices change; therefore, end- ready for them.
ing inventory will be priced at the latest 23. A traditional push manufacturing system
average cost. produces goods for inventory in the hope
20. In a period of rising prices, the LIFO method that the demand for these goods will then be
estimates the cost of goods sold using the created. In a JIT pull manufacturing sys-
material purchased at the highest prices. tem, the credo is Dont make anything for
Such costs, when matched to sales for the anybody until they ask for it.
period are believed to more accurately re-
flect the gross margin earned. The lower in-
come, resulting from the use of LIFO,
means that a smaller amount of taxes will be
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40 Chapter 02, VanDerbeck
24. Disadvantages of a push manufacturing 28. Six Sigma is a process improvement meth-
system include having too many: dollars in- od that uses data gathering, analytical tech-
vested in inventory; defects not being de- niques, and customer feedback, and whose
tected because partially completed goods aim is to have no more than 3.4 defects per
are inventoried rather than completed im- one million process occurrences. It is an im-
mediately; obsolete products due to the long portant goal because the manufacture and
lead time from start to finish. sale of defective items is costly and tends to
25. The throughput time is the time that it takes damage a companys reputation.
a unit to make it through the production sys- 29. If the value of the scrap is high, an inventory
tem, and it is computed by dividing the file should be prepared showing the quantity
number of units in work in process by the and market value. If both quantity and mar-
number of units completed each day to ob- ket value are known, an inventory account
tain a measure in days. Velocity also should be debited while an account such as
measures the speed with which units are Scrap Revenue is credited. If the market
produced in the system, but in percentage value of the scrap is unknown, a journal en-
terms relative to past production; for exam- try cannot be made until the scrap is sold, at
ple, velocity increased by 50%. which time Cash (or Accounts Receivable)
26. Advantages of producing all units in a single is debited and Scrap Revenue is credited.
cell include: fewer and shorter movements 30. Spoiled work represents products which are
of materials; production in smaller lot sizes not first quality by the companys standards
because other products do not have to be and have imperfections that will not be cor-
made in the same cell; more worker motiva- rected. They are sold as irregular units,
tion and satisfaction due to the teamwork called seconds. Defective work also in-
approach within the cell. cludes goods that are not first quality by the
27. Critics of backflush costing argue that it is established standard but have imperfections
not consistent with GAAP because it does that will be corrected, making them first-
not accurately account for inventories. Pro- quality products.
ponents of backflush costing argue that
Work in Process and Finished Goods are
immaterial in a lean production environment
and, therefore, their omission does not ma-
terially misstate the financial statements.
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VanDerbeck, Chapter 02 41
EXERCISES
E2-1
E2-2
2 CN
a. EOQ =
K
2 $72 360,000
=
$4
$51,840,000
=
$4
= 12,960,000
= 3,600 gallons
b. 360,000 gals. (annual usage) 3,600 gals. (per order) = 100 orders
Ordering cost: 100 orders @ $72 per order ............................................. $ 7,200
Carrying cost: (3,600 gals. 2) @ $4.00 per gals.................................... 7,200
Total order and carrying cost ................................................................... $14,400
E2-3
2 CN
a. EOQ =
K
2 $40 225,000
=
$2
$18,000,000
=
$2
= $9,000,000
= 3,000 gallons
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42 Chapter 02, VanDerbeck
E2-4
a. Storeroom keeper
b. Purchasing agent
c. Receiving clerk
d. Purchasing agent
e. Production department supervisor
E2-5
Work in Process ..................................................................... 68,000
Factory Overhead ................................................................... 4,800
Materials .......................................................................... 72,800
To record materials used during the month of June.
E2-6
a. Materials .......................................................................... 200,000
Accounts Payable ....................................................... 200,000
b. Work in Process .............................................................. 175,000
Materials ..................................................................... 175,000
c. Factory Overhead ............................................................ 12,000
Materials ..................................................................... 12,000
d. Materials .......................................................................... 2,500
Work in Process ......................................................... 2,500
e. Accounts Payable ............................................................ 1,800
Materials ..................................................................... 1,800
f. Accounts Payable ............................................................ 165,000
Cash .......................................................................... 165,000
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E2-7
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E2-8
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E2-9
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46 Chapter 02, VanDerbeck
E2-10
E2-11
a. The FIFO method which results in the most recent purchases being costed in ending
inventory indicates that materials costs have continued to increase over the three-
year period.
b. FIFO would show the highest net income for 2013. The information given indicates
that prices rose during the year. Using FIFO, the cost of goods sold would be
charged with the oldest materials costs, which during a time of rising prices would be
the lowest materials costs.
c. LIFO would show the lowest net income for 2015, because it would continue to
charge the latest and highest costs to the products sold while the other two methods
would be less affected by the rising cost of the more recent purchases.
d. FIFO would show the highest net income for the three years combined, because it
consistently charges the earliest, lower costs to the product, thereby increasing the
yearly net income.
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VanDerbeck, Chapter 02 47
E2-12
c. $8,110
E2-13
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48 Chapter 02, VanDerbeck
b.
Materials Factory Overhead
Bal. 10,000 (2) 29,250 (4) 3,975 (5) 585
(1) 35,750 (4) 3,975
(3) 2,200 33,225 3,390
(5) 585
48,535
15,310
c. $15,310
E2-14
1. 40,000/10,000 = 4 days
2. 40,000 (40,000 .75) = 10,000
10,000/10,000 = 1 day
E2-15
b. No entry.
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E2-16
e. No entry
E2-17
b. No entry.
E2-18
e. No entry
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50 Chapter 02, VanDerbeck
E2-19
E2-20
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E2-21
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52 Chapter 02, VanDerbeck
PROBLEMS
P2-1
2 CN
2. EOQ =
K
2 $50 25,000
=
$.10
= 25,000,000
= 5,000 units
P2-2
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VanDerbeck, Chapter 02 53
2 CN
2. EOQ =
K
2 $194.4 6 ,000
$ 50
=
49 ,00 ,40
=
= 7,000 units (rounded)
3. 63,000 units (annual usage) 7,000 units (per order) = 9 orders (rounded)
Ordering cost: 9 orders @ $200 per order = $1,800
P2-3
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54 Chapter 02, VanDerbeck
P2-4
3. The total order cost is still $1,000. It does not differ from the answer in
P2-3, because the number of orders will be the same.
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P 2-5
1. a. FIFO costing
MATERIALS
LEDGER
Materials Ledger
Description Rubber gaskets Account No. 11216
Rec. Mat.
Rep. Req. Unit
Date No. Quantity Unit Price Amount No. Quantity Unit Price Amount Quantity Price Amount
11/1 30,000 3.00 90,000.00
11/4 112 10,000 3.10 31,000.00 30,000 3.00
10,000 3.10 } 121,000.00
11/5 49 30,000 3.00 90,000.00 10,000 3.10 31,000.00
11/8 113 50,000 3.30 165,000.00 10,000 3.10
50,000 3.30 } 196,000.00
11/15 50 10,000 3.10
10,000 3.30 } 64,000.00 40,000 3.30 132,000.00
11/22 114 25,000 3.50 87,500.00 40,000 3.30
25,000 3.50
} 219,500.00
11/28 51 30,000 3.30 99,000.00 10,000 3.30
25,000 3.50
} 120,500.00
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P2-5 Continued
b. LIFO costing
MATERIALS
LEDGER
Materials Ledger
Description Rubber gaskets Account No. 11216
56 Chapter 02, VanDerbeck
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P2-5 Continued
MATERIALS
LEDGER
Materials Ledger
Description Rubber gaskets Account No. 11216
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58 Chapter 02, VanDerbeck
P2-5 Concluded
2.
Cost Transferred Cost of Ending
Inventory Method to Work in Process Inventory
FIFO ........................................ $253,000 $120,500
LIFO ........................................ 261,000 112,500
Moving average ....................... 256,295 117,205
3. Probably LIFO because it will come closer to matching current costs with current
revenues. When costs are rising, revenues are usually increasing; therefore, the
resulting gross profit under LIFO will reflect the companys product profitability more
accurately. Other inventory factors that should be given consideration in selecting
any method are: the dollar amount of the inventories; the magnitude of the price
changes; the direction of the price changes, whether rising or falling; and the length
of the inventory cycle. Also, adopting LIFO in periods of rising prices will result in
the minimization of income taxes.
4. In a period of rising prices, the balance sheet inventory under either method will
most likely be less than the current market prices. However, as shown by the
problem, the lowest figure for ending inventory will be reported when LIFO is used.
LIFO charges the higher materials cost to Cost of Goods Sold whereas FIFO defers
more of the higher cost to the inventory on hand.
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P2-6
1. FIFO method
MATERIALS
LEDGER
Materials Ledger
Description Plastic tubing (ft. ) Account No. 906
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VanDerbeck, Chapter 02 59
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P2-6 Continued
2. LIFO method
MATERIALS
LEDGER
Materials Ledger
60 Chapter 02, VanDerbeck
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P2-6 Concluded
MATERIALS
LEDGER
Materials Ledger
Description Plastic tubing ( ft. ) Account No. 906
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62 Chapter 02, VanDerbeck
P2-7
1.
a. Materials ...................................................................... 74,000
Accounts Payable ................................................... 74,000
b. Work in Process ........................................................... 57,000
Factory Overhead ........................................................ 11,000
Materials ................................................................. 68,000
c. Materials ...................................................................... 1,100
Work in Process ..................................................... 1,100
d. Accounts Payable ........................................................ 2,500
Materials ................................................................. 2,500
e. Accounts Payable ........................................................ 68,500
Cash ....................................................................... 68,500
2.
Cash Accounts Payable
Bal. 82,250 (e) 68,500 (d) 2,500 Bal. 21,000
13,750 (e) 68,500 (a) 74,000
71,000 95,000
24,000
Materials Factory Overhead
Bal. 29,500 (b) 68,000 (b) 11,000
(a) 74,000 (d) 2,500
(c) 1,100 70,500
104,600
34,100
Work in Process
Bal. 27,000 (c) 1,100
(b) 57,000
84,000
82,900
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VanDerbeck, Chapter 02 63
P2-8
1.
a. Materials....................................................................... 58,000
Accounts Payable ................................................... 58,000
b. Work in Process ........................................................... 45,000
Factory Overhead ........................................................ 8,000
Materials ................................................................. 53,000
c. Materials....................................................................... 900
Work in Process ...................................................... 900
d. Accounts Payable ........................................................ 1,500
Materials ................................................................. 1,500
e. Accounts Payable ........................................................ 51,500
Cash ....................................................................... 51,500
2.
Cash Accounts Payable
Bal. 64,250 (e) 51,500 (d) 1,500 Bal. 29,000
12,750 (e) 51,500 (a) 58,000
53,000 87,000
34,000
Materials Factory Overhead
Bal. 23,500 (b) 53,000 (b) 8,000
(a) 58,000 (d) 1,500
(c) 900 54,500
82,400
27,900
Work in Process
Bal. 31,000 (c) 900
(b) 45,000
76,000
75,100
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64 Chapter 02, VanDerbeck
P2-9
1. and 2.
a. The company purchased materials costing $22,000. (Forms used: receiving
report and vendors invoice.)
b. The storeroom issued direct materials to the factory in the amount of $19,000.
(Form used: materials requisitions.)
c. The direct labor cost was $17,000.
d. Factory overhead in the amount of $12,000 was charged to jobs in process.
e. Jobs having a total cost of $47,500 were completed in the factory and transferred
to the finished goods storeroom.
f. Total cost of goods sold during the month was $55,000.
3. Ending Inventories:
Materials ............................................................................................. $10,000
Work in Process.................................................................................. 4,100
Finished Goods................................................................................... 4,150
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P2-10
1.
a. b. c. d.
Date Form Journal Entry Book of Original Subsidiary Ledger
Entry
Mar. 31 Purchase Requisition None None None
(for 1,800 aluminum
sheets)
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VanDerbeck, Chapter 02 65
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P2-10 Concluded
a. b. c. d.
Date Form Used Journal Entry Book of Original Subsidiary
Entry Used Records Affected
Apr. 30 Materials Work in Process. 46,500 General Journal Materials Ledger
Requisition Materials 46,500 Job Cost Ledger
66 Chapter 02, VanDerbeck
2.
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VanDerbeck, Chapter 02 67
P2-11
1. 200,000/50,000 = 4 days
2. 25% $1,000,000 = $250,000
3. [(200,000 (1 .50)]/50,000 = 2 days
4. By reducing the average work in process by 50% while keeping the daily production
constant, the velocity of production doubled.
5. 25% (1/2 $1,000,000) = $125,000
P2-12
1.
a. Raw and In-Process.................................................... 150,000
Accounts Payable ..................................................... 150,000
b. No entry
c. Conversion Costs ........................................................ 25,000
Payroll ....................................................................... 25,000
d. Conversion Costs ........................................................ 100,000
Various Credits ......................................................... 100,000
e. Finished Goods ........................................................... 275,000
Raw and In-Process.................................................. 150,000
Conversion Costs...................................................... 125,000
f. Accounts Receivable .................................................. 400,000
Sales ......................................................................... 400,000
2.
e. No entry
f. Cost of Goods Sold ..................................................... 275,000
Raw and In-Process.................................................. 150,000
Conversion Costs...................................................... 125,000
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68 Chapter 02, VanDerbeck
P2-13
1.
a. Raw and In-Process ................................................... 135,000
Accounts Payable ..................................................... 135,000
b. No entry
c. Conversion Costs ....................................................... 20,000
Payroll ....................................................................... 20,000
d. Conversion Costs ....................................................... 80,000
Various Credits ......................................................... 80,000
e. Finished Goods........................................................... 235,000
Raw and In-Process ................................................. 135,000
Conversion Costs ..................................................... 100,000
f. Accounts Receivable .................................................. 355,000
Sales ......................................................................... 355,000
2.
e. No entry
f. Cost of Goods Sold .................................................... 235,000
Raw and In-Process 135,000
Conversion Costs 100,000
P2-14
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VanDerbeck, Chapter 02 69
P2-15
1.
a. Work in Process ........................................................... 7,500
Materials ................................................................. 3,500
Payroll ..................................................................... 1,500
Factory Overhead ................................................... 2,500
b. Spoiled Goods .............................................................. 300
Factory Overhead (Loss Due to Spoiled Goods).......... 150
Work in Process ...................................................... 450
c. Cash ............................................................................. 300
Spoiled Goods ........................................................ 300
2.
a. Same as 1a above.
b. Spoiled Goods .............................................................. 300
Work in Process ...................................................... 300
c. Same as 1c above.
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70 Chapter 02, VanDerbeck
P2-16
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VanDerbeck, Chapter 02 71
1. and 3.
Cash Prepaid Insurance
Bal. 12,000 (b) 1,000 Bal. 3,000 (m) 400
(e) 72,500 (g) 31,000 2,600
84,500 (j) 6,000
6,950 (k) 2,000
(l) 1,800
(n) 2,000 Machinery
(s) 33,750 Bal. 125,000
77,550
11,700
Finished Goods
(q) 98,290 (r) 84,250
14,040 Office Equipment
Bal. 30,000
Work in Process
Bal. 35,000 (q) 98,290
(a) 28,000 Accum. Depr./Office Equipment
(f) 54,340 Bal. 4,800
(p) 11,950 (o) 400
129,290
31,000 5,200
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72 Chapter 02, VanDerbeck
P2-17R Continued
Accounts Payable Payroll
(s) 33,750 Bal. 30,000 (g) 31,000 (a) 31,000
(c) 22,000
(i) 3,000 Factory Overhead
55,000
(a) 3,000 (p) 11,950
21,250
(h) 650
(i) 3,000
Capital Stock (l) 1,800
(m) 300
Bal. 182,200
(n) 2,000
(o) 1,200
Retained Earnings 11,950
Bal. 46,000
Selling and Admin. Expense
Sales (j) 6,000
(d) 126,375 `(k) 2,000
(m) 100
(o) 580
Cost of Goods Sold (o)
(r) 84,250 8,680
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VanDerbeck, Chapter 02 73
2.
a. Work in Process ........................................................... 28,000
Factory Overhead ........................................................ 3,000
Payroll ..................................................................... 31,000
b. Factory Supplies .......................................................... 1,000
Cash ....................................................................... 1,000
c. Materials....................................................................... 22,000
Accounts Payable ................................................... 22,000
d. Accounts Receivable .................................................... 126,375
Sales ....................................................................... 126,375
e. Cash ............................................................................. 72,500
Accounts Receivable ................................................ 72,500
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74 Chapter 02, VanDerbeck
P2-17R Continued
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VanDerbeck, Chapter 02 75
P2-17R Continued
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76 Chapter 02, VanDerbeck
P2-17R Continued
4.
Pullman, Inc.
Statement of Cost of Goods Manufactured
For the Month Ended October 31, 20
Materials:
Inventory, October 1 ............................................................ $51,000
Purchases ......................................................................... 22,000
Total cost of available materials ........................................ $73,000
Less inventory, October 31 .......................................... 18,660
Cost of materials used....................................................... $ 54,340
Direct labor ............................................................................. 28,000
Factory overhead .................................................................... 11,950
Total manufacturing costs....................................................... $ 94,290
Add work in process inventory, October 1 ......................... 35,000
$ 129,290
Less work in process inventory, October 31...................... 31,000
Cost of goods manufactured................................................... $ 98,290
5. Pullman, Inc.
Income Statement
For the Month Ended October 31, 20
Net sales................................................................................. $ 126,375
Cost of goods sold:
Finished goods inventory, October 1 ................................. 0
Add cost of goods manufactured (see statement) ............. $98,290
Goods available for sale .................................................... $98,290
Less finished goods inventory, October 31 ....................... 14,040
Cost of goods sold .................................................................. 84,250
Gross profit on sales ............................................................... $ 42,125
Selling and administrative expenses....................................... 8,680
Net income ............................................................................. $ 33,445
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VanDerbeck, Chapter 02 77
P2-17R Concluded
6.
Pullman, Inc.
Balance Sheet
October 31, 20
Assets
Current assets:
Cash ............................................................ $ 6,950
Accounts receivable .................................... 53,875
Inventories:
Finished goods ....................................... $ 14,040
Work in process ..................................... 31,000
Materials................................................. 18,660 63,700
Factory supplies .......................................... 350
Prepaid insurance ........................................ 2,600
Total current assets ................................ $127,475
Plant and equipment:
Machinery .................................................... $ 125,000
Less accumulated depreciation .............. 11,700 $113,300
Office equipment ......................................... $ 30,000
Less accumulated depreciation .............. 5,200 24,800
Office furniture ............................................. $ 20,000
Less accumulated depreciation .............. 2,680 17,320
Total plant and equipment ...................... 155,420
Total assets ...................................................... $282,895
Liabilities
Current liabilities:
Accounts payable ........................................ $ 21,250
Stockholders Equity
Capital stock ..................................................... $182,200
Retained earnings, October 1 ........................... $ 46,000
Net income for October ..................................... 33,445
Retained earnings, October 31 ......................... 79,445
Total stockholders equity ............................ 261,645
Total liabilities and stockholders equity ............ $282,895
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78 Chapter 02, VanDerbeck
MINI-CASE 1
2. Non-financial advantages:
* Anticipated improvement in product quality
* Frees up factory space for other uses.
Non-financial disadvantages:
Interruptions in materials supply or strike by their own workers resulting in lost
sales.
Difficulty of workers to master JIT processes.
MINI-CASE 2
1. Inventory carrying costs such as storage space for raw materials, security,
insurance, and spoilage and obsolesence should be reduced by a JIT system. Also,
a JIT system can reduce nonvalue-added production activities such as moving
materials and work in process, storage of work in process and finished goods, and
inspection of work in process.
3. Yes, inventory should not be accounted for using traditional job costing techniques.
Products move through the system so rapidly in a JIT environment that it would not
be cost effective to track production costs to them while in process. For example, a
Raw and In-Process account may replace the Materials account, and the Work in
Process and Finished Goods accounts may disappear in a backflush costing
system.
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VanDerbeck, Chapter 02 79
INTERNET EXERCISE
2. Materials handling benefits that result from using lean manufacturing principles
include fewer moves, shorter travel distances, and simpler route structures.
Also, the cellular layout reduces the queuing, delays, tracking effort, and
confusion that accompany materials movement.
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80 Chapter 02, VanDerbeck
5. Functional layouts require the product to move many times between departments
with a separate operation at each. When the product is defective, it is often
difficult to pinpoint where the defect occurred.
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CHAPTER 3
QUESTIONS
1. Direct labor is that part of factory wages The payroll department should also provide
earned by employees who perform work on the accounting department with the infor-
the item manufactured; it is charged directly mation necessary to allocate the labor costs
to the job or product. Indirect labor is that among direct labor, indirect labor, and sell-
part of factory wages earned by employees ing and administrative expense..
engaged in the manufacturing process who 7. The labor-time record shows the employees
do not work directly on the units being man- time spent on each job, as well as the time
ufactured; it cannot be charged to any par- spent on indirect labor activities. It is the
ticular job or product but must be treated as source document for allocating the cost of
overhead. labor to jobs or departments in the job cost
2. a. An advantage of the hourly rate plan is ledger and the factory overhead ledger.
that there is no temptation on the part of 8. Many companies issue magnetic cards to
the workers to speed up their work at direct laborers who use them to log on and
the sacrifice of quality or perfection. On log off to specific job assignments. They
the other hand, it provides no incentive slide the card through a magnetic card
for increased production. reader that is connected to a computer ter-
b. The principal advantage of the piece- minal. The computer sends this information
rate plan is that it provides an incentive to the accounting department for the prepa-
for increased production. The more ration of the payroll and the distribution of
units produced under such a plan, the the labor costs to the appropriate jobs.
higher the employee's earnings. How- 9. Almost all payroll records would contain the
ever, there may be a temptation to strive
following employee information:
for a high level of output at a sacrifice of
quality. A greater degree of supervision a. Marital status
is required and more detailed records b. Number of withholding allowances for
must be maintained when a piece-rate income tax purposes
plan is used. c. Rate of pay
3. A modified wage plan combines certain fea- d. Hours worked per day
tures of both the hourly rate and piece-rate
plans. Employees are paid a regular hourly e. Regular earningshours and amount
wage plus an additional incentive rate if es- f. Overtime earningshours and amount
tablished quotas are exceeded. g. Total earnings
4. In production work teams, output is depend- h. FICA taxable earnings
ent upon contributions made by all members i. Withholdings and deductionsFICA
of the work crew. If the number of pieces fin- tax, federal, state, and local income tax-
ished depends on a group effort, then a sin- es, health insurance, union dues, etc.
gle incentive plan for the group may be ap-
propriate. j. Net earnings paidcheck number and
amount.
5. Productivity is measured as the amount of 10. a. The source for posting direct labor cost
output per hour worked. Over the four cal-
to the individual accounts in the job cost
endar quarters ended March 31, 2011,
ledger is the labor-time records.
worker productivity in manufacturing in-
creased 4.7% over the previous 12-month b. The labor cost summary is the source
period. for posting direct labor cost to the work
in process account in the general ledg-
6. The payroll department is responsible for er.
determining the amount of each employees:
11. Labor-time records and a salaried-employee
a. gross earnings.
list provide the sources for posting to the in-
b. withholdings and deductions. direct labor account in the factory overhead
c. net pay. ledger.
81
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82 Chapter 03, VanDerbeck
12. Regular pay represents the regular hourly c. Charging the daily cost of factory labor
rate to be paid for an established hourly to the proper jobs or the proper factory
payroll period. The accounting treatment for overhead accounts.
regular payroll payments is to charge them Forms used: labor-time records and
to the job or product when they constitute di- labor cost summary.
rect labor.
d. Preparing the payroll, computing the
Overtime premium pay is an extra amount payroll taxes and other deductions, and
paid for each hour worked beyond the pre- determining the net wages payable to
scribed hourly payroll. The accounting factory employees.
treatment for overtime premium pay is gen-
Forms used: payroll record and em-
erally to charge it to factory overhead in or-
ployees earnings records.
der to avoid overcharging a single job with
an abnormally high amount of direct labor 17. a. and b. The schedule of earnings and
cost. (If the overtime was caused by a rush payroll taxes is used to distribute the total
order, that job should be charged with the payroll and to record the employers payroll
overtime premium.) taxes.
13. Effective internal control would require that 18. When the financial statement date does not
the charge to the work in process account coincide with the ending date for a payroll
be determined from the labor cost summary period, an accrual for payroll earnings and
that was prepared from the labor-time rec- payroll tax expense should be made.
ords. The charge to the work in process 19. A shift premium is the additional pay that
control account should be supported by the a worker receives for working the second
separate charges made to individual jobs or third shift of a workday. If a day worker
from labor-time records. The offsetting credit receives $8 per hour, a worker on a night
to the payroll account should be supported shift may receive an additional $1 per
by the separate calculation of the gross hour because of the later shift. The addi-
wages earned by each employee. tional $1 per hour would be a shift premi-
14. Accounts used to record employees taxes um. Shift premiums are charged to Fac-
are: FICA Tax Payable and Employees In- tory Overhead and charged to all jobs
come Tax Payable. worked on during the period.
The employer's accounts for payroll taxes are: 20. A basic requirement of all pension plans
FICA Tax Payable, Federal Unemployment should be to accrue systematically, over
Tax Payable, State Unemployment Tax Paya- the period of active service, the total esti-
ble, Factory Overhead (for payroll taxes on mated cost of the employees pension
factory labor), and Payroll Tax Expense (for from the date of the pension plan to the
payroll taxes on administrative and sales sala- date the worker retires.
ries). 21. a. Under a defined benefit plan an employee
15. The employee portion of the FICA tax rate was receives a specific amount of retirement in-
reduced for 2011 to increase employee dis- come based on a predetermined formula relat-
posable income and, hopefully, spending. ed to income level and years of service. Un-
der a defined contribution plan an employee
16. The procedures involved in accounting for
may contribute a certain amount of pre-tax
labor and the supporting forms are:
earnings, often matched by the employer, to
a. Recording the length of time each em- numerous investment vehicle choices. The
ployee works in the factory, both in total amount of the pension is tied to the perfor-
and in detail. mance of the investments.
Forms used: labor-time records. b. Non-contributory pension plans are com-
b. Analyzing the time worked to determine pletely funded by the employer. Contributory
how each employees time was spent. pension plans require a partial contribution
Forms used: labor-time records. from the employee. Currently, contributory
plans are much more common than non-
contributory plans.
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VanDerbeck, Chapter 03 83
22. In 2011, employees could contribute a pre- 24. An hourly rate may be developed for each
scribed percentage of their income to a direct laborer that includes an amount for
401(K) plan up to maximums of $16,500 and fringe benefits and then used to trace gross
$22,000 for employees under 50 years old earnings plus fringe benefits to the specific
and 50 years of age and greater, respective- jobs being worked on, or the fringe benefits
ly. may be collected in an overhead cost pool
23. Factory bonuses, vacation pay, and holiday and allocated to all jobs worked on during
pay are all chargeable to factory overhead the period using an allocation base such as
and are accrued with other factory payroll direct labor hours.
costs over the period that the employee 25. Many companies have given the recession
works during the year. that began in 2008 as the reason for their
suspension of contributions to employee
401 (k) plans, although many have not re-
sumed contributions in spite of their return
to profitable operations.
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EXERCISES
E3-1
a. $1,350
Regular: Work in Process $930.00
57 hours $20.00 (regular rate) = $ 1,140.00 Factory Overhead
(Maintenance and Repair) $210.00
{
84 Chapter 03, VanDerbeck
Overtime premium:
13 hours $10 (half of regular rate) = $130.00
4 hours $20 (equal to regular rate) = $ 80.00 210.00 (Overtime Premium)
$ 1,350.00
b. Work in Process ............................................................ 930.00
Factory Overhead (Overtime Premium) ......................... 210.00
Factory Overhead (Maintenance and Repair)................ 210.00
Payroll ...................................................................... 1,350.00
Note: The single journal entry for one employee is required here only for the purpose of illustrating the principle in-
volved. Normally the entry would be for the total factory payroll for the period.
