During week three you will be reading about applying overhead costs to a job or batch. Problem 3-54 on page 126 in your textbook has a great ethical issue around the under application of manufacturing overhead. Please read the scenario presented in that p

20191104233002hiltonplatt_11e_sm_ch031 x
 

During week three you will be reading about applying overhead costs to a job or batch. Problem 3-54 on page 126 in your textbook has a great ethical issue around the under application of manufacturing overhead. Please read the scenario presented in that problem. Then in your post answer the two questions posed. Question #1 asks you for each of the tree alternative courses of action that Jackson is considering, explain whether or not the action is appropriate. For question #2 assume that Jackson again approaches Brown to make the necessary adjustments and is unsuccessful. Describe the steps that Jackson should take in proceeding to resolve this situation.

CHAPTER3

Product

Cost

ing and Cost Accumulation in a Batch Production Environment

Focus on ethics (Located before the Chapter Summary in the te

x

t.)

Did Boeing exploit accounting rules to conceal cost overruns and production snafus?

According to the circumstances alleged in the Business Week article cited in the text, Boeing did not handle its cost overruns, production problems, and the merger with McDonnell-Douglas in a transparent manner. Boeing allegedly acted to conceal its worsening operational problems through “earnings management” to ensure that the merger would be approved by the stockholders of both companies. While 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 company’s financial and operational situation. As a result, the merger was approved on the basis of alleged misleading information, and it is the investors who will bear the brunt of this action.

The company’s 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. No accounting system should be used as a tool to cover up operational problems and mislead shareholders. One wonders also what the auditors were doing to assess the accuracy of the accounting information.

Answers to Review Questions

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 cost-of-goods-sold expense on the income statement.

1.

Use in managerial accounting: In managerial accounting, product costs are needed for planning, for cost control, and for decision making.

1. 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.

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.

3-3 Concepts of product costing are

applied

in service industry firms to inform management of the costs of producing services. For example, banks record the costs of producing financial services for the purposes of planning, cost control, and decision making.

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 sheet is a subsidiary ledger account for the

Work-in-Process Inventory

account in the general ledger.

3-5 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.

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.

3-7 An advantage of prorating overapplied or underapplied overhead is that it results in the adjustment of all the accounts affected by misestimating the overhead rate. These accounts include the Work-in-Process Inventory account, the

Finished-Goods Inventory

account, and the

Cost of Goods

Sold

account. The resulting balances in these accounts are more accurate when proration is used than when overapplied or underapplied overhead is closed directly into

Cost of Goods Sold

. The 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 Cost of Goods Sold.

3-8 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.

3-9 The difference between actual and normal costing systems involves the procedure for applying manufacturing overhead to Work-in-Process 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.

3-10 When a single volume-based cost driver is used to apply manufacturing overhead, the managerial accountant’s primary objective is to select a cost driver that varies in a pattern similar to the pattern in which manufacturing overhead varies. Moreover, if a single cost driver is used, it should be some productive input that is common to all of the firm’s products.

3-11 The benefit of using multiple overhead rates is that the resulting product-costing information is more accurate and more useful for decision making than is the information that results from using a single overhead rate. However, the use of multiple cost drivers and overhead rates is more complicated and more costly.

3-12 The development of departmental overhead rates involves a two-stage process. In stage one, overhead costs are assigned to the firm’s production departments. First, overhead costs are distributed to all departments, including both service and production departments. Second, costs are allocated from the service departments to the production departments. At the end of stage one, all overhead costs have been assigned to the production departments.

In stage two, the costs that have been accumulated in the production departments are applied to the production jobs that pass through the departments.

3-13 a.

Overhead

cost distribution: Assignment of all manufacturing-overhead costs to department overhead centers.

b. Service department cost allocation: Allocation 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. Overhead application (or overhead absorption): The assignment of all manufacturing overhead costs accumulated in a production department to the jobs that the department has worked on.

These three processes are used in developing departmental overhead rates.

3-14 Job-order costing concepts are used in professional service firms. However, rather than referring to production “jobs,” such organizations use terminology that reflects their operations. For example, hospitals and law firms assign costs to “cases,” and governmental agencies often refer to “programs” or “missions.” It is important in such organizations to accumulate the costs of providing the services associated with a case, project, contract, or program. Such cost information is used for planning, cost control, and pricing, among other purposes.

3-15 A cost driver is a characteristic of an event or activity that results in the incurrence of costs by that event or activity. A volume-based cost driver is one that is closely associated with production activity, such as the number of units produced,

direct-labor

hour

s, or machine hours.

3-16 When direct material, direct labor, and manufacturing-overhead costs are incurred, they are applied to Work-in-Process Inventory by debiting the account. When goods are finished, the costs are removed from that account with a credit, and they are transferred to Finished-Goods Inventory by debiting that account. Subsequently, when the goods are sold, Finished-Goods Inventory is credited, and the costs are added to Cost of Goods Sold with a debit.

3-17 Hospitals use job-order costing concepts to accumulate the costs associated with each case treated in the hospital. For example, the costs of treating a heart patient would be assigned to that patient’s case. These costs would include the hospital room, food and beverages, medications, and specialized services such as diagnostic testing and X rays.

3-18 Some manufacturing firms are switching 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. With 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 way in which manufacturing-overhead costs are incurred.

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).

3-20 Overapplied or underapplied overhead can be closed directly into Cost of Goods Sold, or it can be prorated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.

3-21 A large retailer would assign overhead costs as part of the cost of goods sold. At a retailer, such costs tend to be the support costs associated with moving products to be sold, controlling those products (theft prevention), and management of the operation.

3-22 A non-profit organization would assign overhead costs as part of the cost of services delivered. At a non-profit organization, such costs would include the support costs required to be able to deliver the services that are included in their mission. These can include such items as supervision, transportation, security, and governmental reporting.

Solutions to Exercises

Exercise 3-23 (10 minutes)

1. Process

1. Job-order

1. Job-order (contracts or projects)

1. Process
1. Process

5.

Job-order

6.

Process

7.

Job-order (contracts or projects)

8.

Process

9.

Job-order

Exercise 3-24 (15 minutes)

1.

(a)

At 200 ,000 chicken volume:

(b)

At 30 0 ,000 chicken volume:

(c)

At 400 ,000 chicken volume:

Exercise 3-24 (continued)

2.

The predetermined overhead rate does not change in proportion to the change in production volume. As production volume increases, the $

100

,000 of fixed overhead is allocated across a larger activity base. When volume rises by 50%, from

200,000

to

300,000

chickens, the decline in the overhead rate is 28.33% [(.60

–

.43)/.60]. When volume rises by 3

3.

33%, from 300,000 to 400,000 chickens, the decline in the overhead rate is 18.6% [(.43 – .35)/.43].

Exercise 3-25 (5 minutes)

5,480

5,480

								Work-in-Process Inventory			5,480
Raw-Material Inventory	4,600
Wages Payable (40 x $17)	680
Manufacturing Overhead (40 x ($5)	200
		Finished-Goods Inventory
Work-in-Process Inventory

EXERCISE 3-26 (30 MINUTES)

Job-order costing is the appropriate product-costing system for feature film production, because a film is a unique production. The production process for each film would use labor, material and support activities (i.e., overhead) in different ways. This would be true of any type of film (e.g., filming on location, filming in the studio, or using animation).

Exercise 3-27 (20 minutes)

1.

