Chapter 1

SHORT ANSWER

1. On what needs do (1) management accounting and (2) financial accounting focus?

ANS: Management accounting focuses on the needs of users inside an organization. Managers need information related to planning, controlling, decision making, and performance evaluation. Their needs are satisfied through the providing of information designed for their particular uses. Financial accounting focuses on the needs of users outside the organization, such as stockholders, creditors, and regulatory agencies. These users require information that is in conformity with generally accepted accounting principles and, thus, is standardized in the form of general purpose financial statements.

DIF:

Moderate

OBJ:

1-1

2. Define value chain and provide a graphic of the interacting flows of information within the value chain.

ANS: The value chain is the set of processes that convert inputs into products and services for a firm's customers. It includes both internal and external processes. It encompasses both upstream and downstream entities. A depiction of the value chain and its information flows is shown in Exhibit 1-6.

DIF:

Moderate

OBJ:

1-5

3. List and explain the four perspectives of the balanced scorecard (BSC).

ANS: Learning and growth perspective--Focuses on using an organizations intellectual capital to adapt to or influence changing customer needs. Internal business perspective--Addresses those things that an organization needs to do well to meet customer needs and expectations.

Customer value perspective--Addresses how well the organization is doing relative to important customer criteria. Financial perspective--Addresses the concerns of stakeholders about profitability and organizational growth.

DIF:

Moderate

OBJ:

1-4

4. Distinguish between lead indicators and lag indicators, and provide an example of each. Which of these indicators is a better guide for strategic planning?

ANS: A lag indicator is an outcome that has resulted from past actions. A common lag indicator is profitability. Other similar performance measures are also acceptable answers. A lead indicator reflects future financial and nonfinancial outcomes. An good example would be the number of employees trained on a new transaction processing system. Lead indicators are better guides for strategic planning, because they provide information on outcomes more quickly than do lag indicators.

DIF:

Moderate

OBJ:

1-4

5. What four areas are covered by the Standards of Ethical Conduct for Certified Management Accountants? How are these areas defined?

ANS: The four areas covered by the Standards of Ethical Conduct for Certified Management Accountants are: competence, confidentiality, integrity, and objectivity. Competence means having the capacity to function in a particular manner.

Confidentiality means having the ability to maintain or keep information undisclosed. Integrity is defined as adherence to a code of moral values. Objectivity is defined as expressing or using facts without distortion by personal feelings or prejudices.

DIF:

Moderate

OBJ:

1-6

1. The branch of accounting that is most concerned with addressing the needs of the firm as a whole is ___________________ accounting

ANS: financial

DIF:

Easy

OBJ:

1-1

2. The branch of accounting that is most concerned with addressing the needs of specific departments of the firm is ___________________ accounting

ANS: managerial

DIF:

Easy

OBJ:

1-1

3. The branch of accounting that serves as a bridge between financial and managerial accounting is __________ accounting.

ANS: cost

DIF:

Easy

OBJ:

1-1

4. The balanced scorecard perspective that focuses on using a firms intellectual capital to adapt to customer needs through product or service innovations is the ___________________ perspective.

ANS: learning and growth

DIF:

Moderate

OBJ:

1-4

5. The balanced scorecard perspective that addresses things that an organization needs to do well to meet customer needs and expectations is the ________________________________ perspective.

ANS: internal business

DIF:

Moderate

OBJ:

1-4

6. The balanced scorecard perspective that addresses how well the organization is meeting specific customer-based criteria is the ____________________________ perspective.

ANS: customer value

DIF:

Moderate

OBJ:

1-4

7. The balanced scorecard perspective that addresses concerns about organizational growth is the ____________________ perspective.

ANS: financial

DIF:

Moderate

OBJ:

1-4

8. The _________________________ restates an organizations strategy into clear and objective performance measures.

ANS: balanced scorecard

DIF:

Easy

OBJ:

1-4

9. Outcomes that have resulted from past actions are also referred to as _________ indicators.

ANS: lag

DIF:

Easy

OBJ:

1-4

10. Data that reflects future financial and non-financial outcomes is referred to as ________ indicators.

ANS: lead

DIF:

Easy

OBJ:

1-4

11. The expression of what an organization wishes to accomplish and how it will serve its customers is contained in the __________________________.

ANS: mission statement

DIF:

Easy

OBJ:

1-2

12. The plan in which an organization indicates how it will fulfill its goals is referred to as a __________.

ANS: strategy

DIF:

Easy

OBJ:

1-2

13. A function or activity in which an organization seeks to excel above its competitors is a ___________________________.

ANS: core competency.

DIF:

Easy

OBJ:

1-2

14. The way in which authority and responsibility are distributed in an organization is _________________________.

ANS: organizational structure

DIF:

Easy

OBJ:

1-5

Chapter 2
COMPLETION

1. Costs that can be conveniently traced to a cost object are referred to as ____________ costs.

ANS: direct

DIF:

Easy

OBJ:

2-1

2. Anything for which management wants to accumulate or collect costs is known as a ______________________.

ANS: cost object

DIF:

Easy

OBJ:

2-1

3. Costs that cannot be conveniently traced to a cost object are known as __________________ costs.

ANS: indirect

4. A cost that remains unchanged in total within the relevant range is known as a _____________ cost.

ANS: fixed

DIF:

Easy

OBJ:

2-1

5. A cost that varies in total in direct proportion to changes in activity is known as a _______________ cost

ANS: variable

DIF:

Easy

OBJ:

2-1

6. The assumed range of activity that reflects the companys normal operating range is referred to as the _____________________________.

ANS: relevant range

DIF:

Easy

OBJ:

2-1

7. A cost that remains constant on a per unit basis within the relevant range is a ________________________ cost.

ANS: variable

DIF:

Easy

OBJ:

2-1

8. A cost that varies inversely with the level of production is known as a _______________ cost.

ANS: fixed

DIF:

Easy

OBJ:

2-1

9. A cost that has both fixed and variable components is known as a __________________ cost.

ANS: mixed

DIF:

Easy

OBJ:

2-1

10. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a ___________ cost.

ANS: step

DIF:

Easy

OBJ:

2-1

11. Another name for inventoriable costs is ______________ costs.

ANS: product

DIF:

Easy

OBJ:

2-2

12. The three stages of production for a manufacturing firm are ______________, ________________, and ______________________.

ANS: raw materials, work in process, finished goods

DIF:

Easy

OBJ:

2-3

13. Costs that are incurred to improve quality by precluding defects and improper processing are referred to as ____________________ costs.

ANS: prevention

DIF:

Moderate

OBJ:

2-4

14. Costs incurred for monitoring or inspecting products are known as ____________________ costs.

ANS: appraisal

DIF:

Moderate

OBJ:

2-4

15. Costs that result from defective units, product returns, and complaints are referred to as _______________________ costs.

ANS: failure

DIF:

Moderate

OBJ:

2-4

PROBLEM

1. Given the following information for McCurley Corporation, prepare the necessary journal entries, assuming that the Raw Material Inventory account contains both direct and indirect material.

a. b. c.

Purchased raw material on account $28,500. Put material into production: $15,000 of direct material and $3,000 of indirect material. Accrued payroll of $90,000, of which 70 percent was direct and the remainder was indirect. Incurred and paid other overhead items of $36,000. Transferred items costing $86,500 to finished goods. Sold goods costing $71,300 on account for $124,700.

d. e. f.

ANS:

a.

