CHAPTER 3 Product Costing and Cost Accumulation in a Batch Production Environment

ANSWERS TO REVIEW Q ESTIONS

3-1 (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 ma!ing (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 "hat those costs are (d) Use in reporting to interested organi#ations: $roduct cost information is used in reporting on relationships bet"een firms and various outside organi#ations %or example, public utilities such as electric and gas companies record product costs to &ustify rate increases that must be approved by state regulatory agencies 3-' In a &ob-order costing system, costs are assigned to batches or &ob orders of production (ob-order costing systems are used by firms that produce relatively small numbers of dissimilar products In a process-costing system, production costs are averaged over a large number of product units $rocess-costing systems are used by firms that produce large numbers of nearly identical products )oncepts of product costing are applied in service industry firms to inform management of the costs of producing services %or example, ban!s record the costs of producing financial services for the purposes of planning, cost control, and decision ma!ing a +aterial re,uisition form: - document upon "hich the production department supervisor re,uests the release of ra" materials for production b .abor time record: - document upon "hich employees record the time they spend "or!ing on each production &ob or batch

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c (ob-cost record: - document on "hich the costs of direct material, direct labor, and manufacturing overhead are recorded for a particular production &ob or batch /he &ob-cost sheet is a subsidiary ledger account for the 0or!-in-$rocess Inventory account in the general ledger 3-1 -lthough manufacturing-overhead costs are not directly traceable to products, manufacturing operations cannot ta!e place "ithout incurring overhead costs )onse,uently, overhead costs are applied to products for the purpose of ma!ing pricing decisions, in order to ensure that product prices cover all of the costs of production /he primary benefit of using a predetermined overhead rate instead of an actual overhead rate is to provide timely information for decision ma!ing, planning, and control -n advantage of prorating overapplied or underapplied overhead is that it results in the ad&ustment of all the accounts affected by misestimating the overhead rate /hese accounts include the 0or!-in-$rocess Inventory account, the %inished-4oods Inventory account, and the )ost of 4oods 5old account /he resulting balances in these accounts are more accurate "hen proration is used than "hen overapplied or underapplied overhead is closed directly into )ost of 4oods 5old /he primary disadvantage of prorating overapplied or underapplied overhead is that it is more complicated and time-consuming than the simpler alternative of closing overapplied or underapplied overhead directly into )ost of 4oods 5old -n 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 5ince an actual overhead rate is computed after costs have been incurred and activity has been recorded, it is more accurate than a predetermined rate 7o"ever, 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 ma!ing decisions, planning, and controlling operations /he difference bet"een actual and normal costing systems involves the procedure for applying manufacturing overhead to 0or!-in-$rocess Inventory Under actual costing, applied overhead is the product of the actual overhead rate (computed at the end of the period) and the actual amount of the cost driver used Under normal costing, applied overhead is the product of the predetermined overhead rate (computed at the beginning of the period) and the actual amount of the cost driver used

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3-19

0hen a single volume-based cost driver is used to apply manufacturing overhead, the managerial accountant:s primary ob&ective is to select a cost driver that varies in a pattern similar to the pattern in "hich manufacturing overhead varies +oreover, if a single cost driver is used, it should be some productive input that is common to all of the firm:s products /he benefit of using multiple overhead rates is that the resulting product-costing information is more accurate and more useful for decision ma!ing than is the information that results from using a single overhead rate 7o"ever, the use of multiple cost drivers and overhead rates is more complicated and more costly /he development of departmental overhead rates involves a t"o-stage process In stage one, overhead costs are assigned to the firm:s production departments %irst, overhead costs are distributed to all departments, including both service and production departments 5econd, costs are allocated from the service departments to the production departments -t the end of stage one, all overhead costs have been assigned to the production departments In stage t"o, the costs that have been accumulated in the production departments are applied to the production &obs that pass through the departments

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a ;verhead cost distribution: -ssignment of all manufacturing-overhead costs to department overhead centers b 5ervice department cost allocation: -llocation of service department costs to production departments on the basis of the relative proportion of each service department:s output that is used by the various production departments c ;verhead application (or overhead absorption): /he assignment of all manufacturing overhead costs accumulated in a production department to the &obs that the department has "or!ed on /hese three processes are used in developing departmental overhead rates

3-1*

(ob-order costing concepts are used in professional service firms 7o"ever, rather than referring to production <&obs,= such organi#ations use terminology that reflects their operations %or example, hospitals and la" firms assign costs to <cases,= and governmental agencies often refer to <programs= or <missions = It is important in such organi#ations to accumulate the costs of providing the services associated "ith a case, pro&ect, contract, or program 5uch cost information is used for planning, cost control, and pricing, among other purposes

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3-11

- cost driver is a characteristic of an event or activity that results in the incurrence of costs by that event or activity - volume-based cost driver is one that is closely associated "ith production activity, such as the number of units produced, directlabor hours, or machine hours 0hen direct material, direct labor, and manufacturing-overhead costs are incurred, they are applied to 0or!-in-$rocess Inventory by debiting the account 0hen goods are finished, the costs are removed from that account "ith a credit, and they are transferred to %inished-4oods Inventory by debiting that account 5ubse,uently, "hen the goods are sold, %inished-4oods Inventory is credited, and the costs are added to )ost of 4oods 5old "ith a debit 7ospitals use &ob-order costing concepts to accumulate the costs associated "ith each case treated in the hospital %or example, the costs of treating a heart patient "ould be assigned to that patient:s case /hese costs "ould include the hospital room, food and beverages, medications, and speciali#ed services such as diagnostic testing and > rays 5ome manufacturing firms are s"itching from direct-labor hours to machine hours or throughput time as the basis for overhead application as a result of increased automation in their factories 0ith increased automation comes a reduction in the amount of direct labor used in the production process In such cases, direct labor may cease to be a cost driver that varies in a pattern similar to the "ay in "hich manufacturing-overhead costs are incurred ;verapplied or underapplied overhead is caused by errors in estimating the predetermined overhead rate /hese errors can occur in the numerator (budgeted manufacturing overhead), or in the denominator (budgeted level of the cost driver) ;verapplied or underapplied overhead can be closed directly into )ost of 4oods 5old, or it can be prorated among 0or!-in-$rocess Inventory, %inished-4oods Inventory, and )ost of 4oods 5old - large retailer could use ?@I to exchange such documents as purchase orders, shipping and receiving notices, and invoices electronically "ith its suppliers ?lectronic data interchange (?@I) is the direct exchange of data via a computer-tocomputer interface -n engineer could use bar code technology to record ho" she spends her time Aar codes "ould be assigned to her and to each of her activities ?ach time she arrived at "or!, left "or!, or changed activity at "or!, the engineer "ould scan her personal bar code and the bar code of the appropriate action or activity ?xamples of activities are designing, redesigning, or testing a productB change ordersB visiting the factory floorB constructing a prototypeB and being trained
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SO& TIONS TO E'ERCISES

?>?C)I5? 3-'3 (19 +IDU/?5) 1 ' 3 * 1 2 3 6 8 19 $rocess (ob-order (ob-order (contracts or pro&ects) $rocess $rocess (ob-order $rocess (ob-order (contracts or pro&ects) $rocess (ob-order

?>?C)I5? 3-'* (11 +IDU/?5) 1

$redetermined overhead rate = budgeted overhead budgeted production volume

(a)

-t '99,999 chic!en volume:

;verhead rate = E199,999 +(E 19)('99,999) = E 29 per chic!en '99,999

(b)

-t 399,999 chic!en volume:

;verhead rate = E199,999 +(E 19)(399,999) = E *3 per chic!en (rounded) 399,999

(c)

-t *99,999 chic!en volume:

;verhead rate = E199,999 +(E 19)(*99,999) = E 31 per chic!en *99,999

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?>?C)I5? 3-'* ();D/IDU?@) ' /he predetermined overhead rate does not change in proportion to the change in production volume -s production volume increases, the E199,999 of fixed overhead is allocated across a larger activity base 0hen volume rises by 19F, from '99,999 to 399,999 chic!ens, the decline in the overhead rate is '6 33F G( 29 H *3)I 29J 0hen volume rises by 33 33F, from 399,999 to *99,999 chic!ens, the decline in the overhead rate is 16 2F G( *3 H 31)I *3J

?>?C)I5? 3-'1 (1 +IDU/?5) 0or!-in-$rocess Inventory Ca"-+aterial Inventory 0ages $ayable +anufacturing ;verhead %inished-4oods Inventory 0or!-in-$rocess Inventory 1,199 *,299 3'9 169 1,199 1,199

?>?C)I5? 3-'2 (39 +IDU/?5) (ob-order costing is the appropriate product-costing system for feature film production, because a film is a uni,ue production /he production process for each film "ould use labor, material and support activities (i e , overhead) in different "ays /his "ould be true of or any type of film (e g , filming on location, filming in the studio, or using animation)