$501,000

Raw-material inventory, January 1	$13 4,000
Add: Raw-material purchases	19 1,000
Raw material available for use	$32 5,000
Deduct: Raw-material inventory, January 31	124,000
Raw material used in January	$2 01,000
										Direct labor	300 ,000
Total prime costs incurred in January		$501,000
																				2.	Total prime cost incurred in January
Applied manufacturing overhead (60% $300,000)	180 ,000
	Total manufacturing cost for January		$6 81,000

Exercise 3-27 (continued)

Total manufacturing cost for January

$681,000

												3.
	Add: Work-in-process inventory, January 1	2 35,000
					Subtotal	$9 1 6,000
Deduct: Work-in-process inventory, January 31	251,000
				Cost of goods manufactured	$665,000

4.

Finished-goods inventory, January 1

$12

5,000

Add: Cost of goods manufactured

 665,000

Cost of goods available for sale

$7

90,000

Deduct: Finished-goods inventory, January 31

 1

1

7,000

Cost of goods sold

$67

3,000

Since the company accumulates overapplied or underapplied overhead until the end of the year, no adjustment is made to cost of goods sold until December 31.

5.

Applied manufacturing overhead for January

$

1

80,000

Actual

manufacturing overhead incurred in January

 1

75,000

Overapplied overhead

as of January 31

$ 5,000

The balance in the Manufacturing Overhead account on January 31 is a $5,000 credit balance.

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

Exercise 3-28 (15 minutes)

1.

=

=

Applied manufacturing overhead

=

=

=

=

	Applied manufacturing overhead																									=	total manufacturing costs30%
$2, 500 ,00030%
$750,000
direct-labor cost80%
Direct-labor cost	applied manufacturing overhead80%
$750,000.8
$937,500

2.

Direct-material cost

=

total manufacturing cost

– direct labor cost

– applied manufacturing overhead

=

$

2,500

,000 – $937,500 – $750,000

=

$812,500

3.

Let X denote work-in-process inventory on December 31.

Total

work-in-process

work-in-process

cost of

manufacturing

+

inventory,

–

inventory,

=

goods

cost

Jan.1

Dec. 31

manufactured

$2,500,000

+

.75X

–

X

=

$2,425,000

.25X

=

$2,500,000 – $2,425,000

X

=

$300,000

Work-in-process inventory on December 31 amounted to $300,000.

Exercise 3-29 (25 minutes)

4/1

Date

Cost

500

Date

Quantity

Cost

4/15

500

JOB-COST RECORD

Job Number

TB78

Description

teddy bears

Date Started

4/1

Date Completed

4/15

Number of Units Completed

1,000

Direct Material

Date

Requisition Number

Quantity

Unit Price

Cost

101

400

$.80

$320

4/5

108

500

.30

150

Direct Labor

Time Card Number

Hours

Rate

4/1 – 4/8

Various time cards

$12

$6,000

Manufacturing Overhead

Activity Base

Application Rate

Direct-labor hours

$2

$1,000

Cost Summary

Cost Item

Amount

Total Direct Material Total Direct Labor Total Manufacturing Overhead

$  470 6,000 1,000

Total Cost

$7,470

Unit Cost

$ 7.47

Shipping Summary

Date

Units Shipped

Units Remaining In Inventory

Cost Bal ance

4/30

700

300

$2,241 *

*300 units remaining in inventory$7.47 = $2,241

Exercise 3-30 (30 minutes)

1.

Direct labor

Add: Work-in-process inventory, January 1

Subtotal

Cost of goods manufactured

Crunchem Cereal Company Schedule of Cost of Goods Manufactured For the Year Ended December 31, 20×1
				Direct material:
Raw-material inventory, January 1	$  30,000
		Add: Purchases of raw material	27 8,000
					Raw material available for use	$308,000
Deduct: Raw-material inventory, December 31	33,000
			Raw material used	$275,000
120,000
Manufacturing overhead	25 2,000		*
				Total manufacturing costs	$647,000
39,000
$ 686,000
Deduct: Work-in-process inventory, December 31	42,900
$64 3,100

*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

Add: Cost of goods manufactured

Cost of goods available for sale

Cost of goods sold

$ 42,000
643,100
$685,100
Deduct: Finished-goods inventory, December 31	46,200
$6 38 ,900

3. In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet 03-30.xls
Exercise 3-31 (20 minutes)

1.

Manufacturing Overhead

120,000

18,000

195,000

132,000

		Raw-Material Inventory				Work-in-Process Inventory
227,000		18,000
174,000	DM 174,000
53,000	DL 324,000
MOH 180,000
	Wages Payable		120,000
324,000		5 76 ,000
				Finished-Goods Inventory
		180,000	30,000
		Sales Revenue		132,000
	195,000
	Account s Receivable						Cost of Goods Sold

2.

XXX

576,000

Reimel Furniture Company, Inc. Partial Balance Sheet as of December 31, 20×2
Current assets
Cash		XXX
Accounts receivable
Inventory
Raw material	$ 53,000
Work in process
Finished goods	18,000
Reimel Furniture Company, Inc. Partial Income Statement for the Year Ended December 31, 20×2
			Sales revenue	$195,000
			Less: Cost of goods sold	132,000
			Gross margin	$ 63,000

Exercise 3-32 (20 minutes)

1.

2.

 326,000

=

=

$360,000

=

$360,000

=

Direct labor

=

3.

	Raw material:
Beginning inventory	$ 71,000
Add: Purchases	?
Deduct: Raw material used		326,000
Ending inventory	$ 81,000
Therefore, purchases for the year were	$3 36,000
Direct labor:
Total manufacturing cost	$686,000
Deduct: Direct material
Direct labor and manufacturing overhead	3 60,000
Direct labor + manufacturing overhead			$360,000
Direct labor + (60%) (direct labor)
(160%) (direct labor)
	Direct labor	$360,000
1.6
$225,000
Cost of goods manufactured:
Work in process, beginning inventory	$ 80,000
Add: Total manufacturing costs	686,000
Deduct: Cost of goods manufactured		?
Work in process, ending inventory	$ 30,000
Therefore, cost of goods manufactured was	$736,000

Exercise 3-32 (Continued)

4.

      ?

Cost of goods sold:
Finished goods, beginning inventory	$ 90,000
Add: Cost of goods manufactured	736,000
Cost of goods available for sale	$826,000
Deduct: Cost of goods sold
Finished goods, ending inventory	$1 10,000
Therefore, cost of goods sold was	$716,000

Exercise 3-33 (20 minutes)

Calculation of

proration amounts:

Amount

Percentage

Cost of Goods Sold

Total

Calculation of
	Account			Percent age
		Work in Process	$ 35, 250	25%	35,250 $141,000
		Finished Goods	49,350	35%	49,350 $141,000
5 6,400	40%	56,400 $141,000
$141,000	100%

Account

Percentage

Work in Process

x

Finished Goods

x

Cost of Goods Sold

16,000

x

Underapplied	Amount Added
	Overhead				x	to Account
$16,000 *	25%	$4,000
	16,000	35%	5,600
40%	6,400

*

Underapplied overhead

= actual overhead – applied overhead

$16,000 = $157,000 – $141,000

Work-in-Process Inventory

Finished-Goods Inventory

Cost of Goods Sold

Manufacturing Overhead

Journal entry:
				4,000
5,600
	6,400
16,000

Exercise 3-34 (15 minutes)

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

1.

2.

=

manufacturing

–

manufacturing

overhead

overhead

=

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

*Actual direct-labor hours.

3.