RM Inventory A/P

28,500 28,500 15,000 3,000 18,000

b.

WIP Inventory Manufacturing OH RM Inventory

c.

WIP Inventory Manufacturing OH Salaries/Wages Payable

63,000 27,000 90,000 36,000 36,000 86,500 86,500 124,700

d.

Manufacturing OH Cash

e.

FG Inventory WIP Inventory

f.

A/R Sales CGS FG Inventory

124,700 71,300 71,300

DIF:

Moderate

OBJ:

2-4

2. Prepare a Schedule of Cost of Goods Manufactured (in good form) for the Graves Company from the following information for June 20X8:

Inventories Raw Material Work in Process Finished Goods

Beginning $ 6,700 17,700 29,730

Ending $ 8,900 22,650 19,990

Additional information: purchases of raw material were $46,700; 19,700 direct labor hours were worked at $11.30 per hour; overhead costs were $33,300.

ANS:

Graves Company Schedule of Cost of Goods Manufactured For the Month Ended June 30, 20X8

Work in Process (June 1) Raw Mat. (June 1) Purchases Raw Mat. Available Raw Mat. (June 30) Raw Mat. Used Direct Labor (19,700 x $11.30) Manufacturing Overhead Total Manufacturing Costs Total Goods in Process Work in Process (June 30) Cost of Goods Manufactured
$ 6,700 46,700 53,400 (8,900) $ 44,500 222,610 33,300

$ 17,700

300,410 $318,110 (22,650) $295,460

DIF:

Moderate

OBJ:

2-5

3. In June 20X8, the Graves Company has Cost of Goods Manufactured of $296,000; beginning Finished Goods Inventory of $29,730; and ending Finished Goods Inventory of $19,990. Prepare an income statement in good form. (Ignore taxes.) The following additional information is available:

Selling Expenses Administrative Expenses Sales

$ 40,500 19,700 475,600

ANS:

Graves Company Income Statement For the Month Ended June 30, 20X8 Sales Cost of Goods Sold: Finished Goods (June 1) Cost of Goods Mf'd Total Goods Available Finished Goods (June 30) Cost of Goods Sold Gross Margin Operating Expenses: Selling Administrative Total Operating Expenses Income from operations
$40,500 19,700 (60,200) $109,660 $ 29,730 296,000 $325,730 (19,990) (305,740) $169,860 $475,600

DIF:

Moderate

OBJ:

2-5

4. The following information is for the Rayne Manufacturing Company for November.

Inventories Raw Material

Beginning
$17,400

Ending
$13,200

Work in Process Finished Goods

31,150 19,200

28,975 25,500

Direct Labor (21,000 DLH @ $13) Raw Material Purchases Indirect Labor Factory Supplies Used Other Expenses: Depr.-Factory Equipment
17,300 $120,000 11,200 350

Insurance-Office Office Supplies Expense Insurance-Factory Depr. Office Equipment Repair/Maintenance-Factory

2,570 900 1,770 3,500 7,400

Calculate total manufacturing costs, cost of goods manufactured, and cost of goods sold.

ANS:

Manufacturing Costs: Raw Material (Nov. 1) Purchases Raw Material Available Raw Material (Nov. 30) Raw Material Used Direct Labor (21,000 x $13) Overhead: Depr.-Factory Equipment Repairs/Maintenance-Factory
$17,300 7,400 $ 17,400 120,000 $137,400 (13,200) $124,200 273,000

Indirect Labor Insurance-Factory Factory Supplies Used Total Overhead Total Manufacturing Costs

11,200 1,770 350 38,020 $435,220

Cost of Goods Manufactured: Total Manufacturing Costs Work in Process (Nov. 1) Work in Process (Nov. 30) Cost of Goods Manufactured
$435,220 31,150 (28,975) $437,395

Cost of Goods Sold: Finished Goods (Nov. 1) Cost of Goods Manufactured Total Goods Available Finished Goods (Nov. 30) Cost of Goods Sold
$ 19,200 437,395 $456,595 (25,500) $431,095

DIF:

Moderate

OBJ:

2-5

5. From the following information for the Galveston Company, compute prime costs and conversion costs.

Inventories Raw Material Work in Process

Beginning
$ 9,900 44,500

Ending
$ 7,600 37,800

Finished Goods

36,580

61,300

Raw material purchased during the period cost $40,800; overhead incurred and paid or accrued for the period was $21,750; and 23,600 direct labor hours were incurred at a rate of $13.75 per hour.

ANS:

Prime Costs: Raw Material (Beginning) Purchases Raw Material Available Raw Material (Ending) Raw Material Used Direct Labor Prime Costs
(23,600 x $13.75) $ 9,900 40,800 $50,700 (7,600) $ 43,100 324,500 $367,600

Conversion Costs: Direct Labor (Above) Overhead Conversion Costs

$324,500 21,750 $346,250

DIF:

Moderate

OBJ:

2-5

6. The following miscellaneous data has been collected for a manufacturing company for the most recent year-end:

Inventories:

Beginning

Ending

Raw material Work in process Finished goods Costs recorded during the year: Purchases of raw material Direct labor Cost of goods sold

$50,000 40,000 60,000

$55,000 45,000 50,000

$195,000 150,000 595,000

Required: Prepare a cost of goods manufactured statement showing how all unknown amounts were determined.

ANS:

BEGIN WIP + DM (1) + DC + OH - END WIP = COGM (2)

$ 40,000 190,000 150,000 ? (45000) $585,000 = $250,000

(1)

BEG RM + PURCHASE - END RM

$ 50,000 195,000

(55,000)

= DM

$190,000

(2)

BEGIN FG + COGM - END FG = COGS

$ 60,000 ? (50,000) $595,000 = $585,000

DIF:

Moderate

OBJ:

2-5

7. The following information was taken from the records of the Enterprise Corporation for the month of July. (There were no inventories of work in process or finished goods on July 1.)

Units Sales during month Manufacturing costs for month: Direct material Direct labor Overhead costs applied Overhead costs under-applied Inventories, July 31: Work in process Finished goods
1,000 2,000 8,000

Cost
$ ?

32,000 20,000 15,000 800

? ?

Indirect manufacturing costs are applied on a direct labor cost basis. The under-applied balance is due to seasonal variations and will be carried forward. The following cost estimates have been submitted for the work in process inventory of July 31: material, $3,000; direct labor, $2,000.

Required:

a.

Determine the number of units that were completed and transferred to finished goods during the month. Complete the estimate of the cost of work in process on July 31. Prepare a manufacturing statement for the month. Determine the cost of each unit completed during the month. Determine the total amount debited to the Overhead Control accounts during the month.

b. c. d. e.

ANS:

a. b.

8,000 SOLD + 2,000 ENDING FG = 10,000 UNITS DM DC OH

$3,000 2,000 1,500 $6,500 $15,000 $20,000 $32,000 20,000 15,000 (6,500) $60,500 $ 60,500 x $2,000

c.

DM DL OH - END WIP = COGM

d.

COGM/COMPLETE UNITS =

= $6.05/UNIT

10,000 UNITS e. OH APPLIED + OH UNDERAPPLIED ACTUAL OH

$15,000 800 $15,800

DIF:

Moderate

OBJ:

2-5

8. The Magnolia Forest Corporation had the following account balances:

Raw Material

Manufacturing Overhead

Bal. 1/1 Debits

30,000 420,000

Credits

Debits

385,000

Credits

Bal. 12/31

60,000

Work in Process Factory Wages Payable

Bal. 1/1 Direct material

70,000 320,000 110,000

Credits

810,000

Debits

179,000

Bal.1/1 Credits

10,000 175,000

Overhead

400,000

Bal. 12/31

6,000

Bal. 12/31

Finished Goods

Cost of Goods Sold

Bal. 1/1

40,000

Credits ?