?>?C)I5? 3-'3 ('9 +IDU/?5) 1 Ca"-material inventory, (anuary 1 -dd: Ca"-material purchases Ca" material available for use @educt: Ca"-material inventory, (anuary 31 Ca" material used in (anuary @irect labor /otal prime costs incurred in (anuary /otal prime cost incurred in (anuary -pplied manufacturing overhead (29F E399,999) /otal manufacturing cost for (anuary E13*,999 181,999 E3'1,999 1'*,999 E'91,999 399,999 E191,999 E191,999 169,999 E261,999
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?>?C)I5? 3-'3 ();D/IDU?@) 3 /otal manufacturing cost for (anuary -dd: 0or!-in-process inventory, (anuary 1 5ubtotal @educt: 0or!-in-process inventory, (anuary 31 )ost of goods manufactured %inished-goods inventory, (anuary 1 -dd: )ost of goods manufactured )ost of goods available for sale @educt: %inished-goods inventory, (anuary 31 )ost of goods sold E261,999 '31,999 E812,999 '11,999 E221,999 E1'1,999 221,999 E389,999 113,999 E233,999

5ince the company accumulates overapplied or underapplied overhead until the end of the year, no ad&ustment is made to cost of goods sold until @ecember 31 1 -pplied manufacturing overhead for (anuary -ctual manufacturing overhead incurred in (anuary ;verapplied overhead as of (anuary 31 E169,999 131,999 E 1,999

/he balance in the +anufacturing ;verhead account on (anuary 31 is a E1,999 credit balance D;/?: -ctual selling and administrative expense, although given in the exercise, is irrelevant to the solution

?>?C)I5? 3-'6 (11 +IDU/?5) 1 -pplied manufacturing overhead K total manufacturing costs 39F K E',199,999 39F K E319,999 -pplied manufacturing overhead K direct-labor cost 69F K E319,999 6 K E833,199
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?>?C)I5? 3-'6 ();D/IDU?@) ' @irect-material cost K total manufacturing cost H direct labor cost H applied manufacturing overhead K E',199,999 H E833,199 H E319,999 K E61',199 3 .et X denote "or!-in-process inventory on @ecember 31 "or!-in-process L inventory, H (an 1 L 31X H "or!-in-process inventory, @ec 31 X K cost of goods manufactured

/otal manufacturing cost E',199,999

K E',*'1,999 25X K E',199,999 H E',*'1,999 X K E399,999

0or!-in-process inventory on @ecember 31 amounted to E399,999

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?>?C)I5? 3-'8 ('1 +IDU/?5) (;A-);5/ C?);C@ (ob Dumber @ate 5tarted /A36 *I1 @escription @ate )ompleted Dumber of Units )ompleted @ate *I1 *I1 @ate *I1 H *I6 @ate *I11 @irect +aterial Ce,uisition Dumber Muantity 191 *9 196 1' 1 /ime )ard Dumber Narious time cards @irect .abor 7ours 199 Unit $rice E6 1' Cate E11 -pplication Cate E' -mount E *39 3,199 1,999 E6,839 E 6 83 stuffed bears *I11 1,999 )ost E3'9 119 )ost E3,199 )ost E1,999

+anufacturing ;verhead -ctivity Aase Muantity @irect-labor hours 199 )ost 5ummary

)ost Item /otal @irect +aterial /otal @irect .abor /otal +anufacturing ;verhead /otal )ost Unit )ost

@ate *I39

5hipping 5ummary Units Cemaining Units 5hipped In Inventory 399 399

)ost Aalance E',281O

O399 units remaining in inventory E6 83 K E',281

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?>?C)I5? 3-39 (39 +IDU/?5) 1 CR NC-E. CEREA& CO.PAN/ SC-E0 &E O1 COST O1 2OO0S .AN 1ACT RE0 1OR T-E /EAR EN0E0 0ECE.BER $!3 #4'! @irect material: Ca"-material inventory, (anuary 1 -dd: $urchases of ra" material Ca" material available for use @educt: Ca"-material inventory, @ecember 31 Ca" material used @irect labor +anufacturing overhead /otal manufacturing costs -dd: 0or!-in-process inventory, (anuary 1 5ubtotal @educt: 0or!-in-process inventory, @ecember 31 )ost of goods manufactured E39,999 '36,999 E396,999 33,999

E'31,999 1'9,999 '1',999 * E2*3,999 38,999 E262,999 *',899 E2*3,199

O-pplied manufacturing overhead is E'1',999 (E1'9,999 '19F) -ctual manufacturing overhead is also E'1',999, so there is no overapplied or underapplied overhead ' %inished-goods inventory, (anuary 1 -dd: )ost of goods manufactured )ost of goods available for sale @educt: %inished-goods inventory, @ecember 31 )ost of goods sold E*',999 2*3,199 E261,199 *2,'99 E236,899

3 In the electronic version of the solutions manual, press the )/C. !ey and clic! on the follo"ing lin!: AUI.@ - 5$C?-@57??/ 93-39 >.5

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?>?C)I5? 3-31 ('9 +IDU/?5) 1 Ca"-+aterial Inventory ''3,999 13*,999 13,999 0ages $ayable 3'*,999 +anufacturing ;verhead 169,999 5ales Cevenue 181,999 -ccounts Ceceivable 181,999 ' 0or!-in-$rocess Inventory 16,999 @+ 13*,999 @. 3'*,999 +;7 169,999 1'9,999 132,999 %inished-4oods Inventory 39,999 1'9,999 13',999 16,999 )ost of 4oods 5old 13',999

REI.E& 1 RNIT RE CO.PAN/3 INC5 PARTIA& BA&ANCE S-EET AS O1 0ECE.BER $!3 #4'# )urrent assets )ash -ccounts receivable Inventory Ca" material 0or! in process %inished goods REI.E& 1 RNIT RE CO.PAN/3 INC5 PARTIA& INCO.E STATE.ENT 1OR T-E /EAR EN0E0 0ECE.BER $!3 #4'# 5ales revenue .ess: )ost of goods sold 4ross margin E181,999 13',999 E23,999 >>> >>> E13,999 132,999 16,999

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?>?C)I5? 3-3' ('9 +IDU/?5) 1 Ca" material: Aeginning inventory -dd: $urchases @educt: Ca" material used ?nding inventory /herefore, purchases for the year "ere ' @irect labor: /otal manufacturing cost @educt: @irect material @irect labor and manufacturing overhead @irect labor L manufacturing overhead @irect labor L (29F) (direct labor) (129F) (direct labor) @irect labor @irect labor 3 )ost of goods manufactured: 0or! in process, beginning inventory -dd: /otal manufacturing costs @educt: )ost of goods manufactured 0or! in process, ending inventory /herefore, cost of goods manufactured "as E 69,999 262,999 P E39,999 E332,999 K K K K K E262,999 3'2,999 329,999 E329,999 E329,999 E329,999 E329,999 1 2 E''1,999 E31,999 P 3'2,999 E61,999 E332,999

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?>?C)I5? 3-3' ();D/IDU?@) * )ost of goods sold: %inished goods, beginning inventory -dd: )ost of goods manufactured )ost of goods available for saleQQQQQQQQQQQQQQQQQ @educt: )ost of goods sold %inished goods, ending inventoryQQQQQQQQQQQQQQQQ /herefore, cost of goods sold "as E89,999 332,999 E6'2,999 P E119,999 E312,999

?>?C)I5? 3-33 ('9 +IDU/?5) )alculation of proration amounts: -ccount 0or! in $rocess %inished 4oods )ost of 4oods 5old /otal -mount E31,'19 *8,319 12,*99 E1*1,999 Underapplied ;verhead E3',999O 3',999 3',999 $ercentage '1F 31F *9F 199F )alculation of $ercentage 31,'19 E1*1,999 *8,319 E1*1,999 12,*99 E1*1,999

-ccount 0or! in $rocess %inished 4oods )ost of 4oods 5old OUnderapplied overhead K E3',999 K (ournal entry:

x x x x

$ercentage '1F 31F *9F

-mount -dded to -ccount E6,999 11,'99 1',699

actual overhead H applied overhead E133,999 H E1*1,999

0or!-in-$rocess Inventory %inished-4oods Inventory )ost of 4oods 5old +anufacturing ;verhead

6,999 11,'99 1',699 3',999

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?>?C)I5? 3-3* (11 +IDU/?5) D;/?: -ctual selling and administrative expense, although given in the exercise, is irrelevant to the solution 1 '
$redetermined overhead rate = E883,199 = E13 39 per hour 31,999 hours

/o compute actual manufacturing overhead: @epreciation $roperty taxes Indirect labor 5upervisory salaries Utilities Insurance Cental of space Indirect material: Aeginning inventory, (anuary 1 -dd: $urchases Indirect material available for use @educt: ?nding inventory, @ecember 31 Indirect material used -ctual manufacturing overhead ;verapplied overhead K K actual manufacturing overhead H applied manufacturing overhead E'31,999 '1,999 6',999 '99,999 18,999 39,999 399,999 E*6,999 8*,999 E1*',999 23,999