Calculation for distribution of labor costs (not required in students solution):
Hours Rate = Total Account Debited
Factory Overhead
Expense
Time-and- Double- Time-and- Double- Gross Work in Overtime
Regular a-Half Time Regular a-Half Time Earnings Process Premium M&R
Sunday (indirect) 4 $40.00 $ 160.00 $ 80.00 $ 80.00
Monday (direct) 8 $20.00 160.00 $160.00
Tuesday (direct) 8 20.00 160.00 160.00
Wednesday (direct) 8 20.00 160.00 160.00
Thursday (direct) 8 3 20.00 $30.00 265.00 230.00 35.00
Friday (direct) 8 3 20.00 30.00 250.00 220.00 30.00
Saturday (indirect) 6 30.00 195.00 65.00 130.00
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40 13 4 $1,350.00 $ 930.00 $210.00 $ 210.00
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VanDerbeck, Chapter 03 85
E3-2
E3-3
a.
Hours Pieces Earnings @ Earnings @ Make-Up
Payroll
Day Worked Finished $25/hr. $.50/piece Guarantee Earnings
Monday 8 400 $200 $200 $200
Tuesday 8 380 200 190 $10 200
Wednesday 8 440 200 220 220
Thursday 8 450 200 225 225
Friday 8 360 200 180 20 200
Total 40 $1,000 $1,015 $30 $1,045
b.
Work in Process .............................. 1,015
Factory Overhead ........................... 30
Payroll ............................................. 1,045
E3-4
Day Worked Finished $20/hr. $.5333/piece Guarantee Earnings
b.
Work in Process .............................. 907
Factory Overhead ........................... 32
Payroll ....................................... 939
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86 Chapter 03, VanDerbeck
E3-5
a. The overtime premium could be charged to Job 402 or charged to Factory Overhead
and allocated between Jobs 401 and 402. If the contract provisions for Job 402 indi-
cate the necessity for overtime in order to complete the job in accordance with the
customers specifications, or if the overtime is due to an emergency demand by the
customer, the overtime premium should be charged directly to Job 402. If the over-
time is not directly attributable to contract provisions or other factors identified with
Job 402, the overtime premium should be charged to Factory Overhead.
b. Costs of Jobs 401 and 402:
Overtime Premium Overtime Premium
Charged to Charged to
Job 402 Factory Overhead
Job 401 Job 402 Job 401 Job 402
E3-6
a.
June 7 June 14 June 21 June 28
FICA tax................................ $ 2,920 $ 2,736 $ 2,984 $ 3,072
Total deductions ................... 9,560 9,236 9,759 9,952
Net earnings ......................... 26,940 24,964 27,541 28,448
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VanDerbeck, Chapter 03 87
E3-6 Concluded
E3-7
b. The total yearly payroll amounted to $306,400. The employer is taxed on the first
$8,000 of each employees earnings for federal and state unemployment taxes. All
eight employees earned more than $8,000; therefore, $64,000 (8 x $8,000) is taxa-
ble and $242,400 is exempt.
c. None. The federal income tax is a progressive tax that is based on the amount that
someone earns. There is no maximum cap on the amount subject to income taxes.
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88 Chapter 03, VanDerbeck
E3-8
E3-9
E3-10
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VanDerbeck, Chapter 03 89
E3-11
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E3-12
a.
Regular Earnings Overtime Premium Total FICA Income Net
Employee Hours Rate Amount Hours Rate Amount Earnings 8% Tax Earnings
Holloway, T. 42 $12 $ 504.00 2 $6.00 $12.00 $ 516.00 $ 41.28 $ 77.40 $ 397.32
Jackson, D. 43 12 516.00 3 6.00 18.00 534.00 42.72 80.10 411.18
McLean, J. 44 15 660.00 4 7.50 30.00 690.00 55.20 103.50 531.30
Lyons, M. 40 9 360.00 360.00 28.80 54.00 277.20
90 Chapter 03, VanDerbeck
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E3-13
a.
Income
Classifi- Regular Overtime Total FICA Tax Net
Employee cation Hours Pieces Rate Earnings Premium Earnings 8% Withheld Earnings
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92 Chapter 03, VanDerbeck
E3-13 Concluded
E3-14
Work in Process ..................................................................... 1,000.00
Factory Overhead (Bonus)* .................................................... 83.33
Factory Overhead (Vacation)** ............................................... 83.33
Payroll ............................................................................. 1,000.00
Bonus Liability .................................................................. 83.33
Vacation Pay Liability ....................................................... 83.33
*$4,000 48 weeks = $83.33
**($1,000 4 weeks) 48 weeks = $83.33
E3-15
a. The holiday pay and vacation pay should be expensed over the forty-eight weeks
that the employee actually works.
E3-16
a. The holiday pay and vacation pay should be expensed over the forty-eight weeks
that the employee actually works.
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VanDerbeck, Chapter 03 93
PROBLEMS
P3-1
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94 Chapter 03, VanDerbeck
P 3-2
1. LABOR-TIME RECORD
007 0 4 4 4 0 0 0 12
2525 0 4 4 4 6 6 0 24
Maintenance 0 0 0 0 2 2 0 4
Total 0 8 8 8 8 8 0 40
P 3-3
1. LABOR-TIME RECORD
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VanDerbeck, Chapter 03 95
AX20 0 4 4 4 0 0 0 12
AX25 0 4 4 4 6 4 0 22
Maintenance 0 0 0 0 2 4 0 6
Total 0 8 8 8 8 8 0 40
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P3-4
1.
Idle Time
(Included Income
Regular Overtime in Reg. Total FICA Tax Net
Employees Hours Earnings Premium Earnings) Earnings 8% 18% Earnings
Black 42 $ 1,050.00 $ 25.00 $1,075.00 $ 86.00 $193.50 $ 795.50
96 Chapter 03, VanDerbeck
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VanDerbeck, Chapter 03 97
P3-4 Concluded
*Rounding difference
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98 Chapter 03, VanDerbeck
P3-5
1.
Total
Total Unemployment Taxes Payroll
Classification Earnings FICA Federal State Taxes
of for Tax Tax Tax Imposed on
Wages and Salaries Month 8% 1% 4% Employer
P3-6
M T W T F Total
Gonzalez ............. $ 81.60 $ 85.20 $ 78.00 $ 96.00 $ 70.00 $410.80
Pujols ................... 70.00 70.40 70.00 70.00 77.00 357.40
Howard ................ 80.60 79.30 92.30 78.00 70.00 400.20
Total .............. $232.20 $234.90 $240.30 $244.00 $217.00 $1,168.40
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VanDerbeck, Chapter 03 99
P3-7
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P3-8
1.
Total
Earnings
Earnings Per Week Through FICA Income
Overtime Fortieth Taxable Tax Net
Employee Regular Premium Total Week Earnings FICA Withheld Earnings
Allen $2,489.00 $ 0 $2,489.00 $112,049.00 $ 0 $ 0 $ 488.00 $2,001.00
100 Chapter 03, VanDerbeck
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VanDerbeck, Chapter 03 101
P3-8 Concluded
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P3-9
1.
EMPLOYEE EARNINGS RECORDS
Weekly Earnings
Weekly Accumulated Subject Withholdings Net
Week Gross Gross to FICA Income Amount
Ending Earnings Earnings FICA Tax Tax Paid
102 Chapter 03, VanDerbeck
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VanDerbeck, Chapter 03 103
P3-9 Continued
2.
PAYROLL RECORD
Withholdings Net
Employees Name Gross FICA Income Amount
Week Ending 11/8:
Hathaway ..................................... $ 300.00 $ 24.00 $ 30.00 $ 246.00
Kunis. 280.00 22.40 28.00 229.60
Portman ....................................... 320.00 25.60 32.00 262.40
Streep .......................................... 2,032.00 48.00 203.20 1,780.80
Williams ....................................... 800.00 64.00 80.00 656.00
$ 3,732.00 $ 184.00 $ 373.20 $ 3,174.80
Week Ending 11/15:
Hathaway .................................. $ 280.00 $ 22.40 $ 28.00 $ 229.60
Kunis .................................. 270.00 21.60 27.00 221.40
Portman .................................. 300.00 24.00 30.00 246.00
Streep .................................. 2,032.00 0 203.20 1,828.80
Wiliams .................................. 760.00 60.80 76.00 623.20
$ 3,642.00 $ 128.80 $ 364.20 $ 3,149.00
Week Ending 11/22:
Hathaway .................................. $ 290.00 $ 23.20 $ 29.00 $ 237.80
Kunis .................................. 260.00 20.80 26.00 213.20
Portman .................................. 340.00 27.20 34.00 278.80
Streep .................................. 2,032.00 0 203.20 1,828.80
Williams .................................. 850.00 68.00 85.00 697.00
$ 3,772.00 $ 139.20 $ 377.20 $ 3,255.60
Week Ending 11/29:
Hathaway .................................. $ 320.00 $ 25.60 $ 32.00 $ 262.40
Kunis .................................. 280.00 22.40 28.00 229.60
Portman .................................. 280.00 22.40 28.00 229.60
Streep .................................. 2,032.00 0 203.20 1,828.80
Williams .................................. 870.00 69.60 87.00 713.40
$ 3,782.00 $ 140.00 $ 378.20 $ 3,263.80
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104 Chapter 03, VanDerbeck
P3-9 Continued
3.
Labor Cost Summary
For the Month Ended November 30, 20
Dr. Dr. Dr. Cr.
Work in Process Factory Overhead Admin. Salaries Payroll
Week Ending (Direct Labor) (Indirect Labor) (Office) (Total)
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VanDerbeck, Chapter 03 105
P3-9 Concluded
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106 Chapter 03, VanDerbeck
P3-10
1.
Federal State
FICA Unemploy- Unemploy- Total
Taxable Tax ment Tax ment Tax Payroll
Items Earnings 8% 1% 4% Taxes
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VanDerbeck, Chapter 03 107
P3-10 Concluded
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108 Chapter 03, VanDerbeck
P3-11
Factory Overhead (Bonus)* 8,000
Factory Overhead (Vacation Pay)** ........................................ 8,000
Factory Overhead (Holiday Pay)*** ........................................ 4,000
Bonus Liability ................................................................. 8,000
Vacation Pay Liability ....................................................... 8,000
Holiday Pay Liability ......................................................... 4,000
Work in Process140,000
Factory Overhead (Indirect Labor) 60,000
Payroll 200,000
P3-12
The entry to distribute the payroll is the same as in P3-11 above. The entry to record
the liability for the bonus, vacation pay, and holiday pay is as follows:
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VanDerbeck, Chapter 03 109
P3-13
P3-14
The entry to distribute the payroll is the same as in P3-13 above. The entry to record
the liability for the bonus, vacation pay, and holiday pay is as follows:
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110 Chapter 03, VanDerbeck
P3-15
1. Hours required:
First 100,000 units @ 5 hours per unit ...................... 500,000
Second 100,000 units @ 5 hours per unit 90% ....... 450,000
Remaining 1,000,000 units @ 5 hours per unit 80% 4,000,000
Total hours required .............................................. 4,950,000
Wages paid at regular rate:
4950,000 hours $20 per hour ................................. $ 99,000,000
2. Total hours required (from above)................................. 4,950,000
Less regular hours available:
2,250 employees 40 hours per
week 50 weeks ...................................................... 4,500,000
Less holidays8 holidays 2,250
employees 8 hours per day .................................... 144,000 4,356,000
Overtime hours required ............................................... 594,000
Overtime premium:
594,000 hours $10 premium per hour .................... $ 5,940,000
3. Second 100,000 units:
Per-unit cost of first 100,000 units5 hours $20 per hour = $100
Expected savings per unit10% $100 = $10
Total savings100,000 units $10 per unit = $1,000,000
Bonus payment on second 100,000 units1/2 of $1,000,000 = $500,000
Remaining 1,000,000 units:
Per-unit costs of first 100,000 units$100
Expected savings per unit20% $100 = $20
Total savings1,000,000 units $20 per unit = $20,000,000
Bonus payment on remaining 1,000,000 units1/2 of $20,000,000 =
$10,000,000
Total incentive bonus payment:
Second 100,000 units ....................................... $ 500,000
Remaining 1,000,000 units ............................... 10,000,000
Total .............................................................. $ 10,500,000
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VanDerbeck, Chapter 03 111
P3-15 Concluded
4. Hours:
Vacation pay2,250 employees 2 weeks 40
hours per week.............................................. 180,000
Holiday pay2,250 employees 8 days 8
hours per day ................................................ 144,000
Total hours ........................................................ 324,000
Cost of vacation and holiday pay:
324,000 hours $20 per hour ........................... $ 6,480,000
5. Wages at regular rate ............................................ $ 99,000,000
Overtime premium ................................................. 5,940,000
Incentive premium ................................................. 10,500,000
Vacation and holiday pay ...................................... 6,480,000
Total payroll....................................................... $ 121,920,000
Employers payroll taxes$121,920,000 13%..................... $ 15,849,600
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112 Chapter 03, VanDerbeck
MINI-CASE 1
MINI-CASE 2
1. The controller is correct in assuming that the weekday overtime and the bonus are
factory overhead costs and should be spread over all production for the period. Un-
der the circumstances, however, it would be improper to charge Saturday and Sun-
day overtime to factory overhead. These costs should be charged to the weekend
jobs that were rush orders.
Based on the facts given, the most appropriate procedure would be to charge the
weekday overtime and bonus to factory overhead. (The bonus could, however, be
added to each direct laborers hourly rate and traced to the specific job.) The Satur-
day and Sunday overtime should be charged to the rush-order jobs that were
worked on during the weekends.
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VanDerbeck, Chapter 03 113
INTERNET EXERCISE
1. Asset mix is the apportionment of investment dollars among various asset clas-
ses such as short-term reserves, bonds, and stocks. It is also known as asset al-
location or investment mix.
2. Rebalancing is obtaining the desired fund mix in your plan account by shifting
the balance to match contribution allocation percentages that you previously
chose. (Say 60% stocks and 40% bonds.) This may involve selling out some
funds and buying others to achieve your desired percentages.
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CHAPTER 4
QUESTIONS
1. Factory overhead represents expenses that the total unit cost of the product increases.
are incurred in the process of production, For example, assume $100,000 of fixed costs
but that cannot be identified directly with the and production of 10,000 units. The fixed
finished product. This distinguishes them cost per unit would be $10. However, if pro-
from direct materials and direct labor which duction doubled to 20,000 units, the new
apply directly to the product being manufac- fixed cost per unit would only be $5 per unit.
tured. 6. Volume changes will affect cost patterns in
A variety of terms can be used to describe the following ways:
factory overhead, such as indirect factory ex- (1) Total variable costs will vary proportion-
pense, indirect manufacturing costs, and fac- ately with the volume change.
tory burden. For simplicity, factory overhead is (2) Fixed costs will remain constant. In total,
often referred to merely as overhead. they are not affected by volume change
2. Sherwin-Williams told its painting contractors (over a certain range of volume).
that cost estimation isnt just about materials (3) Total semivariable costs will move in a
and labor. Overhead costs, such as taxes, stair-step or continuous fashion when
lights, gas, office supplies, and rent, must be volume changes, but not in direct pro-
factored into job bids for the contractors busi- portion to volume changes.
ness to be profitable.
7. A step-variable cost, such as inspection and
3. The three categories of factory overhead materials handling labor, will remain con-
expenses and examples of each are: stant over a small range of production and
(1) Indirect materials. Examples: cleaning mate- then abruptly change. A step-fixed cost,
rials, lubricants, polishing compounds, glue such as factory supervision, will remain the
and nails. same in total over a much wider range of
(2) Indirect labor. Examples: wages of su- activity before it changes.
pervisors, janitors, inspectors, forklift 8. The high-low method assumes that a
operators. straight line can be drawn between the two
(3) Other indirect manufacturing expenses. extremes of the analyzed volume range and
Examples: factory rent, insurance, prop- that all costs for volumes between the two
erty taxes, depreciation, and power. points will fall along the straight line.
4. The distinguishing characteristic of a variable 9. The scattergraph method is an improvement
cost is that it tends to increase or decrease over the high-low method because it uses all
proportionately with production increases and of the available data points rather than just
decreases. Fixed costs will remain the same, two of them. Also, visual inspection of the
in total, over a period of time, regardless of graph allows nonrepresentative data points
the changes in production. Semivariable to be identified. The main disadvantage of
costs, although affected by production, con- the scattergraph method is that the cost line
tain both fixed and variable components. is drawn through the data points based on
5. When a product is composed of both fixed visual inspection rather than on utilization of
and variable costs, the total unit cost will de- mathematical techniques. Using visual in-
crease with volume increases and increase spection only, more than one line might be
when volume goes down. The change in unit drawn to fit the data points.
cost is caused by the spreading of the total 10. The independent variable is the one whose
fixed cost over the new level of volume. change causes the variation in the depend-
When volume goes up, the fixed cost as- ent variable. For example, the variation in
signed to each unit of product decreases, electricity cost (dependent variable) from
lowering the total unit cost. As volume de- month-to-month can be explained by the
creases, more of the total fixed cost must be variation in the number of units produced
assigned to each unit produced; therefore, (independent variable)
115
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116 Chapter 04, VanDerbeck
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VanDerbeck, Chapter 04 117
20. The two types of budget data required in record keeping than the other two methods;
computing predetermined overhead rates however, it has some shortcomings.
are budgeted production and budgeted fac- This method will tend to charge a dispropor-
tory overhead costs. tionate amount of overhead to the jobs that
Budgeted production may be expressed have the highest labor costs. These high
in terms of direct labor hours, direct labor overhead charges may not be justified in all
costs, machine hours, or units of product. circumstances because, for example, the
Budgeted costs are expressed in terms of amount of expense charged for heat, light,
the total estimated factory overhead costs to power, insurance, or taxes should not be af-
be incurred at various production levels. fected by a differential in labor costs.
21. The three traditionally used methods for ap- The direct labor hour method requires
plying factory overhead are the direct labor that detailed computations be made, and
cost method, the direct labor hour method, that a record of direct labor hours be main-
and the machine hour method. tained on all jobs. This method has some
advantages over the direct labor cost meth-
The direct labor cost method requires od because the amount of indirect materials,
that the estimated factory overhead expense indirect labor, power, and other overhead
for the upcoming period be divided by the items used by departments will usually vary
estimated direct labor cost that is expected in proportion to units produced and, thus,
to be incurred. The relationship between the number of hours worked.
factory expense and labor cost is expressed The machine hour method requires a
as a percentage. In order to determine the considerable amount of preliminary study
amount of factory overhead to be applied to and detailed recordkeeping to determine the
the job, the resulting percentage is multi- number of hours that machines are being
plied by the direct labor cost incurred on a operated. This method provides a more ac-
job. curate application of factory overhead to
The direct labor hour method requires jobs that require a substantial amount of au-
the division of the estimated factory over- tomated labor. When machines play a
head expenses by the estimated direct labor greater part in production than do employ-
hours expected to be worked during the ees, machine-related costs are a substantial
period. The relationship between the factory element in factory overhead charges.
overhead expense and labor hours is then 23. Manufacturing conditions that require some
expressed in terms of a dollar amount of departments to perform manual operations
overhead per direct labor hour. When the and other departments to be highly auto-
number of actual direct labor hours are mated should use more than one method of
known on jobs in production, the actual di- applying factory overhead expense. In de-
rect labor hours are multiplied by the dollar partments that use mostly manual labor, the
amount (rate) per direct labor hour to deter- direct labor cost or direct labor hour method
mine the applied factory overhead cost may be appropriate. (If all employees in a
chargeable to the jobs. department receive approximately the same
The machine hour method requires the rate of pay, the direct labor cost method
division of the estimated factory overhead would probably be used because of its sim-
expense by the estimated machine hours to plicity and lower clerical cost.) In the auto-
be used in the forecast period. The dollar mated departments, the machine hour
amount (rate) per machine hour is multiplied method would be more appropriate because
by the number of machine hours incurred on it would most accurately charge a fair
22. The direct labor cost method requires only amount of factory overhead to the automat-
that the direct labor cost charged to the job ed departments products.
or process be known. The percentage de- 24. Activity-based costing considers non-volume-
veloped, expressing the relationship be- related activities, such as machine setups or
tween the direct labor cost and factory over- product design changes, as well as volume-
head, is multiplied by the direct labor cost related activities in charging overhead to jobs.
incurred on the jobs to apply the estimated It considers the complexity of the production
factory overhead cost. This is the simplest of process as well as the number of units pro-
the three methods to apply and requires less duced in deciding how much overhead to
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118 Chapter 04, VanDerbeck
25. To successfully employ an ABC system, a Both of the causes mentioned may be relat-
company must do the following: ed to a seasonal difference in costs incurred
(1) Identify activities in the factory that cre- and/or the level of production for the given
ate costs, such as design changes, in- accounting period.
spections, and machine setups. 29. The factory overhead has been overrapplied
(2) The cost of performing the activities in by $2,000. The probable causes for the
the coming period must be estimated. overapplication could include:
(1) A higher level of capacity was achieved
(3) The cost driver used to allocate each of
than was forecast when the predeter-
the activity cost pools must be decided
mined rate was established.
upon.
(2) The actual factory overhead expenses
(4) The estimated cost of each activity pool charged to the factory overhead control
must be divided by the number of esti- account were less than were estimated.
mated cost driver units for that pool to
obtain an overhead rate that is used to Both of the causes mentioned may be relat-
charge each job ed to a seasonal difference in costs incurred
and/or the level of production for the given
26. Activity-based costing provides the infor- accounting period.
mation that is needed to practice activity-
based management. Once provided, the
information may be used to make the busi- 30. The two ways an under- or overapplied
ness more profitable by reducing costs and facory overhead balance can be disposed of
improving processes. are: (1) charge the entire amount to Cost of
Goods Sold, or (2) allocate the amount be-
27. Volume-related overhead changes as the tween Work in Process, Finished Goods,
number of units produced changes. For ex- and Cost of Goods Sold.
ample, electricity expense incurred to power If the amount of under- or overapplica-
the machines increases as more units are pro-
tion is insignificant, the recommended pro-
duced. The change in non-volume-related
cedure is to charge the balance to the costs
overhead costs is not a function of how many
of the current period by closing it to Cost of
units are produced. For example, you have
Goods Sold.
to incur the same setup costs prior to a pro-
When the amount is substantial, the
duction run whether one unit or one thou-
recommended procedure would be to allo-
sand units are produced.
cate the balance to Work in Process, Fin-
28. The factory overhead has been underap- ished Goods, and Cost of Goods Sold. The
plied by $1,000. The probable causes for allocation would be based on the balances
the underapplication could include: remaining in these accounts at the end of
(1) A lower level of capacity was achieved the fiscal period. This is actually a correcting
than was forecast when the predeter- procedure that recognizes that the balances
mined rate was established. in Work in Process, Finished Goods, and
(2) The actual factory overhead expenses Cost of Goods Sold have been incorrectly
charged to the factory overhead control charged by an inaccurate predetermined
account were more than were estimated. rate.
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VanDerbeck, Chapter 04 119
EXERCISES
E4-1
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120 Chapter 04, VanDerbeck
Note: This is a good time to bring to students attention the fact that some factory over-
head expenses are of a semivariable nature in that they may contain both fixed and var-
iable elements. For example, arguments could be made for (a), (b), (j), (l), (n), (p), (r),
and (s) to be classified as semivariable or semifixed.
E4-2
Hours Cost
High volume............................................................................ 900 $ 11,000
Low volume ............................................................................ 400 6,000
Change ............................................................................. 500 $ 5,000
Variable cost per indirect labor hour: $5,000/500 = $10.00
E4-3
1.
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VanDerbeck, Chapter 04 121
2.
E4-4
1. and 2.
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122 Chapter 04, VanDerbeck
3. There is no difference in the solution obtained under the three methods. There were
no outlier data points that would result in inaccuracies in the high-low points and
scattergraph solutions.
E4-5
Hours Cost
High volume............................................................................ 1,700 $ 22,000
Low volume ............................................................................ 700 10,000
Change ............................................................................. 1,000 $ 12,000
Variable cost per machine hour: $12,000/1,000 = $12.00
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VanDerbeck, Chapter 04 123
E4-6
a. and b.
Unit cost at production levels of 10,000 and 20,000 units:
10,000 units 20,000 units
Direct materials ............................................................ $7.00 $7.00
Direct labor .................................................................. 8.00 8.00
Fixed factory overhead
($24,000* 10,000) .............................................. 2.40
($24,000* 20,000) .............................................. 1.20
Variable factory overhead expenses ............................ 3.00 3.00
Unit cost ....................................................................... $20.40 $19.20
* The 12,000 units budgeted for May multiplied by the fixed overhead unit cost of $2
indicates that fixed costs are $24,000 per month.
c. The variable elements of total cost will increase or decrease in proportion to the
increase or decrease in production. However, costs for the variable elements on a
unit basis will remain the same. Total fixed costs will remain constant, but unit costs
for fixed elements will increase as production decreases and decrease as produc-
tion increases because the same total cost is being divided by fewer or more units.
The difference in unit costs is due to the change in fixed costs per unit.
E4-7
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124 Chapter 04, VanDerbeck
E4-8
1.
Building Factory
Maintenance Office Assembly Machining Total
Direct charges ................ $90,000 $171,000 $ 378,000 $ 328,000 $967,000
Building maintenance
floor space:
Assembly
$90,000 4/9 ......... 40,000
Machining
$90,000 5/9 ......... 50,000
Factory office
direct labor hours:
Assembly
*$171,000 x 8/12 .... 114,000
Machining
*$171,000 x 4/12 .... 57,000
$532,000 $ 435,000 $967,000
*or $171,000 (Factory Office) 120,000 (Direct Labor Hours) = $1.425 per direct labor hour
80,000 $1.425 = $114,000; 40,000 x $1.425 = $57,000
2.
Building Factory
Maintenance Office Assembly Machining Total
Direct charges ............ $90,000 $ 171,000 $ 378,000 $ 328,000 $967,000
Building maintenance
floor space:
Factory office
$90,000 10% ....... 9,000
Assembly
$90,000 40% ....... 36,000
Machining
$90,000 50% ........ 45,000
$ 180,000
Factory office
direct labor hours:
Assembly
*$180,000 x8/12 ..... 120,000
Machining
*$180,000 4/12.... 60,000
$ 534,000 $ 433,000 $967,000
*or $180,000 (Factory Office) 120,000 = $1.50 per direct labor hour
80,000 $1.50 = $120,000; 40,000 x $1.50 = $60,000
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VanDerbeck, Chapter 04 125
E4-9
1.
Building Factory
Maintenance Office Grinding Polishing Total
Direct charges $100,000 $ 150,000 $ 450,000 $350,000 $1,050,000
Building maintenance
floor space:
Grinding
$100,000 x 6/9 66,667
Polishing
$100,000 3/9* ...... 33,333
Factory office
direct labor hours:
Grinding
$150,000 x 75/100 . 112,500
Polishing
$150,000 x 25/100 . 37,500
$629,167 $420,833 $1,050,00
2.
