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Tnblg of Conrerur
Part l-Costs: Concepts and Objectives
Management, the Controller, and Cost Accounting
Cost Concepts and the Cost accounting lnformation System l3
Cost Behavior Analysis 25
Part l-Cost Accumulation
4. Cost Systems and Cost Accumulation . . . . 6 |
5. Job Order Costing 80
6. Process Costing 102
7. The Cost of Quality and Accounting for Production Losses 145
8. Costing By-Products and Joint Products 178
Part 3-Planning and Control of Costs
Mat er i al s: Cont r ol l i ng, Cost i ng, and Pl anni ng . . . . . . . ' 203
Just-in-Time and Backflushing . Dg
Labor: Controlling and Accounting for Costs . )45
Factory Overhead: Planned, Actual, and Applied )7 |
Factory Overhead: Departmentalization 288
Activity Accounting: Activity-Based Costing
andAct i vi t y- BasedManagement . . . 319
Part 4-Budgeting and Standard Costs
15. Budgeting: Profits, Sales, Costs, and Expenses 340
16. Budgeting: Capital Expenditures, Research and
Development Expenditures, and Cash: PERT/Cost 385
Responsi bi l i tyAccounti ng and Reporti ng... 410
Standard Costing: Setting Standards and Analyzing Variances . . . . 443
Standard Costing: lncorporating Standards
t .
2.
3.
t 7 .
18.
t 9.
into the Accounting Records
- l l l -
488
Part 5-Analyris of Costs and Profits
Direct Costing and Cost-Volume-Profit Analysis
Differential Cost Analysis
Planning for Capital Expenditures . . .
Economic Evaluation of Capital Expenditures . . . .
Decision-Making under Uncertainty
5 t 3
543
588
6 r 8
65)
Profit Performance Measurements and
I
lntracompany Transfer Pricing 688
- . 1
I
- l v-
CHAPTER
1
DtscusstoN
OUESTIONS
Ot-1.
Plrnnhg ir hl drvobprnrnt
of e cqrrirron rl
of eglbnr. taaoutc.tr
md mer'ur'm'ntt by
which thr lchirvrmrnt
of obi'cilivtt cm b'
a.r.$.d Pbnnhg trkor hto eccornl thr irtrr'
Etitlt botwren thr orgrni:atkxr
errd itr rnvi'
tqln nl ir whrt'l|r b b br donr'
Cqrtrol ir thr
preolr by which trlrnrg"r
grutl
lhrt rr6urcrr rta obtrir'd rnd urd in
rn ollbbnt and .ttactiw ttlrnn.r !o crtty ot',l ttrt
pbn rnd rccornglirh thl orgrnizeti'cri'! obi'c'
tivor. Cotrtrol inpliot thrt
prrlocnrrc' 'tr{lut..
tn.ntr rto rrvilwod to drt.rmin. if corrrctivo
rtbn ir nquircd
Plennirg rnd cantrol rn htrnrbt'd' Canttol
ir crrrird out wilhh thr ortlblirhrd
plrnnhg
tnrnrworl elrd rrrrrr !o ovrludo enfqnrrrcr
b th.
Phn
rc ttrd o,Fnirrtisd obieclivor rto
rfiirwd.
Of
-2.
Shod.rrrge
plenr ucully d.d with r plrird of e
qu.ttar or I y..1, while long[nga
plmr ururlly
covrr thr.. to livo yern. Shon'rrngr Pbnt
|''
d.tdl.d rnangh b prrmit pnprntin of e csn'
Pl.l.
l.l of finrnchl rtrt.moritt u cf r lulun
dd., tiilb bng'nngo
plenr cubnindr h r wry
turnrnrrizrd rt ol lrpoc{rd ruultr or t hw
qurrditie<! obiostivtr, lrdr u firrtcld rdbr.
Ol-3. Lorg.rrngr
plrnl contrh
quenlitalive rtlultt'
wtrilr rtrdogtc ptrnr rn tfir l..|t quryltiti.bl. cil
r.[ pbnr. Lary'nngr
plrnr urudty lrlrnd lhrco
to tivo yorn hto tho futsrc, wtrib rlntogb
pbnr
tily csrlomPbta thodar fi much longnr prri'
odr. tmgFrrngr plrnr covrrirg r throo'lofivr'
yo|r poricd would br ytgr'd.vrty lht.. lo
fivo yln, or might br ryrtrrnrlialty updetrd
reclr you lo mdnlrh I compbtr
pbn, wtrilo
rtntrgic plrnr rrc lofirrbt.d rl inrgub irlrr'
vrb by en crmtLlly myrtrmrtic Prcort.
01-4. Accounlebility ir klmticrl with ruPonribilily
rccounling. Accosntrbilily dmlr with lhr dir'
c|rrtgo of
gr
irdivitulr rrrponrltility to echirvr
urignrd otrirctivu wibh hr e*l md .rP.ns'
.. dbrd fot.ito prdonnmcr end egrord to by
thr irdivilll
01
.5.
Thr cqfrolbr 6o nct ccnllol. bst ri! lh. csr'
trol tut of tht mrnrgori rl l ovrl l by i rrui ng
'
ttpodt pohthg out dcvielisc lrqn thl prcdctlr'
min d courta oa &iim.
Ol. Thr st d.plrtrnoflt ko.pt d.teil.d ncordr ol
.nattrdr. lrbor, lrsfory ovorhoad, |rld m..k.t'
hg rnd tdnhrttntiva axpon3.t: analyrs tirrr
corlr: irturr cgrtrol taPortt;
Ptaprt.t
cort
dudier tor plrnnhg end d*irbn tridhg; rnd
coordinrt.t cott rnd budgrt drte wilh olhrr
cr.trylnril.
O1.7. F
Pdrrct
roorrdr
rnd derign, thr rrrnufr'
Urhg cbperirr|.ntr nord ortinrtd cl nrlrrirl.
hbor, rnd rtrrdlirr
PtE.3l]
str; lor m.'ruting
srd offi ci rncy ol rchrdul i ng.
produci ng. rnd
htP.siing pmductr, tho drprrtm.ntt
n'od lo
bd |ha codt irun d. Thr plr:anrl drprrr'
tnlrt rrrpplba mpfoyror'wrg. r.1.3- Thr trs'
|Ury dfrytm-t n..dt rccounting, budg.lrlg.
rd nhtrd rlgo.tr h rhrduling culr roqur'
tnatrtl. Tho rnrrtothg dlgertmrnl n.'dt cott
irlsnrtirr h riting
prE.t. Tho ptblic rrblitu
dagrtltn-n nreir'hfornrtbn
qr
Ptc...
r'F'.
PtoaL,
end divUrndr h sdrr to infotm thl puts
Ia Tha Lgal'dapstrnrnt noods st hfo'mrtbn
br frqirg rrny dteirs ol thr snpany h can'
b.mfy wlh lhr lrw.
Ol. ltodrm trctlrluor h csrrnunrcatlcnt
giv. th'
contrdbr end rntf lh. m.ant to tnnttnil hfor'
mdin in thr torrn cl cruttr. sutye.t. end foo'
crtto i n r wry ntvrr bdorr
pori bl r' Profi t
oPPor t uni t i ar or conl r ol . cl i ont hl vo bol n
drbyrd or misrd rntiroly bxaurr ttn'ly hfot'
tilli*1 thrt mi!fit frrvr imprw.d lh' cosl 'nd
prolit poitbn of thr cornpeny w.s poorty cdtl'
mr,'rEsiad.
Ol-9. Thr budgot ir rn oclonlbt colt
plennrng tool
brcaser it (r) lupplilr hfonnation and lrrvrl
rl e rtrlderd of
prrlormarc. lor ct cdtttol by
thr luprrviroc rciponriOto lor cg (b) ptwitor
Jr ..tt mrthod for enticipeting
prolitr rt rn
$ticiPlt.d nlor'bvol;
(c) hrlpr in foncarling
trbl, cotl3. rrponra3. and
pro{ils lor t pricd
of orc
Yorr
or rrlr. h rdYs'tc..
Ol-tO. Thlr dendudr rill not nocr*arily bo rbb lo
pt.vonl rilntg.m.nt ftrud' but th'y do give
inttnrrl accounbtrtt scnr
guilanct on how lo
preerd il thry rncountar ! qu'stiaublr
prr'
ticr.
01-l l . CASB rtandard$
(l ) rnunci al r
a pri nci pl r or
pnrriy'rl lo b. lollow.'{
(b) Glablbh
Prtdictt
is 5rj rpptiod; (c) rpcfy crilrrie to br ornpbyrd
h rlcthg lrqrr allrnretivr
principbr rnd prl:'
t!.! in orlinrting rccutnubtng,
end rcporrr'g
cgltrrst cosb. Th. tttndatds
at' btcktd tsf lho
lutt torc. trld .l{.ct ol thr tew.
Chapter 1
.
EXERCISES
Ei -1 The exerci se requi res turo exampl es of the i nseparabi l i ty of pl anni ng
and
contnol. Thrce are listed here, and the third one
gives two illustrations:
The most obvi ous erampl e of the i nseparabi l i ty of
pl anni ng
and con-
trot is found in the definition of control: managementb slrstematic effort
to achieve objectives by comparing
performance to
plans and taking
appropriate agtion to correct important differences. The definition shows
that the specific results of
planning ane an essential input to the control
phenoi nenon; there cannot be any such thi ng as a control effort wi thout
reference to some set of
plans.
A second exampl a of the i nseparabi l i ty of
pl anni ng and control
results from the fact that they are simultaneous' In practice, the imple-
mentation of the first steps of a
plan, and any control action needed in
those steps, are begun before al l
parts
of pl anni ng are compl ete. Earl y
results and the early findings of control activity can then be used in final-
izing later
parts
of the same
plan. An example is that a single annual
budget i s usual l y not compl etel y fi nal i zed before customer orders begi n
to be received lor that year, and consideration of the number of these
actual customer orders may
point to trends that need to be considered in
finalizing the budget. Even actual financial results of the early weeks and
months of the year can
provide a basis for better
'establistring
the budget
for the later portion of the year.
The most el egant exampl e of the i nseparabi l i ty of pl anni ng and con-
trol results fronr'the fact that both planning and control are complex
human acti vi ti es, and al most al l compl ex human acti vi ti es are pl anned
acti vi ti es and al so control l ed acti vi ti es. In other words, pl anni ng can be
so compl er that the
pl anni ng
effort i s i tsel f control l ed (and pl anned), and
control can be so compler that control activities are themselves planned
{and
controlled}. T\,rro illustrations of this are
provided
as follows:
(t)
A case i n whi ch pl anni ng
i s i tsel f pl anned
and control l ed i s when a
complieated budget (plan) is to be prepared. To facilitate the cre-
ati on of the budget, a detai l ed weekl y schedul e (another pl an) i s
first agreed upon, showing which steps in the preparation
of the
budget are to be carried out during each week. Because it is
desired that the creation of the budget not be allowed to fall far
behind schedule, the responsible manager will exercise control by
making comparisons between (a) the actual progress
made on the
budget each week and (b) the schedul e. The manager wi l l al so take
some correcti ve acti on i f the di fference between the schedul e and
the actual progress
i s consi dered i rnportant.
(21
A case i n whi ch control i s i tsel f pl anned i s when a manager deci des
what ki nds of control reports wi l l be used to compare actuat resutts
wi th pl ons
i n each future peri od
of busi ness operati ons. That deci -
si on, any efforts made to acqui re a suppl y of prepri nted
report
f or ms t o be f i l l ed i n each per i od,
and any changes i n t he desi gn of
' . q
a
ChaPter
t
El -1
(Concl uded)
the cost accounti ng
system to capture and compi l e the needed i nforma-
ti on about actuat resul ts
represent evi dence that the future.control acti v-
l ty i s bei ng
Pl anned.
El-2
(11 B
(21 A
(3) c
(41 A
(51 c
i Oi
B
-
al though the ti me frame i nvol ved i n thi s ki nd of
pl an
may be
.
extremely long, there is nothing strategic about this kind of plan
or deci-
si on. l n fl cti the
pl an and obl i gati on to pay off the bonds when they
come due i s so routi ne that management
woul d not consci ousl y
aPProach it as a decision.
E1- 3
(11
paragraph
(bl comes cl osest to descri bi ng
the ki nd of control used i n
mani gi ng a busi ness, atthough
i t i s descri bed i n a nonbusi ness setti ng.
There i s I
pl an l ormutated
i n advance,
there i s a measure
of actual
resutts, there i s a deci si on maker who compares actual resul ts wi th
pl ans, i here i s a sel ecti on of a correcti ve
acti on to bri ng resul ts cl oser i n
l i ne wi th tae
pl an, and there i s a foreshadowi ng
of repeated
peri odi c con-
trol acti vi ti es
(the remai ni ng
qui zzes)'
The fact i frat i l re measures of
ptanni ng and actual
performance ane
nonfi nanci al measures i s not the governi ng consi derati on.
Much pl anned
and actual i nformati on
used i n controtl i ng a busi ness i s non-fi nanci al '
i ncl udi ng some cost accounti ng
i nfor:mati on
such as the number of uni ts
produced, the
percentage of uni ts that were defecti ve,
and the percent-
age of avai l abl e machi ne ti me that was uti l i zed'
(21 R-ragraph (a) i s a
perfect exampl e of an engi neeri ng
control ' rather than
the ki nd of control managers use i n busi ness. The si mpl e
devi ce
descri bed, whi ch i s founi i n any home bathroom, i s the ki nd of control
devi ce dei i gned to moni tor a
physi cal condi ti on, and so i t i s anal ogous
to
; th;r;;;Jt or any of a varieiy of devices called
"industrial
controls."
of
course, devi ces of tni s ki nd art used i n manufacturi ng
and other busi -
nesses, but they do not possess the essenti al attri butes
of control i n the
sense used i n busi ness and i n cost accounti ng.
The devi ce
achi eves a
conti nuous moni tori ng of the resul ts, rather than a
peri odi c compari son
of resul ts wi th
pl ans, i here i s no human deci si on maker
who sel ects
a
correcti ve acti on to be taken. A human deci si on maker i s
probabl y-the
sal i ent attri bute of control i n managi ng a busi ness that i s mi ssi ng
i n
paragraph (al .
Chaoter
1
I
E1- 3
( Goncl uded)
Par agr aph( c} coul dbei nt er pr et edasanexamp| eof p| anni ng, but i t
tacks
som!
essentiar
inntfris'ot
"ontiolGven
though
the word
"con-
trol,,
is used
in its tast senili""i.
rn"-te
is no
periodic
comparison
of
actuar
resutts
with
plan" ;;;';;
provisioi
ioi
-moairyins
the treatment
based
on
periodic resuttsl
eor
"r-".ple,
the contract
requires
five treat-
ments
each
year, even i t no;";dt
are vi si bl e'
The acti ons
taken are
"r.r*J::l"jxtlil',";efers
to the concept
of contror
that appries
to
porice
work and mi ti tary
sci enc;:
ti ;;;sts
ot bei ng
abte
to
phvsi cal l v deter-
mine
each event ttrat ocJu;
il iot"
tocaiion-
and being
able to
prevent
certain
events
from o""rJring.
rn"
pot""li"i use of coetcive
fotee'
which
is very ctear
in
paragraprr rot,
i, alwayspreient
in achieving
this kind of
control.
ln
paragraph
(d), ti;;'r"
i" no inOi""tion
tft"t
resutts
wene
periodi-
cat t ycompanedwi t hpr ans. l r u| et hat says. ' obt ai nt heobi ect i veat any
cost " i ssomet i mesassoci at edwi t ht heseact i vi t i es'
- F
Chater
t
CASES
.
cl - 1
( 1} Yes, Wi | | i amshasanet hi ca| r esponsi bi l i t yt ot akeact i on.
d;'nilis
-itanaards
of Ethicat
Conducl states that manase-
ment accountants
t'shall
not commit acts contrary
to these standards nor
shal l they condone
the commi ssi on
of such acts by others wi thi n thei r
organizations.tt
l 2l ffhe
requi rement
does not ask whi ch standards
have been vi ol ated' but'
, - ' r at her r whi chonesappl yt oWl l i ams' si t uat i on' )
Management account ant shaveanesponsi bi l i t yt o:
cori-"i"n"":
perform
their
professional duties in accordance with
relevant
6n s, tegulations;
and technical-standards'
(Dumping toxic
wastes in a residential
landfill is
generally a violation of law.)
Confidentiatitv:
Refrain from disclosing
confidential information
""quf f i eof t hei rworkexcept whenaut hori ze. d. , u. n| ess
tegi tl y obti gated to do so
(Wi l l i ams my be l egal l y obl i gated to take
action and make certain disclosures'!
fnteqritv: Refrain from either actively or
passively subverting
the
\
attainmeffi the organizationb
legitimate
and ethical objectives'
(Wi l l i ams, avoi dancJot
the i ssue woutd
passi vel y subvert
attai nment of
ethical obiectives.)
Comm-unicate
unfavorable
as well as favorable information
and
pro-
fessi onatj udgments
or opi ni ons.
(Wi l l i ams i s obl i gated to report hi s unfa-
vorable tindings to appropriate
persons')
Retr?il tion, engaging in or supporting
any activity that would dis-
credit the
professionl (lflitlia1ns' sitence
would
provide support
to the
dumping activity and, ihus, could discredit
the profession')
'Obiectivitvi
Disclose fully all relevant information that could reason-
aory G eilffid to influ"ncJan
intended usefs understanding
of the
reportS, comments, and recommendati ons
presented' (Wi tl i ams shoul d
disclose his lindings to the'appropriate
persons')
(31 Atternative
(a|, to seek ttre adiice
of his immediate superior,
is appropri-
ate. This is itri first step he is reguired to take, unless the superior is
involved.
Atternative
(bl, communication
of confidential information
to
per-
aons outsi de the company, such as the l ocal newspaper, i s i nappropri ate
unl ess there i s a l egai obi i gati on to do so. l f regui red by l aq Wi l l i ams
shoul d contact the proper authori ti es.
Alternative
(c), contacting a member of the board of directors,
would
be i nappropri ate at thi s ti me. Wi l l i ams shoul d report the
probl em to suc-
cessi vei y tri gher l evel s wi thi n the company and turn to the board of
di rectors onl y i f the probl em i s not resol ved at l ower l evel s.
-l
Chaoter t
C1-1
(Concl uded)
(4) Wl i ams shoul d fol l ow the company' s establ i shed
pol i ci es
for resol vi ng
such i ssues, i f such
pol i ci es eri st. l f the i ssue i s not resol ved through
eri sti ng
pol i ci es, he shoutd
report the probl em to successi vel y hi gher
levels within the company
until it is resolved.
ffilliams
is not required to
report this action to his superior if his superior appeani to be involved in
the conflict. He is not to disclose the matter to
persons outside the orga-
nization, untess required by taw.) During these steps' Wlliams may clarify
relevant concepts by confidential discussion with an obiective advisor to
obtain an understanding of
possible courses of action. lf tfie conflict is
not resolved after erhausting all these coursies of action' VWlliams may
have no other recourse than to resi gn and submi t an i nformati ve memo-
randum to an appropriate
representative of the olganization.
Consultation
with one's personal attorney
is also appropriate.
c1- 2
(i
) 61he
requirement does not ask which standards
have been violated' but'
rather, which ones apply to the CFO'S behavior.)
Mana
ge
ment acco untants have a' nesponsibility to:
CompLtgnce: Perform their
professional duties.in accordance with
'
relevant tawC, regulations, and technical standards.
ffhe
CFO has asked
Deerling to account for informatlon in a way that is not in accordance
wi th generatl l l accepted accounti ng
pri nci pl es.)
Prepare comptete and clear reports and recommendations after
appropriate analyses of relevant and reliable informatlon.
[The
CFob
restrictions on disclosure will resutt in incomplete reports.)
Confidentialitv: Refrain lrom using or appearing to use confidential
information acquired in the course of their work for unethlcal or illegal
advantage, either
personally or through third
parties. (The CFO is
attempting to use confidential information to
protect the
fob
security and
bonuses of top management.|
Inteqriw; Avoid astual or apparent conflicts of intercst and advise
atl appropriate
parties of any
potential conflict.
fThe
CFO has failed to
avoid a conflict of interest and has not informed the stockholders of the
conflict.)
Refuse any gift, favor, or hospitality
that would influence or would
appear to i nfl uence thei r acti ons.
[The
GFO' s bonus appears to be an
i nfl uence on hi s acti ons.)
Refrai n from ei ther acti vel y or
passi vel y subverti ng the attai nment
of the organi zati on' s l egi ti mate and ethi cal obj ecti ves. (The CFO has sub-
verted the attainment of the organization's legitimate objective,
profit for
stockhol ders, by pursui ng, i nstead, the
j ob
securi ty and bonuses of top
management . )
Communi cate unfavorabl e as wel l as favorabl e i nformati on and
pro-
fessi onal
i udgments
or opi ni ons.
fl ' he
CFO i s attempti ng to restri ct di s-
cl osure of i nf ormat i on about t he acqui si t i on. |
I
-
F
!
:
Chaptor t
C1-2
(Conti nued)
Refrai n from engagi ng i n or supporti ng
any acti vi ty that woul d di s-
credi t the
professi on.
fi he
CFO' s acti ons coul d di scredi t the
professi on.)
Obiectivitv: Communicate
information
fairly and obiectively.
ffhe
CFO is attetnpting to unfairly control the information reported, resulting
in a rePort that is not obiective.)
Disclose futty all relevant information
that could reasonably be
expected to i nftuence an i ntended userb understandi ng of the reports'
comments, and recommendati ons
presented.
ffhe
CFO i s attempti ng to
restrist disclosure of relevant information.l
(21
fthe
requi rement does not ask whi ch standards have been vi ol ated' but'
r:rther, which ones apply to Deerling's situation.)
Management accountants have a nesponsi bi l i ty to:
Comol tence: Perform thei r professi onal duti es i n accordance wi th
rel evant l aws, regul ati ons, and techni cal standards.
(Deerl i ng i s bei ng
asked to vi ol ate
general ty accepted accounti ng
pri nci pl es.)
Prepare complete and clear reports and recommendations after
appropriate analyses of relevant and reliable information.
(Deerling is
being asked to
piepare an incomplete
report.i
ggg1iEe$bt6i
Refrain from using or appearing to use confidential
information acquireO in the course of their work for unethical or illegal
advantage ei ther
personal l y or through thi rd
parti es. (Deerl i ng must not
use the confi denti al i nformati on about the possi bl e takeover to hi s own
advantage or to that of the
person(s) mounting the takeover attempt.)
l nteqri w: Refuse any gi ft, favor, or hospi tal i ty that woul d i nfl uence
or woutd appear to i nfl uence thei r acti ons.
fi he
l ast sentence of the case
suggests that Deerl i ng i s consi dered
a member of the top management
gnoupr
so he may be el i gi bl e for a bonus.)
Refrain from either actively or
passively subverting
the attainment
of the organi zati on' s l egi ti mate and ethi cal obj ecti ves.
(Deerl i ng i s bei ng
asked to subvert the attainment of the organization's legitimate obiec-
tive, profit for stockholders, by
pursuing instead the
iob
security and
bonuses of top management.)
Gommuni cate unfavorabl e as wel l as favorabl e i nformati on and
pro-
fessi onal
j udgments
or opi ni ons.
(Deerl i ng i s bei ng asked to restri ct di s-
closure of information about the acquisition.)
Refrai n from engagi ng i n or supporti ng any acti vi ty
that woul d di s-
credi t the
professi on. (Deerl i ng i s bei ng asked to take acti ons that coul d
discredit the profession.)
Obi ecti vi tv: Communi cate i nformati on fai rl y and obj ecti vel y.
(Deerl i ng i s bei ng asked to prepare a report that i s not obi ecti ve.)
Di scl ose futl y atl rel evant i nformati on that coul d reasonabl y be
expected to i nfl uence an i ntended user' s understandi ng of the reports'
comment s, and recommendat i ons
present ed. (Deerl i ng i s bei ng asked
t o
restri ct di scl osure of rel evant i nformati on.)
Chaoter 1
C1-2
(Concluded)
(31 tf the company has esta-blished
policies for dealing with such issues,
Deerl i ng shoui a fi rst fol l ow
tAese pol i ci es. l f such pol i ci es do not eri st'
or i f they ane unsuccessful
i n resol vi ng the
probl em, Deerl i ng shoul d pre-
sent the
probl em to the chai rman of the board. Deerl i ngb i mmedi ate
superi or i s i nvol ved, so he need not be i nformed of thi s acti on. l f the
matter remai ns unnesol ved, Deerl i ng shoul d report to the audi t commi t-
tee, the board
of directors, and finally the maiority owners. During these
steps, Deerling may ctarify retevant concepts
by confidential discussion
with an objective advisor to obtain an understanding of
possible courses
of action. lf the conftict is not resolved after erhausting all these counses
of action, Deerling may have no other necourse than to rcsign and'submit
an informative memoriandum to an appnrpriate repnesentative of the
organization.
Consultation with one's personal attomey is also appropriate.
(4) The primary nesponsibility tho company must tulfill betore taking defen-
sive actions is its fiduciary nesponsibility
to stockholdens. Other respon-
sibilities inctude the effects that the takeover and defensive actions
would have on creditors, bondholders, empfoyees, customers' and the 3
community. The company also has a nesponsibility to inform its external
audi tors and l egal counsel to avoi d
putti ng them i n a compromi si ng
posi -
ti on.
c1-3
(f
l ffhe
requi rement does not ask whi ch standards have been vi ol ated' but'
rather, which ones apply to Dixon's behavior.)
Management accountants have a responsi bi l i ty to:
Comoetence: Mai ntai n an appropri ate l evel of
professi onal compe-
tence by ongoi ng devel opment of thei r knowl edge and ski l l s. (By system-
atically rejecting all minority applicants, Dixon is
ieopardizing
the level of
competence among the staff.)
Perform their professional duties in accordance with relevant laws,
regulations, and technical standards.
(Equaf opportunity in employment
is required by law.)
Inteqritv: Avoid actual or apparent conflicts of interest and advise
all appropriate parties
of any
potential conflict.
(Dixon's preiudice is in
conflict with the company's legat obligatibn to
provide
equal opportunity
empl oyment, and wi th the companyfs need for the most competent staff
regardless of race.)
Refrai n from ei ther acti vel y or
passi vel y
subverti ng the attai nment
of the organi zati onb l egi ti mate and ethi cal obj ecti ves.
ffhe
company' s
obi ecti ve of equal opportuni ty empl oyment i s bei ng subveded by Di xon' s
prej udi ce.!
(21
(3)
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Cl -3
(Concl uded)
\
b
Refrai n
from engagi ng
i n or supporti ng
any acti vi ty that woul d di s-
credit the
profession. (Such peristent, systematic
discrimination
in hir-
i ng coutd di scredi t the
professi on' )
ff[e
requirement
does not ask which standards
have been violated' but
iather, which on"" apply to Foxworthts
situation.)
Because management
accountants
may noi condone
the commission
of unethical acts by
;ihd *ig,in ttreir organizations,
all of the responsibilities listed in the
sol uti on to requi rement
(1) al so appl y to Foxworth' s
si tuati on.
In addi ti on,
the fol l owi ng aPPIY:
Management
accountants
have a responsibi|ity
to:
ConfiJentialitv: Refrain from disclosing
confidential information
acqui red i n the couor of thei r work except when authori zedr unl ess
l egal l y obl i gated to do so.
(Foxworth' s suspi ci ons
about Di xon' s behavi or
shoul d not be di scl osed i nappropri atel y'
See requi rement
(3)).
gbiectivitv:
Communicate
information
fairly and objectively'
(poxworttr is oOtigated to make obiective hiring recommendations to
bi ron, i n spi te oi tri s bel i ef that Di xon wi l l be prej udi ced i n acti ng on
them.)
Alternative
(a), discussion with the director of
personnel, who is one of
Dixonb
peets, is inappropriate at this time. lf, however, Foxworth
betieves the directoi bt
personnel is an obiective
pafty, Foxworth
may
discuss the matter with the director, confidentialln
to clarify
the relevant
concepts and to obtai n an understandi ng
of
possi bl e courses of acti on.
Alternative
(b), informal discussion
with a group of MAD senior man-
agement accountants, is inappropriate.
Alternative
(cl, piivate discussion
with the CFO, Dixon's superior, is
appropri ate. Because Foxworth has atready approached hi s i mmedi ate
superi or, Di xon, who i s i nvotved i n the confl i ct, i t i s not necessary for
Foxworth to inform him of this action.
Fonarorth shoul d fol l ow the company' s establ i shed
pol i ci es for deal i ng
with this type of conflict, if such
policies exist. lf policies do not exist' or
if they are-unsuccessfut in resolving the conflict, Foxworth should dis-
cuss ihe issue with the CFO. tf the matter remains unresolved, discus-
si ons wi th successi vel y hi gher l evel s of management, i ncl udi ng
the audi t
committee and the board of directors,
should follow. During these steps'
Foxurorth may discuss the matter confidentially
with an obiective
advisor
to cl ari fy the rel evant concepts and to obtai n an understandi ng of
possi -
bl e courses of acti on. l f the matter remai ns unresol ved after exhausti ng
al l of these steps, Foxworth may have no recourse other than to resi gn
and submi t an i nformati ve memorandum to an appropri ate representati ve
of the company. Consultation with one's personal attomey is also appropriate.
Chagter 1
c1-4
,
{1) ffhe
requirement does not ask lor a list of responsibllities Rodriguez has
viotated, merely which of the fifteen responsibilities apply to his
si tuati on.)
Management accountants have a nesponsibility to :
Comoetence: Perform their professional duties in accordance with
relevant laws, regulations, and technical standards.
ffhe
figures
Hodri guel i s bei ng asked to prepare mi ght amount to fraud i n the l oan
appl i cati on.)
Prepare complete and clear reports and recommendations after
appropriate analyses of relevant and reliable information.
flhe
reliability
of the information is in doubt, and the fact that certain sales figures are
or are not sufficient to
justify
the bank loan are not relevant to prepara-
ti on of the budget)
lnteoritv: Refrain from either actively or passively subverting the
attainment of the organization's legitimate and ethical objectives. (There
is a push to subvert legitimate objectives to the immediate need for a
bank l oan.)
Recognize and communicate professional
limitations or other con-
straints that would preclude
responsible
judgement
or successful per-
formance of an activity. (Rodriguez
has not expressed to Czeista the con-
flict between his desire to be a team player and his ethical responsibili-
ti es.)
Communicate unfavorable as well as favorable information and pro-
fessional
judgements
or opinions. (Rodriguez
is being asked to report
information that reflects so favorably on the company that lt may not be
j usti fi abl e.)
Refrain from engaging in or supporting any activity that woutd dis-
credit the profession.
(Preparing
a deliberately misleading budget as
' part
of a loan application could amount to obtaining mon-y by iraud.)
Obiectivitv: Communicate information fairly and objecfivety.
(Rodriguez
feels pnessuned
to abandon his objectivity in preparing
the
budget.)
Disclose
fully all relevant information that could reasonably
be
expected to influence
an intended user's understanding
of the reports,
commentsr
and recommendations
presented. (A comparison
of the new
targeted
sales figure with the actual sales of tlre coresponding periods
of past years
would be likely to influence the bank's understanding
of
just
how large
an increase in sares is being portrayed.)
12) Rodriguez
coutd have clearly stated his concerns to Czeisla at each
stage
of the budget's
creation and revision. He could have consulted
wi th the marketi ng
manager and producti on
manager.i
"r.ry stage,
rather
than onl y upon recei vi ng the i ni ti al budget
ol ata. He coutd present
the budget,
or a summa
ry
of i t, i n a comparati ve
form to hi ghl i ght the
differences
between
each guarterts
budget
and the actual resutts of the
corespondi ng
quarter
of the precedi ng
year,
and he coul d even
t 0
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C1-4
(Concl uded)
calcutate the
percentage increase being budgeted and compare it with
actual
perceniage increases
that were achieved annually in the past. He
could have conJulted
with his staff superior at the headquarters of
Norttrwestern
(the parent company)
-
Gzeisla is his line superior'
according to the second sentence of the case'
(31 In addition to his ethical responsibiliUes
to CD, Rodriquez has ethical
responsibiliUes
to:
(a) The banks
(b) The management
accounting
profession
cl - 5
(1)
ffhe
requirement does not ask for a list of responsibilities
Jones has vio-
iated, merely which of the flfteen responslbilities
apply to his situation.)
Management accountants
have a responsibi||ty
to:
ConfiJentialitv: Refrain from disclosing confidentlal
information
acquirEA in the counse of their work except when authorized, unless
legally obligated to do so.
(lf Jones accepts the consulting engagement
with Crimson, lt is tikely she will be asked to disclose confidential SMI
information about the desired computer system')'
Refrain from using or appearing
to use confidential information
acquired in the counse of their work for unethical or illegal advantage
either
personalty or through third
parties,
[The
size of the consulting fee
suggests Grimson is seeking to buy confidential information to help win
the
job.)-
lnteqritv: Avoid actual or apparent conflicts of interest and advise
all approptiate
parties of any
potentiat conflict.
(The consulting
iob
would
constitute an apparent conflict of interest and
probably an actual one'
because Jones has been named to the SMI committee that will evaluate
and rank all the
proposats, inctuding Crimson's
proposal, which she
would have helped to write.)
Refrain from engaging in any activity that would
preiudice their abil-
ity to carry out their duUes ethically.
(The consulting
iob
with Crimson
would preiudice Jones'ability to evaluate and rank the
proposals for
SMl, because one of the proposats would be Jones' own work.)
Refuse any
gift, favor, or hospitality that would influence or would
appear to influence their actlons.
(Regardless of wbether the size of the
consulting fee is construed as being a
gift or favor, lt Is likely that other
gifts, favors, or hospitality will be extended to Jones by Grimson during
the counse of the consulting engagement)
Refrain from either actively or passively subverting the attainment
of the organization's legitimate and ethical objectives.
(SMl's legitimate
obiective of obtaining the best computer system at the best
price would
be subverted to Jones' personat need for money, as a resul t of Jones'
di sctosi ng cruci al i nformati on for Cri mson to i ncl ude i n i ts
proposal ,
especi al t y i f Cri mson mi ght not del i ver a syst em wi t h t he cruci al
attributes.)
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C1-5
(Concl uded)
Recognize
and communicate
professional limitations
or other con-
straints
that would
precluJ" *=ponsible iudgmen-t
or sucoessful
perfor-
mance of an activity.
(Accepting-tfie
consutung iob
would
preclude
responsibte iudgment
in .rlfu"ting
and ranking
the
proposals for SMI; on
the otheirr-anu,Lthicat
llmitations-of
Jones' employment
at SMI would
preclude successful
performance of the consulting
engagement
for
Crimson,
Liplcially
li Crimson
does expect her to leveal crucial lnforma-
tion to fr"lp Lin ttre
ioU-her
ethical duty to SMI would
prevent her from
delivering
what Crimson is
paying for)'
Refiin from engagin! in or supporting
any activity-
that would dis-
credit ttre
profession. (Selling confidential SMI information
to a vendor
would be a discreditable
act)
Obiectivitv:
Gommunicaie
information
fairly and obiectively.
(Jones
would Ue unliLely
to communicate
obiective evaluations
of
proposals lf
she had tretpea write one of ttrem')
Disclose fully all relevant
information that could reasonably
be
expected to influence an intended useCs understanding
of the reports'
comments,
and recommendaUons
presented. (JoneslPtt ln writing the
Crimson
pioposat would be relevant information
in SMlts
use of her eval-
uations oi
pioPosals.)
(21 Jones might have disclosed, either orally or on her
personal vita sheet or
iob
application,
the extent of her involvement
on the SMI task force and
the committee.
(3) Jones could have first investigated
all her caneer opportunities
with firms
that
presented no potential conflict of interest of this kind, but for the
sake of the arE,ument, it is reasonable to assume she did exactly that
belore applyin! for a
position at Crimson. Knowing
that Crimson ls a sup-
plier of computer systems, Jones might have revised her
personal vita
sheet and the wording of her application
for this one
iob
interview to
lessen the chances of Grimsonis being tempted to
pursue an unethical
plan. (Of course, her invotvement in SMt's upcoming
purchase might have
become known to Grimson anryay, or it might have been known to
Grimson from other sources before her interview or even before her
application for the
position.)
(41 In addition to her ethical responsibilities
to SMI
(and her financial
responsibitity to the hospltal that provides treatment for her child)' Jones
has ethical responsibilities to:
(a)
her family
(b) the management accounti ng
professi on
(c) Crimson
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CGt it lha curnnt nrnetary Yaluo c' @'
nqnic tatou.cet
givon uP or to bo givcn
up i n obt ai ni ng
goodr and ! ' r vi ces'
Ecgrqnb toloulE.! tnay bo given up by
trandening cash or othcr
propcrty, bsuitg
capital stoih
prrloming rrvbe, or ircur-
ring liabilttbt.
Coclc rrc classifird er unexpirod or
expired. Uncxpired sl! at. aslet! and
apply to tho produclict cl fulure r.venues.
Erarnplet of uncrpired @sts at. invenlo-
rira, prepaH exPent.E, plant and equip'
ment. and i nvcstmcnts. Expi rcd corl s'
s'hi$ ngl costl bosnc eventually, are
thosc that er. not applbable to tho pro'
dus{bn ol luturr rcvonuos and are dodud-
r d l r om cur t anl t evonues or char ged
agohst retahrd oamings.
E:grncr in its broadesl
gense
hcludes
all expired catr; i.r., costl $'hich do not
havc any polential futurc cqlofiiic bene-
lil A mar prrcire ddinition linits thc use
cil the tcrm'axpcnlc'!o lhe et9ired cosls
ariring from uring or con3uming
goods
and srrviccr in tho preesa ol oblaining
rcvenuss: o.g.. co3l of goods sold and
markelhg and adrninistrative expenses.
(t) Cost of
9oo&
soH is an cxpired cosl
and may bc rclorred to ss atr erpensc in
t ho br oad t . n! o of t hc t cr m. On t he
incqnr stal.m.nt. it b most sften Uenti'
fi cd ar e co!| . l nvrnl ory hel d l or sal e
which is destroyed by an abnotmal casual'
ty strould be dssitied as a loss.
(2) Urnollectble accounts expnse is usu'
ally classilied as an exPenso. Howevcr,
some aulhorilicr belicvc thal it is more
desirablc to clasrify uncolleclible accounls
as a direct reductiqr of sales revenuc
(an
of l set t o r r vcnue) . An uncol l ect i bl e
accounl whi:h was nct proviJod for in the
annual adiustmcnt, such as bankruptcy of
a maior drbtor, may be classified as a
bes.
( 3) Dcpr cci al i on . xpen! c l or pl anl
rnachhcry is a corrpooent o{ factory over-
head ard r.presrnts thc rectassifbation of
a portlcn od thc mEdrinory cqsl to product
cct (hventory). Whcn the producl ir sold,
lho doprcciation bccomes a part of lho
co$ ol gods rold which is an oxponso.
Deprccbtian cl pbnt m*hinery durhg an
unplanned atd unptoductive perir:d cl iCle-
ncss, suctr as during a slriko, should be
classified as a lcs. The torm
'expense'
CHAPTER
2
DrscussloN ouEsTloNs
a2-2.
02-3.
shouH preferably be avoided rr'hon rnak'
hg relcrmce to
Productbn
coss-
(a) Orgattizatirr ccls arc tlnse cqsts that
benefil the lirm for its entire perird ol exs'
tcncs and aro most approprbtely classi'
fiod ss a rsrcurcnt asset. When lherc is
hilbl evijence that a firm's life is limiled'
thc orgranizatbn costs Crould be allocalcd
ovor t he f i r m' s l i l e a! an expeneo ot
shoul d bc amorti zed as a l osg whrn a
goi ng conccm foresees termi nal i on. In
praclice, however, orgranizalbn costs are
oftcn writlen ofl in the early years of a
firm's eristence.
(5) Spoiled gods reaulling from normal
menulacluring
preessing shoub be lreal'
cd as a cost of the prodwr rnanulastured.
Whcn t hc
Pr oducl
i s sol d' t ho cosl
becomes an expongs. SPoi l ed
goods
rcrul l i ng from an abnormal occurrenco
shouldbe clrssilied as a kr-ss.
Cost objrts are unils for wlrich atr arrangement
is mede lo accumulate and measure cosl. They
are imporlant because ol thc need lor multiple
dimensians ct dats (c.9., by produci' csltrasl" or
departtnent) to accornplish the varbus
PutPoses
of cost accounling, including cosl fhding'
pbn'
ning, ard contrcl.
(a) To ctassily costs as direst or indirct. the
col t accounl anl musl l i r st know l he
answens to lhe
questlcns
-Directly
traced
to what?' and' l ndi rectl y i denti fi ed wi l h
what ?' Ol her wi se, t her e i s no way l o
assess the direct or indirect nature ol a
cost. lt is the choice ol a cost obiecl lhat
answers lhose lwo qugstbns.
(b) For erample, lhe cost of a department's
manager's salary cannot be cbssified as
direct or indirecl without lelecting the cosl
object first. lf the cost obiect is a prcduct
uni t produced i n the manager' s deparl '
ment, thon the sabry is indirect. ll the cct
obj ect i r the departmonl , l he sal ary i s
direcl.
(a) The product unil, batch, or b is tho cost
obiect. (8e careful about the lack cl cbrily
of the term the
product' when it is nol
known whether il is intended to meen
(a) a
single unil, batch. or lol ol a
Ptoducl.
Bs
oppced lo (b) any large number ol benti'
cal unils. lt couH easily bc laken to meatr.
say,
Product
1321, as oPPosed to somo
other item in the cornpany's catalog' ancl
that could suggost the grand total ol ali
identical pieces ol t321
produced during
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14
lhc onliro
product lilc eycb. Thr rignili'
csnc. o{ lhb dbthstion it thal sstr. cGls.
eucn s!
product dceign' Ptotoqping,
8nd
hilial worker trahhg' arc dincl codr with
rosPccl to th. tolal of all unitc tvct
pto-
ducod, bul ero indirccl with tocPesl to e
eingle uil, bdch' or bl')
(b) A diaaggrcaatkrn
of ovcrhcad
would be
uselul for lny ltudy of lpw to brttlr rnan'
age cost!. or ol what cau!'s tl l'o b'
i ncur r r d. Rol al i vr l y l r w ol l ho coel e
i ncurrod.,i n a factory arc causl d by l he
rqrthe
proargin ol ale npre unit of
qte
producl.
(c) (l) A bstch of Henlical vnits'
(2) Th. rum o{ all Uenlical unils cver po-
duced.
(3) An activity or
proco3s carried out in
prroduclicr.
(4) A gtoup or
' ccl l '
ol machi nos and
workerc wilhin a d.Parimont-
(5) A departmcnt i n whi ch producti on
GUnS.
(6) A plant or clher produclion facility.
( 7) A et r at cgi c
Aoal
ol l he f i r m ( 1. 9. '
inprovod qualny).
O2-5. A cost system ir a combinalim of prcedures
and rccordc dnignrd to providc the various
types of informEtiqr reguired in thr conducl o{
the enterprise; including cosl lhdhg, planning,
and cqllrol.
02. A gnod hformatinn rystem_reguires lhe crtab'
l i ghment of (a) l ong.rangr obi ccl i vcr; (b) an
organization phn rhoing dclegated rreponsibi l'
itier in dotail; (c) ddailcd phns for luture opera'
tbna, botr bng and rhod-lem; 8nd (d) pree-
dures for i mpl omcnl i ng and control l i ng l hese
plans.
A2-7. A charl of accountr ia ncccraary to clarrify
accounthg data, ro that thr data may bc uni-'
formly rccordrd in
irumals
and posted to lhe
ledger accountr.
02. Advantagcr of tho rlectronic data processing
lyllem for rccord keeping are: spced. larger
!torag., ringb rntry ol mulliplo transaclions.
aul omal i c conl rol fl aturel , and f l exi bi l i ty i n
r.port lonrlats.
O2-9. Thc ldbrrhg poceived
weaknessos wore mon-
lined h lh. text
(a) Tndi ti onel m.rrur.r ettompl to rcrvc
rniny purprg,
arrd ar a rcault lhey arc
not univorrslly rcanrdcd ar srrving any
qt.
purp6.
iJcally.
( b) Tr edi t i onal mea. ur . l ar o r l l ect cd by
accannting ctroicor that arc rrl ahrayr rol-
cvant to lh. purpo.. al hard; cramples od
thrsr clrobcs aro c6l flow agsumptisrs
and arbhrary fircd et allocatixrs.
(c) Tradi ti onal meesuro! arr cal cul ated by
sy3lcns lhat aro ueually sbw to rospond
to cfnn gin g srditiorrs.
Chapter 2
(d) Tndhbnal
m.lrurot of plenl uliliz'atton
c8n t .m lo ancourago orrrrutilizatbn of
caPritY'
(e) Tradi ti onal
m.l tuto! of offi ci rncy err
cilton rcPorted b bl.. ato t@ 899m9ai-
.4 lrd rt. .rry b mbhlrrPrct-
02-10. Nqtthancbt
pcrlonnerrr rn aaur.t rr. basod
an rinplr count! or clh.r phyrical date rathor
tun dlocat.d eunlhg dala. thry !n uncql-
nocird to tho grnrral fhrrcial rccounlirg rys-
trn, and thoy en cfrorn to rrflcl me sPecifb
alp-t ol
Prdorrnrncr.
O2-1 1. Four rrampbr ol nonl i nanci al prrl ormancc
mcasunrs
givcn h tho lort and the a.rpects of
portonnancr hry mi1t'tl b. ustd lo nsrits, an
(a) rcrap woi ghl .s r p.tc.nl ag. of l ol el
shppcd wcigfiB lo rnslitot cffbiency of a
- prs.s, pariicr.rlarly cllbioncy of matcrial
u8al
(b) proccring limo er r p.rc.ntaP of total
timc; to nsrita
qade etlicicnry or inv.nte
rY vclcitY
(c) dbtancc rrcvcd by a unil while insUc thr
plant to nutitc rinplifbalbn of a prarrs
(d) ruggcrl i cnr P.r
y.rt
P.r
cmpl oyoe: l o
rrr itor rnPryea ilotvrmrnl
O2-12- Tht cfiallcngr
poscd by lhr ircrrasod inlcrcrl h
'
nqrfinanciel
pldornam maarBurcs ir to defho
thc cost accountanl't rob broadly cnough lo
irctude rEr. rnasuror that arr nol preceded by
dolhr signs and thst at ncl thi lo the financial
eccqlnting !)rrlsn.
Q2-13. Cctr an most co,lutbnly claroified borrd st
lhcir rcbtictshP to
(a) thc produci (a ahgb bstch' lctt' or unit of
tho gmdorrrubo);
(b) thc Yolurnr od Elivity;
(c) tho manulacturing dcparlmcnts,
Ptsca!-
.t. o6t c||ltoili s othcr aubdivbixts:
(d) thc accounthg
Pctii;
(e) a
Propecd
decbirr, Elitn, or cvalualbn.
O2-t4. lrdircct rnstedab an thco rnslorials nroded for
tho csnplotion of lhc product bul whorc con'
aumptict is eithcr so amall or rc cornplex that
thcir trestment ar dirccl nralorialr would no( bc
foasible. For eramplo, nailr uerd lo mako the
product arc irdirccl malorialr.
02.15. lndirrt labor. in csltrasl to direct labor, b labor
rrponded lhat doo not efbc{ thr cqrrtrustiqt
or thr snpoilion of tho lhirhrd
Produc.t.
For
orarnple. thc labor of custodians ie indirct labor.
02-16. (a) A cervicr dcpartmont ir onc that ir not
diroc'tly cngngod in production, brtrl rrndrra
a partbular t!rp. of rrybo for the bonolit
od otrcr drpartmcntr. Erarmhr cf rorvbo
dopartmonl! aro rrceiving, ltor.rooms,
mai nl enancc, ti mekeepi ng,
payrol l , and
calelcria-
(b) Produchg dcparimentr clauify thcir aharo
of rorvice departmrnl .xpcnr.t ar indi-
rccl ovorhoad cp.nac8.
:
(c)
(b)
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Cluptar 2
@-17.
(r) Cepital expcndilunr are irdended lo beno.
lil nprt Oran
ql.
accounting
pcricd. Thr
oxprndiluru rhould lhoroforr br rccordrd
by e cfrargr to an ac!.t ac@snt for dls'
tin !o thc periodt bcncfiled.
Fbvrnuo cxprndi turcr brncfi l thr
oporationc of |hr cunrnt
perird mly. Thry
rhoul d bo rocordrd by chargrr l o thr
appmprialr ctp.ilta accounts.
It e ccpilal elgcndituro ir irnproperty clar'
ri fi rd ar .n axpantc' 8tl el r, rrtai nrd
oamings, and hcsnr for thl perird will bo
undrrstEted. In future
pcrids, hqnr will
br overstaled by any arnount thst would
havr bcen arrpdiecd had thc epcndiluro
born proprrl y capi tal i zrd. Anrtr and
rrtained eamings will bo undersialod st
tul urc bal anc. !h..13 by ruccorai vrl y
rrnaller amounts unlil the erct ha! becn
fulty countebalrnced.
lf a rovenuo elgonditurc ie improprrty
capilali:ed, asset!. rclained earninS' and
incqno for lhc period will br overstaled.
lrsnc will bo underslated in subrcquent
periodr as the impropedy c.Fitalized ilerrt
b cfiarged to thr goratbns of thoc peri'
ods. Agsets and retained earnings will
cqrlinuc to be ov.rstatod in subscqucnt
bal ance sheots by succesri vel y smal l er
t5
arnounlr until thc improperty capilalized
ilom has bocn canplelely writlcn ofl.
Tho basic critrrkxt for classifying eutbys
er rovonu. or capital cxpondituros is the
prriod of brncfit. Thr amount ot detail
n.cossary lo mairnah subsUiary rccotds.
tfu rratcriality of lho ctgrnditurcs, and thc
canrirtrncy wilh which vari<rur crprndi'
turu roc'rrt ftun period lo pcriod arc dtlr
crileria generally eqrridered in ertablish'
h9 a capitalizatbn poli;Y.
Firmr lnqurntty ortablirh ctt stbiltary
rrnount bckrw wtrich all oxpendilurrts ate
oxpenscd, inespectivr ol their period ol
benefiL Thr level at which thb arnount b
rot b dctrmined by itr materiality h rrb'
tirr to the rizr of hr firm. The obirtivr o{
sucfi a policy is to avoid lho rxpcnso ol
mai ntai ni ng exccssi vcl y detai l ed sub'
rUiary rccordc. E:genditurer for iternt thal
tall belnw th. lot snlounl but a't tnatorbl
in thc aggregale shouH be cePitalized, il
tctal expenditures lor these items vary sig'
nificantly lrom period to period. A capilal'
i zati on pol i cy l hat roasonabl y appl i es
lhcsc criteria, although il disreganls the
pedod cl benefil and is thsrefore bcking in
thooretical
just if ication, will not sign il icantty
misstatr periodic incomo.
t 6
Chaotar 2
s16, 957, 500
17r458, 350
gERCISES
38
+ 33
= 39
Prime
cost
Sg
.31
= 94 variable
convet:ion
cost
S
* Si
. ir
= $io
variable
manufacturing
cost
ii,oob
fired + (Slo r 5oo)
= $6'0oo
E2-2
',({}
$1o
+ $15
+ 38
= $?1
convorcion
co'st
izi
$32
+ $t
o = $42 Primc
cost
i - i 332+i . i o* i r s i $3=$60v ar i ab| ec os t
i oi
(($sz
+
${o
+g{5 +
$6
+$5) x 12' ooo)
i
1ss
x 8,ooo)
=
$8{6' 000
+
$ 24' ooo.
=
$84O' OOO
t ot al cost i ncurred
wi t h 12' OOO
uni t s
Produced
and 8, OOO uni t s sol d
E2-3 First Method:
Sa|es(ti l g' 95o' ooox85o/o|...............x.........
Lcsr: variable costs
(irrrizr,o00 x 85chl"' $9'q1?'1?o
FiXgd COSTS...""tr"tt""t"t""t!t"t""tt"t'
7t623tOOO
E,.-l
(rl
l2l
(3)
(4)
E24
OperaUng
l oss.-...
Second Method:
l st St ap:
2nd Step:
Salgg
(tlt9r95orooo
I 857o)..' ........o"""""""
L.ass: variable costs
(sl6195715OO r .58).' ... s9r835' 350
Firgd costs .............,.............,.............
!1623
|AOO
OpgraUng
l oSs """"t""t"' o"""t' tor"""""""o"
$16, 957, 500
1714581350 -
s
(500,8501
-
1 . d
2 . b
3 . b
4 . 4
5 . t
g . c
7. c
8. I
s
(5OO,85O)
Variable costs sl 1, 57l , Ooo
= .59 vari abl e cost rati o
l 9A sal es s l 9, 95O, OOO
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Clppter2
E2i5
The cost of direct labor Par
computer
is sloo' ooo'
calculated
as follows:
'
-"t--l ' ri na aac:l ---- """' $6ootooo Gi vgn)
Total manufacturing
cost"""'o""""""""'
L,gsspri mocost.....r...............o.........""""
3OOtOOo
(gi Ven)
EquaI sovorheadGoSt . . . . . . . . . . . . . . . . . . . . t . . . . . . . . . $3oo' o09
COnVgfSiOn
COSt...............................""""
$4OOtOOO
(giVgn)
Less overtlgad
cost..,' ...................o.....""
3OOtooo
(calculated abovel
EqUatS difgCt 1abOf ,..,....-o........-...............
SIOOtOOO
E24 Ttre amount
of factory
overhead
lows:
cost
per bl ade i s 93O0,
cal cul ated as fol -
3l , OOO
( gi venf
4OO
(gi venl
Lee
Total manufacturing
cost' .' .""""t""""""
Lgss convgrsion
cost"""' o"""""""' o"""'
Equals dirgct matgrial cost.""""""""""'
Direst labor cost
= 116 of direet
material
cost
= 1t 6 x 3600
= $1OO
b
Convgrsi on
cost t t "t t t t "t """"t t t t "t t t t t "ot t ""
Lgss dirggt labor C(13t"""""""""r"o""""
Equatrsove.fieadcost..............................
E2-7 The direct labor cost
per system is S200'
Total manufagturing
costs """""""""""'
Lgss
pri me Cost """""t""t"t"tt""""tt""t'
Equals overfi
gad
GoSt """""""""""""""
ConYgrsion cost.........t"""' i"to"t"""t"t""
Lgss overhgad cost o'..""'r"'o'o"""""'o""'
Equals dirgct tabor cosl..' .......r...""""""
sitoo
cal cul ated
as fol l ows:
S1,00O
(gi venl
8oO
(givenl
s 200
gAoO
(given|
2OO
(calculated abovel
Szoo
s400
l oo
(givenl
(calculated above|
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Chaoter 2
Ez-g The ampunt of faetory oyerhead cost
per machino is $1'5OO' calculated \-
as follows:
Total manuf-acturing
c95t......,....r....' .......r
S3TOOO
(given) L
Lgss conversi on
cost..,.......r.......,.,..........
2,.OOO
(gi ven)
Equatsdi rcctmatgri al cost......-.-' .".........
SITOOO
Direst lalor Gost
= 112 oI direet material cost
= 112 r $l ' 0O0
=
95OO
Conversi on cost..
.... $2' OOO
(given)
Lgss dirgct labor cost..............................
5OO
(calculated above|
Equal sovgr hgadcoSt . . . . . . . . . i . . . . . . . r . . . . . . . . . . . .
Sl 15OO
E2-9
(1) The.rclevant cost obiects are:
(a) An item of mErchandise. t
(bl The use of a bank credit catd'
(21 lt implies that cash-paying customers are
paying a part of the cost of the
banks'fees for
processing credit card transactionsr bscause these fees
are paid by the merchant who then necover them in the form of slightly
hi gher pri ces for al l mel chandi se,
(3) The competitive implications ana that the
prices paid by cash customens
are too high to be competitive with the
prices chargad by merchants who
deal only in cash, and the
prices paid by customens using bank credit
cards arp too low to reflect all the costs of a credit sala.
(4)
The raason lor not reducing all prices and charging extra for the use of a
credit card is because of the psychological effect of an extra charge. To
customsrs, lt sounds like a penalty, as If the merchant wants to discour-
age the use of bank credit cards. A discount for cash customers has a
positive
connotation, even if
prices
marked on menchandise are higher to
v
begin with. Raising all
prices
and offering a cash discount
yields the
aame net rsvenue as leaving prices
alone and charging extra for using a
'
bank credlt card, but the former method feels better to the customer
-
than the latter.
t 9
2
s14
(3)
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Thc rolovant cost obfecta arr:
(al A repalr.
(b) A
PlckuP
and daflvery
l1l
JTRSb rpalr
pricor Include an sllocaUon of thc cost of
picking up and
dallvering traAors, ln addlUon to thc cost of thc rtpainl' administraUvo
coata, markeUng costs, end profll CompeUtont
rcpair prices raflect only
tic cost of the llpalrs, adminlgtrstlve snd marko$ng costs' and
profit.
GompeUtort 8hould bc ablc to
prlcc thclr rcpalr rcrvlces lower, because
tSey do not have to reflect
plckup and dellvery costs in repair prices.
F2-11
Cluplx2
(11 Dl rect l ebor
Variable factory ove rh ead
Fi fed faCtOfy OVgfh
gad...............o......o....o.o..ro.........o............."r
Gonvemion cogt..
(21 Dlrect matoriaf
0umberf
Di r Ogt 1abOf . . . o. . r . . . o. . . . . . r . . r . . . . . . . r r r . r . . . . . . r . . o. . . . . . . . . o. o. . . . . ot . . . . . . . t . . t o. . t
Prime GOSI...............r..............
a a a a a o a a a t a a
a a a l a a a o a l a a
s
q
$ 1 1
sl 2
sl 2
2
5
sl e
sl 2
2
5
1
s20
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0
umberl ...'.........o'.......
Dlroct labor
Variablg factory ovgrfieSd .........o.........r.............' ..........oo.......' .
Variable markoting
Total variable cost.
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Chaoter 2
20
E2-11
(Goncluded)
(5) Total cost
=
(6)
rr)
total vari abl e manufacturi ng
cost
+total vari abl e marketi ng cost
+ total fixed cost
2, OOOr ( $12+32+$51
+ l r g OOr $ 1
+
2,OOO' x ($4
+
$3.50)
=
$38, OOo
+
$l ' 9Oo
+
${5' 0oo
=
55419OO
r
The volume used here to catculate
total fixed cost is the 2'OOo-unit vot-
ume levol that was used originally
to calculate the amounts of fixed
costs
per unit, as stated in the data
given in the exercise. The 2'OOO-
unit tevel of
production stated in requirement
(5) is not the reason that
2,OOO is used here to calculate total fixed cost'
The data i ndi cate the bookcases are made of l umber, and some exampl es
of the indirect materials used in making wooden bookcases would be
gl ue, sandpaperr and nai l s.
An estimate of costs referred to in the answer to requirement (6! would
be i nctuded i n the vari abl e factory overhead of 55
per uni t.
;
E2-12 Factory overhead = 113 x prime cost, so:
Total
manufacturing
cost
= prime cost + factory overhead
= pri me cost + (113 x
Pri me
cost)
= 4i:3 r prime cosl;
mufti pl yi ng both si des by 314 gi ves:
Total
314 x manufacturi ng = 314 x 413 x pri me
cost
cost
3l 4xS2O, OOO = 1 x pr i me cost
$15, OOO
= pr i me cost .
Pri me cost .....................
Less di rect materi al cost.......
Di roct l abor cost.......
s15, OOO
12, OOO (gi ven)
s 3,ooo
2l
(3)
(41
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Ctuotar2
c2-1
(11
CASES
The
percentage
profit margin will be 82.5oh, calculated
as follows:
Rgvenugs
(92 r 4)..............,,o........................
Cost of
iuice
(S2o r 4| .....' ....""""t"' r"""""
t
Cost of ong de|ivery
"""""""""x""""""t""
Profi t ...............ro....,......................o.......r.......
Revenues
(S2 r 1!
Percentage
profit margin
=
36' 60
profit divided by SB revenue
= 8.2' 5oh'
(21 The
percentage profit margin will be 6ooh, calculated
as follows:
s.80
. 60
s.20
. 60
s!.o0
1 . 4 0
s6. 60
s2.o0
. 80
sl . 20
Cost of
iuice
(S.2o r 1) .....' ....-............' o""o"'
Gost of ono dgl i very ..' ...""' o""""o"""' o"""o'
PrOf i t . . o. . . . . . . . . . . . . . . . . "' o""' r""""""""""t "' e""'
Percentago
profit margin
= $1.2O
profit divided by s2 revenue
= 609/o'
The manager i s treati ng the menu i tem as the cost obi ect, for erampl e'
one
gl ass of orange
i ui ce.
The rpfinement of the definition of cost obiect that would result in the
ptanned profit margin is the use of two different
kinds of cost obiect'
the
Item and the deti vJry, whi ch can be
pri ced separatel y at S.8O and $2' 4O'
respectively.
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Chaoter 2
C2-l
(Concluded)
(5) For an order
consisting of four
gtasses of orange iuice,
the
profit margin
will be 75e/ot calculated as follows:
Revenues:
($.8O X 4).........' ...
+
( 92. 4O X 1) . . t t " t t " " " " ' i " " " " t " t " " " t " " t " ' o" '
9.80
.60
9.20
. 60
s3.20
2. 40
$5.60
1. 40
9{.20
$ . 80
2. 40
$3.20
.80
Percentage
profit margin
=
90.2o
profit divided by $5.oo
nevenue
= 75oh.
For an order consi sti ng of one
gl ass of orange
i ui ce,
the
profi t margi n wi l l
af so be 75oh, cal cul ated as fol l ows:
Cost of
iuicg
($.2O I 4) ."""""""""""t""""'
Gost of ong dglivgry .........--....-..........o...o.r."'
Pr Of i t . . . t . . . . aaa. . . . . . a. . . . a. t ""t """"t "t """"t "o""t '
COSt Of
! ui ce
. . . . . . . . . . . . . . . . . . . . . . . . t . . . . . . . . . . . o. . " o" " t t '
Cost of ong delivery .............................o......'
RgVgnUgS:
( $. 8O X' l ) . . . . . . . . . . . . r . . . . . . . . . . . . r . o. . . . . . . . . . . . . . . . . . . . ot '
+
($2.4O X 1) ..............................................t..
(6)
PrOfi t ........o....t........
s2.40
Percentage profit margin =
$2.4O
profit divided by $3.2o nevenue
= 75oh.
The food seryice managerb
plan allocates the delivery costs over an
arbitrarily selected number of items
(two). This
plan would result in high-
or-than-planned
pnofit margin
pencentages on noom servico orders that
contain more than two items, as demonstrated in the answer to require-
ment (t). Prices on these olde6 would be higher than those of a Gom-
petitor
wlro traces costs mone carefully to cost obiects and sets
prices
sccordingty. The
plan would also result in lower-than-planned
profit mar-
gins
on room service orders containinE only one item, as demonstrated
in the answer to requirement (21. Prices on these orders would be lower
than what is needed to achieve the target
profitability.
23
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c2-2,
(il The cost objects tor which somo amount of cost is identified in the case,
and tho amount of cost idenUlied lor each' ate:
(al A new product variation
r
Zsggo (which means all units of Zeggo ever
to be producodl' S25O'OOO.
(bl A batch of Zeggo' S1'OOO.
(cl A unlt of Zeggo, $5 + $1O
=
$15.
(Notlce the $1o indirect cost
amount Includes all Indireet production costsr so it must include the
,
$1 amount stated in the problem, along with an allocation or averag-
ing of the $1r0Oo-perbatch
setup costs, a shar of the S25O,OOO
cost amount, and a sharo of any other indirect manufacturing costs.
It would be double-counUng to add the $1 and arrive at a total of
$16
per uni l |
(21 The other items mentioned in the caso that could serve as cost obiects,
and a
purposo each one could sorvr ano:
(al
CCN Company, which is the relevant cost obiect when external
financial statements are prepared.
(bl The assembly line on which Zeggo and other
products are to be pro-
duced. This cost object would be relevant in a decision on whether
to discontinue
production
of all the
products produced on the par-
ticular line, or a decision to shut down the line and shift its produc-
tion to other lines due to a redustion in customer orders.
(31 The totat "o.t erpected to result from
producing the first batch of 3oo
unlts of Zeggo is:
Cost accounted for as direct cost of a unit....,.....
Cost treated as indirect by the CCN s1ctem........
uni ts
Add: setup cost
s1, 8OO
. . . r . . o. r . . . . . . . r . . t r . . . . . . . 1
t OOO
Tot al Co*. . . . . r. . . . . . . . r. . . . . . . . . . . . . . . . . . . r. . . . . . . . . o. . . . r. . . . . rr. rr. s2,8oo
The cost erpected to result from producing ono mone unit of Zeggo is 35
+ $ 1 = 3 6 .
For the first batch of 3OO units, the CCN cost accounting system will
report a cost of:
(35
di rect cost + $1o i ndi rect cost al l ocati on) x 3oO uni ts =
S15 r 3OO =
s4,5OO
$ 5
1
S o
x 3OO
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(41
(5)
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O3-l . The total dollar amount of a fixed cost is con-
stant at difrerent levels of acttvity within the rele-
vant range, but fi xed cosl per uni t ot acti vi ty
varies. In confasl the total amount of a variable
cost varies al differeil levels ol acwity, but the
variable cost pr unit remains consEnt wilhin lhe
rel evant range. A semi vari abl e cost contai ns
both frxed and variable elements. Consequently,
both total semi vari abl e cost and semi vari abl e
cost per unil vary with changes in activity.
Q3-2. The relevant range is the range of activity over
which a fixed cost remains constant in tolal or a
variable cost remains constant per unit of activi-
ty. The underlying assumptions about the rela-
tionship of the activity and lhe incunence ot cosl
change oul si de the rel evanl range of acti vi ty.
Consequently, the amount of fixed cost or the
variable cost rate musl be recomputed for aclivi-
ty above or below the relevant range.
O3-3. The fixed and variable componenls ol a semi-
variable cost should be segregated in order to
plan, analyze, control, measure. and evaluate
costs at difterent levels of actMty. Separation ol
the fixed and variable componenls of semivari-
able cost is necessary lo:
CHAPTER 3
DISCUSSION QUESTIONS
03.
semi vari abl e costs are: (1) the hi gh and l ow
points melhort: (2) lhe statistacal scanergraph
method; and (3) the method of least sguares.
The high and low points method has the advan-
lage ol being simple to compute, but it has the
disadvantage ol using only two data points in O|e
computation, thereby resulting in a signilicant
potential lor bias and inaccuracy in cosl esti-
mates. The scanergraph has the aclvantage ot
using all of the available data. but it has the dis-
advantage of determining the fixed and vanable
components on the basis of a line drawn by vGu.
al inspection tirough a plot ot the data, thereby
resul ti ng i n bi as and i naccuracy i n cost esl i -
mal es. The method of l easl squares has the
advant age ol accur at el y descr i bi ng a l i ne
through all the available data, thereby resulting
in unbiased estimates of the fixed and variable
elements ol cost. but il has the increased disad-
vantage of computational complexity.
The $2OO in.lhe equation, referred to as the y
inlercept, is an estimate ol the tixed
portion
of
indirect supplies cost. The $4 in the equation,
referrecl to as the slope of the regression equa-
tion, is an estimate ol the variable cost a:isociat-
ed with a unit change in machine hours. These
est i mat es may not be per l ect l y accur at e
because they were deri ved l rom a sampl e ol
data that may not be entirely representative of
the universe population, and because activities
not i ncl uded i n t he r egr essi on equat i on may
have some influence on the cost being predict-
ed.
The coeffi ci enl ol correl ati on, denoted r, i s a
measure of the extent to which two variables are
related linearly. lt is a measure of lhe covariation
of the dependent and i ndepenctent vari abl es.
and its sign indicates whether the independent
variable has a posilive or negative relaUorship to
the dependent variable. The coeffcient ot dster-
mination is the square of the coefficint of corre-
lation and is denoted F. fne coefficient of d6ter-
mination is a more easity interpretsd measure ot
the covariation than b the coefficient
of conela-
lion, because il represents the percentago
of
variation in the dependent variable explained by
the independent variable.
The standard enor of ihe estimate is defined as
the standard deviation about the regression line.
tt is essentially a measure ol the variability of the
aclual observations of the dependenl varaable
from the points predicted on the regression line.
A small value lor the standard eror ol the esti-
mate indicates a good fit. A standatd errcr ol
zero would indicate a pertect
ft, i.e., afi sctual
observations would be on the regression line.
I
S
I
!
I
t
b
03-7.
(a) compute precletermined tactory overhead
rates and analyze variances:
(b) prepare flexible budgets and anatyze vari-
ances;
(c) anal yze di rect cost and l he contri buti on
margin;
(d) determine lhe break-even ooint and ana-
lyze the etfect ot volume on cost and prof-
rt;
o3-8.
(e) compule differential cost and make com-
parative
cost analyses;
(f) ma(imize short-run protits
and minimize
short-run dosts;
(S) budget capital expenditures;
(h) analyze marketing profitability
by terrilo-
nes. proclusts,
and customers.
O3-4. The obvi ous advanl age to usi ng manageri al
iudgement lo separato fixed and variable costs
is expediency, i.e., il requires less time and is,
theretore. less cos0y than the use of any of the
three com putational
methods. The disadvantage
is that the use of managerial judgement
to sepl_
rate fixed and variable cosls otlen results in O3-9.
unreliable
estimatG
qt
cost. Cost behavior is nol
always
readily apparenl lrom casual observa-
tron. As a conseguence, managers otlen err in
determining
whelher a cost is fixecl or variable
and frequenily
ignore the possibility
that some
costs are semivariable.
O3-5. The three computational methods available lor
separattng
the ftxed and variable components of
25
26
03.10.
Hotuoscodssttcity mcrn:i t|d tha distibulbn ol
observations around thc rogrcrsion linc is not
unilorm lor dl values of thc indcpcndonl vari-
able. tf hetaroscedasticity b prcocnt. thc den-
rlard eror of tp Blimde and confdcnct intlr'
val catitnd63, btsed on thc Etmdsrd 3fior, lre
unreliabh tnolsuros.
03-11. Serial coneladon mourt thd rdtcr tlun bcing
random, the obsenralions arcund thc rcgresion
line are conelated n'l$ onc ltlcfficr. ll ecrid col'
relation b prssctlt thc stlrrtttd cnor of t|c 6ti'
Chapter 3
malt tnd coflfidcncc intervai cstimltes. blsed
on thc Etandlrd olrotr atc unrcliabb molsuros.
O$12. Muldcollinaarity moatrs f|at two or moro of tho
Indcpendent veriables in a mutliple regrassion
andFb aro conohed witfi one anodtor. When
thc degrcc of multicollinearity is high. the rela.
lionship bctlloon onc or moro of tho corrol8led
indcpcndont vadables and the depondonl vati
ablc may be obscured. However, this circum'
clt lcc would normdly not aflecl the astimate of
cost
z /
I
t-
L
L
I
I
L
L
Clppter 3
I
E3-1
E)GRCISES
F
o
o
(,
o
lrf
J
G
g
3
o
L
!
L
I
L
L
L
I
L
i
t
i
L
I
l-
I
l-
I
l-
High ........
a a t a a a r a a a t a a a a a a a a a
s]ivitvlgv"l
21600 hours
2, 1OO
_5Og
hours
Cost
s1, 3OO
1
, 1OO
9__399
Low
sl , 1 OO
840
s 260
variable nate: s2oo
-r
5o0 machine hours = $.40
per
machine hour
TOtal COSI.........................
Hi gh
$1, 30O
I , O4O
E3-2
Variable cost:
$.4o x
a6o0
hours ....,....,.....
$.40 x 2rl O0 houns ...............r.........r.............
Fi xgd cost . . . ' . . . . . . . r. . . . . . . . . . r. ' . . rr. . . . . . . r. r' . . . r' . . . . . . . . r. . . . . . .
s 260
$l roo0
s900
Saoo
3700
3000
3500
$400
3300
!3200
$100
30
S4O7.5O average totat variable cost
800
$757.s0
350. O0
$407.50
5. 6936 vari abl e cost
=
p",
direct labor hour
5,87s
total direct tauorffi
Chapter 3
28
E3-3
E3-4
Janu3fl ..' ...
February ....
MSFCh' ........
April ...' ....o..
M?! . . . . . . . r . . . .
Jl l l l . . . . . . . . . . .
JUI!............
August . . . , . . .
September.
October.,' ...
November . .
December . .
T(ltal ....."
r -
x( xr
-
x) ( vr
-
Y)
_
87, ooo
_
s6o
g - -
x( xr
-
r ) 2
1' 450
a
-
9
-
b,
-
$1o, ooo
-
(Soo x 125)
-
$z, 5oo
Travef and entertainment
expense tor 2OO aales calls would be:
! i ' - a
+ b x r
- $ 2 , 5 0 0 + ( $ 6 0 x 2 O O c a l l s )
- S 1 4 ' 5 O O
( 1)
v
Electriclty
Gost
$ 1, 600
1r 510
1, 5O0
1, 450
11460
1r52O
1r 57O
1r53O
1,48O
1r47O
1, 450
1, 460
_sl8,oo9
(21
v- n
Gost
Deviation
(3)
x
Machlne
Hourc
?,790
2,68O
2160O
2,50O
2F1O
2161O
2r750
2,7OO
2,53O
2r52O
2r49O
2r52O
(4)
F- A
ActMty
Devlatlon
(6)
a
-nv -n
(a) x
(21
19, OOO
800
o
5,OOO
3,6OO
200
1O,5OO
3,OOO
I , 4OO
2r4OO
515OO
3r2OO
s,600
(!l-squared
36, 1O0
6,4OO
. o
IO' OOO
8,10O
100
22r5OO
to,ooo
4r9OO
6,4OO
12r1OO
6,4OO
!e3.0oo
(5)
(x -i)2
tg0
t o
o
Fo)
(40)
20
70
30
(20)
(30)
(50)
(40)
190
80
o
(1oo)
(e0)
10
150
t oo
rfo)
(80)
(1ro)
(801
31. 200 0
o
,
,
- 2 y + n -
$ 1 8 r o o o
* 1 2 - $ 1 r 5 0 o
-
Xx + n
-
31r 2OO * 12
-
2, 60O
Vari abl e rate (b)
-
: ( x
-
r XY
-
t ) cot umn o t ot at
54' 600
-
g.4.4
123' OOO
r ( x
-
i ) 2
Fi xedcost ( a\ - y
-
bx
=
$1,5OO
- (S.44X2' 6OO)
=
*t56
Column 5 total
x ( r r
- x ) ( v r - y )
1, 5f f _
f
-
' - f f i - ' 9 2
f f i -y)'
J(sso)(s' ooo;
r 2
- ( . g 2 ) z - . 8 4 6 4
E3-6
Month
Jenuary-. I 600
Fcbnnry - OOO
Mtl.rch -..... COO
Aprll...-....., 680
Mry.*......., 570
Juoa---.. 6ltO
July..--.-... 600
Augurt --- OIO
Scptcmbcr. GsO
Ogtobor--.. G2O
Novcmbcr.. 6il0
Elccambor.. 640
29
Ctwpter3
E3-s
(31
x
(11
v
l2l
l y- n
(40)
o
o
(201
(301
(60)
(r0)
t o
50
20
30
.lo
3 201600
3O,OOO
20rooo
2qooo
27,OOO
25,^5OO
30,OOO
33r0OO
35,OOO
3aooo
30,5OO
glr50O
IOOO
500
3,500
l 1600
o
o
400
900
2,5o,o,
roo
loo
2,50O
4(,0
000
1,OOO
(4) (51
F
-a
I
-712
(3rEOO) 12i2j,O,OOO I4O,OOO
o
o
(aooo) 4,oo0rooo 40,ooo
(3,OOO) 0,OO0,oO0 0o,ooo
(+5OO) 2O'25O,OOO ?'2SrOOO
0
SrOOO I,OO0TOOO 3OTOOO
5,OOO Z,,OOOTOOO 25O,OOO
(81
ct)
V
-AV -tl
tv
-r12
ailpplng Expcnrc Sdcr ActtvttY
Erpcmc Dcvlrtlonr Bcvcntr Dcrvlrttonr
(4}Squrrsd (a) x
F)
(2lSquared
(lrOOO) ITOOO,0OO
o o 8t]60.ooo
4TOOOTOOO 4OTOOO
2!lgr@0 l5,ooo
12,25,O,O0O laOrOOO
07.ooo.ooo 97o,ooo t 1.o(x) Totel --.. 373OO
j ' - I y -
+f t -
$7r 2OO
+12 - $6OO
i
-
xx + n
-
$3601000
+ 12
-
$3o,ooo
J: ( r
t
-
i ) ' z( y,
-
Y) '
r z
- ( . 939
) 2
-
. 882
- . 939
97O,OOO
[9?"ooo,ooo Xl
lrooo
)
l t
>( r r
-
i ) ( v
t
- y l
x( r r
-
; ) z z( v
t
30
E3-7
( 11
Clpoter 3
l2l
r z=( . 98Y=. 9216
x ( r r
- i X v r - 9 )
2, 1OO
=. 96
.',/(
e,zso
X
I,ooo)
2r4OO tt,384 varlable malntenance
6,250 cost per machlno hour
b -
x( r r
-
i ) '
( 3 )
|
- \ r 1 + t l
i ' X X l + J l
Slnce
9
-
a
a - g _ b X
a
-
$5rO00
a
-
tl5rooO
a
-
$31464
-
t35O
r0OO
* |
-
4O' O00 + 1O
+ bi , t hen:
o
-
$5 'O0O
-
4' OOO houru
($. sar
)(4, ooo )
$1, 536
E3-8
(1)
For elsctrlclty cost and dlrost labor hours:
5, 7OO
.
| oH
-. e4e7
-
+f33
-.88o5
f t
ra = (.9497F =.9O19
For electrlclty cost and machlne hours:
l t
7,OOO
(21
I ( x r
- r ) ( v r - y )
( r t - i ) ' z ( y r - y ) '
x ( r r
- i ) ( v t - v )
x( : r
-
i ) ' z( yt
-
v) '
J(so, o0o )(r, 264 )
r a=( . 880512=. 7753
ln ttrlr e88, dlrest labor hours shoutd be chosen as the approprlate
acthrtty meaauno to be used In
predletlng
electrlclty cost because the
cocfilclent
of determlnatlon (ts = .9O19) lc hlgher than that for machlne
hours pa
= .77531.
(3)
Cluptor3
E3-8
(Goncluded)
( 4 )
b '
> ( r ,
- x ) ( v t - y )
_
5r 7OO
-
$. 2O
28, 5OO
variable electriclty
cost rate
-
Xxt + nr t hen:
3 1
x ( : r
-
X) '
Slnce
I
-
a + bi and
7
-
ZYr
+ n and f
a' ( z f
t
* n)
-
D( x r
t
* n)
s
-
(42,ooo + zo)
-
(.zo)(rao,ooo + 2o)
a
-
2t 1O0
-
(. ZOx9, OOO
)
?
-
2tlOO
-
1,8OO
-
$300 flxed electriclty cost
E3-9
Month
January .........r........
February ..r.............t
March ..........r.......r..
AFd1........................
May..
JUng . . . . . . r . r . . . . . . . r . . . . . .
JUI ! . . . . . . . . . . . . . . . r. . r. . r. . .
AUgu8t ......r.............
SeptembrBl...,..........
OctObor ............r.....
l{ovombgl ..r............
Docgmbg1............,..
TOtal ....r.........r...!