38,999 E1,99',999

E1,99',999 H (E13 39 69,999O) K E2',999

O-ctual direct-labor hours 3 +anufacturing ;verhead )ost of 4oods 5old 2',999 2',999

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?>?C)I5? 3-31 ('9 +IDU/?5) D;/?: Audgeted sales revenue, although given in the exercise, is irrelevant to the solution 1 (a) (b) (c) $redetermined overhead rate
$378,000 10,000 machine hours $378,000 20,000 direct - labor hours $378,000 $280,000 *

budgeted manufacturing overhead budgeted level of cost driver

K E33 69 per machine hour K E16 89 per direct-labor hour K E1 31 per direct-labor dollar or 131F of direct-labor cost

OAudgeted direct-labor cost K '9,999 E1* ' -ctual manufacturing overhead (a) (b) (c)
R

applied manufacturing overhead

K K K K

overapplied or underapplied overhead E31,699 overapplied overhead E'99 overapplied overhead E'*,199 overapplied overhead

E3*9,999 H (11,999)(E33 69) E3*9,999 H (16,999)(E16 89) E3*9,999 H (E'39,999R)(131F)

-ctual direct-labor cost K 16,999 E11

?>?C)I5? 3-32 (1 +IDU/?5) 1 ' 0or!-in-$rocess Inventory +anufacturing ;verhead 0or!-in-$rocess Inventory +anufacturing ;verhead 3*9,999 3*9,999 *99,*99 *99,*99

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?>?C)I5? 3-33 (19 +IDU/?5) Audgeted overhead rate K budgeted overhead I budgeted direct professional labor 129F K *99,999 euros I '19,999 euros )ontract to redecorate mayorSs offices: @irect material @irect professional labor ;verhead (129F 2,999 euros) /otal contract cost ?>?C)I5? 3-36 (11 +IDU/?5) 1 @ate: /o: %rom: 5ub&ect: /oday $resident I + 5tudent )ost driver for overhead application +emorandum 3,199 euros 2,999 euros 8,299 euros 18,199 euros

I recommend direct-labor hours as the best volume-based cost driver upon "hich to base the application of manufacturing overhead 5ince our products are made by hand, direct labor is a very significant production input +oreover, the incurrence of manufacturing overhead cost appears to be related to the use of direct labor

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?>?C)I5? 3-36 ();D/IDU?@) ' @ate: /o: %rom: 5ub&ect: /oday $resident I + 5tudent )ost driver for overhead application +emorandum

I recommend either machine hours or units of production as the most appropriate cost driver for the application of manufacturing overhead 5ince our production process is highly automated, machine hours are the most significant production input -lso, our chips are nearly identical, so the amount of overhead incurred in their production does not vary much across product lines /he incurrence of manufacturing overhead cost appears to be related closely both to machine time and units of production ?>?C)I5? 3-38 (11 +IDU/?5) 0or!-in-$rocess Inventory: /anning @epartment +anufacturing ;verhead
a E2,999 = 19 s, meters per set '9 sets E39 per s, meter

2,999a 2,999

0or!-in-$rocess Inventory: -ssembly @epartment +anufacturing ;verhead

b $360 = 2 machine hours 20 sets $9 per machine hour.

329b 329

0or!-in-$rocess Inventory: 5addle @epartment +anufacturing ;verhead

',*99c ',*99

c $2,400 = 30 direct - labor hours 20 sets $4 per direct - labor hour.

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?>?C)I5? 3-*9 (19 +IDU/?5) ;verhead distribution: -llocation of the hospital:s building maintenance and custodial costs to all of the hospital:s departments 5ervice-department cost allocation: -llocation of the hospital:s $ersonnel @epartment costs to the direct-patient-care departments in the hospital ;verhead application: -ssignment of the overhead costs in the maternity "ard to each patient-day of care provided to ne" mothers

?>?C)I5? 3-*1 (11 +IDU/?5) 1 ' /otal staff compensation K E'69,999 L E*'9,999 K E399,999 ;verhead rate K total budgeted overheadItotal budgeted staff compensation K E312,999IE399,999 K 196F 3 -pplied overhead K 196F T total direct professional labor K 196F T (E1,'99 L E',999) K E3,*12 * -pplied overhead using single cost driver K E3,*12 -pplied overhead using t"o cost drivers K E3,*69 (E1,969 L E',*99) 5ee the illustration in the text

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SO& TIONS TO PROB&E.S

$C;A.?+ 3-*' (*1 +IDU/?5) D;/?: /he 1'I31Ix1 balances for cash and accounts receivable, although given in the problem, are irrelevant to the solution 1 TWISTO PRET6E& CO.PAN/ SC-E0 &E O1 COST O1 2OO0S .AN 1ACT RE0 1OR T-E /EAR EN0E0 0ECE.BER $!3 #4'! @irect material: Ca"-material inventory, 1'I31Ix9 -dd: $urchases of ra" material Ca" material available for use @educt: Ca"-material inventory, 1'I31Ix1 Ca" material used @irect labor +anufacturing overhead: Indirect material Indirect labor @epreciation on factory building @epreciation on factory e,uipment Utilities $roperty taxes Insurance Cental of "arehouse space /otal actual manufacturing overhead -dd: ;verapplied overheadO ;verhead applied to "or! in process /otal manufacturing costs -dd: 0or!-in-process inventory, 1'I31Ix9 5ubtotal @educt: 0or!-in-process inventory, 1'I31Ix1 )ost of goods manufactured

E19,199 38,999 E*8,199 11,999

E36,199 38,999

E*,899 '8,999 3,699 ',199 2,999 ',*99 3,299 3,199 E1*,899 3,199

16,999 E131,199 6,199 E163,'99 6,399 E13*,899

O/he 5chedule of )ost of 4oods +anufactured lists the manufacturing costs applied to "or! in process /herefore, the overapplied overhead, E3,199, must be added to total actual overhead to arrive at the amount of overhead applied to "or! in process If there had been underapplied overhead, the balance "ould have been deducted from total actual manufacturing overhead /he amount of overapplied overhead is found by subtracting actual overhead, E1*,899 (as computed above), from applied overhead, E16,999 (given)
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$C;A.?+ 3-*' ();D/IDU?@) ' TWISTO PRET6E& CO.PAN/ SC-E0 &E O1 COST O1 2OO0S SO&0 1OR T-E /EAR EN0E0 0ECE.BER $!3 #4'! %inished-goods inventory, 1'I31Ix9 -dd: )ost of goods manufacturedO )ost of goods available for sale @educt: %inished-goods inventory, 1'I31Ix1 )ost of goods sold @educt: ;verapplied overheadR )ost of goods sold (ad&usted for overapplied overhead) E1*,999 13*,899 E166,899 11,*99 E133,199 3,199 E139,*99

O/he cost of goods manufactured is obtained from the 5chedule of )ost of 4oods +anufactured
R

/he company closes underapplied or overapplied overhead into cost of goods sold 7ence, the balance in overapplied overhead is deducted from cost of goods sold for the month 3 TWISTO PRET6E& CO.PAN/ INCO.E STATE.ENT 1OR T-E /EAR EN0E0 0ECE.BER $!3 #4'! 5ales revenue .ess: )ost of goods sold 4ross margin 5elling and administrative expenses: 5alaries Utilities @epreciation Cental of office space ;ther expenses /otal Income before taxes Income tax expense Det income E'91,699 139,*99 E31,*99 E13,699 ',199 1,'99 1,399 *,999

'3,'99 E1','99 1,199 E3,199

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$C;A.?+ 3-*3 ('9 +IDU/?5) 1

$redetermined overhead rate = budgeted manufacturing overhead budgeted direct - labor hours E'19,999 = = E1' 19 per hour (',999) (19)

'

(ournal entries: (a) (b) (c) (d) (e) (f) Ca"-+aterial Inventory -ccounts $ayable 0or!-in-$rocess Inventory Ca"-+aterial Inventory +anufacturing ;verhead +anufacturing-5upplies Inventory +anufacturing ;verhead -ccumulated @epreciation: Auilding +anufacturing ;verhead )ash 0or!-in-$rocess Inventory 0ages $ayable 32,999 32,999 *29 *29 199 199 6,999 6,999 *99 *99 3*,999 3*,999

/o record direct-labor cost G(1,999 L 399) x E'9J 0or!-in-$rocess Inventory +anufacturing ;verhead '1,'19 '1,'19

/o apply manufacturing overhead to "or! in process (E'1,'19 K 1,399 E1' 19 per hour) (g) (h) (i) +anufacturing ;verhead $roperty /axes $ayable +anufacturing ;verhead 0ages $ayable %inished-4oods Inventory 0or!-in-$rocess Inventory 819 819 ',199 ',199 1*,*99 1*,*99
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$C;A.?+ 3-*3 ();D/IDU?@) (&) -ccounts Ceceivable 5ales Cevenue )ost of 4oods 5old %inished-4oods Inventory OE19,699 K (8I1')(E1*,*99) 13,199 13,199 19,699O 19,699