62,000

Manufacturing Overhead

62,000

Cost of Goods Sold

4. In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet 03-34.xls

EXERCISE 3-35 (20 MINUTES)

NOTE: Budgeted sales revenue, although given in the exercise, is irrelevant to the solution.

1.

=

(a)

=

(b)

=

(c)

=

Predetermined overhead rate

$36.40 per machine hour

$18.20 per direct-labor hour

$1.30 per direct-labor dollar or 130% of direct-labor cost

*Budgeted direct-labor cost = 20,000$14

2.

(a)

=

(b)

=

(c)

=

Actual manufacturing overhead	–	applied manufacturing overhead	=	overapplied or underapplied overhead
$ 3 40,000 – ( 11,000 )($36.40)	$60,400 overapplied overhead
$340,000 – (18,000)($18.20)	$1 2,400 underapplied overhead
$340,000 – ($2 70,000 † )(130%)	$11,000 overapplied overhead

†Actual direct-labor cost = 18,000$15

Exercise 3-36 (5 minutes)

1.

Work-in-Process Inventory

340,000

2.

Work-in-Process Inventory

Manufacturing Overhead

400,400

	340,000
				Manufacturing Overhead
	400,400

EXercise 3-37 (10 minutes)

Budgeted overhead

rate = budgeted overhead / budgeted direct professional labor

160% = 400,000 euros / 250,000 euros

Contract to redecorate mayor’s offices:
			Direct material	3,500 euros
Direct professional labor	6,000 euros
Overhead (160% 6,000 euros)	9,600 euros
Total contract cost	19,100 euros

exercise 3-38 (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.

Exercise 3-38 (Continued)

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 3-39 (15 minutes)

Manufacturing Overhead

Manufacturing Overhead

Work-in-Process Inventory: Tanning Department	6,000a
		Manufacturing Overhead					6,000
Work-in-Process Inventory: Assembly Department	540 b
540
Work-in-Process Inventory: Saddle Department	3,200 c
3,200

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.

EXERCISE 3-41 (15 MINUTES)

1.

2.

3.

4.

Total staff compensation = $280,000 + $420,000 = $700,000

Overhead rate = total budgeted overhead/total budgeted staff compensation

= $756,000/$700,000

= 108%

Applied overhead = 108% × total direct professional labor

= 108% × ($ 1,200 + $2,000)

= $3,456

Applied overhead using single cost driver = $3,456

Applied overhead using two cost drivers = $3,480 ($1,080 + $2,400) See the illustration in the text.

solutions to Problems

Problem 3-42 (45 minutes)

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

1.

Direct material:

Add: Purchases of raw material

Raw material available for use

Raw material used

Direct labor

6,000

  3,100

Total manufacturing costs

Subtotal

Cost of goods manufactured

Twisto Pretzel Company Schedule of Cost of Goods Manufactured For the Year Ended December 31, 20×1
Raw-material inventory, 12/31/x0	$10,100
39,000
$49,100
Deduct: Raw-material inventory, 12/31/x1	11,000
$38,100
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
		Property taxes				2,400
		Insurance	3,600
Rental of warehouse space			3,100
		Total actual manufacturing overhead	$54,900
Add: Overapplied overhead*
		Overhead applied to work in process	58,000
$175,100
Add: Work-in-process inventory, 12/31/x0		8,100
$183,200
Deduct: Work-in-process inventory, 12/31/x1	8,300
$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).

Problem 3-42 (Continued)

2.

Cost of goods available for sale

Cost of goods sold

  3,100

Twisto Pretzel Company Schedule of Cost of Goods Sold For the Year Ended December 31, 20×1
Finished-goods inventory, 12/31/x0	$ 14,000
Add: Cost of goods manufactured*	174,900
$188,900
Deduct: Finished-goods inventory, 12/31/x1	15,400
$173,500
Deduct: Overapplied overhead†
	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.

Sales revenue

Less: Cost of goods sold

Gross margin

Utilities

Twisto Pretzel Company Income Statement For the Year Ended December 31, 20×1
$20 5,800
170,400
$ 35,400
Selling and administrative expenses:
Salaries	$13,800
			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

Problem 3-43 (20 minutes)

1.

2.

(a)

33,000

(b)

Work-in-Process Inventory

460

(c)

Manufacturing Overhead

100

Manufacturing Overhead

8,000

Manufacturing Overhead

400

400

Work-in-Process Inventory

34,000

Work-in-Process Inventory

Manufacturing Overhead

20,400

		Journal entries:
				Raw-Material Inventory		33,000
					Accounts Payable
	460
	Raw-Material Inventory
	100
	Manufacturing-Supplies Inventory
	(d)						8,000
Accumulated Depreciation: Building
	(e)
				Cash
		(f)		34,000
			Wages Payable
To record direct-labor cost [(1,000 + 700) x $20].
	20,400

Manufacturing Overhead

910

Manufacturing Overhead

2,500

Wages Payable

2,500

Finished-Goods Inventory

14,400

To apply manufacturing overhead to work in process ($20,400 = 1,700$12 per hour).
			(g)		910
Property Taxes Payable
			(h)
		(i)		14,400
	Work-in-Process Inventory

Problem 3-43 (continued)

13,500

			(j)		Accounts Receivable		13,500
	Sales Revenue
		Cost of Goods Sold	10,800 *
	Finished-Goods Inventory		10,800
*$10,800 = (9/12)($14,400)

Problem 3-44 (25 minutes)

The completed T-accounts are shown below. (Missing amounts in problem are italicized.)

Raw-Material Inventory

21,000

2,500

Bal. 1/1

135,000

1,000

Bal. 12/31

Work-in-Process Inventory

Finished-Goods Inventory

Bal. 1/1

Bal. 1/1

material

Bal. 12/31

Cost of Goods Sold

710,000

Manufacturing Overhead

450,000

Sales Revenue

Wages Payable

Bal. 1/1

Accounts Receivable

150,000

Bal. 1/1

Bal. 12/31

810,000

Bal. 12/31

		Accounts Payable
					Bal. 1/1
	135,000	120,000	136,500
				Bal. 12/31	36,000
17,000			12,000
		Direct	120,000	Bal. 12/31	718,000 20,000		710,000
Direct labor					150,000	718,000
Mfg. overhead		450,000
19,000
452,500
	810,000
2,000
147,000	11,000
				5,000	806,000
		15,000

PROBLEM 3-45 (35 MINUTES)

1. Predetermined overhead rate = budgeted overhead ÷ budgeted machine hours = $840,000 ÷ 16,000 = $52.50 per machine hour

2. (a) Work-in-Process Inventory 80,000* Raw-Material Inventory 80,000

Work-in-Process Inventory 130,800** Wages Payable 130,800

*

$21

,000 + $44,000 +

$15,000

=

$80,000

** $35,000 + $22,000 + $65,000 + $8,800 = $130,800

(b) Manufacturing Overhead 238,500 Accumulated Depreciation 34,000 Wages Payable 60,000 Manufacturing Supplies Inventory 5,000 Miscellaneous Accounts 139,500

(c) Work-in-Process Inventory 231,000* Manufacturing Overhead 231,000

* (1,200 + 700 + 2,000 + 500) x $52.50 = $231,000

(d) Finished-Goods Inventory 315,250* Work-in-Process Inventory 315,250

* Job 64: $84,000 + $21,000 + $35,000 + (1,200 x $52.50) = $203,000

Job 65: $53,500 + $22,000 + (700 x $52.50) = $

112

,250

$315,250 = $203,000 + $112,250

(e) Accounts Receivable…………………………………………… 146,950*

Sales Revenue 146,950

* $112,250 + $34,700 = $146,950

Cost of Goods Sold 112,250

Finished-Goods Inventory 112,250

3. Job no. 66 and no. 67 are in production as of

March

31:

Job 66: $44,000 + $65,000 + (2,000 x $52.50) $214,000

Job 67: $15,000 + $8,800 + (500 x $52.50) 50,050

Total $264,050

PROBLEM 3-45 (CONTINUED)

4. Finished-goods inventory increased by $203,000 ($315,250 – $112,250).

5. The company’s actual overhead amounted to $238,500, whereas applied overhead totaled $231,000. Thus, overhead was underapplied by $7,500.