Building Factory
Maintenance Office Grinding Polishing Total
Direct charges ................... $100,000 $ 150,000 $ 450,000 $350,000 $1,050,000
Building maintenance
floor space:
Factory office
$100,000 10% ..... 10,000
Grinding
$100,000 60% ..... 60,000
Polishing
$100,000 30% ...... 30,000
Total.. $160,000
Factory office
direct labor hours:
Grinding
*$160,000 x75/100 . 120,000
Polishing
*$160,000 25/100 40,000
$ 630,000 $ 420,000 $1,050,00
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126 Chapter 04, VanDerbeck
E4-10
E4-11
E4-12
E4-13
Assembly support (direct labor cost): $50,000/$75,000 = $.67 per direct labor $
Machining support (machine hours): $80,000/2,000 = $40 per machine hour
Machine setups (number of setups): $25,000/200 = $125 per setup
Design changes (design hours): $15,000/500 = $30 per design hour
E4-14
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VanDerbeck, Chapter 04 127
E4-15
E4-16
a. Factory Overhead.
b. No. If this were a departmentalized factory, the credit to Factory Overhead would be
offset by debits to the various departments in the factory, thereby distributing total
factory overhead to the departments. The account illustrated shows a charge direct-
ly to Work in Process instead of Factory OverheadDepartment A or B.
c. The debit balance in the account represents the amount of underapplied overhead.
d. The application rate of 50% was determined by dividing the estimated direct labor
cost into the estimated factory overhead for the period.
e. The $1,100 balance may be added to the cost of goods sold account, or if signifi-
cant, prorated to the cost of goods sold, work in process, and finished goods ac-
counts.
E4-17
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128 Chapter 04, VanDerbeck
E4-18
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VanDerbeck, Chapter 04 129
PROBLEMS
P4-1
P4-2
2. Variable cost charged to product: 24,000 units $1.00 per unit = $24,000.
3. Fixed cost charged to factory overhead: $2,000 per month 12 months = $24,000.
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130 Chapter 04, VanDerbeck
P4-3
1.
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VanDerbeck, Chapter 04 131
5. No, the answers do not agree. In P 4-2, the fixed cost per month was $2,000 and
the variable cost per unit was $1. In P 4-3, the fixed cost per month is $2,100 and
the variable cost per unit is only $.9545. The reason the two answers differ is that
both of these methods are imprecise. The high-low method only uses two data
points and the scattergraph method fits the trend line by visual inspection.
P4-4
1.
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132 Chapter 04, VanDerbeck
4.
5. In this instance the high-low points solution in P4-2 is closer to this solution than the
scattergraph solution in P4-3 because neither the high nor low point is an outlier.
P4-5
Units
Expenses 1,000 2,000 4,000
Variable:
Indirect materials.. $5,000 $10,000 $20,000
Indirect labor. 10,000 20,000 40,000
Power. 7,500 15,000 30,000
Total variable.. $22,500 $45,000 $90,000
Fixed:
Depreciation $30,000 $30,000 $30,000
Property tax.. 28,000 28,000 28,000
Insurance. 22,000 22,000 22,000
Total fixed. $80,000 $80,000 $80,000
Total expenses.. $102,500 $125,000 $170,000
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VanDerbeck, Chapter 04 133
P4-6
Schedule for Distribution of Service Department CostsDirect Method
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134 Chapter 04, VanDerbeck
P4-7
Schedule for Distribution of Service Department CostsSequential Method
(Note that Building Maintenance services four other departments, whereas Factory
Office only services three departments.)
P4-8
(1)
Factory Overhead-Mixing.21,000
Factory Overhead-Blending18,000
Factory Overhead-Finishing25,000
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VanDerbeck, Chapter 04 135
(2)
(3)
Factory Overhead-Mixing3,120
Factory Overhead-Blending2,080
Factory Overhead-Finishing5,200
P4-9
1. 2. and 3.
Direct Direct Applied Total
Materials Labor Factory Production
Job Cost Cost Overhead Cost
18AX ......................... $ 300 $ 600 $ 1,200 $ 2,100
19BT ......................... 1,080 940 1,880 3,900
20CD ......................... 720 1,400 2,800 4,920
21FB ......................... 4,200 5,120 10,240 19,560
$ 6,300 $ 8,060 $16,120 $ 30,480
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136 Chapter 04, VanDerbeck
P4-10
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VanDerbeck, Chapter 04 137
P4-11
1.
Budgeted Allocation Budgeted Overhead
Cost Pool Amount Base Amount Rate
Direct labor Direct
support ..... $ 150,000 labor hours 20,000 $7.50/direct labor hour
Machine Machine
support ..... $ 200,000 hours 10,000 $20/machine hour
Machine Number of
setups ....... $ 100,000 setups 200 $500/setup
Design Number of
changes .... $ 50,000 design changes 50 $1,000/design change
2. Job 2525
Direct materials ............................................................................ $25,000
Direct labor .................................................................................. 10,000
Factory Overhead:
Direct labor usage (500 $7.50) ...................................... $ 3,750
Machine usage (1,000 $20)........................................... 20,000
Machine setups (5 x $500).. 2,500
Design changes (3 $1,000) ........................................... 3,000 29,250
Total Cost of Job ..................................................................... $64,250
P4-12
1.
Budgeted Allocation Budgeted Overhead
Cost Pool Amount Base Amount Rate
Direct labor Direct
support ..... $ 300,000 labor hours 25,000 $12/direct labor hour
Machine Machine
support ..... $ 250,000 hours 10,000 $25/machine hour
Machine Number of
setups ....... $ 125,000 setups 400 $312.50/setup
Design Number of
changes .... $ 75,000 design changes 75 $1,000/design change
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138 Chapter 04, VanDerbeck
2. Job 007
Direct materials ............................................................................ $15,000
Direct labor .................................................................................. 20,000
Factory Overhead:
Direct labor usage (800 $12)......................................... $ 9,600
Machine usage (1,200 $25) .......................................... 30,000
Machine setups (6 x $312.50).. 1,875
Design changes (4 $1,000) ........................................... 4,000 45,475
Total Cost of Job .................................................................... $80,475
P4-13
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VanDerbeck, Chapter 04 139
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P4-14
1. Predetermined rates:
Job 101 Job 102 Job 103 Job 104 Job 105 Job 106 Total
Materials .............................................. $ 5,000 $ 7,000 $ 8,000 $ 9,000 $ 10,000 $ 11,000 `
$ 50,000
Direct labor .......................................... 6,000 12,000 13,500 15,600 29,000 2,400 78,500
Total prime cost ............................... $ 11,000 $ 19,000 $ 21,500 $ 24,600 $ 39,000 $13,400 $ 128,500
Applied overhead: Direct labor cost .... $ 6,000 $ 12,000 $ 13,500 $ 15,600 $ 29,000 $ 2,400 $ 78,500
Direct labor hour.... $ 6,000 $ 12,000 $ 15,000 $ 15,600 $ 27,000 $ 2,400 $ 78,000
Machine hour ........ $ 9,000 $ 9,600 $ 12,000 $ 10,200 $ 19,500 $ 4,500 $ 64,800
Total cost using direct labor cost.......... $ 17,000 $ 31,000 $ 35,000 $ 40,200 $68,000 $ 15,800 $207,000
Total cost using direct labor hour ......... $ 17,000 $ 31,000 $ 36,500 $ 40,200 $ 66,000 $15,800 $ 206,500
Total cost using machine hour ............. $20,000 $ 28,600 $ 33,500 $ 34,800 $ 58,500 $17,900 $ 193,300
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VanDerbeck, Chapter 04 141
4. Either the direct labor cost or direct labor hour method. The machine-hour method
results in applied overhead that is far different than actual overhead.
P4-15
1.
Application Rates
Basis Bronzing Casting Finishing
a. Direct labor cost ............................................ 250% 200% 180%
b. Direct labor hours .......................................... $ 20 $ 20 $ 10
c. Machine hours............................................... $ 5 $ 2 $ 8
2. Cost of Production
Job M45Direct Labor Cost Method Bronzing Casting Finishing Total
Materials..................................... $ 20.00 $ 40.00 $ 20.00 $ 80.00
Direct labor cost ......................... 64.00 60.00 54.00 178.00
Factory overhead ....................... 160.00 120.00 97.20 377.20
Total production cost .................. $ 244.00 $ 220.00 $ 171.20 $ 635.20
Job M45Direct Labor Hour Method Bronzing Casting Finishing Total
Materials..................................... $ 20.00 $ 40.00 $ 20.00 $ 80.00
Direct labor cost ......................... 64.00 60.00 54.00 178.00
Factory overhead ....................... 160.00 120.00 60.00 340.00
Total production cost .................. $ 244.00 $ 220.00 $ 134.00 $ 598.00
Job M45Machine Hour Method ..... Bronzing Casting Finishing Total
Materials..................................... $ 20.00 $ 40.00 $ 20.00 $ 80.00
Direct labor cost ......................... 64.00 60.00 54.00 178.00
Factory overhead ....................... 10.00 6.00 8.00 24.00
Total production cost .................. $ 94.00 $ 106.00 $ 82.00 $ 282.00
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142 Chapter 04, VanDerbeck
P4-15 Concluded
P4-16
Building General
Mainte- Factory
nance Overhead Machining Assembly Total
Actual costs incurred ..................... $ 30,000 $ 75,400 $ 45,800 $ 68,800 $ 220,000
DistributionBuilding
Maintenance:
General factory
overhead10% ..................... 3,000
Machining50%......................... 15,000
Assembly40% ......................... 12,000
$ 78,400
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VanDerbeck, Chapter 04 143
DistributionGeneral Factory
Overhead:
1/2 x $78,400 .................................. 39,200 39,200
$ 100,000 $ 120,000 $ 220,000
Applied factory overhead:
Machining28,000 $4.00 ........ (112,000) (112,000)
Assembly28,000 $4.50 ........ (126,000) (126,000)
$(238,000)
Machiningoverapplied ............. $ (12,000)
Assemblyoverapplied .............. $ (6,000)
Net overapplied ...................... $ (12,000) $ (6,000) $ (18,000)
P4-17
Job 2526
1. Materials........................................................................... $ 5,000
Labor ................................................................................ 10,000
Applied factory overhead (1,600 hrs. $6) ...................... 9,600
Total cost.......................................................................... $ 24,600
Job 2527
Materials........................................................................... $ 10,000
Labor ................................................................................ 15,000
Applied factory overhead (1,900 hrs. $6) ...................... 11,400
Total cost.......................................................................... $ 36,400
Job 2528
Materials........................................................................... $ 4,000
Labor ................................................................................ 7,000
Applied factory overhead (1,300 hrs. $6) ...................... 7,800
Total cost.......................................................................... $ 18,800
2. a. Work in Process .......................................................... 28,800
Applied Factory Overhead ...................................... 28,800
b. Applied Factory Overhead .......................................... 28,800
Factory Overhead ................................................... 28,800
c. Factory Overhead ....................................................... 1,800
Under- and Overapplied Factory Overhead ............ 1,800*
d. Finished Goods ........................................................... 61,000**
Work in Process ...................................................... 61,000
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P4-18
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VanDerbeck, Chapter 04 145
P4-19
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146 Chapter 04, VanDerbeck
P4-20R
1.
Cash
Accounts Receivable
Finished Goods
Work in Process
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VanDerbeck, Chapter 04 147
Materials
Prepaid Insurance
Factory Building
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148 Chapter 04, VanDerbeck
Office Equipment
Accounts Payable
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VanDerbeck, Chapter 04 149
Wages Payable
Capital Stock
Retained Earnings
Factory Overhead
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150 Chapter 04, VanDerbeck
Factory OverheadStamping
Factory OverheadPlating
Factory OverheadPower
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VanDerbeck, Chapter 04 151
Factory OverheadMaintenance
Sales
Oct. 31 Finished
Goods (k) 28,760
Payroll
Salaries
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152 Chapter 04, VanDerbeck
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VanDerbeck, Chapter 04 153
P4-20R Continued
Material A
Unit
Units Cost Total
Material B
Unit
Units Cost Total
Material C
Unit
Units Cost Total
Factory Supplies
Total
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154 Chapter 04, VanDerbeck
P4-20R Continued
4. Transactions
(a) Materials.................................................................... 69,500
Accounts Payable ................................................ 69,500
Materials purchases.
(b) Work in Process ........................................................ 52,600
Factory Overhead ..................................................... 2,450
Materials .............................................................. 55,050
Materials requisitioned.
(c) Payroll ....................................................................... 53,300
FICA Tax Payable ................................................ 4,264
Employees Income Tax Payable.......................... 5,330
Wages Payable .................................................... 43,706
Recording wages payable.
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VanDerbeck, Chapter 04 155
P4-20R Continued
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156 Chapter 04, VanDerbeck
P4-20R Continued
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VanDerbeck, Chapter 04 157
P4-20R Continued
6.
a. Material SummaryOctober 31
Unit
Unit Cost Total
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158 Chapter 04, VanDerbeck
P4-20R Continued
6.
b. Custom Chrome, Inc.
Statement of Cost of Goods Manufactured
For the Month Ended October 31, 2013
Direct materials:
Inventory, October 1. ............................... $15,000
Purchases......................................................................... 69,500
Total cost of materials available ....................................... $84,500
Inventory, October 31 ....................................................... 29,450
Cost of materials used ...................................................... $55,050
Less: indirect materials used ............................................ 2,450
Direct materials used ................................................................................... $ 52,600
Direct labor .................................................................................................. 25,500
Applied factory overhead ............................................................................. 22,000
Total manufacturing cost ............................................................................. $ 100,100
Add work in process inventory, October 1 ............................................ 3,600
Total .................................................................................................. $103,700
Less work in process inventory, October 31.. 25,000
Cost of goods manufactured $78,700
Less work in process inventory, October 31 .......................................... $78,700
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VanDerbeck, Chapter 04 159
P4-20R Concluded
Custom Chrome, Inc.
Balance Sheet
October 31,2013
Assets
Current assets:
Cash ................................................................. $20,244
Accounts receivable ......................................... 9,340
Finished goods ................................................. 58,690
Work in process ............................................... 25,000
Materials........................................................... 29,450
Prepaid insurance ............................................ 4,200
Total current assets ...................................... $146,924
Property, plant, and equipment:
Factory building ................................. $64,000
Less accumulated
depreciation ............................. 22,767 $41,233
Machinery and equipment ................. $38,000
Less accumulated
depreciation ............................. 16,633 21,367
Office equipment ............................... $10,500
Less accumulated
depreciation ............................. 7,675 2,825
Total property, plant, and equipment ........................... 65,425
Total assets ................................................................ $212,349
Liabilities
Current liabilities:
Accounts payable .................................................. $72,000
FICA tax payable ................................................... 8,528
Federal unemployment tax payable ...................... 897
State unemployment tax payable .......................... 3,536
Employees income tax payable ............................. 5,330
Deferred credit-overapplied factory overhead* ...... 250
Total liabilities .............................................................. $90,541
Stockholders Equity
Capital stock ................................................................ $75,000
Retained earnings, October 31 .................................... 46,808**
Total stockholders equity ...................................... 121,808
Total liabilities and stockholders equity ....................... $212,349
* Any balance in an under-or- overapplied overhead account will be disposed of at the
end of the period.
** $54,782-$(7,974)
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160 Chapter 04, VanDerbeck
MINI-CASE
3.
4. Product costs are so dramatically different because the plant-wide overhead rate on-
ly uses direct labor cost as the allocation base. Since five times as many standard
units are produced as compared to deluxe units, significantly more labor dollars and,
thus, overhead costs would be assigned to the standard model. However, this ap-
proach ignores the fact that deluxe units are more complex and require more ma-
chine time, more design changes, and a greater number of setups because they are
made in small production runs.
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VanDerbeck, Chapter 04 161
Standard Deluxe
Cost per unit .......................................... $95.50 $ 347.50
Markup (50%) ........................................ 47.75 173.75
Selling price ........................................... 143.25 $521.25
INTERNET EXERCISE
1. If machine hours were used to allocate most of the overhead, Product 366, the high-
volume product, would be allocated most of the overhead even though it did not
require any testing, engineering, and setup activities. Using activity-based costing,
Product 124 that consumes many of the special activities would be charged with a
greater share of the overhead cost.
2. Activity-based costing has grown in importance in recent decades because (1) man-
ufacturing overhead costs have increased significantly, the manufacturing overhead
costs no longer correlate with the productive machine hours or direct labor hours,
(3) the diversity of products and the diversity in customers demands have grown,
and (4) some products are produced in large batches, while others are produced in
small batches.
4. When all of the overhead is allocated using a volume-related allocation base such as
machine hours, a job that is for a great number of units, such as the 50,000 units in
this example, will be charged with a very large amount of overhead whether or not it
consumes many special overhead activities.
5. If a company knows the overhead cost associated with setting up a machine, it can
then ask activity-based management questions such as: Why is the cost of setting
up this machine so expensive?, What can be done to reduce the setup costs?, and If
the setup costs cannot be reduced, are the selling prices adequate to cover all of the
companys costs and earn a satisfactory profit?
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CHAPTER 5
QUESTIONS
1. The two basic systems of cost accounting c. The factory overhead charged to jobs is
are the job order cost system and the proc- usually based on a predetermined rate
ess cost system. The job order cost system under a job order cost system. Under a
may be used advantageously when goods process cost system, these costs are
are produced in lots of predetermined gathered and distributed to departments,
quantity usually based on customers and a predetermined rate for each
specifications. The process cost system may department is used to apply overhead to
be used advantageously when goods are Work in Process.
produced continuously as in the case of 7. The primary objective in accumulating costs
mass production industries. by departments is to determine the amount
2. Job Order Cost System of manufacturing expenses to be borne by
items b, c, f the product as it passes through each de-
Process Cost System partment or process. This facilitates better
items a, d, e, g, h control by making available unit costs of
production for each department, which can
3. Answers will vary, but may include: clothing
then be compared to unit costs in prior
(Levi Strauss), beverages (Coca Cola), food
periods and to budgeted costs for the
(General Mills), petroleum (ExxonMobil),
current period.
and pharmaceuticals (Merck & Co.).
4. In a job order cost system, (a) costs are ac- 8. Equivalent production represents the
cumulated by specific jobs or orders, and (b) number of whole units that could have been
unit costs are calculated at the time the job completed during the period, given the
or order is finished. In a process cost sys- amount of work that was performed. For
tem, (a) costs are accumulated by proc- example, if 1,000 units are completed during
esses or departments, and (b) unit costs are the period and there are 500 units in
calculated at the end of a given period, process estimated to be one-half completed
usually a month, for each process or at the end of the period, equivalent
department. production in whole units is 1,250 units [
1,000 + (500 x .50) ].
5. The term unit cost refers to the average
cost of producing each unit manufactured 9. It is necessary to estimate the stage of com-
during a given period; the term job cost pletion of work in process at the end of the
refers to the cost of producing each job accounting period so that the costs incurred
completed or fully manufactured during a during the period may be properly allocated
given period. A job may consist of any num- between the goods finished during the pe-
ber of units. riod and those in process at the end of the
6. a. In accounting for materials under a job period.
order cost system, the costs, as deter- 10. If the estimate of the stage of completion of
mined from materials requisitions, are work in process is too high, the figure repre-
charged to specific jobs (direct materials) senting equivalent production would be
or to factory overhead (indirect overstated and, therefore, the unit cost for
materials). Under a process cost system, the month would be too low. As a result, the
these costs are charged to the de- uncompleted units would absorb more than
partments to which the materials were their appropriate share of total costs and the
issued. goods finished would be charged for less
b. The cost of labor under a job order cost than the correct amount of costs. The unit
system is charged to specific jobs worked cost of finished goods would be understated.
on (direct labor) or to factory overhead
(indirect labor). The cost of labor under a
process cost system is charged to the
departments in which the work was done.
163
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164 Chapter 05, VanDerbeck
Conversely, if the estimate of the stage of 14. No. The calculation of unit cost in a depart-
completion of work in process was too low, ment subsequent to the first considers only
the figure representing equivalent production those costs incurred for materials, labor, and
would be understated and, therefore, the factory overhead added during the month in
unit cost for the month would be too high. As that department and the equivalent units
a result, the uncompleted units would produced in that department. However, a
absorb less than their appropriate share of separate computation is made for the
total costs and the good finished would be transferred-in costs and it is added to the
charged more than the correct amount of cost of the goods transferred out.
costs.
15. Yes. In determining the costs transferred
11. The production report shows the number of
from a second department to a third, all prior
units (1) in process at the beginning of the
departments costs must be considered. The
period, as well as the stage of completion,
costs from the first department would also
(2) placed in process or received from a
be included in the computation of the ending
prior department during the period,
work in process in the second department.
(3) completed or transferred to a subsequent
department during the period, and (4) in 16. Goods that are finished but still on hand in a
process at the end of the period, as well as department at the end of the month are ac-
the stage of completion. counted for as goods completed and on
hand on the cost of production report, and
12. The four main sections of a cost of
as finished goods for financial statement
production summary are (1) the costs to be
purposes.
accounted for, (2) the equivalent production
(unit output) for the period, (3) the 17. If the prior departments transfers from two
computation of unit costs for the period, and different periods have different unit costs
(4) the summary of production costs each month, these previous department
accounted for (inventory costs). costs must be averaged as a separate
grouping so that these transferred-in costs
13. In a single-department factory, units trans-
can be properly allocated to the products
ferred out are moved to the stockroom as
being produced in the department to which
finished goods. In a multiple-department fac-
they were transferred.
tory, the units transferred out of the first de-
partment are considered to be raw materials
that will be added at the beginning of a
second departments processing opera-tions.
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VanDerbeck, Chapter 05 165
EXERCISES
E5-1
Equivalent
Units
a. Completed during month .................................... 10,000
Equivalent units of work in process, end of period:
(5,000 units, one-half completed) ................ 2,500 12,500
E5-2
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166 Chapter 05, VanDerbeck
E5-2 Continued
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VanDerbeck, Chapter 05 167
E5-2 Concluded
E5-3
E5-4
Cost Element Production Cost Unit Output Unit Cost
Materials $ 18,900 10,000* $ 1.890
Labor 44,100 10,000 4.410
Factory overhead 26,250 10,000 2.625
Total $ 89,250 $ 8.925
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168 Chapter 05, VanDerbeck
E5-5
Production Cost
Beginning Work Cost for Unit Unit
Cost Element In Process Month Total Output Cost
Materials $ 1,250 $ 99,150 $ 100,400 40,000* $ 2.51
Labor 675 54,925 55,600 40,000 1.39
Factory overhead 950 75,050 76,000 40,000 1.90
Total $ 2,875 $ 229,125 $ 232,000 $ 5.80
E5-6
Production Cost
Beginning Work Cost for Unit Unit
Cost Element In Process Month Total Output Cost
Materials $ 2,500 $130,000 $ 132,500 47,500* $ 2.789
Labor 1,400 70,000 71,400 47,500 1.503
Factory overhead 1,800 82,000 83,800 47,500 1.764
Total $ 5,700 $ 282,000 $ 287,700 $ 6.056
E5-7
Units in process at beginning of month ................................... 500
Units started in process and finished ...................................... 2,000
Units completed during month ................................................ 2,500
500 units, three-fifths completed at the beginning of the month equals the equivalent
of 300 fully completed units.
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VanDerbeck, Chapter 05 169
E5-8
Cost Element Production Cost Unit Output Unit Cost
Materials $ 8,800 10,000 $ .88
Labor 7,200 10,000 .72 (a)
Factory overhead 8,800 10,000 .88
Total $ 24,800 $ 2.48
Transferred from
Assembly 30,000 10,000 3.00
Total $ 54,800 5.48 (b)
E5-9
Atlanta Appliance, Inc.
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2013
Materials.$8,800
Labor.7,200
Factory overhead8,800
Total manufacturing costs $24,800
Add work in process inventory, January 1.. 30,000
Total in process $54,800
Less work in process inventory, January 31 -0-
Cost of goods manufactured during the month $54,800
E5-10
Cost Element Production Cost Unit Output Unit Cost
Materials $ 6,000 15,000 $ .40
Labor 9,000 15,000 .60 (a)
Factory overhead 12,000 15,000 .80
Total $ 27,000 $ 1.80
Transferred from
Immersion 25,000 15,000 1.67
Total $ 52,000 3.47 (b)
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170 Chapter 05, VanDerbeck
E5-11
Amarillo Adhesives, Inc.
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2013
Materials.$6,000
Labor.9,000
Factory overhead 12,000
Total manufacturing costs $27,000
Add work in process inventory, January 1.. 25,000
Total in process $52,000
Less work in process inventory, January 31 -0-
Cost of goods manufactured during the month $52,000
E5-12
Account
Transaction Debit Credit
Purchase of materials and Materials Accounts Payable
supplies
Materials and supplies Work in Process Materials
issued to the factory (for each department)
Factory Overhead
(for indirect materials)
Labor cost incurred Work in Process Wages Payable
(for each department)
Factory Overhead
(for indirect labor)
Other costs incurred Factory Overhead various accounts
Distribution of factory Factory Overhead Factory Overhead
overhead to departments (for each department)
Factory overhead applied Work in Process Factory Overhead
(for each department) (for each department)
Units transferred from one Work in Process Work in Process
department to another (receiving department) (transferring department)
Units completed Finished Goods Work in Process
(last department)
Units sold A/R and Cost of Goods Sold Sales and Finished Goods
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VanDerbeck, Chapter 05 171
E5-13
a.
E5-14
1.
Cost of Production Summary
Blending Department
January 31, 2013
Cost of work in process, beginning of month:
Cost in Mixing$10,000
Cost in Blending:
Materials.$ 200
Labor. 500
Factory Overhead. 300 1,000 $11,000
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172 Chapter 05, VanDerbeck
2. Finished Goods..102,500
Work in Process-Blending.. 102,500
E5-15
a.
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VanDerbeck, Chapter 05 173
E5-16
1.
Cost of Production Summary
Finishing Department
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174 Chapter 05, VanDerbeck
Cost in Finishing:
Materials (3,000 2/3 $.36). $720
Labor (3,000 2/3 $1.10) 2,200
Factory overhead (3,000 2/3 $.70). 1,400 4,320 22,320
Total production costs accounted for $128,400
2. Finished Goods..106,080
Work in Process-Finishing.. 106,080
E5-17
Units Cost
Beginning inventory.. 1,000 $ 21,200
Transferred in this month 5,000 100,000
Total6,000 $121,200
Adjusted unit cost from prior department = $121,200 / 6,000 = $20.20 (the units
transferred to Finishing and the number of units in ending work in process have no
effect on the solution.)
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VanDerbeck, Chapter 05 175
PROBLEMS
P5-1
Superior Products Co.
Cost of Production Summary
For the Month Ended February 28, 20--
Inventory costs:
Costs of goods finished and transferred to finished goods
during month (60,000 $1.44)......................................... $86,400
Cost of work in process, end of month:
Materials (10,000 1/4 $0.48)................................ $ 1,200
Labor (10,000 1/4 $0.32) ..................................... 800
Factory overhead (10,000 1/4 $0.64) .................. 1,600 3,600
Total production costs accounted for ...................................... $ 90,000
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176 Chapter 05, VanDerbeck
P5-2
Erin Company
Cost of Production Summary
For the Month Ended October 31, 20--
Inventory costs:
Costs of goods finished and transferred to finished goods
during month (13,000 $2.10) ........................................ $ 27,300
Materials (2,000 1/2 $0.90) ................................. $ 900
Labor (2,000 1/2 $0.70)....................................... 700
Factory overhead (2,000 1/2 $0.50) .................... 500 2,100
Total production costs accounted for ...................................... $ 29,400
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VanDerbeck, Chapter 05 177
P5-3
Maxsim Company
Cost of Production Summary
For the Month Ended March 31, 20--
Inventory costs:
Costs of goods finished and transferred to finished goods
during month (18,000 $2.94)......................................... $ 52,920
Material (3,000 2/3 x $1.26). $ 2,520
Labor (3,000 2/3 $0.98) ....................................... 1,960
Factory overhead (3,000 2/3 $0.70) .................... 1,400 5,880
Total production costs accounted for ...................................... $ 58,800
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178 Chapter 05, VanDerbeck
P5-4
P5-5
Military, Inc.