$C;A.?+ 3-** ('1 +IDU/?5) /he completed /-accounts are sho"n belo" (+issing amounts in problem are italici#ed ) Ca"-+aterial Inventory Aal 1I1 '1,999 135,000 120,000 Aal 1'I31 32,999 0or!-in-$rocess Inventory Aal 1I1 13,999 @irect material 120,000 @irect labor 150,000 718,000 +fg overhead 450,000 Aal 1'I31 18,999 +anufacturing ;verhead 452,500 450,000 0ages $ayable ',999 Aal 1I1 1*3,999 150,000 1,999 Aal 1'I31 Aal 1I1 -ccounts $ayable ',199 Aal 1I1 132,199 135,000 1,999 Aal 1'I31 %inished-4oods Inventory 1',999 718,000 710,000 Aal 1'I31 '9,999

)ost of 4oods 5old 319,999 5ales Cevenue 810,000 -ccounts Ceceivable Aal 1I1 11,999 810,000 692,999 Aal 1'I31 11,999

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$C;A.?+ 3-*1 (31 +IDU/?5) 1 ' $redetermined overhead rate K budgeted overhead U budgeted machine hours K E612,999 U 12,999 K E13 19 per machine hour (a) 69,999 0or!-in-$rocess Inventory 0ages $ayable 139,699 O E'1,999 L E**,999 L E11,999 K E69,999 OO E31,999 L E'',999 L E21,999 L E6,699 K E139,699 (b) +anufacturing ;verhead '36,199 -ccumulated @epreciation 3*,999 0ages $ayable 29,999 +anufacturing 5upplies Inventory 1,999 +iscellaneous -ccounts 138,199 (c) '31,*99 O (1,'99 L 399 L ',999 L 199) x E13 19 K E'31,*99 (d) 313,119 O (ob 2*: E6*,999 L E'1,999 L E31,999 L (1,'99 x E13 19) K E'9*,'99 (ob 21: E13,199 L E'',999 L (399 x E13 19) K E11',819 E313,119 K E'9*,'99 L E11',819 (e) -ccounts CeceivableQQQQQQQQQQQQQQQQQ 1*3,219O 5ales Cevenue O E11',819 L E3*,399 K E1*3,219 )ost of 4oods 5old %inished-4oods Inventory
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0or!-in-$rocess Inventory Ca"-+aterial Inventory

69,999O

139,699OO

0or!-in-$rocess Inventory +anufacturing ;verhead

'31,*99O

%inished-4oods Inventory 0or!-in-$rocess Inventory

313,119O

1*3,219

11',819 11',819
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(ob no 22 and no 23 are in production as of +arch 31: (ob 22: E**,999 L E21,999 L (',999 x E13 19) (ob 23: E11,999 L E6,699 L (199 x E13 19) /otal

E'12,999 19,119 E'22,119

$C;A.?+ 3-*1 ();D/IDU?@) * 1 %inished-goods inventory increased by E'9*,'99 (E313,119 - E11',819) /he companySs actual overhead amounted to E'36,199, "hereas applied overhead totaled E'31,*99 /hus, overhead "as underapplied by E3,199

$C;A.?+ 3-*2 (31 +IDU/?5) 1 cost ' 3 * -dditions (debits) total E11,291,999 GE1,299,999 L E*,319,999 L (E*,319,999 x 139F)J /he finished-goods inventory consisted of &ob no '1*3, "hich cost E311,199 GE112,999 L E61,999 L (E61,999 x 139F)J 5ince there is no "or! in process at year-end, all amounts in the 0or!-in-$rocess account must be transferred to %inished-4oods Inventory /hus: %inished-4oods Inventory 0or!-in-$rocess Inventory 11,321,699O 11,321,699 $redetermined overhead rate K budgeted overhead U budgeted direct-labor cost K E1,*29,999 U E*,'99,999 K 139F of direct labor

OAeginning balance in 0or!-in-$rocess Inventory L additions to the account: E112,699 L E11,291,999 K E11,321,699 1 %inlonSs applied overhead totals 139F of direct-labor cost, or E1,211,999 (E*,319,999 x 139F) -ctual overhead "as E1,11*,999, itemi#ed as follo"s, resulting in overapplied overhead of E191,999 Indirect materials used Indirect labor %actory depreciation %actory insurance %actory utilities /otal
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E 21,999 ',629,999 1,3*9,999 18,999 639,999 E1,11*,999

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+anufacturing ;verhead )ost of 4oods 5old

191,999 191,999

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$C;A.?+ 3-*2 ();D/IDU?@) 2 /he companySs cost of goods sold totals E11,398,399: %inished-goods inventory, (an 1QQQQQ -dd: )ost of goods manufacturedQQQQ )ost of goods available for saleQQQQQ .ess: %inished-goods inventory, @ec 31Q Unad&usted cost of goods soldQQQQQQ .ess: ;verapplied overheadQQQQQQQ )ost of goods soldQQQQQQQQQQQ 3 E 9 11,321,699 E11,321,699 311,199 E11,*19,399 191,999 E11,398,399

Do, selling and administrative expenses are operating expenses of the firm and are treated as period costs rather than product costs 5uch costs are unrelated to manufacturing overhead and cost of goods sold

$C;A.?+ 3-*3 (39 +IDU/?5) 1 /raceable costs total E',899,999, computed as follo"s: /otal )ost $rofessional staff salariesQQQ E3,999,999 -dministrative support staffQQ 399,999 /ravelQQQQQQQQQQQQ '19,999 $hotocopyingQQQQQQQQ 19,999 ;ther operating costsQQQQQ 199,999 /otalQQQQQQQQQQQ E3,399,999 $ercent /raceable 69F 29 89 89 19 /raceable )ost E',*99,999 169,999 ''1,999 *1,999 19,999 E',899,999

(.CSs overhead (i e , the nontraceable costs) total E699,999 (E3,399,999 - E',899,999) ' $redetermined overhead rate K budgeted overhead U traceable costs K E699,999 U E',899,999 K '3 18F of traceable costs (rounded) /arget profit percentage K target profit U total cost K E2*9,999 U E3,399,999 K 13 39F of cost (rounded)

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$C;A.?+ 3-*3 ();D/IDU?@) * /he total cost of the +artin +anufacturing pro&ect is E23,381, and the billing is E3*,63', as follo"s (using rounded percentages from above): $rofessional staff salariesQ QQQ -dministrative support staffQQQ /ravelQQQQQQQQQQQQQ $hotocopyingQQQQQQQQQQ ;ther operating costsQQQQQQ 5ubtotalQQQQQQQQQQQ ;verhead (E19,999 x '3 18F)QQ /otal costQQQQQQQQQQ +ar!up (E23,381 x 13 3F)QQQQ Ailling to +artinQQQQQQQQQ 1 2 E*1,999 ',299 *,199 199 1,*99 E19,999 13,381 E23,381 11,933 E3*,63'

$ossible nontraceable costs include utilities, rent, depreciation, advertising, top management salaries, and insurance $rofessional staff members are compensated for attending training sessions and firm-"ide planning meetings, paid vacations, and completion of general, non-clientrelated paper"or! and reports /hese activities benefit multiple clients, the consultant, andIor the overall firm, ma!ing traceability to specific clients difficult if not impossible

$C;A.?+ 3-*6 (39 +IDU/?5) D;/?: -ctual selling and administrative expense, although given in the exercise, is irrelevant to the solution 1 +achining @ept overhead rate K budgeted overhead U budgeted machine hours K E*,999,999 U *99,999 K E19 per machine hour -ssembly @ept overhead rate K budgeted overhead U budgeted direct-labor cost K E3,969,999 U E1,299,999 K 11F of direct-labor cost

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$C;A.?+ 3-*6 ();D/IDU?@) ' /he ending "or!-in-process inventory is carried at a cost of E113,139, computed as follo"s: +achining @epartment: @irect materialQQQQQQQQQQQQQQ E'*,199 @irect laborQQQQQQQQQQQQQQQ '3,899 +anufacturing overhead (329 x E19)QQQQ 3,299 -ssembly @epartment: @irect materialQQQQQQQQQQQQQQ E 2,399 @irect laborQQQQQQQQQQQQQQQ 16,299 +anufacturing overhead (E16,299 x 11F)Q 3','39 /otal costQQQQQQQQQQQQQQQQQ 3