PROBLEM 3-46 (35 MINUTES)

1. Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor cost = $5,460,000 ÷ $4,200,000 = 130% of direct labor cost

2. Additions (debits) total $15,605,000 [$5,600,000 + $4,350,000 + ($4,350,000 x 130%)].

3. The finished-goods inventory consisted of job no. 2143, which cost $351,500 [$156,000 + $85,000 + ($85,000 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 15,76

1,800

*

Work-in-Process Inventory 15,761,800

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

$156,800 + $15,605,000 =

$15,761,800

5. Finlon’s applied overhead totals 130% of direct-labor cost, or $5,655,000 ($4,350,000 x 130%). Actual overhead was $5,554,000, itemized as follows, resulting in overapplied overhead of $101,000.

Indirect labor

Total

Indirect materials used	$ 65,000
2,860,000
Factory depreciation	1,740,000
Factory insurance	59,000
Factory utilities	830,000
$5,554,000

Manufacturing Overhead 101,000

Cost of Goods Sold 101,000

PROBLEM 3-46 (CONTINUED)

6. The company’s cost of goods sold totals $15,309,300:

Finished-goods inventory, Jan. 1…………….	$ 0
Add: Cost of goods manufactured…………..	15,761,800
Cost of goods available for sale………………	$15,761,800
Less: Finished-goods inventory, Dec. 31…..	351,500
Unadjusted cost of goods sold……………….	$15,410,300
Less: Overapplied overhead………………….	101,000
Cost of goods sold………………………………	$15,309,300

7. 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.

PROBLEM 3-47 (30 MINUTES)

1.

Traceable

costs total $2,500,000, computed as follows:

$2,500,000

90

Total Cost	Percent Traceable	Traceable Cost
Professional staff salaries………	80%	$2,000,000
Administrative support staff……	300,000	60	180,000
Travel……………………………….	250,000		90	225,000
Photocopying……………………..	50 ,000	45,000
Other operating costs……………	100,000	50	50,000
Total…………………………….	$3,200,000	$2,500,000

JLR’s overhead (i.e., the nontraceable costs) total $700,000 ($3,200,000 – $2,500,000).

2. Predetermined overhead rate = budgeted overhead ÷ traceable costs = $700,000 ÷ $2,500,000 = 28% of traceable costs

3. Target profit percentage = target profit ÷ total cost

= $640,000 ÷ $3,200,000 = 20% of cost

PROBLEM 3-47 (CONTINUED)

4. The total cost of the Martin Manufacturing project is

$64,000

, and the billing is $76,800, as follows:

Professional staff salaries… ………	$41,000
Administrative support staff………	2,600
Travel…………………………………..	4,500
Photocopying…………………………	500
Other operating costs……………….	1,400
Subtotal……………………………	$50,000
Overhead ($50,000 x 28%)………….	14,000
Total cost ………………………….	$64,000
Markup ($64,000 x 20%)…………….	12,800
Billing to Martin………………………	$76,800

5. 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-client-related paperwork and reports. These activities benefit multiple clients, the consultant, and/or the overall firm, making traceability to specific clients difficult if not impossible.

PROBLEM 3-48 (30 MINUTES)

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

1. Machining Dept. overhead rate = budgeted overhead ÷ budgeted machine hours

= $4,000,000 ÷ 400,000 = $10 per machine hour

Assembly Dept. overhead rate = budgeted overhead ÷ budgeted direct-labor cost

= $3,080,000 ÷ $5,600,000 = 55% of direct-labor cost

PROBLEM 3-48 (CONTINUED)

2. The ending work-in-process inventory is carried at a cost of $153,530, computed as follows:

Direct material……………………………………

Direct labor……………………………………….

Machining Department:
	Direct material……………………………………	$24,500
	Direct labor……………………………………….	27,900
Manufacturing overhead (360 x $10)…………	3,600	$ 56,000
Assembly Department:
$ 6,700
58,600
Manufacturing overhead ($58,600 x 55%)…..	32,230	97,530
Total cost………………………………………………	$153,530

3. Actual overhead in the Machining Department amounted to $4,260,000, whereas applied overhead totaled $4,250,000 (425,000 hours x $10). Thus, overhead was underapplied by $10,000 during the year.

4. Actual overhead in the Assembly Department amounted to $3,050,000, whereas applied overhead totaled $3,179,000 ($5,780,000 x 55%). Thus, overhead was overapplied by $129,000.

5. The company’s manufacturing overhead was overapplied by $119,000 ($129,000 – $10,000). As a result, excessive overhead flowed from Work-in-Process Inventory, to Finished-Goods Inventory, to Cost of Goods Sold, meaning that the Cost of Goods Sold account must be decreased at year-end.

6. The Work-in-Process account is charged with applied overhead, or $7,429,000 ($4,250,000 + $3,179,000).

7. The firm’s selection of cost drivers (or application bases) seems appropriate. There should be a strong correlation between the cost driver and the amount of overhead incurred. In the Machining Department, much of the overhead is probably related to the operation of machines. Similarly, in the Assembly Department, a considerable portion of the overhead incurred is related to manual assembly (i.e., labor) operations.

Problem 3-49 (25 minutes)

1.

2.

Journal entries:

(a)

Raw-Material Inventory

Accounts Payable

7,850

(b)

Work-in-Process Inventory

Raw-Material Inventory

180

(c)

Manufacturing Overhead

Manufacturing-Supplies Inventory

30

(d)

Manufacturing Overhead

Cash

800

(e)

Work-in-Process Inventory

Wages Payable

75,000

(f)

1,800

(g)

Raw-Material Inventory

Accounts Payable

3,000

(h)

1,700

Cash

1,700

(i)

Manufacturing Overhead

21,000

Wages Payable

21,000

(j)

Manufacturing Overhead

7,000

Finished-Goods Inventory

Work-in-Process Inventory

1,100

	7,850
	180
	30
			800
	75,000
Selling and Administrative Expense		1,800
	Prepaid Insurance
	3,000
Accounts Payable
	7,000
Accumulated Depreciation: Equipment
(k)		1,100

Problem 3-49 (Continued)

Work-in-Process Inventory

Manufacturing Overhead

Accounts Receivable

Sales Revenue

176,000

Cost of Goods Sold

Finished-Goods Inventory

139,000

	(l)	140,000 *
140,000
*Applied manufacturing overhead = 7,000 machine hours$20 per hour.
	(m)		176,000
	139,000

Problem 3-50 (45 minutes)

1.