Debits

Debits

Bal. 12/31

130,000

Required: a. b. c. d. e. What was the cost of raw material put into production during the year? How much of the material from question 1 consisted of indirect material? How much of the factory labor cost for the year consisted of indirect labor? What was the cost of goods manufactured for the year? What was the cost of goods sold for the year (before considering under- or overapplied overhead)? If overhead is applied to production on the basis of direct material, what rate was in effect during the year? Was manufacturing overhead under- or overapplied? By how much? Compute the ending balance in the Work in Process Inventory account. Assume that this balance consists entirely of goods started during the year. If $32,000 of this balance is direct material cost, how much of it is direct labor cost? Manufacturing overhead cost?

f.

g. h.

ANS:

a. b. c. d. e. f. g.

$30,000 + $420,000 - $60,000 = $390,000 $390,000 - $320,000 DM = $70,000 $175,000 - $110,000 DL = $65,000 $810,000 $40,000 + $810,000 - $130,000 = $720,000 $400,000/$320,000 = 125% DM Cost OH Actual OH Applied OH Overapplied
$385,000 400,000 $ 15,000 $ 70,000 320,000 110,000 400,000 (90000) $810,000

h.

Beginning WIP + DM + DC + OH - Ending WIP = COGM

DM DL (To Balance) FOH (1) End WIP

$32000 18,000 40,000 $90,000

(1) $32,000 x 125% = $40,000

DIF:

Moderate

OBJ:

2-5

CHAPTER 3
COMPLETION

1. In a(n) _________ cost system, factory overhead is assigned directly to products and services.

ANS: actual

DIF:

Easy

OBJ:

3-1

2. In a(n) _________ cost system, factory overhead is assigned to an overhead control account and then allocated to products and services.

ANS: normal

DIF:

Easy

OBJ:

3-1

3. The dollar amount of overhead assigned to work-in-process inventory using a predetermined rate is known as __________________ overhead.

ANS: applied

DIF:

Easy

OBJ:

3-1

4. If actual overhead exceeds applied overhead, factory overhead is said to be ______________.

ANS: underapplied

DIF:

Easy

OBJ:

3-2

5. If actual overhead is less than applied overhead, factory overhead is said to be ______________.

ANS: overapplied

DIF:

Easy

OBJ:

3-2

6. If underapplied or overapplied factory overhead is material, it is prorated among ______________________, _________________________, and _______________________.

ANS: Work in Process Inventory, Finished Goods Inventory, Cost of Goods Sold

DIF:

Easy

OBJ:

3-2

7. If underapplied or overapplied factory overhead is immaterial, it is charged to _______________________.

ANS: Cost of Goods Sold

DIF:

Easy

OBJ:

3-2

8. The performance measure that considers routine interruptions is known as ___________________ capacity.

ANS: practical

DIF:

Moderate

OBJ:

3-3

9. A performance measure that encompasses a firms long-run average activity is referred to as __________________ capacity.

ANS: normal

DIF:

Moderate

OBJ:

3-3

10. A performance measure that assumes all production factors are operating perfectly is referred to as ___________________ capacity.

ANS: theoretical

DIF:

Moderate

OBJ:

3-3

11. A performance measure that is short-run in nature and represents a firms anticipated activity level for the upcoming period is ____________________ capacity.

ANS: expected

DIF:

Moderate

OBJ:

3-3

12. Consider the regression equation y = a + bX. The portion of the equation that represents fixed costs is ________.

ANS: a

DIF:

Easy

OBJ:

3-4

13. Consider the regression equation y = a + bX. The portion of the equation that represents the variable rate is ________.

ANS: b

DIF:

Easy

OBJ:

3-4

14. Consider the regression equation y = a + bX. The portion of the equation that represents the activity base is ________.

ANS: X

DIF:

Easy

OBJ:

3-4

15. An observation that is found outside the relevant range is referred to as a(n) ______________.

ANS: outlier

DIF:

Moderate

OBJ:

3-4

16. When a relationship between several independent variables and one dependent variable is analyzed, the regression is referred to as _____________. ANS: multiple

DIF:

Moderate

OBJ:

3-4

17. When a relationship between one independent variable and one dependent variable is analyzed, the regression is referred to as _____________.

ANS: simple

DIF:

Moderate

OBJ:

3-4

18. A __________________________ is a planning document that presents expected variable and fixed overhead costs at different activity levels.

ANS: flexible budget

DIF:

Easy

OBJ:

3-5

19. The costing technique that treats manufacturing overhead as a period cost is referred to as _________________ costing.

ANS: variable or direct

DIF:

Easy

OBJ:

3-6

20. The costing technique that treats all manufacturing costs as inventoriable is referred to as _________________ costing.

ANS: absorption or full

DIF:

Easy

OBJ:

3-6

21. Sales less variable cost of goods sold is referred to as _________________________________.

ANS: product contribution margin

DIF:

Moderate

OBJ:

3-6

22. Temporary profits that result when absorption costing is used and production exceeds sales are referred to as _________________________________.

ANS: phantom profits

DIF: PROBLEM

Easy

OBJ:

3-6

1. Hume Corporation has the following data for the current year:

Direct Labor Direct Material Actual Overhead Applied Overhead Raw Material Work in Process Finished Goods Cost of Goods Sold

$220,000 137,800 320,000 395,000 51,394 101,926 111,192 250,182

What is the amount of under- or overapplied overhead? Prepare the necessary journal entry to dispose of under- or overapplied overhead.

ANS:

Applied Overhead Actual Overhead

$395,000 320,000 $ 75,000

overapplied

WIP $101,926/$463,300=.22 FG $111,192/$463,300=.24 CGS $250,182/$463,300=.54

x x x

$75,000 = $16,500 $75,000 = $18,000 $75,000 = $40,500

Manufacturing Overhead Work in Process Finished Goods Cost of Goods Sold

$75,000 $16,500 18,000 40,500

DIF:

Moderate

OBJ:

3-2

2. Leon Corporation has the following data relating to its power usage for the first six months of the current year.

Month Jan. Feb. Mar. Apr. May June

Usage 500 550 475 425 450 725

(Kw)Cost $450 455 395 310 380 484

Assume usage is within the relevant range of activity.

Required:

a. Using the high-low method, compute the cost formula.

b. Leon Corporation estimates its power usage for July at 660 watts. Compute the total

power cost for July.

ANS:

Usage High Low

725 425 300

Cost
$484 310 $174

$174/300 = $.58 x 425 = $246.50 Total variable cost

$310 (TC) - $246.50 (TVC) = $63.50 Fixed cost

TC = $63.50 + $0.58(VC)

At 660 kw, the total cost would be

TC = $63.50 + $0.58(660 kwh) TC = $446.30

DIF:

Moderate

OBJ:

3-4

3. Miller Corporation applies overhead at the rate of 70 percent of direct labor. Miller incurred $450,000 of direct labor during the current year. Miller incurred actual overhead of $367,000.

(a) Compute the amount of under- or overapplied overhead for Miller Corporation for the current year

(b) Prepare the necessary journal entry to dispose of the under- or overapplied overhead (assuming that the amount is immaterial).