E 12,999

83,139 E113,139

-ctual overhead in the +achining @epartment amounted to E*,'29,999, "hereas applied overhead totaled E*,'19,999 (*'1,999 hours x E19) /hus, overhead "as underapplied by E19,999 during the year -ctual overhead in the -ssembly @epartment amounted to E3,919,999, "hereas applied overhead totaled E3,138,999 (E1,369,999 x 11F) /hus, overhead "as overapplied by E1'8,999 /he companySs manufacturing overhead "as overapplied by E118,999 (E1'8,999 E19,999) -s a result, excessive overhead flo"ed from 0or!-in-$rocess Inventory, to %inished-4oods Inventory, to )ost of 4oods 5old, meaning that the )ost of 4oods 5old account must be decreased at year-end /he 0or!-in-$rocess account is charged "ith applied overhead, or E3,*'8,999 (E*,'19,999 L E3,138,999) /he firmSs selection of cost drivers (or application bases) seems appropriate /here should be a strong correlation bet"een the cost driver and the amount of overhead incurred In the +achining @epartment, much of the overhead is probably related to the operation of machines 5imilarly, in the -ssembly @epartment, a considerable portion of the overhead incurred is related to manual assembly (i e , labor) operations

2 3

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$C;A.?+ 3-*8 ('1 +IDU/?5) 1

$redetermined overhead rate = budgeted manufacturing overhead budgeted machine hours E1,219,*99 = = E'' per machine hour 33,'99

'

(ournal entries: (a) (b) (c) (d) (e) (f) (g) (h) (i) (&) (!) Ca"-+aterial Inventory -ccounts $ayable 0or!-in-$rocess Inventory Ca"-+aterial Inventory +anufacturing ;verhead +anufacturing-5upplies Inventory +anufacturing ;verhead )ash 0or!-in-$rocess Inventory 0ages $ayable 5elling and -dministrative ?xpense $repaid Insurance Ca"-+aterial Inventory -ccounts $ayable -ccounts $ayable )ash +anufacturing ;verhead 0ages $ayable +anufacturing ;verhead -ccumulated @epreciation: ?,uipment %inished-4oods Inventory 0or!-in-$rocess Inventory 3,619 3,619 169 169 39 39 699 699 31,999 31,999 1,699 1,699 3,999 3,999 1,399 1,399 '1,999 '1,999 3,999 3,999 1,199 1,199

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$C;A.?+ 3-*8 ();D/IDU?@) (l) 0or!-in-$rocess Inventory +anufacturing ;verhead 11*,999O 11*,999

O-pplied manufacturing overhead K 3,999 machine hours E'' per hour (m) -ccounts Ceceivable 5ales Cevenue )ost of 4oods 5old %inished-4oods Inventory 132,999 132,999 138,999 138,999

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$C;A.?+ 3-19 (*1 +IDU/?5) 1 - RON CORPORATION SC-E0 &E O1 COST O1 2OO0S .AN 1ACT RE0 1OR T-E /EAR EN0E0 0ECE.BER $!3 #4'# @irect material: Ca" material inventory, 1'I31Ix1 -dd: $urchases of ra" material Ca" material available for use @educt: Ca"-material inventory, 1'I31Ix' Ca" material used @irect labor +anufacturing overhead: Indirect material Indirect labor @epreciation on factory building @epreciation on factory e,uipment Utilities $roperty taxes Insurance /otal actual manufacturing overhead @educt: Underapplied overheadO ;verhead applied to "or! in process /otal manufacturing costs -dd: 0or!-in-process inventory, 1'I31Ix1 5ubtotal @educt: 0or!-in-process inventory, 1'I31Ix' )ost of goods manufactured

E68,999 331,999 E6'9,999 18,999

E321,999 *3*,999

E*1,999 119,999 1'1,999 29,999 39,999 89,999 *9,999 E169,999 ',199

133,199 E1,61',199 -9E1,61',199 *9,999 E1,33',199

O/he 5chedule of )ost of 4oods +anufactured lists the manufacturing costs applied to "or! in process /herefore, the underapplied overhead, E',199, must be deducted from total actual overhead to arrive at the amount of overhead applied to "or! in process If there had been overapplied overhead, the balance "ould have been added to total manufacturing overhead /he amount of underapplied overhead is found by subtracting the applied manufacturing overhead, E133,199, from the total actual manufacturing overhead, E169,999

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$C;A.?+ 3-19 ();D/IDU?@) ' - RON CORPORATION SC-E0 &E O1 COST O1 2OO0S SO&0 1OR T-E /EAR EN0E0 0ECE.BER $!3 #4'# %inished-goods inventory, 1'I31Ix1 -dd: cost of goods manufactured )ost of goods available for sale @educt: %inished-goods inventory, 1'I31Ix' )ost of goods sold -dd: Underapplied overheadO )ost of goods sold (ad&usted for underapplied overhead) E 31,999 1,33',199 E1,693,199 *9,999 E1,323,199 ',199 E1,339,999

O/he company closes underapplied or overapplied overhead into cost of goods sold 7ence the E',199 balance in underapplied overhead is added to cost of goods sold for the month 3 - RON CORPORATION INCO.E STATE.ENT 1OR T-E /EAR EN0E0 0ECE.BER $!3 #4'# 5ales revenue .ess: )ost of goods sold 4ross margin 5elling and administrative expenses Income before taxes Income tax expense Det income E',191,999 1,339,999 E331,999 '28,999 E 22,999 '1,999 E *1,999

* In the electronic version of the solutions manual, press the )/C. !ey and clic! on the follo"ing lin!: AUI.@ - 5$C?-@57??/ 93-19 >.5 $C;A.?+ 3-11 (11 +IDU/?5) 1 ' 3 E*9,999 5ince there "as no "or!-in-process inventory at the beginning of '9x', all of the costs in the year-end "or!-in-process inventory "ere incurred during '9x' /he direct-material cost "ould have been larger, probably by roughly '9 percent, because direct material is a variable cost @epreciation is a fixed cost, so it "ould not have been any larger if the firm:s volume had increased
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$C;A.?+ 3-11 ();D/IDU?@) * ;nly the E39,999 of e,uipment depreciation "ould have been included in manufacturing overhead on the 5chedule of )ost of 4oods +anufactured /he E39,999 of depreciation related to selling and administrative e,uipment "ould have been treated as a period cost and expensed during '9x'

$C;A.?+ 3-1' (39 +IDU/?5) 1 .ARCO PO&O .AP CO.PAN/ SC-E0 &E O1 COST O1 2OO0S .AN 1ACT RE0 1OR T-E .ONT- O1 .ARC@irect material: Ca"-material inventory, +arch 1 -dd: +arch purchases of ra" material Ca" material available for use @educt: Ca"-material inventory, +arch 31 Ca" materials used @irect labor +anufacturing overhead applied (19F of direct labor) /otal manufacturing costs -dd: 0or!-in-process inventory, +arch 1 5ubtotal @educt: 0or!-in-process inventory, +arch 31 (89F E*9,999) )ost of goods manufactured

E13,999 113,999 E139,999 '2,999

E19*,999 129,999 * 69,999 E3**,999 *9,999 E36*,999 32,999 E3*6,999

R

O0or! up"ard from the bottom of the statement, using the information available @irect labor L manufacturing overhead K total manufacturing costs H direct material cost K E3**,999 H E19*,999 K E'*9,999 5ince manufacturing overhead K 19F of direct labor, then manufacturing overhead K E69,999 and direct labor K E129,999
R

)ost of goods manufactured K cost of goods sold L increase in finished-goods inventory K E3*1,999 L E3,999 K E3*6,999

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$C;A.?+ 3-1' ();D/IDU?@) ' .ARCO PO&O .AP CO.PAN/ SC-E0 &E O1 PRI.E COSTS 1OR T-E .ONT- O1 .ARCCa" material: Aeginning inventory -dd: $urchases Ca" material available for use @educt: ?nding inventory Ca" material used @irect labor /otal prime costs 3 .ARCO PO&O .AP CO.PAN/ SC-E0 &E O1 CONVERSION COSTS 1OR T-E .ONT- O1 .ARC@irect labor +anufacturing overhead applied (19F of direct labor) /otal conversion cost E129,999 69,999 E'*9,999

E13,999 113,999 E139,999 '2,999 E19*,999 129,999 E'2*,999

$C;A.?+ 3-13 (39 +IDU/?5) 1

$redetermined overhead rate = budgeted manufacturing overhead budgeted machine hours E'31,999 = = E1 per machine hour *3,999

'

)alculation of applied manufacturing overhead: -pplied manufacturing overhead K machine hrs used x predetermined overhead rate E'9,999 K *,999 hrs x E1 per hr

Underapplied overhead E3,999

K K

actual overhead H applied overhead E'3,999 H E'9,999 3,999 3,999

)ost of 4oods 5old +anufacturing ;verhead

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$C;A.?+ 3-13 ();D/IDU?@) 1 (a) )alculation of proration amounts: ?xplanation (ob $6' only (ob D96 only (ob -38 only -mountO E',199 1',199 1,999 E'9,999 $ercentage 1' 1F 2' 1F '1 9F 199 9F )alculation of $ercentage ',199 '9,999 1',199 '9,999 1,999 '9,999

-ccount 0or! in $rocess %inished 4oods )ost of 4oods 5old /otal

O+achine hours used on &ob predetermined overhead rate Underapplied ;verhead E3,999 3,999 3,999 -mount -dded to -ccount E 631 *,331 1,319 E3,999

