CHAPTER 3

Product Costing and Cost Accumulation in a

Batch Production Environment

3-2, 3-4, 3-6, 3-19, 3-30 (1~2), 3-34 (1~3), 3-42, 3-49, 3-50 (1~3)
ANSWERS TO REVIEW QUESTIONS
3-2 In a job-order costing system, costs are assigned to batches or job orders of
production. Job-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. Process-costing systems are used by
firms that produce large numbers of nearly identical products.
3-4 a. Material requisition form: A document upon which the production department
supervisor requests the release of raw materials for production.
b. Labor time record: A document upon which employees record the time they spend
working on each production job or batch.
c. Job-cost record: A document on which the costs of direct material, direct labor,
and manufacturing overhead are recorded for a particular production job or batch.
The job-cost record is a subsidiary ledger account for the Work-in-Process
Inventory account in the general ledger.
3-6 The primary benefit of using a predetermined overhead rate instead of an actual
overhead rate is to provide timely information for decision making, planning, and
control.
3-19 Overapplied or underapplied overhead is caused by errors in estimating the
predetermined overhead rate. These errors can occur in the numerator (budgeted
manufacturing overhead), or in the denominator (budgeted level of the cost driver).

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SOLUTIONS TO EXERCISES
EXERCISE 3-30

1. CRUNCHEM CEREAL COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, January 1 ............................... $ 30,000
Add: Purchases of raw material .................................... 278,000
Raw material available for use ...................................... $308,000
Deduct: Raw-material inventory, December 31 ........... 33,000
Raw material used.......................................................... $275,000
Direct labor .............................................................................. 120,000
Manufacturing overhead 252,000 *
Total manufacturing costs ..................................................... $647,000
Add: Work-in-process inventory, January 1 ......................... 39,000
Subtotal ................................................................................... $686,000
Deduct: Work-in-process inventory, December 31 .............. 42,900
Cost of goods manufactured ................................................. $643,100

*Applied manufacturing overhead is $252,000 ($120,000  210%). Actual manufacturing

overhead is also $252,000, so there is no overapplied or underapplied overhead.

2. Finished-goods inventory, January 1 ........................................................... $ 42,000

Add: Cost of goods manufactured ................................................................ 643,100
Cost of goods available for sale .................................................................... $685,100
Deduct: Finished-goods inventory, December 31 ........................................ 46,200
Cost of goods sold ......................................................................................... $638,900

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EXERCISE 3-34

NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant
to the solution.

$997,500
1. Predetermi ned overhead rate = = $13.30 per hour
75,000 hours

2. To compute actual manufacturing overhead:

Depreciation $ 231,000
Property taxes 21,000
Indirect labor 82,000
Supervisory salaries 200,000
Utilities 59,000
Insurance 30,000
Rental of space 300,000
Indirect material:
Beginning inventory, January 1 ..................................... $ 48,000
Add: Purchases ............................................................... 94,000
Indirect material available for use .................................. $142,000
Deduct: Ending inventory, December 31 ....................... 63,000
Indirect material used...................................................... 79,000
Actual manufacturing overhead ............................................ $1,002,000

actual applied
Overapplied = manufacturing – manufacturing
overhead overhead overhead

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

*Actual direct-labor hours.

3. Manufacturing Overhead...................................................... 62,000

Cost of Goods Sold .................................................... 62,000

Managerial Accounting, 12/e 3-3

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PROBLEM 3-42

NOTE: The 12/31/x1 balances for cash and accounts receivable, although given in the
problem, are irrelevant to the solution.

1. TWISTO PRETZEL COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1

Direct material:
Raw-material inventory, 12/31/x0 ................................... $10,100
Add: Purchases of raw material ..................................... 39,000
Raw material available for use ....................................... $49,100
Deduct: Raw-material inventory, 12/31/x1 ..................... 11,000
Raw material used ........................................................... $38,100
Direct labor ............................................................................. 79,000
Manufacturing overhead:
Indirect material ............................................................... $ 4,900
Indirect labor .................................................................... 29,000
Depreciation on factory building .................................... 3,800
Depreciation on factory equipment................................ 2,100
Utilities ............................................................................. 6,000
Property taxes ................................................................. 2,400
Insurance ......................................................................... 3,600
Rental of warehouse space ............................................ 3,100
Total actual manufacturing overhead ....................... $54,900
Add: Overapplied overhead* ...................................... 3,100
Overhead applied to work in process ............................ 58,000
Total manufacturing costs ..................................................... $175,100
Add: Work-in-process inventory, 12/31/x0 ........................... 8,100
Subtotal ................................................................................... $183,200
Deduct: Work-in-process inventory, 12/31/x1 ...................... 8,300
Cost of goods manufactured ................................................. $174,900

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work
in process. Therefore, the overapplied overhead, $3,100, must be added to total actual
overhead to arrive at the amount of overhead applied to work in process. If there had been
underapplied overhead, the balance would have been deducted from total actual
manufacturing overhead. The amount of overapplied overhead is found by subtracting actual
overhead, $54,900 (as computed above), from applied overhead, $58,000 (given).

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PROBLEM 3-42 (CONTINUED)

2. TWISTO PRETZEL COMPANY

SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1

Finished-goods inventory, 12/31/x0 .............................................................. $ 14,000

Add: Cost of goods manufactured* .............................................................. 174,900
Cost of goods available for sale .................................................................... $188,900
Deduct: Finished-goods inventory, 12/31/x1 ................................................ 15,400
Cost of goods sold ......................................................................................... $173,500
Deduct: Overapplied overhead† .................................................................... 3,100
Cost of goods sold (adjusted for overapplied overhead) ............................ $170,400

*The cost of goods manufactured is obtained from the Schedule of Cost of Goods
Manufactured.