ANS:

a.

$450,000 x 70% =

$315,000 applied overhead 367,000 actual overhead $ 52,000 underapplied overhead

b.

Cost of Goods Sold Manufacturing Overhead

$52,000 $52,000

DIF:

Easy

OBJ:

3-2

4. Action Trainers provides a personalized training program that is popular with many companies. The number of programs offered over the last five months, and the costs of offering these programs are as follows:

Programs Offered Jan Feb Mar April May

55 45 60 50 75

Costs Incurred
$15,400 14,050 18,000 14,700 19,000

a.

Using the high-low method, compute the variable cost per program and the total fixed cost per month. Using the least squares regression method, compute the variable cost per program and the total fixed cost per month.

b.

ANS:

a.

Variable cost per program:

Change in costs Change in activity

$19,000 - $14,050 = $165 per program 75 - 45

Fixed cost: At high activity = $19,000 - (75 x $165) = $6,625 per month At low activity = $14,050 - (45 x $165) = $6,625 per month

b.

x
55 45 60 50 75 285

y
$15,400 14,050 18,000 14,700 19,000 $81,150

xy
$ 847,000 632,250 1,080,000 735,000 1,425,000 $4,719,250

x2
3,025 2,025 3,600 2,500 5,625 16,775

= 57

= 16,230

b = 4,719,250 - (5 b = 176.79 a = 16,230 - (176.79 a = 6,152.97

57

16,230)

(16,775 - (5

57 )

57)

DIF:

Moderate

OBJ:

3-4

5. The facility manager of Bello Corporation asked the systems analyst for information to help in forecasting handling costs. The following printout was generated using the least squares regression method.

Fixed cost Variable cost per unit Activity variable

$2550 1.85 units of production volume

a.

Using the information from the printout, develop a cost function that can be used to estimate handling costs at different volume levels. Estimate handling costs if expected production for next month is 20,000 units.

b.

ANS:

a.

Total handling costs = $2,550 + $1.85 (unit production) Total handling costs = $2,550 + ($1.85 x 20,000) = $39,550

b.

DIF:

Moderate

OBJ:

3-4

6. The McAlister Co. has the following information available regarding costs and revenues for two recent months. Selling price is $20.

March Sales revenue Cost of goods sold Gross profit Less other expenses: Advertising Utilities Salaries and commissions Supplies (bags, cleaning supplies etc.) Depreciation Administrative costs Total Net income
$ 600 4,200 3,200 320 2,300 1,900 -12,520 $11,480 $ $60,000 -36,000 $24,000

April
$100,000 - 60,000 $ 40,000

600 5,600 4,000 400 2,300 1,900 -14,800 $25,200

Required:

a.

Identify each of the company's expenses (including cost of goods sold) as being either variable, fixed, or mixed. By use of the high-low method, separate each mixed expense into variable and fixed

b.

elements. State the cost formula for each mixed expense. c. d. What is the total cost equation? Estimate total cost if sales = $75,000.

ANS:

a. Cost COGS Advertising Utilities Salaries, Etc. 3,200/60,000=5.3% Supplies Depreciation Administration

April
36,000/60,000=60% 600 4,200/60,000= 7% 4,000/100,000=4%

May
60,000/100,000=60% 600 5,600/100,000=5.6% M

Behavior
V F M

320/60,000 .53% 2,300 1,900

400/100,000=.4% 2,300 1,900

M F F

b.

Utilities

$1,400 $40,000

= 3.5% Sales

FC = $4,200 - (3.5% x 60,000) = $2,100

Salaries

$800/$40,000 = 2% Sales

FC = $3,200 - (2% x 60,000) = $2,000

Supplies

$80/$40,000 = .2% sales

FC = $320 - (.2% x $60,000) = $200

c.

Total FC = $600 + $2,300 + $1,900 + $2,100 + $2,000 + $200 = $9,100 Total VC = 60% + 3.5% + 2% + .2% = 65.7% sales TC = $9,100 + 65.7% sales

d.

TC = $9100 + (65.7% x $75,000) = $58,375

DIF:

Moderate

OBJ:

3-4

7. Browning Company owns two luxury automobiles that are used by employees on company business. Mileage and expenses, excluding depreciation, by quarters for the most recent year are presented below:

Quarter First Second Third Fourth

Mileage
3,000 3,500 2,000 3,500 12,000

Expenses
$ 550 560 450 600 $2,160

Required: Determine the variable cost per mile (nearest tenth of a cent) and the fixed costs per quarter, using the method of least squares.

ANS:

X 1ST 2ND 3RD 4TH

3,000 3,500 2,000 3,500 12,000

Y
$550 560 450 600 $2,160

XY
$1,650,000 1,960,000 900,000 2,100,000 $6,610,000

X2
9,000,000 12,250,000 4,000,000 12,250,000 37,500,000

_ X = 12,000/4 = 3,000/miles per quarter _ Y = $2,160/4 = $540

b = $6,610,000 - 4 (3,000) ($540) = $130,000 = $.087/mile $37,500,000 - 4 (3,000) (3,000) $1,500,000

a = $540 - ($.087) (3,000) = $279

TC = $279 + .087/mile

DIF:

Moderate

OBJ:

3-4

8. On December 30, a fire destroyed most of the accounting records of the Adams Division, a small oneproduct manufacturing division that uses standard costs and flexible budgets. All variances are written off as additions to (or deductions from) income; none are pro-rated to inventories. You have the task of reconstructing the records for the year. The general manager informs you that the accountant has been experimenting with both absorption costing and variable costing.

The following information is available for the current year:

a. b. c. d. e. f. g. h. i.

Cash on hand, December 31 Sales Actual fixed indirect manufacturing costs Accounts receivable, December 31 Standard variable manufacturing costs per unit Variances from standard of all variable manufacturing costs Operating income, absorption-costing basis Accounts payable, December 31 Gross profit, absorption costing at standard (before deducting variances) Total liabilities Unfavorable budget variance, fixed manufacturing costs Notes receivable from chief accountant Contribution margin, at standard (before deducting variances) Direct-material purchases, at standard prices Actual selling and administrative costs (all fixed)

$10 $128,000 21,000 20,000 1 $5,000 $14,400 18,000

22,400 100,000 1,000 4,000 48,000 50,000 6,000

j. k. l. m. n. o.

Required:

Compute the following items (ignore income tax effects).

1.

Operating income on a variable-costing basis.

2. 3. 4.

Number of units sold. Number of units produced. Number of units used as the denominator to obtain fixed indirect cost application rate per unit on absorption-costing basis. Did inventory (in units) increase or decrease? Explain. By how much in dollars did the inventory level change (a) under absorption costing, (b) under variable costing? Variable manufacturing cost of goods sold, at standard prices. Manufacturing cost of goods sold at standard prices, absorption costing.

5. 6.

7. 8.

ANS:

1.

CM - FC Operating Income (STD) - unfavorable variances Operating Income (actual)

48,000 (26,000) $22,000 (6,000) $16,000

Actual fix mfg - unfavorable VAR fix cost @STD

$21,000 (1,000) $20,000

2.

Sales - CM = VC

$128,000 (48,000) $ 80,000 /$1 UNIT = 80,000 units sold

3.

Sales - GM COGS

$128,000 (22,400) $105,600 /80,000 = $1.32

Difference in OI = (P - S) fix mfg/unit $(1,600) = (P - 80,000) $.32 P = 75,000

4.