-ccount 0or! in $rocess %inished 4oods )ost of 4oods 5old /otal (b) (ournal entry:

$ercentage 1' 1F 2' 1F '1 9F

0or!-in-$rocess Inventory %inished-4oods Inventory )ost of 4oods 5old +anufacturing ;verhead

631 *,331 1,319 3,999

$C;A.?+ 3-1* (*9 +IDU/?5) 1 In accordance "ith the I+- 5tatement of ?thical $rofessional $ractice, the appropriateness of +arc (ac!sonSs three alternative courses of action is described as follo"s: (a) Follow Brown's directive and do nothin !urther" /his action is inappropriate as (ac!son has ethical responsibilities to ta!e further action in accordance "ith the follo"ing standards of ethical conduct
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$C;A.?+ 3-1* ();D/IDU?@) #o$%etence& +aintain an appropriate level of professional expertise by continually developing !no"ledge and s!ills $erform professional duties in accordance "ith relevant la"s, regulations, and technical standards $rovide decision support information and recommendations that are accurate, clear, concise, and timely Cecogni#e and communicate professional limitations or other constraints that "ould preclude responsible &udgment or successful performance of an activity 'nte rit(& +itigate actual conflicts of interest Cegularly communicate "ith business associates to avoid apparent conflicts of interest -dvise all parties of any potential conflicts Cefrain from engaging in any conduct that "ould pre&udice carrying out duties ethically -bstain from engaging in or supporting any activity that might discredit the profession #redi)ilit(& )ommunicate information fairly and ob&ectively @isclose all relevant information that could reasonably be expected to influence an intended userSs understanding of the reports, analyses, or recommendations @isclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance "ith organi#ation policy andIor applicable la"

()) *tte$%t to convince Brown to $a+e the %ro%er ad,ust$ents and to advise the e-ternal auditors o! her actions" /his action is appropriate as (ac!son has ta!en the ethical conflict to his immediate superior for resolution Unless (ac!son suspects that his superior is involved, this alternative is the first step for the resolution of an ethical conflict
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$C;A.?+ 3-1* ();D/IDU?@) (c) .ell the *udit #o$$ittee o! the Board o! /irectors a)out the %ro)le$ and ive the$ the a%%ro%riate accountin data" /his action is not appropriate as a first step since the resolution of ethical conflicts re,uires (ac!son to first discuss the matter "ith his immediate superior ' /he next step that (ac!son should ta!e in resolving this conflict is to inform Aro"n that he is planning to discuss the conflict "ith the next higher managerial level (ac!son should pursue discussions "ith successively higher levels of management, including the -udit )ommittee and the Aoard of @irectors, until the matter is satisfactorily resolved -t the same time, (ac!son should <clarify relevant concepts by confidential discussion "ith an ob&ective advisor to obtain an understanding of possible courses of action = If the ethical conflict still exists after exhausting all levels of internal revie", (ac!son may have no course other than to resign from the organi#ation

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$C;A.?+ 3-11 ('1 +IDU/?5) 1 Muarter 1st 'nd 3rd *th ' @irect material @irect labor +anufacturing overhead: '9 hrs E* 19 per hr '9 hrs E1 per hr /otal cost 3 /otal cost +ar!up (19F) $rice *
$redetermined rate =

$redetermined ;verhead Cate E* 19 per hour 1 per hour * per hour 1 per hour (anuary E199 399 89 VVVV E*89

)alculations E89,999I'9,999 E69,999I12,999 E19,999I1',199 E39,999I1*,999 -pril E199 399 199 E199

(anuary E*89 *8 E138

annual budgeted manufacturing overhead annual budgeted direct-labor hours

-pril E199 19 E119

$290,000 = $4.64 per hour 62, 00

1 @irect material @irect labor +anufacturing overhead ('9 hrs E* 2*) /otal cost (anuary E199 99 399 99 8' 69 E*8' 69 -pril E199 99 399 99 8' 69 E*8' 69

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$C;A.?+ 3-11 ();D/IDU?@) 2 /otal cost +ar!up (19F) $rice E*8' 69 *8 '6 E1*' 96

Dotice that "ith ,uarterly overhead rates, the firm may underprice its product in (anuary and overprice it in -pril $C;A.?+ 3-12 (*1 +IDU/?5) 1 $redetermined overhead rate:
Audgeted manufacturing overhead E292,999O = Audgeted direct-labor hours 1'9,999

= E1 91 per direct-labor hour

OAudgeted manufacturing overhead K variable overhead L fixed overhead E292,999 K E389,999 L E'12,999 ' )ost of &ob 33: )ost in beginning "or!-in-process inventory @irect material @irect labor (3,199 hours E'* 99 per hour)O -pplied manufacturing overhead (3,199 hours E1 91 per hour) /otal cost O@irect-labor rate = 3 direct-labor "ages E'9*,999 = = E'* 99 per hour direct-labor hours 6,199 E1*,999 *1,999 6*,999 13,231 E'99,231

+anufacturing overhead applied to &ob 38: @irect-labor hours predetermined overhead rate

= =

',999 hours E1 91 per hour E19,199

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$C;A.?+ 3-12 ();D/IDU?@) * /otal manufacturing overhead applied during Dovember: /otal direct-labor hours predetermined overhead rate

= E*',8'1

6,199 hours E1 91

-ctual manufacturing overhead incurred during Dovember: Indirect material (supplies) Indirect-labor "ages 5upervisory salaries Auilding occupancy costs, factory facilities $roduction e,uipment costs /otal E1',999 11,999 2,999 2,*99 6,199 E*3,199

Underapplied overhead for Dovember: -ctual manufacturing overhead H applied manufacturing overhead

= =

E*3,199 H E*',8'1 E*,131 underapplied

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$C;A.?+ 3-13 (31 +IDU/?5) 1

$redetermined overhead rate = budgeted manufacturing overhead budgeted direct - labor hours E*'2,399 = = E'1 per direct - labor hour '9,399

'

(ournal entries: (a) (b) Ca"-+aterial Inventory -ccounts $ayable Ca"-+aterial Inventory -ccounts $ayable 0or!-in-$rocess Inventory Ca"-+aterial Inventory O('19 s, ft E1 per s, ft ) L (1,999 lbs E19 per lb ) +anufacturing ;verheadOO +anufacturing-5upplies Inventory 199 199 1,999 1,999 *,999 *,999 11,'19O 11,'19

(c)

OONalve lubricant is an indirect material, so it is considered an overhead cost (d) 0or!-in-$rocess Inventory +anufacturing ;verhead 0ages $ayable 0or!-in-$rocess Inventory +anufacturing ;verhead 3*,999 13,999 *3,999 31,399O 31,399

O-pplied manufacturing overhead K 1,399 direct-labor hours E'1 per hour (e) +anufacturing ;verhead -ccumulated @epreciation: Auilding and ?,uipment +anufacturing ;verhead )ash 1',999 1',999 1,'99 1,'99
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(f)

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$C;A.?+ 3-13 ();D/IDU?@) (g) (h) (i) (&) +anufacturing ;verhead -ccounts $ayable +anufacturing ;verhead )ash +anufacturing ;verhead $repaid Insurance 5elling and -dministrative ?xpenses )ash 5elling and -dministrative ?xpenses -ccumulated @epreciation: Auildings and ?,uipment 5elling and -dministrative ?xpenses )ash %inished-4oods Inventory 0or!-in-$rocess Inventory O)ost of (ob /61: @irect material ('19 E1) @irect labor (699 E'9) +anufacturing overhead (699 E'1) /otal cost (n) -ccounts Ceceivable 5ales Cevenue O(32 E1,'19 12,999 12,699 E3*,919 '2,299O '2,299 ',199 ',199 ',*99 ',*99 3,199 3,199 6,999 6,999 *,999 *,999 1,999 1,999 3*,919O 3*,919

(!)