Direct material:

Add: Purchases of raw material

Raw material available for use

Raw material used

Direct labor

Manufacturing overhead:

Indirect material

Indirect labor

150,000

Depreciation on factory building

Depreciation on factory equipment

Utilities

Property taxes

Insurance

Total actual manufacturing overhead

Overhead applied to work in process

Total manufacturing costs

Subtotal

$1,812,500

Cost of goods manufactured

Huron Corporation Schedule of Cost of Goods Manufactured For the Year Ended December 31, 20×2
Raw material inventory, 12/31/x1	$ 89,000
731,000
$820,000
Deduct: Raw-material inventory, 12/31/x2	59,000
$761,000
474,000
$ 45,000
125,000
	60,000
		70,000
90,000
40,000
$580,000
Deduct: Underapplied overhead*	2,500
577,500
	$1,812,500
Add: Work-in-process inventory, 12/31/x1	-0-
Deduct: Work-in-process inventory, 12/31/x2		40,000
$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.

Problem 3-50 (Continued)

2.

Cost of goods available for sale

    40,000

Cost of goods sold

Huron Corporation Schedule of Cost of Goods Sold For the Year Ended December 31, 20×2
Finished-goods inventory, 12/31/x1	$   35,000
Add: cost of goods manufactured	1,772,500
$1,807,500
Deduct: Finished-goods inventory, 12/31/x2
$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.

Sales revenue

Less: Cost of goods sold

Gross margin

Income before taxes

Income tax expense

Net income

Huron Corporation Income Statement For the Year Ended December 31, 20×2
$2,105,000
1,770,000
$ 335,000
	Selling and administrative expenses	269,000
$   66,000
25,000
$   41,000

4. In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet 03-50.xls

Problem 3-51 (15 minutes)

1.

$40,000

. Since there was no work-in-process inventory at the beginning of 20×2, all of the costs in the year-end work-in-process inventory were incurred during 20×2.

2. The direct-material cost would have been larger, probably by roughly 20 percent, because direct material is a variable cost.

3. Depreciation is a fixed cost, so it would not have been any larger if the firm’s volume had increased.

Problem 3-51 (Continued)

4. Only the $30,000 of equipment depreciation would have been included in manufacturing overhead on the Schedule of Cost of Goods Manufactured. The $30,000 of depreciation related to selling and administrative equipment would have been treated as a period cost and expensed during 20×2.

Problem 3-52 (30 minutes)

1.

Direct material:

Raw material available for use

Direct labor

*

Total manufacturing costs

Subtotal

Cost of goods manufactured

Marco Polo Map Company Schedule of Cost of Goods Manufactured For the Month of March
	Raw-material inventory, March 1		$ 17,000
	Add: March purchases of raw material		1 13,000
	$130,000
	Deduct: Raw-material inventory, March 31		26,000
Raw materials used	$104,000
160,000
Manufacturing overhead applied (50% of direct labor)	80 ,000
$344,000
	Add: Work-in-process inventory, March 1	40,000
$384,000
Deduct: Work-in-process inventory,
March 31 (90%$40,000)	36,000
$348,000	†

*Work upward from the bottom of the statement, using the information available. Direct labor + manufacturing overhead = total manufacturing costs – direct material cost = $344,000 – $104,000 = $240,000. Since manufacturing overhead = 50% of direct labor, then manufacturing overhead = $80,000 and direct labor =

$160,000

.

†Cost of goods manufactured = cost of goods sold + increase in finished-goods inventory
= $345,000 + $3,000 = $348,000.

Problem 3-52 (Continued)

2.

Raw material:

$ 17,000

Add: Purchases

 113,000

Raw material available for use

$130,000

  26,000

Direct labor

Marco Polo Map Company Schedule of Prime Costs For the Month of March
Beginning inventory
Deduct: Ending inventory
Raw material used	$104,000
160,000
Total prime costs	$264,000

3.

Direct labor

Marco Polo Map Company Schedule of Conversion Costs For the Month of March
$160,000
Manufacturing overhead applied (50% of direct labor)	80,000
Total conversion cost	$240,000

Problem 3-53 (30 minutes)

1.

2.

3.

=

$6,000

=

4.

Cost of Goods Sold

6,000

Manufacturing Overhead

6,000

Calculation of applied manufacturing overhead:
Applied manufacturing overhead = machine hrs. used x predetermined overhead rate $20,000 = 4,000 hrs. x $5 per hr.
Underapplied overhead	actual overhead – applied overhead
$26,000 – $20,000

Problem 3-53 (continued)

5.

(a)

Calculation of proration amounts:

Work in Process

Finished Goods

Total

Account	Explanation	Amount*	Percentage	Calculation of Percentage
Job P82 only	$ 2,500	12.5%	2,500 20,000
Job N08 only	12,500	62.5%	12,500 20,000
Cost of Goods
Sold	Job A79 only	5,000	25.0%	5,000 20,000
$20,000	100.0%
*Machine hours used on jobpredetermined overhead rate.

Account

Underapplied Overhead

Percentage

Amount Added
to Account

Work in Process

$6,000

12.5%

$  750

Finished Goods

 6,000

62.5%

 3,750

Cost of Goods Sold

 6,000

25.0%

 1,500

Total

$6,000

(b)

Journal entry:

Work-in-Process Inventory

750

Finished-Goods Inventory

3,750

Cost of Goods Sold

1,500

Manufacturing Overhead

6,000

Problem 3-54 (40 minutes)

1. In accordance with the IMA Statement of Ethical Professional Practice, the appropriateness of Marc Jackson’s three alternative courses of action is described as follows:

(a) Follow Brown’s directive and do nothing further. This action is inappropriate as Jackson has ethical responsibilities to take further action in accordance with the following standards of ethical conduct.

Problem 3-54 (continued)

Competence:

· Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

· Perform professional duties in accordance with relevant laws, regulations, and technical standards.

· Provide decision support information and recommendations that are accurate, clear, concise, and timely.

· Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

Integrity:

· Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

· Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

· Abstain from engaging in or supporting any activity that might discredit the profession.

Credibility:

· Communicate information fairly and objectively.

· Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

· Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

(b) Attempt to convince Brown to make the proper adjustments and to advise the external auditors of her actions. This action is appropriate as Jackson has taken the ethical conflict to his immediate superior for resolution. Unless Jackson suspects that his superior is involved, this alternative is the first step for the resolution of an ethical conflict.

Problem 3-54 (continued)

(c) Tell the Audit Committee of the Board of Directors about the problem and give them the appropriate accounting data. This action is not appropriate as a first step since the resolution of ethical conflicts requires Jackson to first discuss the matter with his immediate superior.

2. The next step that Jackson should take in resolving this conflict is to inform Brown that he is planning to discuss the conflict with the next higher managerial level. Jackson should pursue discussions with successively higher levels of management, including the Audit Committee and the Board of Directors, until the matter is satisfactorily resolved. At the same time, Jackson should “clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible courses of action.” If the ethical conflict still exists after exhausting all levels of internal review, Jackson may have no course other than to resign from the organization.

Problem 3-55 (25 minutes)

1.

5 per hour

2.

Direct material

$100

Direct labor

 300

Manufacturing overhead:

3.

January

April

Total cost

$480

$500

4.

5.

January

April

Direct material

$100.00

Direct labor

 300.00

  88.80

Total cost

$488.80

Quarter	Predetermined Overhead Rate	Calculations
1st	$ 4 per hour	$100 ,000/25,000
2nd		5 per hour	$80,000/16,000
3rd	4 per hour	$50,000/12,500
4th	$70,000 /14,000
		January			April
	$100
	300
20 hrs$4 per hr	80
20 hrs$5 per hr	____	100
						Total cost		$480		$500
	Markup (10%)	48	50
		Price	$528	$550
	$100.00
	300.00
Manufacturing overhead (20 hrs $4.44)		88.80
		$488.80

Problem 3-55 (Continued)

Total cost

$488.80

Markup (10%)

Price

				6.
48.88
$537.68

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

Problem 3-56 (45 minutes)

1.