(3)
l y i =a+bx )
Predicted
UUllty
Cost
$ 3,650
4rOOO
3,9OO
3,8OO
3r70O
3,55O
4rOOO
413OO
4,5OO
4r2OO
4,05O
4,35O
(4)
th-
vil
Predlctlon
Error
(2)
-
(3)
(sol
o
100
o
o
(so)
(1oo)
(2oo)
o
o
250
50
(s)
lh
-
til2
(4)
Squared
$ 2,5OO
o
l O,OOO
o
o
215OO
1O, OOO
4O, OOO
o
o
62,500
2,500
$13O,OOO
(rl
X1
. Labor
Hourc
2,65O
3rOOO
2r9OO
2,8OO
2r7OO
2,55O
3,OOO
3r3OO
3r5OO
3r2OO
3r05O
3r35O
l2l
It
Astual
tltlllty
Cost
$ 3,600
4rOOO
4,OOO
3r8OO
3r7OO
. 3r5OO
3r9OO
4, 1OO
4,5OO
4r2OO
4r30O
4,40O
36,OOO $4g,OOO $48,OOO
o
" ' -
{
> ( y ,
- y ' , ) '
n
- 2
/ $l 30, ooo
G
11 10
-
51 14 . O18
Column 5 total
32
E3rl O
Chapter:
6 t
-
i l ( v r
-
y' r ) '
n
- 2
The
g0
percent conlldence lnterval estimate at the 1'SOo-hour level of
activlty would be:
. ; - r
( x r
- , ) '
Y t
- t mX S
r i l
+ :
I
n
> ( x , - i ) t
ssoo = (t.tztXsoz
)
{,
.
#
.
(t'uotlu;#?oo
)'
S5oo - (1.771X$ez)ffi
' .
35oO ; (1.771X$62
X1.1547 )
$5OO r $126. 79
lb
33
Ctvptar3
P3-l
PROBLEMS
Coefllclent of corrtation
and cofnclent of determlnation
between:
{a)
TFavel oxpsnses
8nd lho numbr of calls made:
(r)
L
({)
{5)
(6)
m
-
F
-a g --rf
F
-49 -D
tu
-#
Aemty
Dcvlrdonr
({l Squarcd
(A) r (21
l-Squt-d
ilonth
Jrnutty---. 3 3rOOO
Fobnlry.-....
3'2OO
Hfrch-F-. 2'8OO
Apdl*---.
3rOO
il!f--
qtOO
Juno --
qzOO
July...-....--. agOO
Arilu.t.*-. 3F3OO
Scptrmbor.-. 3'5OO
C)GtoboJ---. 3r.fOO
Nolrrnbor..-.. 3'2OO
Dccamber...... 3r4OO
Tltll ......-- E3&l!99
l l )
v
Travcl
Erpcnro
l2l
(31
V- n
x
Erponro Cellr
DevlaUonr iladc
410
120
380
400
430
450
390
a70
.180
.l90
40
aoo
6,000 aO,OOO
o o
2{'OOO tOOTOOO
4,OOO 40 OOO
1,O@
IO' UOO
o o
l5,ooo 0orooo
3'OOO lorooo
12,OOO 9O,OOO
l0,ooo 40,ooo
o o
4,OOO 4OTOOO
79.OOO 520,OOO
: :
6 total
12oo)
o
(.too)
200
(1oo)
o
(3ool
loo
300
200
o
200
o
(301
tm)
(60)
20
l ro)
10
(50)
30
&
60
o
20
900
400
3rOOO
400
100
100
a5oo
900
l1600
2r5OO
o
.loo
6.280 0
: :
_l-g,4oo
l -
Column 5 total
)(Cotumn
7 total
)
79, OOO 79' OOO
J( t g, 4oox52o, ooo)
i 6' 968' OOO' OOO
79. OOO
,
'
d5;7u
-.9464
fz
-
.8957
x ( x r
- x ) ( v t - r )
x( xr
-
, ) ' zt y
t
34
P3-1 (Concluded)
(r)
v
January......
3 3,OOO
February.... 3,eOO
Marlh...-,..
aSOO
April ...-.--. 3r4OO
May....-..-. 3,1o0
June........... 3'2OO
Ju|y..,......-. 2,gOO
August....-. 3,3OO
Septembcr. 3,SOO
Octobcr......
3,400
Xovembor..
3eOO
Dccember..
3r4OO
Total.-...
g?8.40O
(31
(4)
x
F- i )
(s)
tx
--xf
l 69,OOO,OOO
ITOOOTO0O
Chap@r
3
(6)
ttl
tr
-rw -h
tr
--y*
(41x (2) (2)
Squared
2,600,000
4o,ooo
0 O
(b)
Travel expenses and otderc neceived:
t2l
u-n
Tnavcl Erpsnsc Ordcrr Achrtty
Erpensc Deviations Rcceived Dcviatons
{4)
Squarcd
(200)
o
(4ool
200
(ro0)
0
(3Oo)
100
300
200
tt 53,OOO
65,OOO
48,OOO
73,OOO
oaooo
67,OOO
60TOOO
76rOOO
82rOOO
6210OO
64rOOO
80,OOO
(t3,oool
(t,ooo)
(r8,o0ol
TrOOO
(4,OOO)
I,OOO
(6,OO0l
l O,OOO
torooo
(4,O00)
(2,OOO)
t4,ooo
o
200
o
324'OOO'OOO
7,2OO,OOO
l60'000
4g,ooorooo
1,40O,(X)O
4O,OOO
I6,000' 000
4OO,OOO
lo,ooo
I,OOO,OOO
O
O
30,oooro0o
lrSoorooo go,ooo
too,ooo,ooo
I,OOO,OOO
lO,OOO
2sETOOOTOOO
4,goo,ooo
9O,OOO
t6,000,000 (goo,ooo)
4O,OOO
4,O0O,OOO
o o
tg6,ooo,qoo
2,8OO,OOO
40,OOO
l -
7 total
)
(2'
Perfect
direct corretation
would be evidenced
by a coretation
coefficient
of one'
The coefficient
of .94il neyealed
in (lXa)
is closer
to one than the
coefficient
of .8602
in (l)(b).
This means trat the variabte portion
of t'v-
el expense
Yaries mone directly
with mov.-"nt"
in the number
of calls
made than with the value of orfoers received.
To exptain this further, the
relative
coefficients
of determination
are obtained
by squaring
the coeffi_
cients
of correration
and expressing
the ""=*.i.s
a pencentage
in each
case.
The coefficients
of determinalion
are ag,ii
oh
torcarts
made and
only
73'99o/o
tor ordens
received.
This mea"= irt"t approximately gooh
ot
the movements
in the variable portion
of travel
"tp"r="
are retated to
fluctuations
in the number
of ca[s made, ,no itr" remaining
1o% of the
moyements
are related
to other factors.
s7s2o99
-9
1..'168,000.000
2t,2oo0gg
g3o,oog
x ( x r
-
t X
v r
-
y )
J:(',
-;f;G:ry
2Tr2OO|OOO
G -
r / (
l , r 68, OOO, OOO
X52O, OOO )
21, 2OO, OOO
r - - 8 G O 2
24
16441675
)
r' -
.7399
6
Gol umn 5 total )(Col urnn
35
o
I
L
t-
I
L
L
L
I
L
L
L
L
L
L
I
!
b
I
l-
I
I
I
l-
Clnpter 3
P3-2
( 1)
Month
(51
tr'itz
{a}
Squared
0
160,000
25rEO0
lo,ooo
28r9OO
c2?5OO
1O,OOO
I/roo
aorooo
t61900
z'5,OO
0orooo
{6)
E- r W- n
(al r
P)
o
42,OOO
1O,4OO
l rSoo
9r350
21',25O
3'5OO
.loo
l5'OOO
4r550
o
24,OOO
cr)
ly
-rP
(2) Squarsd
(r)
v
Suppllcr
Co.t
(21
v- n
Cost
Dcvlrdonr
5
(ro5l
olt
t 5
Fq
(851
(351
5
75
35
o
80
o
y -
7. y + f r
-
$181000
* 12
-
$11500
i
-
Xx + t r
- 601000 + 12
-
5r 00O
l t
(3) (41
x
F- a
L-abor Acdvlty
Houn Dcvlatonr
January.-... 31r5O5
Fcbruary.... l'395
Mrrth --.... 1't65
Aprll --...-.; tr5l5
Moy............ f
r45
Junc..-....... tralS
July-.-..--. 1rf65
Arguet.--. IFOS
Scp,tcmbcr. 1'576
Octobcr...-. 11535
NoYombcr - f
i6OO
Dcccmbcr.,__-!f99
Totel......9!8,rU
SrOOO
4r6OO
Srt oo
Srtoo
4'a30
41750
4r9OO
6,O80
5'2OO
61130
4r05O
513OO
6O,OOO
0
{4o0}
180
100
(1701
(250)
(roo)
80
200
130
(50)
300
23
111025
4r2i25
225
3,025
7,2J25
7,2i25
25
5,O25
1,2ir5
o
g,40o
452.800 131. 950 40.250
131, 950
-
.977
J(*sz,Boo X
40,250
)'
12
- ( . gr z) z - . gss
b
: ( x - * ) ( v - l )
ffi
37
!.
I
!
{6)
(x
-7W -h
i
I
I
L
I
I
b
I
E
Ctnpter 3
P3-3 1
( 1)
@
(1)
v
ElcclrlclU
Cort
t2l
v- n
Cott
Dcvirtiorr
{4}
F- a
(5)
lt
-rP
rt)
v
-rtz
(3)
x
Lrbor ActvttY
L Jrnulty.'-.. 3 t'OOO
Fcbrue4y.... 1$7O
Merch....,-.
I' Cl O
Aprll -...,..-. 1r35O
May---.-...
t'530
Juna--....- 1r.640
July.-.*.-.. 11620
Augurt...- f
F3O
Soptcmbar. 1'580
OctobGr..-.. 1'O5O
NoYcmbcr.. 11660
Dcccmbcr.. IrO2O
13oo
(30)
4,OOO
(230)
4,3OO t3O
4,OOO
(2301
4,050
(r8ol
4,too
(l3o)
4,t60
-(8Ol
+2n
20
4,tEO l8o)
4FOO tto
4,OOO 37O
4/rOO 17O
20
(rol
30
(30)
(501
(40)
(ool
(60)
o
70
80
40
Dovb0onr
(a) Squercd
(4) x
{2}
(2) Sguared
(600) 4Oo
2,3OO too
3,9OO 9OO
6,900 9OO
I,OO0 2,500
5r2O0 11600
4r8OO 3,600
(l ' OOO) 2,5OO
o o
18,900 4r9OO
29,600 6140O
orSoo lrooo
85.800 25.400
900
62r0(x)
tor0oo
52r900
32,400
lG' 9OO
6r4OO
.lOO
0t'fOO
710OO
t3o,9oo
28r9OO
i
b
i
b
b
I
I
b
I
L
i
b
I
!
Total...... tl&OOO O
,
-
2y + r r
-
$181960
+ 12
-
31r 58o
x
-
xx + n
-
501760
+ 12
-
4, 30
I
L
x ( x - r ) ( v - r )
. / >( t
- r ) ' z( v- 7) '
. )
r -
- ( . 826) - - . 682
424.800
50.700 0
:: :
85,8OO
- . 826
I
(-*za,soo
X
25,4oo
)
u
Pg-3
(Concludcd)
(r)
v
Elcctrlctty
Hotr$ Co.t
(5)
lx
--rr2
{!l_squrt*
. o
z2,5AO
IO'OOO
4N
tgrcoo
trc@
ta/aOO
ror0oo
I'COO
aorooo
67,600
zAEo{,
(c)
tr
-iw -h
(.) x
12)
o
t'5oo
t ooo
tr8oo
TrOOO
11OO
rr2!,O
c'aoo
0
t+ooo
r0'2oo
c,ooo
trl
tv
-tF
{21Squrrcd
.lOO
too
D|00
900
asoo
I' OOO
SrOOO
z6,0o
o
4190O
6"lOO
I' GOO
25.aOO
Cllopter3
el
u
--n
Cort
Dadrdonr
f3)
x
f,lrchlnc
Hourt
(4)
F
-i f
AEdYttt
Dadedonc
Jlurery-..- E I'EOO
Fobrurry.... f
r57O
Ml ch..--. l r6tO
Aptl!-....-- tr660
Hry--..,.-. tF63O
Junr..-.-.- f
rAfO
Juty-.---- f
r52O
Arrlturt..-- f
r.B3O
Sopilcmbcr. f
1680
Oc{ob.r,-. f
rttO
Novrmbcr.. Ir0co
Dcccmbcr- IrC2O
Totrl....-
Ig.gg9
27,COO O 2rt.200
20
Irol
30
(301
(to)
(40)
lcol
t60l
o
70
80
40
o
2,goo
1760
244oo
2.2&
2r7CO
2J4o
1r80
1r7O
42fi
4&O
2W
2t4tj{)
o
(r60)
too
(60)
(r.o)
lco)
lr20)
(tso)
(401
no
2&
160
oa.aoo
y -
8
+ f r
-
$181960 + 12
-
31r 58O
i
-
Xr + tr
-
271600 + 12
-
2r3OO
-
rr(y
-
y)
e8, 3oo
-.93t1
x( x
-
r z
- ( . g33
) 2
-
. gl o
(21
Slnce the coefllclent of determlnaUon for electrlclty coat and machlno
houne
Qe
= .a7Q le
grestor
than the coetficlent of determlnaUon for elcc-
trlclty cost and labor houra
pe
=.682), machlno hours should be used as
the barls for estlmaUng electrlclty cost. Machlne hours explsln morp of
the varlanco In electrlclty cost thsn do labor houlr,
(3)
Wtth machine houru a8 tfio bagls for predictlng
elesffcltlr cost, the l|red
cogt and Ore varlable cogt rato can be determlned by the method of least
squanos ae followrr:
var i abt e r ar e ( t , ) - . x( r
:
i XY
I
Y)
'
X ( x - i ) '
Col umn 6t ot al
_
68, 300
_G
Gof umn 5 t ot ar '
m
-
$' 32339
Fi red
cost (a)
t
i l fi :
-
($' 3233e
,.2' 3oo)
: ( r - x ) ( v - y ' )
r)' : (
v
-
-v)z
(zt'l,2oo
)(zs,4oo )
39
I
I
L
I
I
I
t
!
I
b
br
I
!
i
b
Clwter
3
P34
,
(11
Janualy'..-.
Fcbruary '...
March -.--.
Apfi1 ...........
Mry-....-.'..
Juno-.........
Ju|y..,........'
Atgud.......
Soptcmbcr.
Oclobcr......
llovcmbcr.'
Dccombcr..
I2' 2OO
2r130
2rOOO
117O
2,O50
2,220
2r750
2r25O
2r20O
&160
2'21O
2rl OO
2r5OO
a35O
2rOOO
2r4OO
211OO
2rOOO
2r*5O
2r55O
2,7o/0
a45O
2rlOO
2,3OO
28.800
torooo
2r5OO
lOO,OOO
o
9OTOOO
40,OOo
215OO
22'5,OO
90TOOO
2,5OO
o
lorotx,
430.OOO
4rOOO
1,5OO
04,ooo
o
st,ooo
12,OOO
(5Oo)
13r5OO
39,(XX)
(5oo)
o
6,OOO
I ' COO
000
25rOOO
t oo
12r' l oo
3rOOO
l oo
I rl oo
16,9()0
l oo
15'OO
_g99
Hl gh aa. at aaaaat t t t t " t t " " t t " " t " " " r t t t " " " t t " t t t t " t " t t "
LOsf ......
a a a a a o a a t a a a o a t a a " " t t " t " l '
Dlffelonce.'.
a a a a a a a a a a a a a a a a " t t t t t t '
(1)
l2l
vt ln-h
Malntcnancc
Cott
Cod DevlaUon
{31 {4}
(5)
(6)
rt}
-
' ;;
ui-a
lou-#
tot-lwt-h
tu-vf
Machlnc ActtvttY
Houre Dcyilqgn!
(4) Squercd
(4) r
(2)
Q93urrl!
Malntenance
Gost
s2,290
2,OOO
3 2s0
Machi ne
Hours
2r7OO
2, OOO
700
Low
$2, OOO. OO
828.57
$1. 171 . 43
Varfabfe rate
= 3290
+ 7OO hour:s
= 3'4142857
per machine hour
Hl gh
Total cG,Et...........r.r.............................r.r.........
$2t290t00
Total variable crogt..,.r.' ...........................r..' ...'
l
tl
18' 57
Average ffxgd c(tSt ............................' ...' .......r
$1 .1 71 .19
l2l
I
E
I
b
I
I
!
40
(30)
(roo)
t 0
(rrol
oo
(101
00
130
(r0)
50
{o0l
100
(50)
(.o0)
0
13oo)
200
60
l EO
3{}0
50
o
(roo)
Totrl .-.. E25,920
O
o
172.OOO 76,200
,
,
I
b
I
I
-
I ; Yt + f l
-
$25r 92O
+ 12
-
$2J6O
-
Xx, + o
-
28r 8OO
* 72' 2t 4GO
I ( x - r ) ( v - i )
Column 6 total
-
6lu;;;-5-GGf
-
172'ooo
-
3.40 Yariabte cost rate
4i t0,oo0
b -
x ( x
-
i ) 2
S l n c e
Y
- 8 + b X t
a
- y t - b t
a
-
32' 160
a
-
t 12, 160
a
-
$1' 2O0
t hen:
-
( $. eo
) ( 2, 4OO
)
-
s960
10
P3-4 (Concluded)
Chapter 3
l -
x ( : - z ) ( v - 9 . )
Column 6 total
(31
f t
172, OOO
a
' 1W, - . 9565
(r)
X1
(41
1 2 -
Month
Janualy......
Februaty....
M8hCh.........
Aprll r..........
M8! . . . . . . . . . r. .
Jl l l te..r.....' ..
Jl l l !....' .......
AugU8t . . . . . . .
September.
Octobor......
llovembor..
Decgmbor..
Tot81.......
t2l
It
Actual
Malntonancc
Cort
$ 2,2OO
2r130
2rOOO
2rl 7O
2,O50
2r2,2O
2rl60
2rzf',O
2CoO
2r150
2121O
2rtoo
(31
l yi =a+br ,
Prodlstcd
Malntenence
Cost
$ 2,2OO
2r140
2rO(X'
2r160
2t04o
2r2tn
2r18f.
2r2i2o
2r2g0
2rl80
2rt 60
ztl20
(4t
lh
-
v'l
Predlctlon
Errpr
(21 - (31
8 0
(ro)
o
l o
t o
(201
(301
. 3 0
t o
(30)
50
_e9)
9_e
(s)
Ut
-
t'12
(4)
Sguarsd
$ o
100
o
too
100
400
900
900
100
900
2r5OO
400
$6,4Ot)
2r50O
2r3li0
2,ooo
2r4OO
2,1(x)
2,600
2r4EO
2,550
2,7AO
2,45O
2,4AO
2,3OO
28,800
:
- ^ ! A^ A
Et y- Y
::
t125,920
Column 5 total
-
1 2 - 2
8 t -
(5)
The 95% confidenco tnterval for matntenance cost 8t the 2r5OO machtno
hour level of acdvlty lr
m
Y ' * t p ; s x s ' . 1 1 + i +
\ - - '
- ' f
:
!
n
x( r ,
- r ) '
!+ff
-
sz' .zs*22
s. | , 2oo* ( s. eo) ( e, soo) ' ( z. zz8X?5. 2g822) { ' - +" - w
32' 2OO = $59. 29
v: (x 1
-
i )t : (
yt -
i l z . / (col umn
5 t ot al
)pot umn
i t ot at
I
172,OOO
_
172,OOO
@ - @
. . ,
' ( . 9585
) -
-
. 91489
Machlntr
Hourt
4 1
I
!
I
It
I
L
I
!
I
!
I
t
E
I
I
!
I
b
I
!
I
'
!
I
!
I
l-
I
I
E
Ctnpter 3
P3-5
1
(1) (a) The method of least sguanct:
( 11
vt
l2l
tn-f,
Dtllcrcncc
frorn
Avrngc of
(3) (41 (s) (6)
Ct)
\
Fl -i t
t n-xr2
h-rui -h
l n-i F
Dlllcrcncc
From
Avcragn of
\
tToo
3F0o
K)
Squared
{4}
r (2}
Ebc{rlclty Elcctrlclly Orrcrt OuGtt
(OOOI (OOOs
Co.t Drvladon Dryr Dryl omtttcd)- omtttedl
t2l
Squarcd
(oOOs
omlttedl
Jenuery.-.. $ 4OO
g3OO) I,OOO
(21600)
Fcbruery -. 5oo (2o0) 1F0O
l2'Ooo)
ar2,,,o
4rOOO
I' OOO
EO
I'OOO
lr0oo
IrOOO
G'25O
arooo
250
trooo
o
3 750
400
200
o
100
100
900
500
400
o
100
o
s e o
40
40
o
t o
l o
90
40
40
o
1 0
l o
M{-..-.-... 600 (tOO) 2'5OO (1'OOO)
March --- 600 (2OOl
Aprll--.-.., 7OO O
Juns--.-... 8OO lOO
Juty-..-.-... I'OOO 3OO
Au!tt3t..-... 9OO 2go
Scptcmbcr.
gOO
2OO
Octobor.-- 7OO O
Novcmbcr - 600
Dccambor.. 8OO
2,500
(trOOO)
3,OOO
{5O0}
aFoo I,ooo
o'5oo 3,ooo
o,ooo 2r5oo
6FOO 2,OO0
3,O0O
l5o0l
gtao
I
I
tt
lroo)
21600
(1,000)
t oo 3'5OO
Total...... E8.4OO O 42.OOO 0 34.000 . lxl.450
: ( t r
- r ) ( v , - y )
Column 6 total
-
tl3' 45o
-
3.1015 variable rate
34,OOO
b -
I
!
x ( r ,
-
i ) '
Golumn 5 total
Sl n c e f
-
a + b i l t h e n :
STOO
-
a+( t l . t Ol 5 x 3' 5OO)
a
-
$7OO
-$355
e
-
$345 llxed coat por month
12
P3-5
(Contlnue{)
(b) The hlgh and low
Points
method:
Electrictty
Gost
$1, OOo
400
$ 600
Clupter 3
Guest
Datrs
6r5O0
l , OOO
5,500
Hl gh . . r. . . . . . . . . . a t a a a a a a t l a a a t a a a a a a a a a a a a a l a a a a a a a a a t a a a a a a a a a a a
Low...
D1ffergnc18..r...r.....r.....................r...........' ..' ..t
Varlable nate
-
#=
-
$.1091
per guast day
5r 5t ) O
Fired cost =
$1,OOO
-
(61500 x $.1091)
=
$1' OO0
-
$7Og
= 3291
OR
Fixed cost =
S400
-
(1,OO0 x ll.1091l
=
9{OO
-
StOg
=
Szet
(c) A scattergraph wlth trend llne fltted by Inspectlon:
tE
lu
o,
F
o
o
o t
l-
> 2
= o
9 E
IE
F
o
ul
J
lll
s1, 1OO
st , ooo
s900
:8800
3700
3600
r3500
3400
3300
3200
8r 00
$o
o t , ooo
Fixed cost per
month
detormlnecl
by
I nspcctlort
............_SSSO
Averago
cc'61 ......,..,.. SZOO
Less llrcd
cost.........
g5O
variablo rGrolt
......,..... G
:
2,OOO 3,OOO
/3rOO0
S' OOO
GUEST DAYS PER MONTH
3s50
crooo 7r00o
$.1O vari abl e cost
per guest
day
3r5OO avorlge guest
days
43
t-
t_
I
S
t
I
!
I
E
Clpoter 3
P3-5 (Continued)
(Zl The coefflclent of coretatlon
(r) and tlre coefficlent of determination
(rz)'
uslng data from the requiromcnt
(lXa) answen
x( r ,
-
, ) ( v,
-
Y)
cot umn 6 t ot al
- -
l : ( t
r
-
x) ' >( v,
- y) ' . ' / ( cot umn
5. t ot al ) ( cot umn
3' 45o' ooo
- @
.l 72r92Or0OOrO0OrOOo
3r+50,O00
3r5g4
r44g
'
' 9598
r 2
-
. 9212
7 total
)
L
I
b
I
I
b
I
I
b
I
t
L
(3) The standard error of the estlmate:
( 11
X1
(21
YI
I
!
l
I
L
I
b
I
I
I
b
I
!
b
Month
January......
Fobrualy ....
Ma1ch.........
4pr11 .......,.r.
M8! . . . . . . . . . . . .
J l tJl o .........r.
J l l l ! ......' .....
August .,,....
September,
Octobor.,....
NoYember.,
Decembgr..
Total .......
' roundl ng
eror
iZU t
- y ' r ) '
j
Golumn 5 total
s
(5)'
s29,975
Guest
Days
I
'OOO
1r5OO
2,5OO
3,O00
2,5O0
4,5OO
6,50O
6rOO0
5r5OO
3rOOO
2,50O
3150O
42.OOO
Astual
Electriclty
Cost
$ 4oo
500
500
700
600
800
I ' OOO
900
900
700
600
800
sg.4oo
(3)
Vi =e+Dx1)
Predlcted
Electrlctty
Cost
$ u 7
4f'7
599
650
599
ao2
1, OO5
9S
903
650
599
700
39.405'
(4)
t h-vl
Predlction
Error
(2) - (3t
'
9(47)
3
(ee)
50
1
l2l
(51
(sl
(3)
50
I
100
(s)
t h-vF
Predistion
Error
Squared
(4)
Squared
g
2,209
I
9r8O1
2,5OO
I
4
25
2, 916
I
2r5OO
I
1O, O00
5 ' -
n
- 2
1 2
- 2
-
v
s2
,gg7
.5
-
$54.75
chapter 3
1
r3-5 (Goncluded) ,
4) The9o%conf f dence| nt er ua| f or e| ect r | c} t ycosi l sat 2' oooguest days
would
be:
t z,
ooo
-
3, 5oo
)2
(sg{s
+ ($.tor5
X2,ooo
))
t3548
3318
(t.atz
X330.75
)f
*
#,
*
(t,atz
X3s4.zs
)(r.ozz
)
$106. 35
!
t
34, OOO, OOO
P3-6
(1)
(a) The hlgh and low
polnts method:
Hl gh aa. . t a. . " " t " t t t " " " " " t " t t t t t t t ' l t " t t " t t t t t t " t " t t t " t " " '
LOW aaaaaaa" l t " t t t " t " " t " " t " " " t t " " " " " " t t " l t " " " l t t " l "
Dl f i grcnc9
. t t t t t t t t t t t t t t """t """t t ' l t ""t "t ""t t r"t ""' rt "
Varlable
rate
=
$f
OO
+ I;OOO
Bllletr
= $lO
Flred cost
=
$5Oo
-
Sl'1o
r2r4OO
Blllets)
= 3260
or
Flxed cost
= $4OO
- (!l'lO x l,4OO
Bllletr)
= $260
Cost
4stlYttY
2r4OO
l , 4oo
l.ooo
:1500
400
Sloo
45
I
I
b .
!
!
I
L
I
l
b
L
ChsPwS
P3-6
(Qontinued)
(b) A scattergraph
wlth
a trend
line
fitted
by insPection:
F
I
E
l-
o
ul
J
lll
t500
:oo
9300
$200
$t oo
30
t rOOO
I
BILLETS
Fixed
cost detormlned
by Inspection
= $260
Average
cogt
= S5t52O
total cogt
+ 12 months
= $46O
Average
aetlvtty
= 24,OOO
total
Blllets
+ 12 months
= 2'OOO
Var | abl ecoat =( g460aver i agecost - s26of i xedcost ) +29oooavef t l ge
agtlvl$
= $.1O Per
Blllet
I
I
g
I
Chapter 3
P3-6
(Continued)
(c) (r)
l2l f3)
(4) (5) (6)
rt)
y
V- n
x
F- ; l l x- i f l x- r v- t l l v- t r
Elccrriclty Cost llumbcr Activity (a) (21
uonth Cost DcviaUonr of Bllletr Devletionr Squrrcd (4) r (21 Sguarcd
Jenurry,,.... 3455
(51 2,OOO O O O 25
Fcbrury.... 450
ll0l
1'8OO
(2OO) 4O'OOO 2'OOO tOO
Mrrch........
{35
(251 1,900
(l 00l t0' O0O 2' 5OO 625
Aprf1....,.,.... 4S5 25 2,2OO 2OO 4O'O0O 5,OOO 625
1fry............ 4?O 10 2,1oO tOO IO' OOO I' OOO l OO
Junc........... 475 t5 2,OOO O O O 2i25
Ju1y........,... 4OO (60) l,4OO (8OOl
.
3EO'OOO 36'000 3'8OO
August....... 450 (f O) l ,9OO
(f O0l i 0' OOO I' OOO
' l OO
Scptamber. 4:t5
l25l
1,8OO
(2OO) tlO'OOO
5'OOO c,25
Octobcr....,. 5OO 40 2,4OO
.lOO
160'000 iO'OOO 1'600
ilovambcr.. 495 35 2r3OO 3OO
g0rOOO
1O'5OO 1r2i25
Decomber.. 47O lO 2,2OO 2OO
.3O,OOO
2'OOO loo
Total...... 35.529
_9 _?!.OOO ___9 -999,099
gr.OOO
_8.950
f
-
zy + n
-
$5r52o
+ 12
-
$460
i
-
Lx + f t
-
241000 *12 -
2r OO0
vari abte rate (b) -
:(x
-
rXv.:
f)
-
Sq9 l oFl
-
i l 9
x( x
*7) '
- cot umn
s t ot at
- 6dd; 66d' $' 10125
Fi xedcost ( a) - y
-
bi
-
($.r olzs
X
z,ooo
)
-
$257. 50
(21
The coefficient of correlation (rl and the coofffclent of determlnation (F),
using data from the answer in requlrement (lXcl
tollow:
- l - \ / - \
-
f t x r
-
x ) l y ,
_
V )
-
81' 099--
-
.957
V: ( x r
-
i ) ' z( y,
-
y) '
J( 8oo' ooo X8' e5o )
1 2 - 1 . s s z ) 2 - . 9 1 6
47
t
!
I
I
L
I
L
I
t
L
I
t
L
I
L
i
I
!
I
-
I
I
b
Ct8pr( 3
P3-O
(Concluded)
(3)
Month
J8nuary.r....
Februal y....
M8J1Oh.r......'
Aprll r..........
M8! . r. . . . . r. r. .
J1tJ|9...........
Jlll!............
Au$ust.......
September
October......
NoYember..
Decamber..
Total ..,..'.
g ' -
(r)
v
Actual
Electrlclty
Gost
$ 4{ts
4lto
4{ls
485
470
475
400
450
4it5
500
495
470
35.520
(21
x
Number
of
Blllets
2,O00
1r 8OO
11900
2r2OO
2rlOO
2rO00
1r4O0
l r 9OO
1r8O0
214OO
213O0
2r2AO
24,OOO
(3)
l y' =a+Dx)
Estimated
Eleetriclty
Cost
$ 460
#o
4{to
480
470
460
399
450
#o
501
490
480
t15.520
(4)
lv
-
v'l
(1) - (3)
(s)
1 0
(1s)
5
o
1 5
1
o
(5)
(r)
5
' ( 10)
(5)
U- vT
(4)
Squarsd
25
100
?25
25
o
225
I
o
25
1
25
100
752 o
lcolumn 5 total
-
$8.672
i
\,
I
i
!
The 9506 conlldsnce Interval level for electrlclty costs at the 2r2OO
Blllets level of agttylty would O" 0","--
a + Dx * t esst "' . , / . t *
*
*
( t
-
f ) ' =
Y
"
> ( r - i ) '
$257.5o + ($.rorzs
)(z,zoo)
' ( 2.?2s)($a.eze
)
1 2
- 2
$48o .25 * (2.zza
)($e,ozz )(t.oos )
$48O .25
*
$2O.58
or between a low of 3459.G7 and a high of SSOO.83,
!
b
I
b
I
gt52
l o
48
P3-7
( 1
)
( 1)
vi
Month
t2l
rl'.1-91
Dlffcroncr
lrom
(4)
Fi - i )
Dlflcrencc
Frctory
Dirrct from Averagc
Overhead Avcragc lrbor of 1'80O
Coctr of 37,900
Hourr Hours
Chapter 3
(61 (6)
rr)
lq
-|12
lry
-
rWi
-h
rq
-
vlz
(41
Squrrrd
'(4)
r
(2)
l2l
Squarcd
4O,OOO |2O,OOO 360,000
S60'000 l'2OO,OOO 4TOOOTOOO
t0orooo {2oro0o Irt02,5oo
2SO'OOO S5O'OOO tr2lOrOOO
4OTOOO 5O,OO0 62,500
IO'OOO
f3SrOOOl
72i2,5OO
too,ooo 34o,ooo 72t2)5oo
640'000 lrl6OrOOO 2tlO2rSOO
360,000 OOO,O0O ITOOO,OOO
to,ooo 4o,ooo 160,000
ao,ooo tSorooo 5o2,5oo
torooo
(lorooo) to,ooo
90,ooo 2/3O,O0O 84O,OOO
250rO0O TOOr0Oo I,060,000
t6o,ooo
-
680,000 1,060,000
tSo,ooo S2orooo o4o,ooo
4O,OOO 2OTOOO IOTOOO
o 0 c2r6oo
360,000 C9OTOOO tr322,5OO
25O,OOO 4{tOrOOO 640,000
0o,ooo l6li,ooo 3o2"5oo
l0,ooo 85,ooo 122,soo
9O,OOO 24O,OOo C4OTOOO
o o tbo,ooo
.3O,OO0 !4O'OOO a9O'OOO
25O,OOO 7O0,OOO 1,9OO,OOO
25O,OOO 75O,OOO 235O,OOO
t6o,ooo 320,ooo c4o,ooo
4O,OOO 4O,OOO 4O,OOO
o 0 9o,ooo
25O' OOO 45O,OOO 81O,OOO
360,000 OOOTOOO ITOOO' OOO
25O,OOO 4OO,OO0 84O,OOO
o 0 t8o,ooo
9O, OOO 27O, OO0 81O, OOO
l O, OOO (3O,OO0) 9O,OOO
(3)
xi
20A
' {
J!ll.'....... 3 81600
Fcb....-...
gr9O0
ll!1...-... 81050
APt- '..-...
grOOO
l hy--.., I' 160
Juno.--. 7'550
July --... 7,050
Aug....-... 61450
Scp......... 6'900
OcL........ 7' 5OO
NoY.-.-... 7rl 50
Dcc...--. 7' 8OO
4p
Jan.....,... 8r7OO
Fcb.-...... 9,3OO
Mrr......... 9'.iOO
Apa........ 8,7OO
i fry,..--. 8,OOO
June.....- 71650
Jul y........ 61760
Aug....--. TrtOO
Scp......... 71350
OcL........ Tr25,O
!lov..,-... TrtOO
Dcc..-.-. TpOO
20c
Jrn......... 81600
Fcb...,.....
g,3OO
Mer.........
gr4OO
Apr....-...
8r7OO
_
l l ty..-....
SrtOO
Juno.......
?1600
July -......
Z'OOO
Aug.-......
6,900
sop.........
?rl oo
OsL........
Z,EOO
Nov.........
Z,OOO
Dcc. . . . . . . .
Z, OOO
Total.......
S2g4.4Oo o o
ooo
2r0oo
1, 060
I
rl oo
25O
{3so)
(8s0)
(1/450)
(t,0ool
(4oo)
frso)
(roo)
800
lr4oo
lr4OO
800
l oo
(2rol
(t,tgol
(8ool
(6s01
(cs0l
(8ool
(4ool
700
lraoo
1Foo
800
200
(3oo)
(eoo)
(1, OOO)
(8o0)
(4oo)
(ooo)
(3Oo)
2rOOO
2,4O0
2r2OO
2,3OO
2rOOO
lr0oo
lr4OO
I' OOO
l'2oo
lr7OO
I ' COO
lr9OO
2, 1O0
2FOO
2.,.OO
2',,OO
2rOOO
trSoo
tr2oo
tr3oo
r'5oo
'tr7oo
rr5oo
lr8OO
2rOOO
2poo
2r3OO
2,.OO
2,OOO
t,8oo
lr3OO
1, 2O0
l r3oo
1, 800
1, 500
1, 9OO
64.800
200
600
400
500
200
ro0
(4oo)
(8oo)
{600}
lro0)
(2oo)
100
300
500
aoo
4(}0
200
o
(oo0l
(5oo)
(3oo)
(ro0)
f3oo)
o
200
500
600
aoo
200
o
(5oo)
(0oo)
(5o0)
o
(3oo)
100
5. 280, OO0 11, 625. 000 29. l A5. OOO
(9
I
L
I
I
lL
t-
I
b
I
,
\,
L
I
i
b
I
!
I
b
I
b
I
Lr
iL
I
b
I
qww3
P3-7
(Continued)
p -
z ( x t
-
x ) ( v t
-
l )
x( xr
-
x) '
Golumn 5 total
51280, 0O0
32.20 variable
cost rate
t hen:
Col umn 6 total
11' 625' 000
t -
Sl nce
j -
a + bi and
t
'
I;yt
* n and i
'
Xr
1
t
rtt
(Sesa, 4oo
+ 36)
-,
+ ($z. zo)(o*' aoo
* 36)
,
tz '
eoo
:
3.tl fdT:.t
ovelhaad cost
(21 The coefficlent of correlation
and the coefficient of determination'
using
data from the regulnement
(1) answen
x( r ,
-
7) ( y,
-
Y) cot umn 6 t ot at
11r025, OO0
11rA?S
' @9-
:
'
-
@)
. v153, 938, 4OO, OOO, OOO
1 2
- ( . g g z o ) 2 - . . 8 2 8 0
1 11625 , O0O
12r4O7
1191
- . 9370
chspttir3
(3)
fi
P3-7
(Continued)
Month
g
Janual Y......
FobruSrY
'.'.
M8FCh.r.......
APrl l . . . . . . . . . . t
M8! r. . . . . . . . . . .
J11JIo...........
Jl l l ! .....' ......
August .......
September.
OCtobOl......
November
..
December..
ry
JanuatY......
Febl arary....
MdFGh, . . . . . ".
Aprl l ...........
M8! . . . ' . . . . . , . .
JUl l ' . . . . . . . . . .
Jl rl ! ' . . . . . . . . . . .
August.......
September.
Ogtobor....,.
November ..
Decembgr..
20c
January......
February....
Mi hCh. . ' . . . . . .
Aprl l . . . ' . . o. . . .
M8! . . . . . . . . . . . .
Jung. . , . . . . . . . .
Ju| y. , . . . . . . . . . .
August . . . . . . .
September.
October......
November . .
December..
Total
$ 8,340
9]2i2O
8r780
I,OOO
8r34O
81120
7'p,zo
6rl 40
6r58O
71680
7
1460
81120
8,5O0
I,OOO
8,78O
8r78O
8,34O
7,9OO
6,58O
6,8OO
7
t24O
7,680
71244
7r9OO
8,34O
I,OO0
I,OOO
8,780
8,340
7r9Oo
6,8OO
6,580
6,8OO
7,9OO
7,24O
_
8, 120
E284.4O9
(4)
Ui -vl
Prudlction
Emor
(21- (3)
It 160
680
170
o
(1eo)
(5701
30
3l o
320
(r 80)
(31o)
(320)
140
300
520
(80)
(34o)
(250)
170
300
1 1 0
(43o)
(r40)
(4oo)
260
300
400
(80)
(240)
(3o0)
200
320
300
(4o0)
(240)
(s20)
(5)
tvi
-
vF
Prediction
Error
Squared
(Cl_Squarea
$ 25,600
462,4OO
28,9OO
o
36, 1OO
324,9OO
900
96, 1OO
to2,40o
32,4OO
96, 1O0
1O2,4O0
19, 600
9O,OO0
27Or4OA
6,4OO
I l 5,600
62,5OO
28,9OO
9O,O0O
12, l OO
184,9OO
l 91600
l 60,000
67,600
9O,OOo
16O,O(x)
6,4O0
571600
90rooo
40rooo
1O2|4AO
90,OOO
160, OOO
57,6OO
27O,4OO
|x1.580.200
The standard
omor of thc cstimate:
(r)
l2l
(3)
x1 lr
luj=
?.+.brJ)
Actlsl
Predlcted
Dlract
Factory
Factory
Labor Overhead
Overhead
Houns
Gosts
Costs
2rO00
2'd,oo
2r2OO
2,3(X)
2,OOO
1,9O0
1,4(X)
I,OOO
l,2oo
1r 7O0
1, 600
1, 9O0
2r1O0
2,30O
2r2OO
2r2OO
2,OOO
l r8OO
1, 2O0
l r3oo
l rSoo
l ,7oo
1,5OO
1,8O0
2,OOO
2,3OO
2,3OO
2,2OO
2,OOO
1, 8OO
l r 3OO
I , 200
1r 3O0
1, 8O0
1, 5OO
l
r9OO
8r5OO
9,9OO
8,95O
I,OO0
8r l 50
71550
7rO5O
6,45O
6,900
7,500
7r l 50
7,80O
8,70o
9,3OO
9,300
8,7OO
8,0oo
7,650
6,75O
7r l OO
7,3lio
7r?So
7,10o
7r5OO
8,60O
9r3OO
9,4O0
8,70O
8, 1OO
7r60O
7,OOO
6,9OO
7, 1OO
7,500
TrOOO
7,600
s284.400
o
ff,800
I
I
iL
I
I
! chtPrer 3
l_
Ps-T
(concluded)
5 t
=-
-
i >( y,
- y- ' , 12
- , @-
; $i l , 56o' 2oo
- - [ r ga- zt 2 - s324
b
i I t - 2
' \ - 6 : z
\ 3 4
|
(4) Slncc a large sample
ls usod
In thls
probtem, tgS%
= zgsYo and the confi'
r dcnce lnterval
ls:
i
Y' t
i z e s y r 9 '
(sspm * ($z.eo
)(z,zoo
))
t (t.eoo
)($sze )
l38, 78O t $635
I
I
b
t
I
tt
I
I
L
I
I
b
*
I
I
E ,
!
I
L
!t
)
b
I
Cnsgter
3
52
P3-8
(r
)
(1)
vt
(4)
Fr
-t)
ActlvltY
Dovlation
(5)
ui -7f
(4)
Squarrd
(6)
Vt-7Wr-h
tt)
ti l -h"
(2)
Squarsd
(2)
ru-h
(3)
xi
[.abor
jloto
950
1rO24
1rl o0
' l , l
1r313
1,.C1
11552
11372
t,360
11455
t pl
I r l So
009
1)Oz2
1po
r}283
r,&?9
r' 260
lr44O
r}20o
r1335
I rl 64
1$73
11124
2,.JCO
Maintenancc
Coct
Ug1!r
Cost
Dovlrdon
.lan,
ZOe ' .-.$' l' l05
(286)
Feb. ,
2OA , . . . l ' 110
(365)
fnar.,
2OA ...
tt39O Pf)
Oot.,
tOO....
l' 449
F2)
May,
2OA. ' . '
I t Gt S
t 37
. t une, 2OA
. . l F?5
U
JulY,
2OA -..
1' 687
2Oo
Arg.r
2OA ...
I;OSO
169
Sep.,
ZOI ...
f
1595
l l /f
o"t., ZOI ....
1t675
104
not . , 2OA
. . . 1, 405
t t 6)
o"". , 2OA. . "
1125. 1
1230)
.,;;:;io"
..'
eso
(cgr)
;;;:,
ro",.,.
I' 175
(3oc)
"". , 2O8
"' 1/ ; ?5
158)
;;;:;ro'
"" r'5oo
25
""r, aOt
""
I' COB
127
, ; ; , 2o8
. . l ' 6s3
172
, ri t , ' t o"
"" 1' 675
t g4
;;;;
2oB
"' 1'724
243
; ; ; . , 2oB
"' 1' 626
145
O",.r
rO"
"" 1]576
04
*; ". ; 2oB
"' l ' 633
172
;".: 2oB
..' t,/tt'
(63)
Totsl.-..$$ J
(2e0)
(210)
( 13r )
(02)
73
21
312
132
128
216
(ro)
(eo)
(24r)
(2r8)
1zo)
43
00
l o
200
60
05
ct6)
133
(1r o)
J
84,1@
46,656
l 7, l 6l
8,{d
61329
u1
97rg
17,121
16}876
4,Sl?,l5
3C1
8,l oo
68108t
471324
aoo
11849
eBOr
l oo
40,OOO
2"oo
9rO25
51776
17,689
13,456
543.682
82r94O
78,84O
t 1, 921
zo4
to,o0t
921
c4..:72
22FOB
r4,304
41r?t o
1t4/4
20'7OO
1271''71
06'708
I rl 20
I1076
12$73
1'72O
38,8OO
t 2' 150
'
t3r776
ct,t+0)
2i2,876
T,3S
G51.300
8i 1796
133)225
8128t
I , O24
18, 769
11936
12143'6
2AF81
121996
37,636
6t776
52,90O
2811961
93r636
3r136
c,25
t 3rt 29
23F84
37,6;:!6
60,o49
21rO?5
8rgl6
zfF84
3r9O9
<
34ee
-v
7
-
I y t
+ n
-
-
! X, j
* n
-
f -
335, 54{
+24
-
$11481
? 9 , 7 6 0
+ 2 4 ' 1 1 2 4 0
x( xr
-
t X v,
-
i )
- r 2
x ( x r
-
f ) " x ( v r
-
Y) -
651, 30o
651, 300
- 0 6 )
J(ss3, 682
X
t ' o
Column
7 total
)
651, 3OO
-
fr|sfr
eol um4
ffitumn
5 total
r2
- (, ezot zs
)z
- . 758162
. E59798, 983
' 092
- . 870725
53
I
b
t
I
!
l
S
I
I
b
I
t
i
I
-
I
!
I
t
!
Cnagter
g
P3-B
(Cohtinued)
(r)
(2) F)
vt
ru-f,
-.-:!
Mtlnttnanct
ion
Machlnc
Uontf,,
.
*"
Dcvladon
ry
,I',-r0o....31'195
(2so)
8oo
;;;:;
too,,' .
r' 116
(365)
7u
;;20A...
i ' 3eo
'
Pl )
?tt
ior-
ioo-.. ttas
t32)
e87
mt y,
t O", . . . I ' 018
197
I ' 186
,;;;,
2oA..
t,EE
u
l ' l tn
]",r,' ro"-.
1' 087
2Oo
1391
;;;.,20A...
t,6o
l oe
1' 2u,
Sep. ,
2OA. . .
1' 595
1t 4
I t l 86
oct . , 2OA*
l ' 675
194
t , l $
Nov.,2OA' ..
l ' 4O5
f' O)
997
Dec.,
2OA..'
1331
(23O)
841
Jan.r
2oB '.'
95o
($r)
60'2
Feb. , 2OB. ' .
1' 175
(306)
73t l
Mar.,
2o8...
1,4?5
FO)
1' O*
Apr.,2OB...
r.rfo
25
1' t*
MaY,2OB
..'
I' OOB
127
1' 174
June,
2o8. .
I ' O53
172
: 2*
Jul y,2oB
' -.
,,i zo
t94
1,.oA
Aug.,
2O8...
1t124
28
13,23
SeP.,
2OB ' ..
1' 026
145
133x)
Oct . r
2OB. . .
11675
94
l ' 1S
Nov.,2oB' ..
1' 653
172
\A7
Dec. , 2oB. -
1118
(O3)
I ' O35
Totll..-.5.!!!l J
25'8oo
({)
trl
-i)
ActivttY
ry!91!gn
(2o0)
(3:lr)
(88)
(88)
t t t
70
214
163
t l l
171
rrsl
t234.l
(573)
(342)
1 6
oo
00
171
189
28
' 155
00
l 02
(5)
v,-il'
(4)
(6)
V
-
xW' rt
rD
v-
j f
(2)
Souarcd
8rJe6
$332s
8,'81
1'o24
l 8' 769
11936
42,436
2,.FO1
12'996
37'Gi:l6
6J76
52'9OO
28t'0ol
93'636
3' 136
. o,25
t0' 129
z?.F84
37'336
59'o49
21,p25
8p3O
2aF84
3,S9
Squrrod
7oJ56
to9r50r
7r7U
7;t+4
12,321
a,|1
a8,650
23FOe
121521
2' ,3l1
oro84
641753
328r38
116, 964
a25
3,ooo
0r8Ol
29,l 1
9,721
01r5O4
21tQ?s
Irl oo
26,44
(4) r
(2)
76,076
120, 8t 5
8roo8
21816
15.r2O7
3,a76
44,4S
27F17
12,A31
33,174
51928
53,82O
304,203
1041652
(s4ol
lFOo
121573
N,112
36'665
oo,,:0,
n1476
8'4OO
27r8*
I
!
b
I,013.8?9
lol0'600
,
,
- x Y t + f t - s 3 s r $ &
- f ' 2 5 r 8 O0
*
- - '
1 i r ( x t - x ) ' x ( r r
- Y )
+ 24
-
$1,481
24
- Iro75
(Gol umn
z tout
)
1, O13, 826
1, o13 , 826
@, 506)
- f f i
- ' ee1176
(10)
l,600
2F20
J
J.o35349
Columq
Cofumn
5 total
r ?
- ( . 9 9 1 1 2 6
) 2
- . 9 8 2 4 3 0
ffi46@366'o88
v
54
chaotar 3
P3-B
(Contlnued)'
i2l
-
'
Th; activlty moa3uro us9-d to
predlct- maintenanco
cxpcnee should be
machlne
h6urs, nrhlch wlll result In ttre following
cost cstlmates:
b -
x( :
-
t ) ( v
-
Y)
: ( x - f ) 2
Cotumn 6 total
Column 5 total
s I , 195
I , l l 6
1, 39O
lr4d.g
1, 618
1r5,?S
11687
1, 650
1r5f i 5
I , 675
1,4o5
1r?J5',l
950
11175
1r4?S
1,506
1, 608
1165!l
11675
1?724
11626
1, 575
11653
I , 418
sss.5!{
1, Ol 3
, 826
3. 979213
-
mEim
-
variable rate
slnco
y r
a + bi
rthen
the estlmated
fixed
cost ls determlned
as follows:
t
r j --bl x
r
r
s1,481
-
(3,e2e213
x1' O75
)
t
-
$l ' 481
- 31' 052. 65
e
r
3428.35
(r)
l2l
(31
x1
rt
Ui=
1.+-bx!
Actiral
Predleted
Machine Malntenance
Malntenance
]lours Cogt
Cogt
(5)
tq
-viF
(3)
Months
(41
ln
-vil
Pmdlctlon
Ertor
(2)
- (31
q26)
(4r)
(s)
54
2A
(33)
(0)
I
5 .
27
o
(r)
30
29
('tl)
(34)
30
5
I
o
rt)
6
i 3 '
lze'1
E-lg)'
(4)
Squared
3 676
11681
25
2, 916
7U
I rO89
36
8t
25
729
o
. 1
900
841
5r041
I , 156
900
25
81
o
49
36
169
576
sl zsr 7
Jan. , 2OA. . . .
Feb.r 2OA ...
Mar. , 2O4. . .
Apr . , 2OA. . . .
May, 2OA, . .
June, 2OA, .
Jul y, 2OA, . . .
Aug. , 2O4. . .
Sep. , 2OA. . .
Oct . r 20A, . . .
Nov. , 2O4. . .
Dec. , z0n. . . .
Jan. , 2O8. . .
Feb., 2O8...
Mar. , 2O8. . .
Apr. , 208, . . .
May, 2OB
. . .
June, 2O8. .
Jul y, 2O8. . .
Aug. , 2O8. . "
Sep. , 2. O8. . .
Oct . , 2O8. , .
Nov. , 2O8. . ,
Dec., 20-Et...
Tot 81. . . . . . .
809
7#
987
9,87
1, 186
1r 154
-11291
11238
11186
11246
997
841
.
502
733
I , O9O
I , 135
1;174
11246
1126,.
1,323
1,23O
1, 165
11237
I , O35
39.8gg
3 1&21
1r 157
1,395
1, 395
1r 59O
11558
1,693
11641
1, 59O
11648
1,4O5
1r?52
920
I r l 46
11496
1r54O
11578
11648
1, 666
11724
11633
1, 569
1,ffO
1r 4f . 2
g{z'
' rounding
error
j t ( "
t
-
v ' ) 2
Column 5 total
2 4
- 2
I
\
" ' -
\ n
- 2
1317
,817
,
-
\ f r-
-
S2B. 4sBl o3
lF
I
I
>
!
I
+ Clqter 3
I
I
P3-8
(Cgncluded)
!
r
(a)
ffirfflffi:;|;ffi,T:"t""'
lor maintenance
cost at the 1'1oo machine
b
I
I
b
I
I
I
t
I
!
I
tt
I
I
!
55
t - t l
{ { r r
-
x l
Y'
* t g; s* S' . , i 1 +
I
+
r
- - ' c v ' -
\
n
t ( r ,
- x ) '
i
- _ _ - ^ - . i r
( t r t o o - 1 , o 7 5 ) 2
9028 .3tt + (s.ezezl 3
)(r,1oo)
r (e.ozl
)(ze.rcarm )!
, *
*
-
r,agsff
31,505.48
* $80.26
I
! :
!
b
\,
1
>
I
56
Cnapter
3
W
= a + b S
CASES
= 5.062
+
(.023) (1' 20O)
= 5.062 + 27.6
= 32.662 or about 33 total workens
Total workgl.s negdgd ....,.........rr...............................r.
LeSS
pgnnanent WOfkgllS ......' ......................t"""""""
Number
of temporary
workers needed'
Regression
2 appoars to be better than Regrcsslon 1 because:
i"i-
O"t outside the rclevant r.tnge have been excluded'
thereby nemov'
i ng anY bi as.
(b) fhe standard error of the estimate
(s') for Regrcssion
2Js smaller
than the standard error of the estimate for Begression
1 (.432 com'
pared to 2.012).
(c) The coefficieni of determinatlon
(r2) ls hlgher for Regrcsslon 2 tfian
the coefficient of determinatlon
for Regrcssion
t (.998 compared to
.962).
Jim Locter can use the legression
in his
plannlng for tempolary
workers
lf the foltowing condltlons exist:
(a) The forecasted dally shlpments
are
greater than 3oo and do rrot
deviate too much from the agtual shlpments.
(b) The amount of work to be done is dependent only on the number of
shipments to be made and does not change from shipment to shlp-
ment.
(c) Worlier
productlvlty is erpected to remain approximately
the same
as that experienced during the
period used to develop the negnes-
si on.
(d) A strong cause and effect relationship exists between the depen-
dent variable and the Independent variable.
(e) The time frame for a forecast ls short'term'
The regression could be improved by the following:
(a) Redeveloplng the regression using the number of hours worked as
the dependent variable.
(b)
Performlng another analysis ll rush orders or deviations of actual
otderc fiom forecasts occur wlth any degree of ragularlty.
(c)
tnvestigating the historical data used as a basis for the regrcssion
to determine lf there aFe any further unusual circumstances that
should be temoved from the data set.
td)
Redoing the regression after a
period of tlme' such as four to slx
months, to discover lf thens have been any changes In the relatlon-
shl p bet ween t he dependent and t he I ndependent varl abl es.
c3-1
(r)
33
1 0
23
tzl
(3)
(4)
l
-
I
I
t
Clnpter3
c3-2
( 1) The| nct oase| nyassoci at edwl t haun| t Jncneasei nxl s. l . 2, Ther ef or e, e
Soo-untt
tn"r""i"
tn x
wtti-J;ilin
a 6'O'unitln"t"t"e
11'2
x 5O0)
in
y
(2) [:i"T,::riJ"i?,1P."rr.
unreriable
rf the corrararon
rs spurious'
rhe
' assumpt i oni st t r at 1; #i " " ] ogi * r . Li " i i " " shi pbet weenout put
and
the use of efee#c
powgr and dirsct
labor'
(b) rrre equa$on
may
b; Ji"ble
undsr
ii"
"onattions
at the time
of th
studv,butfconOl ti Jns-tt' "ng"' theresul tsmaybeunrel i abl e'
(c) D"tj;;;;;-
limitJ
i" " l'ige
of 5oO.2'ooo
unlts.
(d}rt s-assumeat rrat ast ral ght -| | neassumpt i on| sva| | d.
(e)rrrecoemcbnt of correl at | onl g"' """, ' "of t t reext ent t owhi ch
two
varlables
ars ,;;i;ttiearty.
n i"
t t"railve
masune
of
good-
ness
of fit. More
or iil"-""tiatlon
ln
yi" ttpl"lned
by ora rugrcssion
egua*on
for direct
f,rl]o,
nours
than'ior
elbctrfc Powen
that
ls' the
esuatlon
for dlrsct
ffi;;
iiouo
ts a uJtt"r
flt ttan
the equatlon
for
elecilric Power'
( 0Thest andar der or of t heest l mat e. l sameasuneot var | at | onf r om
the regrcsston
ltne.li
il; ;;t
"tlon"
tt" not-alty
dlstrlbuted
about
the regrc"",on
.qu"ii*,
tne
sGndard
errcr
can be lnterpret-
ed ln tllre
same
r"y'",
it " "t"no"tu-i-"'r"uon'
The
stsndard
entr
ls
gruater In the case
;id;;
i"Uo'
f'o'u-o
tft"n
In trs
caso
of elestric
power'
GGA-canada
(adapted).
Reprint
wtttr
permisslon
( 1) An advantage
of Alternative
A ls that using
time-as
an IndePendent
vari-
abte is a conyenl""i*"V
to take il;
;;;;ideqtlon
all
posslble
factors
that may be lnfluencing
the depeidtnfvartaUrc
Juring
each
period of
time.
A disadvantage
of Alternatire
A rs that there
ls no loglcal
rclation-
shlp between
years and rental
expense'
An advantage
of Atternatf"e
b-ts that this method
ls loglcal
because
as rovenu""
tnciase,
the stgryi
lnrr""r",
and, thus,
rsntal
exPense
lncreases.
A di;-d';tage
of eliernatfv"
6 t" that an estimate
of ruv-
.n""il"J#[l;
of Arternative
c is that the mathematicar
carcurationr
are relailvely
eaiy and
the mc-thod
ls easy to underctand'
A disadvantag
of arternativ,
diJ.ffi
il;
arnrrm"t.
.rr-r"9" rs an oversrmptfica*on
that does ,rot *r"oi;;;';;t
rchilonship
between
varlables'
OuPter
3
C3-3
(Concluded)
| 2| Mot orcoGor?orat i onshoul dse| ect A| t ernat i veBbecau. set here| at i on-
rhtp between
neyan,r"
riJt}
" ,"nt"l
.;;;;;b
ioglcal'
the coefficient
of
corrslafion
ls hlgh,
rnaiii"
tt"ndard
eqor
of the estimate
ls low'
(3)
A "t"ti#;iirr[iiq*
i" "'n-"pp-priati-ieirtoa
for es*matins
rental
cxpense
betorp
i[otorro-;;ft.d"iTi'il;["
attto
Parts'
A statistical
tcchnigue
attempts
to- -"""r-
ttrt "o'"iation
between
tre variables
trat
aru
pnesumeO
to fral]IE"it
"nA ttftA
rclatlonshlp'
and such
a
relailonship
appea*
to "iriiiirti"
"ttuauon'
of cout:e'
Motorco
ls
lssumrng
that
any neratl-J"iiJs
tnat-.rr=t
in *re hrstorrcar
data
wttt con'
tlnue
ln ttre ftrture
wnnout-ln;ig"'
Management
mav-want
to adiust
the
variabtes
for chang".
i;i rr"ip*tt
*irr"t"iu6
and
Motorco
may
wish
to
i ntroo
uc-e
-oit'tt
q Jantltative
vari
ab les'
c3-4
(r) The
phraso
,,-gle""ion provides a rclational
statement
nther than a
causal
statementn
means
that reg;"ion
analysls
ls used to determine
a
relationshlp,
but not nt"""sarffyi
cause-and'etfect
relationship'
A spe'
clftc
value for a negnession
cosfficlent
does not imply
that the lndepen-
dent var | ab| e( s1ca- usesachangei nt hedependent var i ab| e.
The meaning of each of the "VtJb;i"
in tt i basic
formula
for a tegression
oquatlon follows:
y' r = estlmateJ value of the lth observation
of the dependent
variable'
a=t hey. axl s| nt er cept or const ant t er m( 9. 9. , t hef i r edpor t i onof a
semivariable
exPense)'
b = the rcgrcsston
coefficient
corresponding
to the Independent
vari-
ab| er ( e. g. gt hevar i abt ecost el ement associ at edwi t haoneuni t
change in actlvlty
r).
x1
= the tth ou""r""tibn-of
the first Independent
varlable.
c = the regrcsslon coefficlenl
iott""ponding
to the lndependent
vari'
ab| ez( e. 9. , t hevar i ab| ecost e| ement associ at edw} t haoneun| t
change ln activity:).
21 = the lth observatibn
of the second
independent
variable.
d
= the error term associated
with the lth observation.
Statistical factors used to test a negrcssion
equation
for
goodness of flt
i ncl ude:
(a) The coeffi ci ent of determi nati on,;2,
whi ch l ndi cates the
porti on of
the varian"" i" the dependent
variable
erplained
by the lndepen-
dent variabtes. A coefficieni
of determination
approaching
I lndi-
cates a good llt.
l2l
(3)
59
(b)
(a)
(b)
(4)
I
lv
I
L.
l
b
I
lb
I
|-
I
b
L
t,
I
!
I
I
!
l
!
b
I
I
:,
L
Clapter3
l -
C3-4
(Concluded)
c3-5
( 1)
(c)
(d)
(e)
The standard orror of the estimate which measures the dispersion
of the observed
points about the regression line. A standard error of
the estimate approaching zeno Indicates a
good
flt.
The term
"linearl$l
wlthln a relevant ranget' means that in a specific
sltuation, a straight-line relationship between the dependent vari-
able and the independent variables can be assumed only within the
range of historically observed values.
The term
rconstant
variance
(homoscedasticltyl" means that the
distrlbution of the observations about the regression line is unlform
for all values ol the independent varlables within the observed
rrange of values.
The term
"serial
correlation" refens to the lack of independence in a
geries
of successlve observations oyer tlme. The deviation of a
value from the regression line should be unrelated to the deviation
of any other point from this line.
The term
'normality"
means that the
ioint
probabllity disHbution of
Ure variables ls normally distributed
(multlvariate normal). The fre-
quency
of the observatlons should approximate a norrnal curve.
The term
smultlcolllnearlty'
refers to tfie correlatlon of lndependent
variables. When Independent variables are hlghly correlated wltfl
each other, the relationshlp(s) between the Independent vzrlablee
may obscure the relationship between the lndependent varlables(s)
and t he dependent vari abl e.
( a) D = ( 2. 455+( . 188X1, 5OO, O0O* 1O01O00) ) x 1O, OO0unl t s
= (2.455
+ 2,821x 1O,0OO unlts
= 5.275 x 1O,OO0 unl ts
=
82,750 unlts
(bl
D = (2,491 + (.441(12,OOO,OOO + 1,O0O1OO0)) r IO,OOO unlts
=
12,491
+ 5.28| x IO,OOO unlts
= 7, 771r l O, OOO unl t s
= 77,71O unlts
The 5o7o confidence interval for demand is calculated as follows:
D =
104,160 unl ts=
{.59X,922
x 10,OOO untts)
= 1O4r 16O unl t s
*
6, 361. 8 unl t s
or between 97,798 unlts and 1 10,522 unlts.
l
:
\
\
tzl
&
c3-5
(3)
Cl?.pter
3
(Concluded)
Eguation 4 ls the best The coefficient of correlatlon and the coefficient
of determination arp the hlghest of ttre four equatlons. The coefficient of
determination
Indlcates that 70.3oh of the sample variance of automoblle
sales ls explalned by the rcgrcssion. For
predigtlve purposesr the stan-
dard arror
gf the estlmate a|.922 is also tfie lowest of tfie four models'
giving the tlghtest
(smallestl phyrsical confidence Interval of any of the
equatlons.
Equation 3 assumes that factory rebates
(R) are dependent on advertls-
ing funds
(A). The rcsuJts of the analysls show that factoly rcbates and
advertlsing funds are almost totally independent andr ttrereforc' cannot
be used to predict
each othea The rcsults of Equatlon 3 lend credlblllty
to the use of A and R ln Equatlon 4. The Independence of A and R
leduces ttte posslble
negative aspects of colllnearlty'
(4)
I
!
S
I
CHAPTER
4
DISCUSSION QUESTIONS
'I
O4-1. The five
Parts
arc:
(a) Direct nraterblg reqtbn
(b) Direct lsbor ceclbn
(c) Frlory ovefiead
(O Work h
Pr@oer
hventories
(c) Fhbhed
grood hvmtorbr
*2. iho bahnc" rhoet ir t 3tal.ment ct finsncbl
pcrttbt; the hcqrr ctBternont b a dalement of
sttYity. The incqne lbtement is ccnplementary
to thc babnce sheet, munthg in padicubr for
tho ctrange in hr prcprietary equrty Bs a resull
of operatims during the year. In |hat respecl' the
incornc atatemenl ir eeaentially nothing more
than a major rection of the retained eamings
accounl. Thereforc, tht rsvenue and expense
accounls in the income 3talemont have been
lcrmed'cxplanatoqf ac@unl3, explaining the
cbb and lkrw of r.YcnueE and cxpensee lhat
bod to thc new hcqno (or bce) and to the new
rrtahed camhgs balancc h the balance sheet.
O4-3. Thr ordinary babncr rhecl and incqne slate-
menl aro htended to ptwkJe hlormalist as lo
financial peilion and resulb of operation of a
burinesl, in sctordancc wilh several assump'
liqs that arc made h preparhg |he stalements.
Frqn the standpoinl cil the criticisms rnade, the
most important cil these assumptions are lhal
cocl lost appropdale arnortization of cost mea'
rurca unelgired cct, and that a business mey
bo a$umod lo bc gohg to conlinue operatbns
i ndcl i ni l el y i nto l he future. Accounti ng state-
mcntg sre usually prepared on lhe heory lhal a
cale or
gome
other definite event is essenlial
bcfore revenur i s recogni zed. Basi cal l y, the
aseot sUe of a balancc aheet coctaha a preson-
tstbn o{ the anrounts cl cost incurred, which can
bc pr esumed l o bencf i t f ut ur e per i ods. ' An
incornc slalement presents the srnounl of rov-
cnue recognized as having been realized during
thc period, less the podioo cl all cosls incuned
thsl doe3 not appear to be lairly delerrable lo
ftnurc perinds.
Thc ircome staternonl is prirrnrity a masure
cd what lres been camcd, and not a measure of
'camhg
power.' For plant assots, the balance
rheot b pdnarily a rnasure cl accountability for
cxp.ndi tureE,
rhowi ng acgui si ti on cosl s l ees
codr sllocalod to past operatbns. This rneasure
of accounlability may br quile diflerent from
1rur velue.'
To hcreese ilg usefuhess as one elemerd in
judChC
eaming porver, the ircsne stalement is
picparcd
with a dietinclion between operating
and nonoperaling items. For the samo roason,
c.rtain iterns may be climinoled frorn the incorne
sl st omenl and shown i n t he st at emont ol
nrtained eemings. However, the effec-t of nmre'
curring and nonoperaling transaclions is not
entirelY eliminated.
lnfonnalion revoaled by a serios of income
3tatcments b morc rignilinnt in
iudghg
eaming
power than informatbn revcaled by ane hcqnc
statcmstl. The incqne of a bushess rnay folbw
or .Yen exaggetat the ups and downs ol the
bueinesg cyclo and, therefore, lhe inccne of any
crc year will ncl represent eaming powor.
Changes in law or local zoning ordinances
may result in a marked change in lhe eaming
power ol a bushess. Ukewise, changes in public
taste, devebpment of new prodtrts' apPgarance
ol new conrpetilion, acquisition ol subsiJiaries'
changes in management and lhe like, all may
change earni ng power and yet not be cl earl y
rellecled, il reflected at all, ir one incorne stale'
menl.
The accounting use of historical. rather lhan
curront, dollars in measuring depreciation and
cost of goods sold may resull in distoding any
view of earning power obtained frorn a single
incorne statemenl.
ln regnrd to plant assls, il can be said lhat
their value to a going concetn is usually depen'
dent uPon the eaming power of the business.
Such s value is not necessarily the same as lQ'
ui dati on val ue, cost, cost l egs amorti zati on.
repbcement value, or any other kind of value'
The phrase
.true
value'has no definile connota'
tion.
O4-4. Actusl describes the way cosls are measured.
i.e., at actual historical arnounts; /ull absaption
describos which elemenis of cost are allocaled
to hvenlory accounls, i,e., all elements of rnanu-
lacluring cost are fully allocated to hventories;
p/ootss describes how cqsl infonnation is accu'
mubted, i .e., costs are accumul ated for each
procoss or deparlment in the laclory.
O4-5. Prime costing systems albcate only lhe prime
costs, direct material and direcl bbor, lo hvento-
ry accounts. Direct costing systms, abo called
variable costing syslems, albcale the variable
manulacluring ccts, direcl materbl, direci labor,
and variable factory overhead lo lhe inventory
accounts. Absorpticn costing systems albcate lo
Ilvenlories parl or all of tixed frtory overhead,
in addilioo to all varlrble manufacluring costs.
04. Actual costing masuros product costs at actual
hislorical arnounts, while standard ceting mea-
sures product costs by uei ng predetermi ned
arnounts ol resourceg to be coosurrned and pre-
determined prices o{ those resources.
62
Q,4-7. Preess costi ng ai cumul ates costs fot oach
pt@olts or department
in the ladory end rnah'
tains detailcd recordr and calculationr of the
cotl of *ork h preest. Job order cting accu-
mulales cotr lor oach
irb,
lc', balcfi' or contrasl
and mEhtains detBilsd records and calculalbng
od tho cost! of tork in prceas. BacHlush st'
ing accumulal.r coltr by working backwards
through ihc availablc inlormatiqr afler produc-
ticn is cornpleted
(i.e., at the end of the accounl'
hg pori<rd) and rnahtahr no detailed records ol
lhe costs cl ttPrk ir
Prcesr.
O.4. Actual cosihg il more cornmon lhan standard
coothg in defense'rebted industries, while stan'
dard cosiing ic adnewhat more cornmon else'
where.
O4-9. Super'full absorpfbn or suPer absorption refers
to tho income lax requiremenl thal some
pur'
chasing and storage costs be allocated to inven'
tory ac@unts.
O4-lO. Job order costing would be colrlmon in repair
shops. buiHhg cotslructicr, and prhting; and in
servicc bushesse
guclr
as medical, legal' archi-
leclurat, corutrucliqr engineering, accounling'
and consulling lirms, as mentioned in the lexl'
Other exampl es i ncl ude shi pbui l di ng. bri dge
bui l di ng, tool and di e manufacturi ng, arl and
antique resloratirn, and contracl rossarch'
o4-1 1. As mentixred h tho text,
Pr66!ts
costing would
be common i n thc mi l l i ng, brewi ng, chemi cal '
and textile industries; in sirnple assembly oPra-
tions: and in seryice businesseg serving large
numbers o( cuglorners simultanrcusly, ruch as
airlhes. Other erampleg include petroleum refin-
ing, basic food preessing, and manufacture of
ChaPter 4
low*ost @nsumor
products such as toys, dis'
posable
Pens,
na:ronr' and lighters.
04-12. Aspecls cqrtrnon lo
icb
order and prccess cost-
ing are:
(a) They can be used by rervi ce organi za'
tbns.
(b) They requin cqrsiderablo detail to calcu'
late tho cost ol *ork h
Procells.
(c) The wprk h process accotnl in the gener'
al l cdgcr i r l uppor t ed by subsi di ar y
tcordg.
O4-1 3. A blended cthg method uee
irb
order ccting
l o accumul ate sofl rc cl ement(s) ol cost and
prcces3 ccthg to accumulale ofien-
O4-14. Flcxible manufacluring 3yslems consisl of an
integrated collection ol automated production
pnocesges, autornated rnaterials rpvemonl, and
cornputerized systetn csttrob lo utilize facilities
ln etticiently rnanulacturing a highly flerible vari-
ety cl
Products.
Q4-15. The adnantages of a llexble nranufacturing sys'
le.n over the cther systems include shorl (near-
zero) setuP l i mes, l he absence of a l earni ng
curve, lflet lead times to chipmont' lower diresl
labor cost
per unil, lower direct labor cost in
total, and bwer work in prccess invenlories.
O4-16. Thc hilial cost of creathg a flerible rnanufactur'
i ng system i s much hi gher than l hat of ol her
rngnuf asturing systoms.
O4-17. l,lanufacturing setthg suiied for bacHlush cosl'
i ng are di sti ngui shed by very fasl processi ng
speeds, which rernoves both the incentive and
the opportuni l y to track the detai l ed costs of
work in
Pr@ess'
63
l-
I
t
L
I
\-
I
b
I
b
I
S
I
b
I
S
I
b
I
b
Chaptor I
.
EXERCISES
E4-1 Cal cul ati on of cost of
goods sol d
(i n thousands):
TOtal manUfaCtUfi ng COSt ...........' ................r.r.....t
Add work i n
process i nventory begi nni ng """""
Less work i n
process i nventory endi ng.r..........".
Cost of
goods manufacturgd r.......o.r.-........' ....r..' .,
Add fi ni shed
goods i nventory begi nni ng ........!....
GOSI Of
gOOdS ayai t abl g f Of Sa| g. . . . . . . . . . . o. . . . . . oo. . . . . . .
Less fi ni shed
goods i nventory, endi ng ...o......' ......
Cost of
goods sotd .....' . .-,....................' ..
E4-2 Cal cul ati on of cost of
goods sol d (i n thousands):
Di rgCt matgri al s used.....................r...,...r,...' ........
Di f gCt 1abOf . . . . . . . . . . . . . . . . . . . . . . . ' . r. . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . .
FaCt Of y Ovgf h
gad
. o. . . ' . . r. . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tot al manuf aCt Uri ng COSt . . . . . . . . r. . . . . . . . . . . . . . o. . . . . . . . . . . . .
Add work i n process i nventory begi nni ng ........' ..
Less work i n process i nventory, endi ng
Gost of goods manuf act ur ed. . . . . . .
Add f i ni shed goods i nvent or y begi nni ng . . . . . . . . ' . . . .
Gost of goodsavai | abt ef or sa| e. . . . . . . . . . . . . .
Less fi ni shed
goods
i nventory endi ng..............,..
Gost of
goods sol d .......o............. ..t......' ..
sl 10
80
$1eo
90
$t oo
150
$250
60
$.11D
$230
250
$480
210
$27o'
340
$610
27fJ
s340
$ s o
60
80
i
I
Clpptcrl
E44
(Goncluded)
(21 Gost of
goods
manufactured:
Stores, Apri l 30.......' .' ........r.,..
.....--..----.
PUf ChaSgS. . . . . . . . . . . . . . . . . r r . . . . . . . . . . . . . r r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . .
LoSS: StOrtSt May 3t ro....rr...........r.................r....o......r..o....or....
Di rgct mat gri al s COnSUmgd ' . . . . . . ". . . . . . . . . . . . rr. . . . . . . . t . . r. . . . o. . . . . . . . . . . r.
Di rgct tabor used (4r25O x5221..r,.....,.........o.,............r.,...o......
FaCt Of y OYef head . . . . . . . r . . . . . r . . . . . . . . . . . o. . . . . . . . . . r . . . . . . . . . . . ' . . . . . r . . . . . . . ' . . . . .
Total manufacturing cost
Add work in process, beginning inventory
Loss wgrk i n
process, endi ng i nventory................r.....,...........
COSI Of
gOOdS
manUfaCtUngd ....' .....' .........r......................' .......
Endi ng bal ance of fi ni shed
goods:
Finished Cost of Finished
goods,
+
goods goods, =
April 30 manufactured May 31
S 4 5 , 6 0 2 + $ 2 8 2 r O g O X =
X =
Therefore, the finished
goods ending balances is $47,662.
E4 (al
*",i135";;;;;il..:::.::::::.::::::::::::::-:::::: 35,ooo
(b)
Work i n Process............ t...........r.... 33' OOO
Factory olrgrhead Gontro| ..o............r...,........ 21000
Mat gr i al s . or . . r . . . . . ' r . r . . . . . . . . . . . . . . . . . . . . . . r . r . . . . . . o.
(c)
Payroll 4O,OOO
Accrugd Payro11.....,....,.r,.r..,.....r....,...r...,
Accrugd Payroll .r................,......,...,.............. 4OTOOO
CaSh. . . . r r . . . . . . . . r . . . . . . . . o. r . . . r . . . . . . . . . r . . . . . . . . . or . . . .
Work i n Procgss . . . . . . . . . . . . . . . . . r. . . . o, . . . , . , . . r. . . . . . . . . .
g2rOOO
Factory Overhead control,.. S' OOO
Payrol l . . . . . . . . . .
(0
Factory
gverhead
Control 4,OOO
65
(31
s 1O, 25O
105, OOO
sl 15, 250
12r7AO
sl 02,550
93, 500
77. 390
5273r4/,O
61.420
s334,86O
52, 80O
s282,O60
Cost of
goods
sol d
s28O,OOO
$ 47,662
35, OOO
35, OOO
4O, OOO
4O, OOO
4O, OOO
4, OOO
(d,
(el
Cash
ffi
E4-S
(Concl uded)
(g) Factory Overhead Control .."""' r"""""""""
Account s
Payabl e . . . . . . . . . . . , . . . . . . . . . . . . . . """"
Factory Overhead Gontrol .....-.................' ."'
Accumul at ed
Depreci at i on. . . . . . . . . . . . . . . . . . . ' .
Prepai d Expenses . . . . r, . . . . , -. . . . . . . . . . . -. . . . . . . . . .
Accrued Property Taxes .,..,........r........"'
WOf k i n Pf OCeSS . . . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . . .
Factory Overhead Control
Fi ni shgd GOOdS. . . . . . . . , . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . , . .
Wor k i n Pr ocess. . . . . . . . . . . . . . . . . . . . . . . . . .
Account s Rgcei vabl . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . "
Sal es
. . . . . . . . . . . . . .
Gash . . . . . . . . . . . r . . . . . . . . . . . . . . . .
Account s Recgi vabl . . . . . . . . . . . . . . . . . . . . . . . . . . . . "
Cost of Goods So1d. . . . . . . . . . . . . . . . . . . . . . . . ! . . . . . . . . """
E4-6
(al
Work i n Procgss ......................' ...............,..,.
Factory Ovgrhead Control .r....r..,r.' .............,.
Marketi ng Expenses Control ........-...............
Admi ni strati ve Expenses Control
Payr ol l . . . . . . . . . . . , . .
Factory Overhead Control
Cash. . . . . . . . . . . . . .
Factory Overhead
Control
Accounts PaYabl e
Wor k i n Pr ocess
. . . . . - . - . . - .
Factory Overhead
Gontrol
Fi ni shed Goods. . ' .
Wor k i n Pr ocess
""""""
Chapter 4
l 8, ooo
_
18, OOO
4, 130
2, 1OO
780
11254
36, 130
36, 130
92, OOO
92, OOO
8O, OOO
8O, O0O
4O, OOO
4O, OoO
60, 000
:
17, 5OO
'
17, 5OO
1, 800
1, 800
27,OOO
17, 0OO
2, 000
5, 000
3, 000
27, OOO
2r5OB
:
2,5O8
8, 5OO
B, 5OO
14, 8O8
14, BOB
60, 1OO
60, 1OO
(hl
(il
o
(k)
Fi ni shed Goods . . r . . . . . . . . . . . . . . . . ' . . . , . . . , . , """"
6Ot 000
13, 50O
Account s Payabl e
13' 5oo
(bl
(c)
(d)
Accrued Payrol l .....,.' ......
27
|OOO
(e)
(0
(gl
(h)
Chaptor I
E4-O (poncluded)
O
Accounts R9cgivab18.............o...............oo' ....