(l) (m)

') E399 per trombone

13,9'1OO 13,9'1

)ost of 4oods 5old %inished-4oods Inventory OO13,9'1 K E3*,919

'

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$C;A.?+ 3-13 ();D/IDU?@) 3 Aal /-accounts and posting of &ournal entries: )ash 19,999 1,'99 ',*99 6,999 1,999 -ccounts Ceceivable '1,999 '2,299 (f) (h) (&) (l) -ccounts $ayable 13,999 1,999 *,999 ',199 Aal (a) (b) (g)

Aal (n)

0ages $ayable 6,999 *3,999

Aal (d)

Aal

$repaid Insurance 1,999 3,199

(i)

-ccumulated @epreciation: Auildings and ?,uipment 19',999 Aal 1',999 (e) *,999 (!) (c) (d) (e) (f) (g) (h) (i) (n) +anufacturing ;verhead 199 31,399 13,999 1',999 1,'99 ',199 ',*99 3,199 )ost of 4oods 5old 13,9'1 (d)

+anufacturing-5upplies Inventory Aal 199 199

(c)

Aal (a) (b)

Ca"-+aterial Inventory 1*8,999 1,999 11,'19 *,999 0or!-in-$rocess Inventory 81,999 11,'19 3*,919 3*,999 31,399

(c) 5elling and -dministrative ?xpenses 6,999 *,999 1,999

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Aal (c) (d) (d)

(m)

(&) (!) (l)

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$C;A.?+ 3-13 ();D/IDU?@) Aal (m) * %inished-4oods Inventory ''9,999 3*,919 13,9'1 (a) 5ales Cevenue '2,299 (n) (n)

)alculation of actual overhead: Indirect material (valve lubricant) Indirect labor @epreciation: factory building and e,uipment Cent: "arehouse Utilities $roperty taxes Insurance /otal actual overhead E 199 13,999 1',999 1,'99 ',199 ',*99 3,199 E33,899

(b)

;verapplied overhead

K E33,899 H E31,399O

actual manufacturing ap lied manufacturing o v e r h e a d o v e r h e a d

1,699 1,699

K E1,699 overapplied OE31,399 K 1,399 direct-labor hours E'1 per hour (c) +anufacturing ;verhead )ost of 4oods 5old

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$C;A.?+ 3-13 ();D/IDU?@) 1 SC-O&ASTIC BRASS CORPORATION SC-E0 &E O1 COST O1 2OO0S .AN 1ACT RE0 1OR T-E .ONT- O1 .ARC@irect material: Ca"-material inventory, +arch 1 -dd: +arch purchases of ra" material Ca" material available for use @educt: Ca"-material inventory, +arch 31 Ca" material used @irect labor +anufacturing overhead: Indirect material Indirect labor @epreciation on factory building and e,uipment Cent: 0arehouse Utilities $roperty taxes Insurance /otal actual manufacturing overhead -dd: overapplied overheadO ;verhead applied to "or! in process /otal manufacturing costs -dd: 0or!-in-process inventory, +arch 1 5ubtotal @educt: 0or!-in-process inventory, +arch 31 )ost of goods manufacturedR

E1*8,999 8,999 E116,999 1*2,319

E 11,'19 3*,999

E 199 13,999 1',999 1,'99 ',199 ',*99 3,199 E33,899 1,699

31,399 E69,819 81,999 E131,819 133,899 E 3*,919

O/he 5chedule of )ost of 4oods +anufactured lists the manufacturing costs a%%lied to "or! in process /herefore, the overapplied overhead, E1,699, must be added to actual overhead to arrive at the amount of overhead a%%lied to "or! in process during +arch
R

)ost of (ob /61, "hich "as completed during +arch

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$C;A.?+ 3-13 ();D/IDU?@) 2 SC-O&ASTIC BRASS CORPORATION SC-E0 &E O1 COST O1 2OO0S SO&0 1OR T-E .ONT- O1 .ARC%inished-goods inventory, +arch 1 -dd: )ost of goods manufactured )ost of goods available for sale @educt: %inished-goods inventory, +arch 31 )ost of goods sold @educt: ;verapplied overheadO )ost of goods sold (ad&usted for overapplied overhead) E''9,999 3*,919 E'1*,919 '33,9'1 E13,9'1 1,699 E11,''1

O/he company closes underapplied or overapplied overhead into cost of goods sold 7ence the balance in overapplied overhead is deducted from cost of goods sold for the month 3 SC-O&ASTIC BRASS CORPORATION INCO.E STATE.ENT 1OR T-E .ONT- O1 .ARC5ales revenue .ess: )ost of goods sold 4ross margin 5elling and administrative expenses Income (loss) E'2,299 11,''1 E11,331 13,999 E (1,2'1)

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$C;A.?+ 3-16 ('9 +IDU/?5) (;A-);5/ C?);C@ (ob Dumber @ate 5tarted /61 +arch 1 @escription @ate )ompleted Dumber of Units )ompleted @ate 3I1 @ate 3I6 to 3I1' @ate 3I6 to 3I1' @irect +aterial Ce,uisition Dumber Muantity 11' '19 /ime )ard Dumber 3-96 through 3-1' @irect .abor 7ours 699 Unit $rice E1 99 Cate E'9 /rombones +arch '9 32 )ost E1,'19 )ost E12,999

+anufacturing ;verhead -ctivity Aase Muantity @irect-labor hours 699 )ost 5ummary

-pplication Cate E'1

)ost E12,699

)ost Item /otal direct material /otal direct labor /otal manufacturing overhead /otal cost Unit cost

-mount E1,'19 12,999 12,699 E3*,919 E**6 93O

@ate +arch OCounded

R

5hipping 5ummary Units Cemaining Units 5hipped In Inventory 36 36

)ost Aalance E13,9'1R

E13,9'1 K E3*,919 U '

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$C;A.?+ 3-18 (11 +IDU/?5) /he ans"ers to the ,uestions are as follo"s: 1 ' 3 * 1 E''1,999 E'6,999 E39,999 E*',999 E69,999 2 3 6 8 19 E2*,999 E119,999 E*9,999 E11,999 E*,999 ;verapplied

/he completed / accounts, along "ith supporting calculations, follo" Ca"-+aterial Inventory Aal 19I31 11,999 39,999 *9,999 Aal 11I39 *1,999 0or!-in-$rocess Inventory Aal 19I31 6,999 @irect 119,999 material *9,999 @irect labor 69,999 ;verhead 2*,999 Aal 11I39 *',999 +anufacturing ;verhead 29,999 2*,999 0ages $ayable 1,999 38,199 69,999 1,199 5upporting )alculations: 1 5ales revenue K cost of goods sold 1'1F K E169,999 1'1F K E''1,999
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-ccounts $ayable 1',999 61,999 39,999 1,999

Aal 19I31 Aal 11I39

%inished-4oods Inventory Aal 19I31 31,999 119,999 169,999 Aal 11I39 1,999 )ost of 4oods 5old 169,999

5ales Cevenue ''1,999 -ccounts Ceceivable 6,999 ''1,999 '91,999 Aal 11I39 '6,999 Aal 19I31

Aal 19I31 Aal 11I39

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$C;A.?+ 3-18 ();D/IDU?@) ' ?nding balance in accounts receivable K beginning balance L sales revenue H collections K E6,999 L E''1,999 H E'91,999 K E'6,999 3 $urchases of ra" material -ddition to accounts payable K K K K * addition to accounts payable ending balance L payments H beginning balance E1,999 L E61,999 H E1',999 E39,999

Dovember 39 balance in "or!- K direct L direct L manufacturing in-process inventory material labor overhead K E'*,999 L (199)(E'9) L (199)(E12O) K E*',999 O$redetermined overhead rate K K
budgeted overhead budgeted direct -labor hours R

$768,000 48,000

K E12 per direct-labor hour

R

Audgeted direct-labor hours

budgeted direct -labor cost direct -labor rate

E829,999 = *6,999 E'9

-ddition to "or! in process for direct labor Dovember credit to "ages payable

Dovember credit to "ages payable

K ending balance L payments H beginning balance K E1,199 L E38,199 H E1,999 K E69,999

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$C;A.?+ 3-18 ();D/IDU?@) 2 Dovember applied overhead K direct labor hours predetermined overhead rate K *,999O E12 K E2*,999 @irect labor hours K K
addition to "or! in process for direct labor direct -labor rate E69,999 = *,999 hours E'9

)ost of goods completed during Dovember

beginning balance in "or! in process

additions L during H Dovember

ending balance in "or! in process

K E6,999 L (E*9,999 L E69,999 L E2*,999) H E*',999 K E119,999 6 8 Ca" material used in Dovember ;ctober 31 balance in ra"-material inventory K Dovember credit to ra"material inventory Dovember 39 balance in ra"material inventory K E*9,999 (given)

direct L material H purchases used

K E*1,999 L E*9,999 H E39,999 K E11,999 19 ;verapplied or underapplied overhead K actual overhead H applied overhead K E29,999 H E2*,999 K E*,999 ;verapplied

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$C;A.?+ 3-29 (19 +IDU/?5) 1 5chedule of budgeted overhead costs: @epartment Nariable overhead - '9,999 E12 A '9,999 E * %ixed overhead /otal overhead 4rand total of budgeted overhead (- L A):
$redetermined overhead rate =

@epartment A

E3'9,999 '99,999 E1'9,999 E69,999 '99,999 E'69,999

E699,999

total budgeted overhead rate total budgeted direct-labor hours E699,999 = = E'9 per hour *9,999

'

$roduct prices: Aasic 5ystem E1,199 119 E1,'19 -dvanced 5ystem E1,199 119 E1,219

/otal cost +ar!up, 19F of cost $rice 3 @epartmental overhead rates:

@epartment Audgeted overhead (from re,uirement 1) Audgeted direct-labor hours $redetermined overhead rates E1'9,999 '9,999 E1'9,999 '9,999 E'2 per direct-labor hour