Predetermined overhead rate:

$5.05 per direct-labor hour

*Budgeted manufacturing overhead = variable overhead + fixed overhead $606,000 = $390,000 + $216,000

2.

Cost of job 77:

Cost in beginning work-in-process inventory

$ 54,000

Direct material

45,000

Direct labor (3,500 hours$24.00 per hour)*

84,000

Applied manufacturing overhead

(3,500 hours$5.05 per hour)

  17,675

Total cost

$200,675

3.

Manufacturing overhead applied to job 79:

Direct-labor hourspredetermined overhead rate 2,000 hours$5.05 per hour

$10,100

Problem 3-56 (continued)

4.

5.

15,000

6,000

6,400

  8,100

6.

Total manufacturing overhead applied during November:
Total direct-labor hourspredetermined overhead rate 8,500 hours$5.05
$42,925
Actual manufacturing overhead incurred during November:
Indirect material (supplies)	$12,000
Indirect-labor wages
Supervisory salaries
Building occupancy costs, factory facilities
Production equipment costs
		Total	$47,500
Underapplied overhead for November:
Actual manufacturing overhead – applied manufacturing overhead
$47,500 – $42,925
$4,575 underapplied

Problem 3-57 (75 minutes)

1.

2.

Journal entries:

(a)

Raw-Material Inventory

5,000

Accounts Payable

5,000

(b)

Raw-Material Inventory

4,000

Accounts Payable

4,000

(c)

Work-in-Process Inventory

11,250*

Raw-Material Inventory

11,250

*(250 sq. ft.$5 per sq. ft.) + (1,000 lbs.$10 per lb.)

Manufacturing Overhead**

100  

Manufacturing-Supplies Inventory

100

**Valve lubricant is an indirect material, so it is considered an overhead cost.

(d)

Work-in-Process Inventory

34,000  

Manufacturing Overhead

13,000  

Wages Payable

47,000

Work-in-Process Inventory

35,700*

Manufacturing Overhead

35,700

*Applied manufacturing overhead = 1,700 direct-labor hours$21 per hour.

(e)

Manufacturing Overhead

12,000

Accumulated Depreciation: Building and

Equipment

12,000

(f)

Manufacturing Overhead

1,200

Cash

1,200

Problem 3-57 (continued)

(g)

Manufacturing Overhead

2,100

Accounts Payable

2,100

(h)

Manufacturing Overhead

2,400

Cash

2,400

(i)

Manufacturing Overhead

Prepaid Insurance

3,100

(j)

8,000

Cash

8,000

	3,100
Selling and Administrative Expenses

(k)

Selling and Administrative Expenses

4,000

Accumulated Depreciation: Buildings and

Equipment

4,000

(l)

Selling and Administrative Expenses

1,000

Cash

1,000

(m)

Finished-Goods Inventory

34,050

*

Work-in-Process Inventory

34,050

*Cost of Job

T81

:

Direct material (250$5)

$ 1,250

Direct labor (800$20)

16,000

Manufacturing overhead (800$21)

 16,800

Total cost

$34,050

(n)

Accounts Receivable

26,600

*

Sales Revenue

26,600

*(76 2)$700 per trombone

.

Cost of Goods Sold

17,025

**

Finished-Goods Inventory

17,025

**17,025 = $34,050 2

Problem 3-57 (continued)

3.

Accounts Payable

Bal

1,200

(f)

5,000

(a)

2,400

(h)

4,000

(b)

8,000

(j)

2,100

(g)

1,000

(l)

T-accounts and posting of journal entries:
Cash
	Bal	10,000	13,000

Accounts Receivable

Wages Payable

Bal.

21,000

8,000

Bal.

(n)

26,600

47,000

(d)

Accumulated Depreciation:

Prepaid Insurance

Buildings and Equipment

Bal.

5,000

102,000

Bal.

3,100

(i)

12,000

(e)

4,000

(k)

Manufacturing-Supplies Inventory

Manufacturing Overhead

Bal.

500

(c)

100

35,700

(d)

100

(c)

(d)

13,000

(e)

12,000

(f)

1,200

(g)

2,100

(h)

2,400

(i)

3,100

Raw-Material Inventory

Cost of Goods Sold

Bal.

149,000

(n)

17,025

(a)

5,000

11,250

(c)

(b)

4,000

Selling and Administrative

Work-in-Process Inventory

Expenses

Bal.

91,000

(j)

8,000

(c)

11,250

34,050

(m)

(k)

4,000

(d)

34,000

(l)

1,000

(d)

35,700

Problem 3-57 (continued)

Finished-Goods Inventory

Sales Revenue

Bal.

26,600

(n)

(m)

34,050

17,025

(n)

220,000

4.

(a)

Calculation of actual overhead:

Indirect material (valve lubricant)

$   100

Indirect labor

13,000

Depreciation: factory building and equipment

12,000

Rent: warehouse

1,200

Utilities

2,100

Property taxes

2,400

Insurance

  3,100

Total actual overhead

$33,900

(b)

Overapplied overhead

=

=

$33,900 – $35,700*

=

$1,800 overapplied

*$35,700 = 1,700 direct-labor hours$21 per hour.

(c)

Manufacturing Overhead

1,800

Cost of Goods Sold

1,800

Problem 3-57 (Continued)

5.

Direct material:

Raw-material inventory, March 1

Add: March purchases of raw material

Raw material available for use

Deduct: Raw-material inventory, March 31

Raw material used

Direct labor

34,000  

Manufacturing overhead:

Indirect material

Indirect labor

13,000  

Utilities

Property taxes

Insurance

Total actual manufacturing overhead

Overhead applied to work in process

Total manufacturing costs

Add: Work-in-process inventory, March 1

Subtotal

Scholastic Brass Corporation Schedule of Cost of Goods Manufactured For the Month of March
$149,000
9,000
$158,000
146,750
$ 11,250
$    100
Depreciation on factory building and equipment	12,000
Rent: Warehouse	1,200
2,100
2,400
3,100
$33,900
Add: overapplied overhead*		1,800
35,700
$ 80,950
91,000
$171,950
Deduct: Work-in-process inventory, March 31	137,900
Cost of goods manufactured†	$  34,050

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in process. Therefore, the overapplied overhead, $1,800, must be added to actual overhead to arrive at the amount of overhead applied to work in process during March.

†Cost of Job T81, which was completed during March.

Problem 3-57 (Continued)

6.

Add: Cost of goods manufactured

Cost of goods available for sale

Cost of goods sold

  1,800

Cost of goods sold (adjusted for overapplied overhead)

Scholastic Brass Corporation Schedule of Cost of Goods Sold For the Month of March
Finished-goods inventory, March 1	$220,000
34,050
$254,050
Deduct: Finished-goods inventory, March 31	237,025
$ 17,025
Deduct: Overapplied overhead*
$ 15,225

*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.