Cost of Goods Sold'
Finished Goods
' sl 5,ooo
+ $oo,roo
-$1s,roo
=
$8o,ooo
67
Sa
8O, OOO
6O, OOO
8O, OOO
60,o00
E4-7 WALLACE INDUSTRIES
Cost of Goods Manufactured Statement
For May
( i n t housands of dol l ar s)
Direct materials:
Direct materials, April 30, 20A.........o
Purchases ......,...,.
Fr ei ght i l l . . . . . . . . . . . r . . . . . . . . . . . . r . . . . . r . . . . r . r . . . t . .
Direct materials available for use.....t.
Less direct materials, May. 31r 2OA...
Dirgct materials consumed ..........
Di rgCt tabOr.........roo........i ..r.......o.,
Factory overhead:
Indirect factory labor ..............,...r.......
Utilities ($f
gs
r
go o/o).............,..,...o..r..
Propefi t?,if, ..........r.....,.............r.........
l nsuran co ($2O
x
gO%1..r...,...............r.
Depreciation
Sl2O
+ $3O).....
Total factory ovgrhgad,r...r..r.r.......
Total manufacturing
coSt..........o....r............
Add work in process, April 30, 2OA,...
Less work i n process, May 31, 20A.,.
Cost of goods
manufactured
s5f o
t 5
$ zs,
525
sss3
23
$ e o
108
60
1 2
50
s s30
260
320
$t , t 1o
150
$1, 28O
210
${ . 050
:
Chaptor I
ffi
E+8
cll{l{ABAR
69ffiplMf
Statement of Cost of Goods
Sold
For Year Ended December
31
Raw materials:
Purchase3
.........' ."
Less dlgcounts on raw
materials
Punchagod
.""
Lesg raw materials on handt
Dgcgmbgr 3{
e
2OA.........""t
Cost of raw materials consumod
Dirgct labor ...........o."""""""""""r'
Factory overheads
Factory mainte na!1co"...............
Factory suppllgs used ....""'t""'
Powgr and hgat-factofl
......'...'
lnsuranco erpense-factorY
bui l di ng and equi Prl l ol l t...."
Dep reciation-factory
bullding
and eqUi pmgnt .."""""""""
Factory superintendence
..........
tndirgct factory |abor.........."""'
Total factory overhead
........
Total manufacturing costs-,....--.....-.-.
Add work i n
Process,
January 1r 2OA
Less work i n
Process,
December 31t
204
Cost of
goods manufacturgd....-........
Add fi ni shed
goods,Jbnuary 1r2OA.
Cost of
goods available for sale o....-..
Less fi ni shed
goodsr December 3l '
2OA' . . . . . . . . . . . . . . . . . . . . . o. . . . . t . . . . . . " t " " "
Cost of
goods sol d ....................o.......
$40o,ooo
4,2OO $ggs,goo
24,0O0
s371' 8OO
l Eo, ooo
s?8,4OO
22t4AO
19, 400
4,8OO
l 7, 5OO
1O0, 000
20,OO0
222,5AO
$774,3OO
.
84,OOO
$858,30O
3O,OOO
$828,3OO
37, 5OO
s865,80o
.
7O.OQ0
szggJsq
CGA-Canada
(adaptedl . Repri nt wi th
permi ssi on'
Chaptor I
PROBLEMS
P4-1
(rl
BRTDGEWELL COMPANY
Gost of Goods Sol d Statement
For Month Ended Jul y 31
(i n thousands)
Di rect materi al s consumed,...,....... .....r......r...,.
Di r gCt 1abOf . . . . . . . . r . r . r . . . . . . . . . . . . . . . . . r . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . r . . r r . r . o. . . . ' r . . r . . r
FactOry ovgrhgad ................' .....................................' .....r............
Total manufacturi ng cost
(a)...............................rr..,....,............
Add work i n process i nventory Jul y 1.......,......,.....,............,........
s7s
Lgss work i n process i nventory, Jul y 3' l ..........,.......................,... 25
Cost of goods manufacturgd r.....,........r..,r....r...,........o..........,.......
55O
Add fi ni shed goods i nvgntory, Jul y I (b) .............r....................... 20
Cost of goods
avai l abl g for sal g r........r............,.,..........,.....o......... S?O
Lgss finishgd goods
inventory, July 31(G) ................_.-.-.u.r..........
15
Cost of goods
sotd ........,.........' ......r.r....................,..,.....,...r......,..
G
Cal cul at i ons:
(a)
Cost of goodsmanuf act ured. . . . . . . , . . . . . . . . . . . . . , . .
Add work i n process, endi ng
Less wor k i n pr ocess, begi nni ng. . . . . , . . . . . . . - . , . . .
Equal s t ot al manuf act ur i ng cost . . . . . . . . . . . . . . . . . .
( b)
69
s 16
24
20
s60
1 5
$50
25
s75
l 5
_999
( c)
Cost of goods
avai l abl e for sa| e.,.,......,..r...o.
$ZO
Less cost of
goods
manuf act ur ed. . . , . , . . . . . . , . . . 50
Equal s f i ni shed goods,
begi nni ng . . . . . . , . . . . , , , . .
14
Gost of goods
avai l abl e f or saf e. . . . . . . . . . . . . . . . . . . $ZO
Less cost of
goods
so| d. . . . . . . .
55
Equal s fi ni shed goods,
endi ng
gg
' 70
(b) Work In Process
a a a a a a a a a a a a a a a a a a a a a l a
a a a a a a a t a a a a a a a a a a a a a a '
Chapter 4
25, OOO
16, OOO
2,OOO
29,OOO
24rOOO
5,O00
25, OOO
29' 0oo
5O, OOO
5O, OOO
105, O00
105, 0OO
55, OOO
55r O0o
P4-1
(Concl uded)
l 2l
(al Mat ef i a1S. o. . r. . . . . . . . . . . . . . . . . . . . . . . . . . o. . . . . . . . . . o. . . . . . . . . . .
Account sPayabl e. . . . . . . . . . . . . . . . . . . . . t . | . . . . . . . . . .
Factory
Ovgrhgad
Gontrol ....."""""""""""'
Mat gri al s
. . . . . . . . . . . . . . . r' . . . . . . . . """""""""""'
(cl Payrol t
($ZCrOoO +$5' OOO)"""""""""""t""'
Accru
gd
Payro11 """"""""tr"""""D"""' r'
(dl work i n Procgss ..............r....r.....................' .
Factory Ovgrhgad
Gontrol r""""""""""t"o"
Payr Ol l t . . . . . . . " t " " " " " " " t " t " " r t " " " " " " " t "
(e) Finished Goods
18, OOO
29, OOO
Work i n ProcesS
"""t"""""""""""""""
(0 Accounts Rgcei vabte""""""""""""""""""
Sales
($60'000 + (75o/o of $6O10O0))
"""'
cost of Goods so1d............................,..o.......
Fi ni shgd Goods """""""""""""' r"""""
Chapten4
P4-2
(11
SCOTTSBURG COMPANY
Cost of Goods Sol d Statement
For Mont h Ended June 3O
( i n t housands)
Direct materials:
Materi al s i nventory June 1 ........................
Purchases........................., ..........
Mat eri al s avai l abl e f or use. . . . . . . . . . .
Less: Indi rect materi al s used.................... S 1
sl s
33
s48
Mat eri al s i nvent ory June 30. . . . . . . . . . . 19 ZO
Total manufacturi ng cost (b)........
Add work i n process
i nvent ory June 1. . . . . . . . . . . . . . . . . .
Less work i n process
i nventory June 30...............
Cost of goods
manufactured ......
Add f i ni shed goods
i nvent ory June 1
(c). . . . . . . . . . . . , .
Cost of goods
avai l abl e for sal e.,
Less fi ni shed goods
i nventory, June 30
(d)..........:.
Cost of
goods
so| d. . . . . . .
Gal cul at i ons:
(a)
i ndi rect l abor + di rect l abor =
$4g
i ndi rect l abor + (i ndi rect l abor x 6) =
$49
i ndi r ec t l abor x T=949
i ndi rect l abor = 37
d i r e c t l a b o r = 6 x $ 7 = 9 4 2
( b) Cost of goodsmanuf act ur ed. . , . . . . . . . . . . . . . . . , . . . . .
$120
Add work i n process,
endi ng
gO
sl 50
Less wor k i n pr ocess,
begi nni ng. . . . . . . . .
40
Equal s t ot al manuf act ur i ng cost .
Sl i O
( c)
Cost of goods
avai l abl e f or sal e
S19O
Less cost of goods manuf act ur ed
. . . . . . . 12O
Equal s f i ni shed goods, begi nni ng
S ?O
s ,
t,
$ 1
7
1 7
2
1 3 4
s l 1
4
s1s
3
sl 2
7
s l 9
3
sl s
72
P4-2
(Concluded)
(d) Cost of
goods avai l abl e for sal e r......' ..""""'
Lgss cost of
goods so1d......................,......,..
Equal s fi ni shed
goods, endi ng ..............."""
Chapter 4
33, OOO
29, 0OO
49, OOO
49, OOO
120, OOO
210, OOO
155, OOO
l2l
(al
(b)
(c)
(d)
(e)
n
Mat gf i al s . . . . . . . . . . . . . . r. . . . . . . . r. . . . . . . . . . . r. . . , . . . . . . . . . , . . . .
Accounts Payabl e ...,......r.....,.........o..,....
Wor k i n Pr ocgss . . . . . . . . . t r . . . . t t ' ot r " " " " " " " " t ' r " '
Factory Ovgrhgad Gontrol ............................
Mat gri al s . . . . . . . . t . . . . . . . . ' t """""""""t ""t ""'
Payr ol l . . . . o. . . . . . . . . . . . . . . . " " " " t t t t " t " t " " t t " " " " " t "
Accru
gd
Payro11...t..r..""""""""""""""'
WOf k i n Pf OCgSS . . . , . . . . . . . . . . . . . . r . . . . . ' . . . . . r . , o. . r . . . . . .
Factory Ovgrhgad Control ....t..r......"""""""
Payrol l ...............""""""""""""""""""'
Fi ni shgd GOOdS. . . . , r r , . . . . . . . r . . . . , . . . , . . . . . . . o. . r . . . . . . . . .
Work i n ProcgsS. . . . . . ' . . . . . ""r"""o""""""'
Account s Rgcgi vabl . . . . . . . . ". . . . . . . . """""t t """
Sal es ($14o, ooo + (50% ot $14o' o00)). . .
Cost of Goods So1d...................,....,..ro..........
Fi ni shgd Goods . . . ' . . . . . . . . . . """""""""""'
$1 90
{ 55
s 3 5
33,O0O
28, OOO
I , OOO
49,OOO
42rOOO
7, OOO
12O,OOO
21O, O0O
{ 55, OOO
-
ChaPtar I
P4-3
,
( 11
73
MADEIRA COMPANY
Schedul e
of Cost of Goods Manufactured
For Mont h Ended March 31
work i n
process, March
I .............r.......r,.......
Production costs:
Di rgct mat gri at s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$l o4rooo
t r
r Di rect l abor....r.-....."
"""""""" l 6otooo
ttt
Factory overhead
..............,......"""""""
8or999
*tt
-344t009
Lgss work i n
procgss, March 31 ............."""'
Cost of
goods manufacturgd..-.' ....,...............'
r
Cost of
goods sold
($345,O0O) + ending finished
goods inventory
($tos,ooo)
-
begi nni ng fi ni shed
goods i nventory
(sl o2,ooo) =
s348r000.
' rpurchases
of materi al s duri ng March
($l tO,OOO) + begi nni ng materi al s
i nventory
(S2O,OOO)
-
endi ng materi al s i nventory
($26' 000) =
Sl O4' OOO.
r.'
production
costs for March ($gCC,OOO)
-
direct materials
($t Oe
'OOO1
=
direct labor and factory overhead
($24O'0Oo).
Let x = di r ect l abor
1.5r =
S24O,OOO
x =
$l 60' 000
di rect l abor
.5x =
$8O,OOO
factory overhead
(21 Prime cost:
Di rect materi al s (requi rement (1)) .........,..r.o........, Sl O4r0gO
Di rgct l abor (requi remgnt (1))....:....,..................... l 6OIOOO
_9261poo
(31
Conversion cost:
Di rect t abor (requi rement (1))' . . . . . . r. . . . . , . . . . . . . . . . . . . . . . . $160rO0O
Fact oryoverhead(requi rement (1)1. . . . . . . . . . . . . , . . . . . , . . 80' 0OO
_9240,999
s 4o,o0o
s384, 000
36,000
$a8, @'
P4-4
CompanY
A:
Sal gs " " " " t " " " " " t " t t " " t t t " t t " " t " " " t t t " " " " " t "
Cost ol
goods sold:
Finished
goods inventory
Janualy
i """
Gost of
goods manutactlli9d"""""""""
Gost of
goods avai l abl o
l or sa|e""""""'
Finished
goods Inventory
December
3l
. Cost of
goods Sol d tt""t' o""t""""t"""t"'
Gross
profit
l2oo/o
Of Sales).o......'..............r.....
GompanY B:
'
ctst of
goods availablg
tor 3a1o.,..r.........,......
Less finished
goods ending
inventory""""""
COSI Of
gOods Sol d "t t ""t """"""""""r"""""'
CompanY C:
Sal eS . . . " " " t " ' r t " t " ' ot " " t " " " " " " " o" t 1" " " " " " t "
Cost of
goods sold:
Cost ol
goods manufacttlrl9d"""""""""
Add bsginning finished
goods inventory
Cost of
goods availablo
lor 8a1e""""""'
Less ending finished
goods inventory""
Cost of
goods Sold """"' o"""""""""""'
Gross
profit """"t""""' r""""""""""""""""'
P4-5
S
600,000
3,80O,OOO
$4,4oO,ooo
l r2OO' OOO
51, 5{ O, OOO
_
2'l o.ooo
slJggJoo
$
34O,OOO
45,OOO
$
385,OOO
52,OOO
Work in Process
Chaptor 4
s4,oo0,ooo
3, 20O, OOO
s
Soo,ooo
S
429,ooo
333,OOO
$
96, 000
346,OOO
13, OOO
55, OOO
2OO, OOO
268,N
End. 9, Ooo
Finished Goods
Beg.
(41
34,0OO
348r00O
38Ct,o(to
End.3O,W
2O, OOO
65, OOO
85,O@
End. 7S, OOQ
35O,OO0
2O,OOO
5O,OOO
70,O@
7,0oo
5O,OOO
20O,OOO
loo,0oo
357,W
End. 17, @
Beg.
M
L(2)
FOH
Materi al s and Suppl i es
Accnred PaYroll
(8)
( 11
259,OOO Beg.
75
Chapter 4
P4-5
(Concl uded)
Accounts Recei vabl e
54, 000
5OO,OOO
554,OOO
End.22,OOO
,Factory Overhead Gontrol
Accounts Payabl e
77, OOO Beg.
(7)
(6) 18, OOO
65, OOO
83,OOO
End.6,00O
2O, 000
55, 000
10, 00o
2, OOO
13, OOO
l OO,AOO
(3)
532, OOO
l OO, OOO
55, 000
2OO,OOO
255,OAO
Payrol l
Cost of Goods Sol d
350, OOO
55, 00O
20O, OOO
255,OOO
(5)
( 11
l2l
(3)
(41
(51
(61
rtl
(81
Materi al s i ssued to
producti on' 55O' OOO
Di rect l abor, $2OO,000
Total factory overhead' $1OO' 0OO
Gost of
goods manufactured, $346' OOO
Cost of goods sol d, S35O,OOO
Payment of accounts
payabl e' 577' 0OO
Col l ect i on of account s r ecei vabl e, 5532, OOO
Payment of
Payrol l '
S259' 0OO
GGA-Ganada
(adapted).Repri nt wi th
Permi ssi on.
Sal es
t
1
, <
76
P4-6
Work
in Process
Materi al 8...
Cost ol
gOodg SOl d ttt"tt""t"""""t""tt""
Add finished
goods inventoq/ inclase"
Cost of
goods manufactllhod..' ...' ...r..""'
Add work in
process inventory increase
Total manufagturing
cost -....--.-...........o"
Less : Factory overhead.t..... $35' OOO
Dirgct t:lbor.......,....o...
4OTOOO
Materials used in manufacturing .,.r,......
Mat er i al s . . . . . . . . . . t . . . . . t . . . t " " " t " " " t t t t t " t " t t " t t t t "
Accounts Payablg .....'.."""""""""""""
Materials ussd in manufacturing
(from above| .........o...."r""""""' rt"""'
Add materials inventory increase ....'.....
Matgri al s
punchasgd ".........""""' r""""'
Payrol l .....' .' .......
l a a a a t a
Chapter 4
84, OOO
84,OOO
91, OOO
9l , ooo
40,ooo
4O,OOO
4O,OOO
4O,OOO
35,OOO
35,OOO
35,0OO
35,OOO
t 57, 0oo
t 57, OOO
l 40, ooo
l 4o, ooo
$14o,ooo
l 7,ooo
s157, OOO
2,OOO
s159, OOO
75rOOO
l_84,OOO
$
84,OOO
7,OOO
$ er, ooo
a a t a - a a a a a a a
Accnrgd Paytoll.......' .........""""""""to"'
Wor k i n Pr ocgsS . . . . . . . . . . . . . . . . . . . . . . . . t t " " t " " " t t t r t '
Payr ol l . . . . . . . . . r . . . . . . . . . . " " t " " t " " " " " " " " " t '
Factory Overhgad Gontrcl ......r' .r.t,,.....""""'
Va ri o u s C rgd its.' ........ "' t " " "" " " "r' r t " " "'
Wor k i n Pr ocgs3 . . . . . . . . . . . . . . ' . t " " t ' o" t " t " t t t " r " ' t r
Factory Ovgrhgad Control o..r........ro""""
Fi ni shed Goods
(12' OOO + 84' OOO + 4O' OOO +
35t OOO
-
1 4t OOO) . . . . . . . . . . . . . """""""""t
Work in ProcgsS .............' ...r"""""r""""
Cost of Goods Sol d (28' 000 + 157' O0O
-
45t OOOl . . . . . . . . . . . . . . . . . . . . . . . . . ' . . " t " " t " t " " t " '
Fi ni shed Goods ..............
GGA-Canada
(adapted). Reprint with
permission'
n
(c) Payrol l ... 86,000
' '
Accrued Payrol l .............. 86,000
Work i n Process....................r............................. 6Or5OO
Factory Overhgad Contro| ..........,.,....,...........,..... 1215OO
Marketi ng Expenses Control ,..............t............., IrOOO
Admi ni strati ve Expenses Gontrol 5,OOO
86, OOO
92, OOO
26, 530
47,33O
188, OOO
241, 150
185, 5OO
(hl
Cash !........,r.........,......,..
ZOSrGO2
Sal es Di scounts,...........
...,...... 4r2i g
Accounts
Recei vabl e........... 212rg2}
(i )
Marketi ng
Expenses
Control ...,............ 18,ooo
Administrative
F.xpenses
Control 12,OOO
Accounts
Payabl e
3O,OOO
0 Account s
Payabl e
1O4, OOO
rt
Cash
1O4, OOO
78
P4-7
(Gontinued)
88,25O
l 04, o0o
't92,250
212,924
2,25O
86, OOO
Materi al s
Machi nery
Chapter 4
9O, 8OO
15, 5OO
92, OOO
26,53O
3O,OOO
,64\030
l /l Bal '
(hl
Cash
20,O0O
2O8,662
2i28,662
36,412
Accounts Receivable
(c)
0l
t7,2OO
l / 1 Bal '
(gl
25,O0O
241,15O
26art50
(hl 1/ 1 Bal . 4O' OOO
53J,3O
Fi ni shed Goods
(g) 1B5, 5oO
188, O0O
Accumul ated DePreci ati on
111 Bal . 1O, OOO
Accounts Payabl e
1t 7
(0
Bal .
t/l Bal .
(c)
(dt
(e)
9r5OO
l 88, OOO
,97,5OO
4,50O
6O,5OO
82,50O
47,330
(q4,>e3<t
Accrued Payroll
88,25O 111 Bal .
(c)
Sal es
104, OOO1/ l Bal .
(a)
(b)
(i)
Retai ned Earni ngs
111 Bal . 21,25O
Cost of Goods Sol d
(g) 185, 5OO
I
Payroll
(c)
111 Bal . 1o' ooo
I
(d)
(a) 92,OOO
102,OOO
Work in Process
241,15O
Sal es Di scounts
I
86,0O0
|
(c) 86, OOO
L
L
L
I
\
79 Clppterl
P4-7
(Concluded)
(b)
(cl
(d)
(cl
(i)
(cl
(il
t_
I
!
I
!
I
I
!
b
Administrative Expenses Gontrol
5,O0O
12, OOO
17,AOO
Factory Overhead Control
26,53O
l 2r 5OO
8r3OO
47,33tO
(e) 47, 330
Marketing Expenses Controf
810oo
' l 8,0oo
2l,ooct
(31 HOPKINS & WHITE COMPANY
Thial Balance
January 31
Common Stock
CSSh ' ........
AcCOuntS RgCgivabl...tr..............r............................r......
Fi ni shed GOOdS. . . . . . r . . . . . . . . . . . r . o. . . . ' . . r . . r . . . . . . r . . . r ' . . . . . . . . . . r . . . . . . r .
WOrk l n PrOCgSS.........' .o,.r.,.....,..r' .......r.' ....' .rr.' .....r........t
Materfals a a a a a a a r o a a a a a a a a a a t t a a a a a a a a a a a a
$ 36, 412
53,23O
12, OOO
6,830
11r 2OO
4O,OOO
4,258
185, 5OO
26,OOO
l 7' OOO
s
60,030
l O, OOO
6O, 0OO
21r25O
241,15O
Machine
Accounts Papble a a a a a a a a a a a a o a a a a a a a a t a a a a a a t t a a a l a a
Accumul atgd Depreci ati on....,...,......,,.,.....,....,................
Common Stock..,. a t
Retained Earnin a a r a o t a a a a a a a a a a a t a a a a
Sales
Salgs Discounts,...,..
1993,430 _$3e2,499
l
CHAPTER 5
DISCUSSION QUESTIONS
O5-1. The cost attached to 8
Producl
il an amount
'
assi gned
by the costi ng mel hods ul ed-an
amounl cont r ol l ed
by t he ci t cumst ancer ,
assumpti ons'
and l i mi tati ons ol l ha mel hod
under which il was ccrnfiled' Product cosb ato
cornposiles ol historbal outlay thal have, per'
haps, been modifki by estlnateo or slandards,
by processer assigning or proratlng expendi'
tures to periods, or by lracing the direct costs
and allocating the indirect cosls lo particular
producls so thal the total period outby b spread
over the aggrgatt or'ipli. Despile these shorl-
comi ngs, product costs aro usel ul i n cosl i ng
invenlories, cornpaling
prices and tolal unit cost'
measuring current profil or loss, and indicating
the rni ni mum cosl bel ow whi ch a sal es
pri ce
cannot go in the long run. Sorne confusion will
result al times in usitlg cosl intonnatbn h mak'
ing management decisions unless informatioo
relevant only to the decisbo is used.
O5-2. The primary obiectivc h
irb
order costing is lo
determine the cost ol materiats, labor, and faclo'
ry
overhead used to produce a specific otder or
conl tact. Cost esti matss ato made when the
order is taken, and the
iob
order praeduros ate
desi gned l o r eveal cosl s as l he or der goes
through prodrrction, thereby giving an opportuni'
ty lo control costs.
O5-3. The typ of cost accumulaiion melhod used by a
cotrlpany will be determined by the tlpe ct man'
uf acturing operatbns pedormed. A rnanuf actur'
ing company should uso
Process
c6l accumub-
tion lor product ccthg putpos3 when like units
are continuousty nrass
Produced;
when cuslorn'
rnade or unQue gpods are produced'
icb
order
costi ng woul d be more aPProPri al e. Process
costing is otten used in industries such as chem-
icals, food processing, oil, mining, rubber, and
electrical appliances. With a continuous mass
produclian ol like units, lhe cenler ol atlenllcn is
the i ndi vi dual process (usual l y a dopartmonl )'
The unit ccts by cost category as well as lotal
unil cct lor each
Ptocess
(deparrment) are nec'
e3sary lor product cosling
PutPosss'
O5-4. A
icb
order cost sheet is used:
("i to keep track of the direct rnaterials and
direct labor used on a
icb
plus atl aPPro-
Priate
share cl frtorY overhead;
(b) to comPara actual cost3 to esti mal ed
cqsts:
(c) as a subsi di ary l edger for the work i n
procoss accounl.
O5-5. The work in procesr accounl is a conlrol account
i n t he gener al l edger , r ef l ect i ng l ol al cosl s
assigned or applied to
jobs. The individual
iob
cgst shoots lorm the work in process acco{'nt's
subsidiary ledger, indicathg the direct malerbls'
direct labor, and factory overhead charged to
each
irb.
05. Job order cosl sheets serve a control funclion'
Comparisons are made between estimates ol
pb cosrs and cosls actually accumulated lor lhe
job. ln addition, cost control is enhanced by
accumulating direcl materials and labor as well
as factory overhead co3l3 by cost cenlers or
departments, and by comparing lhe aclual cosls
to cGt conter budgets.
O5-7. Actual lactory overhead consisls of the day'by'
day cosl s that ato actuatl y experi enced and
incurred by the cornpany. Applied lactory over-
head is the overhead charged to pbs based on
the predelermined factory overhead rate. This
rale is crealed by divirJing total stirnated over'
head by toial estimated nurnber ol units (or any
other appropriate base). ThE dilference between
aclual and applied factory overhead is lhe ovet-
or underaPPlied faclory overhead,
05. The characteri sti c of a servi ce busi ness l hal
rnakes likely the use ol
job order costing is lhat
al l
j obs are not al i ke and cost i nformati on for
each
iob
is desired.
8l
Chapter 5
E5-3
( 1) The amount of di r ect l abor i n f i ni shed
goods:
Fi ni shgd
gOOdS. . , . . . . . . . . . . . . o, . . . o. . , . . . .
. . . . . . . . . . . . . t t . . ' . ' . . . t ' . . . . .
Mat er i al s i nct uded i n f i ni shed
goods
{$15' 5OO
-
93' 2OO}. . . . . . . .
Di rect l abor and l actory overhead
i n fi ni shed
goods """""""
s l 1, 80O
a
= - = d
sl 4 , 75O
s84, OOO
1, 5OO
s24,07O
221832
1OrO24
s56,926
S 4, 420
2, 600
2, OOO
s 9, o2o
s37,5OO
12, 30O
s25,2OO
$
I , OOO
85, 5O0
$94,5OO
4,5OO
Let X = di r ect l abor i n f i ni shed
goods
1. 8X =
$25, 2OO
di r ect l abor and f act or y over head i n f i ni shed
goods
X =
514' ooo
di r ect l abor i n f i ni shed
goods
The amount of factory overhead i n fi ni shed
goods:
X =
$14, OOO
.8X = .8 ($14,000)
. 8X =
$11, 2OO
f act or y over head
i n f i ni shed
goods
Factory overhead charged to work i n
process
Di rect l abor charged to work i n
process
December mat er i al s used:
Materi al s i nventory, Decembei 1 .......................' .
Mat er i al s pur chased. . . . . . . . . . . .
Frei ght-i n
Materi al s avai l abl e
Materi al s i nventory, December
31 .......
l2l
( 1)
E5-4
$9O, OOO
82
E5-4
(Concluded)
l2l
Work
in
Process,
December
3l:
Per
Unit
$6, 4OO
312OO
Chapter 5
s 9O, O0O
3O, OOO
6O, 0OO
sl 80, OOO
l 4, 4OO
s
5,ooo
3, OOO
6, OOO
$ 14, OOO
Di rectmateri al s.......r..
$2.4o
Dirgct
tabor -.r.,-.......--.
.8O
, i?.2o
r 2,ooo units
=
Factory
overhead
.....'..32 machine hrs' @ $t
OO =
$9,6OO
(31 Dscember
cost ol
goods manufactured:
Materials
used
(direct) (requirement
(1)) """""t""""""t""""'
Di f | ' Ct
1abOf . . . . r r r r . . . . . . . . . . . . r . . . . . . . . . r . . ' . . . . . . Dr . . . . . . . . . . . . . . . . . . ' t " " " " " " " '
Factory
overhead
(600 machine hours
(}SlO0)"""' t""""tt"""
TOt al manUf aCt Uf i ng COSt . . . . . . . . . . or. . . . . . . . . . . . ' . . . . . . . . . . . . . . . . t . """"""'
Add work i n
Process,
December 1:
Direct Material' S2.4o
x 3'ooo
=
Direct Labor, $.8o r 3'ooo
=
Overhead, $t0o r 48 machine hours
=
Fi ni shed
goods, December 31:
Di f gCt mat gf i al S. , . r. . , . . . . ' . . , . . . . . . . . . . . . . . . . , . . . . . , . . . . . . . . . . . r. . . . . .
Di f gCt t abOf . . . . . . . . . . . . . . . . . . . . . . . . . . r . . r . . . . . r . . . . . . r . . r r . . . . . . . . . . o. . t . . . " r " " " t t "
Factory overhead
(60 machine hours CDSl OO)""' r""""""""t' r'
December cost of
goods sol d:
Cost of
goods manufactured
(requi rement
(3))""""""""""""
Add fi ni shed
goods, December
1' -.............""""""""""""""'
Cost of goods avai l abl e
for sal e ' ............'
"""""""""
Less fi ni shed
goods, December
31
(requi rement
(4))"""""""
s7,2Oo
2r4OO
4, 8OO
s194, 40O
Less work in
process, December 31
(requirement
(2))""'r""" 9'600
s184, 8OO
(4)
(sl
s184, 80O
12, 00O
s196, 800
14, OOO
9l_93,8oo
permi ssi on.
CGA-Canada
(adapted). Reprint with
83
Chapter 5
E5-5 Materi al s:
Begi nni ng
i nventory
""""
PUr ChaSgS t t t t t t t t t t t " " " ' o" " " r t " " " " " " " " " " " " '
Mat eri al s avai t abt e
f or usg """""""""""""'
LeSS endi ng i nVent Ory
. . . . . r. . . . . . . . . . r. . . . . . r. . . . . . . . . .
Mat gri al s usd. . , r. . . . r. . . . . . . . . . . , . . . . . . . . . . . . . . r. . . . . . . . . .
Di rect l abor
(($gaO
-
$s201
' r
1' 61""""o""""""""
Factory overhead
(S225 x ' 6)""""""""""""""""
' i
TOt al manUt aCt Uf i ng
COSt . . . . . . . . . . . . . . . . . . . . . , . . . t """""o
Add work i n
process, begi nni ng
i nvent of """""'
E5-6
(rl
$ 7 5
336
( 1)
$411
85
9geo
225
135
s766
30
s736
(3)
90
s826
125
s701
(4)
s13, OOO
15, OOO
2, 7OO
2, 1OO
s32,8OO
$13, 000
15, 000
s28,009
s15, 0oo
4, 8O0
s19, 8OO
l2l
s586
80
(21
(31
Less work i n process, endi ng i nventory
Gost of goods manufactured
""' r"""""'
Add ti ni shed
goods, begi nni ng
i nventot]
""""""'
cost of
goods avai l abl g
for sa19........,.,..............o.
Less fi ni shed
goodsr endi ng i nventory""""""""'
Cost of
goods sol d . . . . . . . . . . . . . . ' . . . . . r . . . . . . . ' . """' t """t "
Materi al s
....' r""""
Di f eCt 1abOf . . . . r . . . . . . . . . . , . . . . . . , . . . r . . . . . ' . . . . . ' . . . . . . . . . t . . . t t " " " " " " " " " " " '
Factory overhead:
Mol di ng
( 1, OOO DLH x $2. 70)
. . . ' . . . . . . . , . . . . , """""""""""""
Decorati ng
($6,OOO x 35oh1...............
Esti mated cost to produce -........-..........,..""""""""
Ma t g r i a l s a a . . . . . . . r . . o . . o . . . r r . r . . r . . . . r . . . . . . . . . . . . . t . a . . r . . . . a . . . . a r . . . . . . . . . . . . r a . r o 4 a r
Di f e Ct 1 a b Of . . r . . . . r . . r . . . . . . . . . . r . r . . r . . r . . . . . r . . . . . . . . . r . r . r . . . . . o . . . . . . . r . o . t . . . . . . . j 1
Est i mat gd pr i me COSt . . . . . . . . . . . . . . . . . . . . . , . . . . . . . r . . . . . . r . . . . . . . . . . . . . . . . " " " r "
Di r eCt 1abOf . . . . . . . . . . . . . , . . . . . . . . . r . . . . . . . . . r . . . . . . . . . . . . r . o. . . . . . ' . . . r . . . . . . . . . . . , . " ' t
Factory ovgrhead
($zrzoo + $2rl
ool ...........' ....o..............""""'
Esti matgd convgrsi on cost................'
"""""""""""'
Est i mat ed cost t o pr oduce ( r equi r ement
( 1) ) . . . . . . ' , . . . . . . S32' 8OO
Markup ($32,8OO x 45' hl
14' 760
Bi d pri ce
S4?F6o
(4)
a
E5-7
I
(r)
Chaoter 5
WADSWOBTH MACHINE WORKS
Job Order Cost Sheet-.Job 9O9
Dlrgct Materlalt
Datc
lgsucd
9114 t OOO
sl20 331
9122 200
st , 13l
Dlreet l,.abor
Houn
Datc
gt(ryO
Appl i gd f act ory ovgrhead' . r. . ' . . ' . , . . . . . . . . . ""' D"'
Total factory CoSt...' ........t...t.."""""' o"' o"""'
Appllcd Factory Orerhead
Datc
(Week o0 Houn Bate Cost
sl20 1 0 s80 s800
s800
:
800
s3,OOO
1, 5OO
Debi t Credi t
134, OOO
12O, O0O
96,O0O
288,OOO
Rata Cogt
sl20 90
9126 70
3s.20 3
7.30
558
511
31, 060
(2) sales
price of Job 9o9, contracted a markup of Sooh of cost:
Di f gCt mat gf i a1S. . . . . . . . . . . . , . . . . . . o. . . . . . . . . . . . . . r. . . . ' . . . .
S1t t 31
Di rgCt l abOr . . . . . . . . r. r. . . . . . ' . . . r. . . . . . . . ' . . . . . . . . . . . . . . o. . ' .
I
t O69
Markup SOoh of cost
Sal gS
pf i Cg. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ! . . . . . . o. . ' . . .
S4r500
:
E5-8
(f
)
Work i n Process
(35' OOO + 45' OOO +54' OOO)........
Mat gf i al s . . . . . . . . . . . r . . . . . . r r r . . . . . . . . . or . . . . . . . . . . . . . . . . t t . . . .
(2) Work in Process (45rOOO + 4O' OOO + 35r0OO)."....,
Payr ol l . . . . . . . . ' . . . " " " " " t t ' r " " " " t t " t " " " " t " t " " " '
(3)
Work i n Process (36' 000 + 32,000 + 28' O0O)....1."
Factory Ovgrhgad Control ..' o' ......r........."""'
(4) Fi ni shed Goods
(156' 000+ 132' O00)........' -' ...-.o.,.
WOr k i n Pf OCeSS . . . . . . . . . . . . . . r r . . . . r . . r . . . . . . . . . . . . ' . . . . . .
134, OOO
l 2o, oQo
96,OOO
288, OO0
I
I
E
I
I
I
- ,
I
b
Chapter 5
E5- 9, ( a)
E5- 10
Inv.
Purch.
wtP 1 1O, OOO lnv.
Materi al s
Factory
overhead
Labor
35, OOO
8, OOO
2, OOO
9, 4OO
7, 6OO
1, 8OO
1r2OO
1r 22O
4, 5OO
1r25O
6, 10O
4, 50O
Work i n Process
I 1O, OOO
90, 000
18O, OOO
41O, OOO
11O, OOO
85
(b)
(cl
I
I
!
(d)
(e)
(0
(g)
I
b
L
b
Materi al s
35, OOO
10, 000
9, 4OO
9, 4O0
1, 2OO
1, 22O
4, 5O0
1, 25O
6, 10O
4, 5OO
1O, 0OO
138,O0O
,48,OOO
5O, OOO
3OO, OOO
35O,OOO
t So, ooo
3OO, OOO
:
Fi ni shed Goods Cost of Goods Sol d
2OO, OOO FG 2OO, OOO
Inv.
wt P
CGS
GGA- Canada ( adapt ed) . Repr i nt wi t h per mi ssi on.
Es-t I
(f l WOf k i n PrcCI SS. . . . . . ' . . . ' . . . . . . . . . . . . . . . . . . . . . . . . . . . o. . . . . . r. t . . .
Mat gf i al s
. . . . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . rr.
Payf Ol l . . . . . . . . . . . or. . . . r. . . o. . . . r. . . r. . . . . . . . . . . . . . . . . . . . . . t . . . .
Appl i ed Factory Overhead ................""""""
(21 Fi ni shgd GOOdS. r. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r. . r. . r. . . . .
WOf k i n Pf OCBSS . . . . . . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . . . . . .
19, 1 12. 5O
19, 1 12. 5O
Chapter 5
gr25O.OO
3r945.0O
5r gl 7. 5O
19, { t 2. 5O
I ,
87
I
l>
I
I
b
I
:'
\,
Chapter 5
Ps-1
(1) Total
PROBLEMS
cost of work
put i nto
Process:
Mat gri al S. r. . . . . . . . . . o. . r. . . . . . . . . . . . . . . . . . . . ' . . . . . . r. . . . . ' . . . . . . . .
S 6Ot OOO
Labon Gri ndi ng
t8r00O
hrs. x S5.60l ...............,...o.......... 441800
Machi ni ng
( 4, 600 hr s. x $6) . . . . . . . . . . . . . . . . . ' . ".
27' 600
Factory overhead: Gri ndi ng
(8,ooo
hrs. x $6)
.........' ..,... 48' ooo
Machi ni ng ( 4, 60O hr s. x S8) . . . . . . . . . . . . .
36, 800
s31l,2oo
s217,2OO
15, OOO
Cost of goods
sol d:
Cost of goods manufactured (from requi rement
(2)) .......
Fi ni shgd goodsr begi nni ng i nvgnt or y. . . . , ' . - . . , . ' . . . . . . . . . . . . ' . . . .
Fi ni shed goods,
endi ng i nvent or y . . , . . . . . . r . . . . . . . , . . . .
s232,2OO
17, 600
s21_1,699
s214, 600
22rOOO
s236.600
21. 000
52{ 5. 600
I
b
(21 Cost of
goods
manufactured:
Total cost of work put i nto process (from requi rement (1)l
Work i n Process, begi nni ng i nventory........
Work i n process, endi ng i nvent ory. . . . . . r, . . . . . ,
Cost of materi al s purchased:
Mat er i al s put i nt o pr ocess
. . . . . . . . . . . . . . . . . . . , . . . . . r . o. . . o
Add mat er i al s, endi ng i nvent or y
Less mat er i al s, begi nni ng i nvent or y, . . . . . . . . . . . . . . . . , . . . . . . ! . . . , . , .
(3)
(4)
Gonversi on cost:
Labon Gr i ndi ng ( 8r OOO hr s. x S5. 60l . . . . . . . . . . . . . . . r r r . . . . . . . . . ' . . $
4418OO
Machi ni ng( 4, 6oOhr s. xSO) . . . . . . . . , . . . . . . , . . . . . . . . . . . . . . . . 271600
Fact or y over head: Gr i ndi ng ( 8, OOO hr s. x $6) . . . . . . . . . . . . . . . .
48r OOo
Machi ni ng ( 4, 6OO hr s. x $8) . . . . . . . . . . . ' .
36' 800
g!_qz'209
$
60,000
18, 000
$ 78, OoO
2O, OOO
s_99p99
(s)
I
.t
I
P5-2
(r)
Materials
Chapter 5
Job 206
Total
411
2r75O
Purchases t l'5OO
14'"250
1,755
lndirect
Material
Direct
Material
2r790
gr7o5
|
114s5
r
$9,7OS
=
$2r45O
+ S97O
+ 36' 285
(Job 2O7)
(Job 2O4)
(Jobs 2O2,2O3,2O5,
& 206l
work in
process ending inventory consists of
iobg
2o3 & 206:
Job 203
Di rgct matgri a| s.........................r.....
(Sl r48O + $
555)
Di fgCt | abOf .,...r...............................
( I
rOOO
+ 115OO)
Appl i edoverhead.....' .,.' .........-.........
( SoOr+
14991
Total ...r....r......r..,.................. F3,.280
"
#-S-l
' Applied
overhead is 80% of direct labor cost'
l 2l
Worki nProcess....o.....,.................
Mat er i al s . . . t . . " " t " " " t " " ' t " " t t " " " t " " " " " " " t r '
Payr ol l " " " " r " " " t t " t " " " " " " " " " " t ' r " " " " r " " ' t
Appl i ed Overhgad ....""""""""""' t"""""""'
Fi ni shad Goods
(4' 7OO + 1r25O + 2,OOO + 116OO) "
work i n Procgss ..........r..........r,.....,........r.....
COst of GoodS So1d"""t""""""' o""""""t""""""'
Fi ni shgd Goods................................r.' ..........
ACCOUnt S RgCgi Vab18. . . . . . . . . . . . ". . . . . . . o. . . . . . . ' . . . . . . . . ' . ""
Sa l g 3 t t t t t t " " t t " t t t " t " t t " t t t t t " ' r " " t " t t t " t t " ' r " t " " '
+ St ' 98O
+ I ' OOO
+ 8OO
+ S3' 78O
4, 85O
9, 550
9, 55O
14,325
s
4, 015
3,5OO
2,8OO
$1o, gt
s
1r25O
2,OOO
I , 600
9,55O
9, 550
141325
I
I
I
I
L.
I
!
t-
89
i
E
I
I
!
Chaoter 5
P5-2
(Concluded)
(31 Cost ol
goods manufactured
= cost of
iobs
finished in April'
Job 2O5:
Dirgct matgrial ........' ........
Di rgct 1abor......".........' .o..
Appl i ed overhead' ....,.o' ....
'
Total Job 205...' ......' ....
Job 2O2. . . . . . . . . r . r . . . r ' . . . . t . . . . . . . . . " " t
Job 204 r . . . . t . . . . . . . t . . . . . . . . . t . . . ' r " " " '
JOb 2O7' . . . . . . . . . . . . . . . . . . ' . ' . . r . . ' . . . . " ' t
$ 2,5OO
2,7OO
(l 05 direct labor hours x S2Ol
I,O8O
(105 di rect l abor hours x 516)
$ 6,280
9,550
(see requirement
(2))
6193O
5, 87O
I
!
Bal .
(i)
(4)
s 5,280
1r52O
800
$36,420
124,2801
, ( 1, 76s)
$1O, 375
s 9, 365
7, 6OO
91t99
(5) Jobs 2O1r 2O2, and 205 wene sold. Their costs are S8' 45O + S9,55O +
56' 280
=
S24' 28O.
Sal es (524,280 x 1.5)
Cost of goods sol d .......
Underappl i
gd
ovgrh3d ......' ..........' .........r..r..' ......
Gross profit for April
.' ....r...r....'
P5-3
Fi ni shed Goods
Work in Process
32O, OOO
8O, OOO
32O, OOO
40O,OOO
36O, OOO
3OrCnO
' $?3o,ooo
-
SSo,ooo
-
$25o,ooo di rect l abor and factory overhead.
Factory overhead i s l 50% of di rect l abo6 thereforo, di rect l abor i s
sl oo,ooo
Bal
(c)
(e)
Tot a| . . . r. . , , . . . . . . . . . . . . , . ' . . . . . . S28rO3O
Actuat overhead
(1' 375 + 2,5OO + 2r7OO + 2r790l.
Appl i ed overhead:
Jobs 2O2' 2O3, 2O5' 2Og (330r hours x $16!.
Job 207 .' ........' ....
.........' .."""' r"""'
Job 2O4
($l
rZgO
-
5960l .r..' .r.......t..........".."
Total appl i gd ovgrhgad r...' ........r-........r.....
Undef appl i ed. ' . . . . ' . . D. . . . . . . . ' . ' r. . . . . . . . . . . . r. ' . r. . . ' . . . . . . ' . . . . . .
' 1 O O + 7 5 + 1 0 5 + 5 O
20,OOO
l (i l
15O, OOO
go,ooo
l OO, OOO'
35O,OOO
Materials
90
I
P5-3
(Concluded|
ChwterS
l 5o,ooo
I I , OOO
175, OOO
l8o,@o
Cost of Goods Sold
360,OOO
Bal.
(b)
Bal .
(a)
l 5' OOO
loo,ooo
t t ' , NO
29,N
8O,O(X)
12,OOO
92,W
( 1t
l2l
t3)
(4)
(5)
(6)
rr)
(8)
Factory Overhead Gontrol
Applied Factory Overhead
6OTOOO
l 2' OOO
75,OOO
147,N
Accounts Payable
Accrued Payroll
1O2, O0OBal . TrOOO
loo,ooo
707,N
t72,OOO Bal.
5rW
Accounts Receivable
45,OOO
5OO,OOO
g5,o@
65,AOO
480,OOO
"Cost
of
goods
sold is 72% of sales (r0o%
-
28ohl.
Materials
purchased-$l oo'ooo
Cost ol goods sold-$360'OOO
Finished
goods ending inventoryt4O,OOO
Work in
process ending invento4;-$3O'O00
Direct labor cost-$l o0,00o
Applied factory overhead-$l 5O'OOO
Ovep or underapplied factory overhead-$3,OOO
overapplied
Glosed out to the cost of
goods sold account
Sales
GGA-Canada
(adapted). Reprint with permission-
Chaptor 5
P5-4
l
( 1)
9l
COLUMBUS COMPA}TY
Cost of Goods Sold Statement
For Month Ended October 3{
Materials:
Materials and supplies inventory, OcL I
PurghaseS .........' ..r.........o........r................................t
Materials and supplies available for ]|so......,..........,.
Less: Factory suppl i es used.......r...r........ $ 3195O
Materials and supplies inventory
OcL 31 31, 75O
Materials consumed
Di rgCt l abOr .........rr..r..........' ...r.' .
Appl i ed factory ovgrhad.....r.,r.....,.........D,.....rt...............
Total manufacturing cost........o..o............r.......r.......r........
Add work i n process
i nvgntory Oct 1................,........o,..
Less work in process
inventory Oct 31
Gost of goods
manufactunad o.r.,........o..................r.........,
Add fi ni shed goods
i nventory Oct 1.,..,..............r......,....
Cost of goods
available for salg .............r........o..,....o.......
Less finished goods
inventory, Oct 31 (2,500 units x
53. 7O)r. . . . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods
so!d...................... .............r....,....
rCal cul ati ons:
Units in finished goods inventory, OcL 1
Units manufactured 20,4OO
(2Or7OOl Units sold
Units in finished goods inventory, OcL 31
Cost of
goods
manufactured
s4O,7OO
24,8OO
sgs,5O0
35r7OO
2, 8OO
(3oo)
_3's09
s29,8OO
18, 600
27,45O
s75,850
4, O7O
s79, 920
4, 44O
$75,480
g, g0o
s85,280
9, 250
s76, 03O
Units manufactured
s75, 480
=
-t- -
'1-.-.-
-
Sif .7O
20, 4OO
92
I
P5-4 (Concl uded)
tzl
COLUMBUS COMPANY
Income Statement
For Month Ended October
3{
Chapter
S
Sales t a l a a a a a a a a a a a a a a a a a a a a a a r a a a a a a a a r a a a a o a a
s144, 9OO
1, 3OO
$143, 600
76, 03O
$ 67, 570
$25,O96
19,744
44,940
$ 22, 730
Less safes returns and al l owances ......................
Ngt sa| gs. . . . . . . . . . . r . . . t . . . . o. . . . . r . . . . . . . . . . . . . . . r . . . . r . . . . . . . . r r . . . .
Lgss cost of
goods
so1d...,...,.........,................,.r.r.
Gt pss pr of i t . . . . . . . . r . . . . . . r . . r . . . . . . . . . . . . . . r . . r . . . . r . . . r . . . . r . . . . . . .
Less commercial expenses:
Marketin g
expensr ............
Deprecl ati on-bui l di ng
....,.........
Depreciation-office
equipment
Admi ni strati vg
expense.....r.......
Depreci ati on-bui l di ng
..............
Depreci ati on-offi ce
equi pment
Incomg bgforg i ncomg t?x..........r...r..
Amount of over- or underappti ed factory
Actual factory overhead:
Factory overhgad pai d,.............r
In di rect materi af s ..,...,...............
Depreci ati on-bui l di ng
.....r.....r..
Depreci ati on-machi nery
and
ggui pment
. . . . . . . . . . . . . , . . . . . . . . . . . . . r .
Indi rgct 1abor.,.......r...,...,....,...r..
Appl i ed factory overhgad ..........,......,
Underappf i ed factory overhead.........
$25, O5O
30
1 6
$19, 7OO
20
24
(3t
overhead:
$2O, 1OO
3, 95O
1 5 0
800
4, 4OO .s29,40O
27, 45O
$ 1, 950
\'
Chapter 5
-
"
P5- 5'
( 11 MORRISVILLE CANNING COMPANY
Bal ance sheet
December 31, 208
93
Assets
-
Current assets:
CaSh. . . ' . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . r . . . . r . . . . D. . . . . . . . . $1 9t OOO
Accounts recei vabl G!............................... 1O,OOO
lnventories:
Fi ni shgd
goods .........,......r............r.. S4rooo
Wor ki npr ocess. . . . . . . . . . . . r . . . . . . . r . r . . . . . . . . l r 0O0
M at gri a l S. . ' . ' . . . . r. . . . . . ' . . . . o. . . . . . . . r. . . . . . . . . . ' 2t OOO 7t OOO
Prgpai d expensgs. . . . r. . . . ' . . . . . . . . . . o. . . . . . . . . o. . . . 5OO
v
Property,
;[:1:
lllTll,lr',i?",";ffiil::::.::.::::
TOt al aSSgt S t . . . . r. . ' . . . . . . . . . . . . . , . . . . . . . . . . . . . . . ' . . . . . . . . . . .
-
Li abi l i ti es
Currgnt l i abi l i t i gs. . . . . . . . . . . . , . . rr. . r. . . ' . r. . . . . . . . . . . r. r. .
s3o,ooo
15, OOO
s36,5OO
26, 00O
s63,599
sl 7, 5oo
45, 000
s62, 5OO
Stockhol ders' Egui ty
Common st ock' , . . . ' . . ' . . ' . . . . . . . . ' . . ! . . . , r
Ret ai ned ear ni ngs, . . . . . . . . . . , . . . . . . . . . . . . . . . . .
Total stockhol ders' equi ty ............
Total l i abi l i ti es and stockhol ders' equi ty......
94
P5-5
(Concludedf
l2l
Chagter
5
MORRISVILLE CANNING COMPANY
lncome Statement
For Year Ended December 31, 2OB
S3l esar aaaaaaa. . . aaaar aaaar . . aaa. aaaaaa. a. aa
ar aaaa. a. aaaaat aaaa aaaa aaaaaar aaa a aaaaaaa
Gost of
goods sold:
Materials:
tnvgntOryrJanuary1.....' ......r...' ..' ..........' ............
$ 4tOOO
PUrchaS
gS
....r....................r....r......r.....' ....t..o.t..t..
I 5t O OO
Matgri al s avai | ab| gforuser.........................' ......
$l grOOO
LgsSl nventOryrDeCgmbgf3l ...' ........' ................
2rOOO
Matgri al s consumod....' ........o..........r..........' ....... SIZpOO
Di rgCt 13bOf .......o..rr..........................r.........o..............
ITOOO
s60,000
Appfied factoly overhead r.,.......
I,O0O
Total manufagturing GoSt .....,........,.......,...ro.............. 335rOOO
Add work In
process Inventoryr Januafl I ......' ..r,..... jrOOO
s37,DDO
Less work in process inventoryr December 3l ...o.o... I' OOO
Cost of
goods manutactllrr8d...........o....r.....r.........r.... S36r,OOO
Add finished
goods inventory Januafl' t ........o........o 6' 000
Cost of
goods avai l abtoforsal e..' .' ...oo................o' ..r- $.02rOOO
Less finished
goods inventory, December 3' l .....-..... 4rOOO
Gost of
goods 30l d. . . ' . . ' . . . r. . . . . . . . . . . ' rr. . . . . . . o. . . . . . . . . ' r. . . t t . t t
$38^OOO
Add underappl l od factory overhgad.,...,....................
2t999
COSI Of
gOOdS SOl d-adi USt gd . . . . . . . . . . . . , . . o. . ' . . . . . o. , . . . . r. . .
4O,OOO
$2O,OOO
Gross
profit
Less commencial expenses:
Markgti ng expgns(0..........,,..............' ...' ..' .....' ...' ....r..
$
6rOOO
Admi ni strati vg
gxpensg...' ....o......' ............,..' ..,.,......t 9t9OO 15tOOO
l ncOmg bgf Org i nCOmg t 8X. ' . . , . J. . . . . . . . . ' . . . . . . . . . . . . . . . . . . ' r. . . . . ' . . . .
s 5,ooo
a a a a t a a a a a t a a a a a a a a a a a a a t a a a . a a a a a a a a a a a a a t t t t " '
Chagler 5
P5-6
(1) and (2)
9:
TROPEZ INC.
Job Order Cost Sheets To Post Beginning Inventory Data
March 1, 19-
Mat gri al s . , . . . . . . . . . r, r. . . . r. .
LI l bOr . . . . . . . . . . . . r . . . r . . r r r . . . . .
Factory Overhead.......,
TOt al . D. . . . . . . . . . r " . . . . . r .
(bl M ............,.......
(cl M. . , . . . . . . . ,
( f } L. . . r . . . . . ' . . . r . . . . . . .
(hl oH ......,.........,.
Tot al . . . . . . . . . . . . . r. . . . . . . .
0l
Compl eted and
to warehouse
(21
s29,e49
Compl eted and trans-
ferred to warehouse
Job 621
$ 2,8OO
2r1OO
1, 680
$ 6,580
5,30O
6r42O
51136
s23,436
transferred
$ 8,260
7r4OO
(4oo)
8r 160
6, 528
Job 622
$
g,4oo
2r7OO
2, 160
Job 623
s 1, 800
1, 350
I , O8O
s 4, 230
5, 9OO
6, 32O
5, 056
s21,s99
Sti l l i n
pnocess
Cr.
(a)
(b)
(c)
Materi al s
Bui l di ng & Equi pment . . . . , . . . .
Dr.
22,OOO.OO
22,OOO.OO
18, 6OO. OO
2, 4OO. OO
u
21, OOO. OO
600.0o
400. oo
200. 00
800.o0
800. oo
38, OOO, O0
38, OOO. OO
2O, 9OO, OO
7, 6OO. OO
5, 7OO. OO
3, 8OO. OO
38, OOO. OO
9, 404. 5O
7, 154. 5O
2, OOO. OO
250. 0o
(d)
(e)
(0
(gl
Pr epai d I nsur ance
.t
_ t l
Chatsr 5
96
P5-6
(Concl uded)
(h) Work
i n
ProcgsS""""t""' r"""""ott"t"' t"""""""'
Faaory
Overhead
Control
(or Applied
Factoryoverhead)...' .....................' .....|t...
{ i l
Fi ni shgd
GoodSt t " " r " " " " ' ot ' or " " " " t " " " " t " " " " " o'
Work'
in PrcCess
""""""""""""""""t"""""
nl AccountS
Rgcei vab16.............o.."""tto""""""""'
Y'
S3l 9st t t t t t " " " " " t t t t " " " " " t " " " t " " t t " t " " t t 1t " " "
GostofGoodsSo| d..............t...........| .t................
Fi ni shgd
GoodS"""""""""' r""""""""t""""
( k ) Ca Sh t " t r t t " " ' t " " ' r t t t " t t " t " t t " " " " " " " t " t " " t t t " t t t t " '
AccountsRecei vabIo' ...' ........................t......
'
(s53,38 4 r 4oohl + $53,384
=
$74' 738
Dr.
16, 720. OO
53,384.OO
741738. OO'
53,384.OO
69,45O.OO
Cr.
16, 720. O0
53,384.OO
74,738.O0
53, 384. 00
69, 450. O0
Work in Process
Materi al s
311
(a)
(c)
Bal .
t 4' 000
22,OOO
600
38,600
14, 8N
(b)
(d)
21r OO0
800
2t,8oo
53, 384
3/1 Bal.
(bl
(0
(h)
19, O7O
t 8, 600
20,9OO
16,720
753X)
400
53, 384
53,784
(c)
(i)
27,506
3/ 1 Bal '
0)
Fi ni shed Goods
15, 000
53,384
68,3U
| 5,OOO
(31
TROPEZ
INC.
Schedute
of l nventori es,
March
31
s14, 8OO
21, 506
15, OOO
s51, 306
Chapter 5
P5-7
'
(r) and
(3)
311
(g)
Bal . 78,83O.OO
94, 5O1. 65
173,331.65
78,83O.U'
97
Accounts Receivable
I 17, 5OO. OO
Fi ni shed Goods
(g) 94, 5O1. 65
Materials
3/1 Bal. 65,000.00
(al 42,3OO.OO
(bi s,aoo.oo'
tt3,loo.ao
59,37O.OO
53,73O.O0
Accounts Payabl e
42,3O0.O0
5, 8OO. OO
48,tOO.OO
Accrued Payroll
( c) I 1 1, 364. 00
Payroll
( c) 111, 364, 00
|
( cl 11 1, 364. 00
Appl i ed Factory Overhead
3O, 20O. 15 30, 2OO. l 5
(dl
(al
(b)
Work in Process
3/1 Bal. 2921627.OO
(cl 98' 884.00
(d) 53,73O.0O
(0 3o,2OO.l 5
475,435.15
380,933.50
12, 48O. OO
281467.87
40,941.87
94, 501. 65
3O,2OO.15
1O,741.72
40,941.87
(g)
Gost of Goods Sol d
94, 5O1. 65
Factory Overhead Control
(cl
(e)
(f)
(3)
Over. or Underappl i ed
Factory Overhead
281461.87
(31
1,558.28
.S5I8OO
coul d al so be posted di rectl y
to the work i n process accountr reduci ng
entry
(d) to $47,930.
Various Credits
Sal es
(g) 117, 50o. oo
98
Drrcct matcrrarr.,..
rtlill:ll
Dlrcct labor......-....
21'4alO.OO
26,844.OO
Factorl oYerhosd..
l 3' 8OO.0O
7,717.65
'
Total CogL $94,501.65
Chapter 5
3 OO,875.OO sl O,O4O
l o,49o.oo
5,800 $170,285.00
43,800.O0
28,920.00 2O' 37O 210,414.OO
19,388.00
9,314.50 0,893 85,736.15
P5.-T
(Concluded)
l 2 l Th e t o t a l c o s t o t e a c h f o b a t t h e e n d o f Ma r c h :
Job 2O4 Job 2O5 Job 2OO Job 207 Total
t 4or4lio
11r32O
33,24O
a2t750
22137O
7' 375
The balancd in the work in
process account
(JObS 2O5, 206, an d 207). . . . ' . . . . . . . . . . . o' . . . . . . . . . r. . . . . . . , . . . . ' . .
'
3,355.5 hours r sz.go
=
$7r717.65
Dr.
M at
g
f i a 1S. . . . . . . r . r . . r . . . . r . . r . . . . . . . . . . , . . . . . .
r . . . . . . . . . . ' . . . . r . r . . . I
Accounts Payabl e......-' .-......
Payr O11. . . . . . . . . . . D. t . . . " t " " t ' r t ' r " " " " t " " " " ' r " r " t " t " " " '
ACCrugd Payf Ol l . . r. . . . r. . ' . . . . . . . . . . . . . . . . . . . . . . . . . . ' . ". . .
(c) Work in Process
FaCt Ory OVgf hgad COnt l OJ. . . ' . . . . . . . . . . . . . . . . . . . . . . . . . . ' . . ' .
Marketing and Administrative
Expenses """"""
Pay r ol l . . . . . . . t t " t " t " " t t " " t " t " t " " " t " t t " " ' t t t " " " '
Work i n Proc8sS..........."""""""""""""""""' t"'
FaCtOry OVgfhgad COnttO1.........r.....' .............,,...
Matgfi al s ................................r..................' .,
WOf k i n Pf OC9SS. . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . r . . r ' . . . . r . ' . . . .
Appl i ed Fact ory Overhead. . . . . . . . . . , . . . . . """"""
Cost of Goods Sol d' . . . . -. , . . . r. . . . . . . . . r. . . . , ' . . """"r"""
Work i n Procgss . . . i . -. . . . . . . . . . ' . . . . . . r"'
$159,605 3171,825.50
$49' 503 3475' 495j 5
s38O,933,50
Cr.
114,52O
I I O, OOo
78rOOO
12, 00O
2O,0OO
I 08, 175
7
r52O
42t75,0
190, 35O
1 1O, OOO
P5-8
(21
(a)
(b)
(d)
(e)
(0
114,520
11O, OOO
115, 695
421750
19O, 350
Chapter 5
P5-B
(Continued)
99
Sal gS Di SCOUnt S . . . . . . r . . . . r . r . . . o. . . . . . . . . . . r . . . . r . . . . . . . . . . . r . . .
Accounts Rgcgi vabl o .....................o....r.........
(hl Marketing and Administrative Expenses...........-
Factory Ovgrhgad Gontrol........'.....r........'.....'-..r,
a
CaSh a. aaa. a. . aaa. . . . . . r . . r . . a. . . . r r . . . r . . . . . . . . 4. . . . . . . . . . . . . . . o.
Acc u m u I ate d D e p re c i ati o n{tl a c h i n e ry .......
(i l ACCOUnt S Payabl g' . r. . r. . . . r. . . . . . , . ". . . . . . . r. r. . . . . . . . . . . . . . . .
CaSh . . . . . . . . . . . r . . . . . . . . . . . . . . . . r r . . r . . . . . . . . . . . . . . . . . t . . . . . . . . t .
0)
Appl i ed Fact ory Ovgrhead . . . . . . . . . . . . ' . . . . . , . . . . . . . . . . --. . .
Factory Ovgrhead Gontrol .....r..r' .....' ...' r..-.-r.
GOSI Of GOOdS SOl d . . . . ' . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . . . . . . . .
Fagt ory Ovgrhgad Cont rol . . . . . , . . . . . . ' . . . , . . . . . r. . -. '
(11 and (3) GENERAL LEDGER
Gash
(sl Gash
47,0OO
247rOOO
294,OOO
l 7' t,32O
Accounts Receivable
Bal . 5O,00o
255,OOO
3O5,OOO
(gl 26O,OOO
Fi ni shed Goods
32, 5OO
I
Work in Process
Machi ner y
1/ 1 Bal . 45, 3OO I
Accu mul ated DePreci ati on-
Machi nery
111 Bal .
(h)
a a a a a a a a a a a a a a a a o a t t t a t a a a 247
|OOO
13, OOO
l 5, ooo
24, 68O
85, O0O
421750
1, 45O
Materi al s
260,000
37,68O
2,O0O
85,OOO
42,750
1, 450
1 15, 695
1/1 Bal .
(g)
(hl
(i)
371680
85,OOO
122,680
1/ 1 Bal .
(al
22'oOO
114,520
138,52O
(dl
1t 1
(0
1/ 1 Bal .
Accounts Payabl e
111 Bal .
(al
l O, OOO
2,OOO
12,OOO
59,375
114, 520
173,895
1t 7
(c)
(dl
(e)
7, 5OO
78, OOO
108, 175
421750
236,425
Bal . 19O, 35O
85, OOO
I N
P5-8
(Continuedl
Accrued Payroll
Chapter 5
Sal es
Retained Earnings
lor
11O, OO0
l rn
zss,ooo
Factory Overhead Gontrol
l 2, o0o
7,52O
241680
41t 200
(cl
(dl
(ht
42,750
1, 45O
u,2oo
(gl
1/1 Bal .-MaL
1/1 Baf.-[l b.
1/1 Bel .-OH
(c) Labor
(d) Materialc
(e) otrerhead
1/l Bal .-Mat
1/l Bal.-L.b
1/l Bal .-OH
(c) Labor
(d) Materlalr
(e) Overhead
13, OOO
I
Cost of Goods Sold
19O, 35O
1, 45O
79r,goo
Common Stock
600
1, OOO
400
4O, 000
42,OOO
18, OOO
to4@o
It/' r
e"r.
g4,gzs
Sal es Di scounts
Applied Factory Overhead
(t) 42,7so
l (e)
42,750
Marketing and Administrative
Expenses
2OTOOO
15, OOO
35,OOO
111 Bal . 100, 000
WORK IN PROCESS SUBSIDIARY LEDGER
Job l oi Job 1O3
(cl Labor 18,0oo
(dl Materi al a 14,575
(e)
Overhoad 13,5Oo
16,O75
Job l 02
Palroll
Chapter 5
P5- 8, ( Concl uded)
(4) MID.STATE COMPANY
Tri al Bal ance
January 31
101
MID.STATE COMPANY
Cost of Goods Sol d Statement
For Month Ended January 3{
171, 32O
45, OOO
32,5OO
46,O75
20,925
45, 3OO
35, OOO
13, OOO
191, 8OO
12, OOO
88, 895
11O, OOO
l OO, OOO
34, 925
255, 000
600,820 600,820
(sl
Less work i n process i nventory January 31
Cost of
goods
so1d. . . . . . . . . . . . . . . . . . . , . . . . r . t . . . . . r . . . r .
Add underappl i ed factory overhead .........,,....
Cost of goods sol d-adj usted......
$l 08, 175
78, OOO
42,750
s228,925
7,5qO
$236,425
46,O75
s190, 350
1, 45O
s191, 8O0
06-1. The basi c obi ecti ve ol process costi ng i s l o
determine
the costs of the products manufac'
tured by the conrpany. Determinhg the cost of
the
productr manutactured
is necessary h order
to properly cost ending invenlories for exlemal
reporting Purpo3o!
(i'e., teporting to credilors
and ownen of thd company, lhe SEC' and the
IRS) and lo evalual. the ptofilability of the man'
ulacturing ac-tivity. In order to cost products, the
costs musl be determined for malerials, labor,
and taclory ovefiead used to process each unit
of producl lhtough eaclr deparlmenl.
06-2. The products rnanufactured wilhh a departmenl
(or cost center) during the period can be helero-
geneous il
pb order costing is used, but musl be
honrogeneous if process costing is used. In
icb
order cosl i ng, producl s are accounted l or i n
batches. The cost cil each unil ol product manu-
factuted on a pb is determined by dividing lhe
total cost charged to the
pb by the number ol
unils produced on the
iob.
Since the nranufactur'
ing cosl ol each
iob
is accounted for sepamtely'
accuralo and uselul product cosl can be deter'
mined even when the producls rnanulac{urad on
dilferent
ircbs
are substantially diflerent' By con'
trast, in procesr cosling, all nranulacturing costg
are charged to the departrnent, and the unit cost
is determined by dividing the cost charged to the
deparlment by the number ol units produced' As
a consequence, the unils ol producl manufac-
tured wi thi n a department musl be essenti al l y
alike in order tor the cost allaated to each unil
lo be meaningrtul (i.e., to reasonably reflect the
actual c6l of the resources used to manulacture
the prcducl).
06-3. (a) Process
(b) Process, unless signilicantly ditferent rnod'
els are manulactured
(c) Process
(d) Job order
(e)
Process
(t)
Process
(S)
Job order
(h)
Process, unless dillerent fabrics are used
l or di f f er ent model s, i n whi ch caso t he
conversi on cosl s may be accounl ed for
using proce*s, but the materials using
iob
order
06-4. Three product fkrw fonnats are: sequential,
par'
allel, ard seleclive,
Seouenti al maans that the producl fl ows or i s
manul act ut od i n an unchangi ng f i xed set ol
oporal i ons,
9oi n9
l rom one dparl msnt to tho
nen.
Paral l el moans that certai n operati onal
phases
take place simultaneously
in othor departments
CHAPTER 6
DtscussloN ouEsTloNs
06-5.
06.
and the
parti al l y compl eted uni l s or
Parl s
atg
brought togethet in subsequenl
deparlments'
Selective refers to the fact that a product does
not necossatily rnove through every dopatiment'
Depending
uPon the characler or shape of the
fhal
product, ditlerent deparlments
are angagecl
in ccnptethg the desired
Prcduct
Materials Costs-{n
irb
order costhg, rnaterials
fiuisitbnr
are uged and charges are nrade to
jobs; in procoss costing, charges for malerials
isgued to productinn are rnade to departmenls'
with inlrequent usc of rnaterbls requisilians'
Labor Costs-Time tickets are used h
iob
oder
-osting lo accumulate labor costs for each
job; in
pr ocess cost i ng, l abor cosl s at s char god l o
depar t ment s, and, t her ef or e, del ai l ed l i me
racords arg nol nocossary.
Factorv Overhead-Job order costing requires
l ho use of pr edel er mi nad r at es f or char gi ng
overhead to
j obs; i n process costi ng, actual
overhead may be used.
(However,
predeter'
minEd rales are otten used in order lo smooth
ovefiead that is not hcurred at the sarne rata a3
productior activity to the products manulactured
throughoul the
Year.)
Summarizino Costs-A
iob
order cosl sheet is
*Ja to accumulate lhe costs of an order in
iob
order costing; a cct of production rePorl is usod
i n process costi ng. In
i ob
order costi ng, costs
aro summari zed on compl eti on of the
j ob; i n
process costi ng, costs charged to l he depart-
menl and cosls accounted for are summarized in
the cost of producti on report each month (or
sornetimes each week).
Predetermined overhead tatos can and should
be used if the pattem of overhEad cost incur'
rence does not follow the pattern of produclion
activity. Some items of overhead are fixed and
not responsive to changes in production aclivity'
It production volume varies each month, then
predetermined overhead rates should be used'
Some i tems of overhead are i ncurred onl y at
cerlain times during the year, but benefil produc-
t i on t hr oughout t he year ( e' 9. , payr ol l t axos,
i nsurance,
property taxes, vacal i on
pay, ei c' )'
These i t ems can be r ecor ded as pr epai d
oxpenses and amor t i zed uni l or ml y t o each
rnonth it actual overhead is charged to produc'
tion. Altematively, estimates of such costs can
be included in the predetermined ovefiead rale'
and the actual cosi charged to overhead
when
i ncurred. The use of predetermi nsd ral es i s often
si mpl er t han t he al l ocat i on ol acl ual cost s
because a si ngl e pr edel er mi ned r al e r equi r es
onl y one overhead charge to aach department
each monl h. l n contrast. the capi tal i zal bn
and
l5,
I
I
L,
I
!
Clppter6
arnorli:alion of .ach itcm ol astual ovcrhead
nogld rcquirc nurrr.,orr. chargcr rach rnoth.
OO-7. A sl of prodtgtioh npod b an offetivo rnqth-
ly (c wookly) ourynary of tho cod of rnatorbb,
labor, ard overhcad consrrm.d by eadr deparl-
rrJrl or cocl c.nl.r, abng with a rrcord cl tho
guenlity ol productr menufrclurcd. ll providor
hfsnnlbn necrslary lo col prodrctr, prep.r.
irumel
.nlrier lo rccord lhr trandcr of coslr
bolwecn departmcnlr, end cmtrol cob.
06. The rectbns ccnnurly lound in a cocl of pro
ducttn reporl arc: (a) e quantity achcdub incJi-
calhg thc soursr and dispeitim oil thr unib of
producl, (b) a cel charged lo the departrnent
t clbn, indicathg the cost h total and pcr unil
for lho cl lrenlf.rrod in from tho procoding
dopartmont, as woll as rnatcriab, labor and ovcr-
hoad cfnrgod lo the depadrnent, and (c) a el
eounled for seclisr indicalhg the anpunt of
cod assigned to thr unitr tranderred oti c/ the
143
dsparfnml, as well as tho eet of ending hven-
tory.
06- 9. Scpar al o depar l menl al cosl of pr oduct i on
ropgrtt arc uced to accumul al o costs more
accuralely and to prwUe rnore detailed data lor
c6t cqrtrol purpooo. than a planl-wUe cct of
;roductbn
rcport couki prwirto. In sornc ceses
(c.9., a msnuteglurhg plant tul hss a sel*live
prodwtim flow for its producta), a planl-wide
c6t of prcduclirn reporl cannot bo usd.
06-10. An cquivalenl unit cil produclicr ir thc anrornt cil
a nrsounco (r.9, malcrbb, labof, or ovrfiead)
lhat wouH bc required to csnplcto
qrr
unit of
thr producl with respecl to thc cost clemenl
behg cansidered- Thc lolal number of equiva-
lonl unite. with rcspecl to a particular element of
cod, ropresonls lhe number ol unils of the prcd-
usl lhal could have been cornpletod with lhe
resource3 used durhg the perird.
I
t
I
b
\,
ta1
Chaptar 6
Factory
labor Overhead
Cort from
Precedlng
Department Materlalr
2O,OOO 2O,OOO
5r00o
5, O0O
l5,oo9 __?!,ooo
Cost from
Precedlng
Department Materialg
EXERCISES
E6-1
(11
Equivalent
units
transferred
out """"""
Equivalent
units
!n
ending
inventorln
Cost from
Pniceding
dePartment
(1OO% r 5rO0Ol "' t"""""r' r""""'
Materi al s
(l 00oh r 5' OOO) """"""""'
Labor
(60% r 5rOOO)"""""""o' t""""
Factory overhead
(4O% x 5' OOO) """
Total equi val ent
uni ts...' .,..........."' r""""
l2l
Cost i n begi nni ng
i nventory....."""""""
Cost added duri ng current
peri od' .""""
Total cost to be accounted fot' .....,.......' .
Di vi ded by total equi val ent uni ts......,.' ...
Cost
per equi val ent uni t . . . . . . . .
S15, OOO
s 9, 200 sl s, 4oo
25,OOO 23,OOO 22,AOO
2O,OOO 20,OOO
3, OOO
23, OOO
2,OOO
22,AOO
Factory
Overhead
o
st5,4oo
o
$4o,ooo
$4o,0oo
25,OO0
o
sl 5,ooo
o
s
9,200
E6-2
WOf k i n Pf OCgSS-Depaf t mgnt
X' . . . . . . ". . . . . . . . . . . . . . . . . . t . . """'
WOf k i n Pf OCgSS-Depaf t mgnt
Y . . . . . . . . . . . . . r. . . . . . . . ' . . , """""'
Mat gr i a1s. . r . . . . . . . . . . r r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
WOf k i n Pf OCgSS-Depaf t mgnt
X. . . . . . ' . . ' . . r. . . . . . . . . . . t """"""
WOf k i n Pf OCgSS-Depaf t mgnt
Y. . . . . . . . . . . . . . . . . . . . . . . . . . """t ""
Pay r o11 . . . . . . . . . . . " " t " " ' i " " t " " t t " " t t t " t " " t t " " t t " " t t " t "
WOf k i n Pf OCeSS-Depaf t ment X. . . . . . . . . . . . r. . . . . . . . . . . . . . . . , . . . . . "
WOf k i n Pf OCgSS-Depaf t mgnt
Y . . . . . . . . . . . . . . . . . ' . . o. , . . . . . . . . . . . . . .
FaCt Ory OVgf hgad . . r. . . . . . . . . . . . . . . . . . . , . r. . . . . . . . . . . . . . . . . . . . . "'
WOrk i n PTOCSSS-Depaf t ment
Y . . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . r. .
Work i n Process-Depart ment
X' . . . . . """"""""""
Fi ni shed Goods l nvent or y
Work i n Process-Depart ment
Y . . """"""""""""
5O, 0OO
4O, OOO
8O, OOO
70, 00o
18O, OOO
7O, OOO
31O, 0OO
476, OOO
9O, OOO
l 5o,ooo
25O,OOO
31O, OOO
476, OOO
105
I
l>
:
I
b
\
L.
l-
ClppterO
E6-3
Tlndol FabricatorE Inc.
Cutting and Forming
DePartment
Cost of Produstion RePort
'
For November
QusnUV Schcdub
Bcglnnlng lnvrntotY
!'ttrt d h proccg thb
Prrlod
Tnnrfcrrrd to Aromblhg Dopertmrnt
End h g lnvcntoty..,...'.........'.......'..--.
Cost Chargcd to DePartmcnt
Eeglnnlng Inventory:
Matcrlafr
Labor
Fsdory ovcrhced
Totel cort h bcglnnhg hvcntory ..otso'-...'..'....Fo..
Cort rddcd durlng currcnt Pcrlod:
Matarlalr - .......oo...' ...r...' .F......' .' .
[.:bor
Frctory
Totel coot eddcd durlng currcnt
pcdod......*-.-
Total coct chargcd to deparbnct|t.......................'....'..,.'...,.
i/lst rbb Labor
7l4r 1gY. EV.
Total
Cort
Overhcad QuanUty
800
3"20O
a,ooo
3/lOO
ooo
4, OOO
Equl val ent Unl t
Unlta' Cost"
3113,377
3137,452
Vt
Gompl eta Unl t Cogt
too% 336.70
Cort Accountcd tor ar Followr
Tnnrlrrrcd to Arrembllng Dcprrtmcnt
Wort In Prccclr, cndlng hvcntory
Equtvebnt unttr tranrfrrrcd o9t......
Equl vel ent unttr h ondl ng Inventory
Total cqul val ent unl tr -
s36.70
Total Cogt
3124,780
310, 1I O
1,128
Unltr
171923
2rJ52
3l8OO
t 21',07|'
t 08,025
14r75|,
29190O
3U2A8
1.70
0.52
3,85O
3rO4O
3,55O
t22,4a
a,70
9.52
Metrrlelr
Labor
Factory ovcrhcad
11428 12,f,72
Total coct accounted tor
t137,452
.Total
number of cquhralent unltr roqulrcd In thc coot accounted tor rccUon detormlned ar tol'
lorvr:
Mrt rlsb Lebor Orcrhcad
34oo 3/fOO
alro 240
3,8!tO 3rO4O
-
Total cort
0,c.,
thc cort In begl nnl ng Invcntory pl ur thc cort edded durl ng thc curront
pcrl od)
dtvl ded by thc total number ol cqul val ent unl tr requl red l n thc cost accountod l or ractl on
3/|OO
@o
ooo
ooo
75t/.
&.h
at.h
I
t
3/0OO
150
3,55O
:
ta6
Chagtor 6
E6-4
Quantl ty Schedul s
Beglnning InventorY
Started In procesa thlr per|od...........
Transferred to Flnlshlng Department
Endl ng i nven tory,.................,
Sonora Manufacturi ng
GomPanY
Mol di ng DePartment
Cost of Production
RePort
For August
Materiatr
L:bor Overhead Quantity
75% 25o/o 25o/o
Total
Gost
I ' OOO
0,ooo
l OrO0O
9,200
800
I O, OoO
Equlvalent Unit
Unlts' Cost"
Cost Charged to Department
Begi nni ng i nventonn
Materi al s
Factory overhead
Total cost In beginnlng inventorY
Cost added duri ng current
peri od:
Mat eri al s
[abor....
Factory overhead
S 4, 120
522
9El
Total cost added durl ng
Total cost charged to department
Cost Accounted for as Fol l owr
Transterred to Flnlshlng Departmcnt
Work In Process, endl ng Inventory:
Mat eri al s
l abor. . . . . . . .
Factory overhead
Total cost accounted for' ,..-,.............
:::::::::ll ::::::::::::::: ffi
:
o/o
Unlts Complete Unit Cost
$e.so
Iotaf Coet
378,200
33,ooo
280
42O 3,700
s81, 900
9r200
800
800
800
lOOo/t
750h
25o/c
25%
3 5,603
344,880
12, 638
18r779
s8.50
35.00
1, 40
2. 10
9, 800
9, 400
-!9,400
s5.00
1, 40
2. 10
Total number ol equi val ent unl ts requi red In the
fol l ows:
Materi al s
Equi val ent uni ts transferred out....