Cost of Production Summary--Bravo
For the Month Ended May 31, 20__
Cost of goods received from Alpha during month(10,000 x $2.50). $25,000
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VanDerbeck, Chapter 05 179
Inventory costs:
Cost of goods finished and transferred to Charlie during month:
Cost in Alpha (8,000 $2.50).. $20,000
Cost in Bravo (8,000 $2.118) 16,944
(8,000 $4.618) $36,944
P5-6
NYC, Inc.
Cost of Production Summary--Brooklyn
For the Month Ended May 31, 20--__
Cost of goods received from Bronx during month (15,000 $3.00). $45,000
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180 Chapter 05, VanDerbeck
Inventory costs:
Cost of goods finished and transferred to Queens during month:
Cost in Bronx (12,000 $3.00)..$36,000
Cost in Brooklyn (12,000 $1.929)23,148
(12,000 $4.929).. $59,148
*rounding difference
P5-7
Phillies Manufacturing Co.
Cost of Production SummaryCutting
For the Month Ended July 31, 2013
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VanDerbeck, Chapter 05 181
P5-7 Continued
Inventory costs:
Costs of goods finished and transferred to Finishing:
Cost in Cutting (4,400 $10.00) ........................... $ 44,000
Cost in Shaping (4,400 2.50)........................... 11,000
(4,400 $12.50) ........................... $ 55,000
Cost of work in process, end of month:
Cost in Cutting (1,000 $10.00)................................ $ 10,000
Cost in Shaping (1,000 2/5 $2.50) ....................... 1,000 11,000
Total production costs accounted for ...................................... $ 66,000
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182 Chapter 05, VanDerbeck
P5-7 Concluded
Inventory costs:
Costs of goods finished and transferred to finished goods:
Cost in Cutting (4,000 $10.00) ......................... $ 40,000
Cost in Shaping (4,000 2.50) ......................... 10,000
Cost in Finishing (4,000 4.00) ......................... 16,000
(4,000 $16.50) ......................... $ 66,000
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VanDerbeck, Chapter 05 183
P5-8
1. Work in ProcessCutting ............................................... 30,000
Work in ProcessShaping .............................................. 1,200
Work in ProcessFinishing ............................................ 6,300
Materials .................................................................... 37,500
Work in ProcessCutting ............................................... 16,000
Work in ProcessShaping ............................................. 6,000
Work in ProcessFinishing ............................................ 4,200
Payroll ....................................................................... 26,200
Work in ProcessCutting ............................................... 14,000
Work in ProcessShaping ............................................. 4,800
Work in ProcessFinishing ............................................ 6,300
Factory Overhead ..................................................... 25,100
Work in ProcessShaping ............................................. 54,000
Work in ProcessCutting ........................................ 54,000
Work in ProcessFinishing ............................................ 55,000
Work in ProcessShaping ....................................... 55,000
Finished Goods ............................................................... 66,000
Work in ProcessFinishing ..................................... 66,000
2.
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184 Chapter 05, VanDerbeck
P5-9
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VanDerbeck, Chapter 05 185
P5-10
Reynolds, Inc.
Cost of Production SummaryCutting
For the Month Ended May 31, 20--
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186 Chapter 05, VanDerbeck
P5-10 Continued
Reynolds, Inc.
Cost of Production SummaryGrinding
For the Month Ended May 31, 20--
Cost in Grinding:
Materials ($5,000 + $40,000) 15,000 ............................ $ 3.00
Labor ($5,500 + $44,000) 15,000 ................................. 3.30
Factory overhead ($3,500 + $37,000) 15,000 ............... 2.70
Total ................................................................................. $ 9.00
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VanDerbeck, Chapter 05 187
P5-10 Concluded
Inventory costs:
Costs of goods finished and transferred:
Cost in Cutting (10,000 $ 6.20)........... $ 62,000
Cost in Grinding (10,000 9.00)........... 90,000
(10,000 $ 15.20)........... $ 152,000
P5-11
Mankato Manufacturing Co.
Cost of Production SummaryForming
For the Month Ended March 31, 20--
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188 Chapter 05, VanDerbeck
P5-11 Continued
Unit cost for month:
Materials ($500 + $4,000) 9,000 .................................... $ .50
Labor ($1,000 + $8,000) 9,000 ...................................... 1.00
Factory overhead ($750 + $6,000) 9,000 ....................... .75
Total ........................................................................... $ 2.25
Inventory costs:
Costs of goods finished and transferred to Finishing
during month:
Cost in Shaping (8,000 $4.00) ............................. $ 32,000
Cost in Forming (8,000 2.25) ............................. 18,000
(8,000 $6.25) ............................. $ 50,000
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VanDerbeck, Chapter 05 189
P5-11 Concluded
4
Beginning work in process = equivalent of 1,000 units
P5-12
1. Work in Process---Forming..36,000
Work in Process---Shaping. 36,000
2. Work in Process---Forming..18,000
Materials.. 4,000
Payroll.. 8,000
Factory Overhead. 6,000
3. Work in Process---Finishing50,000
Work in Process---Forming. 50,000
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190 Chapter 05, VanDerbeck
P5-13R
1.
Ito Manufacturing Co.
Cost of Production SummaryMixing
For the Month Ended December 31, 20--
Inventory costs:
Costs of goods finished and transferred to Blending
during month (13,000 $2.05) .................................. $ 26,650
Cost of work in process, end of month:
Materials (2,000 1/4 $1.22) ................................. $ 610
Labor (2,000 1/4 $0.40)....................................... 200
Factory overhead (2,000 1/4 $0.43) .................... 215 1,025
Total production costs accounted for ...................................... $ 27,675
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VanDerbeck, Chapter 05 191
P5-13R Continued
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192 Chapter 05, VanDerbeck
P5-13R Continued
Inventory costs:
Costs of goods finished and transferred to Bottling
during month:
Cost in Mixing (10,000 $2.05) ...................... $ 20,500
Cost in Blending (10,000 1.35) ...................... 13,500
(10,000 $3.40) ...................... $ 34,000
Cost of goods finished and on hand:
Cost in Mixing (500 $2.05) ................................ $ 1,025
Cost in Blending (500 1.35) ................................ 675
(500 $3.40) ................................ 1,700
Cost of work in process, end of month:
Cost in Mixing (4,000 $2.05) .................................. $ 8,200
Cost in Blending:
Materials (4,000 4/5 $0.20) ................. $ 640
Labor (4,000 4/5 $0.65) ...................... 2,080
Factory overhead (4,000 4/5 $0.50).... 1,600 4,320 12,520
Total production costs accounted for ...................................... $ 48,220
Ito Manufacturing Co.
Cost of Production SummaryBottling
For the Month Ended December 31, 20--
Cost of work in process, beginning of month:
Cost in Mixing .................................................................. $ 6,150
Cost in Blending .............................................................. 3,660
$ 9,810
Cost in Bottling:
Materials ............................................................... $ 900
Labor .................................................................. 3,100
Factory overhead.................................................. 3,080 7,080 $ 16,890
Cost of goods received from Blending .................................... 34,000
Cost of production for month:
Materials .......................................................................... $ 1,500
Labor ............................................................................. 6,500
Factory overhead............................................................. 7,000 15,000
Total costs to be accounted for............................................... $ 65,890
Unit output for month:
Finished and transferred to finished goods ...................... 11,000
Equivalent units of work in process, end of month
(2,000 units, one-half completed) .............................. 1,000
Total equivalent production ....................................... 12,000
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VanDerbeck, Chapter 05 193
P5-13R Continued
Cost in Bottling:
Materials ($900 + $1,500) 12,000 ........................... $ 0.20
Labor ($3,100 + $6,500) 12,000 ............................. .80
Factory overhead ($3,080 + $7,000) 12,000 ........... .84
Total .......................................................................... $ 1.84
Inventory costs:
Costs of goods finished and transferred:
Cost in Mixing and Blending (11,000 $3.37) ......... $ 37,070
Cost in Bottling (11,000 1.84) ......... 20,240
(11,000 $5.21) ......... $ 57,310
Cost in work in process, end of month:
Cost in Mixing and Blending (2,000 $3.37) ............. $ 6,740
Cost in Bottling:
Materials (2,000 1/2 $0.20) ................. $ 200
Labor (2,000 1/2 $0.80) ...................... 800
Factory overhead (2,000 1/2 $0.84) .... 840 1,840 8,580
*Alternative calculation.
Detailed calculation of the average unit costs from other departments as follows:
Cost from
Units Mixing Blending
Units in process, beginning of month ........................... 3,000 $ 6,150 $ 3,660
Units received during month ........................................ 10,000 20,500 13,500
Total ............................................................................. 13,000 $ 26,650 $ 17,160
Unit cost ....................................................................... $ 2.05 $ 1.32
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194 Chapter 05, VanDerbeck
P5-13R Continued
2.
Blending:
Opening inventory in
process.................. 1,500 $ 4,970
Received during
Month from Mixing 13,000 26,650
Costs added during
Month:
Materials................ 0.20 2,500
Labor ..................... 0.65 8,000
Factory overhead 0.50 6,100
Finished and trans-
Ferred to Bottling... $3.40 10,000 $ 34,000
Completed and on
Hand...................... 500 1,700
Closing work in
process.................. 4,000 12,520
Total ...................... 14,500 14,500 $ 48,220 $ 48,220
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VanDerbeck, Chapter 05 195
P5-13R Continued
Bottling:
Opening inventory in
process .............. 3,000 $ 16,890
Received during
Month from 10,000 34,000
Blending
Costs added during
Month:
Materials ............ 0.20 1,500
Labor.................. 0.80 6,500
Factory overhead 0.84 7,000
Finished and
transferred to stock $ 5.24 11,000 $ 57,310
Closing work in
process .............. 2,000 8,580
Adjusting due to
averaging costs
from prior
department ......... (.03)
Total ................... $ 5.21 13,000 13,000 $ 65,890 $ 65,890
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196 Chapter 05, VanDerbeck
P5-13R Continued
Summary:
Materials:
Mixing ........................................................................ $ 15,000
Blending .................................................................... 2,500
Bottling ...................................................................... 1,500 $ 19,000
Labor:
Mixing ........................................................................ $ 4,750
Blending .................................................................... 8,000
Bottling ...................................................................... 6,500 19,250
Factory overhead:
Mixing ........................................................................ $ 5,240
Blending .................................................................... 6,100
Bottling ...................................................................... 7,000 18,340
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VanDerbeck, Chapter 05 197
P5-13R Concluded
4.
Ito Manufacturing Co.
Statement of Cost of Goods Manufactured
For the Month Ended December 31, 20--
Materials ................................................................................. $ 19,000
Labor....................................................................................... 19,250
Factory overhead .................................................................... 18,340
Total ........................................................................................ $ 56,590
Add work in process inventories, December 1 ................. 24,545
Total .......................................................................... $ 81,135
Less work in process inventories, December 31 .............. 23,825
Cost of goods manufactured during the month ....................... $ 57,310
MINI-CASE
1. Presumably, the controllers are accusing the St. Bernard plant of treating all ending
work in process as finished goods, because they report no ending work in process.
If there is any ending work in process that should be converted to a lesser number
of equivalent units, this would cause the number of units in the denominator of the
unit cost formula to be smaller than reported, thus resulting in a higher than
reported unit cost figure.
2. There are a number of items that apply to this situation, for example:
Competence: Prepare complete and clear reports and recommendations after
analysis of relevant and reliable information.
Integrity: Communicate unfavorable as well as favorable information and
professional judgments or opinions.
Objectivity: Communicate information fairly and objectively.
3. Per the IMAs Resolution of Ethical Conflict guidelines, she should consider the
following courses of action:
Discuss such problems with the immediate superior except when it appears
that the superior is involved, in which case the problem should be presented
initially to the next higher level of management.
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198 Chapter 05, VanDerbeck
Consult your own attorney as to legal obligations and rights concerning the
ethical conflict.
If the ethical conflict still exists after exhausting all levels of internal review,
there may be no other recourse on significant matters but to resign from the
organization and to submit an informative memorandum to an appropriate
member of the organization.
INTERNET EXERCISE
1. First consult with the finance director or vice president to determine what
treatment is in accord with the companys accounting practices. If it is not, or not
applicable in this situation, you must immediately advise the head of financial
operations for your division and copy the senior vice president of financial
operations and the chief compliance officer.
2. Confidential information is only given to those who are authorized to receive it.
Never provide this type of information unless you are certain that it is
appropriate. If in doubt, talk to HR to ensure the legitimacy of the request.
3. No, the employee may not make the trade. Trading in company stock while
aware of material, non-public information will be deemed to have been traded on
the basis of that information, even though it was not a significant factor in the
decision to make the trade.
4. Any gift should be in good taste, not used to gain influence, and nominal in value
(less than $100, never in cash). Ask yourself, Would the public disclosure of
the gift be embarrassing to the Company? If returning the gift to the donor
would be embarrassing, discuss it with your manager, donate it to charity, or
turn it over to the Company.
5. One may not pay U.S. customs officials under any circumstance. In some
countries small payments may be made to expedite products through customs.
First consult with the Law department to see if your situation qualifies, then
receive written permission from Law and from your managing director.
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CHAPTER 6
QUESTIONS
1. The unit costs of materials, labor, and over- 7. The total number of units completed during
head may be computed by using one a month plus the number of units in process
equivalent production figure when materials, at the end of the month may be less than the
labor, and overhead are put into process total number in process at the beginning of
with uniform continuity or in an equal flow. the month plus the number placed in
2. Separate equivalent production figures must process during the month because of a loss
be used in computing the unit costs of mate- of units during the process through spoilage
rials, labor, and overhead when these three and evaporation.
elements are not put into process uniformly 8. The usual method of handling the cost of
during production. normal processing losses is to include the
3. The assumption is reasonable in a cost of lost units in the cost of all units
manufacturing process where direct labor is finished or still in process. With this
significant because the application of approach, the units lost are ignored in the
overhead is usually so closely related to the calculation of equivalent production.
incurrence of labor costs that overhead is 9. If some units are normally lost in the manu-
generally thought of as being applied in the facturing process and all good units are to
same ratio as labor expense. absorb the cost, the effect is to increase the
4. In determining the cost of the ending work in unit cost of the goods completed during the
process, the cost accountant must consider period as well as those still in process at the
the stage of completion and the point at end of the period.
which materials are added in order to make 10. The total manufacturing costs for the month
the proper allocation of cost. will include those costs applicable to the
5. Reasons for using standard costs per unit in units that were lost. The equivalent units will
a process costing system include: (1) clear be based only on units actually completed or
and accurate reports can be prepared without still in process, thereby excluding the units
having to wait until the end of the period for lost. When manufacturing costs for the
actual cost data; (2) getting reports on a period are divided by equivalent units for the
timely basis enables management to focus period, the resulting unit cost will include a
on business performance and strategy; (3) portion of the cost relating to the lost units.
developing accurate estimates of production 11. If goods lost at any time during the process
costs and equivalent units of production aids are considered to be abnormal losses, the
the efficient and effective management of cost of the lost units will be charged to an
business operations; (4) comparing standard expense account such as Abnormal Loss of
costs to actual costs enables management to Units. Under this procedure, the number of
determine if it is making the most of raw units lost is taken into consideration in deter-
materials, labor, and overhead deployed for mining equivalent production. The resulting
production. unit cost will be used to compute the amount
6. In the cost of production summary presented charged to lost units.
in Chapter 6, the equivalent units are com- 12. If materials added to the process increase
puted separately for materials and for labor the number of units being manufactured, the
and factory overhead, while in Chapter 5, unit cost from the prior department must be
only one equivalent unit figure had to be adjusted. The total cost of the units
determined. The reason for this difference is transferred would be divided by the new
that in Chapter 6 the discussion concerning total of units being processed to determine
the accounting for materials is based on the the new adjusted unit cost, which will be
assumption that materials are not added to less than the original unit cost in the
the manufacturing process at the same rate originating department(s).
as are labor and factory overhead. In Chapter
5, it was assumed that all three cost elements
were uniformly added to production.
199
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200 Chapter 06, VanDerbeck
13. With the average cost method, the cost c. Joint costs include the costs of
elements in the beginning work in process materials, labor, and overhead incurred
inventory are merged with the production during a common process that produces
costs of the current period, and the units in two or more products.
process at the start of the period are merged d. The split-off point is that stage of a
with the units received or started during the manufacturing process at which two or
period. The effect is to treat the units started more products are separated and
but not completed in the prior period as become individually identifiable
though they had been fully manufactured in 16. (1) Physical unit of measure.
the current period, and to treat the related (2) Relative sales value.
cost for these units as though these costs
(3) Chemical engineering, or some other
had been incurred in the current period.
type of component analysis.
One unit cost is determined for the
17. Treat the estimated sales value of the by-
current period and charged to all units pro-
products as a reduction in the cost of the
cessed during the period.
main products by debiting By-Products and
The FIFO method assumes that units
crediting Work in Process for this value. Any
are finished in the order started in process
difference between the estimated and the
and unit costs are assigned accordingly. The
actual sales value would be recorded in an
units in process at the beginning of the
account such as Gain or Loss on Sales of
period and their related costs are kept
By-Products.
separate from units received or started
during the current period and their related 18. Some companies further refine the relative
costs. These units in process at the start of sales value method by subtracting the
the period are valued at the cost carried estimated expenses incurred after split-off
over from the prior period plus a portion of on a joint product from its ultimate sales
the current periods cost necessary to value to determine the sales value at
complete them. split-off.
Units started and finished during the
current period are handled separately and
charged with the current periods unit cost.
With both methods, the procedures to
value the ending work in process are the
same; the costs charged may be different,
however, if the unit cost differs between the
average cost and the FIFO cost method.
14. Unlike average costing, under FIFO costing
the units and costs in the beginning
inventory maintain their separate identity
from the units and costs in the current
month, thus helping to identify trends and
control costs by making month-to-month
comparisons.
15. a. Although technically all products
resulting from a common process are
joint products, the term is commonly
used to mean those products that are
the primary objective of the
manufacturing process.
b. By-products are those products with
rela-tively little value that are obtained
from a common process that also
produces a product of greater value.
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VanDerbeck, Chapter 06 201
EXERCISES
E6-1
a. CASE 1
Unit output for period:
Materials
Added to work started in process and
finished during period ...................................... 3,000
Added to work in process, end of period .......... 2,000 5,000
Labor and factory overhead
Added to work started in process and
finished during period ...................................... 3,000
Added to work in process, end of period
(2,000 units, three-fourths completed) ............. 1,500 4,500
CASE 2
Unit output for period:
Materials
Added to work started in process and
finished during period ...................................... 39,000
Added to work in process, end of period 6,000 45,000
Labor and factory overhead
Added to work started in process and
finished during period ...................................... 39,000
Added to work in process, end of period
(6,000 units, one-fourth completed) ................. 1,500 40,500
CASE 3
Unit output for period:
Materials
Added to work started in process and
finished during period ...................................... 29,000
Added to work in process, end of period .......... 10,000 39,000
Labor and factory overhead
Added to work started in process and
finished during period ...................................... 29,000
Added to work in process, end of period:
5,000 units, one-fourth completed ............. 1,250
5,000 units, one-half completed ................ 2,500 3,750 32,750
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202 Chapter 06, VanDerbeck
E6-1 Continued
b. CASE 1
Unit output for period:
Materials
Added to work started in process and
finished during period .................................... 3,000
Added to work in process, end of period ....... none 3,000
CASE 2
Unit output for period:
Materials
Added to work started in process and
finished during period .................................... 39,000
Added to work in process, end of period ....... none 39,000
CASE 3
Unit output for period:
Materials
Added to work started in process and
finished during period .................................... 29,000
Added to work in process, end of period ....... none 29,000
Note: The unit output for labor and
factory overhead in (b) is the
same as for (a).
c. CASE 1
Unit output for period:
Materials
Added to work started in process and
finished during period .................................... 3,000
Added to work in process, end of period ....... 2,000 5,000
CASE 2
Unit output for period:
Materials
Added to work started in process and
finished during period .................................... 39,000
Added to work in process, end of period
(6,000 units one-fourth completed, 75%
of materials added at beginning of process) .. 4,500 43,500
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VanDerbeck, Chapter 06 203
E6-1 Concluded
CASE 3
Unit output for period:
Materials
Added to work started in process and
finished during period ........................... 29,000
Added to work in process, end of period:
5,000 units, one-fourth completed,
75% of materials added ................. 3,750
5,000 units, one-half completed, all
materials added.............................. 5,000 8,750 37,750
Note: The unit output for labor and factory
overhead in (c) is the same as for (a).
E6-2
a. Equivalent Units
Material Labor and Overhead
Units completed 9,500 9,500
Units, ending process:
All material 1,500
25% labor and
overhead _____ 375
Equivalent units 11,000 9,875
b.
Material Labor Overhead Total
Work in process, beg. $ 5,000 $ 5,000 $ 8,000 $ 18,000
Current costs 61,000 20,000 48,000 129,000
Total costs $ 66,000 $ 25,000 $ 56,000 $ 147,000*
Equivalent units 11,000 9,875 9,875
Unit costs $ 6.00 $ 2.53 $ 5.67 $ 14.20
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204 Chapter 06, VanDerbeck
E6-3
CASE 1
Equivalent Production
Materials:
Added to work started in process and
finished during period ................................... 10,500
Added to work in process, end of period ...... 1,500
12,000 units
Labor and factory overhead:
Added to work started in process and
finished during period ................................... 10,500
Added to work in process, end of period
(1,500 units, two-fifths completed) ............... 600
11,100 units
a. Unit costs:
Materials.................... $ 36,000 12,000 units = $ 3.00
Labor ......................... 44,400 11,100 units = 4.00
Factory overhead ...... 22,200 11,100 units = 2.00
$ 102,600 $ 9.00
b. Cost of units finished (10,500 $9.00) ............... $ 94,500
c. Cost of units in process:
Materials (1,500 $3.00) ............................. $4,500
Labor and factory overhead
(1,500 2/5 $6.00) .................................... 3,600 8,100
Total cost accounted for ...................................... $ 102,600
CASE 2
Equivalent Production
Materials:
Added to work started in process and
finished during period ................................... 10,500
Added to work in process, end of period
(1,500 units, one-half added at start of process) 750
11,250 units
Labor and factory overhead:
Added to work started in process and
finished during period ................................... 10,500
Added to work in process, end of period
(1,500 units, two-fifths completed) ............... 600
11,100 units
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VanDerbeck, Chapter 06 205
E6-3 Concluded
a. Unit costs:
Materials .................... $ 36,000 11,250 units = $ 3.20
Labor ......................... 44,400 11,100 units = 4.00
Factory overhead....... 22,200 11,100 units = 2.00
$ 102,600 $ 9.20
E6-4
Units to
Account for
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206 Chapter 06, VanDerbeck
E6-5
CASE 1
Units transferred ................................................................ 1,300
Units in process, end of period .......................................... + 200 1,500
Units in process, beginning of period ................................. 300
Units started in process .............................................. 1,200
Units transferred ................................................................ 1,300
Units in process, end of period .......................................... + 200
Equivalent unitsmaterials ....................................... 1,500
Units transferred ................................................................ 1,300
Units in process, end of period, one-fourth completed
(200 1/4) ...................................................................... + 50
Equivalent unitslabor and factory overhead ............ 1,350
CASE 2
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VanDerbeck, Chapter 06 207
CASE 3
Equivalent unitslabor and factory overhead ................................................ 18,440
Labor and factory overhead unit cost for period .............................................. $0.20
Total cost ........................................................................................................ $ 3,688
Less labor and factory overhead costs in process, beginning of period .......... 388
Labor and factory overhead current month .............................................. $ 3,300
Equivalent unitslabor and factory overhead ................................................ 18,440
Less equivalent units in process, end of period (1,400 1/5) ......................... 280
Units transferred ....................................................................................... 18,160
Units in process, end of period ............................................... 1,400
Less: Units started in process ............................................. 19,200
Less units transferred ................................................ 18,160 1,040
Units in process, beginning of period .............................................................. 360
Units transferred ............................................................................................. 18,160
Units in process, end of period ....................................................................... + 1,400
Equivalent unitsmaterials ..................................................................... 19,560
Materials unit cost for period ........................................................................... $0.30
Total cost for materials.................................................................................... $ 5,868
Less materials cost in process, beginning of period........................................ 568
Materials cost current month .................................................................... $ 5,300
E6-6
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208 Chapter 06, VanDerbeck
E6-7
Cost of production for month:
Materials $132,000
Labor 33,000
Factory overhead 20,625
Total cost to be accounted for $185,625*
Inventory costs:
Cost of goods finished and transferred (8,000 $21.84) $174,720
Cost of work in process, end of month:
Materials (1,000 1/2 $15.53) $ 7,765
Labor (1,000 1/2 $3.88) 1,940
Factory overhead (1,000 1/2 $2.43) 1,215 10,920
Total production costs accounted for $ 185,640*
*rounding difference
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VanDerbeck, Chapter 06 209
E6-8
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210 Chapter 06, VanDerbeck
E6-9
Department 1
Department 2
Unit output for month:
Finished and transferred .............................. 15,000
Equivalent units of work in process .............. 3,000
Total ...................................................... 18,000
a. Unit cost for month:
Materials ($36,000 18,000) ....................... $ 2.00
Labor ($13,500 18,000) ............................. 0.75
Factory overhead ($4,500 18,000) ............ 0.25
Total ...................................................... $ 3.00
b. Cost of units finished and transferred:
Cost in Dept. 1 (15,000 $6, adjusted
unit cost)* ..................................................... $ 90,000
Cost in Dept. 2 (15,000 $3) ....................... 45,000
Total ...................................................... $ 135,000
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VanDerbeck, Chapter 06 211
E6-9 Concluded
E6-10
a. CASE 1
Unit output for period:
Materials
Added to work started in process and
finished during period ........................... 3,000
Added to work in process, end
of period ................................................ 2,000 5,000
Labor and factory overhead
Added to work started in process and
finished during period ........................... 3,000
Added to work in process, end of period
(2,000 units, three-fourths completed) .. 1,500 4,500
CASE 2
Unit output for period:
Materials
Added to work in process, beginning
of period ................................................ none
Added to work started in process, and
finished during period (39,000 5,000) 34,000
Added to work in process, end
of period ................................................ 6,000 40,000
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212 Chapter 06, VanDerbeck
E6-10 Continued
CASE 3
Unit output for period:
Materials
Added to work in process, beginning
of period ................................................ none
Added to work started in process, and
finished during period (29,000 9,000) . 20,000
Added to work in process, end
of period ................................................ 10,000 30,000
b. CASE 1
Unit output for period:
Materials
Added to work started in process and
finished during period ............................ 3,000
Added to work in process, end of period none 3,000
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VanDerbeck, Chapter 06 213
E6-10 Continued
CASE 2
Unit output for period:
Materials
Added to work in process, beginning
of period ................................................ 5,000
Added to work started in process and
finished during period ........................... 34,000
Added to work in process, end of period none 39,000
CASE 3
Unit output for period:
Materials
Added to work in process, beginning
of period ................................................ 9,000
Added to work started in process and
finished during period ........................... 20,000
Added to work in process, end of period none 29,000
Note: The unit output for labor and factory overhead in (b) is the same as for (a).