Sales revenue

Less: Cost of goods sold

Gross margin

Selling and administrative expenses

	7.	Scholastic Brass Corporation Income Statement For the Month of March
$26,600
15,225
$11,375
13,000
Income (loss)	$ (1,625)

Problem 3-58 (20 minutes)

JOB-COST RECORD

Job Number

Description

Date Started

Date Completed

Number of Units Completed

Direct Material

Date

Requisition Number

Quantity

Unit Price

Cost

Direct Labor

Date

Time Card Number

Hours

Rate

Cost

800

Manufacturing Overhead

Date

Activity Base

Quantity

Application Rate

Cost

3/8 to
3/12

Direct-labor hours

800

Cost Summary

Cost Item

Amount

Shipping Summary

Date

Units Shipped

Units Remaining
In Inventory

Cost Balance

38

T81	Trombones
March 5	March 20
76
3/5	112	250	$5.00	$1,250
	3/8 to 3/12	3-08 through 3-12	$20	$16,000
$21	$16,800
Total direct material Total direct labor Total manufacturing overhead	$ 1,250 16,000 16,800
Total cost	$34,050
Unit cost	$448.03*
March		38	$17,025†

*Rounded

†$17,025 = $34,050 ÷ 2

Problem 3-59 (55 minutes)

1.

6.

2.

7.

3.

4.

5.

Raw-Material Inventory

Accounts Payable

15,000

12,000

Bal. 10/31

70,000

70,000

45,000

Bal. 11/30

Work-in-Process Inventory

Finished-Goods Inventory

Bal. 10/31

8,000

Bal. 10/31

Direct

150,000

150,000

180,000

40,000

Bal. 11/30

5,000

Direct

Cost of Goods Sold

Overhead

60,000

180,000

Bal. 11/30

The answers to the questions are as follows:
$216,000	$60,000
$19,000	$150,000
$70,000	8.	$40,000
$ 38,000	9.	$15,000
$80,000	10.	Zero
The completed T accounts, along with supporting calculations, follow.
			Bal. 10/31
	40,000	81,000
			Bal. 11/30	1,000
35,000
material
labor	80,000
38,000

Manufacturing Overhead

Sales Revenue

60,000

60,000

216,000

Wages Payable

Accounts Receivable

 1,000

Bal. 10/31

Bal. 10/31

8,000

79,500

80,000

216,000

205,000

 1,500

Bal. 11/30

Bal. 11/30

19,000

Supporting Calculations:

1.

Sales revenue

=

cost of goods sold120%

=

$180,000120%

=

$216,000

Problem 3-59 (continued)

2.

Ending balance in accounts receivable

=

beginning balance + sales revenue
– collections

=

$8,000 + $216,000 – $205,000

=

$19,000

3.

Purchases of raw material

=

addition to accounts payable

Addition to accounts payable

=

ending balance + payments
– beginning balance

=

$1,000 + $81,000 – $12,000

=

$70,000

4.

November 30 balance in work-in-process inventory

=

direct
material

+

direct
labor

+

manufacturing
overhead

=

$20,500 + (500)($20) + (500)($15*)

=

$38,000

*Predetermined overhead rate

=

=

=

$15 per direct-labor hour

†Budgeted direct-labor hours

=

5.

Addition to work in process
for direct labor

=

November credit to
wages payable

November credit to
wages payable

=

ending balance + payments – beginning balance

=

$1,500

+ $79,500 – $1,000

=

$80,000

Problem 3-59 (continued)

6.

November applied overhead

=

direct labor hourspredetermined overhead rate

=

4,000*$15

=

$60,000

Direct labor hours

=

=

7.

Cost of goods completed during November

=

beginning balance in work in process

+

additions during November

–

ending balance in work in process

=

$8,000 + ($40,000 + $80,000 + $60,000) – $38,000

=

$150,000

8.

Raw material used in November

=

November credit to raw-material inventory

=

$40,000 (given)

9.

October 31 balance in
raw-material inventory

=

November 30 balance in raw-material inventory

+

direct material used

–

purchases

=

$45,000 + $40,000 – $70,000

=

$15,000

10.

Overapplied or underapplied overhead = actual overhead – applied overhead

= $60,000 – $60,000

= 0

Problem 3-60 (50 minutes)

1.

 200,000

2.

System

Total cost

Price

3.

Department A

Department B

$520,000

  20,000

$280,000

  20,000

  20,000

direct-labor

hour

Schedule of budgeted overhead costs:
	Department A		Department B
Variable overhead
A  20,000$16	$320,000
B  20,000$4	$ 80,000
Fixed overhead		200,000
Total overhead		$520,000		$280,000
Grand total of budgeted overhead (A + B):	$800,000
Product prices:
		Basic	Advanced System
$1,100	$1,500
	Markup, 10% of cost	110	150
$1,210	$1,650
Departmental overhead rates :
Budgeted overhead (from requirement 1)	$280,000
Budgeted direct-labor hours				20,000
Predetermined overhead rates	$520,000
$26 per	$14 per
	direct-labor
	hour

Problem 3-60 (Continued)

4.

Basic

System

Direct material

Direct labor

  300

Manufacturing overhead:

Total

5.

Basic

Advanced

System

System

Total cost

$1,040

$1,560

Markup, 10% of cost

New product costs:
	Advanced
			System
$ 400	$ 800
	300
Department A:
Basic system 5$26	130
Advanced system 15$26	390
Department B:
Basic system 15$14	210
Advanced system 5$14	_ ____	70
	$1,040		$1,560
New product prices:
104	156
Price	$1,144	$1,716

Problem 3-60 (Continued)

6.

Memorandum

Date:

Today

To:

From:

Subject:

TeleTech Corporation

President, TeleTech Corporation

I. M. Student

Departmental overhead rates

Until now the company has used a single, plantwide overhead rate in computing product costs. This approach resulted in a product cost of $1,100 for the basic system and a cost of $1,500 for the advanced system. Under the company’s pricing policy of adding a 10 percent markup, this yielded prices of $1,210 for the basic system and $1,650 for the advanced system.

When departmental overhead rates are computed, it is apparent that the two production departments have very different cost structures. Department A is a relatively expensive department to operate, while Department B is less costly. It is important to recognize the different rates of cost incurrence in the two departments, because our two products require different amounts of time in the two departments. The basic system spends most of its time in Department B, the inexpensive department. The advanced system spends most of its time in Department A, the more expensive department. Thus, using departmental overhead rates shows that the basic system costs less than we had previously realized; the advanced system costs more. The revised product costs are $1,040 and $1,560 for the basic and advanced systems, respectively. With a 10 percent markup, these revised product costs yield prices of $1,144 for the basic system and $1,716 for the advanced system. We have been overpricing the basic system and underpricing the advanced system.

I recommend that the company switch to a product costing system that incorporates departmental overhead rates.

solutions to cases

Case 3-61 (45 minutes)

1.

2.

3.

A job-order costing system is appropriate in any environment where costs can be readily identified with specific products, batches, contracts, or projects. This situation typically occurs in a manufacturing setting when relatively small numbers of heterogeneous products are produced.
The only job remaining in CompuFurn’s work-in-process inventory on December 31 is job PS812. The cost of job PS812 can be calculated as follows:
Job PS812 balance, 11/30 ………	$250,000
	December additions:
Direct material	$124,000
	Purchased parts	87,000
	Direct labor	200,500
Manufacturing overhead (19,500 machine hrs$5*)	97,500	509,000
Work-in-process inventory, 12/31	$759,000
The cost of the chairs remaining in CompuFurn’s finished-goods inventory on December 31 is $455,600, calculated as follows: · Units of chairs in finished-goods inventory on December 31:
Chair Units
Finished-goods inventory, 11/30	19,400
Add: Units completed in December	15,000
Units available	34,400
Deduct: Units shipped in December	21,000
Finished-goods inventory, 12/31	13,400

Case 3-61 (Continued)

December additions:

Purchased parts

10,800

Direct labor

  79,000

Total cost

Since CompuFurn uses the first-in, first-out (FIFO) inventory method, all units remaining in finished- goods inventory were completed in December.
· Unit cost of chairs completed in December:
Work in process inventory, 11/30	$431,000
Direct material	$ 3,000
43,200
Manufacturing overhead (4,400 machine hrs$5)	22,000
$510,000
Unit cost = = = $34 per unit
· Cost of finished-goods inventory	= unit cost quantity
= $34 13,400
= $455,600

4.