OI - absorption cost = $22,400 - $6,000 =

$ 16,400 (14,400)

OI STD OI ACT UNF UNF FAV

variances - other VAR VOL VAR

2,000 6,000

4,000

$4,000 F = (75,000 - X) $.32 X = 62,500 units produced

5.

Inventory decreased. OI absorption is less than OI variable.

6.

Absorption cost 5,000 units $1.32 = $6,600 Variable cost 5,000 units $1 = $5,000

7.

80,000 units $1 = $80,000

8.

80,000 $1.32 = $105,600

DIF:

Difficult

OBJ:

3-7

9. Sports Innovators has developed a new design to produce hurdles that are used in track and field competition. The company's hurdle design is innovative in that the hurdle yields when hit by a runner and its height is extraordinarily easy to adjust. Management estimates expected annual capacity to be 90,000 units; overhead is applied using expected annual capacity. The company's cost accountant predicts the following 2001 activities and related costs:

Standard unit variable manufacturing costs Variable unit selling expense Fixed manufacturing overhead Fixed selling and administrative expenses Selling price per unit Units of sales Units of production Units in beginning inventory

$12 $5 $480,000 $136,000 $35 80,000 85,000 10,000

Other than any possible under- or overapplied fixed overhead, management expects no variances from the previous manufacturing costs. Under- or overapplied fixed overhead is to be written off to Cost of Goods Sold.

Required: 1. Determine the amount of under- or overapplied fixed overhead using (a) variable costing and (b) absorption costing.

2.

Prepare projected income statements using (a) variable costing and (b) absorption costing.

3.

Reconcile the incomes derived in part 2.

ANS:

1.

a.

$0

b.

(90,000 - 85,000) $5.33 = $26,650 U

2.

a.

Sales (80,000 $35) = - VC (80,000 $17) = CM - FC Income before income taxes

$2,800,000 (1,360,000) $1,440,000 (616,000) $ 824,000

b.

Sales (80,000 $35) - COGS ($17.33 80,000) GM - S&A Income before income (STD) - VOL VAR Income before income taxes

$2,800,000 (1,386,400) $1,413,600 (536,000) $ 877,600 (26,650) $ 850,950

3.

5,000 $5.33 = $26,650.

DIF:

Moderate

OBJ:

3-7

10. Sherrill Corporation produces a single product. The following is a cost structure applied to its first year of operations.

Sales price Variable costs: SG&A Production Fixed costs (total cost incurred for the year): SG&A Production

$15 per unit

$2 per unit $4 per unit

$14,000 $20,000

During the first year, Sherrill Corporation manufactured 5,000 units and sold 3,800. There was no beginning or ending work-in-process inventory.

a.

How much income before income taxes would be reported if Stanley uses absorption costing? How much income before income taxes would be reported if variable costing was used? Show why the two costing methods give different income amounts.

b.

c.

ANS:

a.

Income under absorption costing is: Sales $15 3,800 = COGS 3,800 ($4 + $20,000/5,000) GM Oper. Exp. VSE $2 3,800 = FSE
$ 7,600 14,000 (21,600) $57,000 30,400 $26,600

Absorption income before income taxes

$ 5,000

b.

Income under variable costing: CMU = SP - VProd.Cost - VSGA = $15 - $4 - $2 = $9 Vol. sold 3,800 CM Less: FC - Production SG&A Variable costing income before income taxes
$34,200 (20,000) (14,000) $ 200

c.

Reason for difference in income: Fixed costs expensed under absorp. costing COGS 3,800 $20,000/5,000 units Fixed SG&A Total Fixed costs expensed under variable costing Fixed SG&A Fixed Production Total FC Difference in FC expensed under two methods
$14,000 20,000 $34,000 $ 4,800 $15,200 14,000 $29,200

This is also the difference in income amounts.

DIF:

Moderate

OBJ:

3-7

11. Trent Johnson Company used least squares regression analysis to obtain the following

output:

Personnel Department Cost Explained by Number of Employees

Constant

$5,800 $630

Standard error of Y estimate R - squared No. of observations Degrees of freedom 0.8924 20

18

X coefficient(s) Standard error of coefficient(s)

1.902 0.0966

a. What is the total fixed cost?

b. What is the variable cost per employee?

c. Prepare the linear cost function.

d. What is the coefficient of determination? Comment on the goodness of fit.

ANS: a. The constant or intercept is the total fixed cost of $5,800.

b. The variable cost per employee is the X coefficient of $1.902.

c. Personnel department cost = $5,800 + $1.902 * (number of employees).

d. The coefficient of determination is the R - squared of 0.8924. This represents a very high goodness of fit. The closer to 1.0, the better the cost driver explains the dependent variable. Therefore, the conclusion can be drawn that there is a significant relationship between the cost of the personnel department and the number of employees.

DIF:

Difficult

OBJ:

3-7

CHAPTER 4
COMPLETION

1. An activity that a customer is willing to pay for and increases the worth of a product is referred to as a _______________________ activity.

ANS: value-added

DIF:

Easy

OBJ:

5-1

2. An activity that does not increase the value of a product for a customer is referred to as a _______________________ activity.

ANS: non-value added

DIF:

Easy

OBJ:

5-1

3. An activity that is essential for business operations but does not add value to a product is referred to as a __________________________ activity.

ANS: business value-added

DIF:

Easy

OBJ:

5-1

4. A chart that indicates each step in a production process is referred to as a ____________________.

ANS: process map

DIF:

Easy

OBJ:

5-1

5. A series of activities that when performed together satisfy a specific objective is referred to as a _____________.

ANS: process

DIF:

Easy

OBJ:

5-1

6. The actual time taken to perform all necessary manufacturing functions in a process is referred to as ______________________.

ANS: processing or service time

DIF:

Easy

OBJ:

5-2

7. The sum of value-added processing time plus non-value added time equals __________________________.

ANS: cycle (lead) time

DIF:

Moderate

OBJ:

5-2

8. The proportion of value added processing time to total cycle time equals ________________________________.

ANS: manufacturing cycle efficiency (MCE).

DIF:

Easy

OBJ:

5-2

9. Costs that are associated with the production of a single unit of a product are referred to as ________________________.

ANS: unit-level costs

DIF:

Easy

OBJ:

5-3

10. Costs that are associated with the production of a group of similar products at the same time are referred to as ________________________.

ANS: batch-level costs

DIF:

Easy

OBJ:

5-3

11. Costs that support a product type or process are referred to as ________________________.

ANS: product/process level costs

DIF:

Easy

OBJ:

5-3

12. Costs that support an overall production or service process are referred to as ________________________.

ANS: organizational or facility costs

DIF:

Easy

OBJ:

5-3

13. A segment of a production or service process for which management wants a separate report is referred to as a(n) ______________________________.

ANS: activity center

DIF:

Moderate

OBJ:

5-4

14. A(n) __________________________ measures the resources consumed by a manufacturing process.

ANS: activity driver

DIF:

Moderate

OBJ:

5-4

15. _____________________________ refers to the number of different processes through which a product flows.

ANS: Process complexity

DIF:

Easy

OBJ:

5-5

PROBLEM

1. Heirloom Company. manufactures hand-made pine storage boxes for a variety of clients. As production manager, you have developed the following value chart:

Operation Receiving materials Storing materials Handling materials Cutting/measuring materials Assembling materials Building boxes Attaching hinges Inspection

Average Number of Days 1 2 3 6 4 7 2 1

a. b. c.

