Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

Suggested Answers to Self-Review Questions Week 5

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(a) Use in financial accounting: In financial accounting, product costs are needed to
determine the value of inventory on the balance sheet and to compute the costof-goods-sold expense on the income statement.
(b) Use in managerial accounting: In managerial accounting, product costs are
needed for planning, for cost control, and for decision making.
(c) Use in cost management: In order to manage, control, or reduce the costs of
manufacturing products or providing services, management needs a clear idea
of what those costs are.
(d) Use in reporting to interested organizations: Product cost information is used in
reporting on relationships between firms and various outside organizations. For
example, public utilities such as electric and gas companies record product
costs to justify rate increases that must be approved by state regulatory
agencies.

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Although manufacturing-overhead costs are not directly traceable to products,

manufacturing operations cannot take place without incurring overhead costs.
Consequently, overhead costs are applied to products for the purpose of making
pricing decisions, in order to ensure that product prices cover all of the costs of
production.

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An important cost-benefit issue involving accuracy versus timeliness in accounting

for overhead involves the use of a predetermined overhead rate or an actual
overhead rate. Since an actual overhead rate is computed after costs have been
incurred and activity has been recorded, it is more accurate than a predetermined
rate. However, a predetermined overhead rate is more timely than an actual rate,
since the predetermined rate is computed earlier and in time to be used for making
decisions, planning, and controlling operations.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-39 (15 MINUTES)

1.

Memorandum
Date:

Today

To:

President

From:

I.M. Student

Subject:

Cost driver for overhead application

I recommend direct-labor hours as the best volume-based cost driver upon which to base
the application of manufacturing overhead. Since our products are made by hand, direct
labor is a very significant production input. Moreover, the incurrence of manufacturing
overhead cost appears to be related to the use of direct labor.
2.

Memorandum
Date:

Today

To:

President

From:

I.M. Student

Subject:

Cost driver for overhead application

I recommend either machine hours or units of production as the most appropriate cost
driver for the application of manufacturing overhead. Since our production process is
highly automated, machine hours are the most significant production input. Also, our
chips are nearly identical, so the amount of overhead incurred in their production does
not vary much across product lines. The incurrence of manufacturing overhead cost
appears to be related closely both to machine time and units of production.
EXERCISE 3-40 (10 MINUTES)
Overhead distribution: Allocation of the hospital's building maintenance and custodial
costs to all of the hospital's departments.
Service-department cost allocation: Allocation of the hospital's Personnel Department costs
to the direct-patient-care departments in the hospital.
Overhead application: Assignment of the overhead costs in the maternity ward to each
patient-day of care provided to new mothers.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-43 (35 MINUTES)

1.

Predetermined overhead rate = budgeted overhead budgeted direct-labor cost

= $2,730,000 $2,100,000 = 130% of direct labor cost

2.

Additions (debits) total $7,802,500 [$2,800,000 + $2,175,000 + ($2,175,000 x 130%)].

3.

The finished-goods inventory consisted of job no. 3154, which cost $175,750
[$78,000 + $42,500 + ($42,500 x 130%)].

4.

Since there is no work in process at year-end, all amounts in the Work-in-Process

account must be transferred to Finished-Goods Inventory. Thus:
Finished-Goods Inventory........................................ 7,880,900*
Work-in-Process Inventory ..........................

7,880,900

*Beginning balance in Work-in-Process Inventory + additions to the account:

$78,400 + $7,802,500 = $7,880,900
5.

BBBCs applied overhead totals 130% of direct-labor cost, or $2,827,500 ($2,175,000

x 130%). Actual overhead was $2,777,000, itemized as follows, resulting in
overapplied overhead of $50,500.
Indirect
materials
used
.................................................................................
Indirect
labor
.................................................................................
Factory
depreciation
.................................................................................
Factory
insurance
.................................................................................
Factory
utilities
.................................................................................
Total
.................................................................................
Manufacturing Overhead ..........................................
Cost of Goods Sold ......................................

32,500

1,430,000
870,000
29,500
415,000
$2,777,000
50,500

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50,500

Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

6.

The companys cost of goods sold totals $7,654,650:

Finished-goods inventory, Jan. 1.
Add: Cost of goods manufactured..
Cost of goods available for sale...
Less: Finished-goods inventory, Dec. 31..
Unadjusted cost of goods sold.
Less: Overapplied overhead.
Cost of goods sold...