Equi val ent uni t s i n endi ng i nvent ory
Total equi val ent uni ts
cost accounted for secti on determl ned
Labor Overhead
9, 200 9, 200
200 200
9, 800 9, 400 9, 400
Tot al cost ( 1. e. , t he cost i n begi nni ng i nvent or y pt us t he cost added dur i ng t f i e cur r ent
per i od)
di vi ded by t he t ot al number of equi val ent uni t s r equi r ed i n t he cost account ed f or sect i on
9r 2OO
800
L
\--
I
I
L
I
L
I
b
ChapterG
E6-5
Quanti tY
Schedul c
Beglnnlng
InYentotY..
Received
from Cutting Departmcnt"'
Trangfcrred
to Paintlng DepartmenL'
Hypertec CorPoration
Forming DePartment
Cost of Production
RePort
For SePtember
Materialr
Labor Overhead
Total
Cost
t 21,120
5,880
2, 914
5,228
g
34,U2
3178,24O
Unl t Cost
Quanti tY
1r 4OO
4, 600
Endlng InventorY
80o/.
3Oo/n 300h
Coat Charged to Departmcnt
Eeginnlng lnventorY:
Cost from
precedlng department"""
Materials
FactorY overhead
Total cost In beglnnlng
lnventory """'t""""""""
Coat added during curent Period:
Cost from
precedlng department"""""""'
Matarialr ....."...-....-.
Ll bo 1...............o......r.......ro......r.....-......o...o...................
Factory overhcad
.""'t"""""
Total cost addcd durlng crrrcnt
period"""'
Total cost charged to departmcnt..""""'
3 70, 380
20,Uo
17,526
35,052
tl43,398
6, 000
5, 0oo
1, 000
I , OO0
Equi val ent
Uni t
Units'
Cost"
Coat Accountcd for as Follows
Tranrtcrrcd to PainUng Dcpartmcnl.
Work lrr Proccssl cndlng InventorY:
Gort from
preccding dcPartrncnt
Matorlalr ........o.......'..
[.abor........
Factory overhead
Total cost accounted for ...-.'....-..-..
Equlval ent unitc transf erred out....
Equl val ent unl ts In endi ng Inventory
Total equi val ent uni ts
5' OOO
5, 000 5rOO0 5, 000
1, OOO OOO 300 3O0
6, O0o
Unlts
ch
ComPl et e
o,0oo
5, 800
5, 300
5, 30O
sl 5, 25O
2,82O
1 , 1 4 0
2,28O
5, 300
s15. 25
4. 70
3.80
7. 60
331. 35
Total Cost
s156, 750
21,49O
s178, 240
5rOoO
I r O0O
1r 00o
I , O0O
1, 00O
1000h $31.35
l AOo/. sl 5.25
8go/o 4.79
3ooh
3.gO
30,h 7.60
I
Total number of cqul val ent unl ts requi red
In ths cost accounted
tor eecuon determi ned as
followg:
Pri or DePL
Gost
Materi al s Labor Overhead
5, OoO 5, 300
-
Total cost
(i .e., tJre cost i n begi nni ng i nventory pl us the cost added duri ng the current
peri od)
dl vl ded by thc total numbcr of cqul val ent' unl ts requi red l n thc cost accounted for
gecUon
\
1@
E6-o
'
Ramirez Corporation
Assembly DePartment
Cost of ProducUon
RePort
For February
Quantlty Schedub
Beglnnlng InventorY
Recahved lrom Cuttlng Departmcnt.-
Trangferrcd to Flnlghcd Goodg..-.....
En dln g Inven tory..,..........,..r....,....8....
Cost Charged to Departmcnt
Beginning inventory:
Chapter 6
Materlalr
l.abor Overhcad QuanUty
400
al oo
2,5O0
Fooo
8Oo/, EO'/o 8Oo/o 50O
2r5OO
Totat Equhralent Unlt
Coat Unlts' Cost"
s 67,410 2,500 s32.00
21,200 2,400 10.50
Cost from precedl ng
deparbnent.............,. . $ 12' 590
Materi al s 4,OOO
1, 20O
2,49O
3 20, 190
Labor.
Factory ove
Total cost In beglnnlng Inven
Cost added during eurrent
perlodl
Cort from
preceding department.
Materl al a
l :bor 171060 2r3OO 8.2O
35, 320 2, 3OO 18. 40
Factory overhead
Totat cost added durl ng current
perl od..,....
8141,59o
Total cost charged to department
:-
sl 81, 78O
.h
Cost Accounted tor ag Fol l ory! Unl tg Compl cta Unl t Cort
Transferred to Finlshed Goodr..,....... 2,000 l00th 387.10
Work In Process, cndlng Invcntory:
'
Cost from precedi ng
department 500 l OOc/, S32.OO 316' 000
Materi a1s....,............ 500 8O' /,
' l
O.5O 4,2OO
[abor....,... 500 $Oc/o a.2O 2,460
Factory overhesd
Total cost accounted for................... s191, 780
'
Total number of equl val ent unl ts requl red In the cost accounted for
gectl on
determi ned as
fol l ows:
Prl or DepL
Cost Materi al g l abor Overhead
Equi val ent unl ts transferred out.... 2,0OO 2,OOO 2,OOO 2,OOO
Equi val ent uni t s I n endi ng l nvent ory 5O0 4O0 3OO 3OO
Total equi val ent unl ts Z"SoO Z*C}O Z,SOO ,"3OO
: : : :
-
Total cost (1.e., the cost In begi nnl ng i nventory
pl us the coat added duri ng thc current
peri od)
di vi ded by thc total numbcr ol equtval ent unl ts rcqul rcd In thc cost accounted tor secUon
s67. 10
WI
si 34,20o
L.
I
L
L
Clppter6
E&7
Zupton Manufacturing
Corporation
Formlng DePartmant
Cost of Pmduction
RePort
For June
Matcrbl A Materbl B
109
Overhead QuanUtY
o00
31000
4,500
4, l oo
a00 300h
4' 50O
Equl val ent Unl t
Unltr' Coct"
I
I
Lt
I
I
b
i-
QuanUV
tlchsdulc
Bog lnnln
g hvcntorr...m'o..--....c.
Recolvcd fl.,om Cutdng Drpartmont-.
Tranrlerrrd to Fhlrtrlng Departmcnt
End lng lnvcntory...-'..--...o..0-......6..
Labor
100% o% 30%
Cort Chargcd to DePartmcnt
Beglnnlng lnventorY:
Cort trom
praccdlng dcpartmcnt......-"'-""""""""""
*letarbl A.--..**...,.'.'..-o-oo
lletrrld 8........*..--........'.-.6.-6'Fts
|.e bor....'.....'..........D...................
Frctory ovcrhcad
Total cogt ln beglnnhg
hventorY
@et addcd durlng curcnt Perlod:
Cort from
precedlng department...........""
Matsrlal 4..-.....................,......
Total
Cost
I
I
J
4A22
2, 805
0
1, 25O
1. 875
3 1 0 . 3 s 2
:
3 29, 32E
19, 695
14, 350
151630
23.4a5
JtOZ.tt$
rl_1_?@o
Unl t Coot
326.00
97'50
5. 00
3.50
4,OO
o.oo
4,5OO
4,5OO
4, 1OO
4,2i2O
4,2J20
$!l,ooo
2rOOO
o
4ao
720.
3 7.50
5. 00
326. O0
Total Cogt
3100, 000
o,200
sl 12, 800
Fectory ovcrhcad
3.50
4.00
o. 00
'fotat
cori rdded durlng csrent
porlod"""'
Total cort charged to department..-'.--'--
V'
Unltr Gompletc
Cort Aceounted tor r Followr
Trandrrrod to Flnlrtrlng Doparbncnt
Work h Proccgr cndhtg hvontorY;
Cort from procsdlng dePartmcnt
Matsrlal A -.-.-*
Matsrlal I
Lebor
Fectort ovcrhcad r....-................
Totrl cort eccountod for ..-....,...-*..
Equhralcnt unltr tranctcrcd out.... 4,1OO
Equtval ent unl tr In cndl ng Inventory 4oO
Total cqul vatent unl tr I,5OO
4rl oO
400
400
400
400
400
100%
100.h
lOOc/.
Ot/o
4r l oo
400
4, 5OO
-
3Oc/o
3004
'
Tottl numbor of rqutvelent unltr rcqulrcd In the cost eccounted tor rccUon dctormlncd ar
followr:
Prlor DepL
Coot
{ttttbt
A
Utt.t"l i
l ' ' abor Overhead
4rl oo
o
4, 1OO 4, 1OO
120 120
4,1OO 4,220 1,220.
-
Total cort
(1,c., thc coct In begl nnl ng Invcntory ptur thc coct added durl ng thc current porl od)
dtvlded by thc total numbcr of cqulvalont unltr requlrcd ln thc cogt accountod for rcctlon
QuanUty Schcdulo
Beglnnln
g lnvcntotT -x..o'd"""-"'-o".*tr"
Recelved from
gyn
rp Depe rtm c J1t....."""'-'-'
Addcd to
grocou ln CarbonsUon
Departrncnt
Tranrferrod to BotUlng Dcpertmcnt -......-.....
End In g brventory...osso....F.r-.-......h"'!"il'
.l
_ _
Pop Col a Company
Carbonation Department
Cost of Productlon Report
For October
Hatcrllb L^abor
100% 25%
Totrl
Co.t
Chaoter 6
ry
QuenUtY
I rOOO
2,OOO
c,ooo
25V.
e,ooo
7"8OO
13OO
0,ooo
Equlvelcnt Unlt
Unltt' Cocti'
o,ooo
9rOOO
8, l oo
8, 1OO
32.0O
Totel Cort
il5,ooo
1 1 0
E6-8
Cogt Chargcd to Dsprrtmcnt
Beginnlng hvcntorY:
Coat f mm
prcccd In g departmcnt..............-
lvlaterlalr
Labor
Fectory
Total colt ln boglnnhg hvcntory
Coat added durlng curcnt
Pcrlod:
Cort from
prrcrdlng doptrtmcnt
Matorlelr
[abor
Factory ovcrhced
Total coct addcd during current
pcrlod....-.,"""'t
Total coet chargcd to deparhnent.........--
Unltr
7'800
l Soo
11200
1'3,OO
1, 200
x
Complctr
100%
1oo%
100%
25.h
25.h
3 1 , 1 2 0
190
oo
120
t f/a90
3 o,oao
1, O1O
lFEo
3, 120
315, e7O
3t 7/ | 60
Unlt Cct
SrLOO
31: O
20
.20
AO
31tO
2AO
co
120
tl .20
20
.20
AO
Cort Accountcd for r Followr
Tranrforrcd to Botdlng Dcpertrnrnt -
Wort In Ploceur cndlng lnvcntoryl
Cort from
pncedlng dcPartrncnt
Mats r1a1r,...........,......
Labor
Factory ovcrhcad -..............'......
Total cort eccounted for -'.-...-.*.
l BOO
317,400
.
Total numbcr of rquhutlcnt unltrr rcqulrod ln thr cort eccountod tor locUm dctcrmlncd I
fol l owr:
Prlor DcpL
Coct Matcrlab Lrbor Ovcficed
Equlvelcnt unltt trenrfcrcd out ... TBoo TBoo 7,8oO TBoo
Equlvalent unltr h cndlng lnventory l,2OO 1' 200 3OO
3OO
Total cqulvalsnt unttr
!'099 I'o99
JrL99 81199
*
Totat coet (1.r., tfir cg4t ln bcalnnlng Invcntory
plur thc colt addod durlng tlro currcnt
perlod)
dhvldsd by thr total numbcr oi oqulwlcnt unltr rcqulrcd ln thc coat eccounted
for rcctlon
Chapter6
E6- 9,
Labor
1 1 1
Quantlty Schedule
Beglnnlng lnventory,.
Recelyed trom Reflnlng Department............,..
Added
!o
process In Bl endi ng Department..,..
Tranaterrcd to Fin lsh In g Departmen t .............
Endl ng l nventory..
Cogt Charged to Department
Beglnning lnventory:
Donegal Chemi cal Company
Bl endi ng Department
Cost of Production Report
For Mar ch
Materials Labor
100ah
gooh
Total
Cost
Overhead QuanUty
5,0o0
2O, 0OO
5, 000
goeh
3O, 0OO
26, OO0
4, OO0
99'o99
Unl t
Costtt
Equi val ent
Uni ts'
Cost trom precedl ng department
Gost added duri ng current peri od:
Cost from precedi ng
department...............
Materlale
Total cost In beglnnlng Inventory I 8,072
3 4,750
21375
180
7fJ7
s25,25O
_12,A25
2r740
8, 113
94,8,728
956,80O
Unl t Gost
. . . a . . . a . a a a a a
29, 000
4, 000
4, 000
4, 0o0
4, 00o
'1000h
1000h
1000h
aoeh
sooh
91. 90
$1. oo
.50
. 1 0
.30
3O, O0O
3O, O0O
29,2OO
29, 600
$4,OOo
2, 0oo
320
1, 08O
s1. o0
.50
, t o
.30
$1. eo
Total Cost
$49, 40O
7,4OO
358,80O
Factory overhead
Transferred to Finlshing Department
Worl In Process, endlng Inventory:
Cost from precedi ng
department
Materi al s
Labor........
Factory
overhead
Total cost accounted for ......._..........
Equ i val ent
u ni ts transferred out....
Equi val ent
uni t s I n endi ng i nvent ory
Tot al equi val ent
uni t s
Total cost added duri ng current peri od.......
Total cost charged to department...........
Cost Accounted for as Foltowt
c/o
Unl ts Compl ete
r
Total number of equl vatent uni ts requi red In the cost accounted for
gecUon
determl ned aa
follorrs:
Pri or DepL
Cost Materi al s Labor Overhead
28, 000 26, 000
4, OOO 4, OOO
3O, 0OO 3O, OOO 29,2OO 29,600
26, OOO
3, 20O
28rOOO
3, OOO
"
Tgtal cost (i .e., the cost i n begi nni ng i nventory pl us the cost added duri ng the current perl od)
di vi ded by the totat number of equi val ent uni ts regui red In the cost accounted for aectl on
112
E6.10
APPENDIX
For Jul Y
euanUV
Schedulc
Matertalr
ry
onerhead
Bcginnlng
Invcntory....""""'o"""''"-
AOoh
2O'h
2Oo/o
Starbd ln
Procesr
thle
Perlod
t
Chapter 6
Brimhall Manufachlrlng
GomPanY
Cuttlng
Departrncnt
Cort of ProducUon
Reoort
\
Transferred
to Assgmbly
Department
Endlng lnventorY'.
Cogt Gharged to Department
Beginning inventorln
Materl al l
Labor
Factory overhead
Total cost In beglnning
InventolY
Cost added duri ng current Peri od:
Cogt Accounted
for aa Fol l owr
Transferred
to Assembly Departments
Begi nnl ng i nvent ol Y.
Gost to compl ete:
Materi al g.-
Labor
Factory overhead
""""
Started and comPl eted
thi s Peri od
Total cost transferred to Assembly
DePartment ....' ..........
Work i n Process, endi ng i nventorY:
Materl al s..
Labor........
FactorY overhead
Total cost accounted tor ..............' ..' .
To compl et e begi nnl ng i nvent ory. .
Started and compl eted thi s Peri od
Endi ng I nvent ory. .
Total equi val ent unl ts
-
Cost added duri ng thc current
peri od
durl ng thc currcnt Perl od
lOOo/.
50'/o
5Oolt
CurentT.
$ 2,940
390
585
3 3, 915
340,530
t 8, 100
27r15O
39t,78o
395,895
:
Unit Gost
QuanUtY
100
000
I , OOO
850
150
I , OOO
Equl nal ent
Unlts'
33, 915
1, 98O
1, 600
2, 4O0
87,425
1, 50O
2,25O
Uni t
Costt'
349.50
20. 00
.
30.oo
See.5o
Total Cost
$
9, 895
74,A25
s84,520
111175
s95' 695
as fol l ows:
Total
Gost
Materlala ..............-......
Labor...' ...
Factory overhead t....................................................t.'
Totat cost added during current
period'-'-""o""'
Totat cost charged to department
"""""""'
940
905
905
Unl tc
100
t oo
1 0 0
750
1 5 0
150
t 50
7so
1 5 0
40ch
8Ac/o
sooh
100.h
t4e.so
20.o0
30. o0
99, 50
.
Number of equi val ent uni t s of cost added duri ng
t t ro current
peri od det ermi ned
Materi al s
l :bor Overhead
40
80 80
lOOo/c $49.50
3Oo/.
20.00
5Oo/o
3O.OO
750 750
75 75
940
905 905
di vi ded
by t he number of equi vat ent uni t s
of cost
added
1 1 3
Chapter 6
E6.11. APPENDIX
QuanUty Schodul c
Beglnnlng InventorY
Kandu Tool GomPanY
Assembly DePartment
Cost of Production Report
For November
Materl al s
5Oolo
Becel ved from Cutung Department...
Transferred to Finished Goods
Endlng lnventorY..
Coet Charged to Department
Beginnlng Inventory:
Cost trom precodi ng department..........' ....
Materl al s .................
Labor
Factory overhead
Total cost In beginning inventorY
Cost added durl ng current
peri od:
Cost from precedi n g d epartment."..........................,...
Factory overhead
Total cost added duri ng current
peri od.......
Total cost charged to department...........
9Oo/.
gooh gooh
l.abor Overhead
4ooh 4Oolo
QuanUty
1r2OO
2,80O
4, 00O
3, O0O
1, 000
4, O00
Equi val ent Uni t
Uni ts' Cost"
Total
Cost
17,28O
5, 55O
2,4OO
3, 8OO
s 28,830
s 40, 600
30, 89O
1A,932
25 398
I_1_3,610
s142, 450
2r8OO
3, 300
3, 320
3, 320
314. 50
9.30
5. 10
7. 65
s36.55
l l 1
E6-1
I APPENDIX
(Concluded|
Coat
Accountcd
tor ar Followa
Tranctcrrcd
to Finlghed Ooodg:
Beginn
ing Inventoty """""""""'
Cost to comPl ete:
Materlall.-
Labor.....'..
Fa ctg-rY ove rh ca d ...'....
Started and comPl atcd thl l
Pcrl od
Total cogt transferrcd to Flnlshcd
Work In Proce3s, cndl ng InventorY:
Cogt trom
Precedi ng
dePartment
Mat eri al c. .
L:bor .................-.
Factory overhead
Total cogt accounted tol .......-.-...' ....
To compl ete begi nni ng i nventorY -
Started and compl eted thi l
Porl od
End i n g i nventory............................
Unltr Currcnt'/o Unlt Coot
Chagter 6
Total Cott
328,&tO
5,39O
3,A72
5,508 3 {3,590
o5, 79O
3100, 380
314, 500
8,37O
4, 08O
a, 12O 3:!,070
s142,45O
determl ncd ar totl ow::
Overhced
.
Number of equl val ent unl ts of cogt added duri ng the current
perl od
Prlor DepL
Cott Materialr Labor
1, 200
1, 20O
1, 20O
I , 8OO
Goodr
1, 00o
1, 00o
1r 000
1, 00o
3Ot/t
sooh
60.h
1OOV.
100.h
00.h
80e/o
800h
EOO
1, 800
900
3 e.30
5. 10
7.85
36.55
314.50
0.30
5. 10
7.85
o
1, 800
1, 000
720
1, 80O
800
720
1, 80O
800
Total equl val ent unl ts
-2' 800 -9' 399 -3' 339 -3' 329
Cost added duri ng thc current
pcrl od dl yl ded by thc numbcr ol cqui val ent uni tr of col t added
duri ng t hc current peri od
Chapter 6
E6-12 APPENDIX
1 t 5
QuanUty Schcdul c
Begl nnl ng l nvcntory
Recelved from Retinlng Department..,..........-
Added to proceae
In Blendlng Department.,...
Transtered to Flnlshed Goods
Endl ng Inventory..
Coat Charged to Department
Begi nnl ng l nventory:
Cost from precedi ng
department
Materl al s ........,.....,
L:bor........
Factory overhead
Total cost In beginnlng Inventory
Cost added during current perlod:
Northeastern Chemical Corporation
Bl endi ng Department
Cost of Production Roport
For May
Materlals Labor
100.h 20ch
lOOo/t 800h
Overhead Quantity
4OV. 2rOOO
5, 000
5, 0o0
gooh
12, 0O0
1O, 5O0
1, 5OO
12, 0OO
Equi val ent Uni t
Units' Cost"
Total
Cost
3 2, 490
500
150
600
Cost lrom procedlng
departnrant;,
Materl al s...
l.abor
Factory overhead
Total cost added duri ng current peri od,......
Total cost charged to department.........
$ 3, 71O
s12, 5OO
2,500
3,3OO
7163O
$25,930
_s29,64O
1O, O0O
10, o00
1 1 , OOO
1O, 9OO
s1. 25
,25
,30
.70
32.50
n6
I
Ef-l 2 APPENDIX
(Concluded)
Cort Accountcd
lor er FollorYr
frz-"tf-"tt"a
to Flnlrhcd
Ooodr:
Bcglnnln
g Invcntory
"""""""''-
Cogt to complcta:
Matcrlrlr
""""""""""""
Itbol ."*-
Fecto rI oYcrh4ad............
Started and comPl eted thl a
Perl od
Total coat trancferrcd to Flnlshcd
Ooods
Work ln Proces!, cndlng InventorY:
Cost from
Prsccdl ng
dePartment
Mat edal r. . . . . .
Labor...............
Factory overhead
Total coat accountsd l or ...................
To compl et e begi nni ng i nvent ory. .
Started and compl etcd thl a
Perl od
Endl ng InventorY..
Total equl val ent unl tr
Unltr Curcnwl Unlt Coct
Chagter 6
Totel Cort
3 5,030
21,25O
s26, 28O
31, 875
375
3, 360
s20,640
Prlor Dept.
Coat Materlalt
31. 25
. 25
270
840
L:bor Ovarhoad
1, 000 1, 200
8, 500 8, 500
900 1, 200
2, OoO
2,00o
2,00O
8, 50O
1, 5OO
1, 50O
1, 5OO
1, 5O0
0
8, 500
1, 500
ooh
8.0ch
aoch
100%
100ch
1000h
6Oc/c
80o/c
0
8, 50O
1, 500
3 .25
.30
. 70
2.50
t 3, 71O
n
480
840
.30
. 70
,
Number of equl val ent unl tr of coct added duri ng thc cutzent
perl od detsrml ned aa fol l owg:
l O, OOO
' l
O, OOO 1 l , Ooo 1O, 9oO
:
Cost added durl ng thc currcnt
pcrl od dhl dad by thc numbcr of cqul val cnt unl tr of cost added
duri ng t hc current
perl od
Chagter 6
1
P6-1
( 1)
1 1 7
PROBLEMS
Modern Cabi net ComPanY
Cutting Department
Cost ol Production BePort
QuanUV Schedul c
Begl nnl ng InventorY..
Startgd In proceso this
Perlod
Transf erred to Assembly Department
Endi ng Inventoty
Cost Charged
_to
Department
Begl nnl ng Inventorp
For August
Materlalr Labor
Materl al s
l abor...
Factory overhead
Total cost i n begi nni ng i nventory....' ...-......' ...-.r...
Cost added duri ng current
peri od:
Materl al s
[.abor
Factory overhead
Total cost added duri ng current
peri od-.-.-..
Total cost charged to department...........
Overhead QuanUty
200
800
gooh
60ch 600h
Total
Cost
800
650
150
800
Equi val ent Unl t
Uni ts' Cost"
S 5,385
530
795
s 6, 890
s28,035
8, 35O
12,323
$48, 91O
s53,6O0
Unl t Cost
7A5
740
740
3f0.oo
12. O0
18. OO
Cost Accounted for as Follows
Transferred to Assembl y Department
Work i n Process, endi ng i nventory:
Materi al s
l-abor
Factory overhead
Total cost accounted for ...................
'
Tot al number of equi val ent unl t s requi red
fol l ows:
Unlts
150
150
%
0ompl et e
050 lO0o/c
150 900h
s70. o0
rot"l C*!
s45,50O
35,4O0
1r 08O
1,620
8, 10O
gooh
6Ao/c
970. 00
s40. 00
12.OO
18. 00
s53,000
i n t he cost account ed f or sect i on det ermi ned as
Mat eri al s Labor Overhead
Eguhral ent
unl t s t ransf erred out . . . . . . . . . . . . 05O 05O 85o
Equl val ent uni t s i n endi ng i nvent ory. . 135 90 90
Total equi vatent unl ts
_JE _J79 _Jl 9
-
Tot al cost (1. e. , t he cost i n begi nni ng i nvent ory
pl us t he cost added duri ng t he current
peri odl
di vi ded by t he t ot at number of equi val ent uni t s requi red i n t he cost account ed f or aecUon
Chaptar 6
1 t 8
P6-1
(Conti nuedi
Modern
Cabinet
ComPanY
AssemblY
DePartment
Cost of Production
RePort
For August
QuanUV Schcdul c
\
Beglnnin
g Inventory.-,........""""'-'d
Racelved from Cuttlng Departmsnt"'
Tranaferred
to Finiahed Goodr ""'-'-
En d in g Inventoty..-..'...-.....'...
Coat Charsed
to DcPartmcnt
Beginnlng InvcntorY:
Matcrialr
l:bor Overhead Quantlty
Coct trom
precedlng d epartnrent
""""""""""""""""'
3 17,41O
3,451
3, 811
3, 011
Materl al a
Labor
Total cost ln beginnlng
Inventory
3 28,083
Cost added durl ng curtent Pcrl od:
Cogt from
pt ""oiiJ departrnent"""""""'
' 3 45'5oo
Materlall
13'43:l
tabor......' .
20' 989
Factory ovefi ead
20' 989
4ooh
2Oo/o
20t/.
250
050
900
800
100
Total
Cost
900
Equivalent
Unit
Unlts'
Cosf'
sl oo, 911
$128, 994
$
69.eO
20. 10
30.o0
30. 00
s150. 00
900
940
820
820
Total cost addcd durl ng curent
perl od"""'
Totat cost charged
to department"""""'
fi9
Chapter6
P6-1
(Goncl uded)
Coat Accounted tor as Follows
Trangferred
to Finlshed Goods....-....
Work ln Process, endlng lnventorY:
Cogt from
Preccdlng
department
Materlala-
labor
FactorY overhead
Total cost accounted for.....' .......-.....
%
Unl ts Compl ete Unlt Cost
100% s' | 50. 00
Total Cost
sl 20,ooo
8,994
s128, 994
800
100
100
100
100
1000h I
4Ao/.
69. 90
20.10
30. 00
30. 00
36,99O
804
soo
600
20o/c
200h
'
Total number of equi val ent uni ts regui red tn the cost accounted for secti on determi ned as
fol l owr:
Pri or Dept.
Cost Materi al s Labor Overhead
Equlvalent unlts transterred out....
Equtvalent unlts In ending Inventory
Total equivalent unlts
800
100
800
40
800
20
800
20
420 840 900
*
Totat cost
(i.e., the cost in beginning
inventory
plus the cost added during t*te current
periodl
divided by the total number oi equivalent units required in the cost accounted lor section
(21 Work in Process-Cutting
Department""""'
Work i n Process-Assembl y
Department
Mat gf i al s . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . r . . r . . . r . . r . . . . . . ' . . . . t . .
Work i n Process-Gutti ng
Depattment""""'
Work i n Process-Assembl y
Department
Payrol l ..' ........' ......."....r..
Work i n Process-Gutti ng
Department ........
Work i n Process-Assembl y
Department
Appl i ed Fact or y Over head' , . . . . . . , . . . . .
Work in Process-Assembly
Department
Work i n Process-Cutti ng
Depanment......."
Fi ni shed Goods Inventory
Work i n Process-Assembl y
Department ...,'
26, O35
13, 433
39, 468
8, 35O
2O, 989
29, 339
121525
2O, 989
33, 514
45, 5O0
45, 50O
120, OOO
12O, OOO
ChaDter 6
120
P0.2
(rl
Endlng lnventoty.
Coat Charged
to DePartment
Begl nnl ng InventorY:
Rathbone
Tool GorPoration
Casting
DePartment
Cost of Production
Report
For December
QuanUty
Schedulc
Materialg
Beglnnlng
Invcntory-""""n"'xo""'r"
StartcO In
Prcccg
thlc Perlod
Trancf errod to Flnlghlng
Department
Labor Onerhead QuanUty
I , OOO
8,OOO
1000h
80%
8Oa/c
0rooo
7150O
1, 5O0
-9' ooo
Equl val ent Unl t
Unltsr Cost"
Mat erl al r
Total
Cogt
$
ot s
60
90
Total cost In beglnn
Cost addcd durl ng current Pe
Total cost charged to department...
Cogt Accounted for aa Followg
Transferred to Fl nl shl ng Department
Work In Proceal , cndl ng i nventory:
Materl al s
l abor........
Factory overhead
Total cost accounted for ..' ....--..........
Ing lnventofl ...........-......t..."'
rl od:
s 1,085
Materi al r
sl 7, 085
4,29O
6,435
I,OOO
8r7OO
817OO
$3,OOO
600
900
7, 5OO
1, 2OO
32.0O
.50
.75
s3.25
Total Cost
324,375
4, 500
FactorY overhead
Total cost added duri ng current
peri od""-' s27, 81O
Unltg
7r5oo
1, 500
11500
1, 500
.h
Completa
100eh
7, 5O0
1, 5OO
s28,875
Unlt Cost
$3.25
7, 5OO
1, 2OO
l0Oc/o 32.00
gO./o .50
ggoh .75
Tot al number of equi val ent uni t s requl red
fol l owg:
Equi val ent unl ts transferred out...........
Equi val ent unl t r i n endi ng i nvent ory. .
Tot al equi val ent uni t s
s28,875
ln the cost accounted
for
gecUon determined
as
Materi al s
Labor Overhead
9, ooo 8, 7OO
8' 7OO
-
Tot al coat (i . e. , t he cost i n begi nni ng i nvent ory
pl us t he cost added duri ng t he current
peri od)
di vi ded by thc total number of equi vai ent
uni ts requi red In the cost accounted
for secgon
- ClpPter6
-
.
P6-2
(Conti nued|
Rathbone Tool Corporation
Fi ni shi ng DePartment
Cost of Production Rcport
For December
QtrenUV 9chcdul c
Bcgl nnl ng Inventory..
-
Rccel vcdfromCastl ngDcpartmcnt.............-.
Tnnrforred to Finirhed Goodr
-
Endl ng l nventory..
Cogt Charged to Departnent
Bcginnlng Inventorp
Cort from praccding
departmcnt...............r.r....oo6.ooeoor. 3 a'78!i
[.abor-. 291
Factory ovcrhead
555
Total cost ln beginning inventory 3 5,54l
Cort edded during currcnt pcrlod:
121
l-abor Ovcrhced QuantitY
1, 50O
715OO
9, 00o
7, 00O
4O.h 'o.h 2,0oo
I,OOO
Totel Equi val ent Unh
Cort Unttr' Cort"
324,375 I,OOO 3324
2, 130 TBOO . 30
3, 18 A, OOO
AA
Cost from prccedlng
departmmt
[-abor.-.-
Faetory overhcad
Totrl cct charged to dcpertmcnt-.-........
Totel cst rddcd durlng current period.......
32r"g3,
335,180
9r.oo
t2
P&2
(Goncluded)
%
Cort &countod
tor er Followr Unltr Compbtr Unlt Cqt
Tnnrferrrd
to FhLh.d Ooodt.--.- 7,000 1o0% 3t.oo
Work ln Ptpcs, oodlng hvrotorn
Cort trom pncrdlng dcprrtrnrnt 2,O0O lOO% 33.2a $S/38O
Crtcplcr 6
Totrt Cort
328,OOO
2,OOO
/30L
30 21O
Fretory ovrr.hord 2,0OO 30.A .U 4CO 7,i8O
Totrl cot eccountrd tor,.......--.--
t35,180
'
Totel numbcr of rqulvelcnt unttt ruqulrcd In thr cqt rccountcd for rocUon dotcrmlncd er
followr:
Prlor DrpL
Cort t-abor Ovcrhcad
Equlvrlcnt unltr tnnrfcrrcd out........... 7,000 7,OOO T'OOO
Equl vel cnt unttr h rndl ng Invontory.. 2,OOO 8OO I,OOO
Totel cqutvrl cnt un|tr..........-.....
g,0OO
7OO 8,0OO
-
Totel coet
0.1.,
tfrr cort In bcalnnhg lnvcntory plur tfrr cort rddod durlng llrr currant
pcrlodl
'
dlyldod by t|rr totrl numbrr of rqulvrlcnt unltr nqulrrd h tho cort rccountcd for rocUon
l2l
Work in Process--Casting Department | 7, 085
Matgri al s ......,....,.,,..........,..,.............
Work In Process--Casti ng Departmont....o........... 4r29O
Work In Process-Fl nl shl ng Department... 2,139
Payr ol l . . ' o. . . . o. . . . . . . r . . . . . . . . . . . . . . . . . . . . . . r . .
Work i n Proces!-Casti ng Department................ 6,435
Work i n Process-Fl nl shi ng Department.............. 3,125
Appl l ed Factory Overhead ....,.........
Worki nProcess-Fi ni shi ngDepart ment . . . . . . . . , . . . . . 241375
Work In Process-Castlng Departmont ........
Fi ni shed
Goods l nventory-.................,................. 28rOOO
Work In Process-Fl ni shl ng Department ......
17, 085
6, 429
-
cl EAA
g r J v Y
_
24.375
28, OOO
Ctpptcr 6
P.3
( 11
chrtnUty
gchodub
--
Beglnnlng
lnirrnbry
atrrt d h procrs
thb porfoa
Hetrrletr
*F.-_.-.
bbor-_.,_
Fr ctory ovcrft ced,......8_..,.rts,..
Totrl
cct rccountad
for.__.**.
Totel
rgutvelcnt
unltr
Jettcr Engine Corporation
Gasting Departnrent
Cost of Production Report
For February
123
Hrt rbb bbor orlrrhcrd
QuenUty
500
3,OOO
Tnnctrrr.d
to Anmbly
Dcprrtnmt
Endhg Lrvrntory-E*_Ea
Tnnrfrrrrd
to Arrmbty
Olptrtnrnt
Wort_h
Proce,
rndbrj
hyrntorrl
-
Coct Chrrpcd
to Dc?rrtnrrt
Beetnntng
h;;t"m
-
Ml tarbb
--..-EE----H-E*-8..-
bbof
-*..s--.E..-*_
Frctory
ovcrtrced
Totrl cqt h beghnhg
trvcntory
Cort eddrd durlng currurt prrlod:
Hetrrlelr
b&8,
I ^ L _-
H. - . - __
* _c _aa
Itbof ---.----.,
D- - - aa- aa- gFa_
Ftelory
ovcrhotd
Totrl cort rddcd durlng currrnt p.riod_.._
Totrl cst clrergad
to rlcprrtmont_.._..-
Co.t Aorrntrd
for rr Folbwr
%
Unltr Compbtr
too!a 80'. 90%
Totrl
Cost
t 1O,9?S
ssa
2.&?9
3 ta,1o2
s1.0575
to,3E2
4a/aEl
35OO
2,7oo
aoo
3"5OO
Equtvrhnt
Unlt
Unltr'
CotF
2r7OO
aoo
800
800
l oo%
100%
80%
go.h
3211' 398
s23g5og
Unlt Cct
sas.oo
845.OO
33E,OOO
5.OO
33OO
15. 00
I O, SOO
3,5OO
3r3ao
3lzo
345.OO
5,OO
t5.oo
305.o0
Total Cort
3r75^5OO
50,oo0
3225,5O0
'
A;*mbrr
of rqulvlbnt
unltr rogulrcd
In thc cct rccountad
tor rocuon dctarmlncd er
Equlnbnt
unttt trenrtrrrrd
out..
Egulnhnt
unttr
h rndtng rnvcntory-:*.*.
Mrtarbb
Lebor
OYcrhced
2,7OO
720
3r42O
17oo
aoo
2,7oo
G40
35OO
3,340
-
Totel
cct (lr-
thr.cort In bcainnlng
brvcntory plur
thc cor-t edded
durrng $rc current pertod)
dhddcd
by thr totrl numbct
";;;;bnt
unti
-r.oo-"ii"l'n
t,,a cort rccountod
tor rccuon
Chaoter 6
121
l
P8-3
(ConUnued) Jetter Engi ne
CorPorati on
Assembl Y
DePartment
Cost of Production
RePort
For
February
QuanUty Schcdulc
Matcrials
Bcglnnlng Invcntqtt-
Rccclvrd from CerUng DcPartment -
I'latcrialr
1:bor
tabor Orerhead QuanUty
I ' OOO
2,7OO
3,700
2,9O0
800
Trendcrrcd to Flnlrhlng Dcparlrnent
Endlng lnvcntolY-
7Ot/.
3oth 3Ot/t
Cort Charged to Dcpartmcnt
Begi nni ng
l nvcntoDn
Cost trom
prcccding departmcnt.*.-...
Matcrl al r...
[:bor.......-
Factory ovcrhcad
Totel coet h bcginnlng
Cost added durlng current Pcrlod:
Cost from
praccdlng dcparlrncnt -..*-...
3,70O
Equi val cnt Uni t
Uni ts' Cost-
Total
Cost
3
ql , l 50
40',28
12'426
12,424
3128,260
3175, 5OO
119, 480
44r4O8
44,4O8
3,7OO
3,49O
3,' t4O
3, 140
3 04.50
45.30
18. 10
18. 10
Factory ovcrhead
Total coct added durl ng current
peri od"""' 3380' 798
Totat cct charged to departnent.-.--...... t"ttg
Coat Accountcd for ar Followr
Transf crrcd to Flnlshln g Dcpartmcnt
Worl in Ptlceca, cnding invcntorY
Cost from prcceding dePartmant
Materlalr
[:bor
Fectory ovcrheed
Total cct accounted for .'.................
Equhral ent unl tr transferred out....
Equi vatant unl ts l n cndi ng i nventory
Total oquhrelent unlts
c/o
Units ComPlete Unit Cct
s146. OO
Tottl Cosl
t423'4OO
351, 600
25,368
41344
2,9OO
24o
2, 90O
800
800
800
800
2, 900
800
3, 7OO
2, 9O0
s60
2, 9O0
240
10c.h s't40.oo
10o.h s 84.50
70.h 45.30
30.h 18.10
30ch
' t
8. 10 4t3'44
85,65O
3509,058
'
Total numbcr ol cqui val ent uni ts requi red i n the cost accounted for secUon determi ned
as
followr:
Pri or DepL
Cost Mate rials Labor Overhead
3, 400 3, 140 3, ' t 40
-
Totel coct (k., thr cort ln bcglnning invcntory
plus
ttrc cost added during thc current
period)
dMdcd by tho total numbcr of cqutvetcnt unlts requlred In the cost accountcd
for rccdon
125
A189ter 6
P6- 3
( Cont i nued) Jet t er Engi ne Cor Por at i on
Fi ni shi ng DePar t ment
Cost of Producti on Report
For February
QurnUtY
Schcdulc
Bcgl nnl ng
InvantorY..
Rcccl vcd from Ascmbty Dcpaftment ."""""""'
Tnnctorcd to Finlshcd Ooodl
Endl ng l nvcnt ot T. .
Cort Charged to Department
Begl nnl ng l nventory:
Tnnsl crrcd to Fl nl ched Goods
Work l n Proceu, endl ng Inventory:
Cost trom precedi ng department
Labor........
Factory overhead
Total coct accountcd for ...................
2, 8O9
'
Tot al number ol squi val ant unl t s requi red
l ol l owg:
Equl val ent
unl t s t ranst erred out . . . . . . . . . . . .
Egul val ent
unl t s l n endi ng l nvent ory. .
Tot al oqul val ent
unl t r
-
Tot al coat ( 1. o. , t hc cost l n begi nni ng i nvent or y
dMdcd by t he t ot al number ol equi val ent unl t s
Lrbor Ovcrhcad QuanUty
300
2, 9O0
50% 50.h
3, 200
2, 8O0
ao0
100ch 3158. 20
100ch s145. 70
50cL 5.O0
5Oc/c 7.5O
i n t he cost account ed l or
Pri or Dept .
Cost Labor
2, 800 2, 8OO
400 200
3, 200 3, OO0
pl us
t he cost added
r equi r ed I n t he cost
3,2O0
Equl val ent Unl t
Unl ts' Cost"
3, 200 3145. 70
3, OOO 5. 00
3, 00o 7.30
-
3158. 20
Total Cost
34f2,9O0
858,280
1, O00
1, 50O oo,78o
35O3' 74O
gecti on
determl ned al
Ovefi ead
2,BOO
200
g,ogg
durl ng thc current
Perl od)
accountcd l or recuon
Total
Cort
Cort l rom p reced i n g d epa rtment.' ..............
l-abor
Factory overhcad ...............' .
Total cost i n begi nni ng i nventorY
Cort added duri ng current
peri od:
Coat f rom p reced i n g d epartm ent.....' ..........
Labor. . .
Fectory overfrcad
Total cost added durlng current
pcriod...............'
Totel coct charged to department..,,.......
Cort Accountod l or ar Fol l owr
.h
Uni t s Compl et e
I 42,840
2,780
4, 140
3 49, 740
9423,4O0
12,240
18, 300
agj,ooo
3503,740
Unlt Cost
400
400
400
tfi
P6-3
(Concluded|
(21 Work in Process-4asting
DepartmeJlt """"""""
Work in Process-Assembly
Departmellt """"""'
Matgrials ..o......,................o.,.........................
Work in Process.-Casting
Department
""""""""
Worki nProcess-Assemb|yDepartmetl t.............
Work in Prccess-Finishing
Department
"""""""
Payroll " "" "" """ """""" """"" ""
Work in Process.-Gasting
Departmont "..""""""
Work in Pttcess-Assembty
Department
"o"""""
Work i n Process-Finish
i ng Department
""""""o'
Appl i ed Factory Overhead....""""""""""""
Work in Process-Assembly
Department
""""""'
Work in Process'-Casting
Department
Worki nProcess-Fi ni shi ngDepartmel l t..............
Work in Process-Assembly
Departttlgrlt
""'
Finished Goods Inventory'......-.'.
Work in Process-Finishing
Depalt[lellt
"""
148,575
1 16, 480
16, 362
44,4O8
12,240
48, 461
44,4O8
18, 360
175, 5OO
423,4OO
442,960
haoter6
263,055
73, Ol O
111,229
175, 5OO
423r4OA
442,960
s Ctnptar6
P6-4
,
( 11
-
Quandtf Schcdulc
Startad In procegs thls period
Transterrod to Flnlshlng Department
Endlng hventory..
Cogt Chargcd to Department
Beglnnlng Invcntory:
Persona Col ogne Company
Bl endi ng Department
Cost of Production Roport
For June
127
Materlalg Labor Overhead QuanUty
1r O0O
8r000
6Oc/t 2oth %'/.
7,00o
6,4OO
ooo
7,OOO
Total Equl val ent Unl t
Cost Unlts' Cogt"
Materlalc $ 19, 620
tabor 9U
Factory ovcrhead 2,375
Total cost In beglnning inventory....o..,................. 3 22,939
Coat added durlng current perlod:
Matcrlall .to..........'.r....................................i.......-......... $129rloo
61760 S22.oo
l,.abor o,88O 01520 120
29,005 E' 55O
/3.80
Factory oycrhcad ..r..............
Total coct addcd durlng current perlod...,... SlO5,o45
Total cort chtrged to department......... ...... 3187,984
328.OO
Total Cort
oh
Cort Accountad tor ar Fol towe Unl ts Compl ete Unl t Coat
Traneforad to Finlshlng Department 0,400 lOOc/o 328.00
Work ln Pmcess, cndlng Inventoryn
Mater|a|r.,..o......,,....................... 600 6ooh $22.00 $7,920
s179, 200
Iabor..........,.......
600 200h 1.20 1U
Factory overhead,...................... OOO 25% 4.8O 72o 817&4
Total cocteccounted
for"""""""""'
3187' 984
'
Total number of equl val ent unl ts requi red In the cost accounted for secUon detarml ned
ae
, lollowr:
-
Materl al s Labor Overhaad
Equl val ent
uni ts transferred out........,.. 6,400 O,4OO 6,400
Equtval ent
unl ts In endtng Inventory.. 360 1?:O 15O
Total cqul val ent
unl tg
_
| cqulvalent
unltg
SISS _q,*9 li?gg
"
Total cost (1.e., thc cost i n begl nni ng i nventory pl us the cost added durl ng the currsnt pcrl od)
.
dtvi dod by tho total number of equi val ent uni ts requi red In thc coet eccountcd for rcsuon
128
P&,4
(Conti nued)
Pelsona Cologne
ComPanY
Flnishing
Department
Gost of Production
RePort
For June
Hrt rbb
100%
70%
ChWter6
Ovrrhoed Quan0V
rroo
6,.1o0
10, 2O0
70%
27IOOO
20,OOO
I , OOO
27,OOO
Equlvalcnt
Unlt
Unltr' ColF
thranUty Schcdub
Beglnn Ing Invcntoty..F--.o.'--E-o.*@'F
Rccclvcd from Bbndlng Dcpartmcflt*--'-".-
Added to
proccta h FlnbhlnO Dcprrtmont '."""
Transferrcd to Flnlsh.d Ooodr
Endlng Invcntory
lrbor
t to,61o
317e' 2OO
z'r605
1g, el o
oo,75l
Coat Chargcd to DePartrncnt
Beginnlng InvcntorY:
Total cot h bcglnnlng lnventorY
Cogt eddod durlni currcnt Pcrlod:
Tote!
Cort
Coat frpm
pnccodln g d cpartmcnt.-..-.--.---..-F.*.-.-
Matsrlalr
L-cbor...
Factory ovcrhced
i
g/aso
11395
100
050
Cort f ro m p nccd In
g d epertnrcnt --.---.-.-.'-..
Matsrl al r
t-abor
Factory
27,OOO
27t OO
2Q,7OO
2gr7OO
36.e5
t . oo
.75
2.30
311. OO
Totat coot rddcd durlng curront
pcrlod-..-....-... 3245/a75
Total cst chergc'd to dcPrrtmcnt
329O,O85
Clppter 6
P-,4
(Concluded)
Cort Accountad for er Follon
Tnnrf rrrrd to Flnlrficd Ooodt.-....-
Work br Proccr' rndlng lnventorY:
Cort from
Pncccdlng
dcPartmcnt
lletcrlrlr-
lrbot
Fectory ovcrhcad
Totrl cott rccounted for .....--.-..---
Equhralent unltr transfered out....
Egutvalcnt unltr In cndlng lnvcntory
Totel rquhnlcnt unltr ...................,
Vr
Gomplctr Unlt Coct
129
Total Cost
3280,ooO
t8,950
I
rOOO
525
1, 81O 1O,O85
329O,O85
26,OOo
700
26t7OO
l 29, 1OO
25r605
1541705
6r88O
19, 919
26,799
29, O65
6O,751
89, 816
179,2O4
. 17g,2OO
286,OOO
286' 0oo
Unltr
2OTOOO
I' OOO
I ' OOO
1, 000
I
'OOO
20,0OO
l r0oo
100%
100%
100%
28rO0O
I ' OOO
tt 1.oo
3 6.e5
1. OO
.74
230
26,0OO
700
7OY.
70%
.
Totel numbcr ol equlvalent unltt rsqulrcd In thc cot accountod for rocUon determlned er
lollorvr:
Prlor DepL
Cort Matsrhlr Labor Overhead
27',0OO 27IOOO 26,7OO
il
Total cort
0,c.,
thc cort In beglnnlng lnvcntory
plur thc cort addcd durlng tlrc curront
perlod)
dMded by thc total number of cquhyalent unltr reguirsd ln thc cort accounted for recUon
( 21 Wor ki nPr ocess- Bl endi ngDepar t ment . . . r . . . . . r . . . o
Work in Process-Finishing
Department' .............
Matgri al s ..."........".....-...' .' -.
Work i n Process-Blen ding Departmellt ...' .....' ....
Work i n Process-Finish ing De
partment .............'
Payf Ol l . . . . . . . ' . . . . . r. . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . r. . . . . . . . . . . . .
Work i n Process-8len
din
g Department ...r..' ...,r.'
Work in Process-Finishing
Department..........' ."
Appli
gd
Factory Ovgrhgad .' .....o..' ......' .....r""
Work in Process-Finish ing Department...' .......o..
Work in Process-Blending
Department ..' ...
Fi ni shgd GoOds Inventory.........,....,....................' .
Work in Process-Finishing
Departmont.-' ...
tfr
Hytest Chemical CorPoraUon
Reltning
DePartment
Cost of Production
RePort
For March
*btrrLrb
Labor
100rA 75i *
Totel
Cort
Chaptor 6
Otrcrhcad Quentty
800
7r2OO
8,OOO
50}|
T' OOO
1, O00
P6-5
(rl
ol-nnEhr
Uchcduh
Beglnn ln
g Invrntory
--....-'-"""''d"'d---.*
Startod ln
procccl thb prrlod """"""'d""-'s
Trenctcrrad
to B|cnd In g Dcpartmont'*""""'--
Endlng lnvrntort
Coct Chargcd to DaPartrncnt
Beglnnlng InvcntorY:
Matorlelr
L-abor
Fa
gtort
ovcrhced ....""r"-".-'D-t'-F""""n'-""""-o
Total coet ln bcglnnlng
lnvcntory
Cort rddcd durlng cunrnt Pcrlod:
Matcrlrlr ......E....-'-r""-"--"'--""-"'Do'-'-'--oF
[ : bor. . ' --. . ---Mo"h"""""*---H"' E' F
". -' F'
Factoryovcrhcrd...-....o8....'.|..g.-'.........-...-....9...d
1o1t1 6oct rddcd durtng curcnt
perlod
Total coct chargcd to departmcnt....--...
3 725
30
00
818
, 7,272
1,920
4*O
311, 732
tl 2,550
x
Complotr Unlt Coet
Coct Accountcd tor ta Followf
Tranglerred to Blcndlng Dcpartncnt.
Work In Procc.r, rndlng lnvcntorY:
Materlalr
Labor........,...
Unltr
7r0oo
I ' OOO
I , OOO
l r0o0
100%
100%
73.h
50%
ll.ao
31, 00
.20
AO
8,OOO
7r75O
7,5OO
t1,ooo
150
200
31. 00
20
,10
31.60
Total Cort
i l 1, 200
1,350
312, 550
Total cot rccountcd for.-..--**
Totel numbor of oqutvtlcnt unltr rrqulrod ln tfir colt rccountrd
for lccUon dctarmlncd
ll
followr:
Mrt rbb Lebor Ovcrhcad
Fastory
EquhraIcnt unttr trandcrrcd out...........
Equl val cnt unl tr l n rndl ng Invcnto:y..
Total cqul val cnt unl tt
T' OOO 7,OoO 7,OOo
I , OOO 75O 50o
7, 5OO 8, OOO 7,75O
-
Total coct (1.r., ttrr cort ln bcalnnhg
lnvcntory
plur thc cort added during thc currcnt
pcrlodl
dhyldcd by thr total numbcr oi rgulvatcnt
unltr rcqutrcd !n thc cort eccountcd
for rccuon
8,O0O
Equlvalcnt Unh
Unltr' CorF
Chaptor 6
P6-5
(Continuedl
Quandty t]chedulc
Begl nnl ng
Recclvcd from Refinlng Dcpartmottt ........-..--.
Addcd to
proccrr ln Blendlng Departmcnt.....--
Transferred to Finlshed Gooda
Ending InventorY..
89t/t
Cogt Charged to Departtnent
Begl nnl ng Inventory:
Cort fro m p rcccdln g d epa rtment'......'........
Materl al a
131
Hytest Chemical Corporation
Bl endi ng Department
Cost of Production RoPort
For March
Matcrlalr Labor Overhcad QuanUty
1r4O0
7' Oo0
1, 80O
40o/c
10, 20o
9,20o
1, O0O
10, 200
Equlualent Unlt
Unlts' Cogt"
40ch
Total
Cort
$ t , 7sl
420
88
100
labor
Factory overhead
Total cost ln beglnning lnventorY
Coat addad durlng curront
porlod:
t 2, 602
Goat from precedlng department
911, 200
4,380
3r l oo
SrOOO
Materlalr
Labor.....,.
Factory overhead
Total cost added during current
pcrlod 924,280
Total cost charged to department...........
10r2OO
10, 000
9,6OO
I,OO0
s1.27
.50
.33
. 60
t?n
t32
P6-5
(Goncludeil)
Cort Accountcd
for ar Followa
Tnngfcrrcd
to Flnlghed Good3"""""
Worlt In Proccar,
cndlng InventorY:
Cort from PrPcedlng
departmcnt
Materlala
Labor
Factory overh
gad
..""""""""""'
Total cogt accounted
for .........-..---
Equlvalent unib transferred out..'.
Eguivalent units In ending Inventory
Total equivalent unlts.......:..........-.
%
Compl ctc Unl t Cost
Chapter 6
Total Cost
s24,840
2rO42
s26,882
9,200
400
9r 60O
7
1272
4, 38O
11, 652
I , 520
3, 1O0
41620
2r940
5, 6OO
8, 54O
11,2OO
11r2OO
241844
24,84O
Total number of egul val ent uni ts requi red i n the cost accounted for secuon determi ned as
followa:
Prior Dept.
Cost
Overhead
0,200.
I ' OOO
' l ,0oo
1, OoO
I
' OOO
g,2oo
l r ooo
1O, 2OO
100%
1OO'/o
gooh
49o/c
10o/o
s2.70
91.27
.50
.33
. 60
sl ,270
400
132
240
Materi al s Labor
9,20O
400
9r 8OO
g,2oo
800
1O, Ooo
-
Totat coct
(1.c., the cogt tn beginning Inventory
plus the cogt added during t|re current
period)
dl vl ded by thc totat number oi equi vatent unl ts requl red In the cost accounted tor sectl on
l 2l
Worki nProcess-Ref i ni ngDepart ment . . . , ' . """"'
Work i n Process-Bl endi ng
Department ....,""""'
Mat gri al s . . . . ' . . """""""' t "t ' r"""""""
Work i n Process-Refi ni ng Department' ......' t"""
Work i n Process-Bl endi ng Department
"""""""
Payr ol l . t . . . . " t " " " t " " t " " " " " " t " ' r " " " " " " " " " "
Work i n Process-Refi ni ng Department
"""' r"""'
Work i n Process-Bl endi ng
Department
Appt i ed Fact or y Over head' . . , . . . . . . . . . . . . . . . """"'
Work i n Process-Bl endi ng Department
r......."""
Work i n Process-Refi ni ng
Department
"""'
Fi ni shed Goods 1nvent or y. . . . . . . , . . ' . . . . . . . . . . . . . . . . , . . . . . . . . .
Work i n Process-Bl endi ng
Department """
Chapter 6
P6.6 APPENDIX
(1t
Cluand(y Schcdub
Beglnnlng
Stsrtrd h
proccs thb pcrlod..-.'.-.
Tranrf rrrrd to Asrombly Dopertmont
End hg lnvrntory........--x...
Cort Chargcd to Dcpertmrnt
Beglnnlng Invcntory:
Upton Manufasturing CompanY
Cuftlng Department
Cost of Production Roport
For Oct ober
t33
H.trrbb Labor Orerhead Ouantlty
00t6 1AV. 20Vr I , OOO
0,ooo
100% 80%
'loo.h
1O, OOO
8,5O0
1, 50O
l O, OOO
Totel
Coet
l-abor
8, 01O
1, 750
790
Factory overhcad
Total cct h beglnnlng hventory .'...... $ 10'550
Cort rddrd durlng currcnt
pcrlod:
Matarlelr 3 81, 900
18, OOO
3930O
l.bor
Fectory ovcrhcrd
Totrl coct rddrd durlng currcrit
pcrlod-.'..' 3130'7oo
Equi val ont Unl t
Unltr' Cogt"'
1o61 sot chergcd to depertrncnt
Cort Accountcd for rr Followr
Transtcrrrd to Arocmbty Dcpartmcnts
Ecglnnlng lnvcntoty .s.-6*
Colt to complctr:
Metcrlelt-
[rbor-*.-
Frctory ovrrhred ----
Strrt d end complct d thb pcrlod
Totrl coet trenrfrrnd to Ascmbly
Doprrtmcnt --*.
fVork ln Proccs, rndlng hvcntory:
Metcdelr
l.ebor
Factory ovcrhced
Total colt eccountcd tor ...................
-... 3150J250
Unltr Current' A Unlt Cogt
I , OOO
I
' OOO
l , OOO
7,5OO
1, 50O
1, 50O
l
r5OO
10.h
go.h
80%
100.h
100ch
aooh
1O0'/.
3 c.oo
LOO
4. OO
15. O0
t c.oo
2.OO
4. OO
9, 1OO
or3oo
9r800
310, 550
ooo
1r2OO
3,2OO
313, 50O
2,4OO
orooo
$ 9. oo
2.00
4.00
3l 5. OO
Total Cogt
3 15,850
112, 500
3128,35O
21, 9O0
$15O, 250
134
Chapter 6
P6-6 APPENDTX
(Contin ued)
.
llumbcr of equlvalent
unltr ol colt added durlng thc c'urant
perlod detsrmined
ar follows:
Materlab
Labor Overhead
100
000
7r5OO
71500
7' 5OO
Endlng lnventorY
1,500
1r2OO
1r500
To comptetc
bcglnn|ng
Invontory"""o'D,""'o"
Startod end complgtad
thlr
perlod o'D'-oo"o-"
Total cqulvalont unltr
e,1o0 o,3oo
e,8oo
-
cogt addsd durlng thc current
perlod dtvlded by thc numbor ol cqulvalent
unlts of cost addod
durlng the current Perlod
i-.'<--
Clwtor6
P6-6
+PPENDI X
(Gont i nued)
t 35
Upton Manufacturi ng Company
Assembly Department
Cost of Production Repod
For Oct ober
Materials labor QuanUty Schedul c
Beglnnlng Inventory
Rccetved trom Cuttlng Department...
Tranctcrred to Finished Goods Inventory
Endlng lnventory..
75% $Oo/t 8Oo/o
60c/c 4Oo/t 40ch
Overhead QuanUty
2, OOO
8,50O
' l o, 5oo
915OO
1, OOO
1O, 5OO
Equivalent Unlt
Units' Cost"
Cort Charged to Department
Bcglnnlng Inventory:
Coet from preceding department................................. $
Matcrialr
lsbor
Factory overhead
Total cost In begl nnl ng Inventory
Coat added durlng current
period:
Cort from preccdlng department...,........,....................
Matorlalr...
Labor..........
Factory overhead
Total cost added duri ng current
perl od.......
Total cogt charged to department,..........
Cort Accounted tor as Followr Units Current % Unlt Cost
Trangtarrad to Finlshed Goods:
Begl nni ng i nventory,.
Cost t o compl et c:
Mat eri al s. .
Labor........
Factory overhead ........
Started and compl eted thi s peri od
Total cost transferred to Fi ni shed
Ooods
Work In Process,
endi ng Inventory:
Cost from precedi ng
departrnent
Mat erl al s
Labor........
Factory overhead
Tot al cost account ed f or . , . . . . . . . . . . . . . . . . .
Total
Cost
4, 000
400
800
1, 800
$ 0, 800
3128,350
30, 100
21, 315
30, 015
$2O9,78O
s216, 58O
8,50O
81600
8, 7OO
8, 7OO
315. 10
3.50
2.43
3.45
2, 000
2, OOO
2, 00o
7, 5O0
1, 0oo
1, OOO
1, OOO
1, OOO
2s%
40%
40%
1000h
1000h
600h
400h
400h
s 3.50
2.43
3.45
24,50
315. 10
3. 50
2.45
3. 45
s24,50
Total Cost
$ 6, 800
1, 750
1, 960
2,760
g
13,270
18:t,75O
3197' o2o
$15, 1OO
2. 1OO
980
1, 38O 19, 590
93:l'599
t6
P6-6 APPENDI X' (Concl uded)
Chapter 6
.
llumber
of equhralent unlts of cort added during thc current
perlod determlned as follows:
7o completc
beglnnlng Inventory..
tltartsd and completsd
thlc
pcrlod
Endlng Inventoly-r.-...................t..
Total equlvalent unltr
Prlor DepL
Cort Materlale
0 500
7,500 71500
1, 000 Eoo
' 8, 500
8, 60O
Labor Overhead
800 800
7,500 71500
400 4oo
8,7OO 8,700
-
Coat added durlng thc current
perlod
dtvlded by the number of equlnalent unlts ol cost added
durlng ttre currpnt
perlod
tzl
Work in Process-Cutti n g Dep artm ent'................
Work in Process-Assembly Depa rtm e nt ....--....-'.
Mat gri al s r. . . . . . r. . r. . . r. . . . . . . . . ' . . ' . . . r. . . . . . . .
Work in Process-Guttin
g Dep a rtm 8f1t......' ..........
Work in Process-Assembly De
partme nt ....."..' .o.
Payr ol l . . . . . . . r . . . . . t . . . . . . . . . . . . . . . . . . . . . t " t " " t " " " t " t t " '
Work in Process-Cutti n g Departm
gflt' ................
Work in Process-Assem bly De partm ent ........' ..,.
Appl i ed Factory Ovgrh
gad
......"..............' .....
Work i n Process-Assembl y Department....r.....r..
Work i n Proc ess-Cutti n
g Depa rtm
gllt' ........
Fi ni shgd Goods 1nventory...,....o......"........' ,..r.......
Work i n Process-Assembl y Department ..,..
81, 900
30, 1OO
18, 600
21, 315
39,20O
3O, Ot 5
128, 350
197rO2O
1 12, OOO
39, 915
69, 215
128r35O
197, 02O
Chapter 6
P6.7 APPENDIX
(rl Marston Manufacturi ng GompanY
Fabri cati ng Department
Cost of Producti on Report
For August
QuanUty Schedulc Materi al a Labor Overhead QuanUty
1OO'/. 4och 80o/o 400
1, 2OO
1, 600
Beglnnlng Inventory
Stlrtod In
process thls perlod
Tranrfered to Finlshlng Departmcnt 1,100
y
Endlng Invcntory.. 1OO'h 8oo/c 9Oo/o 5OO
-1f99
Coet Charged to Department
Total Equi val ent Unl t
-
Begl nnl ng Inventory: Cost Uni ts' Cost"
Materl al s .. $ 29,280
Factory overhead
1, 900
11, 80O
Total cost i n begl nni ng i nventory
Coat added duri ng current peri od:
I 42,980
Materl al c... $
9O,OOO 1,2OO $ 75.OO
1O,o8O 1,340 I2' OO
48,740 1,230 38.00
137
. a . . . a a a a a a a a a a
l.abor
Factory overhcad
Total cost added durl ng current peri od....... S152,820
Total cost charged to department...........
!199f99
s125. OO
,g
P8-7 APPENDIX {Continued}
och
aoch
2Oolc
lOAo/"
3 75. 00
12. 0O
38.00
125. OO
942,980
$37,500
4, 800
17, 10O
80
700
450
Chaptar 6
Total Coet
g
48,900
87,500
$130, 4O0
59, 4OO
$195, 8OO
Cort Accountod
for ar!g!!ow:
f-rtf"-.a
to Flnlshlng
Department:
Bcglnnlng
lnventory.'
Cort to complste:
Materlalr..
l-abor..-.--.
FactotY overhead
""""
Startcd and completed
thlr
Perlod
Total coct transfcrrsd to Finlshlng
Dcpertmont
Work tn Procesr, ending Inventory:
Materl al e..
Labor........
'
Factory overhead
Total coat accounted for ...-.--.-..........
To completc beglnnlng Inventory
Startad and completed thls
Perlod
Endl ng InvcntotY..
Total equl val ent unl tg
-
Cost added duri ng the current
peri od di vi ded by
durl ng the current
Perl od
Unitg
Current 7r Unlt Cost
o
2,880
31040
400
400
400
700
500
500
500
1000h I 75,00
800h 12.OO
9Oo/o 38'00
240
700
400
.
l l umber ol equl vatent uni ts of cost added duri ng the current
peri od determi ned ac fol l ows:
Materials Labor Overhead
o
700
500
1. 200 1, 340 1, 230
: :
:
the number of equi vatent uni ts of cost added
CluptcrG
7g--7 APPENDX (Contlnuod|
Marston Manufasturing Company
Finlshlng Departrtent
Cost ol Produstion Report
For August
Or||nuU&hodub llrt rbb lrbor Ovrrhcrd
*
tnV.
20V. 3gYr
Rocrlvod from Frbrbrtlng D.p.rbnltt
Tnnrfrrrrd to Flnlrhed Ooodr hvrntory
Endhg lnvrntory...,.o..m..F6.os,,o IOO%
Cort Chrrg.d to Dopertm.ot
Boglnnlng Invrntory:
Cort from pncrdlng
dcprrtnont --*...n...-.,...,. t 74'OOO
lbtarfrb-es.e..-F..F= An
t bot I , OOO
2,52O Frctory
Total coct h bcglnnlng hvcntory
Cort rddrd durfng curnrnt
pcrlod:
Cort from pncodlng
drprrtmmt---...-,......,,.....,.
Hl tarhbH*ed-nare
s 78r3!to
trbor
3130/a0o
2r02O
19,880
20,42o
Frctory ovrrhred
Totrf coet rddrd durlng currrnt p.r|od.......
Totel cct clrtrgcd to dcprrbncnt.,.*.-
ti 80,020
Cort Accountod
tor rr Followt Unltr Currrnt 16 Unlt Cort
Tnnrfrmrd
to Fhlrhcd Ooodr:
Boglnnlng
Invcntory .-.-..-F.,-.-
Cort to complctr:
Mattrlalr.-F.-.*nE
bbor.--.*ffi
Frctory oyrrftlad -*
Ettrt d end complrt d trb p.rfod
Totrl
cort trrnrfrrnd to Flnbhcd
Omdt Hhs.*
Wort
h Procan,
ondlng hvrntory:
C;ort from pncrdlng
dapertnrrnt
Httorletr
_ F.....r........
139
oo?6 oof)6
Totel
Co.t
Quentfu
ooo
1, 1OO
1, 7OO
l
r3OO
.3OO
1, 700
Egul vel ent Unl t
Unl tr' CorF'
oo0
oo0
ao.h s 2-oo
w. A 14. OO
w% 2t . oo
100% 101. 00
3267,37O
l r l oo
1r4OO
1t12O
1l 2O
t78,&5O
720
Q1720
l Or O8O
3124. 00
LOO
14. 00
21.O0
3101. 00
Totel Cort
3 95p7O
112t7OO
3208"570
58r8OO
3267,370
ooo
700
L^abor
Fectory
ovcrhcad
Totel
coct tccountcd tor ...................
100% sl 24. 00 3{9, OOO
100cA 2-oo aoo
oo.h 14.OO 3,3OO
6O.h 21.OO 5,O4O
400
.fOO
.3OO
400
140
Chapter 6
P6-7 APPENDIX,(Goncl uded)
.
llumbcr
of cqulvalent
unlta of coct added durlng t{rc curent
perlod determlned al follows:
To compteto
beglnnlng
lnvanto4y "
st *.0-"nd
comPletcd
thlt
Perlod
Prlor DepL
Coct Materlalr
o
700
400
Labor Overhead
480
700
240
380 4ao
700 700
400 240
Endlng InventorY
Total equlvalent
uhltl
1, 42O 1, 42O
9O, O0O
21920
921920
16, 080
19r 880
35, 960
46,7 40
29,82O
76, 56O
136, 400
136, 4OO
208, 570-
208, 57O
1, 46O
ft
Coat added durl ng the current
perl od dl vi ded by the number of equl val ent unl tc of cost added
durlng tlrc currtnt Perlod
l2l
Work in Process-Fabricating
Department
"""""
Work i n Process-Fi ni shi ng
Department......' ...' ...
Mat gri al s . . . . . . . . . . . . . . . . . . . . . . . . . -. . . . . . . . . , ' . . r
Work in Process-Fabricating
Departmeflt ..........
Work i n Process-Fi ni shi ng
Department....' ..o.r....
Payf Ol l . . . . . . . . . . . . . r . . . . r . . . . . . . . . . . . . . r t r . . . . . . . . . . . . . . . . t . t . r .
Work in Process-Fabricatin
g Departm ellt .'........
Work in Process-Finishing Depa rtme nt ..'.-....,..'.
ApFl i ed Factory Overhead ......-.........' ......,....
Work i n Process-Fi ni shi ng Department........r....,
Work i n Process-Fabri cati ng
Department
"
Fi ni shed Goods Inventory
Work i n Process-Fi ni shi ng
Department.....'
141
ClvgtorO
P6.8 APPENDIX
( 1)
QrranUV Schcdulc
Bcglnnlng lnventorY
Strrtld In
Proccsc
thla
Pcrlod
Trandcrrcd to Bl
Endlng hvcntory
endi ng Departmant.
TWonka Beverage
GomPanY
Mashi ng DePartment
Cost of Production
RePort
For SePt ember
Matcrlalr
[.abor
9Oc/, 60oh
00% 400h 20c/o
gvcrhead
QuanUtY
30o/c 800
3, OOO
3, 6OO
3r l oo
500
3,600
Equi val ent Unl t
Uni ts' Cost"
Cort Ghargcd to DePartmcnt
Begl nnl ng Inventory:
Matarl al s
l^abor
Factory overhead...
Total cost In begi nni ng i nventory...........' ..' ..,.......
Coat added duri ng current
Pcrl od:
Materl al r
Total
Cost
3 1, 088
172
172
3 1, 432
3 O, O0g
1. 47O
3, 020
2,84O
2r94O
3, 020
32. 10
-50
1. O0
33.60
Factory
Total cort addcd durl ng currcnt
peri od....-.. 310' 496
Total cogt charged to department............ 3t1i 93g
112
P6-8 APPENDIX
f0ontin
ued)
Cort Accountrd
for al Followr
Tnnrtcrad to Etendlng Department
Beglnnlng Invontory .......,...""""
Cogt to comPlete:
Matgrial
g..."""""""""
labor.-..,...
Factory overhcad """"
Stsrtad and compteted thls
Perlod
Total coct trancterred to Blending
Departn ent .....'..................
Work ln Proccct, cndlng Inventory:
Materlalr..
l-abor........
Factory overhead
Total cost accounted for....,..............
Untts Currant 7o Unit Cost
Chaptor 6
Total Cort
$1,4i 12
I 2,098
I rOOO
311, 008
t 6:10
100
100 830
800
600
600
2,5OO
500
500
500
10%
40o/o
7Oo/"
'loooh
8Oo/.
400h
200h
s2.10
.50
1. 00
3. 60
$2, 10
.50
1. 00
126
120
420
.
Humbcr ol equl val ent uni ts of cost added duri ng the current
peri od determi ned ar tol l ows:
To completc beglnnlng Inventory
Startod and com
pleted th lg period .................
Endlng Inventory
Total cqul val ent unl tr
Coat added duri ng the current
peri od di vi ded
duri ng tfi e currrnt peri od
sl 1, 928
Materi al s Labor Overhead
240 420
2,500 2,500
200 100
2,890 2,940 3,020
by t he number of equi val ent uni t s of cost added
60
2,500
300
Chapter 6
Po-8
APPENDIX
(Gonti nued)
143)
Twonka Beverage Company
Bl endi ng Department
Gost of Producti on Report
For September
QuanUty Schedul e
eeglnnlFg Inycntoty.......,..r.,.........r........,............
Recclvcd from Mashlng Department..................
Added to process In Bl endi ng Department.........
Matarlala Labor
50ch 20.h
Overhcad QuenUty
2otlo I
'OO0
3, 1OO
3, 1O0
60o/c
73OO
6,40O
800
J-,n9
Equl val ent Unl t
Unlts' Cogt"
Transterred to Finished Goods Inventory
End ln g lnventory.......... 1000h 6Oc/o
Coat Charged to Department
Begi nnl ng i nventory:
Cost trom
precedl ng department................ $
Total
Cost
Materlals
Labor
Factory overhead
Total cost i n begi nni ng i nventorY
Cost added duri ng current
peri od:
Cort from precedl ng d epartment...........' ...
Materials
Factory overhead
Total cost added duri ng current peri od.......
Total cogt charged to department...........
Coat Accounted for ss Follows Units Current 7n Unlt Cost
Transferred to Fi ni shed Goods:
Begi nni ng i nventory..
Cost to compl ete:
Materi al s..
l,-abor........
Factory overh ead ........
Started and compl eted thi s peri od
Total coat transferrcd to Finished
Goods
Work In Process, endi ng i nventory:
Cogt f rom precedi ng
depart ment
Materl al s
l :bor........
Factory overhead
Tot al cost account ed f or . . . . . . . . . . . . . . . . . . .
1r77O
100
55
74
s 1, 999
-lt
t,ogg
1r4O7
2,OO4
2,''72
$17, 181
$19, 180
6,2OO
g, 7oo
o1680
6,ego
$1. 70
21
.30
. 40
1, 000
1, 00o
1, 000
5, 400
goo
800
soo
BOO
500h
800h
sooh
1000h
1000h
' loooh
600h
gooh
3 . 21
.30
,40
2.70
s1. 79
. 21
. 30
. 40
$2.70
Total Cost
si , 999
s 2,664
14, 580
317,244
s1, 432
168
144
' 192
1, 930
319, 180
105
240,
320
,41
P6-8
APPENDIX (Gonctuded|
'
Xumbcr
of cquhrafent
unltr of cogt
added
during
Chapter
6
.
thc
current period
determlned
as foftows:
To completc
beglnnfng
Inventory..
gt"rt"d and comptetad thlc perl;d
Endln g Inven toly..-,F.F.........,.......,
Total cqulvalent
unltr
Prlor
DepL
Cogt
o
5,400
800
6,20o
Materlab
Labor
5OO
8OO
5,400
5,400
800
480
6,700
9.880
Overhead
800
5,40o
480
6,ogo
"
ff:;ffi'"HlllSil;t"'t
perlod
divlded
bv the number
or equivarent
units
or cost added
(21
Worki nprocess_Mashi ngDepart ment . . . . . . . . . . . . . . .
Work i n
process_Btendi ng
Department,o............
Mat gr i al s' r " " " . . . . . - . . . r . . . . r . . . - . . . - . r . . . . . . . . . . r . . . . . r . . . .
Work
in
process_Mashin
g
Department
...........r,..
Work
in
pro.cess_Blen
din g
Depa rtm
ent .....r..,.,...
Payr ol l
" r " " r " " " r r r " " r . . . - - . . . . r . . . r r . . . . . . . . . r r - . r . - . . . . .
Work
in tT:
::s_!l-ashi1
g
Dep artm
nt,......,.......
Work
in
process_AlenOini
Departmelt
..............
Applie
d Facto
ry
Ovgrir ga
d r.................,......rD.
6, O06
7, 4O7
1r47O
2rOO4
3,O2O
21672
7, 413
31474
5, 692
Work
i n
process-B_l endi ng
Department
............,.
I 1,Ogg
work
i n
process_rraai ni ni
oepart-;;f::.::::
1l ,oeg
Fi ni shed
Goods
Inventory..............
.........
1Tr244
work
in
process-Biending
oepatt.;;i::::::
I t
' z' rq
12,244
I
CHAPTER
7
DTSCUSSION QUESTIONS
O7-1. Ot slity cost! rnay be groupcd hto the folbwing
three classifications:
1. Preventicn costs are the ccts hcurred lo
Ptcvent
product failure. They include the
cdt ct designing high quality productr and
prcductbn rystenrs, irrludhg thc coett o{
implementing and maintaining such sys'
'
lems.
2. Appraisal coots ate the coets incuned to
detecl
producl fai l ure. They i ncl ude l he
cet of inspccting and testing malerials,
hspecting produc'ts during
prodwlion, and
thr cogt d obtahhg hlonnatinn lrqn cus'
lorners aborn
product salisfastiqt.
3. Failure ccts ato the cosls incuned when
a product tails, ard may occur inlemally or
externally. Intsmal failure cosls are those
that occur during the manufacluring
gr
Pro-
ductbn procoss (e'g., scrap, spoilage' and
rework), and external fai l ure cosl s aro
t hose t hat occur at l sf t he
Pr oduct
has
been sol d ( e' g. , war r anl y r epai r s and
r epl acement s, 3al s r ef unds, handl i ng
cuslomr cornplaints, and bsl sales result'
hg frorn
Poor Producl
qualtty).
Q7-2. TOM stands for total quality nwragemenl' which
b a cornpany'wirCe approach to quality improve'
menl in all processes and activities. TOM is a
pervasi ve phi l osophy ol doi ng busi ness thal
appl i es to al l funsti onal areas of the company
and to ail personnel.
Q7-3. Five characteristics of TQM syslems are:
1. The company' s obi ecti ve l or al l busi ness
activily is to serve ils cuslorners' The term
product' is extended to include services
as well as groods, and'custorner'hcludes
htemal usors as well as those outside of
the cornpany who purctrase the company's
products. Each empbyee's activity is ori'
entod to provirCing service to the cuslorner.
2. Top marngement prcvlCes an aclive lead-
er shi p r ol e i n t he qual i l y i mpr ovemenl
rnovoment.
3. Al l empl oyees ar e acl i vel y i nvol ved i n
qusl i ty i mprovement. Empl oyees aro nol
only asked to contribute ideas, but also lo
l i nd bat t er ways of doi ng l hi ngs-
Involvemenl can be successlul only when
there is oncourago.neol and an open and
honest environment cl trust.
4. Thc cornpany has a sysiem of idenlifying
qual i l y pr obl ems, devel opi ng sol ut i ons,
and set t i ng qual i l y i mpr ovement obj ec-
t i ves. Thi s t ypi cal l y i nvol ves or gani zi ng
empbyees lrorn all ranks and lrom dilfer-
enl orgnnizational units along with man'
agers who have authority to take the nec-
essary actbn lo solve
Prcblems.
5. The company
places a high value on its
empbyees and proviCes cqrtinuous train-
i ng, ar wel l as recogni ti on for achi eve'
ment. Employees perform besl wfien they
are well lrained, and they have the greal'
est capacily to contribute when lhey are
hightY educaled.
Q7-4. The concept cl continuous quality improvement
ditlers frorn the cmcept ol quality optimization in
that csrtinuous
quality improvemenl is a dynam-
b process of change under lhe assumption that
the iCeal is not an abrclute loown value; where'
as, quality optimization is a slalic approach to
fhding the best solutbn to a given set of fixed
and knorvn constraints.
O7-5. The fi rst
probl em wi th tryi ng to i nspect qual i l y
into the
product is that il delects inlemal lailures
only afler coosiderable cost has been incurred.
The second
problem is that the rnagnilude ol the
cost of the internal failures, delecled by inspec-
lion, is rarely measured and typically ignored.
Q7. Cornpanies should concEntrale their eflorls on
preventhg poor gualily rather than on lrying lo
inspect it into the
Process,
because il will result
in less total quality cost. The approach is found'
ed on the bel i ef i hat by i ncreasi ng preventi on
cost s, t he cosl of i nt er nal l ai l ur es- such as
scr ap, spoi l age, r ewor k, and downt i me- wi l l
decline by a larger amount than the increase in
prevention cosls'
O7-7. Ouality costs should be measured and reported
lo managemenl in order to provide incenlive and
di r ect i on f or i mpr ovi ng qual i l y. Lar ge qual i t y
costs indicate large opportunities for improve-
menl . Al so, moasuremnts
provi de a basi s l or
moni l ori ng the cosl of qual i ty and eval uati ng
improvemenls.
07. Scr ap i ncl udes ( 1) t he f i l i ngs and t r i mmi ngs
remaining aller processing nraterials'
(2) defec'
live materbls that cannot be used or returned lo
the vendor, and (3) broken parts resulting trorn
empl oyee rrors or machi ne fai l ures' Spoi l ed
goods differ lrom scrap in that they are parlially
or ful l y compl eted uni ts l hat are i n some way
delective and are not econornically or physically
conectable. Spoiled goods rnay be unils of the
product or componont
Parts,
and they may of
may not have a sal vage val ue. Bework i s l he
pr ocss ol cor r ect i ng del ect i ve manuf acl ur ed
gooos.