Determine the value-added activities and their total time. Determine the non-value-added activities and their total time. Calculate the manufacturing cycle efficiency.

ANS:

a.

Value-added activities Cutting/measuring materials Assembling materials Building boxes Attaching hinges Total production time (days)

Time 6 4 7 2 19

b.

Non-value-added activities Receiving Storing Handling Inspection Total nonproduction time (days)

Time 1 2 3 1 7

c.

Total lead time = 19 + 7 = 26 days MCE = 19/26 = 73.1%

DIF:

Easy

OBJ:

5-2

2. McMahon Company would like to institute an activity-based costing system to price products. The company's Purchasing Department incurs costs of $550,000 per year and has six employees. Purchasing has determined the three major activities that occur during the year.

Allocation

# of

Total

Activity Issuing purchase orders Reviewing receiving reports Making phone calls

Measure # of purchase orders # of receiving reports # of phone calls

People 1 2 3

Cost $150,000 $175,000 $225,000

During the year, 50,000 phone calls were made in the department; 15,000 purchase orders were issued; and 10,000 shipments were received. Product A required 200 phone calls, 150 receiving reports, and 50 purchase orders. Product B required 350 phone calls, 400 receiving reports, and 100 purchase orders.

a.

Determine the amount of purchasing department cost that should be assigned to each of these products. Determine purchasing department cost per unit if 1,500 units of Product A and 3,000 units of Product B were manufactured during the year.

b.

ANS:

a.

$150,000/15,000 = $10 per purchase order $175,000/10,000 = $17.50 per receiving report $225,000/50,000 = $4.50 per phone call

Product A 50 purchase orders $10 100 purchase orders $10 150 receiving reports $17.50 400 receiving reports $17.50 200 phone calls $4.50 350 phone calls $4.50 Total cost
$4,025 900 2,625 $ 500

Product B

$1,000

7,000

1,575 $9,575

b.

Product A= $4,025/1,500 = $2.68 per unit Product B= $9,575/3,000 = $3.19 per unit

DIF:

Moderate

OBJ:

Chapter 5
COMPLETION 1. A company that manufactures sugar will use a _____________________ costing system to track production costs

ANS: process

DIF:

Easy

OBJ:

4-1

2. A company that manufactures custom bridal gowns will use a _______________ costing system to track production costs

ANS: job-order

DIF:

Easy

OBJ:

4-1

3. A company that manufactures large quantities of homogeneous goods will normally use a _________________ costing system.

ANS: process

DIF:

Easy

OBJ:

4-1

4. A company that manufactures small quantities of identifiable products will use a ________________ costing system.

ANS: job order

DIF:

Easy

OBJ:

4-1

5. Three methods of job-cost valuation are normal, standard, and _________________.

ANS: actual

DIF:

Easy

OBJ:

4-1

6. In a normal job order costing system, factory overhead is applied using ___________ rates times ________ input.

ANS: predetermined;actual

DIF:

Easy

OBJ:

4-1

7. In a standard job order costing system, factory overhead is applied using ____________ rates times _______ input.

ANS: predetermined;standard

DIF:

Moderate

OBJ:

4-1

8. When a job is begun, the first document in the job order process is the ____________________.

ANS: materials requisition

DIF:

Easy

OBJ:

4-4

9. When raw materials are placed into production, the ______________________ account is debited

ANS: Work in process

DIF:

Easy

OBJ:

4-4

10. When indirect materials are added to a job, the __________________________ account is debited.

ANS: manufacturing overhead

DIF:

Easy

OBJ:

4-4

11. When manufacturing overhead is applied to a job in process, the __________________ is debited

ANS: work in process

DIF:

Easy

OBJ:

4-4

12. When manufacturing overhead is applied to a job in process, the _______________ account is credited.

ANS: manufacturing overhead

DIF:

Moderate

OBJ:

4-4

13. The document that contains all information about the costs of a specific job is a ___________________.

ANS: job order cost sheet

DIF:

Easy

OBJ:

4-4

14. When indirect labor is recorded for a job in process, ___________________________ is debited.

ANS: manufacturing overhead

DIF:

Easy

OBJ:

4-4

15. When production is completed on a job, finished goods are transferred to the ____________________________ account.

ANS: Finished Goods Inventory

DIF:

Easy

OBJ:

4-4

16. The difference between a standard and an actual quantity, price, or rate is a(n)________________.

ANS: variance

DIF:

Easy

OBJ:

4-6

17. If a substandard product can be reworked, it is known as a ______________.

ANS: defect

DIF:

Easy

OBJ:

4-8

18. If a substandard product cannot be reworked, it is known as ______________.

ANS: spoilage

DIF:

Easy

OBJ:

4-8

19. Underapplied factory overhead that is immaterial in amount is closed to ______________________ at year end.

ANS: Cost of Goods Sold

DIF:

Easy

OBJ:

4-6

20. Underapplied factory overhead that is material in amount is closed to _______________, ______________, and ______________________ at year end.

ANS: Work in Process, Finished Goods Inventory,Cost of Goods Sold

DIF: PROBLEM

Easy

OBJ:

4-6

1. Prepare the necessary journal entries from the following information for Anderson Company, which uses a perpetual inventory system.

a. b.

Purchased raw material on account, $56,700. Requisitioned raw material for production as follows: direct material-80 percent of purchases; indirect material-15 percent of purchases. Direct labor wages of $33,100 are accrued as are indirect labor wages of $12,500. Overhead incurred and paid for is $66,900. Overhead is applied to production based on 110 percent of direct labor cost. Goods costing $97,600 were completed during the period. Goods costing $51,320 were sold on account for $77,600.

c. d. e. f. g.

ANS:

a.

Raw Material Inventory Accounts Payable

56,700 56,700 45,360 8,505 53,865 33,100 12,500 45,600 66,900 66,900 36,410 36,410 97,600 97,600 51,320 51,320 77,600 77,600

b.

Work in Process Inventory Manufacturing Overhead Raw Material Inventory

c.

Work in Process Inventory Manufacturing Overhead Wages Payable

d.

Manufacturing Overhead Cash

e.

Work in Process Inventory Manufacturing Overhead

f.

Finished Goods Inventory Work in Process Inventory

g.

Cost of Goods Sold Finished Goods Inventory Accounts Receivable Sales

DIF:

Easy

OBJ:

4-4

2. Richards Company employs a job order costing system. Only three jobs-Job #205, Job #206, and Job #207-were worked on during January and February. Job #205 was completed February 10; the other two jobs were still in production on February 28, the end of the company's operating year. Job cost sheets on the three jobs follow:

Job Cost Sheet Job #205 January costs incurred: Direct material Direct labor Manufacturing overhead
$16,500 13,000 20,800 $ 9,300 7,000 11,200 $

Job #206

Job #207

February costs incurred: Direct materials Direct labor Manufacturing overhead

4,000 ? 8,200 6,000 ? 21,300 10,000 ?

The following additional information is available:

a.

Manufacturing overhead is assigned to jobs on the basis of direct labor cost.

b.

Balances in the inventory accounts at January 31 were as follows:

Raw Material Work in Process Finished Goods

$40,000 ? 85,000

Required: a. Prepare T-accounts for Raw Material, Work in Process Inventory, Finished Goods Inventory, and Manufacturing Overhead Control. Enter the January 31 inventory balances given previously; in the case of Work in Process Inventory, compute the January 31 balance and enter it into the Work in Process Inventory T-account.

b.