7.

0
7,880,900
$ 7,880,900
175,750
$ 7,705,150
50,500
$ 7,654,650

No, selling and administrative expenses are operating expenses of the firm and are
treated as period costs rather than product costs. Such costs are unrelated to
manufacturing overhead and cost of goods sold.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-45 (25 MINUTES)

The completed T-accounts are shown below. (Missing amounts in problem are italicized.)
Raw-Material Inventory
Bal. 1/1
29,400
189,000 168,000
Bal. 12/31
50,400

Accounts Payable
3,500 Bal. 1/1
191,100
189,000
1,400 Bal. 12/31

Work-in-Process Inventory
Bal. 1/1
23,800
Direct
168,000
material
Direct
210,000 1,005,200
labor
Mfg.
630,000
overhead
Bal. 12/31
26,600

Finished-Goods Inventory
Bal. 1/1
16,800
1,005,200 994,000
Bal. 12/31
28,000

Cost of Goods Sold

994,000

Manufacturing Overhead
633,500 630,000
Wages Payable
2,800 Bal. 1/1
205,800
210,000
7,000 Bal. 12/31

Sales Revenue
1,134,000
Accounts Receivable
Bal. 1/1
15,400
1,134,000 1,128,400
Bal. 12/31
21,000

3-5
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-48 (30 MINUTES)

1.

Traceable costs total $3,750,000, computed as follows:

Total Cost
Professional staff salaries $3,750,000
Administrative support staff
450,000
Photocopying..
75,000
Travel.
375,000
Other operating costs
150,000
Total. $4,800,000

Percent
Traceable

Traceable
Cost

80%
60
90
90
50

$3,000,000
270,000
67,500
337,500
75,000
$3,750,000

Golden State Enterprises overhead (i.e., the nontraceable costs) total $1,050,000
($4,800,000 - $3,750,000).
1.

Predetermined overhead rate = budgeted overhead traceable costs

= $1,050,000 $3,750,000 = 28% of traceable
costs

2.

Target profit percentage = target profit total cost

= $960,000 $4,800,000 = 20% of cost

3.

The total cost of the Davis Manufacturing project is $96,000, and the billing is
$115,200, as follows:
Professional staff salaries
Administrative support staff
Photocopying
Travel..
Other operating costs.
Subtotal
Overhead ($75,000 x 28%).
Total cost.
Markup ($96,000 x 20%).
Billing to Davis

$61,500
3,900
750
6,750
2,100
$75,000
21,000
$96,000
19,200
$115,200

4.

Possible nontraceable costs include utilities, rent, depreciation, advertising, top

management salaries, and insurance.

6.

Professional staff members are compensated for attending training sessions and
firm-wide planning meetings, paid vacations, and completion of general, non-clientrelated paperwork and reports. These activities benefit multiple clients, the
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

consultant, and/or the overall firm, making traceability to specific clients difficult if
not impossible.

3-7
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-56 (25 MINUTES)

1.
Quarter
1st...................................................................
2nd ..................................................................
3rd ..................................................................
4th ..................................................................

Predetermined
Overhead Rate
$8 per hour
10 per hour
8 per hour
10 per hour

Calculations
$400,000/50,000
$320,000/32,000
$200,000/25,000
$280,000/28,000

February
$600
340

May
$600
340

2.
Direct material .............................................
Direct labor...................................................
Manufacturing overhead:
20 hrs $8 per hr .................................
20 hrs $10 per hr ...............................
Total cost......................................................

160
$1,100

200
$1,140

February
$1,100
110
$1,210

May
$1,140
114
$1,254

3.
Total cost......................................................
Markup (10%) ...............................................
Price ..............................................................
4.

Predetermined rate

annual budgeted manufacturing overhead

annual budgeted direct-labor hours
$1,200,000
135,000

$8.89 per hour (rounded)

5.

6.

Direct material ..............................................

Direct labor....................................................
Manufacturing overhead (20 hrs $8.89) ..
Total cost.......................................................

February
$ 600.00
340.00
177.80
$1,117.80

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

$1,117.80
111.78
$1,229.58

May
$ 600.00
340.00
177.80
$1,117.80

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

3-8
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