c. CASE 1
Unit output for period:
Materials
Added to work started in process
and finished during period..................... 3,000
Added to work in process, end
of period ................................................ 2,000 5,000
CASE 2
Unit output for period:
Materials
Added to work in process, beginning
of period ................................................ none
Added to work started in process
and finished during period..................... 34,000
Added to work in process, end of period
(6,000 units, one-fourth completed, 75%
of materials added) ............................... 4,500 38,500
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214 Chapter 06, VanDerbeck
E6-10 Concluded
CASE 3
Unit output for period:
Materials
Added to work in process, beginning
of period:
1,000 units, one-half completed.......... none
8,000 units, one-fourth completed,
25% of materials added ...................... 2,000 2,000
E6-11
a. (1) Average Cost
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VanDerbeck, Chapter 06 215
E6-11 Continued
a. (2)
Dept. 1 Units finished and transferred ...................................... 19,000
Units in process, end of month .................................... none
Equivalent unitsmaterials .................................. 19,000
Equivalent unitslabor and factory overhead
(Same as (1) Dept. 1) ........................................... 20,500
Dept. 2 Units finished and transferred ...................................... 15,500
Units in process, end of month .................................... none
Equivalent unitsmaterials .................................. 15,500
Equivalent unitslabor and factory overhead
(Same as (1) Dept. 2) ........................................... 16,500
Dept. 3 Units finished and transferred ...................................... 21,000
Units in process, end of month .................................... none
Equivalent unitsmaterials .................................. 21,000
Equivalent unitslabor and factory overhead
(Same as (1) Dept. 3) ........................................... 21,300
a. (3)
Dept. 1 Units finished and transferred ...................................... 19,000
Units in process, end of month, three-fourths
completed, all materials added .................................... 2,000
Equivalent unitsmaterials .................................. 21,000
Equivalent unitslabor and factory overhead
(Same as (1) Dept. 1) ........................................... 20,500
Dept. 2 Units finished and transferred ...................................... 15,500
Units in process, end of month, one-half
completed, 50% materials added ................................ 1,000
Equivalent unitsmaterials .................................. 16,500
Equivalent unitslabor and factory overhead
(Same as (1) Dept. 2) ........................................... 16,500
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216 Chapter 06, VanDerbeck
E6-11 Continued
FIFO Cost
b. (1)
Dept. 1 Units in process, beginning of month ........................... none
Units started in process and transferred....................... 16,000
Units in process, end of month ..................................... 2,000
Equivalent unitsmaterials ................................... 18,000
Units in process, beginning of month, one-half
to complete................................................................... 1,500
Units started in process and transferred....................... 16,000
Units in process, end of month, three-fourths
completed..................................................................... 1,500
Equivalent unitslabor and factory overhead ....... 19,000
Dept. 2 Units in process, beginning of month ........................... none
Units started in process and transferred....................... 14,000
Units in process, end of month ..................................... 2,000
Equivalent unitsmaterials ................................... 16,000
Units in process, beginning of month, two-fifths
to complete................................................................... 600
Units started in process and transferred....................... 14,000
Units in process, end of month, one-half
completed..................................................................... 1,000
Equivalent unitslabor and factory overhead ....... 15,600
Dept. 3 Units in process, beginning of month ........................... none
Units started in process and transferred....................... 19,800
Units in process, end of month ..................................... 1,200
Equivalent unitsmaterials ................................... 21,000
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VanDerbeck, Chapter 06 217
E6-11 Continued
Units in process, beginning of month, one-fifth
to complete .................................................................. 240
Units started in process and transferred ...................... 19,800
Units in process, end of month, one-fourth
completed..................................................................... 300
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218 Chapter 06, VanDerbeck
E6-11 Concluded
b. (3)
Dept. 1 Units in process, beginning of month, one-half
to complete................................................................... 1,500
Units started in process and transferred....................... 16,000
Units in process, end of month, one-fourth
completed, 100% materials added ............................... 2,000
Equivalent unitsmaterials ................................... 19,500
Units in process, beginning of month, one-half
to complete................................................................... 1,500
Units started in process and transferred....................... 16,000
Units in process, end of month, three-fourths
completed..................................................................... 1,500
Equivalent unitslabor and factory overhead ....... 19,000
Dept. 2 Units in process, beginning of month, three-fifths
completed, 1/2 materials added .................................. 750
Units started in process and transferred....................... 14,000
Units in process, end of month, one-half
completed, 1/2 materials added ................................... 1,000
Equivalent unitsmaterials ................................... 15,750
Units in process, beginning of month, two-fifths
to complete................................................................... 600
Units started in process and transferred....................... 14,000
Units in process, end of month, one-half
completed..................................................................... 1,000
Equivalent unitslabor and factory overhead ....... 15,600
Dept. 3 Units in process, beginning of month, one-fifth
to complete, all materials added ................................... none
Units started in process and transferred....................... 19,800
Units in process, end of month, one-fourth
completed, 1/2 materials added ................................... 600
Equivalent unitsmaterials ................................... 20,400
Units in process, beginning of month, one-fifth
to complete................................................................... 240
Units started in process and transferred....................... 19,800
Units in process, end of month, one-fourth
completed..................................................................... 300
Equivalent unitslabor and factory overhead ....... 20,340
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VanDerbeck, Chapter 06 219
E6-12
Finished GoodsA ..................................................................... 82,759
Finished GoodsB ..................................................................... 62,069
Finished GoodsC..................................................................... 155,172
Work in Process ................................................................... 300,000
E6-13
(a.) Relative Sales Basis
Products
A B C Inventory
1. Number of units............................ 1,000 500 500
2. Unit sale price .............................. $20 $200 $160
3. Sales value, (1) (2).................... $20,000 $100,000 $80,000
4. Percent of sales value .................. 10% 50% 40%
5. Allocation of joint cost of
$20,000 ........................................ $2,000 $10,000 $8,000
6. Allocated joint cost per unit,
(5) (1) ........................................ $2 $20 $16
7. Units in ending inventory .............. 100 200 300
8. Joint cost included in
Ending inventory valuation,
(6) (7) ........................................ $200 $4,000 $4,800 $9,000
Products
A B C Inventory
1. Number of 1,000 500 500
units
2. Unit sales $20 $200 $200
price
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220 Chapter 06, VanDerbeck
E6-14
(a.) Relative Sales Basis
Products
X Y Z Inventory
1. Number of units ........................... 2,000 1,000 1,000
2. Unit sale price .............................. $30 $100 $90
3. Sales value, (1) (2) ................... $60,000 $100,000 $90,000
4. Percent of sales value ................. 24% 40% 36%
5. Allocation of joint cost of
$50,000........................................ $12,000 $20,000 $18,000
Allocated joint cost per unit,
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VanDerbeck, Chapter 06 221
Products
X Y Z Inventory
1. Number of 2,000 1,000 1,000
units
2. Unit sales $30 $100 $120
price
3. Sales value $60,000 $100,000 $120,000
(1) (2)
4. Less costs -0- -0- $10,000
after split-off
5. Sales value $60,000 $100,000 $110,000
at split-off
6. Percent 22.22% 37.04% 40.74%
sales value
7. Allocation of $11,100 $18,520 $20,370
joint cost
8. Allocated $5.555 $18.52 $20.370
joint cost
per unit
9. Units in 200 300 100
ending
inventory
10. Joint cost in $1,111 $5,556 $2,037 $8,704
ending
inventory
E6-15
a. By-Product Inventory ............................................. 2,000
Work in Process ............................................. 2,000
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222 Chapter 06, VanDerbeck
E6-16
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VanDerbeck, Chapter 06 223
PROBLEMS
P6-1
1.
Kerwin Kleaning Products
Cost of Production SummaryMixing Dept.
For the Month Ended January 31, 20--
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224 Chapter 06, VanDerbeck
P6-1 Continued
1.
Kerwin Kleaning Products
Cost of Production SummaryMixing Dept.
For the Month Ended February 28, 20--
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VanDerbeck, Chapter 06 225
P6-1 Concluded
2.
Jan. 31 Work in ProcessMixing .......................................... 20,000
Materials ............................................................ 20,000
Work in ProcessMixing .......................................... 15,200
Payroll ............................................................... 15,200
Work in ProcessMixing .......................................... 11,400
Factory Overhead .............................................. 11,400
Work in ProcessBlending ....................................... 42,552
Work in ProcessMixing .................................. 42,552
P6-2
1.
Laurence Liquids, Inc.
Cost of Production SummaryBlending Dept.
For the Month Ended June 30, 20--
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226 Chapter 06, VanDerbeck
Inventory costs:
Cost of goods finished and transferred to Bottling
during month (2,800 $22.508) ...................................... $63,022
Cost of work in process, end of month:
Materials (500 $9.091) ........................................... $ 4,546
Labor (500 3/4 $7.937)........................................ 2,976
Factory overhead (500 3/4 $5.480) ..................... 2,055 9,577
Total production costs accounted for ...................................... $ 72,599*
* rounding difference
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VanDerbeck, Chapter 06 227
P6-2 Continued
1.
Laurence Liquids, Inc.
Cost of Production SummaryBlending Dept.
For the Month Ended July 31, 20--
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228 Chapter 06, VanDerbeck
P6-2 Concluded
2.
June 30 Work in ProcessBlending...................................... 30,000
Materials............................................................ 30,000
Work in ProcessBlending....................................... 25,200
Payroll ............................................................... 25,200
Work in ProcessBlending....................................... 17,400
Factory Overhead ............................................. 17,400
Work in ProcessBottling......................................... 63,022
Work in ProcessBlending............................... 63,022
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VanDerbeck, Chapter 06 229
P6-3
a. Materials .......................................................................... 50,000
Accounts Payable ...................................................... 50,000
b. Work in Process ................................................................ 49,000
Materials .................................................................... 49,000
c. Work in Process ................................................................ 50,500
Payroll ....................................................................... 50,500
d. Factory Overhead .............................................................. 61,000
Accumulated Depreciation ......................................... 20,000
Cash ($28,000 + $11,000) ......................................... 39,000
Supplies Inventory ..................................................... 2,000
e. Work in Process ................................................................ 63,125
Factory Overhead ...................................................... 63,125
f. Finished Goods Inventory* ................................................ 164,700
Work in Process ........................................................ 164,700
*Calculation of Costs Transferred to Finished Goods:
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230 Chapter 06, VanDerbeck
P6-4
1.
Youngstown Manufacturing Co.
Cost of Production SummaryDept. 1
For the Month Ended January 31, 20--
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VanDerbeck, Chapter 06 231
P6-4 Continued
Youngstown Manufacturing Co.
Cost of Production SummaryDept. 2
For the Month Ended January 31, 20--
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232 Chapter 06, VanDerbeck
P6-4 Continued
Youngstown Manufacturing Co.
Cost of Production SummaryDept. 3
For the Month Ended January 31, 20--
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VanDerbeck, Chapter 06 233
P6-4 Continued
2.
Youngstown Manufacturing Co.
Departmental Cost Work Sheet
For the Month Ended January 31, 20--
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234 Chapter 06, VanDerbeck
P6-4 Continued
Summary:
Materials:
Dept. 1....................................................................... $ 22,500
Dept. 2....................................................................... 23,200
Dept. 3....................................................................... 19,600 $ 65,300
Labor:
Dept. 1....................................................................... $ 7,200
Dept. 2....................................................................... 14,500
Dept. 3....................................................................... 11,800 33,500
Factory overhead:
Dept. 1....................................................................... $ 10,800
Dept. 2....................................................................... 14,500
Dept. 3....................................................................... 8,850 34,150
Total production costs for January .......................................... $132,950
Deduct work in process, end of month:
Dept. 1....................................................................... $ 6,500
Dept. 2....................................................................... 17,500
Dept. 3....................................................................... 5,630 29,630
Cost of production, goods fully manufactured during January $103,320
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VanDerbeck, Chapter 06 235
P6-4 Concluded
P6-5
Peas Labor Overhead Cans
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236 Chapter 06, VanDerbeck
P6-6
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VanDerbeck, Chapter 06 237
P6-7
Calumet Chemicals, Inc.
Cost of Production SummaryDept. A
For the Month Ended May 31, 20--
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238 Chapter 06, VanDerbeck
P6-7 Continued
Calumet Chemicals, Inc.
Cost of Production SummaryDept. B
For the Month Ended May 31, 20--
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VanDerbeck, Chapter 06 239
P6-7 Concluded
Inventory costs:
Cost of goods finished and transferred to
finished goods:
Cost in prior departments (9,500 $3.91*)................ $ 37,145
Cost in Dept. B (9,500 $2.53) ................................. 24,035 $ 61,180
Cost of work in process, end of month:
Cost in prior departments (500 $3.91*)................... $ 1,955
Cost in Dept. B:
Materials (500 $0.75) ............................. $375
Labor (500 1/2 $1.04) ......................... 260
Factory overhead (500 1/2 $0.74) ....... 185 820 2,775
Total production costs accounted for ...................................... $ 63,955
*Calculation of the adjusted unit cost is as follows:
Units from Dept. A ........................................................... 8,500
Units added...................................................................... 1,500
New quantity .................................................................... 10,000 units
$39,100 cost 10,000 units = $3.91 adjusted unit cost
P6-8
Bristol Beverages, Inc.
Cost of Production Summary
For the Month Ended October 31, 20--
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240 Chapter 06, VanDerbeck
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VanDerbeck, Chapter 06 241
P6-9
1. Cost of goods completed and transferred:
Beginning work in process ......................................... $ 8,775
Cost to complete:
Materials .............................................................. 0
Labor (1,500 50% $1.75) ............................... $ 1,313
Overhead (1,500 50% $1.00) ......................... 750 2,063
Completed cost of beginning inventory ............................ $ 10,838
Goods started and finished:
[8,750* ($4.56 + $1.75 + $1.00)] ................................... 63,963
Cost of goods completed and transferred ........................ $ 74,801
*Units completed and transferred ...................................... 10,250
Units in beginning inventory ............................................. 1,500
Units started and finished this period ............................... 8,750
2. Cost of units in ending inventory:
Materials (3,200 $4.56)........................................... $ 14,592
Labor (3,200 60% $1.75) ..................................... 3,360
Overhead (3,200 60% $1.00) .............................. 1,920
Total cost of ending inventory .......................................... $ 19,872
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242 Chapter 06, VanDerbeck
P6-10
Mt. Soledad Manufacturing Company
Cost of Production SummaryMachining Department
For the Month Ended July 31, 20--
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VanDerbeck, Chapter 06 243
P6-10 Continued
Mt. Soledad Manufacturing Company
Cost of Production SummaryFinishing Department
For the Month Ended July 31, 20--
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244 Chapter 06, VanDerbeck
P6-10 Concluded
Inventory costs:
Cost of goods finished and transferred to finished goods during month:
Beginning units in process:
Prior months cost ................................................ $ 450,000
Current cost to complete:
Labor (40,000 20% $1.905) ...................... 15,240
Overhead (40,000 20% $0.952) ............... 7,616 $ 472,856
Units started and finished during month:
Cost in prior dept. (60,000 $4.479) ................... $ 268,740
Cost in Finishing Dept. (60,000 $5.257) ........... 315,420
Total cost transferred (60,000 $9.736) ........ 584,160
Cost of work in process, end of month:
Cost in prior dept. (40,000 units $4.479) ................ $ 179,160
Materials (40,000 units $2.400) .............................. 96,000
Labor (40,000 units 40% $1.905) ........................ 30,480
Factory overhead (40,000 units 40% $0.952) ..... 15,232 320,872
Total production costs accounted for ...................................... $1, 377,888*
*Rounding Difference
P6-11
Computation using relative sales value method:
Relative
Sales Sales Allocated
Product Value* Value** Joint Cost Cost
AA $ 125,000 0.70621 $125,000 $ 88,276
A 45,000 0.25424 125,000 31,780
B 6,000 0.03390 125,000 4,238
C 1,000 0.00565 125,000 706
$ 177,000 1.00000 $ 125,000
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VanDerbeck, Chapter 06 245
P6-11 Continued
P6-12
Product Barrels Price Ultimate Costs After Sales Value
/ bbl. Sales Value Split-off at Split-off
P6-13
Product Barrels Price Ultimate Costs After Sales Value
/ bbl. Sales Value Split-off at Split-off
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246 Chapter 06, VanDerbeck
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VanDerbeck, Chapter 06 247
MINI-CASE
1.
Unit Ultimate Less Cost Sales Percent Allocation
Units Selling Sales After Value at of Sales Of Joint
Product Produced(a) Price(b) Value Split-Off Split-Off Value Costs
Unit cost of Xenon = $65,000 Direct labor + 49,000 Factory overhead + 54,100
Joint costs = $168,100 / 60,000 gals. = $2.80 / gal.
3. NOTE: You may want students to read the Differential Cost Analysis section of Ch.
10 before attempting Part 3 of this case. Alternatively, you may wish to challenge
them with Part 3 to see if they can determine the relevant items to this decision
without first teaching them the concept.
The joint cost of $13,400 that is allocated to Tantalum should be ignored in
deciding whether or not it should be sold. The joint cost is a past cost that had to
be incurred just to get all three products to split-off. It will still be $100,000, even if
Tantalum is not marketed. The comparison should be made between the selling
price per unit of $3.20 and the separable costs incurred after split-off of $2.58
($77,500/30,000 gals.). Therefore, Tantalum provides incremental income of $.62
per unit and it should be processed beyond split-off and then sold.
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248 Chapter 06, VanDerbeck
INTERNET EXERCISE
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CHAPTER 7
QUESTIONS
1. A budget is a planning device that helps the Responsibility for forecasting costs and
company set goals and a gauge against accountability for actual results must be
which the results can be measured. identified with specific members of the
2. The successful use of budgets in a business organization.
setting helps to assure the maximum effi- 6. A continuous budget rolls forward so that
cient use of resources and the most favora- as one month or quarter is completed a new
ble results possible. month or quarter is added to the end of the
3. Four problem areas identified in the budget, resulting in a budget that is always
Centage/IOMA survey were: one year in advance. Advocates of continu-
* A majority of financial executives are on- ous budgeting argue that it causes manag-
ly either somewhat confident (45%) or ers to have a more long-term perspective,
not very confident/not at all confident rather than just concentrating on the next
(12%) in the accuracy of their budgets. month or quarter.
* Department managers dont take own- 7. Answers will vary. Operating budgets in-
ership or hold themselves accountable clude the sales budget, production budget,
for their pieces of the budget. direct materials budget, direct labor budget,
* Senior executives were faulted for their factory overhead budget, cost of goods sold
lack of direction on or lack of support of budget, selling and administrative expenses
the budget. budget, and the budgeted income state-
* Four out of five CFOs surveyed ex- ment. Financial budgets include the cash
pressed frustration with using spread- budget, capital expenditures budget, and
sheets in the budgeting process. pro forma financial statements including the
4. The author offered the following steps for balance sheet, retained earnings statement,
improving a companys budgeting process: and statement of cash flows.
Evaluate your process; Upgrade your tech- 8. The sales budget, or sales forecast, must be
nology; Communicate; Communicate some prepared before the other types of budgets.
more; Train and educate; Collaborate; Fol- The number of units to be sold will have a
low through. direct effect on the planning of the produc-
5. The general principles of budgeting have tion budget. Also affected will be budgets for
several requirements: administrative and selling expenses, cash,
Management must clearly define its receivables, and capital expenditures.
objectives. 9. Demand software takes numerous varia-
These goals must be realistic and pos- bles, such as projected economic conditions
sible to attain. in the industry and in the economy as a
whole, estimates of currency exchange
Development of the budget must care-
rates, and predicted weather patterns, into
fully consider global economic develop-
consideration when forecasting sales for the
ments, the general business and indus-
sales budget.
try-specific climate, and consumer and
supplier behavior that may influence 10. It is important to have front-line managers
sales and costs. participate in the budgeting process be-
cause they are the ones closest to the indi-
There must be a plan to analyze actual vidual sales territories or production depart-
operating results and compared them to ments and, therefore, should be most famil-
the budget. iar with the operations. Also, if they partici-
The budget must be flexible enough so pate in formulating the budget, they have
that it can be modified in the light of more of a vested interest in meeting or beat-
changing conditions. ing the budget numbers.
249
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250 Chapter 07, VanDerbeck
11. Not necessarily. The production plan must sponsible directly into the master budget at
take into consideration not only the number the budget website. This precludes em-
of units to be sold but also the inventory pol- ployees from having to prepare individual
icy, the number of units in the years begin- spreadsheets for their areas of responsibil-
ning inventory, and the number of units re- ity, which then have to uploaded and coor-
quired for the ending inventory. dinated by the budget staff.
12. a. If a companys sales fluctuate greatly 17. A flexible budget is a plan that shows what
during the year, the advantage it gains would happen to costs under varying sets of
from a stable production policy is that it conditions. Whereas the master budget is
can maintain a stable work force prepared for a single level of activity, the
throughout the year. Thus, the problems flexible budget is prepared for a range of ac-
of labor turnoversuch as hiring and tivities within which the firm may operate.
training new employees, the use of un- 18. A flexible budget is better than a master
skilled workers, and costly unem- budget for comparing actual results to
ployment insurance premiumsare budgeted expectations because the variable
greatly reduced. items such as revenue and certain costs will
A disadvantage of a stable production differ in total when the actual level of pro-
policy with fluctuating sales is that the duction or sales volume achieved is different
company must have storage facilities than the planned master budget level.
that would be unused during some part 19. It is important to distinguish between varia-
of the year, with the related costs of up- ble costs and fixed costs when preparing a
keep, insurance, and taxes. Another flexible budget because fixed costs will re-
disadvan-tage is that the company main the same in total within a relevant
would have a considerable amount of range of activity, whereas variable costs will
capital tied up in finished goods, with the change in total depending upon the volume
problem of spoilage or possible obsoles- level achieved.
cence. 20. The concept of relevant range is important
b. The advantage of a stable inventory pol- when preparing a flexible budget because
icy is that it reduces the need for stor- the assumptions made regarding unit selling
age to a minimum and releases capital prices, variable costs per unit, and total fixed
costs are only applicable within the relevant
for other purposes.
range.
A disadvantage is that fluctuating pro-
21. Yes, as illustrated in the flexible budget in
duction requires manufacturing facilities
Fig. 7-11, you may have a favorable vari-
to handle peak loads, but these would
ance for sales because the actual selling
be idle part of the time. The company
price charged was greater than the selling
would also be faced with the problems
price budgeted for, given the actual sales
of employee turnover and feelings of ill
volume achieved.
will when it attempts to adjust the labor
force to different levels of production. However, the actual sales revenue earned
13. The direct materials budget, direct labor may be less than the master budget sales
budget, and factory overhead budget can be figure because the number of units sold was
prepared subsequent to the preparation of less than the sales volume used in prepar-
the production budget. ing the master budget.
14. Kaizen means continuous improvement 22. a. Theoretical capacity represents the
and kaizen budgeting is the practice of maximum number of units that could be
building continuous improvement into the manufactured with the completely effi-
budget numbers such as labor time or mate- cient use of all facilities and personnel.
rials quantity allowable per unit of produc- b. Practical capacity is the level of pro-
tion. duction that provides complete utili-
15. Information from the sales budget, cost of zation of all facilities and personnel, but
goods sold budget, and selling and adminis- allows for some idle time due to operat-
trative expenses budget is needed to pre- ing interruptions or inefficiencies.
pare the budgeted income statement. c. Normal capacity is the level of pro-
16. Using Web-based budgeting employees duction that will meet normal require-
can input the data for which they are re- ments of an ordinary sales demand over
a period of years.
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VanDerbeck, Chapter 07 251
23. Yes. Normal capacity, or 100% of capacity, historical costs that have been adjusted for
usually represents the most efficient use of any distorting items and future trends and
the present facilities under normal operating possible changes. These combined estimat-
conditions with some allowance for operat- ed overhead expenses are then divided by
ing interruptions. It is possible, however, for the standard number of units to be produced
a factory to manufacture more units than to determine the standard cost per unit.
normal by working overtime, increasing ma- 26. It is important that a standard rate, rather than
chinery or workers, and adding facilities. actual expenses, be used to charge service
department costs to producing departments,
24. No. The unit cost for factory overhead would
so that extra costs resulting from the inefficient
be determined at the 100% level of normal operation of service departments cannot be
capacity, and this unit cost would be passed on to the producing departments.
charged to Work in Process, regardless of
the number of units manufactured.
25. Factory overhead for the standard, or nor-
mal, level of production is an estimation.
The calculation must take into consideration
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252 Chapter 07, VanDerbeck
EXERCISES
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VanDerbeck, Chapter 07 253
E7-3
Units
Sales ................................................................................ 45,000
Plus desired ending inventory, October 31....................... 4,000
Total ................................................................................. 49,000
Less estimated beginning inventory, October 1 ............... 5,000
Total production ............................................................... 44,000
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254 Chapter 07, VanDerbeck
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VanDerbeck, Chapter 07 255
E7-7
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256 Chapter 07, VanDerbeck
E7-8
Less variable
costs:
Variable factory
overhead ............... 210,000 225,000 240,000
Variable selling
and administrative
expense ................. 168,000 180,000 192,000
Contribution
margin ................... $231,000 $247,500 $264,000
Fixed factory
overhead ............... 75,000 75,000 75,000
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VanDerbeck, Chapter 07 257
E7-9
Budget Actual
(5,000 units) (5,000 units) Variance
Variable factory
overhead .......................... 20,000 25,500 5,500 U
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258 Chapter 07, VanDerbeck
E7-10
Budget Actual
(6,000 units) (6,000 units) Variance
Variable factory
overhead .......................... 24,000 26,500 2,500 U
E7-11
Calculation of factory overhead allowed: 5,000 5,200 4,500
Units Units Units
(100%) (104%) (90%)
Fixed costs .................................................. $ 2,500 $ 2,500 $ 2,500
Variable costs ............................................. 7,500 7,800* 6,750**
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VanDerbeck, Chapter 07 259
E7-12
Calculation of factory overhead allowed: 7,500 7,875 6,750
Units Units Units
(100%) (105%) (90%)
Fixed costs ................................................. $ 10,000 $10,000 $10,000
Variable costs ............................................. 15,000 15,750* 13,500**
E7-13
Calculation of factory overhead allowed:
Standard Month1 Month2
8,000 7,200 8,400
Units Units Units
Fixed overhead .......................................... $ 4,000* $ 4,000 $ 4,000
Variable overhead ($1.50 per unit) ............. 12,000 10,800 12,600
* $0.50 x 8,000
Month 1 Month 2
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260 Chapter 07, VanDerbeck
E7-14
* $1.00 x 10,000
Month 1 Month 2
PROBLEMS
P7-1
Sales40,000
Total 46,000
Total production..44,000
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VanDerbeck, Chapter 07 261
P7-1 Continued
Material X Material Y
Quantities required for production:
Unit price $4 $2
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262 Chapter 07, VanDerbeck
P7-2
1.
Royal Tire Company
Sales Budget
For the Year Ended December 31, 2013
2.
Royal Tire Company
Production Budget
For the Year Ended December 31, 2013
Units
Passenger Truck
Car Tires Tires
Sales (from sales budget) ............................ 120,000 25,000
Plus desired ending inventory, Dec. 31 ........ 6,000 2,500
Total ............................................................. 126,000 27,500
Less estimated beginning inventory, Jan. 1 . 5,000 2,000
Total production ........................................... 121,000 25,500
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VanDerbeck, Chapter 07 263
P7-2 Continued
Department Total
Molding Finishing
Hours required for production:
Passenger car tires:
121,000 x .10 ..................... 12,100
121,000 x .05 ..................... 6,050
Truck tires:
25,500 x .25 ....................... 6,375
25,500 x .15 ....................... 3,825
Total ......................................... 18,475 9,875
Hourly rate ............................... $15 $13
Total direct labor cost .............. $ 277,125 $ 128,375 $405,500
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264 Chapter 07, VanDerbeck
P7-2 Continued
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VanDerbeck, Chapter 07 265
P7-3
Selling expenses:
Advertising expense ................................ $ 942,000
Sales salaries expense ........................... 868,000
Travel expense ........................................ 443,000
Total selling expenses ............................. $2,253,000
Administrative expenses:
Office salaries expense ........................... $ 821,000
Officers salaries expense ....................... 661,000
Office rent expense ................................. 125,000
Office supplies expense .......................... 45,500
Telephone and fax expense .................... 33,500
Total administrative expenses ................. 1,686,000
Total selling and administrative expenses .... $3,939,000
P7-4
1.