Prepare journal entries for February as follows:

1.

Prepare an entry to record the issue of materials into production and post the entry to appropriate T-accounts. (In the case of direct material, it is not necessary to make a separate entry for each job.) Indirect materials used during February totaled $4,000.

2.

Prepare an entry to record the incurrence of labor cost and post the entry to appropriate T-accounts. (In the case of direct labor, it is not necessary to make a separate entry for each job.) Indirect labor cost totaled $8,000 for February.

3.

Prepare an entry to record the incurrence of $19,000 in various actual manufacturing overhead costs for February (credit Accounts Payable).

c.

What apparent predetermined overhead rate does the company use to assign overhead cost to jobs? Using this rate, prepare a journal entry to record the application of overhead cost to jobs for February (it is not necessary to make a separate entry for each job). Post this entry to appropriate T-accounts.

d.

As stated earlier, Job #205 was completed during February. Prepare a journal entry to show the transfer of this job off of the production line and into the finished good warehouse. Post the entry to appropriate T-accounts.

e.

Determine the balance at February 28 in the Work in Process inventory account. How much of this balance consists of the cost of Job #206? Job #207?

ANS: a.

Raw Materials Inventory BB 40,000

Work in Process Inventory BB 77,800 29,500 60,700

31,500

20,000 32,000 98,600

Finished Goods Inventory BB 85,000 60,700

Manufacturing Overhead Control 4,000 8,000 19,000 32,000

b.

1.

Work in Process Inventory Manufacturing Overhead Control Raw Materials Inventory

29,500 4,000

33,500

2.

Work in Process Inventory Manufacturing Overhead Control Payroll

20,000 8,000 28,000

3.

Manufacturing Overhead Control Accounts Payable

19,000 19,000

c.

160%/DL COST $20,000 = $32,000

Work in Process Inventory Manufacturing Overhead Control

32,000 32,000

d.

Finished Goods Inventory Work in Process Inventory

60,700 60,700

e.

WIP INV Job 206 = $51,300

98,600

Job 207 = $47,300

JOB #205 Beg WIP Direct Mat Direct Labor Factory Overhead
$50,300 0 4,000 6,400 $60,700

JOB #206
$27,500 8,200 6,000 9,600 $51,300

JOB #207
$21,300 10,000 16,000 $47,300

DIF:

Moderate

OBJ:

4-4

3. The Pittman Company manufactures special purpose machines to order. On January 1, there were two jobs in process, #705 and #706. The following costs were applied to these jobs in the prior year:

Job No. 705 Direct material Direct labor Overhead Total

$ 5,000 4,000 4,400 $13,400

706
$ 8,000 3,000 3,300 $14,300

During January, the following transactions took place:

* *

Raw material costing $40,000 was purchased on account. Jobs #707, #708, and #709 were started and the following costs were applied to them:

JOB 707 Direct materials Direct labor

$3,000 5,000

708
$10,000 6,000

709
$7,000 4,000

Job #705 and Job #706 were completed after incurring additional direct labor costs of $2,000 and $4,000, respectively Wages paid to production employees during January totaled $25,000. Depreciation for the month of January totaled $10,000. Utilities bills in the amount of $10,000 were paid for operations during December.

* * *

* * *

Utilities bills totaling $12,000 were received for January operations. Supplies costing $2,000 were used. Miscellaneous overhead expenses totaled $24,000 for January.

Actual overhead is applied to individual jobs at the end of each month using a rate based on actual direct labor costs.

Required:

a.

Determine the January overhead rate.

b.

Determine the cost of each job.

c.

Prepare a statement of cost of goods manufactured.

ANS:

a. MOH $4,000 + $10,000 + $12,000 + $2,000 + $24,000 =

$52,000 = $2.4762/dl cost $21,000 dl cost

b . DM DL MOH

JOB #705
$ 2,000 4,952

JOB #706
$ 4,000 9,905

JOB #707
$ 3,000 5,000 12,381

JOB #708
$10,000 6,000 14,857

JOB #709
$ 1,000 4,000 9,905 = = = $ 20,000 21,000 52,000

Beg WIP

13,400 $20,352

14,300 $28,205

$20,381

$30,857

$20,905

27,700 $120,700

c.

Beg WIP + DM + DL + MOH - End WIP

$27,700 20,000 21,000 52,000 72,143 $48,557

DIF:

Moderate

OBJ:

4-4

4. The Western Corporation, began operations on October 1. It employs a job order costing system. Overhead is charged at a normal rate of $2.50 per direct labor hour. The actual operations for the month of October are summarized as follows:

a.

Purchases of raw material, 25,000 pieces @ $1.20/piece.

b.

Material and labor costs charged to production:

Direct Job No.

101 102 103 104 105

Direct labor hours

3,000 2,700 4,500 2,400 1,800

Units
10,000 8,800 16,000 8,000 20,000

Material
$4,000 3,600 7,000 3,200 8,000

labor cost
$6,000 5,400 9,000 4,800 3,600

c.

Actual overhead costs incurred:

Variable Fixed

$18,500 15,000

d.

Completed jobs: 101, 102, 103, and 104

e.

Sales-$105,000. All units produced on Jobs 101, 102, and 103 were sold.

Required: Compute the following balances on October 31:

a.

Material inventory

b.

Work in process inventory

c.

Finished goods inventory

d.

Cost of goods sold

e.

Under- or overapplied overhead

ANS:

a. b.

$30,000 - ($4,000 + $3,600 + $7,000 + $3,200 + $8,000) = $4,200 Job #105 $8,000 + $3,600 + ($1,800 2.50) = $16,100

c.

Job #104

$3,200 + $4,800 + ($2,400 2.50) = $14,000

d.

Job #

101 102 103

$4,000 + $6,000 + ($3,000 2.50) = $3,600 + $5,400 + ($2,700 2.50) = $7,000 + $9,000 + ($4,500 2.50) =

$17,500 15,750 27,250 $60,500

e.

Applied 14,400 $2.50 = Actual Overapplied

$36,000 33,500 $ 2,500

DIF:

Moderate

OBJ:

4-4

Steel Company.

Steel Company uses a job order costing system and develops its predetermined overhead rate based on machine hours. The company has two jobs in process at the end of the cycle, Jobs #177 and #179.

Budgeted overhead Budgeted machine hours Raw material Labor cost

$100,300 85,000 $ 63,000 $ 50,000

5. Refer to Steel Company. What amount of overhead is charged to Jobs #177 and #179? Machine hours are split between Jobs #177 and #179-65 percent and 35 percent, respectively. Actual machine hours equal budgeted machine hours.

ANS: OH Applied = MH Cost POHR Job #177: 85,000 MH 65%= 55,250 $1.18 = $65,195 Job #179: 85,000 MH 35%= 29,750 $1.18 = $35,105

DIF:

Easy

OBJ:

4-4

6. Refer to Steel Company. Fifty-four percent of raw material belongs to Job 17 and 38 percent belongs to Job 179, and the balance is considered indirect material. What amount of raw material used was allocated to overhead as indirect material?

ANS:

54% + 38% = 92%; this means that 8% is indirect or $5,040 (.08 $63,000).

DIF:

Easy

OBJ:

4-4

7. Refer to Steel Co. Labor cost was split 25 percent and 70 percent, respectively, between Jobs #177 and #179 for direct labor. The remainder was indirect labor cost. What are the total costs of Jobs #177 and #179?