@epartment A E'69,999 '9,999 E'69,999 '9,999 E1* per direct-labor hour

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$C;A.?+ 3-29 ();D/IDU?@) * De" product costs: Aasic 5ystem E*99 399 139 389 '19 V VVVV E1,9*9 -dvanced 5ystem E699 399

@irect material @irect labor +anufacturing overhead: @epartment -: Aasic system 1 E'2 -dvanced system 11 E'2 @epartment A: Aasic system 11 E1* -dvanced system 1 E1* /otal 1 De" product prices:

39 E1,129

/otal cost +ar!up, 19F of cost $rice

Aasic 5ystem E1,9*9 19* E1,1**

-dvanced 5ystem E1,129 112 E1,312

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$C;A.?+ 3-29 ();D/IDU?@) 2 /?.?/?)7 );C$;C-/I;D +emorandum @ate: /o: %rom: 5ub&ect: /oday $resident, /ele/ech )orporation I + 5tudent @epartmental overhead rates

Until no" the company has used a single, plant"ide overhead rate in computing product costs /his approach resulted in a product cost of E1,199 for the basic system and a cost of E1,199 for the advanced system Under the company:s pricing policy of adding a 19 percent mar!up, this yielded prices of E1,'19 for the basic system and E1,219 for the advanced system 0hen departmental overhead rates are computed, it is apparent that the t"o production departments have very different cost structures @epartment - is a relatively expensive department to operate, "hile @epartment A is less costly It is important to recogni#e the different rates of cost incurrence in the t"o departments, because our t"o products re,uire different amounts of time in the t"o departments /he basic system spends most of its time in @epartment A, the inexpensive department /he advanced system spends most of its time in @epartment -, the more expensive department /hus, using departmental overhead rates sho"s that the basic system costs less than "e had previously reali#edB the advanced system costs more /he revised product costs are E1,9*9 and E1,129 for the basic and advanced systems, respectively 0ith a 19 percent mar!up, these revised product costs yield prices of E1,1** for the basic system and E1,312 for the advanced system 0e have been overpricing the basic system and underpricing the advanced system I recommend that the company s"itch to a product costing system that incorporates departmental overhead rates

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SO& TIONS TO CASES

)-5? 3-21 (*1 +IDU/?5) 1 - &ob-order costing system is appropriate in any environment "here costs can be readily identified "ith specific products, batches, contracts, or pro&ects /his situation typically occurs in a manufacturing setting "hen relatively small numbers of heterogeneous products are produced /he only &ob remaining in )ompu%urnSs "or!-in-process inventory on @ecember 31 is &ob $561' /he cost of &ob $561' can be calculated as follo"s: (ob $561' balance, 11I39 QQQ @ecember additions: @irect material $urchased parts @irect labor +anufacturing overhead (18,199 machine hrs E1O) 0or!-in-process inventory, 1'I31
O +anufacturing overhead rate =

'

E'19,999 E1'*,999 63,999 '99,199 83,199

198,999 E318,999

E*,199,999 = E1 per machine hour 899,999 hours

/he cost of the chairs remaining in )ompu%urnSs finished-goods inventory on @ecember 31 is E*11,299, calculated as follo"s: Units of chairs in finished-goods inventory on @ecember 31: %inished-goods inventory, 11I39 -dd: Units completed in @ecember Units available @educt: Units shipped in @ecember %inished-goods inventory, 1'I31 )hair Units 18,*99 11,999 3*,*99 '1,999 13,*99

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)-5? 3-21 ();D/IDU?@) 5ince )ompu%urn uses the first-in, first-out (%I%;) inventory method, all units remaining in finished- goods inventory "ere completed in @ecember Unit cost of chairs completed in @ecember: 0or! in process inventory, 11I39 @ecember additions: @irect material $urchased parts @irect labor +anufacturing overhead (*,*99 machine hrs E1) /otal cost Unit cost K units completed K 11,999 )ost of finished-goods inventory
total cost
E119,999

E*31,999 E3,999 19,699 *3,'99 '',999

38,999 E119,999

K E3* per unit K unit cost ,uantity K E3* 13,*99 K E*11,299

;verapplied overhead is E3,199, calculated as follo"s: +achine hours used: (anuary through Dovember @ecember /otal 639,999 *8,899 638,899

-pplied manufacturing overhead K 638,899 machine hours E1 K E*,388,199 -ctual manufacturing overhead: (anuary through Dovember @ecember /otal ;verapplied overhead K applied overhead actual overhead K E*,388,199 E*,38',999 K E3,199
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E*,1*9,999 '1',999 E*,38',999

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)-5? 3-21 ();D/IDU?@) 1 If the amount of overapplied or underapplied overhead is not significant, the amount is generally treated as a period cost and closed to )ost of 4oods 5old If the amount is significant, the amount is sometimes prorated over the relevant accounts, i e , 0or!-in-$rocess Inventory, %inished-4oods Inventory, and )ost of 4oods 5old

)-5? 3-2' (19 +IDU/?5) 1 +anufacturers use predetermined overhead rates to allocate to production &obs the production costs that are not directly traceable to specific &obs -s a result, management "ill have timely, accurate &ob-cost information $redetermined overhead rates are easy to apply and avoid fluctuations in &ob costs caused by changes in production volume or overhead costs throughout the year /he manufacturing overhead applied through Dovember 39 is calculated as follo"s: +achine hours predetermined overhead rate K overhead applied 33,999 E11 K E1,981,999 3 /he manufacturing overhead applied in @ecember is calculated as follo"s: +achine hours predetermined overhead rate K overhead applied 2,999 E11 K E89,999 * Underapplied manufacturing overhead through @ecember 31 is calculated as follo"s: -ctual overhead (E1,199,999 L E82,999) -pplied overhead (E1,981,999 L E89,999) Underapplied overhead E1,182,999 (1,161,999) E 11,999

'

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)-5? 3-2' ();D/IDU?@) 1 /he balance the %inished-4oods Inventory account on @ecember 31 is comprised only of (ob Do D11-913 and is calculated as follo"s: Dovember 39 balance for (ob Do D11-913 @ecember direct material @ecember direct labor @ecember overhead (1,999 E11) /otal finished-goods inventory E11,999 *,999 1',999 11,999 E62,999

%iber)omSs 5chedule of )ost of 4oods +anufactured for the year &ust completed is constructed as follo"s: 1IBERCO. CO.PAN/ SC-E0 &E O1 COST O1 2OO0S .AN 1ACT RE0 1OR T-E /EAR EN0E0 0ECE.BER $! @irect material: Ca"-material inventory, 1I1 Ca"-material purchases (E821,999 L E86,999) Ca" material available for use @educt: Indirect material used (E1'1,999 L E8,999) Ca"-material inventory 1'I31 Ca" material used @irect labor (E6*1,999 L E69,999) +anufacturing overhead: Indirect material (E1'1,999 L E8,999) Indirect labor (E3*1,999 L E39,999) Utilities (E'*1,999 L E'',999) @epreciation (E361,999 L E31,999) /otal actual manufacturing overhead @educt: Underapplied overhead ;verhead applied to "or! in process /otal manufacturing costs -dd: 0or!-in-process inventory, 1I1 5ubtotal @educt: 0or!-in-process inventory, 1'I31O )ost of goods manufactured O5upporting calculations follo" E 191,999 1,923,999 E1,126,999 E13*,999 61,999 '18,999 E8*8,999 8'1,999

E13*,999 331,999 '23,999 *'9,999

1,182,999 11,999 E1,161,999 E3,918,999 29,999 E3,118,999 119,'99 E',826,699

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)-5? 3-2' ();D/IDU?@) O5upporting calculations for "or! in process 1'I31: @irect material @irect labor -pplied overhead: ',199 hrs E11 699 hrs E11 /otal @1'-99' E33,899 '9,999 33,199 VVVVVV E81,*99 @1'-993 E'2,999 12,699 E1',999 E1*,699 /otal E23,899 32,699 33,199 1',999 E119,'99

1OC S ON ET-ICS 7See 8age !4, in the te9t5:

@id Aoeing exploit accounting rules to conceal cost overruns and production snafusP -ccording to the circumstances alleged in the Business 0ee+ article cited in the text (page 999), Aoeing did not handle its cost overruns, production problems, and the merger "ith +c@onnell-@ouglas in a transparent manner Aoeing allegedly acted to conceal its "orsening operational problems through <earnings management= to ensure that the merger "ould be approved by the stoc!holders of both companies 0hile the method of <program accounting= is common in the aircraft industry, in this rather extreme case that accounting method did not result in a fair portrayal of the companySs financial and operational situation -s a result, the merger "as approved on the basis of alleged misleading information, and it is the investors "ho "ill bear the brunt of this action /he companySs top executives and their accountants must share the responsibility for these actions, the former for providing the data and the latter for approving it for public release Do accounting system should be used as a tool to cover up operational problems and mislead shareholders ;ne "onders also "hat the auditors "ere doing to assess the accuracy of the accounting information

[Final version]

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