Wicker Works Inc.
Sales Budget
For the Year Ended December 31, 2013
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266 Chapter 07, VanDerbeck
P7-4 Continued
2.
Wicker Works, Inc.
Production Budget
For the Year Ended December 31, 2013
Units
Tables Chairs
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VanDerbeck, Chapter 07 267
P7-4 Continued
Department Total
Assembly Finishing
Hours required for production:
Tables:
30,500 x .5 ........................... 15,250
30,500 x .25 ....................... 7,625
Chairs:
122,000 x .25 ..................... 30,500
122,000 x .10 ....................... 12,200
Total ......................................... 45,750 19,825
Hourly rate ............................... $15 $13
Total direct labor cost .............. $ 686,250 $ 257,725 $943,975
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268 Chapter 07, VanDerbeck
P7-4 Continued
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VanDerbeck, Chapter 07 269
P7-5
Selling expenses:
Advertising expense ................................ $ 429,000
Sales salaries expense ........................... 688,000
Travel expense ........................................ 244,000
Total selling expenses ............................. $1,361,000
Administrative expenses:
Office salaries expense ........................... $ 281,000
Officers salaries expense ....................... 166,000
Office rent expense ................................. 105,000
Office supplies expense .......................... 25,500
Telephone and fax expense .................... 13,500
Total administrative expenses ................. 591,000
Total selling and administrative expenses .... $1,952,000
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270 Chapter 07, VanDerbeck
P7-6
Direct materials:
Direct labor:
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VanDerbeck, Chapter 07 271
P7-7
1.
Scottsdale Styles, Inc.
Performance Report
May, 2013
Budgeted Actual
(31,000 units) (31,000 units) Variance
Direct materials:
Direct labor:
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272 Chapter 07, VanDerbeck
P7-7 Continued
2. The master budget operating income at the 30,000 unit level was $1,587,250,
whereas the actual operating income at the 31,000 unit level was $1,825,295. This
difference of $238,045 was caused mostly by the difference between actual sales
revenue and master budget sales revenue--- selling 1,000 units (31,000 30,000)
more than budgeted and selling the units at an average selling price of $154.84
($4,800,000 / 31,000) as compared to the budgeted selling price of $150 per unit.
3. Its cost control was not especially good. The total variable expenses, which are the
ones that the company has the most control over, were $2,935 unfavorable. Most of
the variable manufacturing expenses were unfavorable, whereas the variable selling
expenses were favorable.
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VanDerbeck, Chapter 07 273
P7-8
1.
Scottsdale Styles, Inc.
Performance Report
May, 2013
2. The master budget operating income at the 30,000-unit level was $1,587,250,
whereas the actual operating income at the 29,000-unit level was $1,364,200. This
$223,050 difference was caused mostly by selling 1,000 units fewer (30,000
29,000) than the master budget called for and selling the units at an average selling
price of $144.83 rather than at the budgeted selling price of $150 per unit.
3. Given the level that it operated at, the companys control of variable expenses was
quite good. The total variable expenses, which are the ones that the company has
the most control over, were $11,630 favorable. This was mostly due the large favor-
able variances for lumber and variable selling expenses.
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274 Chapter 07, VanDerbeck
P7-9
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VanDerbeck, Chapter 07 275
P7-9 Continued
2. Factory Overhead Cost Budget
Percent of normal capacity ....................................... 80% 90% 110%
Number of units......................................................... 4,000 4,500 5,500
Budgeted factory overhead:
Fixed cost:
Taxes on building and machinery .................... $ 500 $ 500 $ 500
Insurance on building and machinery .............. 500 500 500
Superintendents salary ................................... 1,500 1,500 1,500
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276 Chapter 07, VanDerbeck
P7-10
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VanDerbeck, Chapter 07 277
P7-10 Continued
2. Factory Overhead Cost Budget
Percent of normal capacity ....................................... 80% 90% 110%
Number of units......................................................... 8,000 9,000 11,000
Budgeted factory overhead:
Fixed cost:
Taxes on building and machinery .................... $ 750 $750 $ 750
Insurance on building and machinery .............. 800 800 800
Superintendents salary ................................... 2,200 2,200 2,200
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278 Chapter 07, VanDerbeck
P7-11
3. Total fixed factory overhead ($2 2,400 direct labor hours) ................. $4,800
P7-12
3. Total fixed factory overhead ($4 2,700 direct labor hours) ................. $10,800
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VanDerbeck, Chapter 07 279
MINI-CASE
1. No, I do not necessarily agree with the production manager that manufacturing did
a good job controlling costs. This is an apples to oranges comparison because
master budget unit volume was 50,000, whereas actual results were based on the
production and sale of 45,000 units. One would expect the cost variances to be fa-
vorable, given this type of comparison.
2.
Flexible budget 45,000 50,000 55,000
per unit Units Units Units
Sales $ 25.00 $1,125,000 $1,250,000 $1,375,000
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280 Chapter 07, VanDerbeck
MINI-CASE Concluded
3.
Actual Flexible
Flexible Results Budget
Budget (45,000 (45,000
per Unit units) units) Variance
Sales.................................... $ 25.00 $1,125,000 $1,125,000 ---
Less variable expenses:
Direct materials .................... $ 4.50 $ 212,500 202,500 $10,000 U
Direct labor .......................... 3.75 175,750 168,750 7,000 U
Variable factory overhead .... 2.25 110,250 101,250 9,000 U
Variable selling and
administrative expense ........ 1.50 70,500 67,500 3,000 U
Total variable expense......... $ 12.00 $ 569,000 $ 540,000 $29,000 U
Contribution margin ............. $ 13.00 $ 556,000 $ 585,000 $29,000 U
Less fixed expenses:
Fixed factory overhead
expense .............................. $ 95,000 $ 100,000 ($ 5,000 F)
Fixed selling and
administrative expense ....... 160,000 $ 150,000 10,000 U
Total fixed expense............. $ 255,000 $ 250,000 $ 5,000 U
Income from operations ...... $ 301,000 $ 335,000 $34,000 U
4. Manufacturing did not do a good job controlling costs. The variances for direct
materials, direct labor, and variable factory overhead totaled $26,000 unfavorable.
The variance for fixed factory overhead was $5,000 favorable, but that was
probably due to a budgeting mis-estimate.
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VanDerbeck, Chapter 07 281
INTERNET EXERCISE
2. Kaizen is a daily activity, the purpose of which goes beyond simple productivity im-
provement. When done correctly, it humanizes the workplace, eliminates overly
hard work, and teaches people how to learn to spot and eliminate waste in business
processes.
3. In Japan, after World War ll, American occupation forces brought in American
experts in statistical control methods to help restore the nation. Training Within
Industry programs included Job Instruction (standard work) and Job Methods
(process improvement) taught by experts such as W. Edwards Deming and Joseph
Juran.
4. The kaizen philosophy is focused in a different direction from the command and
control improvement programs of the mid-20th century. Large-scale preplanning
and extensive project scheduling are replaced by smaller experiments in improve-
ment, which can be rapidly adapted as new improvements are suggested.
5. The Toyota Production System is known for kaizen, where all line personnel are
expected to stop their moving production line in the case of any abnormality, and
suggestions for improvement are rewarded.1
1
Wikipedia, the free encyclopedia, viewed 8/14/2011
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CHAPTER 8
QUESTIONS
1. Management determines in advance what 7. Reasons for Southwest Airlines $135 million
the cost should be to manufacture a product increase in operating income due to effi-
and subsequently compares the actual cost ciencies included: approximately $45.5 mil-
of manufacturing the product with this lion from obtaining better gas mileage per
standard. Deviations from the standard can available seat mile; $23 million from flying
be immediately determined, inefficiencies 1.4 billion fewer available seat miles to
can be readily detected, and appropriate ac- achieve targeted revenue, thereby using
tion can be taken to correct an unfavorable less fuel; and approximately $66.5 million
situation. Using a standard cost accounting due to an increase in miles flown per pas-
system, management has a specific goal for senger.
production costs. If this goal is not reached, 8. Price variances in materials costs are the
management also has the information to de- differences between standard and actual
termine why it was not achieved. costs due to fluctuations in the price paid for
2. Standard cost is the predetermined calcula- the raw materials. Quantity variances in ma-
tion of what the cost should be. Actual cost terials costs are the differences between
is the historical cost, which can be deter- standard and actual costs due to fluctua-
mined only after a product or job has been tions in the quantities of materials used.
completed. 9. Rate variances in labor costs are the differ-
3. A standard is a norm against which perfor- ences between standard and actual costs
mance can be measured. Specific answers due to fluctuations in wage rates. Efficiency
will vary, but examples might include: a 200 variances in labor costs are the differences
average in bowling; a 1300 SAT score to get between standard and actual costs due to
into a good university; and 10 sacks per fluctuations in the number of labor hours re-
season for an NFL lineman. quired to complete a product or job.
4. Standard costs are determined for direct 10. Not necessarily. A favorable variance simply
materials, direct labor, and factory over- indicates that price and/or usage was below
head. The standard costs, the actual costs, standard. Analysis might determine a good
and the variances are recorded in appropri- situation, such as more efficiency resulting
ate accounts. Variances are analyzed and in a true savings in quantity, time, price, or
investigated, and appropriate action is tak- rate; or this analysis might show a bad sit-
en. uation, such as a lower price being paid for
5. The setting of standards involves a pooling inferior materials or unskilled workers, or
of knowledge and experience of all the fac- quality being reduced by using smaller
tory personnel. It is possible to review com- quantity of materials, or speeding up pro-
pletely every manufacturing element that af- duction. An unfavorable variance indicates
fects the cost of a completed product, and to the price and/or usage was above standard.
establish a standard cost for each type of This situation can be bad if it is due to inef-
product. In setting standard materials cost, ficiencies, but good if it results in a better
the exact quantity of materials per unit that product at a competitive price.
should be used and the price per unit that
should be paid must be determined. In set- 11. A materials purchase price variance is
ting labor standards, the amount of labor based on the quantity of materials pur-
time per unit that should be used and the chased, whereas a materials price variance
cost per hour that should be paid must accu- is based on the quantity of materials used.
rately be determined. 12. Variances are usually recorded in the gen-
6. A variance is a difference or deviation from eral journal at the end of the month, except
an established goal. In standard cost ac- for the materials purchase price variance,
counting, it indicates a difference between which is recorded at the time of purchase.
the actual costs that were incurred and the 13. Standard costs for materials, labor, and factory
standard costs that should have been overhead are charged to Work in Process.
achieved.
283
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284 Chapter 08, VanDerbeck
14. The finished goods and work in process ac- offset by time savings, as indicated by a fa-
counts are generally valued at standard vorable labor efficiency variance; or there
cost, although some companies will adjust could be a favorable materials quantity vari-
these accounts at the end of the accounting ance due to the fact that the personnel are
period to reflect actual cost. The materials more capable. The reverse is also true; hir-
account will reflect actual cost or standard ing less skilled personnel at a lower rate
cost, depending upon whether the price var- may create a favorable labor rate variance,
iance is recorded when materials are used but this variance might be offset by an un-
or when they are purchased. favorable labor efficiency variance or an un-
15. The cost accountant must consider usage favorable materials quantity variance.
and price. Consideration must be given to 19. Definitely yes! Even when there is no net
the actual quantity of materials and labor variance, further analysis may produce a
used in comparison with the standard, and a materials price variance that exactly offsets
comparison must be made of the actual cost a materials quantity variance. These vari-
of materials and labor to the standard cost. ances, even though offsetting, must still be
16. a. Inefficient purchasing methods, use of analyzed by management.
more costly materials than the stand- 20. The entry to transfer the cost of the finished
ards called for, or an increase in market units from the first department to a subse-
price. quent department in a standard cost system
b. More efficient purchasing methods, use is made at the standard cost that should
of less costly materials than the stand- have been incurred to make the units in that
ards called for, or a decrease in market department.
price. 21. If large amounts of inventory remain in work
c. More waste or spoilage of materials in process and finished goods at the end of
than was built into the standards, the the period, it could materially misstate the fi-
deliberate use of more materials to en- nancial statements by charging the entire
hance the product, or poor quality of amount of the variances to cost of goods
materials. sold.
d. Greater efficiency in planning and usage 22. A flexible-budget variance is a deviation that
of materials, the use of higher quality arises when the actual factory overhead ex-
materials than the standard called for, or ceeds or is less than the overhead expense
the use of more highly skilled workers budgeted for a given level of production.
resulting in less waste. 23. A flexible-budget variance indicates that fac-
tory overhead was more or less than the al-
17. a. The hiring of more highly skilled workers
lowed amount. This variance must be traced
than needed for the job, or an unfore-
to the department in which it was incurred
seen change in wage rates due to labor- and the persons responsible must account
management negotiations. for this variance. If the variance is unfavora-
b. A more efficient job in hiring employees, ble, immediate action must be taken to elim-
or the hiring of less skilled personnel at inate inefficient conditions. If the variance is
a lower rate. favorable, it must be determined whether
c. Poor supervision in the factory allowing any advantage can be derived from this sit-
employees to waste time, the use of un- uation.
skilled workers, machinery breakdowns, 24. A production-volume variance arises when
poor production scheduling, or having to actual production is more or less than the
work with inferior materials. standard volume. Work in Process is charged
d. Hiring of more highly skilled personnel, with the established standard unit cost for
a speed-up in production, more efficient factory overhead when actually, due to the ef-
supervision, or working with high-quality fect of fixed costs remaining the same in total
materials. and varying on a per unit basis, it would be
logical to expect that unit cost would change
18. Yes. Quite often there is a relationship be- inversely with production volume.
tween variances. The cost accountant and
management must be alert to these situa-
tions. For example, an unfavorable labor
rate variance caused by hiring more highly
skilled personnel at a higher rate may be
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VanDerbeck, Chapter 08 285
25. A production-volume variance indicates that 27. The flexible-budget variance with a debit
the actual volume of production was not at balance indicates that the actual overhead
the standard level. A favorable variance in- exceeded the flexible budget for overhead at
dicates that volume was higher than stand- the level of activity attained.
ard, and an unfavorable variance indicates The production-volume variance with a
that it was lower. It is possible that the actu- debit balance indicates an underutilization of
al production volume was expected by man- capacity.
agement and is the result of normal, sea- 28. The flexible-budget variance from the two-
sonal increases and decreases in produc- variance method encompasses the variable-
tion; but if not planned, the reason for the spending, variable-efficiency, and fixed-
deviation must be investigated. spending variances from the four-variance
If actual production volume was lower method.
than anticipated, this might be due to poor 29. The primary difference between the two
scheduling, machine breakdowns, or ineffi- methods of calculation is that the three-
cient super-vision of labor. These conditions variance method determines the budget al-
must be corrected. lowances based on actual hours worked ra-
If the volume was higher than expected, ther than on the standard number of hours
this might be due to extra-efficient condi- allowed for the units produced.
tions, but it is not necessarily favorable. 30. The variable overhead spending variance
Overproduction can put a strain on facilities measures the effect of differences in the ac-
and can require extra expenditures for han- tual variable overhead rate and the standard
dling, insurance, and taxes, as well as the variable overhead rate. The variable over-
extra investment in unneeded inventory. head efficiency variance measures the
26. No. It is possible that there would be no flex- change in variable overhead usage that oc-
ible-budget variance if actual overhead is curs because of efficient or inefficient use of
the same as the amount allowed for the ac- the overhead allocation base. The fixed
tual level of production; however, when pro- overhead spending variance measures
duction volume is more or less than the the difference between the actual fixed
standard level, there will be a production- overhead and the budgeted fixed overhead.
volume variance. The fixed overhead production-volume
variance is the difference between budget-
ed fixed overhead and the overhead applied
to production via the overhead rate.
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286 Chapter 08, VanDerbeck
EXERCISES
E8-1
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VanDerbeck, Chapter 08 287
E8-2
a. Same as E8-1.
b.
Case 1: Labor rate variance= AQ (AP SP)
= 1,000 ($10.20 $10.00)
= $200 U
Case 2: Labor efficiency variance= SP (AQ SQ)
= $10 [900 (1,000 1)]
= $1,000 F
c. Case 1
(1) Work in Process ............................................... 16,000
Materials ..................................................... 16,000
(2) Work in Process ............................................... 10,000
Labor Rate Variance (U)
(1,000 $0.20) ................................................. 200
Payroll (1,000 $10.20) .............................. 10,200
(3) Work in Process ............................................... 4,000
Factory Overhead ....................................... 4,000
Case 2
(1) Work in Process ............................................... 16,000
Materials ..................................................... 16,000
(2) Work in Process ............................................... 10,000
Labor Efficiency Variance (F)
(100 $10).................................................. 1,000
Payroll (900 $10) ...................................... 9,000
(3) Work in Process ............................................... 4,000
Factory Overhead ....................................... 4,000
d. Same as E8-1
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288 Chapter 08, VanDerbeck
E8-3
a. Same as E8-1.
b. Materials price variance = AQ (AP SP)
= 1,900 ($8.50 $8.00)
= $950 U
Materials quantity variance same as in E8-1 ($800 F)
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VanDerbeck, Chapter 08 289
E8-4
a. Same as E8-1.
b. Materials price variancesame as in E 8-3.
Materials quantity variance = SP (AQ SQ)
= $8 [1,900 (900 2)]
= $800 U
Labor rate variance --- same as in E8-3
Labor efficiency variance = SP (AQ SQ)
= $10 [900 (900 1)]
= $-0-
c. (1) Work in Process (900 $16) ............................ 14,400
Materials Price Variance (U)
(1,900 $0.50) ................................................. 950
Materials Quantity Variance (U)
(100 $8). 800
Materials (1,900 $8.50) ............................ 16,150
(2) Work in Process (900 $10)............................. 9,000
Labor Rate Variance (U)
(900 $0.20) .................................................... 180
Payroll (900 $10.20) ................................. 9,180
(3) Work in Process ............................................... 3,600
Factory Overhead (900 $4) ...................... 3,600
d. Finished Goods (900 $30) ............................. 27,000
Work in Process.......................................... 27,000
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290 Chapter 08, VanDerbeck
E8-5
a. Same as E8-1.
b. Materials price variance--- same as in E8-3.
Materials quantity variance = SP (AQ SQ)
= $8 [1,900 (1,100 x 2)]
= $2,400 F
Labor rate variance--- same as in E8-3.
Labor efficiency variance = SP (AQ SQ)
= $10 [ 900 (1,100 x 1)]
= $2,000 F
c. (1) Work in Process (1,100 $16) ......................... 17,600
Materials Price Variance (U)
(1,900 $0.50) ................................................. 950
Materials Quantity Variance (F)
(300 $8) ................................................... 2,400
Materials (1,900 $8.50) ............................ 16,150
(2) Work in Process (1,100 $10) ......................... 11,000
Labor Rate Variance (U)
(900 $0.20) .................................................... 180
Labor Efficiency Variance (F)
(200 x $10).. 2,000
Payroll (900 $10.20) ................................ 9,180
(3) Work in Process ............................................... 4,400
Factory Overhead (1,100 $4) ................... 4,400
d. Finished Goods (1,100 $30) .......................... 33,000
Work in Process ......................................... 33,000
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VanDerbeck, Chapter 08 291
E8-6
E8-7
Units produced standard
Actual labor hours labor hours per unit
Actual labor cost standard rate per hour standard rate per hour
31,110 hrs. $13.22* = 31,110 hrs. $12.50 = 6,100 4.5 hrs. $12.50 =
$411,274.20 $388,875 $343,125
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292 Chapter 08, VanDerbeck
E8-8
2.
(Actual price Standard price) Actual quantity purchased = Materials purchase price
variance
($ 4.20* $4.00) 10,000 = $2,000 U
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VanDerbeck, Chapter 08 293
E8-9
Case 1 Case 2
Units produced 1,200 2,000*
Standard hours per unit 2 0.6
Standard hours allowed 2,400* 1,200
Standard rate per hour $15 $20**
Actual hours used 2,340 1,220
Actual labor cost $35,825** 24,690***
Labor rate variance $725 U $290 U
Labor efficiency variance $900 F*** $400 U
Case 1
*Standard hours allowed= 1,200 2 = 2,400 hours
**Actual Labor Cost =
(Actual hours used Standard rate per hour) +/ Labor rate variance
(2,340 x $15) + $725 = $35,825
Case 2
*Units produced = 1,200 0.6 = 2,000
**Labor Efficiency Variance= SP (AQ SQ)
$400 = SP (1,220 1,200)
$400 = 20 SP
$20 = Standard rate per hour
***Actual Labor Cost=
(Actual hours used x Standard rate per hour) +/ Labor rate variance
(1,220 x $20) + $290 = $24,690
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294 Chapter 08, VanDerbeck
E8-10
E8-11
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VanDerbeck, Chapter 08 295
E8-12
Conclusions to be drawn from the four variances:
Materials price varianceThe unfavorable variance indicates that materials were
purchased at a price higher than standard.
Materials quantity varianceThe favorable variance indicates that fewer materials
were used in making the product than called for by the standard.
Labor rate varianceThe favorable variance indicates that the wage rate paid to
production workers was less than called for by the standard.
Labor efficiency varianceThe favorable variance indicates that less time was
spent on production than was called for by the standard.
E8-13
Conclusions to be drawn from the four variances:
Materials price varianceThe favorable variance indicates that materials were pur-
chased at a price below standard.
Materials quantity varianceThe unfavorable variance indicates that more materi-
als were used in making the product than called for by the standard.
Labor rate varianceThe unfavorable variance indicates that the wage rate paid to
production workers was more than called for by the standard.
Labor efficiency varianceThe unfavorable variance indicates that more time was
spent on production than was called for by the standard.
E8-14
1.
Work in Process Mixing ....................................................... 185,000
Work in Process Blending .................................................... 130,000
Materials Quantity Variance Mixing...................................... 2,000
Materials Price Variance Blending ....................................... 4,000
Materials Quantity Variance Blending .................................. 2,000
Materials Price Variance Mixing ........................................... 10,000
Materials ............................................................ 313,000
2.
Work in Process Mixing ....................................................... 110,000
Work in Process Blending .................................................... 95,000
Labor Efficiency Variance Mixing ......................................... 3,000
Labor Rate Variance Blending ............................................. 8,000
Labor Efficiency Variance Blending ..................................... 7,000
Labor Rate Variance Mixing .............................................. 10,000
Payroll .................................................................................. 213,000
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296 Chapter 08, VanDerbeck
3.
Factory Overhead ................................................................... 145,000
Various Credits ................................................................ 145,000
4.
Work in Process Blending.................................................... 380,000*
Work in Process Mixing ................................................ 380,000
E8-15
Month 1 Month 2
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VanDerbeck, Chapter 08 297
E8-16
a. and b.
Actual factory overhead Budget based on standard hours Standard hours standard rate
Fixed costs ...... $ 52,000 Fixed cost: 9,000 units 2 hr $4/unit =
10,000 x $5.00 = $50,000
Variable costs .... 28,500 Variable cost:
9,000 $3.00 = 27,000
$ 80,500 $ 77,000 $ 72,000
a. and b.
Actual factory overhead Budget based on standard hours Standard hours standard rate
Fixed costs ...... $103,000 Fixed cost: 11,000 units $15 /unit =
10,000 x $10.00 = $100,000
Variable costs .... 48,000 Variable cost:
11,000 $5.00 = 55,000
$151,000 $155,000 $165,000
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298 Chapter 08, VanDerbeck
Net variance:
Flexible-budget variance (F) ............................................ $ 4,000
Production-volume variance (F)....................................... 10,000
Net variance (F) ............................................................... $ 14,000
E8-18
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VanDerbeck, Chapter 08 299
E8-19
The usual formula for calculating variances is shown below. Each step in developing the
figures is numbered in order.
Flexible-Budget Variance
$200 (U)
1. Data given.
2. The unfavorable flexible-budget variance of $200 indicates that actual cost was
$200 more than the budget for this level of production; therefore, budgeted cost
was $26,800 ($27,000 $200). (Note that you cannot use the budget formula
to compute the budgeted overhead because the actual level of production is not
given.)
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300 Chapter 08, VanDerbeck
E8-20 (Appendix)
E8-21 (Appendix)
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VanDerbeck, Chapter 08 301
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302 Chapter 08, VanDerbeck
E8-22 (Appendix)
a-c.