ANS:

Job #177 DM DL MOH

$ 34,020 12,500 65,195 $111,715

Job #179
$23,940 35,000 35,105 $94,045

DIF:

Moderate

OBJ:

4-4

8. Sanderson Company manufactures custom-built conveyor systems for factory and commercial operations. Erin Smith is the cost accountant for Sanderson and she is in the process of educating a new employee, Heather Fontenot about the job order costing system that Sanderson uses. (The system is based on normal costs; overhead is applied based on direct labor cost and rounded to the next whole dollar.) Lisa gathers the following job order cost records for July:

Direct Job No.

667 669 670 671 672

Direct Labor
$1,730 1,810 500 9,500 550

Total Applied OH
$ 1,990 2,082 575 10,925 633

Materials
$ 5,901 18,312 406 51,405 9,615

Cost
$ 9,621 22,204 1,481 71,830 10,798

To explain the missing job number, Erin informed Heather that Job #668 had been completed in June. She also told her that Job #667 was the only job in process at the beginning of July. At that time, the job had been assigned $4,300 for direct material and $900 for direct labor. At the end of July, Job #671 had not been completed; all others had. Erin asked Heather several questions to determine whether she understood the job order system.

Required: Help Heather answer the following questions:

a.

What is the predetermined overhead rate used by ABC Company?

b.

What was the total cost of beginning Work in Process inventory?

c.

What was total prime cost incurred for the month of July?

d.

What was cost of goods manufactured for July?

ANS:

a.

Use any job started in July:

Rate =

MOH DL COST

JOB $670

$575 $500

= 115%/DL Cost

b.

DM DL FOH

$4,300 900 1,035 $6,235 ($900 115%)

c.

Prime Cost =DM + DL

DM = $85,639 - 4,300 = $81,339 DL = 14,090 900 = 13,190 $94,529

d.

COGM

$9,621 + 22,204 + 1,481 + 10,798 =

$44,104

DIF:

Easy

OBJ:

4-4

9. Perry Company uses a job order costing system and has the following information for the first week of June:

1.

Direct labor and direct materials used:

Job No.
498 506 507 508 509 511 512 Total

Direct Material
$1,500 960 415 345 652 308 835 $5,015

Direct Labor Hours

116 16 18 42 24 10 30 256

2.

The direct labor wage rate is $4 per hour.

3.

The overhead rate is $5 per direct labor hour.

4.

Actual overhead costs for the week, $1,480.

5.

Jobs completed: Nos. 498, 506, and 509.

6.

The factory had no work in process at the beginning of the week.

Required:

a.

Prepare a summary that will show the total cost assigned to each job.

b.

Compute the amount of overhead over- or underapplied during the week.

c.

Calculate the cost of the work in process at the end of the week.

ANS: a. Job No.

498 506 507 508 509 511 512

DM
$1,500 960 415 345 652 308 835 $5,015 $

DL
464 64 72 168 96 40 120 $1,024 $

OH
580 80 90 210 120 50 150 $1,280

Total
$2,544 1,104 577 723 868 398 1,105 $7,319

b.

Actual MOH Applied MOH Underapplied

$1,480 1,280 $ 200

c.

JOB

507 508 511 512

577 723 398 1,105

Ending WIP

$2,803

DIF:

Easy

OBJ:

4-4

10. You are asked to bring the following incomplete accounts of Andrepont Printing, Inc. up to date through January 31,20X5. Consider the data that appear in the T-accounts as well as additional information given in items (a) through (i).

Andreponts job order costing system has two direct cost categories (direct material and direct manufacturing labor) and one indirect cost pool (manufacturing overhead, which is allocated using direct manufacturing labor costs).

Materials Inventory Control 12/31/20X4 Balance 15,000

Wages Payable Control 1/31/20X5 Balance 3,000

Manufacturing Department Work in Process Inventory Control Overhead Control January 20X5

Charges 57,000

Manufacturing Overhead Control

Finished Goods Inventory Control 12/31/20X4 Balance 20,000

Cost of Goods Sold

Additional Information: a. Manufacturing department overhead is allocated using a budgeted rate set every December. Management forecasts next year's overhead and next year's direct manufacturing labor costs. The budget for 20X5 is $400,000 of direct manufacturing labor and $600,000 of manufacturing overhead. The only job unfinished on January 31, 20X5 is No. 419, on which direct manufacturing labor costs are $2,000 (125 direct manufacturing labor hours) and direct material costs are $8,000. Total material placed into production during January is $90,000. Cost of goods completed during January is $180,000. Material inventory as of January 31, 20X5 is $20,000. Finished goods inventory as of January 31, 20X5 is $15,000. All plant workers earn the same wage rate. Direct manufacturing labor hours for January totals 2,500. Other labor and supervision totals $10,000. The gross plant payroll on January paydays totals $52,000. Ignore withholdings. All personnel are paid on a weekly basis. All "actual" manufacturing department overhead incurred during January has already been posted.

b.

c. d. e. f. g.

h.

i.

Required: a. b. c. Material purchased during January Cost of Goods Sold during January Direct Manufacturing Labor Costs incurred during January

d. e. f. g. h. i.

Manufacturing Overhead Allocated during January Balance, Wages Payable Control, December 31, 20X4 Balance, Work in Process Inventory Control, January 31, 20X5 Balance, Work in Process Inventory Control, December 31, 20X4 Balance, Finished Goods Inventory Control, January 31, 20X5 Manufacturing Overhead underapplied or overapplied for January

ANS:

a.

$15,000 + Purchases - $20,000 = $90,000. Purchases = $95,000

b.

$20,000 + $180,000 - $15,000 = $185,000

c.

DL = $2,000 = $16/HR 2,500 HRS = $40,000 125

d.

$600,000 = 150% DL cost $40,000 = $60,000 $400,000

e.

BEGIN + $50,000 - $52,000 = $3,000 BEGIN = $5,000

f.

$2,000 + ($2,000 150%) + $8,000 = $13,000

g.

BEGIN + $90,000 + $40,000 + $60,000 - $180,000 = $13,000 BEGIN = $3,000

h.

$20,000 + $180,000 - $185,000 = END = $15,000

i.

APPLIED ACTUAL

$60,000 57,000 $ 3,000 overapplied

DIF:

Moderate

OBJ:

4-4

11. Beauty Company manufactures picture frames of all sizes and shapes and uses a job order costing system. There is always some spoilage in each production run. The following costs relate to the current run:

Estimated overhead (exclusive of spoilage) Spoilage (estimated) Sales value of spoiled frames Labor hours

$160,000 $ 25,000 $ 11,500 100,000

The actual cost of a spoiled picture frame is $7.00. During the year 170 frames are considered spoiled. Each spoiled frame can be sold for $4. The spoilage is considered a part of all jobs.

a.

Labor hours are used to determine the predetermined overhead rate. What is the predetermined overhead rate per direct labor hour? Prepare the journal entry needed to record the spoilage. Prepare the journal entry if the spoilage relates only to Job #12 rather than being a part of all production runs.

b. c.

ANS:

a.

$160,000 + $25,000 - $11,500 = $173,500 $173,500/100,000 = $1.735 per DLH

b.

Disposal Value of Spoiled Work Manufacturing Overhead Work in Process Inventory

680 510 1,190 680 680

c.

Disposal Value of Spoiled Work Work in Process Inventory-Job #12

DIF:

Moderate

OBJ