Total

January through November

December

Total

Overapplied overhead is $7,500, calculated as follows:
Machine hours used:
	January through November	830,000
	December	49,900
879,900
Applied manufacturing overhead = 879,900 machine hours $5 = $4,399,500 Actual manufacturing overhead:
$4,140,000
252,000
$4,392,000
Overapplied overhead	= applied overhead actual overhead
= $4,399,500 $4,392,000
= $7,500

Case 3-61 (Continued)

5. If the amount of overapplied or underapplied overhead is not significant, the amount is generally treated as a period cost and closed to Cost of Goods Sold. If the amount is significant, the amount is sometimes prorated over the relevant accounts, i.e., Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.

Case 3-62 (50 minutes)

1.

2.

=

=

Manufacturers use predetermined overhead rates to allocate to production jobs the production costs that are not directly traceable to specific jobs. As a result, management will have timely, accurate job-cost information. Predetermined overhead rates are easy to apply and avoid fluctuations in job costs caused by changes in production volume or overhead costs throughout the year.
The manufacturing overhead applied through November 30 is calculated as follows:
Machine hourspredetermined overhead rate	overhead applied
73,000$15	$1,095,000

3.

The manufacturing overhead applied in December is calculated as follows:

Machine hourspredetermined overhead rate

=

overhead applied

6,000$15

=

$90,000

4.

Underapplied manufacturing overhead through December 31 is calculated as follows:

Actual overhead ($1,100,000 + $96,000)

$1,196,000

Applied overhead ($1,095,000 + $90,000)

(1,185,000)

Underapplied overhead

$   11,000

Case 3-62 (continued)

5.

4,000

12,000

The balance the Finished-Goods Inventory account on December 31 is comprised only of Job No. N11-013 and is calculated as follows:
November 30 balance for Job No. N11-013	$55,000
December direct material
December direct labor
December overhead (1,000$15)	15,000
Total finished-goods inventory	$86,000

6.

FiberCom’s Schedule of Cost of Goods Manufactured for the year just completed is constructed as follows:

FiberCom Company
Schedule of Cost of Goods Manufactured
For the Year Ended December 31

Direct material:

Raw-material inventory, 1/1

$  105,000

Raw-material purchases ($965,000 + $98,000)

 1,063,000

Raw material available for use

$1,168,000

Deduct: Indirect material used ($125,000 + $9,000)

$134,000

Raw-material inventory 12/31

  85,000

  219,000

Raw material used

$ 949,000

Direct labor ($845,000 + $80,000)

925,000

Manufacturing overhead:

Indirect material ($125,000 + $9,000)

$134,000

Indirect labor ($345,000 + $30,000)

375,000

Utilities ($245,000 + $22,000)

267,000

Depreciation ($385,000 + $35,000)

 420,000

Total actual manufacturing overhead

1,196,000

Deduct: Underapplied overhead

   11,000

Overhead applied to work in process

$1,185,000

Total manufacturing costs

$3,059,000

Add: Work-in-process inventory, 1/1

   60,000

Subtotal

$3,119,000

Deduct: Work-in-process inventory, 12/31*

  150,200

Cost of goods manufactured

$2,968,800

*Supporting calculations follow.

Case 3-62 (Continued)

*Supporting calculations for work in process 12/31:

D12-002

D12-003

Total

Direct material

$37,900

$26,000

$ 63,900

Direct labor

 20,000

 16,800

  36,800

Applied overhead:

2,500 hrs.$15

 37,500

  37,500

800 hrs.$15

______

$12,000

  12,000

Total

$95,400

$54,800

$150,200

3-58 Solutions Manual
© 2017 by McGraw-Hill Education.  All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Managerial Accounting, 11/e 3-57
© 2017 by McGraw-Hill Education.  All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(rounded)

chicken

per

$.43

300,000
,000)
($.10)(300

$100,000

rate

Overhead
=
+
=
chicken

per

$.35

400,000
,000)
($.10)(400

$100,000

rate

Overhead
=
+
=
´
¸
¸
hour

per

$13.30

hours

75,000
$997,500

rate

overhead

ned
Predetermi
=
=
driver
cost

of

level

budgeted
overhead

ing
manufactur

budgeted
hours

machine

10,000
$364,000
hours

labor
–
direct

20,000
$364,000
*
$280,000
$364,000
ft.

sq.

per

$3
sets

20
set

per

ft.

sq.

100
$6,000

a
´
´
=
hour.

machine

per

$9

sets

20

hours

machine

3

$540

b
´
´
=
hour.

labor
–
direct

per

$4

sets

20

hours

labor
–
direct

40

$3,200
c
´
´
=
hour

per

$12
(10)

(2,000)
$240,000
hours

labor
–
direct

budgeted
overhead

ing
manufactur

budgeted

rate

overhead

ned
Predetermi

=
=
=
r
hou

machine

per

$20

73,200
$1,464,000

hours

machine

budgeted
overhead

ing
manufactur

budgeted

rate

overhead

ned
Predetermi
=
=
=
hour

machine

per

$5

47,000
$235,000

hours

machine

budgeted
overhead

ing
manufactur

budgeted

rate

overhead

ned
Predetermi
=
=
=
hours

labor
–
direct

budgeted

annual
overhead

ing
manufactur

budgeted

annual

rate

ned
Predetermi
=
(rounded)

hour

per

$4.44

67,500
$300,000

=
=
120,000
*
$606,000

hours

labor
–
direct

Budgeted
overhead

ing
manufactur

Budgeted
=
=
direct-labor wages
$204,000
*Direct-labor rate $24.00 per
hour
direct-labor hours8,500
===
=
volume
production

budgeted
overhead

budgeted

rate

overhead

ned
Predetermi
=
hour

labor
–
direct

per

$21

20,300
$426,300

hours

labor
–
direct

budgeted
overhead

ing
manufactur

budgeted

rate

overhead

ned
Predetermi
=
=
=
÷
÷
ø
ö
ç
ç
è
æ
–
÷
÷
ø
ö
ç
ç
è
æ
overhead

ing
manufactur

applied

overhead

ing
manufactur

actual
†
hours

labor
–
direct

budgeted
overhead

budgeted
48,000
$720,000
rate

labor
–
direct
cost

labor
–
direct

budgeted
=
48,000
$20
$960,000
=
rate

labor
–
direct
labor
direct

for

process

in
work
to
addition
hours

4,000
$20
$80,000
=
chicken

per

$.60

200,000
,000)
($.10)(200

$100,000

rate

Overhead
=
+
=
hour

per

$20

40,000
$800,000

hours

labor
–
direct

budgeted

total
rate

overhead

budgeted

total

rate

overhead

ned
Predetermi
=
=
=
hour

machine

per

$5
hours

900,000
$4,500,000

rate

overhead

ing
Manufactur
*
=
=
completed

units
cost

total
15,000
$510,000