Q7-9, Tho cost of scrap, spcilage, and rework shouH
nol be i gnored, because such costs are ofl en
145
,16
quit. high and ofton re3ult trom hternal failures
tirat can Uc elimihatod lgnoring lhe cosl of these
htemd failures
snds a signal to rnanagers lhal
urc*r codr arc acceg,table. Reporling such costr
provido inccntivl
tor improvement, particularly
il tho cctc are la'rgc'
OZIO. tn ordor to know what to do with lhe cosl' the
accountant
musl know whether lhe spoilage or
rework is caused by thc custorner or by an inler'
Chapter 7
nal failure. ll spoilage or rework is the result cl a
custorner requiremenl, lhe unrecoverable cosl
shoutd be charged to the
trb.
On lhe other hand,
il the spoilage o rework is thc cutsequerrc o{
an intemal lailuro, lhr unrecovrrabb cocl should
be r emoved l r om t hc
i ob
( i . e. , char ged l o
Factory Ovefi ead Control ) and reported to
responsible managomenl
CliwterZ
E)GRCISES
I
E7-1
(1) Accounts Rgcgi vabl 8...' .......o..o..o................."....... 1
r8O0
Scrap Salgs (or Other Income)...' .............o....
l2' l
AccountS RgCgivab|o......................r..' .................. I
r8O0
Cost of Goods Sofd
(31 '
ACCOUnIS RgCgivablg."...' ."...' ......' r.....".' ...' .....' .' . 1r8O0
Factory Ovgrhgad Gontrof ..r....' .....r..r...........
(4) AccountS RgCgi vab19........................' ................... I
,8OO
Work i n Procgss ........,.,.,,,.r....................r..,..
E7-2 Spoi l ed Goods Inventory.,...,.r....,..ro...,................. 12o
Factory Overhgad Control ......,.........,..........o........ 152
Work i n Process .........,.. 272
E7-3 $27,OOO total
i ob
cosVl ,00O chai rs =
$27 cost per chai r
Spoi l ed Goods l nvent or y ( $g x 1OO chai r s) , . . . . . . , . . . 9OO
Factory Overhead Control
((,$zz
-
$9) x 1Oo).........
1,80o
Finished Goods Inventory ($22 x
gOO
chairsl ...,... 24,3oo
Work i n Process...................,.,..r. 2TTOAO
E7- 4 Spoi l ed goods
I nvent or y ( $9o x 1OO' uni t s) . . . . . . . . . . . . 9, OOO
Gost of Goods So| d.,...., .r.............,...,r...D. 95.OOO
Work i n Procgss ,.....,,.....,,.............o.......o..r,.. l O4' OOO
t 47
1, 8OO
1, 80O
1, 800
1, 800
E7-5 FactoryOvgrhgad Contro1.r..,..,....,............,........,.
Mat er i al s ( 10O
uni t s x $1. 5O) . . . . . , . .
Payrol l (1OO uni ts x 114 hour r $1O
per' hour)
Applied Factory Overh ead
( 1OO
r 114 hr x $12 r at e) . , . , . , . . . . . . . . , . . r . . . . . . . .
700
Fi ni shed Goods Inventory.....,........
.,.....,. 6,900
Work in Process
150
250
300
6, 80O
18
E7-6
Work
in Pnocess
""""""
Mat ef i al s
(1
, OOO
Uni t S X $1). . . r. . . . . . . . . . . . r, . . . , , . . .
Payroll
(l
'OOO
units x 116 hour x $151...........
ApbtieO
Factory Overhead (l'ooo r 716 r $3ol
COSt
Of GOOdS SO1d...........................' r...r.........o....
Work in Process
($651000 + $8r5O0!.....'.......
Accounts
Receivable
($73r5oo r I 5oVo1...........r...
Sal
gSt ' . . . . . r . . . . r . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . r . . . r . . . . . . . . . r . . .
8, 5OO
73,50O
I l o, 25O
ChapterT
1r0oo
215OO
5,OOO
73,5OO
1 1O, 25O
ChapterT
E7-7
,
( 11
Quantl ty Schcdul c
Beglnnlng Invenlory
Started In
procesc thla perlod s.........
Transterrcd to Finishlng Department
En ding Inventory............,.....,.............
Spolled In
procccr.....x..,,........,.'s.....
Gogt Charged to Department
Begi nnl ng Inventory:
Manx ComPanY
Forming Department
Cost of Production RePort
For August
149
Matarlalr Labor Otrarhcad QuanUty
I , OOO
9r 000
19'009
8,OOO
1, 50O
500
100%
100%
7,rh
100.h
50o/o
100.h
Total
Cogt
$ 1, 260
770
1, 4O0
g
3,430
$?6,240
10, 78O
21,725
s7.45
3S.ZS
1. 20
2.50
s3.7s
1. 20
2. 50
1O, OOO
Equl val ont Unl t
Unl ts' Coat"
L.abor
Factory overhead
Total cost In beginnlng lnventorY
Cost added durlng curent
perlod:
Materliglr
Labor
Transfered to Finlshlng Dcpartmcnt
Chargc to Factont Overheod tor
gpollage:
Materlialc....
l-abor.....
Factory ove rh ead .......................
Work l n Procees, endl ng Inventorp
Materi al s,.
Labor.....,..
Factory
overhoad
Total cost accounted for ...................
1O, O0O
9,825
9, 25O
s3.75
1. 20
2.50
Factory overhcad
Total cost added duri ng current
peri od-..' ... Soa' 745
Totaf cost charged to department.......,.., Sry-
Cost Accounted for ac Follolvl Unl tr
' /aCompl ste
Unl t Cost
I , O0O
500
1r 500
1, 50O
1r 500
100.h
l Ogo/.
1000h
100.h
1000h
750h
500h
s7.45
f:trt C-!
s59,OO0
s1, 875
800
1, 250
3,725
s5, 625
1, 35O
1, 875
8,850
372,175
500
500
150
Chapter 7
E7-7
(Goncluded|
'
Totat number
of cqulYalcnt
unltr rsqulred h thc cort eccountod lor recuon determlned ar
lollorvr:
Matsrlalr
Labor ovcrhead
I,OOO I,OOO I,OoO
1, 500 1, 125 750
500 500 500
to,ooo 0$25 er?99
= a : :
:
Egu hra I ent u n ltr tran cto rrcd ou t "-""'-"'o"""
Equlvalent unltr ln cndlng lnventory"
Equ lva tent unltr of rpollagc...*."'-"""""':'
Total equlvalont unltf .....'............,..............""
h
Total coet
fl.c.,
thc coct In beglnnlng Inventory
plut the coet added durlng Bro currant
period)
dlvtded by the total numbcr of equlnalent unltr requlrad ln tha cogt accounted for section
(Zl Work In Process-Finishing
Depattment.............,
591600
Fact oryOverhgadCOnt rol . . . , , . . . . . , . . , . . . . . . . . . , . r. . . ' . . . ro.
3r725
work l n Process-Formi ng Depart ment . , . . . . ,
63' 325
Totrl cort ehargcd to dcpertnrcnt.........- 1126'200
Cort Accountcd lor er Followr Unltr %Completr Unlt Cort
Tnnrlrrnd to Flnlrhrd O,oodr-..---
Trenrtcrrr'd to Spollcd Ooodr krvcntory
rt rahrago vrlur .-s-.....-..*..
Ghergr to Ftctory Ovrrhod for rpollrgo:
Cort of complctcd rpolbd unttr
l.rrr ratvagr vtlur oil tpotlcd unltr
Work h Proccsr rndkrg brwntorf
Cod from prrcrdlng
dcpertnrcnt
Matrrl el r_
L-e bor..-....
Fectory
ovcrhcad
3B0O
400
400
400
800
800
800
800
100.h $27.00
510. OO
100.h s27.oo
10. oo
100.A 31e00
10.h 5.oo
20ch
29Vr
4.OO
o.oo
5,OOO
Equlvafent Unlt
Unltr' Cst"
151
ClppterT
E7-8
,
(r) Juni per ComPanY
Finishing Department
Cost of Production Report
For Jul y
QurnU(y Echrdulo
Rccrlvcd trom CutUng Dcprrtmtnt-
Trenrfrrrrd to Flnldt.d Ooodr...-*
Frd hg humtot7...*.-.o.s....'......-r.
8polbd h prccoE.-.m--..,.x.d.
Cort Chrryo'd to Dcprrtmont
Boghnlng hvontory:
Coct from prcccdlng
Matcrlalr
L.abor
Frctory ovcrttcad
Total cort In bcglnnlng InventorY
Gort rddrd durlng cgrrant
prrlo'd:
Hdrrlrb Lrbor Orcrhcad Quan$ty
500
41500
5,000
3,800
800
400
&Vr
100%
20%
100%
20%
100.h
Total
Colt
3 5r5OO
1ro5o
11180
11770
s 1o,4oo
3 54,500
20,olto
10.200
24,39O
3115, 800
Coct from
Hrt rlrlt
prrcodlng
dcpr
Frctory ovcrhcad
Totrl cort eddcd durlng currcnt
pcrld.--..
5, 000
1r52O
ar36O
ar3oo
$1O, 80O
4. O00
s or6oo
1, 600
040
000
31e00
5.OO
327.0O
Total Coat
t i 02, 000
4, OOO
6, 8OO
12, 800
312O, 20O
4.OO
o.oo
Totrl cort rccountcd
for
152
Chapter 7
E7-g
(Gonctudedl
.
Totat numbcr of rqulvrtent
unltr nqulrrd h thr cott tccountcd for rccUon
dctcrmlnod r
followr:
Equ hva lent unltr trandcrrcd
ollt -"
Equlyalsnt unttr h rndlng
lnvcntory
Equ bra le nt unttr o'f rpof bgc....'.*'
Total equlvalcnt unltr
Hor
DcoL Gct Metorbb
Labor Ovorhced
3BOO 3BOO
t8o l8o
aoo aoo
15,20 a,3oo 4,3OO
spoo
320
400
3r8OO
800
400
5,000
-
Total cort
(1.o., thr coct In bcglnnlng Invcntory
plur thr-colt eddcd durlng llrr currcnt
pcrlodl
dtvtdcd by thr toUf i"iUrr oi rquliiini
u"ftt rrqutrrd br t1'r cort eccountrd tor rostbn
(21 Fi ni shgd Goods I nvent ory. . , , . . . . . . . . o. . . r. . ' . ' . . . . . . r. . . . . . . .
1O2t 60O
spoiled Goodg Inventory ..' ...r...........' ..........' ....""
4tOOO
FaCtOly OVgfhgad
COntfOl .....,r.......t..""""""rtt""
6t8OO
Woik in
process-finishing Department"""
l13t4OO
ChagtarT
E7-9
1
(11
$
' l,9oo
380
127,72O
_320,989
QuanUty
55, 0OO
53,200
$2,400
sro
t53
Unl t
Cogtt'
3.no
. 15
s.55
Total Coat
326,950
3rO3O
QuanUty Schgdul c
Beglnnlng lnventory
Startsd In
procer tfilr
perlod
Transfemad to Reflnlng Department
Endl ng
100ch
logt h pnocar
Coet Chargcd to Departmant
Beglnnlng Inventory:
Matcr1a1c..............,.o...........'..... .......'.....'.....
Convgrrslon cost................,.....,.....................,.o,..F...r...
Total cort added durlng current perlod.....-..,......
Totel cort charged to department...........
Cost Accounted for ar Follorrr
Coastal Petroleum Inc.
Cracking Department
Gost of Production Rsport
For MaY
Matcrbb Convcrslon Coot
7O'/.
5,OOO
55,000
99499
49,000
6,0O0
5,00o
60,ooo
Total Egulvalent
Coet Unltr'
Total cost In beglnnlng Inventory.......'...'.........o... 3 2'280
Cost added durl ng current
Perl od:
Materi al s s2o,1oo
-
7,420 Convenlon colt
Trangferrcd to Reflnlng Department
Work ln Procesc, ondlng Invontorp
Materlalg
Convcrgion coct
Total cost accounted for
Total number of equl val ent unl ts
tol l owr:
Equhralent unltr translerred out....
Equl val ent unl tr In endi ng Inventory
Total equl val ent unl ts
Z. C"-prclc Unlt Cost
100ch s.55
7000h
70.h
49, OoO
4r2,OO
53, 2OO
Unltr
49, OOO
o,o0o
9,000
40,00o
o, 0oo
55, 00o
,4O
. 15
s20,980
raqul red l n the cost accounted for l ecUon detcrml ncd ae
Materialg Conversion Coat
Total cost (1.c., thc coat In begi nnl ng Inventory pl ue the cost added durl ng thc currcnt parl odl
di vl ded by tho total number of equl val ent unl ts requl red In the cost accounted for rectl on
( 2)
Wor ki nPr ocess- Ref i ni ngDepar t ment . . . . . . . . . . . . . . .
Work i n Process-Cracki ng Department......
26, 95O
26, 95O
1il
E7.1O APPENDIX
(r)
Chapter 7
15, 00o
Equlvalent Unlt
Unlts' Cost"
Sun Valve Gompany
Tooling Department
Gost ol Productlon Report
For March
l,lstrrlab Labor
lO0t/o 70%
100%
lOOt/o
QuanUV lichcdulr
l
B eglnnln
g InYcntoly',...."""""'"r"{
Startod thlr
pcriod........"""""""!"-',
Tranderred
to Flnlshlng Dapartment
Endlng InYcntory........"'t""""""FF
-'
Spolled In
proccar.-...................-."'-
Coet Chargcd to DePartment
Beglnnlng InventolY:
Total
Cogt edded du
Matcrlala
Labor
Total coct charged to departmcnt
Cogt Accounted tor er Follorvr
Transterrcd to Flnlshln g Dcpartmenb
From bcglnnlng lnvcntory ---*
Coat to complato thla perlod:
Materlala,..........F...-d
Chargc to Factory Ovartread for apollagc:
Materl al r..
Labor.-.....
Factory overhead
Work ln Proccu, cndlng Invantory:
Mat erl al a
L:bor........
Factory overhcad
Total cqt tccountod 1or.........-...-
Chrerhead QuanUty
go.h
2r0oo
13rO0O
15, 000
7r000
3r00o
5, 000
c0%
9Ot/o
10?r,
90./,
3 1, 600
290
950
3 2,&oO
3 0,750
2r32O
0,2oo
13, OoO
' l 1, 600
11, 500
s2,840
o
120
640
g?,75O
900
3, 80O
s2,25O
300
9EO
3 ,75
.20
.80
s1,7s
Tota! Cost
$ 3,ooo
8,750
sl 2, 350
8,25O
3, 51O
324, 1' l O
Total
Gogt
Labor
Factory overhead ....
cost ln bcAlnnlng lnventory ..'..........r........-
ring current
pcrlod:
Factory ovcrhcad
Total cort added durlng currant
perlod'...... 821,270
324, 110
Unltr Currcnt % Unlt Cost
labor
2, 000
2,OoO
2,000 Factory ovcrhead -....-
Startod and completcd thlr pcrlod 5,000
Total cost trangforrsd to Flnlahlng Departmcnt
5, 000
5, 00o
5, 00o
3, OOO
3, 0oo
3, OOO
o.h
30'/t
40t/o
100.h
lOOt/.
9O'/o
99o/o
1000h
30c/t
40ch
3 .75
.20
,80
31. 75
t .75
20
.80
$ .zs
.20
.80
ChapterT
E7
-1O
APPENDIX (Concludedl
'
llumbcr of cgutvalcnt unltr o,f coot addcd durlng tlto currsnt perlod determlned as follows:
Matcrialr Lrbor Overhoad
155
To completo beglnnlng hvcntory,.*.m.o
abrtrd end complctrd thlr pcrlod Em&i
Endlng lnvcntory
c o00 800
5,OOO 5,OOO 5,OOO
3,OOO 1,500
5,000 4,500
1r2OO
4,5O0 8pollcd unltr
Total cqulvalent unltr
' t 3, ooo
1' t , 600 11, 50O
'
Cort added during thc curront
period divlded by thc number of cquivalent unlts of cost added
durlng lfic curent perlod
(2' l Worki nProcess-Fi ni shi ngDepartment.............,
Factory Ovgrhgad Control ..........'......r.,,...'......r....
Work in Process-Tooling Departme[t.....,,.. 2O,600
12, 350
8,25O
1ffi
E7-1I
APPENDIX
(1)
Plastico Furniture
ComPanY
Finishing DePartment
Cost ol Production
RePort
For SePtember
Quantlty
llchcdutc
Mlterlgls
ry,
Overhead
Beglnnfng
InYontoty"""'F""""""""o'
.
8Oo/'
4Oc/o 4O'/o
naiclvcd-trom
Fabrlcatln
g Dep artment
Tranrtercd
to Flnlshed Goodg"""""
Chaptar 7
Quantity
1r2OO
0,000
7,2OO
5, 000
1, 50O
700
7,2OO
Equivalent
Unit
Units'
Cost"
Endlng
lnvantorY
Spolled
ln
Prccer
Coat Chargcd
to DePartmen!
Beginnlng
InYcntorY:
Cort from
precedlng department
""""'
l abor' ..............
Factory overhead
Totat cost In beginning
inventorY
Cost addod durtng current Perlod:
Cort from
precedlnf department
"""""""'
Matcrlalr
......'.""""'
Labor..' ...-
...."i """""
FactolY ovorhead
Total cost added durl ng current
peri od"""'
Total coct charged to dcpartmet1t
"""""""""""""""""""'
lOOo/o
100%
80.h
100.h
80%
1000h
Total
Cost
i 14, 160
1r 21O
1, 30O
3,250
s 19, 920
s 72,000
6,24O
12,24f)
30, 600
!t
r1,o80
3141, 0O0
I rOOO
a,24O
8, 120
6,120
312. OO
' l .oo
2.OO
5. OO
320.O0
Labor
r3oo
13oO
1r2OO
Factory ovsrft cld ....-..
St rt d rnd complctod thb
porlod SBOO
Tottl cort tranrfcrrod to Flnbhhg Dcprrbncnt
Trenrfcrrod to Spollod Ooodl lnventort
rt uhragn velur rs...'...-.......s..
7oo
Chargo to Factory Ovcrhcad for rpollagc:
Cort of complctrd rpollcd unltr 7Oo
Lcg ralvagc valuc of rpollsd unltr 7oo
Work h Procaor, cndlng hvcntorn
Cort trom
Prccedlng
dePartment 1r5OO
1, 5OO
1,500
I , 50O
Matorlalr
bbor
Frctory ovorhead ...,.......n-....'..,.
Totel cott eccounted tol .......-..........
ChapterT
ET
-1
1
APPENDIX
(Concluded)
Cort Accountad for lr Followr
Trenrfrmd to Flnlsh.d Ooodr:
Frorn boglnnln
g lnvontott .-.-..--
Coft to complctc thb
Pcrlod:
Metr da b.....-o.od-..D.
To completc beglnnlng lnvontory..
atert d end complctcd thb
Pcrlod
End ln g hventory.........'.....-...........
Spolled untts
Unltr Currcnt
116
Unlt Cot
20%
@.h
31e,e2o
3 1.00 2a
2-oO 1r4.4o
5.OO
3zo,oo
312-OO
320.00
1LOo
i l zoo t18,ooo
1.OO 1,5OO
157
Total Cort
25,80O
tl 4t,ooo
oo%
100%
100%
100%
10a.h
80%
oo%
2.00
5.00
trSoo
4,500
3,O00 $ 25too
7O,0oo
t l ol l 2oo
8,4OO
tlJtr0oo
8/fOO 5'800
.
Xumber of cqutvatrnt unltt of cct addcd durlng tfio currrnt
pcrlod dctrrmlncd .r followr:
Hor
DcpL Coat Materbb Lrbor Ovorhead
o
3FOO
1, 5OO
700
240
3B0O
1, 500
700
720
sBOO
900
700
720
3BOO
900
700
Totaf cgulvalent unltr O^0OO 6,rAC' o, 120
*
Cort tddcd durlng tttr curcnt
pcrlod dtvldcd by thc numbcr ol cqulvalont unltr of cort addcd
durlng tlrc currant
pcrlod
l 2l
Fi ni shgd GOOdS I nVent Of y. oo. . . . . . . . . . , . . . . . , . r. . . . . . . . . . . . . . .
l Ol r2OO
Spoilod Goods Inventory .................r.t.o..........r.....
8t4OO
Factory Overhead Gontrol .' ...............-' .-..-......-.-...
51600
Work I n Proce*s-Fi ni shi ng
Depart met l t . . . . . '
115t 20O
a' J20
-
tfi
E7.12
APPENDIX
( 1)
ouenutv
!c!g!g!: i
Beglnnlng InvcntotY
Racclvcd from Mhlng Depertncnt-
Tranrferred
to Botulng E)'epartmont -
End In
g lnventory..F.o"o""'o'tr-"-i"
Loat In
procotl ......"o"@'
Gost Chargcd to DePartmcnt
Beglnning InventorY:
Cost from
Preccdlng
departmcnt
Matcrlalr
[abor....'.....
Local PoP Inc'
Cooking DePartment
Cost of Produstion
RePort
For December
Mtt rbt! Labor
7s%
At%
100.h
73.4 75V.
Total
Cort
(hrcrhred
QuanUty
at% lorooo
aor0oo
60,o99
37,000
8,OOO
5,OOO
ChaptorT
5O, O0O
Equlvalent Unlt
Unltr' Colt"'
t 2,920
305
140
210
Factory ovcrhcad
Totel
Cogt added du
Cost from
Materl al r
cct In bcgtnnlng lnventory
rlng currcnt
parlodl
prscedlng dcPartment-..' .
t 3,575
3lo,85O
l ,5oo
21430
3,645
sl8,425
Unltr Currant 7r
322,OOO
Unlt Gost
35,OoO
371500
4Or5OO
40, 500
3-5o
Total Cort
33,575
t oo
/gto
673 3
4, 8OO
13, 50O
3' t 8' 3OO
32,480
320
360
540
3, 7OO
322,OOO
S,31
.04
.o6
.o9
Total coct chargcd to
Cost Accounted for ar Follorvr
Translarred to Bottllng Departmcnt
From begl nnl ng l nvcntotY..."*
Cort to comPlcto thir
Psrlod:
Mater1a14.................o..
La bor........r.'..r""""'..'
FactorY ovcrhcad
...--.
Work ln Procesr, endlng Invcnto4n
Cost l rom preccdl ng dcPartment
Materl al r
l -abor........
Factory overhead
Total cost accounted l or ...-.--....--..
I OrOOO
l Or0OO
10,ooo
8, 000
8, 0oo
8, ooo
I , OOO
100ch
100ch
3. 31
.o4
. 06
. 09
8.04
.0E
,oo
9.50
25t/o
75%
73.h
Started and compteted thla
pcdod 27.OOO 1OO'A
Total cost transferrad to Flnlshlng
Departmant
7sch
7' ch
CtpptorT
E7-72 APPENDIX (Concludad|
s
; '
XumUer of rqutvaturt unltr of eort rdd.d durtng ttrc curcnt pcrlod dctarmlncd rl follorvr:
Hor
DcpL Cot tlatcrlab lrbor Ovcrhcrd
To cornplctc bcglnnhg lnvcntory.. O 2FOO 7,5OO 7r5OO
Stlrt d rnd complct d thb pcrlod
27,OOO 27POO 27,OOO 2T,OOO
Endlng 8'OOO 8,OOO O,0OO O,O0O
Totel rquhnlcnt unttr
-3s,o09
gFog
_lo'5gg
JoFgg
"
Cost lddod durlng Ott cgrrent
pcrlod
dtvHcd by thr numbcr of cgulvelent unltr ol cort tddcd
durlng thr curant pcrbd
(21 Work in Process-Sottling Dopartment................ 1gr3OO
Work in Process-Cooking Department ....... 18, 300
t 59
1ffi
450
1, 35O
I r O0O
3,00o
600
86, 4OO
120, 960
3, OOO
87, OOO
121, 80O
Chagter 7
1, 80O
550
450
3, 6O0
86, 400
120, 960
3,OOO
87,000
121, 8OO
PROBLEMS
P7-1
(1) Spoiled Goods lnventory
(2oo units x $2'25)""""
FaCtOry OVgfhead GOntfOl .r............r.................' o.r
WOfk i n PfOCgSS .................r......r...........t.t..t.
l2l
Accounts Receivable
($55O + $450)
"""""""r""t'
SCfap Sa1eS r.,.....r.............r..r....................t...
Spoiled Goods lnventory t..o...."""""""""""
P7-2
S9O,OOO total
j ob
cost
=
S18
per uni t
( 1)
5, OOO uni t s on
j ob
Spoi l ed Goods tnventory
(200 uni ts x St5 sal vage)
FaCt Ory OVgf hgad COnt f Ol . . . . . . . . . . . r. . . . . . . . . . r. . ' . ' . . . . . . . .
Work i n Process
(2OO uni ts r $18
cost).."' r"
COSt Of GOOdS SO1d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ' . . . . ' . t . . . . t
Work in Process
(S9or00o
-
$31600|,.'......,...
Accounts Recei vabte
(586,400 r l 4O%l ,..............
Sal gs""" """""""'
"""""
{2)
Spoi l ed Goods tnventory
(200 uni ts x $15
sal vage}
Work i n Process .' ......' ......,..r....r....' ....' ...' .....
COSt of GOOdS SO1d. . . . . . . . . . , . . , . . . . . . . . . . r. , . . . . . . . . . . . . . . . ' . . . . .
Work i n Process
($90,00o
-
$3,000).-...-...-...
Accounts Recei vabl e ($azrooo r 1 4a%l ,..' .....--r...
Sal gs' . ' . . . " " " " " " " " ' o" ' r " '
ChaPtarT
P7-3
(1) Factory Ovgrhgad Control ,.......,...,.....,...,...,.......,. 2r2oo
Matgrials (1 oO units x $4|.....,....,,.,r.....,.,...,..
Payroll (lOO
units x 112 hr r $12 ratef ..........
Applied Factory Overhead
(1 OO r 112 hr x $24 ratgl ,.........,.........,......
Cost of Goods Sold..
161
2OOTOOO
3O0,0oo
2r2OO
400
600
l 12oo
20O,OOO
3OO,OOO
WOrk i n PrOCgSS r.....rr...r...............o.r.o...r......r
Accounts Receivable ($2OO'O0O x 15O%)..,..........
Sal gS. . . r . . r . . r r . . . . . . . . . . . . . . ' . ' . . . r . . . r . . . . . or . .
l2l
Work in Process.,.......
Materials (1 0O units r $4).....r......,....r,..........
Payroll (lOO
units x 112 hour r
$12 ratel ...,..
Applied Factory Overhead
(1 OO r 112hr r $Ze rate)....,..............D.......
Cost of Goods So1d.,.,.....,....r..........,r...rr.....r.........
Work in Process ($200roo0 + $2r20O|,,.........
Accounts Receivable (S2O2.20O
x 1 50%) .............
Sa|
gS. . . . . . r . . . . . . r . . . . . . . r . . . . . . . . . . . . . . r . r . r . r r . . . . . . r r . . . r . . . . .
400
600
1r2OO
202,2OO
202,2OO
303,3OO
3O3,3OO
'te
P7-4
(1)
I
QrandU Schcdub
Bcglnnlng
tltrrt d ln
Procar
tlrb
Pcrlod
Tnnrferrcd to Ascmblln
g Dcpartrncnt
Endlng lnvcntorY.' ...-d-
Spolled ln procog
Cort Chargcd to DcPertmcnt
Be!lnnlng InventorY:
Mate
Labor
Factory ovcrhaad
Total cogt ln beglnning InventorY
Coct added durlng curcnt
Pcrlod:
Materialc
l:bor
Factory ovcrhcad
Metcrlalr
Labor
Factory overhead
Total coct accountad fof ..........-*...
'
25,OOO
Total Equhnlcnt Unlt
Cost Unttr' Cort"
3 1,260
780
l r78O
$ 3,838
330,240
25,OoO 3150
l o, 7ot 23, 100 50
21, 311 23, 100 t . OO
Chaptar 7
;
ir.oo
@!
$54,OOO
Overstrost GompanY
Cuttlng Department
Cost of Produetion Repor
For Apri l
Matcrlrb Labor Orcrlrcrd Quen$ty
5,OOO
2O,0OO
2!t,ooo
:
18,OOO
1AO.A OO% 60% a,ooo
too%
g0%
eo% 3,000
Total cort addcd durlng curcnt
pcrlod...---..-. $88,312
Total cogt charged to
372,150
Cost Accounted for !t Followt Unltr
y.Co.pl"t"
Unlt Coat
Trangferrcd to Asscmbttng Departmcnt i8,OOO l0O% if'OO
Charga to Factory Ovcrhcad for rpollagc:
3,OOO l OO% 3150 34' 500
3'OOO eO'/. 50 1'350
Factory overlrcad u.,...-.-.d.--.
3'OOO
g}'h
1.00 2r7OO 8'550
Work In Proccsr, cndlng Invantory:
Materlalr....... a,ooo 1oo' .h $l.so
80' 000
a,ooo ao%
50 l' 2oo
4,OOO 6O.h 1.00 2,4OO
9' 600
$72,150
l:bor.........
.
Total number of equl val ent unl tc requl red In thc cost accounted tor recUon determl ned aa
follorvlr:
Materlalr Labor Ovefioad
Squl val cnt unl tr transl errad out.. 18' oOo 18' o0O 18,OOO
Equlvatent unltg ln cndlng Invcntory'.. 4,OOO 2,4OO 2'4oo
Equl val ent unl tr of rpol l agc....
3' OOO 2,7OO 2r7OO
Total cqulvalcnt unltr
3!'099 39'109
-23'199
-
Total cort
fl .c.,
thr cest In bcAtnnl ng tnvcntory
pl ur thc cott added durl ng thc currant
pcrl od)
dtvl ded Uy tfrc totat numbcr of cqutvatcnt unl b rcqul rcd l n tho cort accounted tor rcstl on
ClppterT
P7-4
(ConUnued|
CFenU(y Schcduh
Rccrlvrd lrom CutUng Dopertm.nt-.
Tranrtrrrrd to Fhlrhrd Ooodr lnvcntory
Endhg hvrntory
Epolbd ln proccs
Cort Chargcd to Departmcnt
Ecalnnlng hvcntory:
Overttreet Gompany
Assembllng Department
Cost of Produstion Roport
For Apri l
tletcrtrb Lrbor Otcrhced
,63
QuanUty
80%
100%
2gYr
100%
20?i',
100%
Total
Coct
$ 1O, 9OO
38,028
t 54,OOO
"ll,4.r4g2
15Aat
23, 1OO
8257,U2
9314,300
4' OOO
18,OOO
22,099
17, 0O0
4,0oo
I rO0O
22,OO0
Equl val ent Unl t
Unltr' Cort"
Cort fromprcccdlng
departmcnt
Matcrlelr
t 57pr8 Totel cort ln bcghnhg lnvcntory
@rt rddrd durlng currrnt
prrlod:
Cort from pnctdlng
drprrtmont....-..--.
lletrrfalt
Lrbor
Fectory ovc
Totel cort eddad durlng current
pcrlod.......
Total cort chargcd to deparbncnt ..,...,,.........r,....r..............,
22,OOO
21,2OO
18, 8O0
18, 8OO
t ze5
9.55
1, O0
150
a4,360
g?14,3OO
Cort Accountcd for
g
Followr Unltr % Complctc Unlt Colt
Tnndcrrod
to Fhlrlrcd Ooodt.....-..
Trenrfcrcd
to Spollod Ooodr hvontory
rt rahragc virlur M-o..mo..o...
17,OOO l OO% 315,OO
Chergc to Fectory Ovcrtrcad lor tpollagc:
Cort ol complctod rpollcd unltt
bu ralvagc veluc st rpollcd unltl
Work In Proccr, cndlng Invcntorp
Cort lrom precedlng
departmcnt
Materl al r..
t^ebor_......
Fectory
ovcrhcad.
Totel cott rccountod lor .......-...---.
I,OOO $ 5.OO
I,OOO 1OO.A 315.00
I ' O0O 5. OO
t 15, 00
Totel Cort
3255,000
5,000
i 15, OOo
5, 000 10r00o
a,ooo
4, 00o
4, OOO
4, O0O
100.4
80.h
29Yr
20ch
2. 95 311, 800
0.55 30,560
1. 00 800
1' 5o 1' 2oo
164
Chaoter7
.
P7-4
(Concluded|
.
Total numbcr od rqulvalcnt
unltr rrqulnd In t||r cat rccountcd
for rocUon dctcrmlncd ar
follom:
Hor
DcpL Cot Mtt rbtt lebor Ovcrhcad
Equlyalent unltr tranrtorrsd
out-.. l7rOOO lTtOOO l7'O0O
'17'0OO
Eiun^i"nt unttr ln ondtng Invcntory ''OoO 3,2OO 8oO
8oo
iiuhralent unttr of ryollagc'-"---
I'OOO I'OOO I'OOO I'OOO
Total equlvalent un|tr..r..............r..
2,OOO. 212OO.
't8eo9
l8po9
-
Total coct
0...,
thr cort ln bcglnnhg hvcntory
ptur thr cort eddrd durhg tfro current
pcrlod)
dtyldod by thr total numbcr oi rqulvatcnt unltr rcqulrcd h thc colt rccountcd for rccdon
l2l
Work in Process-Assembting
Departmellt."...."'
54IOOO
Factory Ovgrhgad COntrOt ....ro.,.....r......................
8t550
Work in Process-Gutting
DepartmeJlt.........
621550
Finished Goods lnventorY....
255,O00
SpOiled GOOdS InVentOfy ..r....r.....r......' ....r............
5r00O i
FaCtOfyOVgfhgad COntfO|......r........,.................' ..
lOr00O
Work In Procegs-Assombling
Department..
27O'OOO
ChapterT
P7-5
,
( 11
10.h 1OV.
Total
Goot
4rOO0
36, OOO
10'9.99
28,0OO
6, OOO
o,0oo
4O,OOO
Equl val ent Unl t
Unl ts' Cost"
34,0OO
3O,4OO
3O,4OO
165
s.23
Total Cost
36,44O
1r1?8
Hometown Brewery ComPany
Miring and Brewing Department
Cost ol Production Report
For January
Meterlrb l.ebor Ovcrhcad QuanUty
Matarlalt
l,.abor
Factory overfiead 124
Total cort h beglnnlng lnventory 3 810
Coct addcd durlng currunt perlod:
Metrrhlr
9{rso
8.24
1,O88
Lrbor
Frctory ovcrbcrd
Total cott eddcd durlng currcnt pcrlod.......
Total cort charged to departmcnt...........
38,752
QuenUU llchcdulc
Bcglnnlng lnvcntory
Startod ln procer thlr perlod
Tranrfrrrrd to Cennlng Dcpertmrnt
Endlng hvcntory 100%
loet h pnoc..f
Cogt Chergcd to Dcpartmcnt
Beglnnlng lnvcntory:
Cort Accountrd
lor tr Followr Unltr
Tnnrfcrrcd
to Cannlng Dcperbnant
Work h Procor, ondlng hvcntorln
Matrrlelr
l^ebor
Fectory
ovorhcad
Totel cott tccounted for
Equhratont
unttr trancf orrcd ou t...........
Equhral cnt
unl tr h ondl ng Inventory-.
Total cqul val ent
unl tr
$ 600
8a
$16
.o3
.o4
s7,5O8
Vr
Compl eta Unl t Gogt
28,000
6, 0oo
0,00o
or0oo
1OO'/o
lOOt/o
40ch
&ch
28, OOO
o,ooo
34, OOO
3.zs
3. ro
.03
.04
28, OOO
2r4OO
3960
72
96
28, OOO
2,4OO
3O, 4OO 3O, 4OO
h
Totel cort (1.c.,
thr coot In begl nni ng l nventory pl ut thc cort added durl ng tho currant
perl odl
dtvl dcd by thc totat numbcr of cqul val ent unl tr roqul red l n tho coet accounted l or tectton
37,568
Totel numbcr
ol cqutval cnt unl tr requl rcd In tho cogt accounted for recUon determi ned as
followr:
Materials Labor Overhead
tffi
P7-S
(Conti nued)
ChaoterT
Unlt
Coett'
Hometown Brewery Company
Canning Department
Cost of Production Report
For January
QuanUty Schcdub
Becelvcd from Mlxlng and
B rewln
g Departm4nt..................
Translerred b Flnlghed Goodg lnventory
Endlng lnvantory..
Spolled In procau
Cort Charged to Departmcnt
Beginnlng Inventory:
Cost lro m p rec edln
g d epa rtment............................'....
Labor
Factory overhead
Total coat ln beglnnlng Inventory
Cost added durl ng current perl od:
Cogt from precedl ng
department...............
Materl al r
[-abor...
Factory overfrcad ........
Total cort addad durlng currcnt
pcrlod
Total cost charged to departmcnt
Mltrr|lb Lebor overhced Quan$ty
,poo
28,000
30,OOO
25r000
1, OOO
4rOOO
3O,00o
Total Equlvalent
Cogt Unlts'
3 550
190
75
150
0gtt
1OO' /o
,looc/.
30% 50!h
800oh ao.a
Cogt Accounted l or aa Fol l owr Unl tr
Trancferrsd to Flnlshed Goodr lnventory25,0OO
Chargc to Factory Ovcrhcad tor apollagc:
Cost from precedlng
departmcnt
Matcrl al a..
Labor...-..-
Factory
overhead
Work In Proce8s,
endlng Inventory:
Cost from precedl ng
department
Matari al t..
Labor........
Factory overhcad
Total cost accounted for .................-
a,o0o
4, 000
4, 000
4, 000
1r OO0
1, O00
1, OOO
1, OOO
100%
100.h
100.h
ao.h
80t/c
lOOo/.
lOOo/.
50ch
500h
3,38o
3.23:t
.057
. 030
.060
s.233
.057
, 030
. 060
V.
Completc
3 6,440
1,52O
786
1, 572
i 1O, 318
$11,28dt
Unl t Coat
30, 000
30,00o
28,7OO
28,7OO
s932
228.
96
192
s233
57
1 5
30
$.23:t
.057
.030
.os0
s.380
Total Coat
I 9,500
lr4/.g
$11, 2a3
fuptor7
P7-6 (Concludedf
'
Tottl numbrr ol ogulvrbnt unltr nqulrrd In thr cot rccountrd for rcctlon dctarmhed at
blbwrs
Prbr
DopL Co.t lbtrrbb bbor Ovcrhod
t67
Equlvrbnt unltr trenrfrrrcd out* 2tt,OOO
Equlyetrnt unltr ln rndlng Invcntory lr0OO
Egulnlcnt unltr of lpol!rgo.-.-.. ar000
Totrlrqulvdrntunltr-.*...o...-.. 3OrOoO
25,OOO ZI,OOO Z,,OOO
1,OOO 5OO IIOO
4,OOO 33OO 3'200
3OTOOO 2,,r7OO 28!7OO
-
Totel coct
S.l.r
thr coet In boglnnhg lnvrntory plur the cort rddcd durlng thc cunrnt pcrlodl
dMd.d by tltr totrl numbrr of rqulvelont unltr mqulr.d h thr cort eccountcd for rcctlon
(21 Worki nProcess.-anni ngDepartmeJtt..,..........,.
Work In Procass-Ittliring and
Brewing DepartmeJlt .......................r........
6,44O
6r44O
Flnished Goods Inventory 9,5OO
11448
a a t a a a a a a a a a
Factory Overhead Control
Work In Process--Canning Department ....... 10, 948
168
P7-A APPENDD(
(r)
Chagter 7
OuenUty Schrdub
Handy Tool Gompany
Fabrlcatlng Departmont
Cost of Productlon Report
For Apri l
l/lrt rbb trbor orrcrhred
QurnS(Y
Strrtad thlr
pcdod*i..-.rude
100%?6 7O% 70%
2'OOO
3' 000
:l-'oo9
Tnndcrnd to Flnbhhg Drplrtnrrt
e'OoO
Endlng hvontory-s-dFs
lOO%
&*
'aota
t'5o0
spoilcd In
procctrD-...-..-d-.H lOO% 60% COta Eoo
I I,OOO
Cort Cherged to Dcpertrncnt
Totel Equhnlcnt Unlt
Beglnnlng Invontory:
Cort Unltr' Cort"
Hgtafletf -t..--.-.dr,....''..s.--qd*o.*.-is
I ItgOO
Labor
340
IrO2O
I 33oO
Factory ovcrhcad
Totat coct h bcglnnlng lnvcntorY
@rt addrd durlng surtrnt Pcrlod:
Metadalr-.---.F-H6.E*d*-dd-.*s
t
gtt80 gtooO
3t'02
1sbor..........--.r.r..-d.m.._..-Fff.-.....-'.'F.*
21125 8r5oo '25
' I
Fectory ovcrhord ----6-..tr.--.*.-.r.--..-.*
C'375 8i5OO '73
Totet coet rddcd durlng curont
pcrlod-...' 317'O8O
Totaf coct chargcd to dcprrtrncfrt ---.-aimrp..-..,.m
32O'?4O
_-t2,o2
ClppterT
P7-q APPENDIX
(Continued)
@rt Accountcd lor er Follon
Tranrlcrrrd to Flnlrhlng DcprrtmcnE
From bcalnnhg lnvcntoty -........
Cost to complctl thb
Pcrtod:
1:bor-*.
FactorY ovortctd.*-
8trrttd end complctcd thb
Prrbd
Totrl cort trenrtcrrcd to Fktbhlng
Dcpartmont
Chergr to Ftctory Orrcrhead for rpollagc:
Metorlalr .-.i....-..-.-O
labor
Factory ovorhcad'.---.1...-........
Work In Proccsr' ondlng InventorF
Matcrlalr
lrbor
Frctory ovcrhead
Totel cort rccountcd fot ..--..-"......
Unltr Currcnt !6 Unlt Cost
2,000
2rOOO.
TrOOO
500
500
500
'
1,5O0
l "5oo
1, 5OO
30%
3(,%
100%
100%
EOV.
AOV'
1000h
10ch
10V.
t 2 5
.73
3LO2
31, 02
.25
.75
$1. 02
25
.75
33,26O
150
4so
169
Total Cost
3 3BOO
14, 140
318,OOO
810
2,130
32O,94O
3 sl o
75
225
91r5:!O
150
450
r
Humbsr of cqulvalent unltr of cott added durlng thc cument
perlod determlned ar lollowg:
Materialg Labor Overhead
To completc beglnning lnventory
tltrrted end completad thlr perlod
Endlng hvcntory
Spolled unltl-....... a................,......
Totel rqulvalcnt unltr
o
TrOOO
1r5OO
500
9,OOO
600
TrOOO
ooo
300
600
TrOOO
ooo
300
8,5OO 8,5OO
-
Cort rddcd durl ng trc currcnt
pcrtod dl vl ded by thc number ot oqul val ent unl tr of cost added
durhg thc curront
pedod
,70
P7
-6
APPENDX
(Continuedl
Qurndty tlchcdub
Bcglnnlng InvcntorY
Chapter 7
;
Handy Tool Company
Finlshlng Department
Cost ol Produetlon Report
For APri l
Hrt rbb Lrbor otrcftcrd QurnUS
Rccclved trom Febrbrtlng Deplrtnrtt
Tranctercd to Fhlth.d Ooodl--* er000
Endlng hvcntory-o-sffiH_ l0Ort 2!'?A zr?i 2'OOO
Spollcd ln procar roo% 100% l oot 6 100
l2,ooo
Coat Chargcd to Dcpertmcnt
Total Equlvelcnt Unh
Beglnnlng lnvsntory: Cort Unltr' Cortft
Cort from prccrdlng dcprrtncnt i c,roo
Factory
520
780
Totel cort h beglnnlng hvcntory 310,000
Cort rddcd durlng currrnt prrlod:
Cort from
prrcodlng
drprrtm
Metorlelr
l.abor
Fastory
lO0.A &%
/fo?l
trOOO
\
I'OOO
12,OOO
Totel colt eddrd durlng curront
prrlod-.** :l38,too
Total cot cherpod to dcprrtncnt t4rpoo
lt8,ooo o,ooo
Szoo
' '
l0Boo o,ooo 1,;o
3,720 eFOo ,A
5r38O 0,3OO .3O
3r.,:o
I
t 7,
Fectort ovcrhoed .'......
3,OOO
SrOOO
Sttrt d rnd elmplctod $b
pcrlod 6'900
Total cort trenctcrred to Flnlsh.d Ooodr
Trrndrrrrd to Spollod Goodr lnvcntory
rt rehregr vrlur ......Fo.o..........xr
l OO
Cfrrrgr to Fectory Orrrhead for rpollrgc:
Cort ol complctcd rpolbd unttr
Lor relvagc velur of rpollod unltr
Work h Procc+ ondhg hvcntorP
Cort trom
prcccdlng departmcnt
Mrtrrlelr.-
lrbo r......................,..
Frctory ovarhaad ..............-.......
Total cort eccounted for .'.................
ChapterT
P7
-O
APPENDTX
(Concludedl
Cort Accountad for r Folbwr
Tnnrforrrd to Flnlthod Ooodr:
From beglnnhg lnvcntort ----.
Co.t to comPlrtl thb
Pcrlod:
To complctr bcglnnlng lnventory..
Strrt d end complet d thb
perlod
Endlng lnvcntoly.....o.......-...o.........
Spollcd unltr.......-.,..-......-...........
Unltr Curront !6 Unlt Coct
Total Cogt
31O, 9OO
720
1, O8O 312, 700
28,980
3f 1'880
100
9 .20
100 320
3 4,OOO
2,4OO
6,90O
s49,O0O
1, 8O0
8,90O
500
100
100
100
2,OOO
2,O0O
2,000
2,OOO
o
or0oo
2,00o
100
60%
60%
100%
100rA
100%
100%
t r o
.60
3f30
tl .oo
3l:o
1. OO
32OO
1. 20
200
300
AO
,60
%t/.
%rh
.
llumbcr of
qqulvalent
unltr of coot edded durlng thc curront
perlod determined ar follows:
Prlor
DcpL Cqt Metcrbb Labor Ovcrhcad
o
Greoo
21000
100
1,8OO
6r00o
5oo
roo
Total rqulvalent unltr
,POo I,OOO 9r3OO 9r3OO
n
Cott rddcd durlng lhc currcnt
perlod dhlded by thc number of cquivalent unlb of cogt added
durlng trr curront pcrlod
l2l
Work in Process-Finishing Departmeflt..'.'.........
l8rooo
Factory Overhead Gontrol ..o........' ....' -.-.......r.-......
81o
Work i n Process-Fabri cati ng
Department..
18' 810
Fi ni shgd Goods tnventory' ...........,.....o.......r..........
41r68O
Spoi l ed Goods l nventory..' ......' .' ..o.......r.-......-' .--.r
l OO
Factory Overhead Contro|..............
32O
Work in Process-Finishing Department..-...
42r1OO
172
P7-7
APPENDD(
.
(f
l
)OO( Chemical ComPanY
DlstillaUon Department
Cost of Produstion Report
For June
Chapter 7
-
QuanUty tlchcdub
Beglnnlng lnvcntory.i
Stlrtod thlr pcrlod
Tranrfcrrcd to Rcflnlng Dcpertmtnt .
End In g Invcntory...,.-*,.--
l-ot In pnocclr
Coet Charged to Departmcnt
Beglnnlng Inventory:
Matedalr
,
M8tortlb l^rbor overhced QuenUty
1OO% z0.h 20% a,000
1Or00o
20r0OO
1{,00o
1OOV. 80% 80% 2'OOO
4,OOO
20,OOO
Total Equlmlent Unlt
Cost Unltrr Costs'
Labor
3 3,824
90
480
Total coct h beglnnlng lnvcntorY
Coct addcd durlng currrnt
parlod:
Materlalr
Labor
Factory
t 4,200
sto,8oo 12,ooo 3 ,eO
1/480 14r8OO .l O i
7,4OO l4r8OO 50
$' t.50
Total cort addcd durlng currcnt
perlod..,,.-.......- 31e1680
Total coot chargcd to dcparbncnt 323,880
Chapter 7
P7
-T
APPENDIX (Gontinued)
t
Cogt Accountad for ar Followz Unltr Current 7r Unlt Cost
Transferrcd to Refl nlng Departnrenb
From bcginning lnventory ......*
Cogt to completa thle perlod:
Factory overhead
Total cmt accounted for ..........-..-...
173
Total Cost
94,2OO
labor 4'000 BOV. S .10 32O
Factoty overhead........ 4,OOO AOoh .50 1,600
S 6,120
Startsd rnd compl stod thi s
peri od
1O,OOO l OOo/. S1.SO 15, OOO
Total coet transferrsd to Refinlng Department
SC1)12O
Work In Proce!1, cndlng Invcntory:
Materl al g
2,OOO l 00o/c
$ .eO
31,800
2' 000 8Oo/o .10 180
2,000 Sooh ,50
go!
2,78' 0
323,880
Labor
'
Number of equi val ent unl ts of cost added duri ng tfi e current peri od
determi ned as tol l ows:
To complete beginning inventory
Materi al s Labor Overhead
0 3, 200 3, 200
1O, OOO I O' OOO I O, OOO
2, OOO l r8OO l rgoo
12, OOO 14, 800 14"SOO
Started and completed thts period
Endlng Inventory
Total equlvalent unlts .,o..,..,..r
: :
-
Cost added duri ng the current peri od
di vi ded by the number of egui val ent uni ts of cost added
durl i g the current peri od
t71
P7
-7
APPENDTX
(Continuedl
QuanUty Schcdulc
Beglnnlng Inventory
Bccolved from DlcUllaUon Dcpartment
Trangferred to Flnlghed Goodr lnventory
End In
g lnventory........-...'ar-......D'-..
lost In procest
Cost Charged to Departmcnt
Beginnlng lnventory:
Labor
)OO( Chemical Company
Refining Department
Gost of Productlon Report
For June
Matcrblr Labor olrefiead QuanttY
339,540
lOO% 50% iOV. 2'OOO
1a,0oo
:_6,0Og
12' OOO
100.h 30ra 30'h 2,ooo
2rOOO
ll'o9.9
Total Equlvalont UnR
Cct Unltr' Cocti'
Coct f rom
preccdlng departrnent..,..-............-.-.-.-.--6. I S'SOO
Materl al s
240
t oo
Labor
Factory overhead........'.....,..
9oo
Total coct ln bcolnning InventorY 3 a,8oo
Cost added duri ng curont
pcrl od:
Cost l rom precedl ng department............... . SZtrtZO
12' O0O 31.7C
Ma terla lr .......,............ 1, Ua 12, OOO . 12
1, 740 1l , 600 . 15
1O, t ' 4O 1l , 600 . 9o
Factory ovcrhead .....
Chapter 7
t2.03
Total Gogt
Total cost added during currcnt
prrlod.--- SSarTaO
Total cost charged to deparbnent
Cost Accounted lor ar Follorw Unltr Current % Unlt Cost
Transferred to Finlshcd Gooda:
From beginning Inventorlf .....,....
Cost to complete thls perlod:
Started and compl eted thi a pedod 1O,O0O l OO' /t 92.93
Total coat transferrcd to Flnlshcd
Goodr
Work In Procest, andlng Inventory:
Cost from precedl ng
department 2,000
' l 00ch
31.76 33,520
335, 150
Materl al r 2,O0O 1OO.h .12 24O
2, 000 30ch . 15 90 [abor....
Factory overhead 2,OOO 3}oh .9O 54O 4' 390
939,540
$4,80O
[abor 2' 000 5ot/o 3 .15 15O
Factory ovsrficad..-,-. 2,OoO 50% '90
g0O
3 5'850
20, 300
Total cost accounted tor .............,..-.
QEpterT
175
P7
-7
APPENDIX (Concluded)
I
Xum,brr of equlvalcnt unttr of cot rddcd durlng thc currcnt prrlod dctcrmlncd er lollorrr:
Hor
DcpL Cot Hatcrbb Lebor otrcrhced
To complrta bcglnnhg hvcntory - O O I'0OO I'OOO
tltlrtrd end completod $b
perbd lO,OOO lO'OOO 10'OOO 1O'OOO
Endlng
2,000
aooo
ooo Goo
Totrl rsulvalent unltr...................,
12'999 i2'999 _11'099 l_1499
.l
Cort rddcd durlng thr currrnt
pcrfod dlvHcd by thr numbor of rqulvalcnt unltr of cort eddcd
durlng llrr currcnt
porlod
121
Workin Procegg-Refinlng DepartmeJlt,.......,.,.... 21r12o
Work in Process-Distillation Dopartment... 21,120
Finishgd Goods 1nvOntoryo....o...r...............' ......D...o 351150
Work in Process-Refining Departmeflt.,.,... 35r15O
t 76
Chapter 7
CASES
C7-1
Although improvement in product quality was clearly a stated
goal at Star
Disk Corporatlon,
the company' s reward structure suggests otherwise.
Employees cannot be expected to
put quality first if rewards are dis'
pensed for achieving obiectives
that are often in conflict with
quality
improvement
(i.e., short-run
production volume
goals). The quality
i mprovemgnt i tto* seems to have been focused sol el y on manufacturi ng
aciivity, and the approach taken seems to have been to improve
quality
by i nspecti ng i t i nto the
product. Such an approach i s i nadequate,
blcause it waits too late in the
pnocess (i.e., after costs have been
incuped in manufacturing defective
prcducts, instead of before) and
focuses on onl y one
pi ece of the
probl em rather than the whol e
probl em.
In order to turn the
probl em anound, top management must become
actively involved. The reward structure should be changed to ensune
compati bi l i ty wi th qual i ty goal s. Qual i ty teams that i ncl ude empl oyees
from al l busi ness functi ons
(product desi gn as wel l as manufacturi ng)
and al l l evel s
(l abor as wel l as management) shoul d be created to hel p
i denti fy
qual i ty probl ems and fi nd ways to sol ve the i denti fi ed
probl ems.
Top management shoul d acti vel y
parti ci pate i n these teams i n order to
emphasi ze the i mportance of qual i ty, coordi nate efforts between organi '
zati on uni ts, and
provi de di recti on. Empl oyees are more l i kel y to become
moti vated when they understand the i mportance of
qual i tg and top man-
agement parti ci pati on and l eadershi p underscore that i mportance. In
addi ti on, al t empl oyees must refocus thei r efforts on servi ng thei r
respecti ve customers. The data
presented i n the case suggest that man-
agers frpm the di fferent departments
put al l thei r attenti on on meeti ng
producti on vol ume goal s rather than on meeti ng the needs of thei r cus-
tomers (i .e., the department recei vi ng thei r output).
Atthough product i nspecti on shoul d be conti nued, emphasi s shoul d
be shi fted to preventi ng poor qual i ty rather than detecti ng i t. Preventi on
shoul d start wi th product desi gn and extend throughout the enti re manu-
facturi ng process. Some thi ngs to be consi dered i ncl ude:
(al reduci ng the number of
parts requi red i n the product;
(bl
usi ng hi gher qual i ty materi al s;
(c) using standardized
parts;
( d) usi ng wel l - known
pr oduct i on t echnol ogi es wher e
possi bl e;
(e)
mi ni mi zi ng retool i ngs;
(0 i ncreasi ng empl oyee trai ni ng;
(g) reorgani zi ng the manufacturi ng faci l i ty from producti on depart-
ments to manufacturi ng cel l s to promote teamwork and decrease
inventory costs;
(h)
upgradi ng or modi fyi ng machi nery;
(i ) i nstal l i ng a stati sti cal
process control system to moni tor producti on
qual i t y
and r educe pr oduct i on var i abi l i t y.
Chaptor 7
t77
C7-1 (Concl uded)
A few of the bi ggest and most urgent probl ems shoul d be i denti fi ed
and tackled. In order to achieve results, effort should be concentrated on
a lew costly
problems that can be solved. Tackling too many problems
results in dispersed efforG and little observable accomplishment.
lmproving
guality takes time and never ends. The company and its
employees need some successes to build confidence and create the
momentum needed to turn the
qual i ty probl em around.
C7-2 Product cost may be increasing as a result of an increasing amount of
scrap, spoilage, and rework. Since the costs of these internal failures are
not measured, management cannot evaluate the significance of the prob-
l em. In addi ti on, si nce these costs are not measured, empl oyees have no
i ncenti ve to reduce or el i mi nate them. Treati ng scrapr spoi l age, and
rework as a norrnal
production cost encourages such waste. As a conse-
quence,
overall costs rise. The company' s cost accountants should
develop a system of determining the cost of scrap, spoilage, and rework;
i mpl ement the system
0.e.,
begi n measuri ng such costs); and repod
these costs to responsi bl e managers. l f the cost of scrap, spoi l age, and
rework is high, management should initiate a
guality
improvement pro-
gram
that concentrates on
preventing these internal failures. This may
involve organizing employee
quality teams to identify problems
and
develop solutions, locating new vendors to obtain higher quality
materi-
als, redesigning products to improve
quality, modifying or upgrading
manufacturing machinery, training or retraining employees, andlor reor-
gani zi ng
the producti on processes.
CHAPTER 8
DISCUSSION QUESTIONS
Og-1 . Joint
products represenl lwo or more produds
sepaiated in the course ol the same processing
operation, with each produci having such rela-
live vatue that no one produd can be designated
as a maior
Produd.
A by-product
i s rel ati vel y mi nor i n l erms of
torat vaiue and is derived incidsntally ftom lhe
production or manufac'ture ol onE or more maior
Producls.
O8-2. Revenue from the sale ol by'producls may be
listed as olhet incoms, addilional sales revenue.
a deduction from the cost ol goods sold of the
main product. or as a deduaion from the cost of
produclion of the main
Product-
O8-3. Yes, when by'producl revenue is deducled from
the total production cost ol ths main product' lhe
unit cost of the main product is reduced; conse'
quent l y, t he cost of t he endi ng i nvent or y
changes also.
O8-4. The rpl acement cost method can be used i n
such cases. In this method, the by'ptoducls that
go into making other unils are valuEd at ths cost
the company would have to pay il it wete to
90
out on the market and purchase such materials'
O8-5.
(a) Ths treatment described tor by'products
may be
j usti ti ed when, rel ati ve to mai n
products, the revenue
generated by l he
by-producl is insQnilicant; when no clearly
del i ned basi s ol i dent i f yi ng by' pr oduct
cosl s oxi st : or whsn t he cosl of mor e
relined accounting would be disproportion-
ato to lho benelits teceived.
( b) The t r eat menl descr i bed has sever al
shortcomings. All gross profil is ascribed
l o mai or products and i s i ncorrscl as a
measure of total gross profi t, si nce the
i nvenl or i es of by- pr oduct s t hat may be
unsol d at the end ol the
peri od wi l l have a
zero value. Failure to assign values lo by'
products may well mean lhey are not rsc-
ognized as inventoriss at all. This' in turn.
coul d l ead to thei r wasl s, l heft, or other
mishandling. ll by-products are sold irregu-
larly and invenlories are albwed to accu'
mulate, bolh a material understatemont ot
invenlories and a distorlion ol reported net
income of suqcessive periods may rssun.
QB- 6. Yes, some of l he i ni t i al manul act ur i ng cosl s,
addi ti onal manufacturi ng costs (when by' ptod'
ucl s aro l urther processed al ter separati on), and
per haps even mar ket i ng and admi ni st r al i ve
expensss may be charged to l he by' produds.
O8-7. Methods for al l ocati ng the total
i oi nt
produdi on
cosl to
joint products are:
(a) Allocate the
pint oost on the basis of the
relative market value of lhe
pint producls.
(b) Allocate the
Fint
cosl by using an .werage
unit cosl obtained by dMding the tolal
joint
manulacturing cost by lhc total number of
units produced.
( c) Al l ocat e t he
j oi nt cosl on t he basi s ol
weight factors such as size' ditficulty ol
manufaciure, ot amount ol materials used.
(d) Atlocate the
joint
cost on the basis of some
uni t of measut ement such as
Pounds,
lons, or gallons. ll lhe
ioint
products are
mt measured in the same way' they musl
be converted to I denomi nator thal i s
common to all the unils
Produced.
O8- 8. The mar ket val ue met hod consi der s t he
revenuegroducing
ability of lhe
ioint
produds by
assuming that each shouH be valued according
to ils cost absorption ability. Resulling invenlory
@sts are i n harmony wi l h revenue produci ng
abitity and, il the combined
joint producls are
profitable, the market value method avoirJs allo-
cating more cosl lo a producl than hs revenue;
thus achieving a neutral elfect. However, this
method may be diflicult to apply if the matket
value al the splitofl point is nol known.
The average unit cost method, while simple lo
appl y when uni l s are measursd i n l i ks tsrms'
lails to consider the heterogeneous nature of tho
individual Products.
O8-9. Joint costs musl be allocated to
ioint
producls
when lhere is invsnlory to be costed.
O8-10. Not exaal y. A new manufadurer woul d do wel l
l o consul l the Internal Revenue Servi ce aboul
the methods to be used, so that an IRS agent
can make a decisbn before the tax rslutn is pro'
par ed. l n ot her cases, wher e an al l ocat i on
method has been apdied consistently lrom year
to year, to apply for a ruling would not be good
$ral egY.
O8-11. The method used i n cabul ati ng uni l costs
pro'
duces the same unh cost l or al l grades of l umber
sold. The owner is then led to bolieve thal lhe
same cosls in the sams ratio are attributable to
the l ow as wel l as the hi gh grade number.
h must also be recognized that because of lhe
i nhotent nal ure ol thE materi al s and the mi l l i ng
promss, il is not possible to eliminate low grade
number. Thus, the profitability of the oPeration
can be vi ewed best by consi deri ng the aggre-
gale ol tovonue and costs of both the high and
l ow grades ol l umber, coupl ed wi th conttol s to
assure that all practical stsps are laken to obtain
hi gh qual i ty l ogs and to mi l l them properl y. A
I
I
I
I
L
I
!
I
|}
CtuptorB
highor prbo lor bgr rf,y b
,utttti.d
h tonrr of
r gnclrr erncrnl of ltigh grrado lumbor'
6-1?4 Fq debi'rcrt nnoh,itrg,
iinl
ab ero inolovanl
rnlo{ thoy arc rlgrslcd b changc !| t r..ui
179
of h. docitixr. Uaualty, stly co.ts bcywtd thr
lplldl ero rebvanl
Chapter I
E8-l
(f
l
Net revenuo method:
PGRGISES
Grogs ngvenuo lrom sale of by-product..............
Productlon cogt aftgr soparatioll.......'.............r..
Ngt rgvgnue film sale of by-product'.................
(21 Market
yalue
(reversal cost) method:
Final market valua
Less: Profit ($eOrOOO r lOTo)........... $2,ooo
MarkeUngandadmi ni straUveerpetl sos...
2' OOO
Prpductlon cost aftor 8oparaUoJl.............. 5' OOO I,OOO
$2O,OOO
5,OOO
glg,ogg
$2o,ooo
Jolnt cost allocated to the by-produGt......'.........
E8-2
(1) Calculation of manufacturing cost betono separation for by-products,
By-Product
A B
Sal es. r.............. $61000 $3r5oo
Manufacturing cost
gftgr
separatioJ| ..............,...,....... $trlOo S 9Oo
Marketing and administrafive oxpenses..........,.......... 75O 55O
Profit allowance (A, l5%i B, 12oh1 ..........,........,,.......r. 9OO 42O
$2,750 $1,87O
s11, OOO
Manufacturing cost beforg separation,.......,...r..,..o..,. S3r25O
9I' 639
L
I
I
It'
I
\>
I
I
!
Chapter I
E8-2 (Concf uded)
t2l
t 8l
\
LOGAN COMPAI{Y
lncome Statement
For Mont h Ended Apri l 3O
Main
Product
$zs,ooo
s32,620
1 1, 5OO
$30,880
6, 000
S24,ggq
By-Product
A Total
s3,500 sg4,soo -
b
Sal gS i r . . . . . . . . . . . . r . r . r r . . . . . . . . . . r r r r . r . . . . . r . . . . r . . . . .
Cost of
goods
sold:
Before separation (requirement (1)).
Aftgr se parati ort...,..................,.,.....,
GrOSS
p rOf i t . . . . ' . . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . . r. . . . . .
Less marketing and administrative
gxpgnsgs
r . . . . . . . . . . . . , . . . . r . . . . . . . . r , . . , . . . . . , . . . . r .
Profi t from operati onS..........,.........,....r..
E8-3
s6,0oo
t
\
Product
t t ,
Ul r r r r r r r r r r r r
. . . . . . . . . . . r . .
\t
, 4 . . . . . . . . . . . .
Y
I r a . a a a a a r a . . a . . . . a a a . . . r . a
a a . a a a . r . r . a a r r . . a a t
,
G r r r e r r r o r r r o a a a a a a a a a a a a a a r a a a a a a r a a a a a a a a a a t a a a a a r r a r r a t a a ,
? a a a l
I V r Ct l o r r r e o . . . . . . . . . . . r . .
, r . . r . . . .
s44,12O $4,350
s3,250 51,630
1, 100 90O
$1, 650
750
s 900
s37,5oo
13, 500
$2,530 $51,000
$ 97O s33,5oo
550 7,300
$ 420 s26,200
Apportlonment of
Joint Production
Gost'
s 64,000
48,OOO
32,000
16, 000
$160, 000
$ 6,00
2.AO
$ 4.00
2.OO
$ 2.00
91' 009
Market Value
at Split-Off
$ 8O,OO0
6O,OOO
40,OO0
20,000
s200,000
'9Ln9,00O.
=
goo/o
s200,000
E8' 4 z: Mar ket val ug pgr
unt t . . . r . . . . . . . . . , , . . , . . . . . . . . . . . , , , . . . . . . . . . r , .
Gross profit,
consisting of:
Oper at i ng pr of i t . . . . r . . . . . . , . .
. . . . . . . . . , . . . , . . . . . . 31, OO
Mar keUngandadmi ni st r at i veexpenses. o. . . . . . . . . .
1. OO
Further processi ng
cost
Val ue per
uni t of by-product at spl i t-off..............
Val ue
of by-product to be credi ted to
j oi nt
cost
( 2, OOO uni t s x 52)
r
I
I
\
ta
I
E8-4
(Goncludedl
X and Y:
Uttlmate
Martet
Valuc
por
Product
UnR
E8-5
{1}
Product
$4.3o
6.OO
6.OO
Spllt-Off
Processing
Cost
After
$
4O,OOO
7O,OOO
Processing
Gost
After
Split-Off
$3O,OOO
2{,OOO
27
|OOO
991'o09
Chagter 8
Apportion-
ment ot
Joi nt
Production
Cost'
Units
Produced
IrOOO
I O,OOO
Ultlmate
Mar|cet
Value
por Units
Unit Produced
Uttimate
Martet
Value
Hy?o-
theUcal
Markot
Value
$eo
25
x
Y
318O,OOO
25O,OOO
Ultimate
Market
Value
$129,OOO
99, OOO
78,0OO
33O8,OOO
$l2o,ooo
18O, OOO
$
8O,OOO
l 20,ooo
s4l O,O{)q
sl l O,OOO - sstoo,ooo $2oorooo'r
'
Ratio to allocate cost
prior to separauon
:19'999
=
3
$3OO ' OOO
3
..$2O4,OOO
cumulatlve foint
cost less $4'OOO
value of credit for by-producl
Hypo-
thetical
Market
Value
Apportion-
ment ol
Joint
Production
Cost
E
s
c
Total
3OTOOO
15, OOO
13, OOO
$
99,OOO
75,0OO
5l , ooo
$
66, 000'
5O,OOO
34,OOO
Net eflgct of sgparable
processing .""""o""""t
Conctusi on: Based on tho Informati on
gi ven, S shoul d be sol d at the
split-oft
poinL
$(3,7sO)
s225,OOO $15O,OOO
'$15O,OOO
+
SZ2S'OOO=
2/3; $99,OOO
r 213
=
966'000
l 2l
Di fferentl al revenue
(t5rooox ($6.60' $5' 25)1"""""""""' t""
Di f f gf gnt i al COSI . . . . . . . . . . . . . . . r. . . . . . . . . . o. . . . r. . r. . . . . . . . t t rt t t """"""t t ' t t "t '
$20,25O
24rOOO
CGA-Ganada
(adapted). Reprint with
permission'
f
t83
ClvpterS
I
I
I
I
l>
I
I
EiEgg3q;l
gfcl
Fs F
rfuil
is
3
Ei:EI
iFfli]I
iFiti
irqgl
$fiil
iaqfll
r
i'sgl $allfll
#l
ffflfll
I
\,
s
N
F
tl
o
o
o_
o
o
I,
o
+
0
o
0_
o
q,
N
J'
r o
e
o
0
(,
tr
I
t
J
T'
9
b
ct
E
a
o
r i r ! 0
c 9
E 9
C L E
t o
9 . v
. L o
= E D
cL r0
d =
o d
+ o
..t O
r !
cil
ssg
!r; il
;'
'
u
J I
H
?
o
I
c'
lrl
b
\
\
i
<! o o
6
F
\
___ __--t\
,u
E8-o
(Conctudedi
t2l
Diffgrgntial
revgnue
per unit ....,""""""""""""""""'
Differential
cost
Per
unit:
$25rOOO
*
1rO0O. . . . . . . . . . . . r. . . . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . .
360TOOO
+ 31O0O. . r . . . . . . . . . . . r . . . . . . . . . r . . . . o. . . . r . . . . . . . . . . . . . . . .
Sl
O5TOOO
+ 5rOOO. . . . . . . . . . . . . , . . . . . . . . . . . . , . . , . . . . . . . . . . . . . . . . . . . . .
Product
A B
900 $rs
25
20
Chwter I
$zs
c
27
3, OOO
4, OOO
3, OOO
$
30,ooo
4O, OOO
3O, OOO
sl
oo,ooo
$
2o,ooo
3O, OOO
5O, OOO
s 4
$r s
1 4
$ r
_
Total
Producti on
Cost
$
5o,ooo
7O, OOO
8O, OOO
s2oo,ooo
$1s
(3)
(l n the l ong-run deci si on to i nvest i n the capaci ty
(faci l i ti es) needed to
i urther
process B, the fi xed cost shoul d, of course, be consi dered.)
(4) No. From part (31, the benefit of further
processing is 91 for each of the
3,ooo uni ts of b,
-or
$g,OOO.
But that must be compared wi th the benefi t
of the al ternati ve use of faci l i ti es, $6,000
-
$1,OOO
=
$5' O0O
of short-run
benefit. So it is better in the short-run to selt B at split' off and devote the
faci l i ti es (the ones that woutd have been used to do B' s further
process'
i ng) to thei r al ternati ve use.
CGA-Canada
(adapted). Repri nt wi th
permi ssi on'
Di ffergnti al rcvgnu................r.........-.
Di fferenti al cost:
($60,000
-
$18rOO0)
+ 3' OOO ...' ."""
Bgngfi t to furthgr
processi n$ .........,...............' .o""""'
E8-7 (1) Average uni t cost method:
units
ooT;*.1:ilf""t
H:,'ffil:
Product Produced Producti on Cost Spl i t-Off
A
B
c
$
(5)
Conctusion: Only
product Bts differential
cost exceeds its differential
revenue. Therefore, only
product B should be sold at the split-off
point.
Yes, because the short-run i mpact ol further
processi ng of B i s then:
Total sl oo,ooo
ChagterB
E8-l (concl uded)
(21 Market val ue method:
A
c
Total .....
Processing
Gost
After
Split-Off
$ 2o,ooo
3O, OOO
5OTOOO
s1g9'oog
3. 0
2. O
4. O
2. 5
Hypo-
thetical
Market
Value
s 4O,OOO
8O, OOO
4O, OOO
Joi nt Cost
Per Uni t
s1. 40
1. 40
1. 40
1. 40
Wei ghted
= Uni ts x
15, OOO
4O, OOO
6O, OOO
25, OOO
14O, OOO
Apportion-
ment of
Joi nt
Production
Cost
$ 25, OO0'
SOTOOO
25, OOO
Joi nt
Cost
s 7,OOO
28, OOO
21, OOO
14, OOO
s?o,ooo
per
uni t
Joi nt
Cost
Per
Wei ghted
Uni t'
$.so
. 50
. 50
. 50
185
Total
Production
Gost
s 45,ooo
8O, OOO
75rOOO
Joi nt
Cost
I 7,5oo
2O,00o
3O,000
12, 5O0
$7O,OOo
Ultimate
Market
Product Value
I 60,000
11O, OOO
9O,OOO
$26q999
5, OOO
2O, OOO
15, 0O0
l O, OOO
Joi nt cost
$169, 009 sl oo,ooo
9?oo,00g
'
$l
oorooo *
$160,000
=
.6zsi $4o,ooo x .625
=
$25,ooo
E8-8
(1) Average uni t cost met hod:
Uni ts
Product Produced
'
Joi nt cost
Total number of uni ts produced
(21
The wei ghted average method:
Units
Product
Produced x
points
5, OOO
2O, OOO
15, 00O
1O, OOO
_so,o99
K
L
M
N
tr|ffi
=
$1.4o
K
L
M
N
$70. ooo
i Aopoo
=
S' 5o
Per
wei ght ed uni t Total number of wei ghteO uni ts
)
186
l
E8-8
(Concludedf
(31 Ttre market value method:
Product
Ultlmate
Market
Value
per
Unit
s5.50 .
1. 60
1. 50
3.OO
Units
Produced
SrOOO
2o,ooo
15,Ooo
l O, OOO
UlUmate
Market
Value
$ z7,soo
321000
22r5OO
30,0oo
Processing
Cost
After
Split-Off
$ 1,5OO
3,OOO
2,500
-
5,0oo
Hy?o-
thetical
Market
Value
$ 2o,ooo
29,OOO
20,0O0
25,OO0
Chapter I
Joi nt
Cost
Allocation
$18, 2OO
2Or3OO
l 4, oo0
17, 50O
Materlalt
Cost
por
Product
Unlt
Converaion
Cogt
per
Product
= Unl t
37.5o
6.00
K
L
M
lf
Joint cost
Hypothetlcal market value
E8-g Materials cost:
Welghted
product
Unlt r Polnta = Unltr
st t 2.ooo sl2,ooo sl oo' ooo $7o,ooo
-
$7o' ooo
-
. 7o
=
Tooh
$1OO, OOO
l o, ooo
8,0oo
x topoo 6
Y 8,000 1
3
2
x
Y
30TOOO
16, 00O
50,OOO
32,OOO
82,OOO
Matsrlalr
Cost
pcr
Welghted
Unlt =
Converslon
Coct
par
Wclghtod
Unlt
31. 5o
1 5 0
Total
Materialg
Coat
360,OoO
32,000
392,O00
Total
Convcrrlon
Cort
+
3 75,000
48,O00
3123,O0O
Product
Unltg
1O, OOO
8,000
Product
Unltr
1O, O00
8,00o
$6
4
32
2
40,OOO
Gonversion cost
Welghted
Product Unlt r Polntr = Unltt
CtnpterE 187
Tot81..,.... 20 00O
PROBLEMS
$53O,OOO sl r3OOrOOO
I
P8-t
-
'
(ll Average unit cost method:
Apportionmont Processing Total
Units (kgl of Joint Cost After Production
Product Produced Production Cost Split-Off Cost
, B. 1OO0O S2O5,OOOr $ 58O,OOO
$ 845,OOO
c f o 0oo 2o5,ooo 72qooo 985,OOO
gl,83g,ogg
'Jolnt
cost of $59O,0OO less $O,OOO by-product credit ($f S r 4 OOo kg) =
SS3O,OOq $S3O,OOQ
+ 20 OOO kg =
$26.5O
per
unig $28.50 r 1O OOO kg =
$265,00O.
Total Production Units in Finished Finished Goods
Product Gost per Unit Goods Inventoly Inyentory
B
$84.50 I OOO kg $ B4,SOO
c 98.50 5OO 49,250
9193,?sg
(21 Market value mothod:
Apportion-
Processing Hypo- ment of
Ultimate Cost theticat Joint Total
Market After Market
production production
Product
Value Split-Off Value Gost Cost
B
$1,300,ooo $ 580,ooo
$ 72o,0oo
$318,000 $ 898,OOO
c 1,2OO,OOO 720rO0O 4go,ooo 2l2,ooo 932'OOO
Total...-.-.
$2Ego,ogg
91,3og,ogg
$tggg,oog $sgo,ooor $t,B3o,ooo
r
Joint cost loss by-product credit SS3O,OOO
*
$1,2OO1OOO
= .4417; .441T x
$72OrOoO =
$318,ro24 = 8ppnoximately
S3l8rOoO; .4417 x $ego,o6o
=
$21 2r0i O = approrimately
$Zi 2,OOO.
Total Production
Cost of
Produst
cost per
unit Units sold Goods Sold
B
agg^Bo , ooo kg
$ 8og"?oo
c
93.20 e 5oo 885;4OO
$1, 693, 6o0
{
\
tffi
Chapter I
P&l
(Concluded)
(31 Neither the market valuE method nor average unit cost method of allo-
cating
joint
cost is a more accurate way of determining
ioint
product
costs. Joint cost, because of its nature, cannot be accurately split up
among
ioint
products, sincs
joint
cost is incurred to producs ono or all of
the
ioint
products. That is,
ioint
cost cannot be reduced by dropping one
of the
products. Thus, to make decisions about
joint productionr
one
must look at the revenue and separable cost of each
product to deter-
mine whether it ls
profitable on the margin. In such decislonsr
foint
cost
ls not relevant. The only
purpose for allocating
ioint
costs is to determine
a cost for inventories on the balance sheet and for cost of
goods
sold on
the income statement.
For financial statement
purposes, in most situationsr better argu-
ments can be made for a value-based allocation basis rather than a
physically-based one. At times, the physical base can result in absurd
allocations of costs among
products because of the disproportionate
relationship between the relative value of the
joint product
and the units
produced, relative to other
ioint
products.
189
ChaptorB
o t o t l
o l 0 l l
OJ 'f,JI
nl$ll
3al
ol nl l
'l$ll
ol c, l l
IJ tJI
$lBll
ol ol l
ot c)tl
ot ot l
Flfill
o
o
ao
o
0
o
5)
tr
o
o
c)
o
I)
|1,
o
o
o
u)
F
, o c
l o c
t o n
l l j F
I F E
o
l Bo
o o
o n
f , F
? o
{t
6l
o o
o c )
o o
o ra)
o| 1,
N r
!,
o o
0 0
q q
l ()u)
O F
t)
o o
o o
q q
o o
CD| . )
o
o
q
o
CD
o
ss
El
s!
3{
rfl
E3l
;=*l i
6c*l 6l l
0 0 1
o o l
o 0 t
o o l
n l ' l
g ) |
o
I
o_
ct
!t
&
t l
o
0
0
c'
;
!.
s A
O . -
! t 0 t -
i : 8- 6
x 0 l l
X t o a
- - N
x
P{ D5
6
r r d
. gl o
F
r C { r
, o :
R x P
o o o
I
qE
C{ ( l l -
Q - { t
F o . t ?
ststl
ot ot l
'lgll
I
-fqrAa1ax
Si'lr-qfl
e - l o o o t o t t
E E 318 8 8l8ll
s
s
slgr
Flgll
d
o
F
F i i
t : 3
F i i I i
?a!
g
5- ! 3
i
Oi l Cl y
o r ! g o o
egj :
! s !
6
3 B : *
er g
g
sl
*sleee
= gl ui dd
q l r r c l
! l ssl qeq
= Es b l RP.
sJ 3t
I
e l
ol
5 l
N S l o J F
ob tl
o . = N
'_
\
\
190
P8-3
(rl
Product
Al pha. . . . . .
Gamma ' ..
Tota1.........