†The company closes underapplied or overapplied overhead into cost of goods sold. Hence,
the balance in overapplied overhead is deducted from cost of goods sold for the month.

3. TWISTO PRETZEL COMPANY

INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1

Sales revenue ............................................................. $205,800

Less: Cost of goods sold ........................................... 170,400
Gross margin .............................................................. $ 35,400
Selling and administrative expenses:
Salaries................................................................. $13,800
Utilities ................................................................. 2,500
Depreciation ......................................................... 1,200
Rental of office space.......................................... 1,700
Other expenses.................................................... 4,000
Total ...................................................................... 23,200
Income before taxes ................................................... $12,200
Income tax expense ................................................... 5,100
Net income .................................................................. $ 7,100

Managerial Accounting, 12/e 3-5

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PROBLEM 3-49

budgetedmanufacturing overhead
1. Predetermined overheadrate =
budgetedmachinehours
$1,464,000
= = $20 per machinehour
73,200

2. Journal entries:

(a) Raw-Material Inventory...................................... 7,850

Accounts Payable .................................... 7,850

(b) Work-in-Process Inventory ............................... 180

Raw-Material Inventory ........................... 180

(c) Manufacturing Overhead................................... 30

Manufacturing-Supplies Inventory ......... 30

(d) Manufacturing Overhead................................... 800

Cash.......................................................... 800

(e) Work-in-Process Inventory ............................... 75,000

Wages Payable ........................................ 75,000

(f) Selling and Administrative Expense ................ 1,800

Prepaid Insurance ................................... 1,800

(g) Raw-Material Inventory...................................... 3,000

Accounts Payable .................................... 3,000

(h) Accounts Payable .............................................. 1,700

Cash.......................................................... 1,700

(i) Manufacturing Overhead................................... 21,000

Wages Payable ........................................ 21,000

(j) Manufacturing Overhead................................... 7,000

Accumulated Depreciation: Equipment . 7,000

(k) Finished-Goods Inventory ................................. 1,100

Work-in-Process Inventory ..................... 1,100

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PROBLEM 3-49 (CONTINUED)

(l) Work-in-Process Inventory ................................ 140,000*

Manufacturing Overhead ......................... 140,000

*Applied manufacturing overhead = 7,000 machine hours  $20 per hour.

(m) Accounts Receivable ......................................... 176,000

Sales Revenue.......................................... 176,000

Cost of Goods Sold ............................................ 139,000

Finished-Goods Inventory....................... 139,000

Managerial Accounting, 12/e 3-7

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PROBLEM 3-50

1. HURON CORPORATION
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X2

Direct material:
Raw material inventory, 12/31/x1........................ $ 89,000
Add: Purchases of raw material ........................... 731,000
Raw material available for use ............................. $820,000
Deduct: Raw-material inventory, 12/31/x2 ........... 59,000
Raw material used ................................................. $761,000
Direct labor ................................................................... 474,000
Manufacturing overhead:
Indirect material ..................................................... $ 45,000
Indirect labor .......................................................... 150,000
Depreciation on factory building .......................... 125,000
Depreciation on factory equipment ...................... 60,000
Utilities ................................................................... 70,000
Property taxes........................................................ 90,000
Insurance ............................................................... 40,000
Total actual manufacturing overhead ............ $580,000
Deduct: Underapplied overhead* ................... 2,500
Overhead applied to work in process .................. 577,500
Total manufacturing costs ........................................... $1,812,500
Add: Work-in-process inventory, 12/31/x1 ................. -0-
Subtotal ......................................................................... $1,812,500
Deduct: Work-in-process inventory, 12/31/x2 ............ 40,000
Cost of goods manufactured ....................................... $1,772,500

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work
in process. Therefore, the underapplied overhead, $2,500, must be deducted from total actual
overhead to arrive at the amount of overhead applied to work in process. If there had been
overapplied overhead, the balance would have been added to total manufacturing overhead.
The amount of underapplied overhead is found by subtracting the applied
manufacturing overhead, $577,500, from the total actual manufacturing overhead, $580,000.

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PROBLEM 3-50 (CONTINUED)

2. HURON CORPORATION
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X2

Finished-goods inventory, 12/31/x1 ....................................................... $ 35,000

Add: cost of goods manufactured ......................................................... 1,772,500
Cost of goods available for sale ............................................................. $1,807,500
Deduct: Finished-goods inventory, 12/31/x2 ......................................... 40,000
Cost of goods sold .................................................................................. $1,767,500
Add: Underapplied overhead* ................................................................ 2,500
Cost of goods sold (adjusted for underapplied overhead) .................. $1,770,000

*The company closes underapplied or overapplied overhead into cost of goods sold. Hence
the $2,500 balance in underapplied overhead is added to cost of goods sold for the month.

3. HURON CORPORATION
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X2

Sales revenue........................................................................................... $2,105,000

Less: Cost of goods sold ........................................................................ 1,770,000
Gross margin ........................................................................................... $ 335,000
Selling and administrative expenses ..................................................... 269,000
Income before taxes ................................................................................ $ 66,000
Income tax expense ................................................................................. 25,000
Net income ............................................................................................... $ 41,000

Managerial Accounting, 12/e 3-9

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