Actual Budget based on Actual hours Standard hours
overhead actual hours standard rate standard rate
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VanDerbeck, Chapter 08 303
PROBLEMS
P8-1
(Actual price Standard price) Actual quantity = Materials price variance
($27.50 $25.00) 5.5 = $13.75 U
(Actual quantity Standard quantity) Standard price = Materials qty. var
(5.5 5.0) $25 = $12.50 U
(Actual rate Standard rate) Actual hours = Labor rate variance
($17.50 - $18.00) 80 = $40.00 F
(Actual hours Standard hours) Standard rate = Labor efficiency variance
(80 60) $18 = $ 360.00 U
P8-2
1-3. Materials:
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304 Chapter 08, VanDerbeck
4-6. Labor:
Actual hours Standard hours
Actual cost standard rate standard rate
40,000* hours $7.60 = 40,000 hours $8.00 = 6,240** units 6 $8.00 =
$304,000 $320,000 $299,520
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P8-3
Standard Actual
Quantity Quantity Standard
or Hours or Hours Difference Cost Variance
1. Materials quantity variance:
Surge ............................................ 640,000 gal.* 600,000 gal. 40,000 gal. $2.00/gal. $80,000
(F) (F)
Empty drums .............................. 80,000 drums 80,000 drums -0- $1.00/drum -0-
3. Labor efficiency variance .............. 80,000 hrs. 81,000 hrs. 1,000 hrs. $8.00/hr.$ 8,000
(U) (U)
Actual
Standard Actual Quantity
Cost Cost Difference or Hours Variance
2. Materials purchase price variance:
Surge.......................................... $2.00/gal. $1.77/gal.** $0.23 645,000 gal. $148,350
(F) (F)
Empty drums .............................. $1.00/drum $1.00/drum*** $0.00 94,000 drums $-0-
4. Labor rate variance ....................... $8.00/hr. $8.08 hr.**** $0.08 80,000 hours $ 6,480
(U) (U)
* 80,000 drums produced 8 gallons per drum = 640,000 gallons
** $1,140,000 645,000 = $1.77 per gallon
*** $94,000 / 94,000 = $1.00 per drum
**** 654,480 81,000 hours = $8.08 per hour
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P8-4
Standard Actual
Quantity Quantity Standard
or Hours or Hours Difference Cost Variance
1. Materials quantity variance ........... 5,000 lbs. 5,300 lbs. 300 lbs. $3.00/lb. $ 900
(U) (U)
3. Labor efficiency variance .............. 8,000 hrs. 8,200 hrs. 200 hrs. $10.00/hr. $2,000
306 Chapter 08, VanDerbeck
(U) (U)
Actual
Standard Actual Quantity
Cost Cost Difference or Hours Variance
2. Materials purchase price variance $ 3.00/lb. $ 2.90/lb. $0.10 5,500 lbs. $ 550
(F) (F)
4. Labor rate variance ....................... $10.00/hr. $9.80/hr. $0.20 8,200 hrs. $1,640
(F) (F)
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P8-5
Standard Actual
Quantity Quantity Standard
or Hours or Hours Difference Cost Variance
1. Materials quantity variance
for Class . ................................... 80,000 ft.* 78,000 ft. 2,000 ft. $0.75/ft. $1,500
(F) (F)
2. Materials quantity variance for
Chic ............................................ 24,000 ft.** 26,000 ft. 2,000 ft. $ 1.00/ft. $2,000
(U) (U)
5. Labor efficiency variance .............. 32,000 hrs.*** 31,000 hrs. 1,000 hrs. $8.00/hr. $8,000
(F) (F)
*10 ft (8,000 units)
**3 ft (8,000 units)
***4 hours (8,000 units)
Actual
Standard Actual Quantity
Cost Cost Difference or Hours Variance
3. Materials purchase price
variance for Class ...................... $0.75/ft. $0.72/ft. $0.03 100,000 ft. $3,000
(F) (F)
4. Materials purchase price
variance for Chic ........................ $1.00/ft. $1.05/ft. $0.05 30,000 ft. $1,500
(U) (U)
6. Labor rate variance ....................... $8.00/hr. $7.80/hr. $0.20 31,000 hrs. $6,200
(F) (F)
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308 Chapter 08, VanDerbeck
P8-6
Standard Actual
Cost Cost Quantity
per Pound per Pound Difference Purchased Variance
Aluminum........ $0.40 $0.48 $0.08 (U) 1,800 $144 (U)
Plasticregular
grade ............ $0.38 $0.50 $0.12 (U) 3,000 $360 (U)
Plasticlow
grade ............ $0.38 $0.29 $0.09 (F) 6,000 $540 (F)
Standard Actual
Cost Cost Actual
per Hour per Hour Difference Hours Variance
$8.00 $8.60 $0.60 (U) 2,700 $1,620 (U)
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VanDerbeck, Chapter 08 309
P8-7
2. Liquid Lead:
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310 Chapter 08, VanDerbeck
P8-7 Continued
Varnish:
Labor:
Actual hours Standard hours
Actual cost standard rate standard rate
10,000 hours $11.70 = 10,000 hours $12.00 = (9,500 units 1 hr/unit) $12.00 =
$117,000 $120,000 $114,000
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VanDerbeck, Chapter 08 311
P8-7 Concluded
P8-8
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312 Chapter 08, VanDerbeck
P8-9
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VanDerbeck, Chapter 08 313
P8-10
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314 Chapter 08, VanDerbeck
P8-10 Concluded
P8-11
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VanDerbeck, Chapter 08 315
P8-11 Concluded
P8-12
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316 Chapter 08, VanDerbeck
P8-13
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VanDerbeck, Chapter 08 317
P8-13 Continued
Materials
Mixing
Actual cost Actual quantity standard price Standard cost
Labor
Mixing
Actual cost Actual hours standard price Standard cost
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318 Chapter 08, VanDerbeck
P8-13 Continued
Blending
Mixing
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VanDerbeck, Chapter 08 319
P8-13 Concluded
* Mixing (100 equivalent units x $30) + Blending (50 equivalent units x $18)
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320 Chapter 08, VanDerbeck
P8-14
* Standard materials cost plus 80% complete as to standard cost of labor and
overhead: $13.20 + (80% $36.00)
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VanDerbeck, Chapter 08 321
P8-14 Concluded
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322 Chapter 08, VanDerbeck
P8-15
MATERIALS VARIANCES
Standard
Actual cost Actual gal. standard price gallons standard price
40,743 gal. $0.38* = 40,743 gal. ($32/80 gal.) = 503 batches x $32 =
LABOR VARIANCES
Standard
Actual cost Actual hours standard rate hours standard rate
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VanDerbeck, Chapter 08 323
P8-15 Concluded
Per hour
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324 Chapter 08, VanDerbeck
P8-16 (Appendix)
Actual variable cost Actual hours standard rate Standard hrs standard rate
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VanDerbeck, Chapter 08 325
P8-17 (Appendix)
1. MATERIAL VARIANCES
Actual parts Units produced standard
Actual cost standard price parts standard price
LABOR VARIANCES
Actual hours Units produced standard
Actual cost standard rate hours standard rate
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326 Chapter 08, VanDerbeck
P8-17 Concluded
Actual variable cost Actual hrs standard rate Standard hrs standard rate
3,816 hrs $1.50 = 3,600 hrs $1.50 =
$4,800 $5,724 $5,400
Actual fixed overhead Budgeted fixed cost Standard hours standard rate
3,600 hrs $1.00 =
$4,100 $4,000 $3,600
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VanDerbeck, Chapter 08 327
P8-18 (Appendix)
Actual variable costs Actual hrs standard rate Standard hrs standard rate
13,015 hrs $3.40 = 13,260 hrs $3.40 =
$45,009 $44,251 $45,084
Actual fixed overhead Budgeted fixed cost Standard hours standard rate
13,260 hrs $3.85 =
$50,125 $50,050 $51,051
Proof:
Applied overhead (13,260 hrs $7.25) ................................ $ 96,135
Actual total overhead ($45,009 + $50,125) .......................... 95,134
Overapplied factory overhead ....................................... $ 1,001 (F)
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328 Chapter 08, VanDerbeck
P8-18 Concluded
Labor Variances:
Actual labor cost Actual hrs standard rate Standard hrs standard rate
P8-19 (Appendix)
Mixing:
Actual Actual hours Applied
overhead Budgeted overhead standard rate overhead
Fixed: $ 4,000 2,150 hrs $3 = 2,200 hrs $3 =
Variable:
2,150 hrs $1 = 2,150
$6,700 $ 6,150 $6,450 $6,600
Blending:
Actual Actual hours Applied
overhead Budgeted overhead standard rate overhead
Fixed: $1,000 1,000 hrs $4 = 950 hrs $4 =
Variable:
1,000 hrs $3 = 3,000
$3,750 $ 4,000 $4,000 $3,800
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VanDerbeck, Chapter 08 329
P8-20 (Appendix)
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330 Chapter 08, VanDerbeck
Fixed rate:
Total rate:
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VanDerbeck, Chapter 08 331
P8-21R Continued
(b)
Actual factory overhead incurred:
Variable costs ............................................................................ $14,000
Fixed costs ................................................................................ 52,000
Total actual overhead costs .............................................................. 66,000
Factory overhead costs applied:
Standard hours allowed standard rate:
7,000 hours $10.00 .......................................................... 70,000
Overapplied factory overhead $4,000
4. a. Two-variance method:
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332 Chapter 08, VanDerbeck
P8-21R Concluded
c. Four-variance method:
Variable Costs
Actual Actual hrs standard Standard hrs standard
variable overhead variable rate variable rate
Fixed Costs
Actual fixed overhead Fixed cost: budgeted Standard hrs standard fixedrate
7,000 hrs $8 =
$52,000* $50,000 $56,000
*These total costs represent actual hours multiplied by actual rates per hour.
When the total cost is given, it is not necessary to determine the specific compo-
nents which make up the total cost unless you do it to understand the formulas
being used.
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MINI-CASE
Materials:
(7,000 units x 4 lbs) @ $14,000
$0.50
30,000 lbs @ $0.52 $15,600 $(1,600)
(5,500 units x 1 gal) @ $ 5,500
$1.00
5,500 gal @ $0.95 $ 5,225 $ 275 $ 19,500 $ 20,825 $(1,325)
Labor:
7,000 hours @ $ 8.00 56,000
6,800 hours @ $ 8.00 54,400 1,600
5,500 hours @ $10.00 55,000
5,600 hours @ $10.20 57,120 (2,120) 111,00 111,520 (520)
0
Factory overhead:
Standard cost per unit
$1.00 7,000
Actual cost 7,000 None
Standard cost per unit
$2.00 11,000
Actual cost 11,000 None 18,000 18,000 None
Total $77,000 $77,000 None $71,500 $73,345 $(1,845) $148,500 $150,345 $(1,845)
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334 Chapter 08, VanDerbeck
MINI-CASE Continued
2. a. Materials:
Mixing:
Actual quantity Standard quantity
Actual cost standard price standard price
30,000 lbs $0.52 = 30,000 lbs $0.50 = 28,000 lbs $0.50 =
$15,600 $15,000 $14,000
Blending:
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VanDerbeck, Chapter 08 335
MINI-CASE Continued
Blending:
b. In Mixing, both the materials price variance and the materials quantity variance were
unfavorable. If they paid more for a better quality material in expectation of having a
lesser amount of waste and spoilage, the strategy was not successful. It is also
possible that there were price increases for material that were not foreseen when the
standards were determined. The labor variances were more satisfactory in Mixing.
There was no labor rate variance, and the labor efficiency variance was favorable.
This means that giving the caliber of labor they budgeted for, the amount of labor
time needed to complete production was less than budgeted.
In Blending, there was a favorable materials price variance and no materials
quantity variance. This indicates that they were able to use less expensive materials
than budgeted for, while maintaining good control over materials usage. It is also
possible that the price of materials of the quality that they had budgeted has de-
clined. Blendings difficulties lie in the area of labor costs. Both the labor rate vari-
ance and the labor efficiency variance were unfavorable. If their strategy was to
employ more expensive labor in hopes of having it complete production in a shorter
amount of time, it was not successful.
3. Work in ProcessMixing ................................................. 14,000
Work in ProcessBlending ............................................. 5,500
Materials Quantity VarianceMixing ............................... 1,000
Materials Price VarianceMixing .................................... 600
Factory Overhead ............................................................ 1,500
Materials Price VarianceBlending............................ 275
Materials ($20,825 + $1,500 indirect materials) .......... 22,325
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336 Chapter 08, VanDerbeck
4. Mixing Blending
Costs charged to departments:
Materials .......................................................................... $ 14,000 $ 5,500
Labor ............................................................................... 56,000 55,000
Factory overhead............................................................. 7,000 11,000
Prior department .............................................................. 66,000
$ 77,000 $ 137,500
Costs credited to departments ................................................ 66,000 120,000
Balance of work in process ..................................................... $ 11,000 $ 17,500
Mixing
2,000 units, one-half completed (2,000 1/2 $11) ........ $ 11,000
Blending
Mixing cost1,000 units @ $11 ................... $ 11,000
Blending cost1,000 units, one-half completed
(1,000 1/2 $13) ........................................ 6,500 $ 17,500
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VanDerbeck, Chapter 08 337
5.
Mixing Blending Total
Cost of production:
Materials ....................................................... $ 15,600 $ 5,225 $ 20,825
Labor............................................................. 54,400 57,120 111,520
Factory overhead .......................................... 7,000 11,000 18,000
Total costs to be accounted for ................ $ 77,000 $ 73,345 $ 150,345
Costs accounted for:
Charged to finished goods ..................................................................... $ 120,000
Work in process ..................................................................................... 28,500
Net unfavorable variance ....................................................................... 1,845
Total costs accounted for .................................................................. $ 150,345
6.
Sales (4,000 $40) ............................................................................ $ 160,000
Cost of goods sold at standard (4,000 $24) .................................... 96,000
a. Gross margin at standard cost ........................................................... $ 64,000
Net unfavorable variance ................................................................... 1,845
b. Gross margin at actual cost ............................................................... $ 62,155
c. The gross margin at actual cost is less than the gross margin at standard cost be-
cause the net amount of all the variances was $1,845 unfavorable. In a standard
cost system, the production costs flow through the system at standard during the
accounting period. At the end of the period, the standard costs must be adjusted to
actual when preparing the financial statements.
7. a. Paula is asking you to do something that is unethical. The labor standards being
used would have been previously agreed to by Paula and her superior. Specific
IMA ethical standards that would be violated by making the change include:
Competence: (3) Provide decision support information and recommendations that are
accurate, clear, concise, and timely.
Integrity: (3) Abstain from engaging in or supporting any activity that might discredit the
profession.
Credibility: (1) Communicate information fairly and objectively; (2) Disclose all infor-
mation that could be reasonably expected to influence an intended users understanding
of the reports, analyses, or recommendations.
b. Follow your organizations established policies on the resolution of such a
conflict. If these policies do not resolve the ethical conflict, you should consider
the IMAs suggested Resolution of Ethical Conflict. In this instance, submitting
the information to the next level of management above Paula would be to the VP
of Manufacturing. That should be sufficient to resolve this issue.
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338 Chapter 08, VanDerbeck
INTERNET EXERCISE
One would expect food and paper costs to have a favorable variance because food and
paper costs were 33.5% of 2009 sales by company-operated restaurants versus only
32.6% of 2010 sales. Occupancy and other operating expenses and payroll and em-
ployee benefits probably had small favorable variances because they were 22.7% and
25.7% of 2009 sales, respectively versus only 22.4% and 25.4% in 2010, respectively.
Selling, general, and administrative expenses probably had little or no variance because
the 2010 percentage (9.7%) was within .1% of the 2009 percentage (9.8%). (Note that
this exercise assumes that the 2009 operating results are used in setting the 2010
standards.)
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CHAPTER 9
QUESTIONS
1. Answers will vary. Examples include ac-counting 8. The revenue budget is the starting point for the
firms, airlines, architects, attorneys, hair stylists, annual budget because the amount of client
plumbers, professional sports teams, and fast- business must be projected before the amount
food businesses. of labor hours and overhead support needed
2. The two distinguishing features of service firms can be estimated.
are that they have little or no inventory and that 9. It is important for professional labor hours to be
labor costs often comprise 75% or more of total budgeted with care because if the firm
costs. overestimates the hours needed, it will be
3. Service businesses are important to the U.S. overstaffed and the additional labor costs will
economy because roughly 85% of U.S. workers reduce profits. If the number of hours needed is
are employed by service businesses and, as underestimated, the shortage of professionals
explained in the chapter introduction, that will reduce the number of jobs that can be
percentage is expected to grow. The lack of undertaken and thus reduce profits.
growth in manufacturing employment is due 10. Factory overhead for a manufacturer is
primarily to inexpensive imports and to the allocated to products and remains in inventory
automation of U.S. factories. Automated as an asset until the goods are sold. Overhead
production processes have resulted in the for a service business consists of marketing
manufacture of many more goods with fewer and administrative costs that may be allocated
workers, thus creating the need for more people to jobs for such things as pricing decisions, but
to market, distribute, and service these goods. must be expensed in the period incurred for
4. Most service businesses use job order costing financial reporting.
because the amount and complexity of services 11. A budgeted income statement may be used for
provided can vary substantially from customer to planning purposes by incorporating the best
customer. projections of operating management for the
5. In deciding whether to use direct labor dollars or fiscal year. It may also be used for control
direct labor hours to charge overhead to jobs in purposes during and at the end of the fiscal
a service firm, it is important to determine what year by comparing budgeted to actual revenue
causes the overhead to occur. If highly paid and expenses to determine the strengths and
partners create most of the overhead, then direct weaknesses of current operations.
labor dollars would be the more appropriate cost 12. Firms that use activity-based costing attempt to
allocation base. If overhead is more a function shift as many costs as possible out of the
of direct labor hours worked on a job, then direct indirect cost pool and into direct cost pools that
labor hours would be a more appropriate can be specifically traced to the individual jobs
allocation base. that caused the costs to occur. The remaining
6. Direct costs are expenses that can be costs that cannot be traced to individual jobs
specifically traced to an individual job. These are separated into homogeneous cost pools
would include professional labor dollars, travel and then al-located to individual jobs via
expenses, photocopying, and long distance separate allocation bases for each cost pool.
telephone and fax charges. Indirect costs are 13. Peanut-butter costing refers to the practice of
expenses that cannot be easily identified with a assigning costs evenly to jobs by using an
specific job and have to be allocated to the job, overhead rate when, in fact, different jobs
using a cost allocation base. These would consume resources in different pro-portions.
include secretarial support, employee fringe 14. Activity-based costing is worthwhile to
benefits, and various office expenses. implement when different jobs use resources
7. A cost performance report compares the in different proportions.
budgeted costs for a job to the actual costs
15. A cost/benefit decision attempts to deter-
incurred and indicates the variance for each
line item. mine whether the benefit of implementing a
certain course of action exceeds the cost of
its implementation. As it relates to activity-
based costing, the question is whether the
339
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340 Chapter 09, VanDerbeck
benefit of implementing a more sophisticated 22. Design quality indicates the degree to which
costing system in the form of more accurate a product or service satisfies customer
information for costing and pricing purposes needs. Conformance quality measures how
exceeds the cost of implementing and well the product or service performs relative
maintaining the system. to its intended design. The absence of a four-
16. A balanced scorecard translates a companys wheel drive option on an SUV was given as
strategy into performance measures that are an example of potentially low design quality,
used to implement the strategy and that whereas the failure of an anti-lock braking
employees can understand. system was given as an example of poor
17. Numerous answers are acceptable here. For conformance quality.
example, under the customer perspective, 23. Prevention costs consist of the cost of the
number of new customers, market share, and activities that are incurred to preclude the
customer satisfaction surveys could be listed. production of a product or the execution of a
Under internal business processes, service that does not conform to its design
percentage of on-time deliveries, percentage specification. Two examples of prevention
of defect-free units, and time taken to replace activities are quality circles where employees
defective products could be mentioned. meet frequently in small groups to discuss
Under the learning and growth perspective, how they can improve processes and
employee turnover ratio, number of statistical process control where production
employee suggestions adopted, and workers use charts to track the quality of
percentage of employees trained in new units being produced.
processes could be included. 24. Appraisal costs consist of the cost of
18. A companys performance measures should be activities that are incurred to identify which
highly correlated with its strategy. If a products do not conform to specifications
performance measure is being reached but the before they are sent to customers. They
companys strategy is not attained, then the consist of activities such as inspection and
performance measure is either an incorrect one product testing. The more emphasis that a
or insufficient to reach the companys strategy. company puts on prevention activities, the
19. The four categories that performance measures less that it should have to spend on appraisal
are divided into and an example of each follows: activities.
Financial (return on investment); Customer 25. Internal failure costs consist of the cost of
(market share); Internal Business Processes activities that are incurred to correct defective
(percentage of on-time deliveries); and Learning products before they are shipped to
and Growth (employee turnover ratio). Note that customers. Examples include the cost to
student answers will vary for the examples of correct defective units and the materials and
performance measures. labor costs expended on units that cannot be
20. A company should bother with a balanced corrected. External failure costs consist of
scorecard approach to performance measurement the cost of the activities that are incurred to
because, without a balanced scorecard approach, remedy the shipment of defective goods to
a company might take actions to increase short- customers. Examples include the cost to
term profits that could be harmful to long-term repair or replace products that are still under
profitability. warranty and the cost to provide customer
support
21. Managers who had a longer tenure with
Wildcat, Inc. would have been exposed to the
previous financial-only metric used for .
evaluating performance and they also would
have had more time to learn and appreciate
the BCS approach.
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VanDerbeck, Chapter 09 341
EXERCISES
E9-1
Budgeted overhead:
Depreciationequipment ............................ $ 50,000
Fringe benefits ............................................. 150,000
Lease expense ............................................ 220,000
Telephone and fax ....................................... 30,000
$ 450,000
E9-2
1.
Job cost:
Direct labor .................................................. $ 9,500
Other direct .................................................. 2,500
Overhead (150% $9,500).......................... 14,250
Total ............................................................ $ 26,250
(a)
Bid price ...................................................... $ 30,000
Job cost ....................................................... 26,250
Profit ............................................................ $ 3,750
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342 Chapter 09, VanDerbeck
E9-3
E9-4
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VanDerbeck, Chapter 09 343
E9-5
E9-6
Budgeted
Cost Budgeted Cost Budgeted
Pool Costs Drivers Rate
E9-7
Partners time (10 hours $125) .................................................. $ 1,250.00
Associates time (25 hours $60) ................................................ 1,500.00
Fringe benefits (30% $2,750) .................................................... 825.00
Paralegal support ($62.50 10 hours). 625.00
Research support ($32.50 35 hours) ......................................... 1,137.50
Total job cost ............................................................................... $ 5,337.50
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344 Chapter 09, VanDerbeck
E9-8
Professional labor ($75 35 hours) ............................................. $ 2,625.00
Professional support ($67.50 35 hours) .................................... 2,362.50
Total job cost ............................................................................... $ 4,987.50
Job costABC costing ................................................................ $ 5,337.50
Job costsimplified costing ........................................................ 4,987.50
Difference .................................................................................... $ 350.00
James used a high percentage of partner hours relative to associate hours, 28.5%, than
the 20% rate (4,000 / 20,000) built into the averaged billing rate and overhead rate. The
ABC system recognizes this difference and the resulting job costs are $350 more when
using ABC.
E9-9
Budgeted
Cost Budgeted Cost Budgeted
Pool Costs Drivers Rate
E9-10
Financial---Revenue from new products; Operating income
Customer---Number of new customers; Percentage of products returned
Internal Business Processes---Percentage of on-time deliveries; Time taken to replace
defective products
Learning and Growth---Employee turnover ratio; Percentage of compensation based on
team performance
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VanDerbeck, Chapter 09 345
E9-11
Increase in operating income through cost reduction---this should not be a primary
performance measure for a company whose strategy is to charge premium prices for
excellent service. Increase in revenue through premium pricing would be a more
logical financial performance measure.
Market share in the overall gasoline market---this is not an appropriate performance
measure in the customer perspective for Hi-End. A more appropriate measure would
be market share in the high-end service gasoline market.
Wait-time at the pump---this would be an appropriate performance measure under the
internal business processes perspective for a premium service station.
Employee bonus based on number of customers served---this would be an
acceptable performance measure as long as it was extended to number of customers
served well. The bonus should not be an impetus to service as many customers as
possible without regard to quality.
E9-12
Increase in operating income through cost reduction---this should be a primary
performance measure for a company whose strategy is to charge discount prices.
Keeping a close eye on operating costs is the best way to stay profitable with this
strategy. (Note that this comment applies to the gasoline portion of the business.)
Market share in the overall gasoline market---this is an appropriate performance
measure in the customer perspective for a company that attempts to attain a high market
share through discount pricing. However, if available, it would be even more meaningful
to determine Lo-Ends market share in the discount-pricing gasoline market.
Wait-time at the pump---this would not be an appropriate performance measure under
the internal business processes perspective for a discount-pricing service station.
Customers are pumping their own gas, rather than having attendants pump it for them.
(Measuring wait time for the grocery part of the business might be appropriate.)
Employee bonus based on number of customers served---this would not be an
acceptable performance measure for the service station part of the business, but might
be used for the grocery part of the business. This measure would also help to evaluate
how good of a job the store manager does in attracting service station customers to the
mini-market.
E9-13
Rework (IF)
Warranty repair (EF)
Product testing (A)
Statistical process control (P)
Customer support (EF)
Quality circles (P)
Inspection (A)
Scrap and spoilage (IF)
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346 Chapter 09, VanDerbeck
PROBLEMS
P9-1
Partners Time:
Associates Time:
Period Ending
12/31/2013 Amount
Travel........................................ $2,800
Telephone/Fax/Copying............ 1,740 $ 4,540
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VanDerbeck, Chapter 09 347
P9-2
1.
Cost Performance Report
Item Actual Result Budget Variance
2.
Bid price ....................................... $ 30,000
Budgeted costs ............................ 21,100
Budgeted profit ............................. $ 8,900
P9-3
1.
Hornick and Sena
Revenue Budget
For the Year Ended December 31, 2013
2.
Hornick and Sena
Professional Labor Budget
For the Year Ended December 31, 2013
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348 Chapter 09, VanDerbeck
P9-4
1.
Hornick and Sena
Overhead Budget
For the Year Ended December 31, 2013
2.
Hornick and Sena
Other Direct Expenses Budget
For the Year Ended December 31, 2013
Travel............................................................................. $ 123,000
Meals ............................................................................. 37,000
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VanDerbeck, Chapter 09 349
P9-6
Budgeted
Cost Budgeted Cost Budgeted
Pool Costs Drivers Rate
P9-7
Budgeted
Cost Budgeted Cost Budgeted
Pool Costs Drivers Rate
P9-8
1.
Ford Mickeys
Products Markets
Professional labor cost:
50 hrs $60* ..................................... $3,000
20 hrs $60 ...................................... $1,200
Professional support:
50 hrs $40**.................................... 2,000
20 hrs $40 ...................................... _____ 800
* ($150,000 2) + ($60,000 4)
1,500 hrs 6
** $360,000
9,000 hrs
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350 Chapter 09, VanDerbeck
P9-8 Continued
2.
Ford Mickeys
Products Markets
Partner labor cost:
30 hrs $100* ........................................ $3,000
5 hrs $100 ........................................... $500
Associate labor cost:
20 hrs $40** ......................................... 800
15 hrs $40 ........................................... 600
Design support:
$3,800 .22*** ....................................... 836
$1,100 .22 ........................................... 242
Staff support:
50 hrs $26.67**** ................................. 1,334
20 hrs $26.67 ...................................... _____ 533
Total ............................................................ $5,970 $1,875
*** _________$120,000_______
($150,000 x 2) + ($60,000 4)
**** $240,000
9,000
P9-9
Ford Mickeys
Products Markets
The Ford job was undercosted by $970, and the Mickeys Markets job was overcosted
by $125 using the simplified costing system.
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VanDerbeck, Chapter 09 351
P9-10
Swoosh Athletics
Balanced Scorecard
(Note that many answers are possible for this solution)
Financial
Increase in operating income through cost reduction
Increase in revenue through the sale of defect-free products
Customer
Number of new customers
Market share in the cost-conscious market
Percentage of products returned
P9-11
Delaware Dairies
Balanced Scorecard
(Note that many answers are possible for this solution.)
Financial
Increase in revenue through charging premium prices
Increase in revenue through new product introductions
Customer
Market share in the premium ice cream market
Customer taste-testing surveys
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352 Chapter 09, VanDerbeck
P9-12
Terbush Manufacturing, Inc.
Cost of Quality Report
For Year Ended 12/31/2013
P9-13
Terbush should invest more in its prevention and appraisal programs which then should
significantly reduce its expenditures for internal failure and external failure costs.
Currently, its internal failure costs as a percentage of sales (1.66%) and external failure
costs (1.85%) are as much as or more than its prevention costs (1.78%) and appraisal
costs (1.43%).
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VanDerbeck, Chapter 09 353
MINI-CASE
1a.
Wilkes Barre Scranton
Professional labor cost:
70 hrs. x $65* ...................................... $ 4,550
70 hrs. x $65 ....................................... $ 4,550
Professional support:
70 hrs. x $70** .................................... 4,900
70 hrs. x $70 ....................................... 4,900
Total cost ............................................ $ 9,450 $ 9,450
Markup on cost, 25% .......................... 2,363 2,363
Bid price .............................................. $11,813 $11,813
* [(5 $250,000) + (20 $100,000)]/ [(5 x 2,000 hrs.) + (20 x 2,000 hrs.)] = $65
per professional labor hr.
** [($2,500,000 + $1,000,000)]/([5 x 2,000) + (20 2,000)] = $70 per professional labor hr.
b. No, the results do not seem reasonable. The Wilkes Barre job had many more
expensive partner hours that also drive secretarial support costs, yet the total cost of
the two jobs was identical.
2.
Wilkes Barre Scranton
Partner labor cost:
50 hrs. x $125* ......................................... $ 6,250
15 hrs. x $125 .......................................... $ 1,875
Associate labor cost:
20 hrs. x $50** ......................................... 1,000
55 x $50 ................................................... 2,750
Legal support:
70 hrs. x $50*** ........................................ 3,500
70 hrs. x $50 ............................................ 3,500
Secretarial support:
50 hrs. x $100****..................................... 5,000
15 hrs. x $100 .......................................... 1,500
Total cost ................................................. $15,750 $ 9,625
Markup on cost, 25% ............................... 3,938 2,406
Bid price ................................................... $19,688 $12,031
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354 Chapter 09, VanDerbeck
3a.
b. Each of the two jobs was undercosted using the simplified costing system.