Ultimate
Market
Value
per
Unit
$ 5
1 2
Units
Producedl
46,2OO
4O,OOO
Market
Value
Processing
Gost
After
Spllt-Oft
Hypo-
thetical
Market
Value
Chapter 8
Joi nt
Cost
Allocation3
t$zgt,ooo 1$
t
15ro6oe
r
38' OOO sl gs,Ooo $
44,4OO
23r66O
4SOrOOO 1651000 315,OOO 75,600
Al pha
Beta
s23,76O
8, 1OO
$15, 660
s726.66O $220,O60 S5OO,OOO $l 2O' OOO
rDiagram
of Flow of Pounds
(not raquiredl
$?8, OOO
$23,660
(41 46,200
pounds
(2) 66,00O
pounds
$120,OOO
l 9, 8OO
pounds
( 11 11O, OOO
pounds
$l 65, OOO
Gamma
(31 44,OOO
Pounds
-4'OOO
Pounds
lost
_4O' OOO
pounds'
'Computation
of
pounds of
good output of Gamma:
Let X=l oodout put
44, OOO
- . l X
= X
{o,ooo = X
zMarket
val ue of Beta
(19r80o pounds x $1.2O|
...r,.................
Less marketing expense of Beta ....r.........."......-...............' ...
Ngt rgal i zabl g Val Ue Of Bgta.' ....r..............o.....o.........' ..r.r......ro
sThe
joint
cost is 24oh of the hypothetical market value.
Chapter I
P8-? (Concluded)
(2'1
t 9l
BROOKS CORPORATION
Statement of Gross Profit for Alpha
Sal gS (38r4O0 poUndS X $5)
. . . , . r. . . . . . . . . . r. . . . . . . . . . . . . ' . . . . . . . . . r. . , .
Productlon costs:
Allocated
joint
cost
s192, OoO
t a . a r a a a r a a a a a a a a a . a a sl 02, ooo
38, O0O
23, 660
Gross cost of
productlon
Less net realizable value
(11
Sa| es.....................
Cost of goods
sold:
Joi nt cost ($236,000
-
Bynd net revenue
($l 1,OOO -
$5,000 separabl e cost))..,.
Separable cost ($215,0OO -
$5,OOO for
Bynd) . . . r r . . . . . . . r . . . . . . . . . . . . . . . . .
Total cost ..........r.r....e...rrr.............
Gross profi t (12%
of sal es).......,o,.....
(21
Ul ti mate
sal es va1ue.....,..,r..r..
Less 72oh gross protit
.........t..,.....,
Total
cost..,....................
Separabl e
cost ......................
Joi nt cost al l ocati on......
s163, 660
l 5r gOO
r
$147, 760
2gr552t
Jana Reta Total
$2OO, OOO $3OO, OOO S50O, 0OO
$23O,000
21O, OOO 2. 1O, 00O
s44O,OOO
$ 60,000
Total Jana Reta
of Beta
Ngt cOSt Of prOduCtl OIl ....' ..' .......' .....ro.....,.........r.........' ...r
Less
gndi ng
i nventory.....r.,...............,...........r.,,..............
Cost of
goods
so1d...........rr.r........ ................,...,
Gf OSS pr Of i t . ' . . r . . r r r . . . r . . . . . . . . . ' . . r . . . . . . . . . . . . . . . . r . . . . . . . . . . r . . . . . . . . . . . r r .
118, 208
s 73,792
' Net
real i zabl e val ue of Beta equal s the revenue fnom Beta (S24,OOO)
l ess i ts
related marketing expense
t$erf
OO).
nEndi ng
i nventory egual s the net cost of producti on (S147,760) ti mes 2O%.
P8-4
$5OO, OOO
6O, OOO
$44O, OOO
21O, OOO
S2OO,OOO
24|AOO
$t 76, OOO
$3OO,O0O
36,000
$264,0O0
21O, OOO
$23O,OOO 9176,000 $ S4,OOO
(31
Gross profit
for Jana and Reta-see line 2 of requirement (2),
t.
192
P8-5
(ll Ultimate
Market
Value
Chapter I
Apportion-
Processing HYPo- ment of
Uhimate Cost thetical Joint
per units Market After Market Produetion
Product Unit Produced Value Split-Off Value Cost'
spr--g 3o.oo Too,ooo S2,8OO,OOO $ 874,000 $1,926'000 $
960'000
*
psT-4
6.00 35O,OOO 2rl O0rooo 816,000 l r281rO0O 640' 000
$4,9OO,0O9
9!,690,009 99,2lO,OOO 9!,8OO,OOO
'Joint
production cost
............ $l rTO2rOOO
Less cost assigned to by-Product
RJ-s (f TOrOOO
gallons r (S.7O*S.1O)!....-..... 1O2'OOO
$1,8oo,ooo
"(51, 926, 000
+
s3r2l O, OOOl
rsl , 6OO, dOO= $960' 000
l2l
sPL PST-4 RJ-s
Joi ntcosta1toc3ti on..................r............ $
g6OrOOO
$
6401000 $l O2,OOO
Additional
processing
cost.........r,.......... 8741000 81qr090
Total cost $1,83{,OO0 $1,456,000 $l O2,OOO
Di vi ded by
gal tons produced.......,........., TOOIOOO 35OrOOO l TO,OOO
Cost per gal l on....
lnventory costing:
s2.62 $4.16 $.go
: : : :
November I inventory (gatlonS) ....... l8rOOO 52' OOO 3' OOO
November production 700,ooo 35o,o0o 17o,ooo
7t8,OOO 4O2,OOO t73,OOO
November sal es 650,000 325,OO0 15O,OOO
November 30 inventoil[.................... 68,000 77rOOO 23rOOO
Cost per ga| | on...o.......,.,..................
$2.62 $4.16 $.OO
Cost assigned to November 30
finished goods
inventory....,...,....
9._!-Z91169
$
32or32o $ l3' 8o9
(31
Per gallon
sales value beyond the split-off
point.,.... $6.00
Per gallon
sales value at the split-off
point.......,...... 3.8o
--
Diffgrontial salgs value .r......,.........r..r...r.....r,............ 52.20
Additional processing
cost
per gallon
(S816rOoO + 35O' OOO gallons).....................r.......... 2.33
Per gallon gain (loss! of turther
processinft..............
l_!:!31
Alderon lndustries should selt PST-4 at the split-off point,
as the difforential
novenue of the sal es beyond the spl i t-off
poi nt
i s l ess than the addi ti onal
cost of further processing.
-T
I
193
I
I
Chaptor I
( '
t o l
r \ l Ol
F. l ! ol
o t F l
l g , l
t F t
l ral
g
lgtl
-l -l l
o t F l l
-l sl l
I
( ' o l
I
F o l
F O I
- - l
o o t
s l
I
F
ol
t\
1\
N
I
N
o
(o
{o
('
{,
q t l
(oi l
co ll
a?
ll
Ell
o t l
ot l
nt l
r t l
( ?t l
5l l
or l
( ot l
F I I
ei l
$tl
8i l t
l 8l
ol l
( ' ,
ol
r-11 d oil
S l l
o l
8i l I t Et l
o l l o l o l l
ql l
d l dl l
$ll E l8ll
o r o r l
I l al
rt l rt l l
tEil
: : i
a a
; : :
o : : :
; : FE :
E
:EEg
i
t r t r c x o :
- - . - - r r
*Ecgs i
- L Y F -
g ^ r - b
-
u b . - L
! f i ?E
e
i
Eg, [ H; t
- = | / ) t r . U ' :
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-
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0
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t r ' af
HE
Ag
E
^ - - - 6 -
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o
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c
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n
J
o
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it
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o o o i l o l o
s i r o ol l ol I
q r c l l l c ? l q
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o o r o r o o
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N I N I
l''t{''l
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o o l o l
N C O I O I
r l N l
& l s) |
t o n t oi l
N F t O i l
r
( ?
l l f ) l l
q ol
l HI
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0 0 t o
o o l o
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a . L
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o r '
o !
o
tg .,
a g
rL' 3
7 O
o
o
tt
o
o
o
t t :
H :
6 :
nE
e
j 9
s +
8B
o
J
!t
o
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t,
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o
.o
tt
G
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o
o
G
!t
c
tl,
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o
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G
J
! t :
o :
L .
o :
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o :
l - .
a !
- o
E3
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L
? r o
= + .
w ( E
6=,
o
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b i
o :
E i
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ct t
.-
t!
si
c o
t r >
. 6o
o F
f 6
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3 r
- c
s a U
c LL
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r_5
o
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g
y E
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F O
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g8_
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f i o
E E *
q l r r
O
=o t r
: O E
E q F
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- N o
r . - E
U , +
6 8 :
E3
oF t t
59? O
E E
o
fit
: !
> :
O 3
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;, 9E
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P c t
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frs
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t r l : t
Ef i :
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+ l O t !
8=' :
o
v
tr
o
fit
CL
o
o
o
o
!t
o
B
|ll
o
o
o
o
194
P8-O
(Continued)
Additional
GomPutations:
Equivalent Production:
Transf gf f ed
oUt "i """""' r""""""' o"""""r"""""'
Ending inventory
(work this
period)""""""""""
Uni t costs:
Matgri al s, Process 1 ............' ....""""""""""
Labor and factory overhead, Process
1""""
Total cost to be accounted for, Plocess 1 ""
Labor and factory overhead, Process 2.......'
Labor and factory overhead, Process 3........
Cost from
preceding department,
Process 2
Cost from
preceding department,
Process
3
Joint cost apportionment:
Chapter I
Labor and Factory Overhead
Process 2
Process 3
9,OOO units
20'000 units
' l ,000
1, 000
21,OOO uni ts
=
$1. 8125 Per
unl t
=
$ .9375
per uni t
= S2.g00O Per
unlt
=
$2.0000 Per
unit
=
S3.0ooo Per
unlt
=
$2.0769 Per
uni t
=
$3.2391
per uni t
Process 2 Process 3
Product
Product
Sal gs
pr i ce . . . . . . t . . . . . . . . . . t . . . . t t t " " " " 1" t " r t t " t " r t " " ' t " t t " t " " t l "
Less processing cost subsequent
to split-off
point r"""'
Hypothetical market value at split' off
point:
58
x 1Or00O units transferrd .....' ............r""""""""
S12 x 20' OOO uni ts transferl gd
....................""""""'
Joi nt cost al l ocati on:
SSO,OOO x .2625' .
S24O,OOO r .2625
.
S84,OOO
-. (S8O,OOO + $24O,O00)
= -2625
$10
2
$ e
:
$8O,ooo
$1s
3
$t e
-
9240,009
1O,0OO
uni ts
s58,OOO
32,OOO
$30,000
32,OOO
$ga,ooo
30,ooo
92,0OO
+ $18' 0OO
10,0oo
i3,OOO
+ $60'O0O
21, OOO
s27,OOO
13, OOO
$74,500
23,OOO
s21, OOO
s63,OOO
f- Chapter I
: -
P8-6 (Conti nued)
.
' "ttt?"t",:oo
+ l o,ooo uni ts............o.. s2.1o
$691000
+ 2o,ooo uni ts
:
s3.15
-
.- Transferred to finished goods
storeroom:
Procgss 2.............,r.......,.............r....
54.O769 x Iroo0 uni ts =
$ 361692
, Pnocess 3.........................r...............
$6.3864 x 2OTOOO uni ts =
S12T.T2Z,
' S6.3864
x 2O,OOO uni ts =
$1271728, To avoi d a deci mal di screpancy, the cost
transferred to fi ni shed
goods
storeroom i s computed as fol l ows:
$137r5o0
-
s S9,773 cost assi gned to endi ng i nventory =
51271727.
r
*ot[,T":T"";:'-"noins inventory:
Cost from precedi ng department...,..
$2.0769 x 4,OOO uni ts =
Sg,gOB
Labor and f act or y over head. . . . . . . . . . . . . .
S2. O0OO x l , OOO uni t s =
S2, OOO
- Process 3:
.
Adj usted cost from precedi ng
.
department..............,.....,...,.......,...
53.9864 x 2' OOO uni ts =
$61723
*
.
Labor and f act or y over head. . . . . . . . . . . . . . $3. oooo x 1, ooo uni t s =
S3, OOO
(2t
fii:flTHllSl;:;;;;;;';':::::.::::::::.:::::::::.::::.:.
"l;BBl
Work i n Process-Process 3 ..,.... O3,OOO
Work i n Process-Process 1........ 8B,OOO
Fi ni shed Goods
Wor k i n Pr ocess- Pr ocess 2. . . . . . , . . , . . . , . . . . . , r . . . . . . .
36, 692
Fi ni shed Goods. . . . . . , , . . . . . . . . . . . . . . . . 1Z7. TZ7
Work i n Process-Process 3........
12Z,TZ7
195
Chaotor I
o o
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dr i
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d 6
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e - o
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f ' 6 | l )
l l L ^ -
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? # s
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!
g t '
, = d c '
o P o
3 ! i
r l i J
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E
Chapter I
P8-6
(Continued|
Additional Computations:
Equivalent
production:
Thansl grrg d o l tt .................. "..r..... t.......o...t... r' t....
Less beginning inventory
(all units) r..........r........
Started and fi ni shed thi s
peri od........,.,..........' ...
Add begi nni ng i nventory
(work thi s peri od)........
Add endi ng i nventory (work thi s peri od).............
Unit costs:
Matgri al s, Process 1......,,......,..' r..................
l -abor and factory overhead, Process 1........
Total cost to be accounted for, Process 1 ....
Labor and factory overhead, Process 2........
Labor and factory overhead, Process 3........
Joi nt cost apporti onment:
197
Labor and Factory Overhead
Process 2 Process 3
I' OOO uni ts 2OTOOO uni ts
3,OOO 3,OOO
6,000 uni ts 17,OOO uni ts
2,OOO
l , OOO
I,OOO units
358,ooo
uni ts
=
51. 8125
per
uni t
=
S . 9375
per uni t
=
S2. 8OOO
per uni t
=
$2, oooo
per uni t
=
S.3.OOOO
per uni t
Process 2 Process 3
Product Product
!
I
t-
2,OOO
I , OOO
2O,OOO
32, 00o
33o,ooo
32,00o
$t4,ooo
3O, O0O
$18, OOO
9r0oo
36O, OoO
20, OOO
Sal es
pri ce , ro, . . . , . . . . . . . . , . . . . . . . . . . .
. . . . . . . . . . ' . . .
Less pnocessi ng
cost subsequent to spl i t-off
poi nt ........
Hypothetical market value at split-off
point:
$8 r 1O,OOO units transferred .....
$12 r 2OrO0O uni ts transferred ..,....,......,.....,,....,.r....
Joi nt cost al l ocati on:
SSOTOOO r . 2625t . . . r. . , . . . . . . . . .
S24O,OOO x .2625
r
SB4,OOO
+ (S8O,OOO + S24O,OOO)
= .2625
sl o
2
sl 5
3
$_g
99o,ooo
s2lr9oo
s 12
9319'099
99!'o99
r - l
I
r
t w
P8-6
(Goncluded|
Unit cost:
$21 rooo
+ I Or0oo unitS .....r.......r.............r.....r.o...o' .' ..
$6{lrOOO
+ 2OTOOO UnitS r............r...............' ......,...."t'
t4l Finished
goods.............r.............r.........................
I '
WOfk In PfOC.SS-P.OC.SS
2.,......o.....' -""""""""
Work In Process-ProcgSg
3 """"""'t"t"""""""r
WOf k I n PfOC oSSl-PfOC
g!l!J
I ..............t.o"r"
"o"'
Fi ni shgd Goods . . . . . . . . . . . f . . rrrrroI rroi rr. r. . . . . . . . . . . . . . . r. . . . . .
work I n Proc
gss-Procesa 2................' .........r.
Fi ni ghed
Goods ...........r.............,..........' .,.............
work In Proc
gss-ProcgsS 3......................' .....
Chapter 8
$2. 1o
4r0oo
21r00o
63,OOO
88,OOO
36,8OO
38,600
727
1860
127
$60
s3. 15
CASES
c8-1
(1) The markot valuo method of
ioint
cost allocation
assigns cost in
pnopor-
tion to oa;h
productb markel Yaluo to all
products as follows:
Market Value of Each
Product at Split-off
Total Market Value of
All Products at SPlit'off
Joi nt
x Producti on
Gost
lf thera ls no market valuo at split-off,
then the value at the first sales
point, tess separable cost, lg used. lf
ioint
products have a markot
valuo
at the split-off
point, the margin for ail
ioini
products at the split-off
will
be the samo.
The
joint
cost i3 altocated in
proportion to n8vnuo
gensrating ability
(as
contrastod to some
quantita*re'measunes
not rlated to rsvenue)'
Therefore, this accomplishes
Jim Simpsonb obiective
that inventoriabls
cost shoutd be based on each
productb ability to contribute
to the recov-
ery ol
ioint
production cosltt
Chapter I
C8-1
(Conti nued)
(21 (a) Because both main products have a market
point, this value, rather than the tinal sales
the
ioint
cost
199
value at the split-off
value, is used to allocate
Joint production cost to be allocated ..r.t..................
Net revenue value of by-product (24OrOOO x (.55
-.05))
Joint cost to be allocated to main
products
Market Value at Split-off
Product Units Produced Per Unit Total
$2,640,000
12O,OOO
93,s20,009
Percentage
of Total
Market Value
Pepco-1......,.r.r.......... 900r0OO
gal l ons
Repke-3............r.,...... T20rOOO
gal l ons
s2.00
1. 50
s1, 800, oo0
I , 080, 0OO
62.5o/o
37. 5
s1, 575, 000
945,00O
120, O00
s2,880,OO0 100. 0%
Allocation of Joint Cost
November
Pepco-1
(s2r5Z0r00O x .625)...........................
Repke-3 ($2r52or000 x .375) .,...,.......,.....o.........r.......
SE-s ............ a a t a a r a r a a a a a a a a a a a a a a a a a a a a
(b)
November
i oi nt
producti on cost.... 52,640,000
Pepco-l Repke-3 SE-s
Allocation of
joint production
cost . . . . . . . . , . . . . . . . . r. . r. .
Additional
processing cost
aftgr spl i t-off .....................r'
Total manufacturing cost.........
Divide by
gallons produced......
Manufacturing cost
per gallon.
Inventory costing:
l nventory November 1 .,......
November producti on........,.
I nventory available ..,r.o.......r
Novgmber sal gs ..................
Inventory, November 30 ......
Manufacturi ng cost per gal l on.
Cost of fi ni shed goods
s1, 575, 0OO
1, 800, 000
s3,375,000
90o,0oo
s 945, 000 s120, 000
720,OOO
s 3. 75
20,000
900,000
920,000
800,o0o
s1, 665, 000
72O,OO0
$120,ooo
24O,O00
50,000
x $.50
9_23125
g___-99
40, 000 10, 000
720,000 24o,ooo
760,000 250,000
70o,o0o 200,000
120,Ooo
x S3.zs
6O,O0O
x 52. 3125
inventory
:_glggfoo
S13B,ZsO S25,ooO
T
E
Chapter I
C8-1
(Gonctuded)
(31 When SE-s becomes a mai n
product,
the
j oi nt producti on cost woul d be
al tocated
proporti onal l y to al l three products on the basi s of the market
valuo of each
product at the split-off
point. The net revenue of SE-5 will
no l onger be deducted from the
j oi nt producti on cost
pri or to afl ocati on
because SE-s wi l l no l onger be a by-product.
c8.2
There are a number of areas that appear to be probl emati c i n Hayes Products'
costi ng and deci si on-maki ng
pnocesses. These areas, whi ch are outl i ned bel ow,
need to be revi ewed and
perhaps modi fi ed.
(f
l
The use of the average uni t cost method for al tocati ng
j oi nt product cost.
Uni ts
produced, al though a si mpl e method of al l ocati on, i s not necessari -
l y the best method for apporti oni ng cost across
j oi nt products. Thi s
method can di stort the cost-val ue rel ati onshi p of a
j oi nt product and
gi ve
an ospeci al l y mi sl eadi ng
pi cture of the
gross margi n provi ded
by a
i oi nt
producl For exampl e, assume that i n meat processi ng
of cattl e, one
produced ground
beef and steaks. Each
pound of
ground
beef woul d be
assi gned the same
i oi nt
cost as each
pound of steak, yet the sal es
pri ces
per pound
are qui te di fferent. For thi s reason, i t i s better to use some
val ue-rel ated al l ocati on base, such as the market or sal es val ue method,
to al l ocate cost.
l 2l
Incl usi on of al l spoi l age costs i n product cost. Spoi l age i n producti on
pnocesses
can be assessed as normal or abnormal . Whether spoi l age i s
normal (expected)
or abnormal
(unexpected) shoul d
gui de the way i n
whi ch spoi l age costs are handl ed i n
product costi ng. Normal spoi l age i s
part
of
product
cost si nce i t i s pl anned for i n i mpl ementati ng the
produc-
ti on technol ogy. Abnormal spoi l age shoul d be wri tten off as a l oss i n the
peri od,
and i f the amount i s materi al or the spoi l age conti nues over some
peri od,
the source of spoi l age shoul d be found and corrected. Hayes
Products does not seem to be di sti ngui shi ng cl earl y between normal and
abnormal spoi l age. Thi s needs t o be st udi ed, and some changes need t o
be made i n t he appl i cat i on of spoi l age cost s t o product .
(31
Deci si on
maki ng based on ful l y al tocated cost. Hayes appears to be
about to make a product l i ne deci si on on ful l y al l ocated cost data wi th
i oi nt cost i ncl uded. Deci si ons wi th rel ati on to any of the products shoul d
be based on the separabl e contri buti on margi n of products,
i .e., separa-
bl e revenue l ess separabl e vari abl e cost . Thi s probl em
needs t o be
l ooked
at cl osel y si nce t he al l ocat ed
j oi nt
cost f i gures shoul d be used
onl y f or f i nanci al st at ement
purposes.
Chaptor I
cg-3
,
( 1)
c8-4
201
I
t-
L
The market value mothod does not
proviile additional data for the rlsr-
keUng deeision. Joint cost sllocation is necessarily arbitrary and'
although used lor financial accounting
purposes,
ls not relevant to the
decision to market DMZ-3 and Pestrol, The VDB
joint
cost is irrelevant to
this decision because it ls incurred in both cases, i.e.' the method of cost
altocafion has no impact on tho differential
profit. Talor Chemical
Gompany should calculate the differential
prolit of its alternate choices
by comparing the differential rsvenues and diflerential costs.
Talorb analysis is incorrsct because it incorporates allocated
portions of
the
joint
cost of VDB. The weekly cost of VDB (3246,000) will be incurred
whether or not RllA-2 ia converted through lurther
processing. Thus' any
allocation of the
ioint
cost of VDB is strictly arbitraty and not rslevant to
tho decision to market DMZ-3 and Pestrol. Talorb decision not to
pnocess RNA-2 further is incorrect The decision results in a loss of
$2O'OOO in profit per week, as indicated by the following analysis:
Revenue'from further
processing of RNA-2:
(21
DMZ-$ (4OO' 00O r ($57.5O + 1OO)| ,...................,..............
Pestrol (40Or00O r ($57.5O + l oO))' ...' r.' ...................-......
Total nBvenuo f ro m fulther
p rocessin
9...............r..........
L8SS ngvgnUg f f Om Sal e Of RNA-2, . . . . , . . . . . . D. . . . . . . . . . . . . . o, r. . . . . . .
Di f f gf gnt i al f 9V9nU9. . . . . . . . . . . ' . . . . . . . . . r. . . . . . . . . ' . . r. . r. . . . . . . . . . ' .
Di fferenti al cost' .' .' ...r' .,....r........"...
Di ffgrgnti al profi t .......,......r........-........,' ..' .' .,' .
s23O,OOO
23O,OOO
s46O,OOO
32O,OOO
sl 4O, OOO
12O, OOO
s 2o,ooo
( 11
' The
cost of VDB i s not rel evant and, thus, i s omi tted l rom the sol uti on.
[The
requirement does not ask for a list of responsibilities Vickery has
vi ol ated, but, merel y, whi ch of the fi fteen responsi bi l i ti es appl y to
Vickeryb
situation,)
Management accountants have a responsi bi l i ty to:
Comoetence: Perform thei r professi onal duti es i n accordance
wi th
relevant
laws, regulations, and technical standards.
ffhe
inventory cost
Vi ckery
i s bei ng asked to accept vi ol ates accounti ng pri nci pl es of con-
gervatism
and of matching current cost against current revenue.)
Chapter 8
c8-4
(Concludedl
preparo
comploto and clsar reports 8nd nocommondations
after
.
appropriate analy:et of rolsvant and rsllable information.
(Vickery has
coiryinclng evidence that lallure to make the adiustment
will misstate the
resulting fi nanclal stataments.|
lnteoritv: Befraln from either actively or
passively subverting the
attainmeFt of the organizationb legiUmate and ethical obiectives.
fflrere
is prrssurc to subvart legitimate and ethical obiectives to the immediate
need for tavorable financial statements.|
Communicate unfavorable, ag welt ag favorable, Informatlon and
professional
fudgmentg
or opinions.
(Vickery is being asked to thwart
communlcation of unfavorable information.)
Refrain from engaging In or supporting any activity that would
discredit the profession. (Preparing deliberately misleading financial
statements, clearly ls a discredit to the
profession')
Obiectivihn Communicate information fairly and objectively.
,
Mckery
would violate this responsibility if the inventory wete not
restated.)
Disclose lutly att relevant information that could reasonably be
'
-
erpected to influenco an intended userb understanding of the rtports'
comments, and nocommendations
presented.
ffhis
material overstate-
ment of inventory and
profit violates this ethical responsibility.) -
(21 In addiUon to his ethical responsibilities to his company, Vickery has eth-
ical responsibilities to:
(al the bank
(bl the companyb stockholders
(cl the management accounting
profession
:_
CHAPTER 9
DISCUSSION OUESTIONS
O9-1. The mosl lreguently used documents in the pro-
curemenl and use ol materials are purchase reg-
ui si ti ons, purchase orders, recei vi ng reports,
materi al s requi si l i ons, bi l l s ol mal eri al s, and
malerials ledger recods.
O9-2. The invoice shouH be routed to the Accounting
Department immedidely upon receipt. A copy of
lhe purchase order and a copy of the receiving
report'with an inspection report should be com-
pared by lhe accounting clerK When lhe invoice
is found lo be correcl in all aspects or has been
adj usted for errors or rej ects, the accounti ng
cl erk approves the i nvoi ce, anaches i l to the
underlying documents il they are in hard-copy
l orm, and sends these documenl s to another
clerk for lhe preparation of the voucher.
O9- 3. I nvent or i abl e cosl shoul d i ncl ude al l cost s
incrrred lo get the produc.t ready for sale to lhe
customer. lt includes not only the net purchase
prica bul also the olher associated costs, such
as freiThl-in, incurred up to ths lime producls are
ready for sale to the customer.
Q9-4. No, administration costs are assumed to expir
with lhe passage of time and do not anach lo the
product. Furthermore, admi ni stral i ve costs do
not relale directly to inventories, but are incursd
for the benefit of all lunciions of the business.
O9-5. The three key questions to anstvr in designing
an inventory control sygm are:
( a) how much t o or der - economi c or der
quanlity
(b) when to order-order point
(c) satety stock required
09. The fi rm benefi l s l rom l hese techni ques by hav-
i ng a crnsi stenl , standardi zed approach to i ts
inventory managsment. lnventory costs and ser-
vica lo customsrs will be optimally balanced.
O9-7. The purpose
ol an economi c ordor quanti l y
model i s to determi ne the opti mum quanti ty to
order or produce when fi l l i ng i nventory needs.
The optimum quantily
is delined as lhat quanlity
l hal mi ni mi zss the cost of i nventory manage-
ment.
Q9-8. The decision concerning how much to order or
produce
at a given lime involves a compromise
belween inventory carrying costs and ordering or
sol up cosl s, Exampl es ol i nvent or y car r yi ng
cost s ar e: i nt er ssl on t he monsy i nvest ed i n
invontories
that could have ben invested else-
where, property
tar and insurance, warehousing
or slorage, handling, deterioration, and obsoles-
cence. Ordering costs include ths cost of prepar-
ing the requisilion and purchase order, receiving
l he order, and accounl i ng for l he order. Setup
@sts i nvol ve the costs ol seni ng up equi pment
to make l he actual producti on runs. For al l these
costs, only lhose thd vary with adivity are rele-
vant lo the E@ model.
O9-9. The @nsequencos of maintaining inadequare
invenlory levels indude hi;her purcfrasing, han-
dling, and transportation costs, bss ol quantity
discounls, produclion disruptions, inllation-relat-
ed pr i ce i ncr eases when pur chases ar e
deferred, and bst sales and customer goodwill.
Mgasursment of the costs of lost orders and
z bst repeat business is not easy because mea-
suremenl may be l argel y subj ecti ve. On the
other hand, the other factors listed can be mea-
sured with fair certainty and grealer ease.
09-10. In computing optimum produaion
run size, CO
ropresenls an estimale ol lhe setup cost and CU
is lhe variable manulacluring cost per unit.
09-11. (a) The order poi nt i s the l ow poi nr ol stock
levef that, when reached, means a replen-
ishing order should be placed.
(b) Lead time is the interval between placing an
order and delivery of lhe ordered gmds.
(c) Salety stodt is the minimum inventory thar
pr ovi des a cushi on agai nst r easonabl y
expecl ed maxi mum demands and agai nst
varialions in lead time.
O9- 12. Mat er i al s r egui r ement s pl anni ng ( MRP) i s a
compuler simulation that integratos each prod,
rjct's bill ol mderials, inventory slalus, and man-
ufacturi ng process i nto a feasi bl e producti on
plan.
09-13. Eftecti ve uti l i zati on of capi tal , whi ch i nctudes
i nvesl ment i n i nventory, i s the responsi bi l i ty of
gener al managment ; l her el or e. t he pr i mar y
interest is in linancial control. Atthough general
or top-level managernsnl is inlerested in provid-
ing customers with gmd products and services,
the scheduling of produaion inrolves unit control
primarily and is the responsibility of production
and purchasing
departmnts.
09-14. ln the control ol materials, the opposing needs
are the mainlenance of an inventory ol sufficient
size and diversity lor efficient operations, and
the mainlenance of an investmenl in inventory at
a level that will maximize earnings and minimiza
costs.
O9-15. When a rel ati vel y few mal eri al s i tms account
f or a consi der abl e por l i on ol t ot al i nvent or y
investmonl selective control is indicatod. Hbh.
value ilems would be under tight control, whilu
low-value items would be under simple physical
conlrols.
Automati c control refers l o orderi ng when a
malerials record shows that lhe balance on hand
has dropped to the order point. At this time, the
quanl i l y t o or dor i s aul omal i c, havi ng been
del ermi ned by bal anci ng the cost to order wi th
203
(-
_ \
2U
the cost lo catry inventory' Aulomatic control is
mosl el l ecti ve i h compani es l hat use an EDP
syslem.
09-16. Appendir The average cost mlhod assumes
that each batch takon ftom the slore'
room is composed ol uniform quanti'
ties from each shipment in slodt at the
dale of issue. The lilo method is based
on the assumption thd the firsl goods
received are the first issued. The lilo
method i s based on the assumpl i on
that lhi latest gds received are lhe
lirst issued.
O9-17. Appendir In an inflationary economy' lifo pro'
vi des a bet t er mat chi ng ol cur r enl
costs wi th currenl rovenue because
costs ol inventory issued are at mora
Chapter 9
r ecenl pur chase pr i ces. Net cash
inflow is generally increased bscause
t axabl e i ncome i s gener al l y
decreased, resul ti ng i n payment of
bwer income lax.
O9.18. Appondix Fifo. The higher costs ol the earlier
purchases would be charyed against
cosl of goods sold.
GGA-Canad a (adapted). Beprint with permiss bn.
09-19. Appendix (a) lilo
(b) filo
(c) fifo
(d) lifo
(e) lifo
(t) lilo
CGA-Canada (adaptsd). Roprint with permissbn.
-
ChaPter 9
EXERCISES
*
\
Eg-l
-
(1) Freight allocated to materials based on cost
E9-2
205
= l=21o= =
=
$- 016
Per
doltar of cost
s17, 5O0
Part A: $ 8,600 x S' or0
=
$137.60
Part B: 5,060 x .O16 = 80.96
Part C: 3,840 x .016
= 61.44
qlzrsoo s280,oo
(21 Freight allocated to materials based on shipping weight
s280
=
S. 20
I 400 ki l ograms
Part A: 63okg x S'2O
=
S126
Part B: 49O x .2O = 98
Part C: 28O x .2O =
.!!
1:j99kg
E289
Units
Total to be
provided ...,........,.......
Quant i t yonhandr Sept ember l , . . , . . , . . . . ' . . . . . . . ' . . . . . . . . o' . . '
4r 4OO
On ordgrfor Septembgr dg1i vgryr....r........................' r
3r600
On ordgr for October del i very,.........,.......................... 4.1OO 12.1OO
Quanti ty to ordgr for Novgmbgr dgl i v]1| ' ...................
4. 800
4,2OO
4, 400
4,7OO
3,600
16, 90O
I
206
E9-3
(1) Forecast
usage:
J anUar y t t t " " t " " ' t t t " o" " t " " " " t t " " t t t ' t t t t "
February
"t "t """"t """"t t "t ""t ot "t t """'
Mar c h
t " t " " " " t " t " t " t " t ' t ' t " " t " ot " t " t " t t "
Desired March 31 inventory
level
( 61000 x 80%) " " " " " " " " t " t " t " r " " " " " t "
Total to bg
providgd""""t""""r"""'
Schedul ed
suPPl Y:
January 1 l nvgntoff """"""""o"""""r'
On orden
January del i very' .."""""""""""""'
February del i very' r""""' o""""""""'
Quantity
to order for March delivery
"""'
4,8OO unlts
5,000
5,600
15,400 uni ts
4,8O0
6,000 unlts
4, 1OO
:l,6oo
Chapter 9
2O,2OO unlts
l 2l
JanUary 1 i nVgnt Of ] . . . . . . . . . . r. . . . . o. r. . . r. . ". . . . . . . . . """""' t t "t t ' rt ""
On order for January and February
de|ivery"""""""""""'
FOfgCaSt USagg-ranuary
and Fgbruar1/.' ........""""""t"""'
( a) Maf Ch
' l
i nVgnt Of l . . . . . . . . . . . . . . . . . . . o. . . . . . . . . . . . . . . . . . t . t t " r t t t t t t " t t
To order lor March delivery
(requirement
(1))"""""""
FOf gCaSt USage- M3l ch
. . . . . . . . . r . r . . r . . . . . . . . . . . ' . . . . . . . . r . . . . . . ' . "
(b) Maf Ch 31 i nVgnt of y . . . . . . . , . . . . . . . . . . . . . . . . . . ' . . . . . . . ' . . . . . . . . . . t . . . . . . .
14. 700
5. 5OO unl t s
61000
uni ts
8. 700
14r7OO uni ts
9. 800
4r9OO unl ts
5. 500
1O' 4OO uni t s
5. 500
-4eo
units
E9-4
( 1) EOQ
=
tzl EOQ
=
=
fiopoo
=
3oo Aiets
, a l
(3)
EoQ
=
rl
=
r $25
=
J5iloob-
=
24O units
2 x100 x $5
S55 x 15o/o
2 1 2 , 2 5 0 x $ 1 2
1, 440, 000
L
207
Chapter 9
E9-4
(Continuedl
(41 (a)
(b)
(a) (6)
(b)
EOQ
2x25, 000 r $20
$8 x 25o/o
=
7O7 cartons
Annual required units
Economic order
quantitY
=
ry
=
35 order:
per year
J
5OO
,O0O
I
S
\-
365 days
=
10.4 orevery 1O days orders shoul d be pl aced
35 orders
=
Jl 8o,ooo
=
424
18J990
= 42.4s or approxlmately 42 orders
per year
424
365 days
=
8,2 or approximately one order every 9 days
42 orders
(a) (s)
(b)
-
( c)
EOQ
= - 12
x 18' 000 x S15
-
\r|
$6 x 2Oo/o
=
{ 450, 000
=
677
EOe
= - j 2
x 18' 000 x S15
-
Y 57.50 x 2oo/o
=
600 units
. 6 A A A
#
=
30 orders
per year
OUU
=
{
360, OOO
lr
\
365 days in year
30 orders per year
E^A m
E L ' I J =
; - =
Y 52.50 x 2Oo/o
=
11039 unl t s
=
12.767 or approxinrately
one order every 12 days
(c)
l , ooorooo
al
I
540, 0oo
LN
540, 000
54O
'
OO0
E---
; 1i 5-
=
11, 08O, 0OO
I
Chapter 9
n8
E9-4
(GonUnuedl
2 x 4 8 r OOO r $ 1 O
ftl
(al EoQ
=
$2O r 12Vo'
632 dozen basebal l s
lo5-oFdd-
l J z ; l r -
t'4o
+ 1oo/o return on investment
$20
Annual ordering cost
=
$ffi
=
-
EoO
=
-f2
r 5t0oo r $Jrooo
-
V Sg r 2oo/o
^/ 6125O' OOO
=
2r 5OO col umns
= 12oh
48, OOO r $1O
800
=
$600
(bl
Annual carrying cost
=
C U T C C T E OQ
2
$2O x 12oh r 8OO
-
Total annual inventory cost to sell 48'OOO dozen
basgbal 1s. . t . . t 1. . . . . . . . . . . . . . . . . . r i t t t """t t t t t "t "t "t "t """t ""
960
sl . 560
(8)
(al (e)
(bl
EOQ
=
2 r t 2 , OO0 r 5 1 6
$9 r 2ooh
384, OOO
1. 80
=
462 units
The frequency of order
placement:
l 2roo0 annual usage
=
26 orders
per
Year
462 EOQ
(cl
365 days
26 orders
14 days
2 r 8 , O O O r $ 1 6
$9 r 22oh
EOQ
=
256, OOO
1. 98
36O uni ts
- .,!Tzg,zgg
2 x 5 0 0 x 5 6
$1O
x . 25
Chapter I
E9-4 (Qoncluded)
(10) (a)
EoQ
=
16, 00o
= 4 l - =
Y 2. 50
209
E3,ooo
3,OO0
s6,ooo
$9,600
5OO x $6
49
=
49 units
$61.22 + $61 .25
=
$122.47
=
total ordering and carrying cost
per year
(b) 49 + (49 x.10) = 54 uni ts
per
order
5ot}9q
.
Y
=
S.5s.56 + $6z.so
=
$123.06
The effect is small because the total cost curve ls relatively flat
around the opti mum l evel .
(11) To compare the two alternatives, the carrying cost and the production
initiation cost must be calculated for each alternative. These two
amounts are calculated as follows:
Carrying cost
=
Annual cost of carrying (2OYol x manufacturing cost
(SSO1 x average annual inventory.
Production initiation cost
-
Number of runs x cost to initiate a run
(s3oo)
Current situation: 2
production runs of 3,000 units per run
Average inventory: 3,OOO units + 2 = 1,50O units
Present costs:
Carryi ng cost (.2O x $5O x 1,500)..... 51S,O0O
Production initiation cost (2 x $3OO) OOO
s15"600
Proposed si tuati on:
The EOQ formul a can be used to determi ne producti on
run
quantities
by substituting cost per order with production
ini-
tiation cost
producti on
quanti ty,
,/2
x 6-' 000 x 9?00
r $ 5 O x ' 2
=
V360, 000
=
60O uni t s
$ 1 0 x . 2 5 x 4 9
6 OO+ 2 = 3 0 Ou n i t s
6, 000 + 600 = 10 r uns
Carryi ng cost (.20
x
$5O x 300)......,.....,......
Producti on i ni Uati on cost (1O x $3O0)
Average inventory:
Number of runs:
Proposed
costs:
2r4OO
3, 600, 000
Expected annual savi ngs
2t 0
E9-5
(11
(21
Chapter
g
-
l z r ( ' t z x l , 5 o o ) r S5 o
E O Q = r l - =
1
i 3 r . 4 O
=
t';500,
ooo
=
tin?"u
Lots ol 2,AOO units should be ordered, based on the following computa-
tions:
QUANTITATIVE DATA
Order size
'11225
units 2r00O units
'14.7
I
612.5 units 1,000 unlts
a a . a . a a a a a a a a a a a a a a a a a a a a a a
Number of orders
Per Year.
Average i nvent ory . . . . r. . . ' . . . . ' . . . . . . r. . . . . . . . . . . . . . . . . . r. '
.
COST DATA
Gost of
pl aci ng orders at $5o r..........r.....,..r.,r
Gost of carrying inventory:
612.5 x $3.00 x .40 ..r......r.........' ....r...........
IrOOO x 92.85
x .4O ..............,........,............
Di scounts l ost (12 x 11500 x 33 x .05)..,.....,...
Cost to ordgr and carry..' ............r.,......r"' o.....
$ 735
735
2r7OO
$4. 170
$ 4so
1, 140
$1, 590
E9-6
(1) Orderi ng and carryi ng costs under current pol i cy:
(T
, $3Bo)*
(sr
'
#)
=
s2, 2Bo
+ $zso
=
s2, s3o
(21 Economic order
quantity
and the related ordering and carrying costs:
j2
x 3' ooo t stSo
=
\fm-o-
=
1,5i0 units
! s l
i +#x$380) . ( t " r y)
=
$zss + $755
=
$1,510
rel ated
ordering and carrying costs
I
Chapter 9
E9-6,(Concl uded)
(3) George should decide to order In quantlties of 3' OOO unlts, based on the
following computations:
QUANTITATTVE DATA
2 l i
3,000 unlts
I
1,50O unl ts
COST DATA
Cost of
ptaclng orders at $380 '...'...o............. $ 755
Gost of carrying inventory:
$1 x755. . . . . . . . . . . o. . . r . . . . . . . . . . t t . ' t r . . r . r r . t . . . t . t . . . . . . . 755
($f
-
S. 05) x 1r500. . . . . . ' . . . . . . . t . . . . ' o. . . . . . . . . . . . . . . or
Di scount l ost (31000 x $5 x .05).................,..o. 750
Gost to ordgr and carryr.o........................r...... $2r260 $1, 805
CGAanada (
E9-7 91600 + 24O = 4O units daity usage
Normal lead time usage (2O days x 4O unlts)...,..................,....
Safety stock ((30 days
-
2O days) x 4O unlts)..........,i.o.............
Ordgr poi nt . . . . . . . i . . . . . . . . . . . . . . . , . . . . . . . . . r. . r. . . . . , . . . . . . . . . . . . . . . . . . . . . . . . , r. . . . . . . . .
Le99
E9-8
( 1) Maxi mumuseper day. . . . . . . . . . . . . . . . , . . . . . . . . . , . , o- . . . . 6OO unl t s
NOrmal usg
PgrdS!...' .............r.....................r
500
Safety stock (maximum)..........................r.r....
i6-O unlts x 5 days of lgad
tlme = 50O unlts
Order si 2g. , . . . . . . . . . . . . r. . . . . r. . . . . r. . . r. . . . . r. . . . . . o. . . . . . ' . . .
1r510 unl t s
Numbgr of orders
pgr year.....,..........' ........' ... 1.9868
,Averagei nventory....................o........r..r......... 755 unl ts
$ 380
11425
adapted). Reprint with permission.
800
400
(21
2,500 unl ts
500
3.000 unl ts
3,000 unl ts
2,500
500 units
3,500
(3)
{0AA
units
Chapter 9
2r2
E9-8
(Concluded)
(41 Order
poi ot.........r...........rr.....................o....ttt""""' o""""t"""'
3tOoO uni ts
Minimum'*"
Juring
leaoii;6
(1OO r 5).....,..o....'..---.'..-.........
5oo
on hand
st time order ngcgiyod......................................."f'
"" 60
units
QUanUty
Ofdgfgd
......"..."t""""""r"t""t"t"t"""""""""""""t'
3' 500 Uni tS
Absolutg
marimum
inventoly .........................""""""'o"""""'
gJQg units
. c G A - G a n a d a ( a d a p t e d } . R e p r i n t w i t h p a r mi s s i o n .
E9-9
(1) Mari mum
ugo
per dS!""""""""""t""o"""""
Normal uso
por d8!"t"""""t"""""""""""""
Safg$ stock
{marimum}
""""""""""""""""'
2OO units
120
6 units r 12 daYs of
l ead ti me
= 960 uni ts
l 2l
Normal use
per day
(120) r days of l ead ti me
(i 2!........o......,...
l t44O
uni ts
Saf ety stock .r......or....................' ......o.............."' tt"t' o"tr""t""'
96O '
order
po1t1t............r....t....r........r..........r..............""tt"t""""tt
"
&
uni ts
2r4OO units
I , 44O
960 uni ts
3,OOO
Order
poi
3,960 uni ts
2r4OO units
960
Mi ni mum uso duri ng l ead ti me
(8o r 12)
On hand at time ordor tceivod......--..r.
1r44O uni ts
3,OOO
Q u a ntity o rd ergd ..r..........o....' ....""'
Absof utg mari mum i nventory.........r...,.................' ...o....r.,.......
4A4O uni ts
CGA-Canada
(adapted). Reprint with
permission'
(31 Of dgf
pOi nt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. . . . . . . . . . "t "t t t t t t t "'
HOrmal USe dUring lgdd timg
(t20 I'
' 1
2| .' ..' .................' ........"'
On hand St timg Ofdef tCeiVd.........' ....,........r' ..o..................'
QUan$ty Ofdefgd r........r...' .........r.o...........r................' .."' r""""
NOf mal madmUm i nVent Ory. . . r. . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . o. . . . . . . . . . . "' t "
(4)
E9- 10
3efcU
Stock Lcvrl
(Unltel
1 0
20
40
80
Annuel
Humbcr
of
Ordorr
Annual
Stocltout
Coat +
3t50.oo
75.OO
30.oo
15. OO
Annual
llafety
Stock
Carrylng
Co.t Ff
pcr unltl
Annual
Comblncd
= Coct
3100. oo
95.OO
70. oo
c5.oo
Probabltl$ ErPcsted Goct
of Annual P.r
x
Secr(993
=9tockoutlr
gglgt =
. 4 2 3 7 5
2 1 7 5
.oa .1 75
.o4 .2 76
level of saletY stock is 40 units.
6
6
!
6
310
20
tn
8('
The recommendod
I
!
I
Chapter I
E9- 11 APPENDI X
r-
(1)
Average costing:
I
I
:,
I
!
I
!
!
el
Fifo costing:
213
Date
Received
lssued
Inventory
Quan- Unit Total
tity Cost Cost
Quan- Unit Total
tity Cost Gost
Quan- Unit
tity Cost
Balance
Jan, I
5OO S1.2O
S 600
6 200 $1.25 $250
70o 1.21 g5o
1 0 400 1.30 520
l r 1OO 1. 25
1, 370
15
560
$1. 25 SZOO 54O 1.25
670
25 500 1. 40 700
1, 040 1. 32
1, 370
27
400 1.32 528 640 1.32
842
Date
Received
l ssued
Inventory
Quan- Unit Total
tity
Cost Cost
Quan- Unit Total
tity Cost Cost
Quan- Unit Total
tity Cost Cost Balance
Jan. 1
6
500 $1.20
$600 $ 600
2OO
$1.25 $250
500 1.20 600
200 1.25 250
850
1 0 400
1.30
520
so0
200
400
1. 20 600
1.25 250
1.30
52O
1,370
15
500
s1. 20 $OOO
50 1. 2s 75
140
1. 25 175
400 1.30 520
695
25
500
1. 40 700
140 1. 25 175
400 1.30 520
50o 1. 40 7OO 1, 395
27
140
1. 25 175
260 1. 30
338
140 1. 30
500 1. 40
182
700
882
I
214
E9-1 1 APPENDIX (Concluded)
(3) Lifo costing:
Chapter
g
Date
Received lssued Inventory
Quan- Unit Total
tity Cost Gost
Quan- Unit Total
tity Gost Gost
Quan- Unit Total
tity Cost Cost Balance
Jan. 1
s00 $r.zo $600 s 600
6 200
$1.25 $250 500 1.20 600
200 1.25 250 850
1 0 400 1.30 520 s00
200
400
7.20 600
1.25 250
1.30 52O 1,37O
1 5
400
160
$r. go
1. 25
$seo
200
500 1.20 600
40 1.25 50 650
25 s00 1. 40 700
500 1.20 600
40 7.25 50
500 1. 40 7OO 1, 350
27
400 1. 40 560 500 1.20 600
40 7. 25 50
100 1. 40 140 790
I
Chapter 9
215
P9- 1
( 1)
(21
PROBLEMS
Budgeted acquisition cost
Budgeted purchases
$148r5O0 net purchases
x
_
$18, O0O
_
12.Soh applied acquisition
=- - - =
S144, OOO eosting rate for the month
12.5o/o applled
acqulsition =
$18,562.50 applled
costing
cost added
rate
to
materials
purchased
during the
month
(3)
The overapplied acquisition eost of $362.50 (Sig,562.50
applied cost
_
S18' 200 actual cost) should be credited to Cost of Goods Sold or prorat-
ed to Cost of Goods Sold and inventories.
P9-2
( 1)
EOe =
. / 2
x 2- 4' 00O x $1. 20
-
\ l
S1O xTOYo
(21
Annual regulrements
_
24.OOO
EOe
' W
=
100 orders needed peryear
(3) E$ (Cartying::"t
) *
Annual reguirements
fOrderins
cost
)
z
1
per
unrr
/
EOe ( p",
order
)
5240 total cost
=
ry($ro
x 1oo/o) .'hi#o ($r.eo
)
=
$reo + $120
=
:t#iltr"ill
for the year
(41
The next order shoutd be placed
in three days. This conctusion is arrived
at as follows:
(a)
Number of days' suppty in each orden
Days in year
@= # = 3 ' 6 d a Y s
(b)
Number
of days' supply left in inventory:
Uni ts In i nventory
,
Days, suppl y
_
4OO
6 days'
f
x
in each oii"r
=
ffi
x 3' 6 days
-
supply
left
(c)
Days before next order should
be placed:
(Days'
supply left)
-
(Delivery
lead
time) =
6 days
_
3 days =
3
=
24O units
57, 600
1
Pg-2
(Gonctuded)
(51 some of the difficulties
most firms have in attempting
to apply the EoQ
formuta
to Inventory Problems
are:
(a) Inventory
ls not always used at a_ constant
rate; the constant usage
assumptlon
ls lmpllclt in the EOQ formula'
(b) fne Ede lormularequires
estimates
of
(1) annual requirements'
(2)
orde-ng
cos!
(3) purchase price per unit, and
(4) cost of carrying
lnveritoiies.
These estimates
may be extremeff difficult to obtain
with accuracy.
2,300
1, 500
800
4,0o0
4. 800
216
P9-3
(1) Normal use
per day
(2OO) x days of lead time
(10) """""""'
Saf gt y SI OCk. . r . . . . . . r . . . . . . . . . r . . . . . r . . . . . . . . . . . . . o. . . . . . . o. ' . . . r . . . . . . . . r " " " ot "
Of dgf
pOi t 1t . . . . . . r . . . . . . . . . . . . . . . r . . r . . . . . . . .
. . . . . . . . . r . . . . . . . . . . . . . . . . .
Chapter 9
2,000 uni ts
300
3i3o9 units
2,300 units
2,000
300 units
4,000
(21 Of def
pgi nt . . . . . r . . . . , . . r . . . r . . . . . . . . . . . r . . i . . . . . . . . r . . . . . . ' . 3. . . ' . r . . . . . . . . . . . . . . . t . t
Normal use duri ng l ead ti me
(2O0 x 1O).....' .."""""""""""'
On hand at ti mg Ofdgf fgCgi Ved ..........,......' .,....r..................
QUant i t y Of dgf gd. . . . . . . . . . ' , . . . . . r . . . . . . . . . . . . . o. . . . . . . . . . . . . . r . . . . . . . . . ' o. . . . . . . .
Normal maxi mum i nventory..-......r....
""""""""""'
Of dgf
poi nt . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . r . . . ' . r ' . ' . . . . r . ' . " "
Mi ni mum use dur i ng t ead t i me
( 150 x 10) . . . . . . . . . . . . , . """""""
On hand at time order received
Quanti ty ordered....' .......' .
....' ..,......
Absol ute maxi mum i nventory.,.,..............r............' ..""""""'
Let S equal cost of storing one unit for one
year.
EOQ
=
(3)
4.3OO unlts
uni ts
uni ts
uni ts
(4)
! 2
x (2oo x 250) x S8o
4 ' o o 0 = r l >
, Y S
4' 000
=
16' 000' 00O
=
s
8, 000, ooo
=
S. 5O
1 6, 0OO
,
OOO
2 x R U x C O
C U x G G
8, 0o0, o00
g, ooo, ooo
S -
GGA-Ganada
(adapt ed).
Repri nt wi t h
permi ssi on.
217
.F
o
o
I
f
o
o
3
o
l
I
ir
L
b l
g n l
; I
r . L I
o t l
-
,_:_-.
J I
8 o I
i c - l
S E s l
f i ; o l
E o I
o l
Chapter 9
I
o o o o o F
C ' ( \ | F O C D F
N ( r | N C { r ' -
o
o o o o o 6 |
o N C O r t F
C ! r r
{,
E 6
x o
F O
. " .
3
9 E
E 6
u,
I
b
I
E
t
:
I
S.
o o o o 0 0
E r . c o c o c o
o
;fi
s
o o o o o c D
t O $ c ) $ l r -
3 : E
3 - " a
EEg
5 5 8
1
x
n n o n | o l o
( ' ) ( ' ( ? ( ' ) ( ' ) ( l )
0
I
It
b
o o o o o u )
( ? ( o g ) N u ) ( o
F F F
s,
t l
fui
; i r
: '
!t
I
o)
o.
o o o o o t { )
v - C { C ? r C l O l { '
Chapter 9
218
I
P9.5 APPENDIX
(1) Fi fo:
Date
Recelved
lssued
Inveniory
Quan- Unit
tity Cost
Total
Cost
Quan- Unit Total
tity Cost Cost
Ouan- Unit Total
tity Cost Cost Balance
Marchl
75O 32O.OO $15,OOO $15,OOO
3 40() s19.50 $ 7,800
750 2O.0O 15,0OO
4O0 19.50 7,8OO 22,8OO
5
600 $20.00 sl2,ooo
150 20.00 3,000
4O0 19.50 7,8OO 1O,80O
1 2 a5o 21.50 7,525
150 20.00 3,000
4OO 19.5O 7,8OO
35tO 21.50 7,525 18,325
t 5 15O 2O.OO 3,O0O
350 19.50 6,825
50 19.50 975
350 21.50 7,525 8,500
1 8 s00 22.OO 11,0OO
50 19.so 975
35O 21.50 7,525
5OO 22.OO 11,000 19,500
22 50 19.50 975
350 21.50 7,525 5OO 22.OO 11,OOO I 1
,OOO
26 550 21. OO 11, 55O
500 22.OO 11,000
55O 21.0O 11,550 22,550
28 5OO 22.OO 11,000
150 21. 0O 3, 150 4OO 21.OO 8,4OO 8,400
31 2AO 20.00 4,OOO
4OO 21.0O 8,4OO
200 20.00 4,000 12,400
219 Chapter 9
1
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Chapter I
\.
-
P9-6 APPENDIX
(1) Cost of the ending inventory under the fifo method when a periodic
!
inventory system is used:
b
133'"'o 3
tll
:
tl:i33
100 @ 12 = 1, 2OO
$4.300
(21 Cost of the ending inventory under the lifo method:
(a)
When a periodic inventory system is used:
20ouni t s @ $t O
=
S2, 000
100 @ 11 = 1, 100
$3, 100
(b) When a perpetual
inventory system is used:
221
Date
Recei ved lssued lnventory
Quan- Unit Total
tity Cost Cost
Quan. Unlt Total
tity Cost Cost
Quan- Unlt Total
tity Cost Cost Balance
Jan. I
2OO $rO S2,OOO S2,OOO
1 2 l OO 31 I $1, 1OO 2AO 10
100 1l
2,O00
t , l oo 3, 1OO
Feb. I 100 9r r $1, 1oo
1OO 10 1, 000 l OO 10 I , OOO I , OOO
Apri l 16 200 12 2, 4OO 100 10
200 72
1,000
2,4OO 3,4OO
May 1 100 12 1, 2OO 100 10
100 12
1, O00
1,200 2,2OO
Jul y 15 l OO 14 1, 4OO
100 10
100 12
100 14
1,000
1,2OO
1,400 3,600
Nov. 10
100 14 1, 4OO 100 10
100
72
1,00o
7r2OO 2,2OO
Dec. 5 100 17 1, 700
100
10
100
72
100 17
1,000
1,2OO
l,7oo 3,goo
CGA-Canada
(adapted).
Reprlnt wlth permlsslon.
r +
Chapter 9
Y
j
222
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Chapter
g
P9-7, APPENDIX (Continued)
(b)
First-in, first-out method:
223
Dste
Received lssued
Inventory
Quan- Unlt
tity Cosl
Total
Cost
Ouan-
tity
Unit Total
Cost Cost
Quan- Unit Total
tity Cost Cost Balance
Jan.2 2,000 s5 310,000 2,000
35
$10,ooo
15 500 s5 $2,500 t,500 5
7,500
31 700 5 3,500 800 5
4,OOO
Feb. 2 1,200 6 7,2OO
8OO 5 S e,ooo
1,2OO 6 7,2OO 11,2OO
1 5
600 5 3,000 20o 5 1,0oo
1,2OO 6 7,2OO
g,2oo
28
200 5
700 6
1,0oo
4,2OO s00 6
3,OOO
Mar.2
1,500 8 12,0OO
5OO 6 3,OOO
1,5OO
g
12,0OO
.ts,(x)o
t 5
s00
t o0
6 3,000
I 800 1, 4OO I
11, 2OO
31
800 8 6,40O 600 8
4,800
DOr. 2
1,900 7 13,3OO
600 I 4,800
l , goo 7 l 3, 3OO 19, 1(X)
1 5
600 8 4,8OO
100 7 700 1, 800 7 t 2, 6OO
30
700 7 4,900 1, 100 7
7, 7OO
r - r
I t
t
224
P9-7 APPENbIX (Concl uded)
(c) Last-in, first.out method:
Sal es ( 5, 500
uni t s @ SI O)
Cost of goods
sotd:
s55,000.00
$42,5OO.O0
7, 805. 60
s34, 694. 4O
s20, 305. 60
(21
Average Fifo
Chapter I
Lifo
$55,oOO
$42,5OO
6,8OO
s35,7OO
El
e,gqg
permi ssi on.
Purchases
........,...
Less i nventory, Apri t 30..........
s55,00o
$42,500
7
r7OO
s34,gOO
939199
Repri nt wi th
Date
Received
lssued Inventory
Quan- Unit Total
tity Cost Cost
Quan- Unit Total
tity Cost Cost
Quan- Unit Total
tity Cost Cost Balance
Jan.2 2,000 S5 91O,0OO 2,OOO 35 |S|O,OOO
1 5 5OO $5 $2,500 1,5OO 5 7,5(X'
31 700 5 3,50O 800 5 4,OOO
Feb. 2 1,200 6 7,2OO
8OO 5 S 4,0OO
1,200 6 7,2OO 11,200
1 5
600 6 3,600 800
600
5 4,000
6 3,600 7,600
28
600 6
300 5
3,6OO
1, 5OO s00 5 2,500
Mar. 2 1,5OO
g
12,000
500 5 2,5OO
1,500
g
12,OOO 14,5OO
1 5
600 8 4,800 500 5
900 8
2,5OO
7r2OO
g,7OO
31
8OO 8 6,400 5OO 5 2,500
100
g
800 3,300
Apr . 2 t , goo 7 13, 300
500 5 2,500
100 I 800
1, 900 7 13, 300 16, 600
1 5
7OO 7 4,900 500 5 2,500
100 I 800
7, 2OO 7
g, 4OO
11, 7OO
30
70o 7 4,9OO 500 5 2,500
100 8 800
500 7 3,500 6,900
Gross profi t
CGA Canada (adapt ed).
I
Chapter I
CASES
c9-1
(1) (a) Topp Desk Gompany would be attempting to minimize total setup
cost and total carrying cost
(b) Variable manufacturing costs per unit
t
Di r gCt mat gf i al s. ' . . . . . . . . . . . . . . r . . . . . . . . . . . r . . . . . . . . . . . . . . . . . . r . t . . r . . . . . o. . .
Di f gCt | abOf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . ' . . r . . ' r r . . . . ' . . . . . . . . . r . . . . . . .
Vari abl g factory overhead..,..........................,.,.,.......*....
Total variable manufacturing cost per unit........
Numbgr of dgsks destroyed,.........,r.,..............,...................
Tot al set up cost . . . . . . . . . . . . . . . . . . r. . r. r. . r. . . . r. , r' . . r. . . . . . . . . . . . . . . . . . . . . . . r. . .
225
$ 5 0
x 1 2
s 3 0
1 4
6
s600
Optimum
production run:
=
1 $50'
x 10. 870
{4F66p6o
=
2,ooo desks
rVariable
manufacturing cost per
unit
(c) Number of
production runs
per yean
Annual demand
Opti mum
producti on run
=
#
=
9
Production
runs
(a) (21 The following factors affect the desired size of the safety stock for
any Inventory itemr
'
(1) Variability of
product demand
(21 VariabiliU of lead time
(3)
Stockout costs
(4)
Carrying costs
The minimum safety stock level that could be maintained without
being worse off than being unable to fill orders equal to an average
dayts demand is the level at which the safety stock carrying cost
equals the cost of a stockout, i.e.,
Stockout cost s2, 295
(b)
=f f i
=42s desks
21, 600, 000
Per uni t carryi ng cost
S50 x 1O.B%
226
c9-2
1
( 1)
$ 90.00
18. 00
Chapter 9
$108. 00
Equipment
Maintenance Department costs:
Sal af i eS
(2 X 5 X $91
' . . . . . . . . . r. . . . . . ' . . . . . . . . . . . . . . . ' . . ! . . . ' . . '
Empl oyee benefi ts
($90 x 2O%1.............-..' .......' .
Production department costs:
Sal afi gs
(5 X 5 X $7.501
.....................r........' ........
Variable factory overhead:
Direct labor hours base
(25 x $2.75).-..'.....-....
Machi ng hours basg (1 x $5).....,.,-..-............,r.
Di rect materi al s
($ZOO
-
$50)....' ..........' .............' ..r..' ..
Estlmate of Model JE 40 setup costs...........,..........-,.
$r
gz.so
68.75
s.00 261.2s
150, 00
s519.2s
Explanation of costs:
(a) The full cost of the maintenance salaries and employee benefits ls
included because the $1o.8o St9.0o
+ ($9'00 x20%17 incurred
per
labor hour is incurred solely for the
purpose of effecting the
changeover.
(bl The other costs of the Equipment Maintenance Department are not
inctuded in the estimate because they are fixed costs of the depart-
ment and will be incurred regardtess of the maintenance workers'
activities.
(c) The sataries of the 5 production workers for the full 5 hours each
are included in the setup cost because they must be in attendance
all of the time, though they are needed only
part of the time. lf the
workers could have been assigned to other
iobs
during the
changeover, then the full amount would not be charged to setup.
(d) The variable factory overhead costs of the
production department
applled on the direct tabor hours base are incurred as a function of
the direct labor hours; therefore, a full 25 hours of cost are
assigned to the setup cost.
(e) The variable factory overhead costs of the
production department
applied on the machine hours base are incurred as a function of the
operation of the machineryl therefore, I hour is assigned to setup
cost for the t hour the machinery is used in testing.
(0 All production department fixed factory overhead costs (both those
applied on the basis of direct labor and those applied on the basis
of machlne hours) are not included in the setup cost because they
would be incurred regardless of the activity in the departmenL
(g)
The net materials cost of $f SO is included because it represents the
unsal vageabl e
porti on of the materi al s used for the setup and not
f or t he product i on of a sal abl e desk.
I
I
!
I
-
Chapter 9
227
-
C9-2
(Concluded)
\,
(21 The cost items that would be included In an estimate of Pointer Furniture
Gompany's cost of carrying desks in inventory include:
'
(a) All costs related to warehousing and handting the desks In Inventory
!
that vary in amount by the number of items stored.
, tb)
The cost of the funds committed to the investment in inventory.
b
cg-3
'
(11 Circumstances necessary to shift raw materials inventory carrying costs
\
(a)
Reliability of the supplier. Will the supplier ship products
on a mone
rigorous timetable and be willing to keep inventory within its own
storage facilities?
.
lf;:$ff""1H;i*:;iili,g,""""XXiii;i1""ff'il#i:fiS"?$il':i,-
traet terms.
*
(c)
Careful control of inventory requirements. Are production
schedules
clearly defined to reduce the potential
for stockouts?
(21 Gircumstances necessary to shift finished goods
inventory carrying costs
!
to the customer include:
>
(a)
i.,?::[FT[il:;:?H'i;ffill=ll?lil?ll#:,'take
the risk or
(bl
Closer production planning.
Gan production schedules be refined to
such an extent that delays in the sale and distribution of the fin-
b
ished inventory are minimized?
(c)
Gareful controt of inventory reguirements. Are customer orders
carefully monitored and anticipated to reduce the probability of fin-
E
ished goods
stockouts?
OlO-1.
The purpooe cil a JIT system is to minimize the
levelc of raw malerials and work in process
i nvcntory i nverl mcnt!, whi l e i mprovi ng thc
werall rnanufacturing pross. Thc htent b to
pull inventory through the syslem mly as il is
required.
010-2. JIT seeks l ol el i mi nate al l formr of wasl e,
including produclion losses such as defects.
Successful reduclion of these problems
con-
tribules lo producl guality, and, so, is a part ol
TOM.
010-3. To avcid inventory buildup, the entire JIT sys-
tem shuts down whenaver defecls are found;
so to achieve a good rale of flow, lhe number
of defects must be srnall.
Qt0-4. Theoretbally, h an ideaf JIT system the EOQ
i! o.re; each time nrcre oulput is needed, one
more part or unil is produced.
Ql0-5. Although a zero inventory level is unattainable,
JIT stimulates improvernent in the environmen-
lal condilions lhat cause inventory buildup,
such as l ong sei up ti mes, hi gh sel up costs,
. p@r guliy, and poorly bahnced work loads.
O10. The relalbnship between velocity and WIP lev-
el s i s an i nverse rel ati onshi p; doubl i ng the
vekrcity mans lnlving the WIP level, provided
lhe outpul rate is held constiant. This is sirnilar,
bul not irdentical, to the relationship expressed
in lhe familiar inventoqy tumover ratio used in
f inancial statemnt analysis.
010-7. The stralegic advantage ol improving velocity
t hr oughout l he company, l r om pr oduct
research and devekrpment to shipping, is that
lhe company can then respond taster to any
changing cuslomer need or to an opportunity
for a new or altered product.
Ql 0. Reduci ng the l evel of WIP al so reduces l ha
maximum numbsr ol detectives, il the defects
are c{ a kind that will be discovered al the nexl
work stai i on afl er l he uni l s are hel d wai ti ng
bel ween sl al i ons. l f
. l 00
uni t s ar e wai l i ng
btwen stati ons, up to l OO detecti ves mi ght
be produced
before the
problem
would be dis.
CHAPTER 10
DISCUSSION QUESTIONS
covered; il 10 units ars heH waiting, no rpr.
than
't0
delectives could b. produced before
lhe prcblem would be discovered.
Q10-9. A bl anket purchasc order i r an agreement
between buycr and sel l er sl al i ng l ho total
quanlity expcled to be needed over a period
ol three or six rnonthr.
Ot0-10. In many JIT work cel l s, these di sti ncti onr-
between dirrl and indirecl labor and between
producing deparlments and ssn6 service lunc-
tions--do nol exist, because the sarne workers
(l he l eam assi gned to the cel l ) perl orm al l
these tasks.
Q10-1 1. In bacldlush costing, the work in process inven-
lory accounl is not adjusled lhroughoul lhe
per i od t o r el l ect al l l he cosl s of uni t s i n
pr ocess; t hor e ar e no del ai l ed subsi di ar y
records mainlalned for work in process; and a
single accounl may be used lor both raw male-
rials and work in process.
010-'12. In bacKlush costing, lhe rnaterials and work in
process inventory accounts mighl be cornbined
into a single account because malerials might
be pul irnmedialely inlo production when lhey
are received.
010-13. Posldedusiion is the sublraslbn lrom the work
in process accounl cil sorne or all elements d
the cosl of completed work, afler the work is
completed.
Q10-14. The peri odi c i nventory method used by many
mer chandi si ng compani es i s anal ogous l o
backllush cosling as used by manufacturers.
010-15. lf a backflush costing system expnses all con-
ver si on cost s t o t he cost of goods sol d
account, tho corrgct arnounl of conversion co.sl
is included in hventory accounts by making an
end- ol - per i od adj ust ment of t he i nvenl or y
accounts' balances. The oflsetling entry is an
adfustment of lhe cost of goods sold accounl.
The corracl amounl of sonversion cost to be
included in each inventory account is estimaled
when invenlories are physically counled.
228
I
I
Chapter l0
EXERCISES
b
' Elo'l rhe:::ffi:
:llt"ir:1H'""J,rr:ii'.'r'i;l:n',"r'J,'"ll"liiilSlJiJ?I,
tollows:
>
Carrying cost savings = 2Ooh r reduction in average variabte cost of Wlp
= ZOoh r 3O7o x past
average vari abl e cost of Wl p
= . 2 x. 3 x ( 1O r 3OO x SBO)
=
$14r4o}
Savi ngs i n cost of defects
=
$25 x reducti on i n number of defecti ve uni ts
\'
(reduction
in
number of (number
of out-of-
=
S25 x defective units x control conditions
produced per
not di scovered
undi scovered i mmedi atel y)
out-of-control
v
ondi ti on)
=
$25 x
l 3O%
x 3oO x S%l x (1/3
x 600)
=
$25 x 4.5 x 2QO
=
$22,500
\-
El O-z The average l ead ti me wi l l be 26 days, cal cul ated as fol l ows:
Reduct i on of vendor l ead t i me = 116 x 18 days = 3 days
Because t he r at e of out put wi l l be unchanged, a r educt i on of Wl p t o one-
thi rd of i ts present l evel wi l l tri pl e the vel oci ty. The average order wi l l
then remai n i n wl P onl y one-thi rd as l ong, savi ng two-thi rds of ti me
presentl y
bei ng spent i n WIP:
Reducti on of ti me i n WIP = 213 of present
ti me i n Wl p
=
A3 x i 2 days
=
g
days
New l ead ti me = present
l ead ti me
-
reducti ons
= 26 days
-
IH::iJffx""n.;:H:
:ffs,:Tlillff :'xiJ":"J3::i:ff'.:il"i,i11'"
components
of total l ead ti me are known, as i n thi s exerci se, then the
i new l ead t i me can be cal cul at ed by addi ng al l i t s component s:
( 5 / 6 x 1 8 ) +
2 + ( 1 1 3 x 1 2 ) + 2 + 3
=
1 3 + Z + 4 + Z + 3
=
26 days
- -
2g
Chaptor 1O
EIO-3
The expei ted
annual savi ngs i s S2,2OO,OOO,
cal cul ated as fol l ows:
Doubl i ng
the vel oci ty of al l tasks, from recei pt of order to shi pment and
from ordering materials to issuing materials to
production, will reduce
WIP and materials inventories by half' therefore:
. Reduction
in materials carrying costs = Z}oh x materials reduction
= 2Ooh x(112 x $3,0O0' OOO)
$3OO' 0OO
Reduction in wlP carrying costs
= 2ooh x wlP reduction
= 2|oh x (712 x $5,OOO' O0O}
=
$5OO,O0O
Thi s change wi l l al so reduce customer l ead ti me from ei ght weeks to
four weeks. Because customers are wi l l i ng to wai t up to fi ve weeks for
shi pment, al t shi pments can then be made-to-order.
There wi l l no l onger
be a need for fi ni shed
goods i nventory. Once the exi sti ng
fi ni shed
goods
i nventory i s l i qui dated by sal es or scrappi ng, the annual savi ngs from not
carryi ng fi ni shed goods wi l l be:
Reducti on i n fi ni shed
goods carryi ng costs
= zl oh x fi ni shed
goods reducti on
= zl oh x (l OO% x $7' O0O' OOO)
=
sl , 400, oo0
Total savi ngs =
s300,000
+ s5o0,0oo
+ sl ,4oo,o0o
-
$2,200' OOO
fl hi s
exerci se i s based cl osel y on an actual case of a
parti al JIT i mpl e-
ment at i on. The name of t he company and dol l ar amount s have been
al tered.)
E10- 4
(1) (al Equi val ent
producti on = 4,500 + (.5O t-2gl
= 4,51O uni ts;
s3OO, 74O
_
4, 51O
$66. 683
per uni t
. \ -
. -
(b)
st,o9l ?oo
=
$i 66.067
per uni t
r - '
4r 5OO
(c) uni ts started
= 4,500 + 2O
-
24 = 4,496 uni ts;
s3oo, o0o
=
566. 726
per uni t
4, 496
(2)
5667, because 2O x . 5O x 566. 683
=
$666. 83.
5667, because 20 x . 5o x 566. 667
= 5666. 67.
S667, because 20 x . 5o x $66. 726
=
$667' 26'
i -
Chapter l0
EIO-4. (Goncl uded|
(3) Considering
that the results of requirement (2)
wene the same (to
the
nearest dollar) for all three methods, then method (il (b) would be recom-
mended because of its ease and simplicity. Method-tii
ttl
is a ctose sec-
ond choi ce, al so because of ease and si mpti ci ty. The deti i l s of method
(11 (al may not be
iustifiable
in these circumstances.
(41 Prccessing speed is very fast, with the result that work in process
inven-
tory levefs ane kept to a very low level-both in absolute terms
and in
ielation to totat production
activity for a month.
El o-5 Journal entri es i nvol vi ng Rrp and/or fi ni shed goods
are:
Raw and I n Procgss. . . . . . . . . . . . t . r. . . . ! . . r! . . . . . . . rr. . . . . . . . , . . . . . . .
Account s Payabl e . r. . . . . . ' . . . . . . . . . . . . . . . . , . . . . . . . . . r. o. . . . . .
456, OOO
456, OOO
A-summary entry for all receipts of raw materials during the period.
when di rect materi al s are used, no entry i s needed, be-ause the
materi al s remai n i n Rl P.
Fi ni shed Goods. . . . . . t . . . . . , . . r . . . . - . . . , . . . . . . . . . . . . . . . . , . . . o. . . . . . . . r
4SSTOOO
Raw and I n Procgss' . . . ' . . . . . ' . . . r' r. . . . . . . . . . . . . . . . . r. . . . , .
455, 000
To backflush material cost from Rfp to finished goods.
This is a
postdeducti on,
The cal cul ati on i s:
Materi al i n May I Rl p ba1ance...,.....,.....,.,.
S 19,OOO
Mat er i al r ecei veddur i ngMay. . . . . . . . . . . . . . . . . . . .
456; OOO
s475, OOO
Mat er i al i n May 31 RI R per physi cal
count 2O, OOO
Amount t o be backf l ushed. . . . . . . . . .
$4SSpOO
Cost of Goods So1d. . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . , . . . . . . . . . . .
461r OOO
Fi ni shgd Goods. . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . D. . , . . . . . . . . .
46i
r OOO
To backfl ush materi al cost from fi ni shed goods
to cost of goods
sol d. Thi s i s a postdeducti on.
The cal cutati on i s:
Materi al i n May I fi ni shed goods
r......,....,.
S 16,OOO
Materi al backfl ushed to fi ni shed goods....
4S5,OOO
:_--
$471, 00O
Materi al i n May 31 fi ni shed goods, per
physi cal
count . . . . . . . . . . . . . . r . . . . . . . . . . , . . . . . . . . . . . . .
I Or OOO
231
L
Amount
t o be backf ! ushed. . . . . . . . . . . . . r . . . . . . , . . , . . . . . . .
$461, OOO
, r
I
i
Chapter l0
232
Eto-5
(Concl uddd)
COSI Ol GOOdS SO1d. . . t . . . . . . . . . . . . . . r . . . . . . o. . . . . . . . . . . . . ' . . . . t . . . ' .
Raw and In Procgss.....o.....
Fi nl sh
gd
Good3. . . . . t t . t . . . . . . . . . . . t ""t ""t t t "t ""t t t "t t '
Matgri at In Jung I RIP bal ance o..' ....r......i .
Matgri al rBcEi rgd duri ng June r...............' .
Material In June 30 RIR
per physical count
Amount to bg backflushlgd ...........'.......""'
Materi al i n June 30 fi ni shed
goods' per
physi cal
cou! 1t . . . . . . . , . . . . r, . . . . . . . . . . . . . . r. . . . ' . -. ' .
Amount t o be backf l ushed . . . . . . . . . . ' . . . . o. . r' . . . '
2,300
300
2, OOO
Conversion cost in RIP is adiusted trom the $2,3OO
of May I to the
$2'OOOosgmato at May 31. bonvsrsion
cost In finished
goods is
aOjusteJ trom ttre $Sr5bO
of May t to the $4'5Oo
estimate
at May
3i. The offsettlng ontry ls made to the cost ol
goods sold account'
where all conve*ion
costs weno charged during May.
El0-6 The
Journal
entries Involving RIP and/or finished
good! 8r1o:
Baw and ln Ptlc8ss.........o......'
'...... 222'OOO
Accounts Payabl g.....t""' r""' ot"""o"""""""""
222,OOO
A
gummary
ontry for all receipts ol raw materials during tho
period.
When direct maierials atu used, no entry is needed, because the
materials nBmain In BlP.
Fi ni shgd GOOd3...r..r.r...............r........r....r....r......."r..
221r5OO
RaW and In PfOCSSS..............i ....' ........r..o.....' .!.
221
,5OO
To backflush material cost from BIP to finished
goods. This is'a
postdeduction. The calculation ls:
I
I O,5O0
222,AOO
$232,5O0
11, OOO
s22t , 5OO
Cost of Goods Sotd.............................-..............r.tt..
223t5OA
Finishgd Goods....r.....o...........i.....................' ...
223r5OO
To backflush materlal cost from finished
goods to cost of
goods
sold. This ls a
postdeduction. Tho calculation
is:
Materi al i n Juna I fi ni shed
goods............' $
8rO00
Materi al backfl ushedfromRl P.""""""""'
221r5oo
s229,500
o,ooo
s223,5OO
I
I
!
Clppter 1O
Elo-O (Concluded|
Raw and In Process..........r.....................................r
Fi ni shgd
Goods.....................D........r...r,.....r......
Gost of Goods Sol d ;..........,.,..................,.!....r..
Elo'7 Journal ontriss Involving the Rlp accounta arl':
Raw and in Procgss r................r....................r..........
Account s Payabl e . r. . . . ' . . . . . . r. . . . . . . . . . . . r. . . r, , or. . . . . . . , .
2s3
300
200
Gonverslon
cost In Rtp ls adjusted lrom tho $lr2oo of June I to the
$lrT0oostimate at Juno 3o. convorsion
cost in finished goods
is
adjusted from the
94rooo
gt
June I to the $3rzoo estima.-te
"i .1u""
3o. The offsetting entry la made to the cost of goods
sofd account,
nfiero all conversion costs wero charged durini June.
500
20O, OO0
2OO, O0O
A-summary entry for all receipts of raw materials during the period.
when dlrect materiafs aro used, no entry is needed, belausJtrrev
remain a part
of RlP.
Finlshed
Good8....................r..........r.........o.....o........
199, 8OO
Raw and in Process
199, 8O0
r t a a a o a a a a a a a a a a a
To backflush material cost from Rtp to Finished Goods. This is a
postdedugtion.
The calcutation is:
Material in March I RIP balance
s I , OOO
2OO, OOO
s2O9, OOO
9,2OO
Materi af rccei ved duri ng March,..........,...,
Materi al i n March 31 RIR per physi cal
count
Amountto be backfl ushed.,.....,...,,,........,.
Si 99,gOO
Raw and i n Procgss...........................................o...o,
3OO
Cost of Goods So1d............,.......,........,.......,..,. gOO
conversion cost in RIP is adjusted from the $1,ooo of March 1 to
the $lr3OO estimate at March 31, The offisetting entry is made to the
cost of goods
sold account, where all conversion costs wene
charged during March.
r
I
I
I
I
Y - )
- . 1
I
: . ;
!