However, the Wilkes Barre job was undercosted by a very significant amount,
$7,875, whereas the Scranton job was undercosted by an insignificant amount,
$218. The reason that the Wilkes Barre job was significantly undercosted was that
it entailed litigation work which had to be done primarily by partners. The partners
system spread the costs equally, like peanut butter, over both jobs without regard to
whether hourly labor cost is $125 whereas the associates hourly labor cost is only
$50. Also, partners consume secretarial support, and associates do not. The
simplified cost the work was being done by a partner or an associate.
INTERNET EXERCISE
1. Professional relationships, just like personal ones, take time, care and commitment
to sustain. If you only pay attention to your network when its convenient or when
you need something, your relationships wont be very strong or authentic.
2. By following people in your professional network on social media sites, you can
keep up with their news and send a hello or forward an article that might be of
interest.
3. Group involvement shows people that you value community, sharing and helping
others. Strong personal brands include demonstrating pride and loyalty to the
institutions that have shaped you.
1
Articulate Your Personal Brand Through Your Social Network, Holly Paul, www.pwc.tv, visited
10/15/2011.
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CHAPTER 10
QUESTIONS
1. Under absorption costing, all manufacturing (b) Many accountants feel that work in
costsdirect materials, direct labor, and process and finished goods inventories
fixed and variable factory overhead exp- do not reflect true costs on the balance
ensesare charged to the cost of the sheet because no element of fixed
product. Under variable costing, only those production cost is charged to the
costs that vary directly with volumedirect inventory accounts.
materials, direct labor, and variable factory (c) The AICPA and IRS do not consider this
overhead expensesare applied to produc- method appropriate for inventory costs
tion. Since fixed costs are not affected by as used in published financial state-
changes in volume, they are not charged to ments and in computing taxable income,
the cost of the product but are expensed in respectively.
the period they are incurred.
5. Under absorbtion costing, profits are
2. Product costs are manufacturing costs that
affected by the dynamic of units produced
are included as a part of inventory costs and
versus units sold with the fixed factory
expensed when goods are sold. Period
overhead being held back in inventory when
costs are all costs that are not assigned to
production exceeds sales, thus increasing
the product, and they are recognized as
expense and charged against revenue in the ending inventory, decreasing cost of goods
period incurred. sold, and increasing net income.
3. Normally income statements prepared under 6. Gross margin is the term commonly used in
variable costing will reflect profits (or losses) absorption costing to describe the difference
that increase or decrease as sales increase between sales revenue and cost of goods
or decreasea logical pattern. When ab- sold. Manufacturing margin is used in
sorption costing is used, this relationship be- variable costing to designate the difference
tween sales and profits (or losses) does not between sales revenue and variable cost of
exist, especially in instances where the vol- goods sold.
ume of production fluctuates widely. 7. Although variable costing may provide
Use of variable costing will normally useful information for internal decision
cause inventories to be reported on the bal- making, it is not a generally accepted
ance sheet at a lower figure than under ab- method of inventory costing for external
sorption costing because no fixed costs will reporting purposes because it matches only
be charged to the product. the variable manufacturing costs with
4. Advantages of variable costing are: revenue. Under absorption costing both
(a) elimination of profit distortion in periods variable and fixed manufacturing costs are
of fluctuating production and sales, matched with revenue in the period that
(b) recognition of fixed manufacturing costs goods are sold.
as they are incurred rather than defer- 8. A segment report prepared using absorption
ring them as inventory costs until the costing may result in indirect costs being
goods are sold, and improperly allocated to the various seg-
(c) presentation of a much clearer picture of ments. Arbitrarily assigning indirect costs to
the effect of additional production on a segment may distort the profitability of that
costs and income. segment because some or all of the indirect
Disadvantages of variable costing are: cost may be common to the other segments.
(a) The measurement of income, in 9. Common costs are indirect costs that are
traditional accounting theory, is based generated by the overall operations of a
on the matching of revenues with all company. These common costs cannot be
associated costs. Variable costing directly identified with any specific segment;
matches only the variable production however, they are identifiable as common to
costs with revenue. all segments at some particular level of an
organization.
355
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356 Chapter 10, VanDerbeck
10. A contribution margin is determined by sub- 16. A study that highlights the significant cost
tracting the variable costs from the sales and revenue data alternatives is referred to
revenue. Its importance to management is as differential analysis. The difference in
that it can be used as a guide in making de- revenue between two alternatives is called
cisions regarding short-term opportunities differential revenue. The difference in cost
such as pricing special orders. between two alternatives is called differen-
11. The direct costs of a segment are the costs tial cost. The amount of extra profit earned
that are incurred because of the existence of from choosing the better of the alternatives
the segment. If the segment were elimi- is called differential income.
nated, the direct costs would also disappear. 17. Make-or-buy studies aid management in
12. Cost-volume-profit analysis is an analytical determining whether to produce a compo-
technique that uses the degrees of cost nent in their own factory or buy that compo-
variability for measuring the effect of nent from an outside supplier. For example,
changes in sales volume on the resulting if a plant has excess capacity and is able to
profits. manufacture products that it is presently
buying from outside vendors, such studies
13. The break-even point is the point where
may show that these products can be pro-
sales revenue is adequate to cover all costs
duced more economically than they can be
to manufacture and sell the product, but no
purchased. This savings should improve the
profit is earned
profit position of the company.
14. The break-even chart is constructed as
18. By practicing contribution pricing, the airline
follows:
will generate additional contribution margin
(a) A horizontal line, the x-axis, is drawn and profit as long as the special ticket prices
and divided into equal distances to rep- exceed the variable costs of servicing the
resent the sales volume in dollars. additional passengers.
(b) A vertical line, the y-axis, is drawn and 19. Distribution costs are the costs incurred to
spaced into equal parts representing sell and deliver the product. They include all
costs and revenues in dollars. selling expenses and a reasonable portion
(c) A fixed cost line is drawn parallel to the of the administrative expenses.
x-axis at the point representing the dol- 20. The purpose of the analysis of distribution
lar level of fixed costs on the y-axis. costs is primarily to determine the profitabil-
(d) A total cost line is drawn from the fixed ity of products, sales territories, etc., with an
cost point on the y-axis to the total cost eye to controlling, adjusting, or possibly
point at the right of the graph. eliminating costs.
(e) A sales line is drawn from the intersec- 21. The cost data and cost concepts to be in-
tion of the x-axis and the y-axis to the cluded are governed by the purpose of the
total sales point at the right of the graph. cost data. It is essential to first clearly define
(It intersects the total cost line at the the specific objective or problem for which a
break-even point.) cost study is needed.
15. The contribution margin ratio expresses the
relationship of the contribution margin to
sale The margin of safety ratio is a relation-
ship computed by dividing the difference be-
tween total sales and break-even sales by
the total sales. It establishes the percentage
by which sales can decrease before the
company reaches the break-even point.
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VanDerbeck, Chapter 10 357
EXERCISES
E10-1
(a) (b)
Absorption Variable
Costing Costing
Direct materials ............................................................ $ 200,000 $ 200,000
Direct labor ................................................................... 100,000 100,000
Variable factory overhead ............................................ 80,000 80,000
Fixed factory overhead ................................................. 60,000 -0-
Total cost of production ................................................ $ 440,000 $ 380,000
(1) Unit cost ....................................................................... $ 17.60* $ 15.20**
(2) Cost of 5,000 units in inventory .................................... $ 88,000 $ 76,000
E10-2
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358 Chapter 10, VanDerbeck
E10-3
1.
Richards Corporation
Statement of IncomeVariable Costing
Sales....................................................................................... $ 700,000
Variable cost of goods sold:
Materials ($1.125 70,000 units)..................................... $ 78,750
Direct labor ($1.50 70,000 units) ................................... 105,000
Variable overhead ($0.75 70,000 units) ........................ 52,500 236,250
Contribution margin ................................................................ $ 463,750
Fixed costs:
Fixed overhead ................................................................ $ 150,000
Fixed marketing and administrative expense ................... 180,000 330,000
Net income ............................................................................. $ 133,750
2.
Richards Corporation
Statement of IncomeAbsorption Costing
Sales....................................................................................... $ 700,000
Cost of goods sold:
Materials ($1.125 70,000 units)..................................... $ 78,750
Direct labor ($1.50 70,000 units) ................................... 105,000
Variable overhead ($0.75 70,000 units) ........................ 52,500
Fixed overhead ($1.875 70,000 units) .......................... 131,250 367,500
Gross margin on sales ............................................................ $ 332,500
Less: Fixed marketing and administrative expense ................ 180,000
Net income ....................................................................... $ 152,500
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VanDerbeck, Chapter 10 359
E10-4
2. Absorption Costing:
Materials....................................................................... $ 480,000
Labor ............................................................................ 260,000
Variable factory overhead ............................................ 44,000
Fixed factory overhead ................................................. 36,800
Total inventoriable costs .......................................... $ 820,800
Cost of production per unit:
$820,800/40,000 units = $20.52
Cost assigned to ending inventory:
5,000 units $20.52 ..................................................... $ 102,600
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360 Chapter 10, VanDerbeck
E10-5
The net income under absorption costing differs from the variable costing net income by
the amount of fixed cost assigned to the increase or decrease in inventory.
Change in inventory:
Beginning ......................................................................... 18,000 units
Ending .............................................................................. 13,000
Decrease ..................................................................... 5,000 units
5,000 units $2 = $10,000 fixed costs released from inventory under absorption
costing.
E10-6
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VanDerbeck, Chapter 10 361
E10-7
E10-8
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362 Chapter 10, VanDerbeck
E10-9
$1,000,000 = $25 per unit
Variable expenses:
40,000 units
E10-10
1.
$100,000
100 (Sales)
$20,000
COSTS AND REVENUES (DOLLARS IN THOUSANDS)
Sales Line
90 (Net
Income)
Area
80 me $80,000
In co (Total Cost)
Net
70
60
Break-Even Point
($60,000)
50
Area
30
o ss
tL
Ne
20
Fixed Cost Line
10
10 20 30 40 50 60 70 80 90 100
SALES VOLUME (DOLLARS IN THOUSANDS)
2. Break-even point$50,000
Net operating income$20,000
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VanDerbeck, Chapter 10 363
E10-11
= $280,000
100,000
= $2.80
= $100,000
$2.80
= 35,715
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364 Chapter 10, VanDerbeck
E10-12
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VanDerbeck, Chapter 10 365
E10-13
= $150,000
1 .50
$150,000
=
.50
= $300,000
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366 Chapter 10, VanDerbeck
E10-14
E10-15
Cost of special order:
Variable costs:
Manufacturing: ($6,400,000 $4,000,000) = $2,400,000
Cost per unit: ($2,400,000 800,000* units) = $3.00
No additional selling expenses.
*$8,000,000 $10 per unit
Contribution:
Selling price ................................................................. $ 6.00
Less variable costs ...................................................... 3.00
Contribution margin per unit ......................................... $ 3.00
100,000 units $3.00 = $300,000 increase in operating income.
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VanDerbeck, Chapter 10 367
E10-16
2. The part should be made by Charlie because its avoidable costs, if it buys the part,
are only $33.20 and its cost to buy from Delta is $36.
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368 Chapter 10, VanDerbeck
PROBLEMS
P10-1
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VanDerbeck, Chapter 10 369
P10-1 Concluded
P10-2
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370 Chapter 10, VanDerbeck
P10-2 Concluded
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VanDerbeck, Chapter 10 371
P10-3
Florence Corporation
Comparative Income Statements
For Three Months Ending December 31, 2013
* $48,000/12
** 360,000/12
*** [$10 + ($360,000 / 72,000)] x 3,000 = $45,000
[$10 + ($360,000 / 72,000)] x 4,000 = $60,000
[$10 + ($360,000 / 72,000)] x 6,000 = $90,000
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372 Chapter 10, VanDerbeck
P10-3 Concluded
Florence Corporation
Comparative Schedule of Cost of Goods Sold
For Three Months Ended December 31, 2013
Beginning
finished goods
inventory ............ --- --- $ 45,000 $ 30,000 --- ---
Cost of goods
manufactured .... $ 90,000 $ 60,000 15,000 10,000 $120,000 $ 80,000
Goods
available
for sale............... $ 90,000 $ 60,000 $ 60,000 $ 40,000 $120,000 $ 80,000
Less ending
finished goods
inventory ............ 45,000 30,000 --- --- 30,000 20,000
Cost of
goods sold ......... $ 45,000 $ 30,000 $ 60,000 $ 40,000 $ 90,000 $ 60,000
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VanDerbeck, Chapter 10 373
P10-4
Greenville Corporation
Comparative Income Statements
For Three Months Ending March 31, 2013
* $60,000/12
** 240,000/12
*** [$16 + ($240,000 / 48,000)] x 3,000 = $63,000
[$16 + ($240,000 / 48,000)] x 4,000 = $84,000
[$16 + ($240,000 / 48,000)] x 4,000 = $84,000
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374 Chapter 10, VanDerbeck
P10-4 Concluded
Greenville Corporation
Comparative Schedule of Cost of Goods Sold
For Three Months Ended March 31, 2013
Beginning
finished goods
inventory ............ --- --- $ 21,000 $ 16,000 --- ---
Cost of goods
manufactured .... $ 84,000 $ 64,000 63,000 48,000 $105,000 $ 80,000
Goods
available
for sale............... $ 84,000 $ 64,000 $ 84,000 $ 64,000 $105,000 $ 80,000
Less ending
finished goods
inventory ............ 21,000 16,000 --- --- 21,000 16,000
Cost of
goods sold ......... $ 63,000 $ 48,000 $ 84,000 $ 64,000 $ 84,000 $ 64,000
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VanDerbeck, Chapter 10 375
P10-5
1.
Clean-It Products, Inc.
Income Statement by Territory
Total Territories
Sales East West
Sales .................................. $ 1,000,000 $ 600,000 100.0% $ 400,000 100.0%
Less variable expenses ..... 600,000 370,000* 61.7 230,000* 57.5
Contribution margin............ $ 400,000 $ 230,000 38.3% $ 170,000 42.5%
Less direct fixed costs........ 90,000 54,000 36,000
Segment margin................. $ 310,000 $ 176,000 $ 134,000
Less common fixed costs ... 230,000
Net income ......................... $ 80,000
Variable Total
Expense Variable
Sales Rate Expenses
East:
Brooms .................................................... $ 400,000 70% $ 280,000
Mops ........................................................ 200,000 45% 90,000
Total .............................................. $ 600,000 $ 370,000
West:
Brooms .................................................... $ 200,000 70% $ 140,000
Mops ........................................................ 200,000 45% 90,000
Total .............................................. $ 400,000 $ 230,000
2. The significance of the territorial analysis is that the contribution of territories toward
the net income of the company is revealed. This analysis shows that the segment
margin of East Territory ($176,000) is higher than the segment margin of West
territory ($134,000). The profitability of each territory could not be determined from
the product line segment report given in the problem.
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376 Chapter 10, VanDerbeck
P10-6
1.
Digital Software, Inc.
Territory and Company Income Statements
For the Year Ended December 31, 2013
Company
North South Total
Sales:
Num 1............................................................ $240,000 $160,000 $ 400,000
Num 2............................................................ 180,000 420,000 600,000
Total sales .......................................................... $420,000 $580,000 1,000,000
Less variable costs:
Num 1 (40%* territorial sales dollars) .............. $ 96,000 $ 64,000 $ 160,000
Num 2 (40%* territorial sales dollars) .............. 72,000 168,000 240,000
Total variable costs ............................................. $168,000 $232,000 $ 400,000
Contribution margin ............................................ $252,000 $348,000 $ 600,000
Less direct fixed expenses ................................. 40,000 60,000 100,000
Territorial margin ................................................ $212,000 $288,000 $ 500,000
Less common fixed expenses:
Num 1............................................................ $ 160,000
Num 2............................................................ 140,000
Home office ................................................... 20,000
Total .......................................................... $ 320,000
Net income ......................................................... $ 180,000
2. The direct expenses of one type of segment report may have an allocation base
which differs from another type of segment report; therefore, the direct expenses
change with the type of segment base that is being used. In the problem above, the
segment base changed from products to territories.
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VanDerbeck, Chapter 10 377
P10-7
1.
Western-Southern Publishing Company
Electronic Division: Product and Divisional Income Statements
For the Year Ended December 31, 2013
Accounting Executive Management Total
Sales ............................................ $ 300,000 $ 280,000 $ 260,000 $ 840,000
Variable manufacturing:
Accounting60% .................. $ 180,000 $ 180,000
Executive40% .................... $ 112,000 112,000
Management50% .............. $ 130,000 130,000
Other variable expenses:
5% of sales............................ 15,000 14,000 13,000 42,000
Total ............................................. $ 195,000 $ 126,000 $ 143,000 $ 464,000
Contribution margin...................... $ 105,000 $ 154,000 $ 117,000 $ 376,000
Direct fixed expenses................... 100,000 150,000 100,000 350,000
Product margin............................. $ 5,000 $ 4,000 $ 17,000 $ 26,000
Common fixed expenses* ............ 90,000
Net loss ........................................ $ (64,000)
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378 Chapter 10, VanDerbeck
P10-7 Concluded
2.
Western-Southern Publishing Company
Professional Division
Market Income Statements: Accounting Books
For the Year Ended December 31, 2013
Auditors Controllers Total
Sales............................................ $ 80,000 $ 220,000 $ 300,000
Variable manufacturing costs
(Auditors,60%;Controllers,60% of sales) 48,000 132,000 180,000
Manufacturing margin .................. $ 32,000 $ 88,000 $ 120,000
Other variable expenses:
Auditors5% of sales ............. 4,000 4,000
Controllers5% of sales ......... 11,000 11,000
Contribution margin ..................... $ 28,000 $ 77,000 $ 105,000
Direct fixed expenses .................. 30,000 50,000 80,000
Market margin .............................. $ (2,000) $ 27,000 $ 25,000
Common fixed expenses** .......... 20,000
Net income .................................. $ 5,000
** Total direct expenses ........ $ 100,000
Less direct to market......... 80,000
Common fixed to books .... $ 20,000
3. If the costs for the auditors books cannot be controlled, books for auditors should
be discontinued. Based on the level of sales dollars, the direct fixed expenses are
out of line.
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VanDerbeck, Chapter 10 379
P10-8
1. Amount Percent
Materials........................................................................... $ 4.00
Direct labor ....................................................................... 0.60
Factory overhead ............................................................. 1.00
Administrative expense .................................................... 1.20
Net income ....................................................................... 2.00
$ 8.80 95%
Selling expense (5% of selling price) ............................... .46 5
Selling price per unit ($8.80 0.95) ................................. $ 9.26 100%
2.
Venetian Manufacturing Company
Income Statement
For the Year Ended December 31, 2013
Sales (24,000 units $9.26) ................................................... $ 222,240
Less cost of goods sold:
Materials........................................................................... $ 96,000
Direct labor ....................................................................... 14,400
Factory overhead ............................................................. 24,000 134,400
Gross margin on sales ............................................................ $ 87,840
Operating expenses:
Selling expense ($.46 24,000) ....................................... $ 11,040
Administrative expense .................................................... 28,800
Total operating expenses ................................................. 39,840
Net operating income .............................................................. $ 48,000
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380 Chapter 10, VanDerbeck
P10-9
1. Variable costs are costs that change in direct proportion to changes in the volume
of activity. If the volume of activity is increased by 50%, the costs that would also
increase by 50% are direct materials, direct labor, and indirect materials.
Fixed costs are costs that remain the same in total within a relevant range of activ-
ity. The costs that remained the same in total are depreciation, office salaries, and
advertising.
Semivariable costs are costs that change as production changes, but not propor-
tionately. These costs are indirect labor, sales salaries, and other expenses.
2. Before calculating the break-even point, costs must be separated into their fixed
and variable components.
Change in total costs $477,500 $365,000 $112,500
Change in production = 6,000 4,000 = 2,000
= $56.25 variable cost per unit
Fixed costs = Total costs Variable costs
= $365,000 $225,000 (4,000 units $56.25)
= $140,000
Break-even sales volume in units:
Total fixed costs
X = Selling price per unit Variable cost per unit
$140,000
= $100 $56.25
$140,000
= $43.75
= 3,200 units
Break-even sales volume in dollars: 3,200 units x $100 sales price per unit = $320,000
or:
Total fixed costs
X = 1 (Per unit variable costs Sales price per unit)
$140,000
= 1 ($56.25 $100)
$140,000
= .4375
= $320,000
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VanDerbeck, Chapter 10 381
P10-9 Concluded
3.
$600,000
(Sales)
600
COSTS AND REVENUES (DOLLARS IN THOUSANDS)
Sales Line
500
$477,500
(Total Cost)
400
Break-Even Point
($320,000) $337,500
(Variable Costs)
300
Total Cost Line
200 s
os
tL
Ne
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382 Chapter 10, VanDerbeck
P10-10
x + 2x +0.5x = 10,000
3.5x = 10,000
x = 2,857 cashews
0.5x 2,857 = 1,429 almonds
2x 2,857 = 5,714 walnuts
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VanDerbeck, Chapter 10 383
P10-11
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384 Chapter 10, VanDerbeck
P10-12
1. Pre-tax income = After-tax income
1 Tax rate
= $500,000
1 0.40
= $833,333
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VanDerbeck, Chapter 10 385
P10-13
Cost of special order:
Variable costs:
Manufacturing: ($1,000,000 $400,000) = $600,000
Cost per unit: ($600,000 20,000* units) = $30.00
No additional selling expenses.
*$3,000,000 $150 per unit
Contribution:
Selling price.................................................................. $100.00
Less variable costs ....................................................... 30.00
Contribution margin per unit ......................................... $ 70.00
1,000 units $70.00 = $70,000 increase in operating income.
P10-14
2. Eradicate, Inc. should not pay more than $3.30 per unit because that is the
differential cost if it manufactures its own cans. However, it should give serious
consideration to purchasing the cans if an offer less than $3.30 per unit is tendered
by another company.
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386 Chapter 10, VanDerbeck
P10-15R
= $360,000 + $252,000
[
1 ($10 + $5) $20 ]
= $612,000
1 .75
$612,000
=
.25
= $2,448,000
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VanDerbeck, Chapter 10 387
P10-15R Continued
3. a.
Musketeer Company
Absorption Costing Income Statement
For the Year Ended December 31, 2013
Sales (150,000 $20).......................................................... $ 3,000,000
Less cost of goods sold:
Beginning inventory, 10,000 $12* .............................. $ 120,000
Add cost of goods manufactured, 160,000 $12 .......... 1,920,000
Goods available for sale ................................................ $ 2,040,000
Ending inventory, 20,000** $12 .................................. 240,000
Cost of goods sold at standard.................................. $ 1,800,000
Add unfavorable volume variance, 20,000*** $2 ........ 40,000
Cost of goods sold ............................................................... 1,840,000
Gross margin on sales ......................................................... $ 1,160,000
Selling expenses:
Variable, 150,000 $5 .................................................. $ 750,000
Fixed ............................................................................. 252,000
Total selling expenses ............................................... 1,002,000
Net operating income ........................................................... $ 158,000
*Standard cost of production = Variable cost per unit + Fixed cost per unit
= $10 + $360,000
180,000
= $10 + $2
= $12
**Ending inventory (units)
Beginning inventory ................................................ 10,000
Add production ....................................................... 160,000
Total inventory available for sale ............................ 170,000
Less sales .............................................................. 150,000
Ending inventory ..................................................... 20,000
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388 Chapter 10, VanDerbeck
P10-15R Continued
Musketeer Company
Variable Costing Income Statement
For the Year Ended December 31, 2013
Sales.................................................................................... $ 3,000,000
Direct costs:
Beginning inventory, 10,000 $10................................ $ 100,000
Cost of goods manufactured, 160,000 $10 ................ 1,600,000
Goods available for sale ............................................... $ 1,700,000
Ending inventory, 20,000 $10 .................................... 200,000
Variable manufacturing cost of goods sold ................... $ 1,500,000
Variable selling expense, 150,000 $5 ........................ 750,000
Total direct costs and expenses................................ 2,250,000
Contribution margin ............................................................. $ 750,000
Less period costs:
Fixed factory overhead ................................................. $ 360,000
Fixed selling expense ................................................... 252,000
Total period costs...................................................... 612,000
Net operating income .......................................................... $ 138,000
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VanDerbeck, Chapter 10 389
MINI-CASE 1
1. Since the fixed factory overhead of $5,500,000 is the only expense that can be
manipulated to meet the profit goal, Let X = the maximum amount of fixed factory
overhead that can be released to cost of goods sold while still reaching the profit
goal of $2,200,000:
Sales Variable mfg. Variable S&A Fixed Mfg. Fixed S&A = Target Profit
$13,500,000* - $2,250,000** - $2,520,000*** X - $2,000,000 = $2,200,000
X = $6,730,000 - $2,200,000
X = $4,530,000
Total Fixed Factory Overhead Fixed Factory Overhead Expensed = Fixed Factory
Overhead held back in inventory to meet profit goal
$5,500,000 - $4,530,000 = $970,000
Sales$13,500,000
Cost of Goods Sold:
Beginning inventory$ -0-
Cost of goods manufactured 8,190,910*
Cost of goods available for sale..$8,190,910
Ending inventory..1,410,912 6,779,998
Gross
margin$6,720,002
Selling and Administrative Expenses:
Variable selling and administrative..$2,520,000
Fixed selling and administrative.2,000,000 4,520,000
Net income $2,200,002
* 538,182 units x $15.22 cost per unit
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390 Chapter 10, VanDerbeck
3. The member responsibility in the Credibility section of the IMA Statement of Ethical
Professional Practice that most applies to this situation is:
Disclose all relevant information that could reasonably be expected to influence an
intended users understanding of the reports, analyses, or recommendations.
There is no reason, other than the desire for the bonus, to produce the additional
88,182 units. In fact, producing those additional units will increase inventory
ordering and carrying costs. It is Dillingers responsibility to not agree to the
production of the additional units. If necessary, he should go to the CEO or the
Board of Directors to prevent such action.
4. The problem with the bonus plan is that it is all or nothing based on hitting a
certain number. It should having varying bonus amounts depending upon what level
of profit is achieved.
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VanDerbeck, Chapter 10 391
MINI-CASE 2
Yes, the liquidation sale will result in an extra $62,500 in contribution margin.
2.
Alternative 1Liquidate:
Additional contribution margin ........ = $ 62,500
Alternative 2Reprocess:
Sell at $33 5,000 = $165,000
Less variable cost to reprocess:
5,000 $8 = 40,000
Additional contribution margin
from reprocessing 125,000
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392 Chapter 10, VanDerbeck
INTERNET EXERCISE
1. For the week of 10/8/11, the author found a weekend Internet roundtrip fare of
$199 plus taxes and fees from Atlanta, GA to Tulsa, OK.
2. The best fare for the same itinerary departing two weeks hence, with a Saturday
night stay, was $454 plus taxes and fees. The difference between the two fares was
$255.
3. Yes, Delta is generating positive contribution margin and not merely generating
goodwill, for reasons given in answer 4., below.
4. Most of Deltas costs are fixed relative to the individual passenger, meaning that
they will not increase due to additional passengers. The only strictly variable cost
relative to an individual passenger would be any free beverages and snacks given
out. (Note that jet fuel costs might vary slightly depending upon the number of
passengers.)
5. Most costs would be variable if the flight were the cost object. They would include
jet fuel, the pilots and co-pilots wages, and flight attendants wages. The idea is
that the airline would not incur the cost of jet fuel if the flight were not operated.
Also, the pilots and flight attendants could be assigned to other flights or laid off,
depending upon their seniority.
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