Chapter lO
.
e
El 0-8 Journal ehtri es i nvol vi ng the RIP accounts are:
Raw and i n Process............ 367' 000
Agcounts Payab|e.r............,.,...........................
367rO0O
A summary entry for all receipts of raw materials during the period.
When direct materials are used, no entry is needed, because they .'
remain a
part of RlP.
Fi ni shgd GOOdS, . . . . . . . . . . . . . . ' . . . . . . . o. . . . . . . . . . r. . . . . . . . . . . . . . . . o. . . .
365r4O0
Raw and in Process..,..
365,4OO a a a a a a a a o a a a t
To backflush material cost from RIP to Finished Goods' This is a
post-deducti on. The cal cul ati on i s:
Materi al i n Apri l I RIP ba1ance.................. $ 291600
Mat er i al r ecei veddur i ngApr i l . . . . . . . . . , . r . . . . . . . 36710OO
$396,6O0
Materi al i n Apri l 30 RIR per physi cal
sount 31,2OO
Amount t o be backf | ushed. . . . . . . . . . . . . . . . . . . . . . . . S365, 4OO
:
Raw and i n Process..........,...r,........,.. 4OO
y
Cost of Goods So| d.,..... .........,.......... 4OO
Conversi on cost i n RIP i s adj usted from the
$1,4OO of Apri l I to the
S1,8OO estimate at April 30. The offsetting entry is made to the cost
of goods
sold account, where all conversion costs wene charged
duri ng Apri l .
'
_,
EIO-9 Journal entri es i nvol vi ng the BIP accounts are:
Raw and i n Pr ocess. . . . . . . . . . . . 246. 000
Accounts Payabl e .............. 246, OOO
A summary entry for al l recei pts of raw materi al s duri ng the peri od.
When di rect materi al s are used, no entry i s needed, because they
remain a part
of RlP.
Cost of Goods So1d......................
,........o...,. 24Z.OOO
Raw and i n Process........,.,. 247r0OO
To backflush material cost from RIP to Cost of Goods Sold. This is a
postdeducti on.
The cal cul ati on i s: v
Mat er i al i n May 1 RI P bal ance. ,
$ 11, 000
Materi al recei ved duri ng May........ 246,000
$257,OOO
Mat er i al i n May 31 RI R per physi cal count l O, OOO
Amount t o be backf l ushed. . . . . . . . . .
S24Z, OOO
l
, / t
t -
1
)
V
I
>-
I
I
1
Chapter 10
EIO-9 (Concl uded|
'
Raw and i n Process ,..........,...,.r.
El o- l o
235
800
Cost of Goods So1d....,.......o,.......
800
conversion cost in RtP is adjusted from the $lr3oo of May I to the
$2'1oo estimate at May 3r. The offsetting entry is made tb the cost
of goods
sold account, where all convercion costs were charged
during May.
( 1)
(21
(3)
(41
The most recent purchase
involved a quantity greater
than the total
materials in ending inventories, and that purchase gives
a cost of materi-
als of $42o'o0o/l,4oo, or $3oo
per
unit of output; t6erefore,
Materi al s cost of fi ni shed goods
endi ng i nventory
= 50 uni ts x $3OO
per
uni t =
$15' OOO
The conversion cost per
unit is calculated by dividing the total GoDVr-
sion cost by (al
the number of units startedrlb) the number
"o.pl"t"d, or
(cl the number completed plus
the number oi partially
"onu"tt"i
units in
the RIP ending inventory (not
an equivalent units calculation|:
(l )
$eSOrl SO + 3,OOO =
$96.72 conversi on cost per
uni t
(Ot $29Orl 6O
-r grl OO
=
993.60 conversi on cost per
uni t
(c)
s29o' l 6o +
t,f 2o =
$g3.oo conversi on cost per
uni t
The three possi bl e
amounts for the conversi on cost of the 5O uni ts i n fi n-
i shed goods
endi ng i nventory are:
5O uni ts @ $96.22 =
$4,93O of conversi on cost
5O uni ts @ $93.60 =
$4,690 of conversi on cost
5O uni ts @ S93.OO =
$4,650 of conversi on cost
L-owest =
g15,OOO
materi al s +
g4,650
conversi on =
$19,650
Hi ghest =
$l 5,OOo materi al s +
$4,g36 conversi on =
btg,ggb
Dol l ar
di f f erence =
$19, 936
-
$19, 650 =
$1gO
Di fference,
to nearest l /1O percent =
$1gO
*
$19,650 = O.9%
b
7-1-
2ffi Chapter lO
810-1 |
r
(f
l
A $3OO
materials cost
per
unit was calculated in requirement (lf of the
pnevious exercise; therefore,
Materials cost of RIP ending inventory = 22O units x S3OO Fer
unit =
$66,OoO
\
(21 The three possible amounts for the conversion cost of the RIP ending
lnventoly ol 20 units, SAoh converted, are:
2O units x SOoh x $96.72
=
$967.2O of conversion cost
20 units r SOTo r $gg.0O
=
$9gO of conversion cost
2O units x SOoh x $93.00
=
9990 of conversion cost
It seems inconsistent to assign 50% conversion costs to RIP when the
uni ts i n RIP l yere counted as whol e
physi cal uni ts i n the denomi nator of
the conversi on cost per uni t cal cul ati on i n requi rement 2(c) of EIO-IO,
y
and when they were not counted at al l i n the denomi nator of the cal cul a-
Uon i n requi rement 2(b) of El 0-10. But the total dol l ar di fference
assigned to RIP is immaterial. Whatever the amount of conversion costs \d
assigned to RIP and finished
goods, the remainder of total conver':sion
costs si mpl y remai ns i n cost of
goods
sol d.
- t s
(3) Lowest =
$66,000 materials + S93O conversion
=
$66,930
Highest =
$66,OOO materials + $S0Z conversion =
$66,967
Dol l ar di fference =
566,967
-
$66,93o
=
$37
-
-
Di fference, to nearest 1/1O percent =
$37
+
$66,930
=.1oh
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1
l>
t
I
t
Clpptsl0
PROBLEMS
Pto-l
(11
The erpected annual savings 8no $72OrooO, consisting of $gg4,ooo csny-
Ing costs savings and $336'O00 savings in the cost of defects, calculateb
ag follour:
Carrying cogt savings = 30% r redustlon In avoriago variable
cost of Wlp
= 3Ooh r 4Ao/o r
past
avoriago variable cost of Wp
= ,3 r .4 x (4O r 2OO r $lOO1
=
$384,0OO
Savings in cost of delects
=
$60 r rsdustion in number of defeetive units
(reduction
in number
=
$6O x of defective units x
produced per
undiscovered flaw)
=
$60 r (4O% r 2OO r 2Oo/ol x
=
$60r 19 r 350
=
$33610OO
I
-
b
!
(number
of flaws not
discovered immediately|
(114
r 1, 4o0l
(2',
Likely benefits that are not assessable from the information given
includs the following:
(al
Faster cycle time resulting from the higher velocity of VUlp. (Because
the rate of final output will not change, velocity wiil change'inverse-
ly with the change in WIP levets.) The faster cytle time will imptove
the speed with which orders can be filled, thul increasing
cusio;ne1.
saUsfacUon
and perhaps
increasing perceived prcduct
value so that
prices
can be raised (or price
cuts delayed oravoided|.
(bl
lf, as a rasult of the shorter cycle time, total lead Ume becomes less
than the Ume customens are willing to urait for an order, then the
company would no longer need to maintain a linished goods
inven-
tory. This possibility
woutd resutt in additional savings in ffoor spaco
and other Inventory carrying costs.
flhe
value of the floor spacg ireJo up by eliminatin g 4o7o of Wlp storage
lc not an addltional
benofig Inventory cirrying cosfi includa etorage
costs, so the valua of the floor space is incluoed in the cirrying cJst s""-
Ingr calculated
In requiroment
1i;.|
(31
Costs and other negatives
to be comparsd with the savings inctude:
(al
Tho Increased
liketihood
of shutdowns due to work l6cations being
gtarved
for WIP; lower WIP levels at each staiion nepnesent lower
safety stocks, so stockouts
are mone likely at all toca-Uons,
(bl
The cost
9f -starting
a larger nu-u"iof
baiches oi lot" into produq-
uon, which incrudes
the iost of processing
.o* ;;* orderc, pro_
2fi
Chapter l0 .-
-
Pl o-l
(Concl uded)
:
-
duction orders, and material requisitions.
flo
reduce average WIP
size, either smaller batches must be started at shorter intervals, or
protracted stockouts must be allowed to occu6 otherwise, the
averags size of WIP will not drop.l
"
(c) The cost of handling more loads of materials. lf lot sizes are small
enough to require only one load per lot both before and after the
chanCe, then a larger number of lots will result in a larger total
number of l oads.
(dl The cost of
performing a larger number ol setups to
permit
running
a larger number of batches or lots of smaller size. ldeally, as part of
the JtT implementation, setup cost will be driven down to eliminate
thi s probl em.
Pl0-2
(1) Protech coul d achi eve an average l ead ti me on these orders of 42 days'
cal cul ated as fol l ows:
Reducti on of ti me i n WIP = 314 of
present ti me i n WIP
= 314 r (360 days
+ I O!
= 314 x 36 days
= 27 days
Reduction of vendor lead time = 113 r27 days = 9 days
New l ead ti me = present l ead Ume
-
reducti ons
= 78 days
-
127
days + 9 days)
= 42 days
Note: lt is not stated that Protech defines WIP and WIP turnover in a way
that excludes the two days spent in receiving and the three days spent
in linal inspection. To check that the average cycle time of 360 days/lO,
or 36 dalrs, does excludE those steps (sothat there is no double-count-
ing), note that a cycle time of 36 days, when added to the other intervals
mentioned, gives
the stated total lead time of 78 days: 6 + 27 + 2 + 36 +
3 + 4 = 7 8 .
(21 The advantages of shorter lead time inctude:
(al
The value of the floor space freed up by eliminating three-foudhs of
WIP storage,
(b)
lmprovement in the speed with which orders can be filled, which
:
should increase customer satisfaction and
perhaps
increase
per-
ceived product
value so that prices can be raised (or price cuts
del ayed or avoi ded).
(c)
lf the new 42-day total lead time is less than the time customers
are willing to wait for an order, ttren the company would no longer
need to mai ntai n a fi ni shed
goods i nventory. Thi s possi bi l i ty woul d
resuJt i n addi ti onal savi ngs i n fl oor space and other i nventory carry-
i ng costs-T
I
i
I
dnpW'10
I
rc
Plo-2lConcludcd|
t3l
Costs and other negatlver to bc compatrd rxlth Ste savlngs Includa:
(al The Incrsaged llkellhood of rhutdonmr duc to work tocations belng
gtaryed
for WIB lower WIP levelg rt cach ctatlon repnosont lower
safety rtockr, so stockoutr erc mort llkely at alf locaUom.
(bl Tha co;t of startlng r larger numbcr of bgtchee or totr Into produc-
Uon, wlrlch.lncludcr thr cort of
pmccedng monc work ordera, pro-
ductlon ordan, and mgtorlal nqulgldonr (Beduclng averagc WIP
rlza generally rcqulrca rtartlng rmaller batcher
gt ghorter
Intervals.)
(cl Thc cogt of hendling morr loadr ol materlalr. ll lot sizac arc srnall
enough to rcqulra only onc load
pcr
fot both befgrc and after the
change, then a larger number of lotr wlfl rosult ln a larger total
number ol loads.
(d) The cost of
performlng
e larger numbcr of eetups to permlt
running
a larger number ol batchcc, or lo'tr, ol rmaller 3lze. ldeatly, as
part
ol the JIT lmpfementatlon, lotup cogt wlll be driven do*m to elimi-
natc thlr problem.
(el
The tmc and eftort that may bc rcqulrcd to Induce
yendors
to
reducc thelr lead Umc by onc-tlrlrd.
Pt o
(1) (a)
Raw and In Procasg 85O,OOO
AccOunts Payable ........o........................r.......r. 8so;ooo
A summary entry lor all receipts of raw materials during the
perlod.
When dlrect materlals aro used, no entry ls needed,
because they rrmaln a
psrt
of RlP.
(bl Fastory
Overhead Gontrol l 3, ooo
Supplles ,..or.......
13,OOO
lndirest materials ara rccorded as used.
Pa1rro11...........r.D....o..r...........D.rr..............o....o........
AcCru
gd
Payroll ................r...o.........r.....r.........
ACCru
gd
Payrott .o...................r..r.........................
Gas h r . r o. . . . r . . . r . . . . r - . . . r . . . . r . . oo. r . . . . . . . . r . o. . aa. . . . . . . . . . . . . .
cost ol Goods sold -......r.r........oo............o...,,.,.....
Factory overhead contro|.....D....o..,,,...................
MarkeUng Erpenses Control ..................o.....o...o.
Admlnlstrauvg
Expensgg contro|,.o............o.,.,...
P81rO11...............ro.rr..,...
4OO, OOO
Dirost labor ls crpenaed to thc cost of goods gold
accounL
(e)
Factory Overhead Gontrot......r........,.....t....,..r..,..
6gi' OOO
Accumulated DepreclaUon
.,.....D..........,...r......
Oggrooo
Prepald In9urance...............................o........,..
t3' OOO
(c)
(d)
4OO,OOO
4OO,OOO
6O, OOO
120, OOO
l 3orooo
9OTOOO
4OO,OOO
4OO,OOO
\
r
I
24)
Pl O
(Conti nuedl
(fl Factory Overhead Contro1.o,................,......'.
Chaptor l0
83, OOO
54,OOO
29,OOO
897, OOO
844,OOO
844,OOO
Cash
AcCounts Payab1e................o....................
bl
CoSt of Goods So1d..............
897,OOO
Faetory Overhead Gontrol
Overhead ls erpensed to the cost of
goods sold account.
(hl Finlshed Goods
Raw and In Process......r..
To backflush material cost lrom RIP to finished
goods. This is a
postdedustion. The calculatlon ls:
Materlal in Juno 1 RIP balance ' .' r.......r.. $ 4OTOOO
Mat er i al r ecei veddur i ngJune. . . . . . . . . . . . . . .
S5Or OOO
$89O,oOO
Material In June 30 RIR
per phyaical
COUl l t . . . . r . . . . . . . . . . . . . . . . r . . . . . . . . o. . . . . . .
46r OO0
Amount t obebackf l ushod. . . . . . . . . ' . . . . . . . . . . . S844. OOO
(i l Gost of Goods So|d,...........,..............' ..r....,..'
tt**
Fi ni shgd Good3. . . . . . oo. . . . o. . . . . . . . . . . . . . . . . . . o. . . t . . ' t
852I OOO
To backflush material cost from Finished Goods to Gost of Goods
Sold. The calculation ls:
Materi al i n June I Fi ni shed Goods.,r....o $ l gor0oo
Material cost transferred trom RlP..'..... 844'OOO
sl r034, OOO
Materi al i n June 3O fi ni shed
goods, per
physical
CoUtlt.....' r' ......r.................' ...
I 82tOOO
Amount to be backfl ushd ' ......' ..' .......... 3 852' Ooo
0l
Raw and i n Procgs3. . . o. . . . . , . . . o. . r. . . . . r. . . . . , . . . . . . . . .
3oo
Cost of Goods So1d...,,....r..t......' ..r..r..r...........
2r7OO
Fi ni shgd Goods. . . . . ' . . . . ! . . . . . . . . . . r. . . r. . . . . ". . . . . r. . 3I OOO
Conversion costs In tho inventoly accounts are adiusted to the
estimates made in ths June 3O physical counl For RIR the adiust-
ment i s from the $11600 of June I to $1r9OO on June 3Q for
Fi nl shed
Goods, the adi ustment i s from the $18O,OOO of Juno I to
$177' OOOon June 3O. The offsetti ng entry i s made to the cost of
goods
sol d account, where al l conversi on costs were charged dur-
i ng June.
:v
\_/
.
242 Chapter 10 .
-
P1o-4
(Conti nued) . -
(gl Gost of Goods So1d..,.,.....,........... 656,000
Factory Overhgad Control ....,...................... 656' 000
Overhead i s expensed to the cost of goods sol d account.
(hl Fi ni shed Goods........rt..........................r....,....' . 6t 5rooo
Raw and In Process................o.................... 615rooo
To backfl ush materi al cost from RIP to Fi ni shed Goods. Thi s i s a
post-deducti on. The cal cul ati on i s:
Mat er i al i n May 1 RI P ba1ance. , . . . . . . . . . . . r . , o. . $
SO, OOO
Mat er i al r ecei veddur i ngMay. . . . . . . . . . . . . . , . . . . . 620r OOO
5650,000
!
Mat er i al i n May 31 RI R per physi cal count 35, OOO
Amount t o be backf l ushed . . . . . . . . . . S615, OOO
:
( i ) Cost of Goods So| d. . . . . . . 605, 000
Fi ni shed Goods. . . . . . . . . . . . . . . . . . . , . . . . . . . r . 605, 000
To backl l ush materi al cost from Fi ni shed Goods to Cost of Goods
Sol d. The cal cul at i on i s:
Mat er i al i n May 1 Fi ni shed Goods. . . . . . . . . , , . . S15O, 0OO
r
v
Materi al cost transferred from RIP ........... 615,OOO
$765, O0O
Mat er i al i n May 31 Fi ni shed Goods,
Fer
physi cal
count . . . . . 160, 000
Amount t o be backf l ushed. . . . . . . . . . $605, 000
0)
Raw and I n Pr ocgss. . . . . . . . , . . . . . . . . . . . . . . , . , . . . . r . . . . , . . . . . 800
Fi ni shed Goods. . . . 4, OOO
Cost of Goods So| d. . . . . . . 4, 8OO
Conversi on costs i n the i nventory accounts are adj usted to the
esti mates made i n the May 31 physi cal count. For BIR the adj ust-
ment i s f r om t he $1, 30O of May 1 t o $2, 10O on May 31; f or
Fi ni shed Goods, the adj ustment i s from the S13O,OOO of May 1 to
S134,OOO on May 31. The offsetti ng entry i s made to the cost of
goods
sol d account, where al l conversi on costs were changed
i
duri ng May.
24a
I
I
Chaptar l0
Pl O- 4 ( Goncl uded)
(21
The three compl eted accounts are
Raw and in Process
Fi ni shed Goods
5t 1
(al
(r)
5/31
3l r 3OO
62O,OOO
800
37,1OO
( h) 615, OOO 511 28O,OOO
(h)
6i 5,OOO
0
4, OOO
5/31 294,OOO
(i ) 605, 000
s 12.OO
s4.50
1. OO
$5.50
$6.50
r 2O,OOO
s(l 3O, 000)
s
(4O,OOO'
6O,OO0
13, 5OO
14, OOO
120, 000
Gost of Goods Sol d
511
-O-
(d) 50,000
(g)
656,000
(i ) 605,000
5/31 1,306,200
Pl o- 5
(f
)
Contri buti on margi n of l ost sal es (2O,OOO
uni ts):
Revenue ( $1 O, gOO - 900 uni t s) . . . . . . . . , . . . . . . , . . . . . . . . . . . , . . . . . . .
Vari abl e costs:
Gost of sal es (S4r050 + 9O0),.............................,....
Marketi ng and admi ni strati ve ($gOO - 9O0).,.,........
Tot al var i abl g cost . . . , . . . . . , . . . . . . . . . . . . . , . , , . . . . r . . . . . , . . . . . . . ,
Uni t cont r i but i on
mar gi n. . . . . . . . . . , . . . . r . , , . . . . . . . . . . . . . . . . . . . . . . . . . ,
Vol ume of l ost sal es. . . , , .
Total contri buti on margi n of l ost sal es,...,.....,........
Overti me premi ums (overti me
cost i s l ess than the.
addi ti onal contri buti on margi n of tost sal es):
15, OOO x $6. 50 =
597, 500 > $4O, OOO
Rgnt al savi ngs. . . , r . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . , . . . . , . .
Rental i ncome from owned warehouse
( 1 2, 000 x . 75 x
S1. 50) . . . , . . . . . . . . . . . . . . . . . r . . . , . . , . , . , . . . . . . , . . . . .
El i mi nati on
of i nsurance and property
taxes
Opportuni ty
cost of funds rel eased from i nventory
i nvestment:
Investment
i n i nventory
I nt er est bel or e t ax
i
. t z
' 1
\ 1 - . 4 0 /
Esti mated
before-tax dol l ar savi ngs
$6OO, OOO
. 20
I
I
I
I
t>
9_q2tr9_
v
Chapter tO .
*
PI O-S
(Goncl uded)
: -
l 2l
Condi ti ons that shoul d exi st i n order for a company to i nstal l
j ust-i n-ti me
i nventory successful l y i ncl ude the fol l owi ng: -
(al Top management must be commi tted and
provi de the necessary
l eadershi p support i n order to ensure a company-wi de, coordi nated
effort.
(bl A deQi l ed system for i ntegrati ng the sequenti al operati ons of the
manufacturi ng process needs to be devel oped and i mpl emented.
Raw materi al s must arri ve when needed for each subassembl y, so
that the producti on pnocess tuncti ons smoothl y.
(cl Accurate sal es forecasts are needed for effecti ve fi ni shed goods
pl anni ng and product i on schedul i ng. s
.
(dl Products shoul d be desi gned to use standardi zed
parts to reduce
manufacturi ng ti me and reduce costs,
(el Rel i abl e vendors who can del i ver qual i ty raw materi al s on ti me wi th
mi ni mum l ead t i me must be obt ai ned.
I
L
I
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!
CHAPTER 11
DISCUSSION
QUESTIONS
,l
b
Ol 1-'1. Yes, lo lhe exlent that il is practical
to masure
the r,ralue
added or the productivity
of a worker.
However, msasurement of lhe cootribution of
each individual is never exacl. Also, a business
cannot pay more for materials or labor than the
sales price will recover. Materials, workers, and
machi nes produce products and servi ces.
There must be a difference belween revenue
irnd oosts consumed; othenrvise, lhe business
cannol sun/ive.
Otl-2. Productivity may be defined as the measure-
menl of producl i on performance
usi ng the
expenditure of hurnan elfort as a yardstick.
ln a
broader sense, it may be described as the etfi.
ciency with which resourcas are converled into
cornmodities ancVor services that people wanl.
Ql 1-3. Productivity is important to a lirm because high
productivity
reduces the unit cost ol the outpul
and makes i he f i r m mor e compel i t i ve. t t i s
important to workers because lheir real earn-
ings should be increased when productivity
is
hi gh. Pr oduct i vi t y
i s i mpor t anl t o soci et y
bEcause increased productivity
enables society
to gel
moro and better oulput from the basic
resources of lhe econorny.
Ql 1-4. To measure labor efficiency, it is necessary to
esl abl i sh
a st andar d of per f or mance.
Thi s
means determining
how much a worker should
be able to produce,
or how much a worK cr6w
shoul d be abl e l o produce.
The standard i s
delermined
by time and motion study, lest runs
by skilled workers, and averages oi past per-
formance
by skilled workers.
Q1 1-5. The purpose
of an i ncenti vs wage pl an i s to
induce a worker lo produce
more, iesulting in a
higher wage and reduced conversion cosl oe,
uni t. Fregueni l y,
machi ne outpul i s l i mi ted by
worker performance.
lt employee perlormance
can be increased,
machine cost per unit of pro-
duclion will decreasa. An incentive wage ptan
may at so r educe l oaf i ng, i ndi f f er ence,
and
carel essness,
and may generate
a cost.con-
scious labor force.
Ql 1- 6. Gener al l y,
hour l y ear ni ngs go up wi t h
increased
production,
and labor co.-st per
unit ol
outpul i s reduced. Hi gh producti on
rates al so
reduce
overhead cosl per unit of output, which
_
i s often the most si gni fi cant savi ngs.
Ql 1-7. (a)
Duri ng peri ods
ol curfai l ej acti vi ty,
i t i s
iust
as ncessary to keep cosls down as
i t i s when oper at i ng al f ul l capacr t y,
Assumi ng
that the i ncenl i ve
wage pl an
r esul t ed
i n gr eal er l abor ef f i ci ency
ano
l ower cosl s per uni t at ful l capaci l y,
than
the l abor cost per uni t shoul d be l ower i n
a sl ack peri od i f the i ncenti ve
wage scate
i s conl i nued,
A shdrter workweek or
sorne other syslem of sharing lhe work
wouH be indicated.
(b) Ordinarity, it is not a propiliour
tine to hi-
tiato an hcentive wagr ptan wtren a phnt
is operating far below capacity, because
the worker is already fearful d sornething
less than full employrnent. ll a ,eason-
able day's work is being received for the
going rate ol pay, po.stponement
of the
.
i ncenl i ve pl an
i s i ndi cated.
However,
there is a nalural tendency for workers lo
reduce output durhg such perlgds,
there-
by increasing cosls, wilh a lendency lo
bring about further reduction in the vol-
ume lhat can be soH. With luft e4plana-
lion and underslandhg
of thc situation,
the incentive wage could be htroduced
-
with a planl operating at 6006 capacity.
O1 1-8. In the straight piecework plan, each worker is
paiC a certain amount for eadr unit produced,
while being guaranteed
a base hourly wage. ln
the 100% bonus plan, ach workor L pai<J for
the standard time to cornplete the job
or unils if
the job
or units are finished in slandard time or
l ess. In the group bonus pl an,
workers i n i
group
are paid
lheir standard hourly wage. lf
the group produces
unils in oxcss of the stan-
dard, lhe workers are paid for the time saved.
Q1 1-9. An organizational or gainsharing
incentive plan
i s desi gned to provi de
i ncenti ve pay to al l
empl oyees by way of an organi zati on-wi de
plan thal rewards for improved productivity.
01 1-1O. The basi c concepl underl yi ng the rel atbnshi p
involved in the cumulative average lime learn.
ing curve modet is that every time the cumula.
live quantity
of unils produced
is doubled, the
cumuhlive averags lim per unil is reduced by
a given pgrcentage.
The l earni ng curve l heory i s used to sol ve
.problems
such as determining labor costs in
bids for governmenl
conlracls, determhing bt
costs tor various slagos ol production
runs,
predicting
labor-hour requirements, permitting
l he cal cul ati ons
of sl andard l abor cost vari l
ances, assisting in lhe evalualion of a manag-
er' s performance,
and provi di ng a basi s for
cost control.
0 1 1 - 1 1 .
Q1 1-12. The f i nanci al account i ng
aspecl i s concemed
wilh a record of earnings of each employee
and pay ment
of t he wor ker s . Fi nanc i at
account i ng records i ncome, FI CA, and ot her
payroll
laxes and deductions wilhheld; proviCer
l or di sbursi ng
l unds l o workers and t o t axi ng
and ot her agenci es; reporl s i o each empl oyee
al least annually the arriount ol wages eamed
245
246
and tho arnountl withheld for various
PurP'
es; and recordg the payroll liability and pay'
ment each
PaYroll Period
Thc cost accannting 8sPcl is concemod with
time worked oo each
Fb
or h each cost conlet,
in order to detetmine the labor houn and bbor
cosil ol
Ptoduclion.
Ot1-13. tui eflbient labor force beghs with the design
ol the producl
gnd
en analysir of produclion
teclrnQuce and
i9b
reguiremenls. Wi|h he per'
sonnel department adeqtntely informed aboul
j ob
speci fi cati ons, i t i s l he l uncl i on ol thi s
deportneot !o locura the pcrsanel qualilied lo
do each
iob.
The produclion planning deparl'
menl keeps the work llowing smoothly. Ths
ti mekeepi ng,
payrol l , and cost accounti ng
departments contribute to lhe lotal elficiency by
accounting for the time purchased and by rnak'
ing payment lor the work as well as charging
the cost to lhe proper dePartment and producl.
Q1 1-14. (a) Delermining labor hours worked by each
empbyee is prirnarity lor payroll
PurPo3-
es and linancial accounting,
(b) Determinatirn ol labot hourc consumed
on each
irb
or h a department is a part
ol cosl det er mi nal i on f or a
j ob or
pnocoss. lt shouH also be a measure of
labor efliciency, since hours consumed
and productive output can be cornpared.
Ol 1-15. (a) The cbck card showg the amounl ol time
an employee spenl in lhe plant ach day
ol a payroll period. lt is evidence that lhe
empbyee's time has been purchased.
(b) The time ticket shows tho amounl ol lime
an employee spends each daY on 6ach
icb
or in each department. ll is an ilem'
ized invoice ol the time thal the employ'
ee selb to lhe empbyer.
01 1-16. Since the clock cards show the time employ'
oes are h the pbnt, the lirst step is to make
sure no error exists on the time tickets. lf the
total time shown on the time tickets is cortecl,
trren the workers speot time in the phnt when
nol working or not assigned lo specific'
jobs ot
dopartments, gr
when assi gned l o mai nte-
nance or repair work For the time thal is idle or
assigned to indirect bbor, a chargo is made to
Factory Overhead.
Chapter 11
01 1-17. Bar codes are symbols thal can be processed
el ectroni cal l y to i denti fy numbers, l etl ers, or
special characlers. Bar-coded empbyee idenlF
lication cards or badges, and lask identilica-
tbns can be used to replace clock cards and
time tickets to collect payroll data ard to mea'
sure worker activitY.
Q1 1-18. Appendix One method would be lo charge the
premium costs directly to lho
Prod'
usts in thc same rtra rne, as straighl'
l i me l abor cosl s. Thi s woul d be
aPpr oPr i at e when
Par t i cul ar i obs
have to be rushed to ccnPlelbn. A
secmd method woub be to trat the
ptgmium as an ovefiead elemnt lo
be ctrarged to all ptoduclirxt through
the allocation ol overhead. lt would
be appropriate when lho ovatlim is
a recurring condilion normally inci'
dsnt to the level of oPeratiens'
011-19. Appendi xThe bonus and vacati on pay shoul d
be accrued ovet the benefi ted ti me
peri od. When the bonus and vaca-
tinn pay are pairJ, the accrued liabilily
account is debited and the cash and
withholding accounls are crediled.
Ol 1-20. AppendixThe recornmended method in com'
puting costs under a pension plan is
to detemine aciuariatly lhe eventual
pension paymenls lo covered empkry'
ees and to cfrarge these luture pay'
menls as a cost
gt
curtnt
production
over the exPected
geri od of acl i ve
service of covered employees' Costs
based on Past
servi ces shoul d be
wr i t l en ol l over some r easonabl e
period on a systematic and rational
basis that doos not distorl the operat'
i ng resul ts of anY one
Year.
These
costs are incurred in contemplation
of lhe presenl and luture seryices nol
only of the individual employee' bul
also ol lhe organi:ation as a whole'
Benef i t s ol t he
Pl an- such
as
improved morale. removal of super'
annuated employees' and attraction
of mor e desi r abl e
Per sonnel - ar e
exPecl ed l o i mProve the oPerati ng
etficiencY of a comPanY.
I
217
Chapts ll
El 1- 1
EXERGISES
ORANGE CITY CA"I{NING COMPANY
t^abor Schedule for Terry Paco
For Fi rst Week i n June
Units producod
a r a a . a a a a a o a a r a . a . a a a a . . . a r . a r
40
1, 32O
1r2OA
110o/ o
S9
9396
s9.90
s.30
E11-2
(11
Tuesday Wednesday
Hours x hourly ratg............
Unlts above standard.
H ou rs saved............r..........
Value of tlme
gavgd....o...o..
SOoh of value of Ume saved
Earninga ............................
U9"d"y
$64.00
o
s64.OO
t o
. 50
s 4.OO
$ 3.20
s67.20
s64. OO
l 5
.75
$ 6.00
s 4.80
$68.80 s200.oo s64.OO
(21
Efficiency ratio: l o7, 50h
Earnings: 1O7.soh r $8 hourly rate r 4O hours =
$344
(31
Earnings: ($8 hourly rate + 5Yc rate increase) r 24 hours =
S8.4O x 24 hours s
$2O1.EO
860
- =
800
!
I
I
Chapter 11
248
t o
e 5
; !
: q
o E )
8 g
E{ t
E T
E:
Es
s 3
E g
. L
= o
o b
E O
r 3
S F
Er r
$ g
3 e
gt E
tg cD
r t c
o !
E ! t
o o
O L
> 5
' 6 9
E E
g.E
: t r o
e f -
E t r +
o
9 u )
. g t r r O
(, tt,
-:
gg
' Er 9
; t t
u i O O
< ' 3
EEI
i;gnFl
rfrI
;EFH3l
o r { ) o o o l o
l r F t f g ) r \ l
a a a a
t o r t @t r q , t r '
o
s E
o
O r
- tll \r n @ o N ot
N 6 l
J d o i ' { i d c . i
f i t
F F F F ' .
\ t O @ O
( 1,
l Fl l
N O r t @
( ' l o) t l
q r \ ' o N G ' l c o l l
- l q I
r = N N N l o l l
I t O q , g g l l F l l
N O I r CO
( ,
l o| l l
o N o l ' F l N l l
- t d l
N I O c l r \ ( o l C ) l l
F F F r - l @ l l
o o o o o l o l
o o o o o t o l
o c , o N \ t l \ t l
- l - l
o ! t o l o t r l @ l
F r F r r l F l
- < l r O C {
0 ) C O O f - f r l
F 1 C { $ l r -
a t
g ) g , ( ' , ( ' ) g ,
I
F r - O N
c o N n N @
q q e q q
N C \ l p p r
{,
! t f i , o o o
o | o n s r r o
( Y , N N N N
a a t a a
t - F ? . r F F
g,
o o o o o
o o o o u ,
d d u i u t F :
O O v . N O
o ( o ( o ( o ( o
{,
o o o
o o g ,
o o u i u i r " i
r ( Y G l
{,
o o o o o
o o o o o
o a o ( o ( o ( o
{,
E e l
. j
J i @ @ @
f l
t r t c * ' r i t ! c
. b
l 9
q s
.3
EE5
!t
GI
c ' . t
Z t t a - *
T ' C l v L
6 ( )
q 3
o
sgi g
o
o
[)
(,
x
ur
t'Ft
:B
gl
3 o 5 l
i o l
FFut
E r
o l
E sl
t El
L I
g '
E ! l
E;I
o ; l
s i
r ;
I
>l
( 0l
o l
? l
,.l
( El
" l
(!,
I
ul
E. E, ^ EI
t e # 3 l
q u ? q q q
E = s ; i
g l s 3 6
t r ,
=
dl
o r o N o o
t r l F Q O r
\ t \ t c l o t o
(!
. >E e
f f ; ! E e Y
: o x = E F
; F ; F E i l
!
o $
. i :
! ! t
- r P
o.
C\|
o <t o @ c{t ottl
c o r - o - - l
Sl l
G
Et$rs
s
E F } F T
lgl
rfrrl
lfl
r t r t G ' O O
o o o o l |
a a a o
r F O ? G |
q ( , t t t o l o
6
t r o
t 3
o c
t r o
i r 0
I
I
I
I
ChWtar ll
Ell\5 19A productivity
ratio =
'
194 standard hours for work done *
19A total actuar dirsct and Indirect rabor hours =
943,823 +
|
$251324
= .422089
Hours needed for i 98 production
at l
gA
productivity
ratio =
198 standard hours for work done
-r
i 9A productivity
ratio =
558t51o +
t422o89 ..r.rr.........o.....r.r....o.....o...............................
Less l9B total actual direct and indirect labor hourt,...,....:.-,
Hours savgd ............-...o...........r...........r..r...r.r.......
Value of wages saved = hours saved r lgB
svoriage hourly pay plus
labor fringe benefits =
38,221 r $i 4.7O =
$561,949
Employee gainsharing
incentive totaf =
vafue of wages saved r 5OZo =
S561,849 x SOoh =
$28O,g24.5O
Gainsharing
incentive per
employee =
total gainsharing
incentive r-
number
of eligible employees =
$28Or924.5O +
755 employees =
$?Z2.Og
219
113231204
1r2g4rgg3
38'227
Ef l -6 I bat ch . . . r. . . . , . . . . . , . . . . . , . . t . , . . . . . . . . . . . . . o. . . . . . . . . .
$60rooo
2 batches..........,...,...........,.............,..,.,,
$l groOO
l go%
of $6Oroogf
4 batchgs..o.r.......................r.r................
Sggrcoo
i gorh
or
Scgroooi
8 batches....................,..........r...,.r.......,.
$gorzzo
i aoy" or $grcooi
16 batches............r.,..........,........r............
$zorszg
i gow of $3or72o)
E11-7
Cumulative
Average
Required
Weeks per
Bridge
100
BO (1OO
weeks r 8O%l
64 (8O
weeks r 8O%f
57.2 (64
weeks x 8O%)
7 addi ti onal
bri dges
must be bui tt i n order to bri ng the cumul ati ve
BVB' -
age bel ow 52 weeks.
Bri dge
Number
x
I
2
4
I
I
Y
I
I
Chapter | 1
El l - 8
(f
l
The schedule below demonstrates
the 8O7o learning curve that the com-
pany expects to experienco in
producing the time devices:
Cumulative
Lots x
Cumulative
Average
Time
=
9O.OO hours
72.OO
57.60
46.08
Cumulative
Time
9O.OO hours
144. OO
230.40
368.64
I
2
4
8
At an SOoh learning factor, the cumulative time to produce 8 lots
should be 368.64 hours. At a standard labor rate of $9
per direct
'
tabor hour, the standard amount for total direct labor cost should be
set at $3,317.76
(368.64 x S9).
l2l
The company shoutd estabtish the standard for direct labor time equal to
the marginal direct labor time required to produce the eighth lot'
provid-
ing steady-state
production occurc after the eighth lot. To assure that
this standard time will be accurate, the company should:
(al Keep accurate records through the first I tots to determine if an
EOoh learning factor is experienced.
(bl Continue to keep accurate records for each successive
production
lot to provide
a basis for:
1. Conformance to expectati ons about l abor ti me (i .e.' steady
state
production after 8 lots)' or
2. Determi ni ng when steady-state
producti on does occur.
E1 1-9 APPENDI X
(1) Overti me premi um
charged to producti on worked on duri ng the overti me
hours:
Work i n ProcgsS...,......,.....,..............,,.......,.................
Payrol l (4O
hours x $91 + (1O hours x 1.5 x $9)..,,..,.
(21
Overtime premium
charged to factory overhead:
Work i n Process (5O hours x $91........,....,..,......o.........
Factory
Overhead Control (1O hours x.5 x S9)...........
Payrol l .... .........,.....
495
450
45
495
495
I
I
I
I
I
Chagter ll
E1 1-1 O APPENDIX
Subsi di ary
Record
Factory Ovgrhead Controt.........,.................
Bonus Pg1| . . . . . . . . . . . . . . . . . . , . . . . , . r. . . . . . . . . . . . . . . . .
l 34. 4Ot
VaCatiOn P8f.......r........r...r.............o....
G7.ZOz
Liability for 8onus..........r............r,........r.
Liability for Vacation Pay .....o.r..........;.....
"
(9lO +
g32l
x 40 hours r 4 weeks =
S6' Z20 + 5O weeks
2
($fO +
$32) x 4O hours x 2 weeks =
g?,36O
+
5O weeks
EI 1.' 1 APPENDIX
Factory Overhead Controt
lgeS,OOo
x 2gTo1...,....
Marketing Expenses Gontrol (SgrOOO
x Zg;/o1......
AdministraUve
Erpenses Control ($7,ooo
x 2a./"1
Liability for Pensions (S5OTOOO
r T.go/o1..,...,,-
Liability for Other
postretirement
Benefits
($5o,
ooo x 2.3o/o1.....r.r.,,...r......,......
Ff CA Tax Payab le (95 0,O0 O r T .S%1..........,...
Federal Unemployment
Tax
payable
($50, ooO x .g/ol ....r,....r.......r.....................
State Unemployment
Tar
payable
($SO, OOO x 4.6Tol ...,..........ro...............,.....,
Workerst Compensation
Insurance
payable
($5o, ooo
r l %1. , . , . . . . . . . , . . .
. . . . . , . . . . . .
Medi cal Insurance
payabl e
($SO,OOO
x 4%1..
GGA-Canada (Adapted).
Repri nt
El 1. 12 APPENDI X
t l )
The entry to record the payroll
liabilitp
Payrol l
. . . t . . . . . . . . . . r. . . . . r. . . . , . . . . . . . . . . . . . . . . . .
26r7OO. OO
Empl oyees
Federal Income Tar
payabl e
..........
Empl oyees
State Income Tax
payaL| o.......,......
Employees
City Wage Tax
payable
.......,.,...,,....
l l CA
Tax Payab18....................,.....
Accrued
Payroll !.,...,,......
25r
l-
b
Dr.
Cr.
201. 60
134. 40
67.20
=
5134. 4O
=
67.20
9,8OO
2124O
1, 960
3r go0
1, 150
3, 750
400
2r3OO
500
2,OOO
wi th permi ssi on.
2,5OO.OO
500.oo
267.OO
2rOA2.5O
21, 430. 50
(21
The entry to distribute the payroll:
Work i n Process,....................,......,..,,........
fac-tory
Overhead
Control ..,............
Marketi ng
Erpenses
Control ............................r...
Admi n i strati ve
Expenses
Control
.............,....,..,...
Payroll
l
18, OOO. OO
3, OOO. OO
4r2OO.OO
1, 5OO. OO
l-
26, 7OO. OO
_\
252
E1 1-12 APPENOf i
(Concl uded)
(31 The entry to record the employer's
payroll taxes:
Factory Ovgrhgad Gontrol ....................' ...........--..
Markgting EXpenSgS COntrOl ........'.......................
Administrative Expenses Control ............or'..........
FI CA TaI Payab19. . . . . . . . ' . . r. . . . . . ' o. ' . . . . . . . . . . . . . . . . r. . . . . . .
'
State Udemptoyment Tax Payab|g...............,..,.
Federal Unemployment Tax Payabl....'.".........
2,394,OO
478.80
171. 00
Chagter | 1
2,O02.5O
854.40
186. 90
I
L
I
L
I
I
I
I
!
ChWter tt
Pr l - 1
(fl Present cost
Direct labor per
hour
PROBLEMS
$10
12
$22
-r
5 units per
hour =
$4.4O conversion cost per
unit
253
Convcnbn Cal
pcr
Unlt
t
l
I
!
Factory overhead per
dirrct labor hour...
PcrWorkcr por
8-Hour Dey
unltrlrromblcd
Plccowort Dlrcct Fectory Totaf convcrzlon
pcr
&Hour Day Rrt Labor Ovcrhead
Coot
( t )
Boguhr Worksoot
Employoe
Hourty
Rrtr
Clrnct D--...-
!O.OO r
l,,ukon, T.--..-
B.OO r
&hott, J...-.....
I.0O r
3 80.oo rs9s.oo
05,40 eo.00
110. 00 06. 00
12650 00.00
144.00 03.00
Totrl dlnct lebor -
lncrndyo lflagr Plan
Boe Pay
Incrntlvr Pay
(Unltr
Producrd r
(Boo
Frtr r Wort Hourr) + InconUvo
prrmlum)
r
10
szoo
4ft
2.12
50
z.2o
55
e.3o
80
z4o
3176. 00
101, 40
20s.00
222.50
240.00
Sf.4o
1.8
1. 12
.3.05
a.oo
(21
lf a
producuon
rate above 4o units per
employeo per
g-hour
day is
noasonably
attainable by the worksr, the employeo oarnings wili increase
under the plecework proposal,
Since convercion cost per-unit
decreases
with increased
output, management
should favor the
iiecework
proposal.
P11-2
b
Totrl
Worl- l'bor
Work Cort
4O hn, E
32a0
,3O
h.!. r 320
aO hrr e 280
lc.go r 4o hn = 't.to
5.5O r 4O hn - 2t2O
4.5O r 4O hn = 18O
Totrl
Lrbor
Coel
Totrl dnct hbor._._._.
_t&ao
flrclt -
t8.fo r llog hbor oori Incroor
l O5 r $t , OO= 3t o! t t OO5
iO5 r l.OO = t0tt 3S!t
105 r l .0O = t0tl O45
tl ,ql 5
Proot:
#*
=
2g.2% trborcort Incro'r
b
254
Chaptor | |
'
Pl 1-2(Gonctudedl
l2l
To assess
properly the effectiveness of the new
plan,
it is nocessary to
anallze lts eftect on convorslon costs and not
just
on direct labor costs.
Although dlrect labor cost
per
unit may rise, this Increase may be moro
than offset by distributlng the overhead over a larger Yolume.
A comparison ol the two
pay plans and their effects on convsrsion cost
per unit shows:
Totrl lrbor Tctrl Totrl Unlt
bbor Cort Frctory Ovorlrerd Convotrlon Corwonlon
Cort prr Ur*t orrorhod por Unlt Cott Cott
tncsntlvc wagc plan
tl,o35 tA.Zt tlr2Oo J|ZZ t2,235 $1355r
Stnfght hourly ratc 84O 5,OO IJIOO 8.OO 2,O4O 13.002
Dtflcrcncc t .o7
l.El 9_1.09)
nct
decrearc
152, 235+165=$13. 55
2
$2, O4O
+
150 =
$i 3. OO
The decreaso In conversion cost is minimat; however, the fact that cus-
tomels can be sryed sooner might be worth additional labor cost.
Based on learning curyo theory the
productivity of the worker might
increase sufficiently to reach a more satisfactory output and cost level.
Chapter 11
I
t
I
L
255
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s! 6i
;
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q q
si sl
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gE
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\ q q
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eE9l
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l i i
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o o, o o
5l
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o .,
t t
? r
i g i
e
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g
s
e
#l
.f
gl
$
N
Egl
5
N s s s
t t l
. e El o
. Et
\ ' I
p
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= 6 l
F t ' F F
N
l - l
r i
i l
l >
! e,i
f i E il
: A
d l
5 e H
5 d
n = , t E
P I F E
5;l
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-1
256
Pl l -3
(Concl udeUf
Hours worked
Chaptar l1
. a a a r a a a a a a a a 40
855
800
Units
produced
Standard
produgtion (20 units x 4O hours|..-..............
Efficiency ratlo (855 + SOOI
Base wage per hour
Base wage plus
bonus (1.O6875 r $91 ...............o.....,..
Wggkly earnings ($9.9t975
r 4o hou1s1........r.............
Unit cost ($384.75 + 855 unltsl ..or.......t.....r....,....,r.o...
1.06875
$9.0o
$9.91975
$384.75
$.45
(_
Clpptor l1
!
257
g'ilglc
r o i I
A - - I
i i s$! i qf i n$r
,3 i E
"l '
- o i I
iEfFl fiFFEF
t i i { l ; . . EE
; eE^l
Es$gl sesss
5
i!
tl$
n
6r c! '!
g; FsF"
i El"*=*=*
"
si;l
"
sil
tFF$s
r : c ! t F S E i
gsrgli
EsfE sl
gfiggH
5i i ' i -
5- E! =1"
l r O r . O U t
@ N O t o N
O u ) N ( \ | @
N N N N N
a a a a
o
EEI Bs s s s
E$l gBddd
N
o
F
g;l
'
! r o 6
3 s E
o s E
: 5
&l r- r-
c t o S
J e g
grliS;$3
ifl$
;
$;l;
;
$l'
EgE3E33
o o l '
O N N
N N N
b
s'r
g
e sle
E g l
'lgggFs
u l
r 8 l o
= : 1 5
5 F l - -
_ l
G I
l : l
3 x l 3
g
= i r
A
t
rl
gi l i .
-'
gEJEF
o o 6 | O
N ( '
: -El
El g
5 3 l '
o
i l
F$l g33Es
I
>
!t
I
G g
- i
2fi
P11- 5
Straight Piecework
Units
produced-regular
tlme
Piecework
rate
Pi gCgWOf k
p3! r. . . . . . . r. o. . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . t . . r. . . . t . . t . . . .
Downtimo PaY
Chapter | 1
Dodd
Hare Lowo
400 410 370
$
.66 $
.66
I
.O6
$264.00 $270.eo 9244.20
30.oo
o 24'OO
o 54.OO
r
36'00
s294.OO $aZc,oo $304.20
284.OO 277.2A
302.20
$ IO.OO $
47.40 $
2.99
: = - z :
Ober
RuPP
a a a a a t a a a a a a a a a a
OVgfti me
p8!....r...........r....r....rr........r...r........o...........
Tot al l \ r 3$l B3 . . . . . . . t t t """"t t ""t o"""' r t t t ""t t """t "' t t t """'
WaggS
por bookst t "t t t "t t t ""t t t ""r t "t t "' r "t o""t t "t """"'
U n d efp aym OJ1t...............r......r.....i ....o.r..
r.....o...........r..
t6.r
$6
x 15ooh
= $54
Percentage
Bonus Plan
Uni t S
pf OdUCgd, o. . r. . r. . . . . . . . . . . . . . . . . . . . . . . . . ' r. . . . ' . . . . . ' r. . . . . . . . . ' . . . . "'
Standafd
pfOdUCti Otl ................' ..o......' .......o......r..............
Ef f i Ci gnCy f at i O. o. . . . . , o. r. . . . rr. . . . . . . . . . . r' . . . . . . r. . . . r. . r. . . r. . . . . . . t . . "' r'
RegUl af Wa993. . . . . . . r . o. . . . . . . . . . D. . . . . . . . . . . . . . . . . . . o. . r . . r . . . t . . . . t r . . . . t " '
8OnUS. . . . . . . . . . . . . . . . . oo. . . r . . . r . . r . . . . . . . . . . . r r . . . . r . r . . . . . . . r . . . . r . . . . . . . . . . " "
TOt al wageS . . . . . . . . . . . . . . . . . . . . . . . . . t ""t t rt t "t ""t ' t t ' t ""t "t t """"t "o
WageS
pef bOOkS . . r . . . . . . . . . r . . r . . . . . . . . . r . . . r . . r . o. . . . . . . . . r . . o. r . . . . r . . . t . .
Undef paymO; . 1t . . . . . . r . . . r . . . . . r . . . . . . . . r . . r . . . r . . . . . . . . . . . . . . r o. . . r . . . . . . . . . . . .
r25oh
pnemi um x $24O
regul ar wage =
$60
or S6.00 hourly rate
x .25
pnemi um
51. 5O bonus pay
S1,5O x 4O hours
=
$60
250
200
125o/o
s240.oo
60.oo1
$3OO.OO
280.OO
180
200
gooh
S2oo.oo
o
$2oo.oo
l 71. OO
$ 20.oo s 29.OO
=:
::z:
I
I
I
E
Chaptar 11
Pl l -5 (Concl uded)
Em erson Effi cien ca System
Unitg
produced..t.........r..
Standard
production
Efficigncy ratio..........
BOnUS l i l l t8 .......r..,.,....r...............
Rggul ar wago.r...or............r..........,......r..................r...
Bon us' uraff o ...............r.r......r.....r.r...r...................r.r...
Downtime pay (2 houra x
35.60}.
Total wages ............,.....
b Wages por
books........r........,.,
I
b
Suggs Ward
259
590
5701
103.5%
450h
s2l2.go3
95.76
11. 20
240
300
80o/o
20o/o
5224,oo2
$ 44.90
a a t a o a a a a a a a a a a a r a a a a a
s268,8O
S319.76
233.20
2go.o0
:----
$ 35.60
$ sg.zo
Un d erp aym
(!Dt....r..rr".........r........,.r.r.....r.r......
i ..........
t
6OO units
(standard production
for 4O hours
)
=
15 uni ts per
hour
15 units per
hour r 38 productive
hours = 57O units (standard production
for 3g
hours)
z4O
hours x $5.60 =
$Z24,OO
s38
hours x $5.60 =
S2i 2.gO
P11- 6
( 1)
Hours worked (5 workers r 4O hours)................,,.r...,,.........,...
Regul ar
wage (2OO
hours r $61.........,..........
Uni t s produced. . . . . . . . . . . r. . . . . . . . . . . r. . . . . . . . . . . r. . . . . D. . . . . . , . . r. . . . . . r. . . . r. . . r. . . .
Bo n u s " " t ' o t ' r t a Dt a a a a . a a a a a t a a a a r a a . a a a a . a r r a a a a a a a a a a . . a a a a o a a a a r a a r r . . . . . a a . a a a a a a o r . a .
we-ekly
garnings.o....r......rr........r...................,...........,..o.......r...
uni t
l abor
cost
Gt l 1252
+
452), . . . . . , . , . . . . . . . . . . r. . . . . , . . . o. . . . . . . . o. . r. . . . , . .
Unit factory
overhead ($f
r4O6
*
452).............r..r..,...,...o.r..,.r..,
Uni t convgrsi on
coSt . . . . ' . . . . . . . . . . . . . . . . . . . r. . r. . . . . . rr. . . . . . . r. . . . . r. . r. . . . . . . r. .
t
452 unlts produced
4OO units standard
_52
units above standard
52 units x $i workersr
share =
$S2 bonus
200
s1, 2OO
45.2
s52
r
$i , 252
$2.7699
$.?.0973
$5.8672
b
l-
b
I
I
Chaptor | |
P11- 6
( Concl uded)
t
4Oo uni ts per 40 hours = 10 uni ts
per hour
1O uni ts
per
hour + 5 workerc = 2 uni ts
per hour
72 uni ts produced + 2 uni ts
per hour = 36 hours standard ti me
z
lf the
group bonus is computed for the week, rather than daily' the bonus
woul d be 36 x 2o hours saved, or $156. Then, $1,356
+ 432 uni ts =
$3 uni t
labor cost. Overhead cost would be S1,4OO
+ 452 units, or 9?.O973
per
unit.
P11- 7
( 1) THOMAS INC.
Quarterly Bonus Allotment
At End of March
Unltl-...'......-..
Standard houn
for unltt.--..-..
Actual houn..-
Bonurr to r
houn ttvcd..-
Total carnlngr.
Unit labor cort.
Unlt factory
ovgrhcad ,....,.{
Unlt convcnion
coat ,............,.-
72
3 6 1
. , 4
3zlo
333333
*r.8e8e
glzaul
8t
nrn
&
3 s
32'til
Sr.oooo
33.45A8
toJ508
95
171t2
10
t r s
328!t
33,0000
32.9471
35.947a
102
5t
ao
f 0 6
3soo
ir.oooo
327451
35.74tn
102
5l
40
f o o
3300
33.OOOO
3Z74nl
35.74tt1
152
22A
200
3 t 8 o 2
31,380
$3.Os31
33.0073
30.1504
Empl oyees
Participating
1 Works managgr....r......
2 Produsti on engi neers.,
5 Shop supervisot' tg.........
1 Storgkgopor.,.,..,....r...,.
5 Factory office clerks ...
l5O Factoty workefs ......
Points
Allowed for
Each Employee
250
200
200
l oo
1 0
20
Shara
per Poi nt
s3.125r
3.725
3.125
3. 125
3.725
3. 125
Total
Share
s 781.25
1, 25O, 00
3, 125. 0O
312. 50
156. 25
9,375.0O
9!9'o99.09
Total
Points
250
400
l , 0oo
100
50
3,O0O
4, 8OO
ra
27O, OOO
24O, OOO
3O, OOO
3O, OOO
s15, OOO
uni ts actual producti on
uni ts normal producti on
units excess ovor normal
uni t s r $5O=$15, OoO
+ 4,8OO
poi nts =
33.125
qer poi nt
f
' l
I
Chapter | 1
Pl 1- 8
(rl
Gumulative
-Cumulative
Number Number of Uni ts Cumul ati ve
of Lots
(Lot Size = 50) Average Time Per Unit Cumulative Time
50 4.0000
l o0 3.6000 (4.oooo x.9l 360.00 (3.6000 x 1oo)
2OO 3.24OO (3.60OO x .9! 648.00 (3.24OO x 2OO)
4OO 2. 9160
( 3. 240O x. 9l 1' 166. 40 ( 2. 9f 6O r 4OO)
8OO 2.6244 (2.916O x .9) 2rO99.52
12.6244
x 8OO)
Ti me i n Hours
I
2
4
I
1 6
DireCt tabOr hOUrS reqUired tO prOdUCe the firSt 8OO UnitS r..,............... 2tO99.52
Di rect l abor hours requi red t o produce t he f i rst 2OO uni t s . . . . . . . ' . . . . o' . . . . , 648. 00
Di reCt f abOr hoUrS f eqUi red t O prOduCe t he next Ordet ' . . . . . , . . . . . . . . . . . . . . . . . . .
11457. 52
:
Numbgr of uni t s i n t hg ngxt ordgt ' . . . . , . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . ' . . . . . . r. . . . . . o. . .
---
600
Di rect l abor hOUrs
per
uni t f or t he next order (1' 451 . 52
+ 600) . ' . . . . . . . . . . 2. 4192
Catoni c Part Number PGB-31
Uni t Costs and Pri ces for Rex Engi neeri ng Company
Estimates
Incorporati ng
a 9ooh Learni ng
Gurve
Materi al s S18O.OO
Labor and empl oyee benef i t s
( 2, 419 x $20) . , , . , . . . . . . . . . . . . r . . . . . . . . ,
48. 38
Var i abl o over head ( 5O% of l abor ) , . . . . . . . , , . . . . . . . , . . . . . . . . . . . . .
24. 19
Total vari abtg coSt.,.......r,..r....i ................,,..,....' ..r...... 5252-5|
Fi xgd ovgr head . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . . , . . . ' . . . . r . . . . r 4O. 0O
Ful t cost. .....!........ SZSZ.SZ
Profi t contri buti on (1 Ooh of ful l cost) .,...........,...,....
.
29.26
Esti mated contract pri ce...........,.,. S321.83
l 2l
The i mpl i cati ons of an 80% l earni ng curve as opposed to a
gOoh
l earni ng
curye are:
(a)
An 80% l earni ng cunre i ndi cates a
greater effect of experi ence on
efficiency.
(b)
Most of the i ncrease i n effi ci ency (decrease i n ti me and cost per
uni t) due to an SOoh l earni ng curve occurs earl y i n the
producti on
r un; t hus, sat ur at i on i n l ear ni ng i s achi eved ear l i er wi t h an AOoh
l ear ni ng cun e.
f
' l
I
Chapter | 1
Pl 1- 8
(rl
Gumulative
-Cumulative
Number Number of Uni ts Cumul ati ve
of Lots
(Lot Size = 50) Average Time Per Unit Cumulative Time
50 4.0000
l o0 3.6000 (4.oooo x.9l 360.00 (3.6000 x 1oo)
2OO 3.24OO (3.60OO x .9! 648.00 (3.24OO x 2OO)
4OO 2. 9160
( 3. 240O x. 9l 1' 166. 40 ( 2. 9f 6O r 4OO)
8OO 2.6244 (2.916O x .9) 2rO99.52
12.6244
x 8OO)
Ti me i n Hours
I
2
4
I
1 6
DireCt tabOr hOUrS reqUired tO prOdUCe the firSt 8OO UnitS r..,............... 2tO99.52
Di rect l abor hours requi red t o produce t he f i rst 2OO uni t s . . . . . . . ' . . . . o' . . . . , 648. 00
Di reCt f abOr hoUrS f eqUi red t O prOduCe t he next Ordet ' . . . . . , . . . . . . . . . . . . . . . . . . .
11457. 52
:
Numbgr of uni t s i n t hg ngxt ordgt ' . . . . , . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . ' . . . . . . r. . . . . . o. . .
---
600
Di rect l abor hOUrs
per
uni t f or t he next order (1' 451 . 52
+ 600) . ' . . . . . . . . . . 2. 4192
Catoni c Part Number PGB-31
Uni t Costs and Pri ces for Rex Engi neeri ng Company
Estimates
Incorporati ng
a 9ooh Learni ng
Gurve
Materi al s S18O.OO
Labor and empl oyee benef i t s
( 2, 419 x $20) . , , . , . . . . . . . . . . . . r . . . . . . . . ,
48. 38
Var i abl o over head ( 5O% of l abor ) , . . . . . . . , , . . . . . . . , . . . . . . . . . . . . .
24. 19
Total vari abtg coSt.,.......r,..r....i ................,,..,....' ..r...... 5252-5|
Fi xgd ovgr head . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . . , . . . ' . . . . r . . . . r 4O. 0O
Ful t cost. .....!........ SZSZ.SZ
Profi t contri buti on (1 Ooh of ful l cost) .,...........,...,....
.
29.26
Esti mated contract pri ce...........,.,. S321.83
l 2l
The i mpl i cati ons of an 80% l earni ng curve as opposed to a
gOoh
l earni ng
curye are:
(a)
An 80% l earni ng cunre i ndi cates a
greater effect of experi ence on
efficiency.
(b)
Most of the i ncrease i n effi ci ency (decrease i n ti me and cost per
uni t) due to an SOoh l earni ng curve occurs earl y i n the
producti on
r un; t hus, sat ur at i on i n l ear ni ng i s achi eved ear l i er wi t h an AOoh
l ear ni ng cun e.
I
I
i
Chapter | 1
P11-a (Goncl uded)
(31
'
The degree of tearning that takes
place
in an industrial operation would
be reduced by
(al
a low proportion
of assembly labor to machine labor;
(bl
an operation ol low complerity;
(cl
high employoe turnoveq
(dl tedium;
(el poor
working conditions.
Pl 1-9 APPENDIX
(11 Charge to work-in-pnocoss:
Normal working houns = 40 houra r 2 = 80 hours
Let X=over t i mehour s
X =
s r , r 4 o - ( 8 o r $ r 2 )
( $l z r r . 5)
X = 10 hours
Therefore, charge to work in process =
gO
r
$lZ
=
$l,OgO
l2l
Factory overhead charge for Emptoyee tloTl:
Gompany benefits paid
by employer....,,
$273.20
Overtimg premium
t............oo..................
6O.O!t ($trf
40
_
Slrogol
s."99
(31
The cost of idleness should be charged to the departmentaf factory over-
head account
PI I.I O APPENDIX
(l )
Apr. 7 Payrol l ,..,..........
........,....r.
Accrugd Payro| 1......r.....r...rr..................r.
Employees lncome Tar
payable
(9.5olo)..
FICA Tar
payable
(2.5|.,.....,....r..r,..,........
14 Payro11........................,..r....,.........
Accrugd Pa1rclt.' ..........r...............r......,..
Employees
Income Tar
payabfe
..,....,...,.
FICA Tar
payable
..,...,.......,.....,..,....,,.....
5, 8gO. OO
21 Payrol l . . . . . . o. . . r. . . . . . . . . . . . . . . . . . , . t . . . . . . , . . . . . . . . . . . . . . . r
srgoo. oo
Accrugd Pa1ro11. . . . . . r. . . . . . . . . r. . . . . . . . . . . . r. . . . . . . .
4rggZ. OO
Empl oyees
I ncome Tar
payabt s. . . . . . . . . . . . .
560. 50
FlcA Tar
payabto
.............:.....................
44z.so
2A Payro!| .......r.......r........,..r.
...r.....,.
4rggo.oo
Accnred
payrol l ....
,...................
4,O5O.4O
Empl oyees
l nco^me Tar
payabfo.............
463.60
Fl cA Tar
payabl e
.............:.....................
366.00
4,92O.OO
4,888.70
559.55
441.75
4r083.6O
467.4A
36g.OO
I
l-
264
Pl l-1 O APPENDD( (Goncluded|
t2l
Apr. 5189O
4rg20
5,9OO
4188O
2164(,
24.23O
Chapter l1
Dr. Cr.
Apa 3O Work In Procgss ..r........r..............o.....
Factory Overhgad Gontrcl' ...,....' .......
lndirgct Labor .' .......r.........' .....
Payro|1 tt...............................t........
Apa 30 Factory Ovgrhgad Gontrol .................
FlcA TaxlS22rOOO r 7.5o/o1.,....
Federal Unemploymont Tax
($22rOOO x' 8oh1.....................
State Unemployment Tar
($2Zr OOO x 4oh1...,..................
Vacation Pay
l922rOOO
x 8o/o1..
FICA Tax Payab19 "..................r.....
Federal Unemployment Tar Payable
State Unemployment Tar Payable
Liability for Vacation Pay.......,......
Payroll
Subsidiary
Record
5,6OO
16, 400
5,6OO
4r4eB
22rOOO
1, 65O
176
880
1, 760
(31
1r 650
17f,
880
1, 760
Accnred Payroll
I
7
1 4
21
28
Apr. I
30
7
1 4
21
28
30
2r23O Apa
22rOAO
24J,sO
Mar.31 Bal .2,23O.OO
Apr. 7 4r888,7O
14 4, 083. 60
21 4r897.OO
2A 4' O5O.4O
30 2,04O.0O
2e789.74
2,840.OO
2,640
2,640
2r23O.OO
4r888.7O
4,O83.60
4r897,OO
4,O5O.4O
20,149.7O
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Chapter 11 265
CASES
I
c t 1- l
(1) Arguments used by each proponent:
(a) 1,00O-pieces-per-hour-rate:
{1}
Studies show that machines can be operated at this rate.
(21 Variances determined by this output rate will measure the inef-
' '
fective use of the machines.
(3) This rate can be a target level to be strived for, and the chang-
ing variances will show pnogness toward this ta4get.
(4) A goal of this natute will motivate the supervisor, and thereby
the workers, to reach this rate of output.
(b)
750-pieces-per-hour-rate;
(1)
This rate of output has been attained by some workers.
(21 The IroOo-pieces-per-hour rate has not been attained, nor has
any rate near to it been attained.
(3)
The 6oo-pieces-per-hour rate is an average of actual perfor-
mance and does not represent good economical performance.
(4) The standard cost should reflect production
rates that can be
attained when good economical performance
occurs. The 75O-
pieces-per-hour
rate, capable of being achieved by some workers,
would seem to be such a
per{ormance.
. (5) The variances would measune the extent by which this economi-
cal levef has been exceeded or the extent to which it has not been
met.
(6) lt should provide
motivation for the supervisor to improve on the
60o-pieces-per-hour cunent rate and in turn motivate the employ-
ees to improve their performance.
(c)
6OO-pi eces-per-hourrate:
(1)
This rate has been achieved by the departments as a whole. The
standard costs should be set to reflect the ability of the whole
department.
l2l
The variances from standard cost based upon the 6Oo-pieces-
per-hour
rate would measure the departures, favorabte and unfavor-
able, from the current effective level of operations.
(31 For two thirds of the workers, the 75O-pieces-per-hour
rate
would be dlfficult
lo attain and would tend to frustrate them, thus
making even the present
6oo-pieces-per-hour
rate difficutt to main-
tain. For all workens, the 1r0Oo-pieces-per-hour
rate could not be
attained' thus lowering the morale of the department and probably
lowering output below current levels.
(4) The 6oo-pieces-per-hour-rate,
when passed
down to the pro-
ducti on worker, wourd be an appropri ate goal
for those three
empl oyees who are produci ng
fewer than 6oo pi eces per hour.
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Chapter | |
C11-1
(Concl uded)
l2l
The
purpose
of standard costs and standard cost reporting is to measure
the performance
of a department agai nst a l evel of cost i ncurrence that
nepnesents attainable good
economical performance.
The variances indi-
cate the periods when the performance
varied (favorably
or unfavorably)
from this acceptable level.
To be used effectively, the rate to motivate the supervisor and, thereby,
the worker,s to improve performance
would depend upon the perceptions
as to what is attainable. lt would also depend upon the reward structures
within the firm. Other variables would also affect what output rate would
motivate improved performances.
The val ue pi cked (e,9.,
i r00o, T5o, or 600) must be a compromi se
between the level that witt have the most effective motivational result
and that whi ch wi l l be an effecti ve representati on of the costs when the
department i s operati ng at an acceptabte economi caf l evel . The 1,OOO-
pi eces-per-hour
rate shoul d be rei ected because i t does not provi de
the
basi s for a measure of an acceptabl e cost tevel . l t woutd al so be of ques-
ti onabl e val ue from a moti vati onal poi nt of vi ew, because i t appears to be
unattainable by the production
workers.
The 75o-pi eces-per-hour
rate i s a possi bl e
choi ce. l t i s capabte of bei ng
achieved by some workers and as such may
provide
motivation to the
supervisor to bring other workers up to that level, thus achieving a
departmental
output of 750 pi eces per
hour. tt al so may represent the
appropri ate
basi s for a standard cost because i t i s a possi bl e
acceptabl e
l evel of performance.
tt may al so be a sui tabl e departmental target
establ i shed i n connecti on wi th the i ntroducti on of the standard cost sys-
t em.
The 6oO-pi eces-per-hour
rate i s al so a possi bte
candi date. The Punch
Press Department
has achi eved thi s tevef, and three of the si x empl oyees
have been abl e to achi eve i t. l t i s, however, the current l evel of oui put
and that may make i t i neffecti ve i n moti vati ng the department and i ts
workers to improve the level of output. As the basis for standard costs, it
coufd represent an acceptabl e l evel of output; but i t does not i ncorporate
the possi bl e
i mprovement ti kel y to be obtai ned i n connecti on wi th an
introduction
of a cost system.
The
75o-pi eces-per-hour
rate seems to be the best choi ce of the three
al ternati ves.
More i nformati on about the condi ti ons under whi ch the
engi neeri ng
studi es were done, the trai ni ng and experi ence of the work-
ers' and the trend of worker and department output i n recent peri ods
woul d
be necessary before the number coul d bs chosen wi th some
assurance
that i t woul d meet the stated obj ecti ves.
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Chapter 11
267
c11- 2
(1)
'
An advantage of the new payrol l i ncenti ve pl an
i s that i t recogni zes a
probl em'
whi ch shoul d i mprove empl oyee moti vati on. Acti on taken by
management will be perceived
as a positive
effort to resotve a
problem,
and empl oyees may feel more a part
of the group and behave as team
members.
Some di sadvantages, whi ch coul d l ower empl oyee moti vati on, are that
empl oyees' fi l es are open to scruti ny by peers,
and that empl oyees may
feel that they have to be a
part
of the
"i n
grouptt
to be assured-recogni -
ti on for wage i ncreases. The pl an
coul d degenerate i nto a popul ari ty
con-
test.
some advantages that shoul d i mprove empl oyee producti vi ty
are the
i ncenti ves the pl an provi des
for empl oyees to perform
effi ci l nt| y and
effecti vel y, and the benefi ci al competi ti on i t promotes
among empl oyees,
as l ong as i t i s i n harmony wi th corporate goal s.
A di sadvantage that coul d l ower empl oyee producti vi ty
i s that the pl an
coul d l ead to col l usi on among groups
of empl oyees to keep producti vi ty
l evel s arti fi ci al ty l ow. Empl oyees coul d approve each otherb' wage
requests wi thout appropri ate meri t. The pl an
al so coutd resutt i n i neffi -
ci enci es, because empl oyees who have had thei r wage i ncreases turned
down may not work up to capaci ty due to a l oss of i ni erest.
some advantages that shoutd i mprove goal
congruence between the
empl oyee and the company are that the pl an
i ndi cates the company' s
i nterest i n the needs of the empl oyees, and that the pl an
may resul t i n
i ncreased profi t
through i mproved producti vi ty,
whi ch may l ead to
empl oyees
earni ng a l arger i ncome through i ncreases i n wages.
Some di sadvant ages
t hat coul d l ower goal
congr uence ar e t hat empl oy- .
ees may mi st r ust a wage pl an
suggest ed and i mpl ement ed
by manage-
ment, and that there may be an overemphasi s on a l i mi ted range of per-
formance
measures.
Some advantages
that shoul d i mprove admi ni strati on
of the pl an
are that
procedures
for requesti ng
a wage i ncrease and for i ts approvat are cl ear
and unambi guous,
and the pl an
al l ows for rel ati vel y qui ck posi ti ve
feed-
back and peer
r ecogni t i on.
Some di sadvantages
that coul d hamper pl an
admi ni strati on
are that
there i s a l i mi ted amount of management i nput and control , and that
there wi l l be addi ti onal record-keepi ng
responsi bi l i ti es
associ ated wi th
the voti ng procedures
and mai ntenanJe
ot' empi ov"" producti vi ty
records
and per sonnel
f i t es.
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(3)
(41
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(31
2ffi
cl 1- 3
(rl
(41
Chpter 1l
I
The basic premise
of the learning curve is increased productivity
as
experience is gained
in the performance
of repetitive tasks. Various
lnputs to the production process
may be used more efficienily as cumu-
lative output increases, but in most production processes
the maiority of
cost savings associated with a learning phenomenon
involve the use of
human labor.
( s , z oo +2, 24o) +16
=
;;3
=
BSoh tearnins rate
3, 200 + 8
With a learning rate up to cumulative output of 32 units, average direct
l abor hours used to produce
these 32 uni ts shoul d equal
gs%
of the
average di rect l abor hours used to produce
the fi rst 16 uni ts. tn short,
average hours empl oyed for each uni t when 32 uni ts are compl eted
shoul d equal :
340 x . 85 =
289 hours per
uni t .
Thi s i mpl i es a total of 289 x 32
=
9,249 hours used i n the producti on
of
the first 32 units, or
91248
-
3, 200
-
2, 240
=
31808 hours
usgd i n the producti on
of uni ts l z through 32.l f the average hours per
uni t i n thi s producti on
batch i s taken as the di rect l abor standard, the
standard per
uni t becomes:
3, 8O8 hour s
238 hour s per
uni t
16 uni t s
Bi d pri ce
on order of 96 uni ts:
s 1, 500
5, 95O
9, 52O
16, 97O
5, 091
22rO61
x 9 6
(5)
FoT"
appl i cati ons of the tearni ng curve i n the pl anni ng
and control l i ng of
busi ness
operati ons are setti ng performance
si andardi , prepari ng
cost
esti mates
i n competi ti ve bi ddi ng, determi ni ng budget ai l owances for
l abor
and l abor - r el at ed cost s, schedul i ng l abor r equi r ement s,
and det er -
mi ni ng per f or mance
evat uat i ons i n whi ch per i odi c pr ogr ess
r epor t s ar e
compar ed
wi t h accompl i shment s expect ed under t he cur ve.
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Chapter | 1
c l 1- 4
Shoi tcomi ngs:
(1) Actual payrol l
hours are not approved by producti on
managernent.
(21 There is inadequate segregation of duties within the Payroll Department.
(31 Personnel Department shoul d not have access to payrol l
checks.
(4) Departmen-t supervisors should not distribute the payroll
checks.
Suggested corrective action:
(f
l
Al l i ncomi ng ti me cards shoul d be si gned by both the ernpl oyee and
supervi sor.
(2' l The payroll
clerk preparing
the input for data processing
should not do
the reconci l i ng, but rather a second cl erk shoul d reconci l e the payrol l
j ournal
to the ti me cards.
(31 An empl oyee of supervi sory l evel shoul d authori ze voi di ng of computer,
gener at ed
checks and t he subsequent pr epar at i on
of a manuat r epl ace-
ment check.
( 4) Repl acement checks shoul d be pr ocessed
f ol t owi ng good
i nt er nal cont r ol
pr ocedur es.
( 5) Al l payr ol l
checks, i ncl udi ng unsi gned r epl acement checks, shoul d t hen
be gi ven
to the Accounti ng Department rather than to the Personnel
Department for storage i n a secure l ocati on unti l payday.
No Accounti ng
Departm ent emp l oyee wi th payrotl
recordkeepi n g responsi bi l i ty sh oul d
have access to the undi stri buted checks.
(6) On payday,
checks shoul d be di stri buted, preferabty
by a Treasurerrs
Depar t ment
empl oyee or by an Account i ng Depaf t ment empl oyee who
does not have r ecor d- keepi ng r esponsi bi l i t i es.
cl 1- 5
f i f he
r equi r ement does not ask f or a l i st of r esponsi bi l i t i es Osbor ne has
vi ol at ed, but , mer el y, whi ch of t he f i f t een r esponsi bi l i t i es
appl y t o
Osbor ne, s
si t uat i on. )
Management account ant s have a r esponsi bi l i t y t o:
Comoet ence: Pr epar e compl et e and ct ear r epor t s and r ecommen-
dat i ons af t er appr opr i at e anal yses of r el evant and r et i abl e i nf or mat i on.
(Osborne
knows that i f he consents to Wal l ace' s request, the resul ti ng
mai nt enance j ob
cost r epor t s woul d be mat er i at l y mi sst at ed and woul d
pr esent
f al se and mi sl eadi ng i nf or mat i on. )
Integri ty: Refrai n from engagi ng i n any acti vi ty that woul d prej udi ce
t hei r abi l i t y t o car r y out t hei r Out i l s et t r i cal l y. ( osbor ne
i s bei ng asked t o
be a party
to an acti vi ty that woutd erode hi i abi ti ty to carry out hi s
duti es ethi cal l y.)
Communi cat e
unf avor abt e
as wel l as f avor abt e
i nf or mat i on and pr o-
f essi onal j udgment s
or opi ni ons. ( osbor ne
i s bei ng asked t o t hwar t com-
muni cat i on of unf avor abl e
i nf or mat i on. )
Chapter l1
Cl 1-5
(Concl uded)
Refrain from engaging in or supporting any activity that woutd dis-
credit the profession. (Preparing deliberately misteadin! maintenance job
cost reports clearly would be a discredit to the profession.)
Obiectivity: Communicate information fairly and objectively.
(Osborne woul d vi ol ate thi s responsi bi l i ty i f the mai ntenance
j ob
cost
reports are,altered.)
Di scl ose ful ty al l rel evant i nformati on that coul d reasonabl y be
expected to i nfl uence an i ntended user' s understandi ng of the reports,
comments' and recommendati ons presented. (The shi fti ng of cost among
mai ntenance
i obs
woul d vi ol ate thi s ethi cal responsi bi l i ty.)
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012-1. Supervircrs' salaries, hdirect labor, overlimo
prcrniurn,
lupplier, indirrct nratorials, payroll
tarq tactory hlurancc, and deprrciatian.
Ql2-2. Thr nst inportant r.elon fa variatbn in fae-
lory ovrfiead b tho pnroncc of lired and rarF
ablo rrpenrer. Thordorc, ar prcduction
vol-
urno changs frqn nrnth to rrcrth, tho coCc
will do likowicc. Howcvor, ovcrhead alco wifl
''
cltrtgo bccause of inrprovcd or dccrcssed cflF
ciencies and ctrangos in pricer paU for over-
head ilrns LEh s! rupplies ard repairs.
012. 3. Pr edcl er mi nod
r al cs ar o ur ed when i t
beconres obvious that 8ny other melhod of
charghg overhead resullr in inequilabfc coct-
hg and delays tho reporthg ct firancisl results.
Charghg aclual overhead io
ic6s
and producir
can resufl h charging
unreasonable arnounls
of owrhead to varbur perirdr and in dehyed
rcporling
of corl data. Thc urr ol prcdclcr-
mined ralcs alao onhances control through
analyria ol over. or underapplied laclory over-
head
012-4. Sir bases used for applying taciory overhead
aro unitr prodrced,
direst rnateriatr cost, direci
labor cosl, direct labor houc, machhe hours,
and transaclions.
lmportant consideratioog in
seleclhg
a base are the relatbnship (conela-
tion) ol the base used and lhe use d ovefiead
items in manufacturing
operalbns, as woll as
the clerical prac-ticability
ol using a particuhr
bge.
012-5. Predetermhed
rde! are used to charge over-
head and becorne the basis for determining the
cost cil a
lcb
or producl.
Thereforo, the reason-
abl eness
of such costs i s to a hrge exl ent
determhed
by the reasonableness
ol-the rat.
Shce these cqsts are used for costing hvenlo
ries and play
sn important
ole h esiabtishing
sales prices,
the selectbn ol proper predeter-
mined rates can be appreciated.
Q12. An objective in seleciing the baso lor a prede_
lermined factory ovefiead rale b lo engure lhe
application
of factory overhead in reasonable
proporikm
to a benefbial or causal relatbnship
lo jobr,
producls,
or work perlormed
or lo be
por f or mcd.
i , c. , f or r r t i mal i ng pur pose! .
Ordiurily,
the base selostod ehojj be'closety
rolded to ttnctions
represenled
by the applioC
overhcad
cost. lf tactory overhead cosls are
predorninantly
labq oriente4 such as supervi-
sirt and indirect hbor, the proper
base would
probably
be dirccl bbor hours. lf taclory over-
head costs are predominantly
retated to the
cosl incurred in the ownership
and operatbn
ol
thc madrinery,
the proper
base would probably
be machhe hours.
GH4pTgR 72
DISCUSSION
QUESTIONS
Anotrer otriectivo in selecthg the base b to
minimizo clericel st and dfort relativo to tho
bonrlitr ottaincd. When two or more ber.s
pro\rid.
apprcximatcly
thr rgrno applicrJ ovor_
hood cst to specilb unils 6t prodrrtbn,
the
rirplcsl ba$ lhouH be usrd.
Q12-7. (a) Theqrfrcal capecity b actuslly tho nrari-
rnum produclion possible
frorn e givon
pbnl wit|r no allo*arrr rnade for ccsla.
lion of operations
for hotidays, wrok_
endr, malerials shorleges,
or machino
bnakdorns.
(b)
precticsl
capacity ig theoretical capechy
lege an ellow.ance
for interruptimr euch
as brealdo*,na,
delayr in recciving rup
plict, and worker abgencer.
prjcticsl
capacily is usualty 75 to 85 pcrcent
of
theorelical capacity.
(c)
Erprctrd ectual caprci ty i r prtcti cal
capacity adjusted lor tho lach of autfbiont
dcmrnd h a tinglo oporathg period and
may br usod h building oporating bu+
gelr tdrcn expected capacity ditfen
gub.,
stantially lun norrnel capaciV.
(d) Normal .capaci ty
i s practi cal
capaci ty
adjusted to give
consideratbn
to t o toci
of suflicient dernand over a pcrird
bng
enough lo hclude cyclical and reassral
fluc.luatbns.
This is usually the basis for
l ong- r ange pl anni ng.
sl andar da,
and
preferably
for the determinalbn
cJ owr-
head rates.
012-8. The underappl i ed
overhead wi l l be hi gher l f
marinum capacity is used and bwer if normal
is used. ll this cost is charged lo lhc currrnl
perird, then nraxirnum capacity will prcducr
a
krwer, and normal capacrty
a higher,
operating
prcrtii.
O12- 9. ( a)
l dl e capaci t y cost s ar i sc f r om i dl c
empl oyees
and i dt e t aci l i t i ec.
l dl e
empl oyeer gi ve ri se l o col te auch ar
base wages paid, employor,r
sharc of
payrol l
l axes, and other l ri ngo benefi t
cosls. ldle facilities cause capacity
6te
due lo delerbratbn
with time, appreh-
i ng obaol eoconce,
cost ! f or upkor p,
readiness,
maintenance,
repairs, lhelter,
and pr ol ect i on
of val uabl ee
r uch ar
hsurance.
(b)
When iile capacity b prescnl,
an dtenrpt
shoul d be made t o r egr egal r i dl o
empl oyees
and i dl e l aci l i ti er through
proper
recbssiticatbn.
Tho rcurnula$on
ol lhe cost attributabte
lo theso Ulc work-
srs or facililiec in excess
_cl a reasonablc
budgnted
arnounl migrht be in aorno ki,rd
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ol overhead account to be lreated sepa-
rately aa e'rnanagemenl by erceplion'
facl or. l db capaci l y corl r shoul d bt
accounlod lor soparalely lor lhoro rea-
!ons: (1) to
Pttv.nl
dittortkn end srlu-
rirr h thr rna[air of ptoduclin cctt;
(2) to bililetr ircqne dclominalixt; (3)
to csrtrol ogcraticts; 8nd (4) lo phn nrrt
year'r hdget edrquatdy.
(c) Exeorc crpe.*ty cod h8! bem iJentilhJ
with thoo capacity.cootr thol rcrull frqn
grealrr produclion capacily lhan lhc
cqnpsny couH rvcr lrqe lo usa, or frcrn
unbal ancrd rqui pmenl or machi ncry
withh dcparUnenls. In creatng lhc fote
casl budgrl, il ir irportanl lo bobto the
.xc.r capacily cosl ro lhal manago-
mcnl can bo made aware cil ilr responsi-
bility rcaardng the excess invesUnent in
labor and machhec.
Q12-10. (a) Anaty":r and identify the ovefiead trans-
actisrs.
(b) Joumali:,c thc lransrlisrs.
(c) Enlcr transaclbnr in general and
gub-
sktbry lodgen.
Ol2-1 1. Ovefiead applicd lo prcduclicn ir enlered as a
credil h |he lactory orerhead control accounL
Acl ual ovr r hr ad i t debi l ed l o l hc same
Chapter l2
accounl Therefore, ovefiead has beon oer-
applied when lhc account lras a crcdil balanc..
Q12-1z- Ovcrhead cen br ovcrappliod beceuso (a)
actual oveficad waa bss than budg.l.d; (b)
capeity utli:.d war greetor |h8n that eslirnaF
od h cnpdhg ovofirad rale; (c) lho wcr-
hcad cdinatc war lo hiCh (a mirtate); (d) lhr
produclian ortimab wat l low (a mirtakc);
(r) corn|liulkns of thr abor.
Q12-13. Over. or undcrapplicd faclory ovcrhead may
be proralod arrrcng work h proc.ss, finished
goods, and cosl of goodr sold, or it may bc
lrcaled rntirrly ar a period cogl. The firsl
method would have a smsller effcl oo cct ct
goods soH and |hcrelqc
qr
lho net ircorne for
the pcriod.
012-14. Thr cxislcncc ol largc undcrabcorbed vari-
ancis doot nol necossarily mcan ihat unil
costs ar. incorrecl. An analysis of thc under-
absorbod figwer will irdlplc (a) whether actu-
al ororhead ir loo high or whcthcr oxponseg
havo been incorreclty estirnated; and (b) what
part of thc underabsorpl i on i s caused by
unusod capacity. ll Eclual ovrhead is cmtiJ-
ered lo b. t@ high and thcro ic Ule capacity,
unil coctr ccnpulcd ate morc rearcnablo lhan
they would bc if overhead rale! wero cornput-
ed to absorb all of the aclual overhead.
1
\-
;
Chapter 12
2n
EXERCISES
I
E12-7
(l)
$l'75oro0o fixed overhead and
$72o variable
overhead per
ton, calculat-
ed as follows:
For both the ngrmal capaclty and expected
actual capacity, the problem
states the total budgeted overhead cost and the number
oi ton" of activi-
'
ty. The high'low method of estimating cost behavlor
can be used to
determine the overhead budget, usin-g those two points:
Activity Level
Normal capacity
Expected
actual
Difference
Tons
6, 000
5,000
I , O0O
Budgeted
Overhead
$6,O7O,OOO
5,35OrOOO
s 720,Ooo
- .
Vari abl e
5720,00O
.
over headr at e=f f i - =$72ovar i ab| eover headper t on
Budgeted
fixed overhead =
$5rg5O,0OO totat overhead
-
($ZeO
x 5,000) variable
overhead
=
55,350,000
-
S3,OOO,O0O =
g1,75O,OOO
or, budgeted
fixed overhead =
$6,070,000 total overhead
-
($72O
x 6,000) variable
overhead
=
$6, 070, O0O
-
$4, 320, OOO =
gt , TSO, OOO
lv
\
274
Chapter 12
I
E12-1 (Concl uded)
(2'l The predetermined rate at practical
capaclty would be $895 per
ton.
Using the budget for fixed and variable overhead, a
predetermined
oyer-
head rate can be calculated at any level of acUvity withln the relevant
range. Assuming
practical
capacity ls wlthln that range, Ore calculation
is:
Predetermined
overhead rate at
practical
capacity
=
(8, 0OO t ons
)
Budgeted total overhead at practlcal capaelty
PracUcal capaclty In tons
Budgeted fixed overhead
+ Budgeted variable
overhead at 1O, O0O t ons
_
$1, 7S0, 000 + ($ZZO
x l Or0OO)
= -
{O' 0OO t ons I O' OOO t ons
_
91, 750, 000 + $7, 200, 00O)
_
$8r 95Or OOO
{OTOOO tons I O' OOO t ons
o\
$72o vari abl e overhead per ton + ($trT5orooo/l orooo
tons)
=
$72O
per
ton +
$175
per ton
=
$895
per
ton.
Factory overhead..........
Di r ect l abor , . . . . . . . . . . . . . o. . ,
515,840 dl ol ot x
20, 160 56 x
=
$895
per ton
$6,640
6,640
$12, 200
5,56O
$ 6,6co
=
$2' 921. 60
=
3t718.4O
$6,g4O.Oo
E12-2
Work i n process
bal ance, Septernb:r 3O........,....r........r...r.r.....,.........,..
Lgss materi al s sti !l i n procgss...,...,......,.,.....,..,.............................,,....r.
Factory overhead and di rgct l abor sUl f i n pnocgss...,.,.......,.r.,...........,..
Charged to
V/ork In Process
Amount
o/o
s36,o0o 100%
' s15, 840
*
$36, o0o = 44oh
(or)
S15,840-(factory
overhead) *
S2O,16O (di rect tabor) =.7gST
Let X = di rect
l abor sti l l i n process
Then, X+. 7857X
=
S6, 640
1. 7957X =
56, 640
X
=
$3,218.429T di rect l abor sti l l i n process
.7857X =
S2,g21.SZO2 factory overhead stilt in process
s6,639.9999
>
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b
Chapter 12
El2-3'
(11 135 peopte
r 8 hrs. per
day r 5 days
per
w6ek r 4g weeks =
259r2OO direct labor hm.
l2l
{35 people
r lo hrs. per
day r 4 days per
week r 49 weeks =
259,2OO direct fabor hrs.
Et24
275
!
b
Factory overhead rates:
(11 Units of production:
$225,000
+ 5y000 units
=
S45
(2f
Materials cost
$ZeS,OOo
*
$SoO,oOO
=,{5 =
45oh
(3| Direct labor hours:
$225,OOO
+ 56,25O DLH =
34
(41
Direct labor cost:
$225,oo0
+ (56,2s0
DLH r $81
=
.5o =
soo/o
(5| Machine houns:
$225,OOO
+
75,OO0 machine houns =
i3
El 2-5
(fl
Assuming
normal capaclty:
(al
The factory overhead rate: (90OO,OOO + 5O,OOO| + $6.69
=
$14.69
(bl
The fired part
of the factory overhead rate:
$e6o,ooO
+
5o,ooo =
38
l2l Assuming
erpected aetual capacitln
(al
The factory overhead rate:
1$lOo,oOo
+
4oroo0! + $6.89
=
$i6;69
(bl
The lixed parf
of the factory overhead rata:
$lbo,ooo
+ .to,Ooo =
$lo
El 2
Actual
l l Aoty
ovgrhgad
r.......' .r...r.....r.....r,...r...,.............,..!......r..r,........
SZZgTOOO
Applied
factory
overhead (S2rSoO
machine hours r $5.iOrt..............r...
267.TSo \- -
underapplied
factory
ovgrhgad for thg period
......,..........r......,r......... a
-
r"se' sPP"tttl
l .l gtCl ry
overneao tor tne pgrl od
......,..........r,......r............
$ 1j 1r?54
!
t$255,o0o
+
5oro0o
budgeted machi ne hours =
$s.1o
,:
Chapter l2
I
El 2- 7
(1
l
Work in Process.' .' ..............................o......o................1
,45OrOOO
Matef| a18..........r..r.........r.......o.....o....rrr.o.....o........
l
r45OrOOO
Work in Procgs,.....,......o...o...
928,OOO
Pa1rc!|......
928,OOO
563, OOO
551, OOO
551, OOO
Factory Overhead Contrcl... . . . . . . i . . . . 563t OOO
Materials, Palnoll, Accruals, and Various Credlts
Work In Process
551, OOO
Overhead rato :
Estimated factoly overhead
$57O, OOO
Applled Factory Ovgrhgad,..........,.........,.......,...r
Appfied Factory Overhgad .r.................' .,......' rj-,r.rorr S5lrOOO
Factory Ovgrhgad Contrcl ...or......,..o.,rrr-ooooorrroi ror
Estimated production
l 2l
Underappl i ed
factory overhead:
$563,000
E12- 8
E12- 9
(f
l
Applied factory oyerhosds
sl 6, 92O
36,OOO machi ne hours
30, OOO
.
$551, 0OO
$19
per dr i l l
=
$12' OOO
Agtual factory ovgrh
gad
r.....t.......r......!.................t.....
Applied tactory oyerhead (4rlO0 units x
$2.46)r..,....r.
Overappligd ovgrhead....?.......o......o..r,,.,..,.......r......,....
*
va tiabl
g
facto ry ovgrh
gad
fiito .......,...........,r....,..r.o....
Fired fastory overhead rate ($ir44O + 4' OOO units)....
Total fa ctory overhead rilto ......,.r,...........r......rr.....,..,.
$ 9, 5OO
10. 086
s
( 586)
$2. 10
.36
92.46
=
$ .47 lired portion
of rate
2.7O variable portion
of rate
_S2I
total rate
$2.57 x 2,7OA machi ne hours =
g6,939
appti ed factory
Actual tactory overhead ........................,...
Applied
factory overhead
Under appl i ed
over head
overhead
57, 4OO
6. 939
s 46,1
t2l
I
I
I*
L
L .
I
Chagter 12
Et 2- 10
Agtual factory ovorhoSd ..D.....................r' ................r..!....o..,...
$836rooo
Applied factory ovarhoad (2ro,ooo
machine hours r tt.:::::.
-iio.ooo
o1rgrapplied factory overhe8d............'.................,.................
s ta.ooot
E72-17
(21
( 11
Fixed portion
of the factory overhead application
rate:
st 50, ooo
=
$1.50
per
machi na hour
tOOTOOO
machi ne hours
277
I
I
b
I
I
\-
I
variable portlon
of the factory overhead application rate:
=
$2.5O per
machi ne hour
1OO, 0OO
machi ne hours
(31
Actual factory overhead
. . . . . . . . . r. . . . . . . . . . .
$4i {, OOO
Applied factory overhead (lOS,ooo
x S4.oo1.....::::::::::
-654
Overapplied
factory overhead ...
r.........
r(9oo)
E72-12
fctu--al tactory
overhgad .........' ........r...........r.........................
$141334
Appl i ed factory
overhead (2Oo%
of $gri l Z) .........,...,.,,...,.....
16.234
overappl i ed
ovgrhg?d.........,...,..........................,....r..,.ro.r......
E_f:.gggl
: t
Chapter 12
278
812-13
Work in
process ..' o""' r"t""'
Finishgd $ood8..,.....t""""""
Cost ol
goods 8old.-.....,......
Regulrements
(11 &
(21
Account Percentage
Balance of Total
5 %
31
zgoh
631noh
t 00
ch
Applled
Percentage
Overhead
of Total
$
2,ooo
16,000
32rOOO
$50,ooo 1oo%.
300
1, 9OO
3,8OO
o,ooo
$
6,000
38,00O
76,OOO
4%
32%
64oh
( 11
(21
Tota1...............r...................
$12OtOO]9
work in Procesz
l5o/o
of $8r0oo)
,.......,......r.......'..'r....r
Finishgd GOOdS
131
Znoh
Of $8rOO0)............'......,...'o'..
cost of Goods sold
1631noh
of $610001.....,................
FaCtOfy OVefhgad GOntfOl.,,.,..' ...,..,....' ....' ..r' o.....
FaCtOfy OVgfhgad Contt!|........,......' .............r..' ....' .r"'
Work in Process
(5% of $6t000|""""""""""' t"' t
Finishod Goods
131
znoh
ol $6' 0OO)""-""""' o""
Gost of Goods Sotd
(63
lnoh
of $6tooo1"""""""
WOfk in PfOCgSS
l4o/o
Of $6rOO0|
.' ...,...' ..' r..............t.."
Finished Goods
l32o/o
of 361000)""""""""""""""""'
Cost of Goods Sotd
lA4%
of $61000!"""""""""""""'
Factory Ovgrhgad
Contt!1
"""" """"""t"""t"""'
240
1, 920
3r84O
o,ooo
300
l
r9OO
3r80O
6,O0o
' v
(31
L
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b
a
I
Chaptu 12
P72-7
(rl
)
b
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I
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!
E
Agtual oVorhead lpcurred .........' ...' ....' ...........r.r...r,.r..........r.....
Applied ovorhoadt..........................r.....r.........t......,.o...............
Underapplied ovgrhgad r.......' .........' ..............r..tr..D......r..........r
PROBLEMS
Machi ne
Hours
l o,ooo
I,OOO
279
$3r3g5, OOO
3. 325. 000
s 60. 000
(21
'acrr3!It41_t_
prodoterminsd
rate based on expected astual capacity
=
9, 5OO MH x ($3, 500, 000/ l O, 00O
MH)
=
9,5OO MH x $35O
per MH
=
$3,325,OOO
The predetormined
rate at
practicaf
capacity would be $316.67 per
machino hour (MHl,
calculated as follonrs:
Flrsg find thc budgeted total lired oyorhoad and the budgeted variable
ovorhead rato par
MH. The
problem
states both the total budgeted over-
head cost and thc number of MH of actlvity, at both the normil capacity
and orpected astual capacity levels, so the high-low method of estimai-
ing cost behavior can bE used:
Astivlty Level
Erpected actual
Normal capacity
Differsnce
Budgeted
Overhead
$3r5OO,OOO
_
3TOOOTOOO
$ 5OO,OOO 2,OOO
Var i abl e $5OO, OOO
a
or"rf,""J'i"t"
=
frffi
=
$25O variable overhead per MH
Budgeted fixed overhead
=
S3,50O,O00 total overhead
-
($2SO
x 1O,OOO| varfable overhead
=
s?r500,ooo
-
$2r500,ooo
=
$l ,ooo,ooo
or, budgeted
fired
overhead =
$3,ooo,oo0 totat overhead
-
(S2SO
r I,O00f variable ovorhead
=
$3,0001000
-
$2rooo,ooo =
$l ,ooo,ooo
Then,
usi ng the budget for fi xed and vari abl e overhead, a predetermi ned
overhead
rate can be cal cul ated
at any l evel of acti vi ty wi thi n the rel e-
vant
range. Assumi ng practi cal
capaci ty i s wi thi n that range, the cal cul a-
t i on i s:
7
--' 1
\
2W
I
P12-1
(Goncluded|
Predetermined
overhead rate at
practical capacity
=
(15, OOO MHI
Budgeted total overhead at practical capacity
Practlcal capacity in MH
Chapter 12
Budgeted fired overhead
+ BUdgeted variable
overhead at 15'OOO MH
_
Sl , ooo, ooo +
($25o x 15, OOO}
15, OOO MH
$1, 0OO, 00O + $3, 75O, OOO
15, OoO MH
$4, 750, oOO
=
$316. 67
per MH
15, OOO MH
$15, OOO MH
ot'r $25o variable overhead per MH + ($f
TOOO,OOO
+ 15,OOO MHf
=
$25O
per
MH + $66.67
per MH
=
$.?16.67
per MH.
(31 lt the actual overhead ol $?,405,O0O
yyere
underapplied by $1O,OOO,
then
Applied Overhead would have a credlt balance of $3r4O5rOoO
-
Slor0o0,
or 33,395,000. The closing entries ane:
Appl i ed Overhgad.....r.......,.,......................r...o...... 3r395rO0O
Factory Ovgrhgad Control r...,,.........r.,..........
3r395rOOO
Gost of Goods So| d....... ..,...........r........' .. 1or00o
Factory Overhead Control .r.............r........t...
IOrOOO
(41
Account
Bal ance
Work in process
............o...r.r.,r.......
Fi ni shgd goods. . . . . . . . . . . . . . . . . . or. , . . . , . . . . .
Cost of goods
sold
Total
_s8,ooo,oo9
Work i n Process (2.5
% of $l Or0Oo)...........r......r...r.....
Fi ni shed Goods,.,.
Gost of Goods Sold
Factory OYgrhgad GonttD1..............r...' ..........t.....
$ 2oo,ooo
4OO,OOO
7,4OOrOOO
Percentags
of Total
2.5%
5.O%
92.50h
100.ooh
1O, OOO
250
500
9r25O
I
i L
281
C@ter 12 :
I
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i
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I
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I
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b
I
!
i
g
vl
o
E
L
o
' c t
3
]P
g
CL
o
tr
4
!l
o
o,
G
!t
(E
G
tt
ct
tr
o
o
I
g
o
o t o t l
t o t l
tfll
o
o
o-
o
I'
0 0
o
to-
7
o o
o o
n- o-
t t N
F
0
- A
o o
o o
o o
- -
rD ra)
Y Y
o o
E N
N
'aD
I
+ +
6 6
- -
o o
o o
0 0
u ) u )
t-
Y
. Y
o o
t t F
0 0
+ +
6 6
i l i l i l l l
^ l ^ ^ l ^
o l o o l o
o l o o l o
o l o 0 l 0
- t - r t -
o l o N l o
@ l ? ' r l p
e l { a l
I
l r
r
l r
t l
o l o o l o
o l o o l o
o t o o l o
- l - - l -
o l l o o l n
F I r
p
l p
r h l o l
v l v v l v
^ l ^ ^ l -
o l o o l o
8_
18-
t_
18-
o
l o
x
l o
. " 1" *
l -
r l , , l ,
3 1 8 8 1 8
313
3l F
sl :
gl :
G
.o
o
o
c
t!
c
O
' =
=
: :
o i
c :
r r !
3 :
i
L
o
. J l -
( J 0
6 r t
b o
c
o 6
o , c )
o . !
X n
F S
!t
o
o
5
o
o
o.
CL
:t
a
!
:
L
o
:
t r
P- 3
o
$FE.'iiFi5
E
I E F f
l l n i l t l
s
3gl
o 6 0 6
o o
o- o-
o o
F F
o 9
or l
;ll
o
N
n
o
o
N
I
o 6 0 q t
o o
o- ro-
q ' o
F
r h 0
o
F
o
!l
a
th
l l
=tr5l
-Eg
il
P12-3
(f
l
Total cost of Job 50:
Work In process, December I
December costs:
Matorlal8..... a a a a a a a a a r a a a t a a a r a a a a a a a a t a t a a a r a a a a
Chwter t2
3 54,OOO
45,OOO
42|OOO
15,750
(21
(3)
(4)
(s)
(61
Direct labor ($lO2,OOO + 8,5OO| r 3,5OO|
Factory overhead (34.50 r 3,5OO|
Factory overhead costs applied to Job 52 during Decemben
$l . SOx2, O0O=$9, OOO
Total factory overhead costs applied during Decomben
$4. 5Ox8r 5OO=$. ?8r 25O
Actual December factory overhsad incured:
Suppl i es a a t a a a a a a a a a a a a a a a a a a a a a a t a a t a a
$156,750
$ 3,soo
15, 00o
6rOOO
3r5OO
6,OOO
5rOOO
Indirect labor lygftos....,...
Supervisory sa!ari|B3.........r....or..........oo......r......r......r.r.....rr......
Bui l di ng occupanqy cost s. . t . . . . . . . . . . . . . . . . . ' r, . . . ' . . . . r. . . . . . . . . . . . . . . o. . . . . . r
Factory equipment costs...o.....' ...........o.............................r.o...
Ot hgr f act ory cost s. . . r. . . . . . . . . . . r. . . . r. . . . . . . . . . . . . . . . . . r' r. . . . . . . . . . ' . r. . . r. . . . . .
$3e,999
An insignificant
amount of ovep or undsrapplied factory overhead woutd
be treated as a
period
cost.
Agt ual ovgr hgad. . . . r . . . . . r . . . r . . . r . . . . . . r r . . . r . r . . . . r . r r . . . . . r . . . r ' . . . . . . . r . . . . . . t r . .
$39,OOO
38,25O
Applied overhead
Underapplied
overhead
$ 75o
I
I
Clnpts 12
P724,
(11
Actual factory
overtread:
Indlrect materlalg
and supp1ies....................................o.,...,.r..
l ndl rggt 1abor....t....r........r...............r..o......r.o.r........................r.
Employec benefits.....................r...............r,.............r..............
Depreci atrol l
tttt.t............r.....r....r............t........1.............r...r......
Supgrvi si ol l "tttt...o.' ..r.o.r......................1..rrrr.t1..r.......r.....o.r.......
l2l
Ovep or undoriapplled
factory
ovrhead!
Totaf dlrect labor, 2o- r.r.............r........' ......r...........r.....rr......o
Factory oyerhead rato per
direct rabor dofrar o......,,.....,......r.,.
283
$ 18, O0o
53, 0Oo
23, 00O
{ 2, OOO
20. o00
fl?s'qaa
s 7o, 0oo
1600h
st 12, OO0
126. OOO
s 14. 000
$ 72,5OO
8,OOO
11,2OO
Applied factory
ovgrhgad .........o..........o..
Actua I factory oygrh ea d ..........o,.,.r,,.......
Underappti gd
factory overhe3d...........,.o,...........r.,........r.......,.
(31
Amount included in cost of goods
sold for Job 1376:
Begi nni ng ba1ance. . r . . . . . r . . . . . . r r . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . r . . . r . . . . . . . r r .
Matgri afs and l abor
r
20- ..r.Drr.....r.....r......................r.......r....,.
Appf i ed f act ory overhead, 2O-- (S7, OOO x l 6O%)
9_91,?og
(41
Gost assi gned
t o t he work i n process
account at t he end of 2o-z
$ 72,500
$ 43,ooo
7O,OOO
1l 2,ooo
225,OOO
$297,5OO
91, 7O0
s205,8OO
Begi nni ng
bal ance (Job i 376). . . , . . , . , . . . . . o. . . . . . . , . . . . . . r
Cost charged t o work i n process,
2O-:
Materi al g
..........rr...................r...................o..
Lbor a. . aaaaaar - . aaa. . o. a. a. a. a. - aa. . . . . . . . . aa. . . aa. aa. ar r a. . a. . a
Appfied'factory
ovgfi ead .....r,......................
Less cost of Job i376, wtrich was completed
and so| d. . . . . . . r . . . . r . . . . . o- . . - . r . o. . . . . r r r . . . . . . . . . . r . . . . . . r . . .
--
I
2U
Ctlpter 12
P12-5
(11 Predetermined factory overfisad rate based on nonnal capacitln
$29
t 25o
'
- r - r - r - - - r ! ^-
4sroooTF
=
S.65 variable portion
of rate for erpected actual and
normal capaclty
$18, OOO
6o,o00TH
=
=.19
fired portion
ol rate based on norrnal capacity
.-- $.95 total rate based on normal capaclty
(21
Predeterminad
factory overhead rate based on expected actual capacitr
s29t 25o
r - Lr - - ^ r ! - - -
4s,ooo MH
=
$ .65 variabte portion
of rate for erpected actuat and
normal capaclty
$18' OOO
A5^ooo itH
=
.4o
H:,rffon
of rate based on expected actual
9!.Og
total rate based on erpested actual capacity
(31
Amount
of-factory
overhead charged to production
if the company used
the normal
capacity rate:
47,OOO
MH r $.9S
=
$44,650
(4)
Amount
of factory
overhead charged to production
if the company used
the expeeted
actual capacity ratel
47,OO0
MH r $1.05
=
$4g,3SO
(5)
Actual
factory
ovgrhgad .........o..................,..r..r...o....r....,.........
$42,1 oo
Applied
oyerhead (from (3)
normal capacity ratel r......,...........
44.650
Underappligd
overhgad ' ............' ......................rr.o....roo...r....r...
$ 2.4so
(61
Actual
factory
ovgrhgad ....o..' ..r........o.o..........D..r....r................,
$42,1 oo
Applied
overhead (fmm (4f erpected
actuat capacity;i;t..,..
4e.3so
Overappligd
ovgrhgad
...' ..............' ...r.........,.i........r......o,.o..,...r
$(?gA)
I
I
Chapter 12
Pl2-q
(11 Work in Process:
a a a a a t t a a a a a a a Da a t a a a a a
285
$1O, OOO
4O, OOO
l 8,0oo
s68,OOO
s t 7, 5OO
29,050
23,goo
zqpp
4,00o
sOoo
6,5.O0
8,250
7r5OO
9,goo
9r.z,oog
$l l 7,ooo
115, 200
9_1999
Dfrect materialg ....,..
Dlrect 1abor..............
Factory overhead
(2'OOO x $3.601.....
Total .........,..r....
$
g,ooo
161000
7r2OO
Flnished Goods:
Dlreet materials r.....,...
Dltuct labor,........,.......
Factory overhead
(5r0OO
r $3.601 r.....r.
b
\-
(21
s32,2OO Total
Heat, light, and
power
Depreciatlon-fa
ctonr b u ll dlngs
Depreciation-factory
eguipment ...
Miscellaneous
fastory overhead ..
Total actual factory ovgrhgad r.,............................r!.,r..,...
(3)
Agtual ovgrhgad ........r..........................
Appl l ed ovgrhEad r. . . o. . . . . . . . . . . . . . . . . r. o. . . . . r. . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . r. .
Underappl i ed
overhead
i-
2ffi
P12-O
(Concluded)
(41
ChWter 12
COLUMBUS COMPA}|Y
Cogt of Goodg Sold Statsment
For January
Materialc:
Inventory January I
Purchasar
lnventory Janualy 3l
Dlract labor
Applied factory
January man ufacturlng cost..,........,............r
Add work in procesr,
Janualt 1...................
Lgss work in process, January 3l ,........,...,..
Cost of
goods
manufactured
Add finished
goods,
Januaql I
Gost of
goods
availablg for
galc.......,.,.........
Less finishgd
goodq
January 3l ......,......!....
Cost of
goods
sold
gt
normal ...r...r...............
Add underapplled factory overhead .......D..o..
Cost ol
goods
gold
at 8ctua|........................r
$ 2l,ooo
$1O8,OOO
Lggt tlturng to rupplleJ''t!,..........r...........
61050 lO2r95O
Matgrials ava11ab1c................................. $123r95O
9' OOO $114,950
25O,OOO
115, 2OO
$488r15O
s
32r50O
$5l8,6lio
32r20O
-
9080,450
l8,ooo
$so4,lso
o8,ooo
s436,45O
'
-
l rSoo
$438,25O
I
Cluptcr 12
CASES
Dlres{ l.abor
Hours
217601000
hours
2rl 60' 000
287
Factory
Overhead
Gosts
334r5OO,OOO
2grggo,000
$ 4,620,000
- '
Low
s29rgg0,0oo
l or632,000
$13,249,0oo
. -
Sl T, zl orooo
l 3,24g,ooo
s3O,g5g,ooo
- -
cl2-1
(tl
High..aa.......r....................a.1...........r......a,
!ow
Differsnce
Total OOSt ......r...r....rrr' xl r.aarar..l raal .r....l rr..............
Variable cost
$!Z.ZO
per
dlrcct labor hourl.........
Fi rgd el em
gnt
......1.....1.......r.r...r..-.....r...............r.
Total factory
oygrhead,................,...,..........
600,000
hours
Estlmated total fagtory
oyerhead for next yoan
Total
yariable
factory overhead (zr3o0;o00
r $7.70).....,........
Total firgd fagtory ovgrhgad .........,.,.......r....o.r..,..D.......r..r......
varlabfc rate =
${ro2orooo +
30oroo0 hours =
$7.7O
per
dlrect labor hour
High
$34r599r999
2lr252rOOO
$l 3,24g.ooo
-
(21
Utility ol cost behavior Informailon:
(al
EYalustlon
ot
product pricing
decisions-Tha
calculation
of the fac.
tory overhead rate requfred the company
to esUmate the variable
fagtory
overhaad cost. tn short-term-priie-cutting
srtuations,
the
price get
should cover at least the varlable materials,
labor, facto'/
ovarhead,
and nonmanufacturing
cost8. For
the longer
toil, tfr"
total cost asslgned
to the various products
may pnovide
some basis
for price
dlfferentials
among the ltems.
(bl
cost control eYaluation-Tho
calculauon
of the factory
overhead
rate rcqulrsd the company to estimate tho
fired t*b;y-;;rhead
cost and thc varlable lactory overhead eost per
direct labor hour.
The amounts
arc esumatesbt
what ttro cost shoufd or witl be during
t" let!
yoar.
Thc amounts can be used aJtnr uasis roi prsparagon
of a budget
alforvance lor actual activity to
U" compared
to actual
cost incunrd.
Any drftenanco
between ine
ruoget amounts
ano
actral
cogt woufd be I moasuno of the ereaivJness
or ractory ovor-
head
cost contlol.
(c)
Development
of budgets-The
estimates
of fixad factory overhead
cost and the.variable
factoryov_erhead
"o"t p"l'
direct tabor hour aro
usefur
In budget deveropment.
They p.rriith"
"o,np"nito
carbu_
late thc estlmated
factory
overheal
iost roioirerent
activity levels
that arc berng consrdered
as the budget tsteveroped.
t
e l
CHAPTER 13
DISCUSSION QUESTIONS
01},1. Departmental ovefiead ralot aro prcfrrrrd to a
.
sirgle talc becausc they irprovr tre cmlrcl of
orcfiead by deparlnenl headr rosponrbb for
csrtrollablr ovrrtrrad, and lhry incroar lhr
'
accuracy ol product and
job
corting whcn
productr or
iobt
rovo througfi variql prduc-
h9 depsdmonb.
01$2. Deparl mrnl al i zi ng facl ory ovrrhrad i r an
exlension of mclhodt used in ralablishing a
single ralc becausr (a) an application baso
musl be selected and crtimaled; (b) ovefiead
estlnales musl bo rnadc; and (c) adual wer-
head musl be accwnubl.d sd cqnparod with
applied overhead. Thcsc rteps an reguired for
each producing deparimenl, whereas wilh a
single rale, mly tolal factory dale ere neccr-
sary.
Ot3-3. The surn cil departnatal over- or underapglied
ovefiead would be diflerent. Every direct labor
hour *ouH havc thc sarno arnount of applied
overhead whcn a planl-wiJr
ovrfiead rato b
used, assuming lhal thr applicatbn base ir
direcl labor hours. However, tho usc crf depart-
menlal ralec resulls in ditlcrcnt amounts ol
appl i ed ovorhoad, dependi ng on thr l abor
houn in cach dcparlmcnl and tho indivirJual
departmenlal ovcrhead ratos. For cxarnple, a
fi rm wi l h an ovoral l ratc ol $2 woul d have
S20,0@ ol applierJ ovefiead la 10,000 hours;
the seme firm wilh departmcntal rates ol 9l
and $3 lor its twe produchg
dopartnents could
have more or lcss applied orerheed, depcnd-
ing an the breakdown c, labor houn receivhg
lhe S't ard 33 overhead charge.
Thc lotsl cet cf gmdr lold ard tdsl hvcnto-
ry
rtould also be differerd, becausr departmen-
tal rate! coul d cauro di ffrrcnt uni l cogts.
Thereforc, invenlory and cost of gods sold
would be hfluenced by products
s<ld
q
still
qr
hard. This hpuH not be thc case il a blanket
ralc were uced.
Q13{. A prodrrcing
department b dhestly csrcomed
with manufrturhg prodrctr or dc*rg ucrk
qr
vari ous j obr.
A servi ce department renden
servi co to vari our deparl menl s and i g not
directly asrociated
with manuf acturing opcra-
tbns" Tho naturc cl tho nprt dono by a Otp.rf-
ment dclcrmhca
rrhrther I b a rcrvicr or ptr
ducing deprrlmont.
Exemplcr ol producing
depa.,tm.nl!
arr cuilhg, fhirhing, m*hining.
mi r i ng, and r cf i ni ng. Exampl er of scr vi sc
dgpartmontr
arc mainlenancc, medbal, power-
houso, pur chasi ng,
r ecci vi ng, and cost
accoonting
Q13-5. The kinds o{ deparlments ertablishod to con-
trol snd chargo ets depend on (a) simibrity
of a company' s operal i ons, processes,
and
machinery; (b) locatbn of operatbns. process-
es, and machhery; (c) responsibilities lor pro-
duclion and cosls; (d) rclalionship ol opcra.
l i ons l o l l ow of product; and (e) number ol
deparlments or work centers. Thc number of
depar l menl s esl abl i shed depends on l ho
emphasis placed on cosl control and on the
develognenl of overhead rates.
Qt}. Physbally different segrnents of a department
or clst pools for ditferent kjrds ol costs wilhin
a deparlment rnay be driven by activity baser
that are guite dillerenl, lhur callhg for lhc usr
ol subdepartmnF tor taclory overhead accu-
mulalion, application, and analysis for each
physical segmenl or cest pool.
Q1$7. No. A more correcl method is the use of thc
planl assel records lo cmpute deparlmental
depreciation, property tax, and fire hsurancc
charges, provided the recordg arr sufficienlly
detailed lor this pufpos. and thc rvork hvolve'd
is nol too complex. Swh a rnethod wouH give
proper recognition lo lhe various depreciation
rales used and fire insurance premiums paid
because ol varying tlpea of equipmenl
0198. Factors involved in selecting the mosl egui-
table rale lor applyhg factory overhead include
consideralion of the nature of a department's
operalions, the relationship ol overhead ele-
ments to operalians involved, and any clerical
difticuties arising through the use of a particu-
lar rate.
0139. The sever al sl eps f ol l owed i n esl abl i shi ng
deparlmenlal factory overhead rales ar6:
(a) Estimating direct overhoad ol producing
departments and lhe direcl costs of ser-
vice departments.
(b) Preparing a lactory survy for the pur-
pose of distributing indirect departmental
cosb and servics deparlment costs.
(c) Estirnating and allocating indirect deparl-
mental cosls.
(d) Dislribuling service deparlment coste.
(e) Compul i ng deparl mental factory over-
head rates.
Ol$10. The questlcnr
lhgt musl be resolved in allocal-
i ng servi ce deparl ment cosl ! to benefi ti ng
'
departmonts include:
(a) Determhing which departments are bon-
elited.
(b) Selecting an allocatiqr base.
( c) Choosi ng t he al l ocat i on met hod, i . e. ,
direcl, slep, or simultaneous.
Ql 3-11. (a) Di rect-No servi ce departmenl costs are
allocated to other service deparlments.
(b) Step-Service department costs are allo-
288
I
1
I
I
t
b
t:
I
b
b
l
lr
I
Chapter 13
celcd in thr order of th. d.partmonlr
, !.rying tho grcatest number of depart-
mentr and rrcri vi ng tcrvi c. l rom tho
arnallesl numbor, or in thc ordcr of thc
brgesl rorvb. deportmont st allcatod
lo oth.r cervict dcparlmrnts. Onco a
r.rvicr dcpartmenlie cortr havr bcen
rl l ocal od, no cortr of othrr r.i vi co
dcpadmontr an a.lteatrd to it.
(c) Simullanoour-Tho full rcciprcal inter-
relalio'rshipe ol bcnolitr amo.tg servico
d.partrnontr an csrs idcrcd.
Tho rinultanoour method b thr mat accu
ralt lor prduci coclhg ard for iJerdifying tcfal
c6lt tor ogeraling particulnr geryice
depart-
mmtc. Howevcr, thir mrthod b atao thc nrod
difficull to conrput..
01$12. Contrcl of crtrtrhead ia achieved by oornparhg
acl ual r csul l a wi t h pt anned
or est i mat od
rreullr. To makr arrh cornpericcrr, both tlgor
of orrcrhead must br aocumubled and rcport-
od in lho sarn. rE.tnor. Sincr thc ernputdbn
c{ overhead rater with required ovcrhead osti-
rndcs procodec
lho ircun.ncc and accumuh-
lbo of astual o\rcrhcad, th. cqnputatiort prc>
duro dolermho tho accounling lq aslual wcr-
head.
01313. Oepartmental over- or underapplied ovefiead
it determhed by curqrsring astual and appliod
ovcrhced.
01$14. ll a cornpfer product
lhe is produced
in a nqr.
deparlrnentalized
factory or in a single depart-
289
monl of r taelory, onc appnoach lo accuratt
producl cosling is to use muhiple overhead
cosl p@lr and mulliplo bases wilhin a sirgb
rospcrbility c.nlcr.
Nqrmanufacturing businorses (lrch
ar rrtail
ltdcr, fluncbl iuilildilu, irsuranc. cdnps-
niot, oducalionrl i,nttitutirnr,
tnd horpitela)
rhouH b. divu.d into dopartrrrnb to brrdgrt
and control stl. For oranlpb, a rrtail rtoo
mighl br dcprrUn nlalhed as folkrp* a*ninir-
lralirr, occllplrlc)r, ralc prwnclin
and advcr-
tirhg,, purc{rarhg,
relfing, and dclivcry. Ar h
mmulrturhg butirosser,
departmcntal
cootf
afr prorel ed
l o ?ov3nuc-produci ng
ral or
dopadrncnts by urhg a cfrarging or billi.rg ratc.
Departnentalizatinn
ir partic
ub rty n""J""rry
lor hcpitab and cducatioral
hstitutbnr, whbi
must budgel l hei r costr on a deparl menl al
berb fo ccrtrol costs and to chargc adcquatr
rut rccorcring feee,
Govomrnent agencies employ targc numbcn
of people,
and as they spend brgei and targer
surnt ol lax money for varbus seruicer, lax-
payor!
arr domending
more otficient urr of
lhd nrmey. Thercfore, rervices CrouH bo ren-
dered al thc l*ost coct with thc
Arrdcst
cffl.
cioncy. Govcmmcntal activilier stpuU b. hrd.
gnlod and lheir csts controlled on a reaponsi-
bility accounting baeis. The efficioncy of ter-
vicer ahouH bc mcasurcd by ushg stch unit3
of measurement as per capita, per
milo,
q
por
loi1.
01$r 5.
or$16.
\
i
290
Et 3-1
Work In Proceer
EXERCISES
33, 31O
Chagter 13
151130
18, 19O
3,OOO,OO
I , O()0. 00
1,0oo.oo
850. 00
750.0O
1, 8OO. OO
4, 6OO. OO
Applied F8story
Qverhead--Department
A
(1 TtOOO r
$89
J
-.......................,...
j..,...,(
Applled Fac,tory Orerhead-Department B
(1 SIOOO I $l rOl
--f
...............o..r...........rr.......r.r.r.....
'
$l7'8OO
+
2O'OOO = ti89
*$2or2oo
+
2o'ooo =
$l.ol
El3-2
Dcprrtmcntal Ovcrh cad Column r Gencral trdgcr
Crcdlt
(al
trl
Factory Oncrhcrd
Control ....,.,D...-.-F
Accumulltcd
DoprrSulldhg[
Frctory Ovrrtrod
Con trol ...,..--ro....-
Accumuhtrd
Depr.-filechhrry
Fectory Ovcrhcrd
Control ......ro........-
Accrucd Proprr$
Trr Pryrblo--.-
Fectory (hrrrhrld
Control -,....8h-
Accr. Wortorrr
CompmteUon...
Factory Ovrrhod
Controt-...
Accrucd
Powor
Peyebb...,...*..
Frctory
Ovrrhod
Control ..........,F...,.
Accountr
peyebtr
Ftctory
Ovrrhred
Control
360.00 360.00 18O. 0O 1, 800. 00
5OO. OO 4, 60O. OO
Mecfilnlng
Genenl
Factory
Pelntlng Arrccmbly Cogt Pool
l ' 5OO.OOO 600.00 300.00 3,ooo.0o
or00o.o0
aooo.oo 1,2oo.oo 4OO. O0 0, 800. 00
550.00 20i t.33 170.00 74. 67 1, 000. 00
450,00 180. 00 100. 00 850.00
ooo,oo
60.00 90.00 750.oo
(cl
{d)
(e)
tr)
900. 00
1, 8OO. OO
bl
Mstrrbb
2, 3OO. OO
t_
1
E
I
b
Chapter
13
Et3-3
I
( 1)
Budgeted
factory ovorhoad
""' t""
Oepiltment
Sl distribuUon
(g o/3OO,
2l o/3o01 ..-u..D-.....""""
bepartment
52 distrlbuUon -
(64/8Ot I 6180l """"""""o"t"""""r
Budgeted
factory
overhead
"D"o"t'
Machl ne
hoUrl B tt""""t"""o""""' ro'
Prgdetgrmlned
rstc ........' r""""o"'
Diroct lsbor houfE' ."""""' r"' o"""'
Prgdgtormlned
rate ......ro,o"""""D'
Job,437 ovorhead cost:
Department
Pl
( 3 x
$6. 5O) . . . . . . . . . . " " " " t " " t " " t '
Department
P2
(2 x $4. 48)"""""""' t """"
"""'
P2
$346, O0O
$368, OOO
3O, OOO
7O, OOO
40,0oo
$416, O00
+ 64. 000
---_$6.5q
I O,OOO
$aae,ooo
-
l 0q0m
$4. 48
$19. 50
8. 96
$?glg
291
s2
$I OO, OOO
SSO, OOO
(l OO, OOO)
(5O,O0O)
sl
P1
I
S
(21 Plantwide
predetermined factory overhead rate:
, ,T1lo1o. ' .
=
$6.40 Per
DLH
i 35,OOO DLH
Job 437 ovgr head cost
( 2 x
$4. 48)
"""""""""""""""""""""
Sl 9' 2O
cGA. Ganada( adapt ed} ' Hepr i nt wi t hper mi ssi on.
292
E134
(11
(21
I
$4O, OOO
+$25' OOO
+ $361' 956 +$420' OOO $846, 956
Chaptor t3
=
s. 83
Budgeted factory
overhead r.........rr.,..
Distribution of:
Bui l di ng and
gnounds .........!..
Factory
admi ni strati on..
Total
Base:
Machi ne hours
Di rect l abor
ho ur s, . . . . . . . . . . . . . . ,
Rat e. . . . . . . . . . . . . . . . o. . . . . , r
452rgOO + 567125O 1r O19, 25O
Building Factory
and Admi n-
Total Machining Assembly Groundg istration
$846, 956 5361, 956 $42O, OOO S4O, OOO 325, OOO
18,OOO 2O,OOO (4OrOOOl ' 2,OOO
13, 2OO 13r 8OO
l3zgg)"
$846. 956 $393. 156 s453, 800
:
195, 60O
567r25O
$2.01 $,80
t-
gl2o,
1ol2o, ltZo to Machining, Assembly, and Factory Administration,
respectively.
n
44l gor 46190 to Machi ni ng and Assembl y, respecti vety.
CGA-Canada (adaptedf. Reprint with permission.
E13- 5
Mai n- Admi n-
Total Gutting Assembly tonanco istration
over head budget . .
Si , 29o, ooo S52O, OOO $42o, ooo S2OO, O0O Si 5o, oo0
Distribution
of:
Mai ntenance
12113O,9/g0l ,.. 14O,OOO 60,000 (2oO,OOOl
Administration
l l sl zs, l ol zsl .
9o,ooo 60,000 (15o,oool
overhead
budset..
gl,ZrrJAA S*ggg
fr_4JlQg
:
:
Machi ne
hour s. . . . . .
2STOOO
2O, OO0
overhead
rat e. . . . . . .
3o, oo $27. oo
CGA-Canada
(adapted). Repri nt wi th permi ssi on.
--1
dlaptcr 13
'
E13- C'
293
Produci ng Servi ce
Departments Departments
Product
Total Mi xi ng Fi ni shi ng Cafeteri a Desi gn
$364, 000 $1O4, O0O $2OO, OOO sl O, OOO S5O, OOO
3,250 6,500
(1O,O0O) 25O
16,750 33,500 (50,250)
Budgeted factory
overhead before
distribution of
sorvict
mentr
depart-
DistribuUon of
' sorviee
department
costg:
Cafeteri a
($1o,000
-r
2OO employees
=
$5O) ....' .' ......' ....
P;oduct Design
G!SO'250
+ 3OO
product orderc
=
$167.50| ..,,.,.....
E
.
g364. 000
S124. OOO
S24O, OOO
Bases: machi ne hours
4O' OOO
6OTOOO
Rates r............,. $3.1O $4.OO
GGA-Ganada
(adapted). Repri nt wi th permi ssi on.
E13- 7
(f
)
Produci ng Servi ce
Departnients Departments
Total Pi P2 Si 52
Budgeted overhead ...
$5s2,75o $2o8,ooo $300,000 $1o,ooo S34r750
Distribution of:
Department Sl ....
Department S2....
4, 500 5, 250 ( l O, OOOr 250
20, 000 15, 000
Total fastory overhead ,$EEZJSO
$Z3ZO_q
S3?999
'
t8O/4OO to Pi ,27O|4OO to P2, 10/4OO to 52
i'
{,OOO/7,OOO to Pl, 3,OOO lT
.OOO
to P2
Pl :
$232, 500 + 4, OOO machi ne hour s
=
$58. { 25 r at e per
machi ne hour
P2: 3320, 250 + 10, 000 di r ect l abor hour s =
532. 025 r at e per di r ect l abor hour
(35,OOolfi
Elg-l
(Conctuded)
l 2l
pl ant-wl de rate: $544r75O
r- l 5rOOO di rect l abor hours = 336.317
pl ant-
wide
rato Por
direct labor hour
(31 Individual fobs
lnal
rsquiro relauvely different amounts of time in each
departmenl
ll Pl is machine-intehsive and P2 is labor-intensive, then
ssparate
departmental
rates would
provide a-fairer allocation of costs to
i obs.
CGA-Canada
(adapted). Reprint with permission.
El 3- 8
( 1)
Mai n-
Total tenance Personnel Machi ni ng Assembl y
Budgeted factorY
overhead....,.......... $27O,OOO s3OrOOO sl 5,OOO SI5O' OOO $75' OOO
Allocate Maintensnce
(S3O' OOO + 4OTOOO
sq. ft. =
$75
Per
sq. ft.) r..!......o..
Allocate Personnel
(S18' OOO + 12O
empl oyees =
$15O
per empl oyee| .
(30,0001 3,ooo 14,250 12,750
( l B, ooo) 6, 000 12, OOO
$27O,OP
Di vi ded by machi ne
hours ..............
Di vi ded by di rect l abor
hourS. . . r. r. . . ' . . . .
Factory overhead rate
(21 Job No, 37522
Materials
Di rect l abor
Factory
overhead:
1o machi ne hours O $7.5o.....................
75
11 di rect l abor hours O 36.00
Chapter t3
s170, 250 $99, 750
,
22,700
16, 625
s7.50 s6.oo
Machi ni ng Assembl y Total
s 6 0 s 7 $ o z
24 99 123
66 141
sl se s172 $331
: :
CGA-63nada (adapted). Repri nt wi th
permi ssi on.
lL
-
Chapter 13
s
Er 3- g'
(21
Dcpartmcnt
_
oycr|t eed
!
bcforr db-
295
(11
Equati on 1: E
=
$2O,0OO +.2OF
Equati on 2: F =
$2O' OOO +.2OE
Equat i on 3: G
=
$1O, OOO +. 3OE + . i OF
SubstituUng Equatlon 2|nto EquaUon l:
E
=
$2OrOOO +.2.O($2O,OOO + .2OE)
E
=
$2orooo + $4,ooo + .o4E
.96E
=
$24rO0O
E
=
$25'00O
SubstituUng E =
$25,OOO into Equation 2:
F
=
$2OIOOO +.2O($25,OOOI
F
=
$25' 0O0
Substi tuti ng E
=
$25,OOO and F
=
$25,OOO i nto Equati on 3:
G
=
$1O, 0OO +. 30($25, OOOI +. 1o($25, o0o1
G =
$2O,OOO
ProduclnE
Dcptrtmcntt
Mrrlcgng
licrvlcc Dcpartrncntr
Dcprrt- Ocncnl
S T m c n t O f f l c o E F O T o t a l
trlbuUon
of rcMcr
>
dcpertmrntt
iEoroOO igo,Ooo
Dlrtrlbutbn
ol!
Dcprrt-
nrnt E.....
Dcprrt-
12, 50O
mlnt F-...,
7r5OO 1O,OOO
Dcprrt-
ment O.....
g,o0o
O,ooo i4,ooo iz,ooo
Total.....
ST5,SOo 311g,5oo S4,ooo S2,ooo
320, 000 t 20, 000 $1o, ooo 32oo, ooo
(25,O0O)
5,OOO 7,5OO
5,000 (25,oo0)
2,5oo
{2O,OO0}
s2oo,ooo
Chapter 13 :
-
296
il
9rr
$ll
A
l o o
l o o
u-|
o- o-
t o o
l q' c ,
r a Y
t s
gt
*
l3 3ll
ltBiF'tr
o o t l
o o l l
o o l l
l l
o o t l
Nr r
l l
3 l l
o o to
I toi l
o o N t N i l
O O I
l r l l
- t d l
N O @ t O l t
= r t r l l 0l l
F
t $l l
to
tl
t\ ll
o t l
ot l
ol l
F t l
gl l l
o o l o l
o o F l
o o c0
l
- l
n l o o l
N - l
I
i o o o
l o o o
r ul o-
o_ o-
l | o
Qo co
t ?
t g +
r o o A
l o o o
^ 1 9 0 0
- l d
d u t
l l o l O
l g +
Y
o
tr
o
tr
L
TE
CL
o
o
o
o
.E
o
o
fl
o
E
o
E
t-
(g
CL
qt
o
o
.9
t
o
o
o ' o o t o u
o o
( ot ( oi l
o \ t cvl l r . l l
- l - { l
F ( I l
- l O l l
rstl
l o
l o
' 13
l F
I g ,
l o
l o
- l Q
- l d
l F
t g +
o
E
O E
5 f
F 3
a 3
o o o
o o o
o- q q
C\|
6
qu
ot l
8il
a l l
ifil
o o
o o
o ( o
q,
@
"l
l o
l o
o l o - - t o
l N
@
o I
8Jl
!t
ll
- l l
tn.tl
t o o
l o o
" 13
s
l F
, 9,
El'lF
t'l"l
F
q
l o r o r l
= l o l o l l
f l 3
i o r l
r r o
l al l
' S
a
i 8l l
q
;gsir:*
j
EEES$$Fg
E
i EEEgF; s;
5 3 , . o
o u r
E
{ O s
I
(1'
ul
t 8i l
I
oJl
lsll
tr
El;
P
? -
6 9
. - F
! b
a + ,
5 h
'tr
o.
'li
o
3 Ei 3
" i o
tlt
o o o l o t l
o o l ; l \ i l |
@- q 0_16l l l
r r Nl o l l
t g ' i l
t { f ^t l
Chapter 13
Et 3- 12
Lot Sl =
$2O,OOO +.2OS2
52
-
317, 600 +. 1OSl
SubsUtutl ng: Sl
=
$2O' OOO + .2O ($i Z,600
+ .1OSt)
Solving: Sl
=
$2O,OOO +
$3,52O + .O2Sl
.9gSl =
$23,520
Si =
$24,OOO
SubsUtuti ng:
52 =
$17,600 + .1O ($2C,OOO;
=
$17, 600 + $2, 4OO
=
$2o,ooo
Total Pl overhead =
$94,OOO +.4O (Stl + .5O (S2l
=
$94r00O +,40 ($Z0,OOO)
+.5O (S2O,OOO}
=
$94r0OO +
$9,6OO + $1O,OOO
=
$113, 600
Ef 3- 13
(11
The dual predetermi ned
overhead rates are:
S4OO,OOO
l O, OOO
ffi
=
$25
per di rect l abor hour
$3OO, 000
and
=
S75
per
machi ne hour
Job f 345
4,OOO machi ne hours
297
l2l
$1, OOO
300
1. 500
s2. BOO
2ln
E13- t 4
I
(11 The dual predetermined
overhead rates are:
$9OO,0OO
Chagter t3
(21
3,600 machi ne hours
s6oo,0oo
30O tonr
=
$250
per machi ne hour
and
=
$2' 00O
per t on
Job f l o3
Parts and matsrials
Applied overhead:
7Or $250
=
$17, 5OO
4
x
$2r OOO
=
9r 0OO . . r . . . . . . . . . . . . . . . . . . . . r . r . . . . r . . .
TOt al . . . . . . . . r . . . . . . . r . . . . . r . . aa. . r . . . aaaaaa. r a. . . r r . . . . . . . . r . r . . . . . . . . . r .
$22,OOO
25. 500
$47. 500
b
i
L
I
I
L
Chapter t3
Pl 3- l
(r)
Overhead
before
distribution
ot
sorvicrg
depart-
mOntS
....r............r
DistrlbuUon
of
Mai ntenanco..,...,..
Gentl
Factory..r.....
Total factory
OVefhgad.r.,........
Machi ne
houtg..,..,
Direct
labor
hour:.
Overhead
ratos:
per
machi ne
hr..,
per
direct
l abor
hr . . . , . . , . . . .
PROBLEMS
Producing
Total
cringl1g
s-ooutilg
Sorvics
Departments
-_
f,lain-
Gener
tenance
Fector
DigtrlbuUon
of Sorulcc
Department
Overhead
Using the Dirsst
Method
$68l ,ooo
$l 7s,ooo
$23o,ooo
$76,000
Szoo,o
f 2,667
83,333
(76,000I'
133,333
06,667
___
s32t,ooo
$soo,ooo
+
4' OOO
l3gg,o
s681, O0o
-
$ 80.25
-r
3OTOOO
$ 7 2
-
i19:{t,98.o
tg Grind-ins,
eoo/l,o8o
to smoothins
6/9 to Grinding,
3/9 t; Smootiiing
b
go
P13-l
(Conti nued)'
l2l
First, the simultaneous equations ane solved:
Let M
=$76, 000+( l / l Ol G
G
=
$2OO,OOO +
l72Oll,8OO)M
Substi tuti ng; M
=
$76,00o +.1($Zoo,ooo +.4oM)
Solving: M
=,
$76,0OO +
$2O,OOO + .04M
.96M
=
$96rO0O
M
=
$1OO, O0O
Substi tuti ng: G
=
$2OO,O0O +.4O ($1OO,OOO1
=
$2OO,OOO +
$4O,OOO
=
$24OIO0O
Distribution of Service Department Overhead
Usi ng the Si mul taneous Method
Chaoter t3
Produci ng Service
Departments Departments
Mai n- General
Total Grinding Smoothing tenance Factory
Overhead before
di stri buti on of
servi ce depart-
ment s
$681, 000 S175, OOO S230, OOO S 76, 000 $200, 0OO
Di stri buti on of
Mai nt enance. . . . . . . . .
Gen' l Factory
1O, OOO 5O, OOO ( 1OO, OOO) 4O, OOO
: -
144, 000 72rOOO 24, OOO (24O, OOO)
--
Total factory
overhead
S681,OOO $S29,OOO S352,OOO
Machi ne hour s. . . . . ,
Di rect l abor hours
Overhead rates:
per
machi ne hr...
per
direct
l abor hr . . . . . . . . . . .
+ 4, OOO
+ 3O, O0O
s 82.25
s 11. 73
180/1
' 8OO to Gri ndi ng, 9OO/1,8OO to Smoothi ng, and 72011
,8OO
to General
.*
Factory
6/ 1O t o Gr i ndi ng, 3/ 1O t o Smoot hi ng, and 1/ 1O t o Mai nt enance
Chagter 13
JOi
Pl 3- l ( Concl uded)
(3)
Distribution ot Service Department
Overhead
Usi ng the Step Method
Producing
Service
Departments
Departments
Mai n- General
Total qin!!ry Sr*!!gg tenance Factory
Overhead before
distribution of
service depart-
ments ..r.......,...r.,.
$6911000 $175rooo $23orOOO 576,000
S2oorooo
Distribution of:
Mai ntenance.....,
Gen' l Factory.....
153,600 76,800
s 84.05
s 11. 49
7, 600 38, OOO (76, 000)
3O, 4OO'
(23O, 4OO)"
Total factory
overhead.,........,.
$691,ooo s336,2oo s344,gOO
Machi ne hours. . . . . .
Direct labor hours
Overhead rates:
per
machi ne hr..,
per
direct
l abor hr. . . . . . . . . , .
+ 4r 0OO
+ 3O,OOO
'
18o17' 8oo
to Gri ndi ng, 9oo/1,Boo to smoothi ng,
and z2otl ,Boo to Generat
Factory
' *6/9
to Gri ndi ng, 3/9 to Smoothi ng
w2
P13-2
(1)
Predetermined lactory
OVgfhgad ft1t9...................""' .
Actual activity base amount...
Applied tactory overhead ...,...
(21
s25,920
s92,oo9
Chaptor l3
Fi ni shi ng
Department
$ 1. 60/ DL$
ry
g!_os,60o
Cutting
Department
Assembly
Department
s 2.40lMH
x 10, 800 MH
s s.oo/DLH
r 12, 4OO DLH
/Actual
overhead for
\
first six months
f /Proiected
overhead for
1
/
-
|. second sir months
)
Revised factory
overhead rate
/Actual
activity base
\ . /Proiected
activity base
\
(
for fi rst si r months
/
-
\
for second si x months
/
Cutti ng Department (machi ne hours):
szSro-o-9 + $-z?t'1oo
-
ry-
-
s2.3o
per machine hour
1O, 8OO + 9, 2OO 2O, OOO
Assembl y Department (di rect l abor hours):
$56, 80O + S57, 5O0
_
$l 14, 3C-
12, 4oo + rg, of o:
'
f f i
-
s4' 5o
per di rect l abor hour
Fi ni shi ng Depaftment (di rect l abor dol l ars):
s98
' 5oo
+ $96
' 5oo
-
$1 95
' 0o0
-
sl . 5o
per
di rect l abor dol l ar
566, 0OO +
$64, 000 S13O, O0O
Chapter 13
Pl 3-2 (Concl udedf
(3)
The applied overhead accounts should be adjusted by the differsnce in
the factory overhead rates (revised
rate less original rate) ilmes the actu-
al activity for the first sir monthg.
GuttingDelartment (9?.3o-$2.4O)
r tO,BOOl
$
(i,O8Ol
Assembly_Department (f.!o -
$s.oo)
x t z,looi
is,zooi
Finlshing Department ($|.SO:-$1,60)
r $gO,ooOi
iO,oooi
'
Dgct8ase in applied factory overhead..............,......... gFa*t,
The applied overhead adiustment is altocated to the inventory
accounts
and cost of goods
sold on the basis of the unadjusted
overhead
compo-
nent i n each accounL
Workl n Procgss. . . . . . ' r. . . r. . ' . . . . . . . . , . . . . . . . . . , . . o, . . . , . . . . . . . . D. . .
$ t 2rOOO
Fi ni shgd Good8.......r' .r..............r.oo..' ..r...........o.......ro
4BTOOO
Gost of Goods So1d. . . . . . . . r. . . . . . . . . . . . r. . . . . . . . . . , . . . . . . . r. . . o. . . o.
f BO; OOO
50h
20
75
Applied
Factory ovgrhgad-cutting
..r......,........,..,.r
fnntieO
Factory
OverheachAssembty...,,......,.......,.
Appf
ig9
Factory Overh ead-Finishin g r..........,...,..,..
Work In Process Inventory (Sf
grggO
x.05).....,
Fi ni shed
Goods ($l 3rgg0
r .20| ...............j .,.,,..
Cost of Goods Sotd
fi ti 3rggo r .ZS)........,......r.
$24O,OOO
looo/o
Debit
Credit
1, 09o
6r2OO
616OO
694
21776
l 0, 4l o
n4
P13-3
Chapter t3
Dlrcct departrncntrl
overherd:
3u
pc rvlr lotl'....-.....'..
tndlrcct bbor **
Indlrcct ruppllrl.*
Labor frlngc bcncfltr
Equipmcnt
deprccleUon......--
Property ter'
.
deprecbtlon ol
bul l dl ngr, ctc..-....
Total ..........' .......6,..-..o
ProraUon of llght end
pOWCf ...-.......n.' -.--.
Dlrtrlbutlon of rcMcr
departmenta:
General Factory Cort
Pool ..'........-......F..
Sto rcroo m ...,...ro-F....
Repaln end Mebi-
tenancc...
Total--produclng
departmontr .............
Maci l nc houn.....-.......
Ovcrhead ratc pcr
mech lnc hr.....,....,-.,,
' General
Factory Gost Pool can be distributed either on the basis of S.8O
per
squaro loot ($67p2OO + 84' OOO sq, ftl or on the basis of the following
pencent-
ages: 25ohr 3goh,35oh, 4oh, and 6oh tor the first five departments. The
per-
centages aro determi ned by di vi di ng the squans footage i n each department
by the total sguano footage.
-
Storeroom can be distributed either on the basis of $.07
per requisition
($18,900 +
2TO' OOO requi si ti ons) or on the basi s of the tol l owi ng
percent'
sgos: 4gohr 30ohr TSo1r' and 9% for the three
producing and one service
departments.
The
percontages aro determi ned by di vi di ng the number of
requi si ti ons i n each department by the total rsqui si ti ons.
*Repai r s
and mai nt enance can bs di st r i but ed ei t her on t ho basi s of 31. 88
per
mai nt enance hour
( S28' 2OO
+
l 5' OOO hour sl or on t he basi s of per cent ages:
32ohr Zgoh, and 4Ooh to the throe
produci ng departments. The percentages
ar e det er mi ned by di vi di ng t he mai nt enance hour s i n each depar t ment by t he
total mai ntenanco hours'
Sorvlcc Dcpertrncntr Produclng Departmentr
Gcnarel
Frctory
Cort Pool
:!8,000
7 j2OO
3r6tt1
700
1r74O
324,000
18, 00o
I , O7O
2, 100
1 1 1 0 0
31{,ooo
8r0oo
5/a3O
10,14!t
10, 000
37r2OO
orlgl
rraoo
640
500
32or3OO
5r.4OO
'lr85O
ap72
!rooo
316rooo
G,0oo
5,OOO
0,349
8, 000
367,200
167,2OOl'
31O, 212
2,688
32i2,467
3{5,482
16B00
81894
'47,271
20, 160
51670
35O,38lt
23,52O
2,83!t
11,2,O
!
CluptxtS
Pt3-4
I
(tt
Department costs,.....................
Allocation ol service department
costr:
Repalr
ll
19, 8191.......,....,,,,..
Power
F
18, 7 l8l ......'.r.r.....r
Total ovgrhgad Gost....,,r.....,......
Dirsct labor hour:
Overhead rate per
direct labor
h O Ur . a. . . a. aa aaor . . r . r a r l a ar r a a. a. o. . . . . .
(21
Algebralc
calcutations:
R
=
Repair Department
P
=
Power Department
Substituting:
Sofvlng:
SubsUtuUng:
Departments
Repai r
s48,OOO
Power
Mol di ng Assembl y
s2o4,ooo s32o,o0o
5,333
218.750
s42soa3
4O, OOO
$r o. 70
42,667
3l r 25O
s3s3,e1Z
l 60, o0o
s2.46
R
=
$48, O0O+. 2OP
P
=
$2501000 +. 10R
R
=
$48, 000 +. 2O ( SZ5O, OOO
+. 1OR)
R
=
948,000 + $5O,O00 + .O2R
.98R =
$98rOO0
R
=
$IOO,OOO
|
=
$250, 000 +. i O ( S1OO, OOOI
P
=
$260,000
Departments
Heparr
power
Mol di ng Assembl v
s ;a,"ro
sffio
$zo4poo
s3zo^ooo
Depa rtment
costs...............,......
Allocation
of seruice department
costs:
Repai r
l l l l 0,
i t7O,
g/l O1.....
Power
l2y'lO, 7 l7O, l/l 0i ..,,.
Total overhead
cbst,...,.......r......
Dirgct
labor hours .......,,.......r.,,.
Overhead
rate per
direct tabor hour
(1O0,ooo)
_92,ggg
1O, OOO
(26O,OO0l
l O, OOO
182, OOO
$396. OOO
4O, OOO
s9. 90
SOTOOO
28,OOO
$426,oo9
1O0, 000
s2.68
(3)
Altocating
service department
costs to producing
departments
onty
ignoras
any service rendered by one ""fuil" department
to another,
whl l e the si mul taneous
method t""ogni ."s
servi ce departments'
support
to one another through the use of si mul taneous
equati ons.
The l atter
method i s more compl ete and shoutd
l ead to resul ts of greater
use to
managemenL
fis
s25O,OOO
(48,000)
(25O,OOO)
ffi
Pl 3-5
(rt
Distribution of Sl (4/9' 5/91.'..
Distribution of 32lUAr 4l8l....
Total Pl P2 Si 52
Chagter 13
Before distributioJt........,.,...... $65,000 $25,ooo $23r8OO $ TrZOO S9TOOO
3r2OO 4,OOO
ftr2ool
3'OOO 6,000
tzl
Aftgr distributioJl-,.........o........ $65.ooo 53i.20o
$33r8OO
Total Pt P2 Sl 32
Before diStributiott................. $65' 000 $25' OOO $23r8OO $7r2OO $9rOOO
DistribuUon of 52 (21O, 4l70l
4/ 1 Ol . . . . . . r. . . . . r. . . . . . . . ro. . . r. . . . . r. t
Distribution of Sl (4/9, 5/91,...
l,8oo 3,ooo 3rooo (9,oool
4,8OO O,OOO (lO,8OOl
Af t erdi st ri but i ol t . , . . . . . , , . . o. r. . . o. .
S65. ooo $3{. 6oo
$t gr{OO
(31 Let
3l
=
33:333 l:133?
Substi tuti ng: Si
=
37,200 +.40($9r0OO +,10Sl l
Sol vi ng: .9651
=
$i O,8OO
Sl
=
$11r 25O
Subst i t ut i ng: 52
=
S9, OOO +. 10( S11, 250)
52
=
$10, 125
Total Pl P2 Sl 52
Before distributioJt.................
$65,000 $2s,ooo $231800 $7r2oo I 9rooo
Di st ri buUon of Sl (4/ t O,
i l l O
I /1 O1 t..........r..................r..r.
Di stri buti on
of 32 (U7Or 4l 7O,
4,500 5,625 (l l ,25ol 11125
411ol 2p25 4,O5O 4, O5O
( l O, t 25)
: -
Afterdi stri buti ol l ..........,r...,,.,.
$65.ooo i Cr.szs
$33r{75
: :
(9,OOOl
\
Chapter 13
Pl 3-O
(11 Let r= Powerhouse;
y=
Perconnel ; z= General Factory
Equati on l : r = $ 1 6 1 0 0 0 + . f o y + . 2 0 2
x
-
.f oy
-
.2o2
=
$161000
Equat i on2:
y =
$29r 5oo +. 1or +. 152
- . l o r + y - . 1 5 2 = $ 2 9 r 5 o o
Equation3: z
=
$42rOoO + .2ox + .OSy
- . 2Ot - . Osy+z =
30aOOO
Mufti pl y Equati on 2by 1O and add to EquaUon l :
r - . l O . y - . 2 O 2 = $ 1 6 1 0 0 O
-x
+ 1o.o0y
-
1.502
=
295r0OO
9 . 9 Oy - l . 7 Oz = S3 t l r OOO
Mul ti pl y Equati on 3 by 5 and add to EquaUon l :
r
-
.l $y
-
.2Oz
=
$ 16,000
-x -.25y
+ 5.Oot
=
2l orooo
-
.35y + 4.802
=
S228' OOO
Then eliminate
y between the resulting equations:
9 . 9 0 y - 1 . 7 0 2 = $ 3 l t r OOO
- . 3 5 y + 4 . 8 O2 = $ 2 2 8 ' OOO
(.351 (9.9Oy) (.35)(l.7oz) = (.35X$3tl,OOOl
(9.90X-,35y1 + (9,90)(4.802) = (9.90)GB226,Oo0l
3. 465y- . 5952
=
$ 1O8, 85O
-3.465y
+ 47.5202
=
s2r237,40o
46.9252
=
$2,346
1250
z
=
g
5O,OOO
From the last equation, z =
$5O,oOo;
putting
z =
$SOrooO in any one of the
eguations in which r has been eliminated enables one to find
f
9, 9Oy - 7. 7O2
=$3l l , O0O
9.9Oy
-
l .7O ($5O,OOO) =
$31i ,OOO
9-9OY =
$398' OOO
y =
$
4O,OOO
Then putting y =
$4O' 0OO and z =
$5O,OOO In any one of the original egua-
ti ons enabl es one to fi nd r
r - . l o y
- . 2 O2
= $ 1 O, OOO
x
-
.i O($4O,OOO}
-
.2O($5O,OOO} =
$16,000
x
=
$3O,OOO
Hence the sol uti on i s:
I
=
$SOI OOO
Y
=
$40' ooo
z
=
S5OTOOO
g7
w
Pf3-6 (Concfuded)
(2t
Mhtng
Rcftnlng
^-:-
irzcsrooo
t 0o,ooo
Powrn
Ftnlattng
ilil:
Porrm-
ocncnf
t r d" ooof f i ##
Chagter
t3
!,ggo
(3o,ooo,
3,OOO
:':::
'-i"-9;'dffi
i:333 2rooo
Prlmaty
@!t........
DbtrfbuUon:
Powcrhouro.....
Pcltonncl
...._.
Ocncref
Fectory
Totel
-_
$g2,goo
3482^3OO
-
T'SOO
lfrooo
12|SOO
- -
Ttoo
t2rOOO
l O, OOO
srs.,ooo
fr.gg 3*r"6
torooo
ro,ooo
r
-vtvYv'
z.t;,go
#
' -' -vv
?' 5oo
tso@l
P73-7
(1)
Annuaf
normat
cost
center
overhead
ratesl
(21
Departmont
1O:
Gost
Centgr
!!-f
...............o..,.......
cost
center
I o-2
;:;::::::::........
Department
2O:
lost
Centgr
?9-!
.....r................r...
Gost
center
2o-2::::::::::.::::::.:.......
Factory
overhead
applied
to:
Department
1O:
.
Gost
Center
l9_1,
7,220
machine
hours
x
$e.eO cost
center
to-2:
tboo
rnlinin"
hours
x $l.oo
Department
20:
Cost
Center
2o-1:
?r??O
l abor
hours
r 31.15 cost
Center
20_22
t;6s;
ffi; t'ours
r S1.25
Jolat
Fixed
Variabte
Rato
Rate
Rate
s2.40
3.OO
$l . f s
7. 25
I .go
f . f 5
s .32
.30
$f . 50
1. 95
$ .83
.95
(3)
Cost
enters Depts.
=
S2,928
=
6100O
Sg,g2g
=
$2rsgz.so
=
2,O62.5O
$4,650
Dept.
2O
s4r005.oo
4,65O.oo
-
$
(ocs.oor
- - . - - ,
3-T:lfactory
overhead........,.....
qe&lq
r'actory
ovgrh ga
d "fi
;;:;!!'!'t""'t""""'.r....
$9, 430. oo
Underapplied
(overapptied)
...r..,._..,....:.:_:.;
ffi
Chapter 13
&
Pt3-8
! i
1
(11
The dual prodetermined
overhead ratas art:
- $4oorooo
_ . ra! ___ r! -
lorooo
ffi
=
$25
Par
direct tabor hour
#
=
S3o
Per machi nehour
(21
Job 1564
(31
Direct rnateriaf ......
.......................
$2rOOO
l i regtl abor(3or$101............r.................r,......,...
--t;;;
Applied
overhead:
3Or $25 =
$75O
1O X $3O
=
3OO...........,.,......r............,.......
IIOSO
?al al
t l ' Lt 1 "r """""' r ". . . . . t . ar . . . . . . r . . . r . . . . oa. . . . r . . . r . . . . . . . . . . . . . . . . .
$3r 3so
Job l6il2
:i::l :i:gTl.::::.:........r...,...............................
S2TOOO
Dirgct fabor (3O
x
$i 01.......r,o.r..r.r..
300
Appfied
overhead:
3Or S25 =
$ ZSO
60 r
$3o
=
l r8oo .....................r..r....
zrsso
Total .........,.r.......,;;.....,...............r.......
$4rg5o
(41 (a)
A single predetermined
overhead
rate based on direct tabor hours would
be:
S4OO,O00 +
$600,00O
l 6,000
Oi rCAl aOor
trours
=
362.50 per
di rect l abor hour
310
Chapter 13
Pl3-8
(Conctudedf
(bl
Job 1564
Dirsct materlal
Dirgct labor (3O r $1 O1................'.........."o.D...................t.........
Applied overhgad (3O r $62.501....j..................r...........oo.'........
Total
Job f6il2
$2,OOO
300
1, 875
9!' 1?9
(cl
Direct materlal
Dirgct labor (3O r $l O1..............r......o.........................' ....' ........
Applied ovgrhgad (3O r $82.501............' ....................,...D.o......r
Total
$2,OOO
300
1, 975
(51
$4,175
The competitive lmpllcatlons of a single overhead rate are that on
jobs
requiring much labor and littfe machine time (e,9., Job l5gdl, Mn will
compute lts cosB at too high a level and will thsrefore quote
too high a
price to the customer. These
iobs
will probably be lost to competitors
who know their costs betten on
fobs
requlring much machine time and
little labor (o.9,,
Job 16321, MTI will calcufate its costs at too fow a level
and will, therafore, quote
too low a price, These
jobs
will probably be
won by MTI because of the low price,
but will generate less profit than
erpected, or perhaps
eygn a loss.
CItWter 13
c13- l
3 1 1
( 1)
CASES
Empco Inc. is currently using a plant-wide
overhead rate that is apptied
on ths basis of direst labor dollats. In general,
a ptant-wide
manufactur-
ing overhead rate is acceptable only if a similar relationship
between
overhead and direct labor erists in all departments,
or the company man-
ufacturcs produc-ts which receive proportional
services from each
-
department"
'
In most casesr departmental overhead rates are preferabte
to ptant-
wide overhead rates because plant-wide
overhead rates do not provide:
t
a framework for reviewing overhead costs on a departmental
basis,
identifying departmental cost overruns, or taking corrective action
to improve departmental cost control.
'
sufficient information about product profitability,
thus, increasing
the difficulties associated with management decision-making.
Because Empco uses a
plant-wide
overhead rate applied on the basis of
direct labor dollars, the etimination of direct tabor in the Driiling
Department through the introduction
of robots may appear to reduce the
overhead cost ol the Drilling Department to zeno. However, this change
will not reduce fired manufacturing
expenses such as depreciation, p-lant
superuision, etc. In reality, the use of robots is likely to increase fired
expenses because of i ncreased depreci ati on
expense. Under Empco' s
currcnt method of allocating overhead costs, these costs wi1 merely be
absorbed by the remai ni ng departments.
(a)
In order to improve the allocation of overhead costs in the Gutting
and Gri ndi ng Departments, Empco shoul d:
o
establish separate overhead accounts and rates for each of
these departments;
'
sel ect an appl i cati on basi s for each of these departments that
best reflects the relationship
of the departmental activity to
the overhead costs i ncurred (e.g.,
di rect l abor hours, machi ne
hours, etc.);
'
identify, if possible,
fixed and variable overhead costs and
establish fired and variable overhead rates.
(bl
In order to accommodate the automati on
of the Dri tti ng Department
i n i ts overhead accounti ng
system, Empco shoutd:
o
establish separate overhead accounts
and rates for the
Drilling Department;
'
identify' if possible,
fixed and variabte overhead costs and
establish fixed and variable
overhead
rates;
'
appl y overhead costs to the Dri tl i ng
Department
on the basi s
of robot or machi ne hours.
(21
(31
: * i
(21
312
cl3-2
( 11
cl 3-3
Chapter 13
I
The company should use departmental ovorhead ratos since the two
departments
ano
producing heterogeneous
producta. The added accura'
cy is requlred for
pricing decisions and for better cost control informa-
tion.
The fixed cost of both seruice departments should be allocated based on
long-range facitiUes utilization. Variable cost of
purchasing would be bet-
ter lllocated using a cost driver, such as
purchase orders, because there
is a stronger explained relaUonship than by use ol volume of materials
ordered. Allocation of variabte cleaning cost basod on square footage
soems reasonable; however, the variable cost of maintaining equipment
should be isolated and charged to departments based on the cost of ser-
vices
provided.
A futler consideration of the interactive benefits of departments
woutd be achieved by use of thE step or simultaneous methods' and
preferably the simultaneous method. Such consideration is desirable
because the ssrvice departments
provide services to each other.
A letter to the president of Summerville InC:
Dear Si n
From a study of the manufacturi ng operati ons of Summervi l l e l nc.' i t
is recommended that in distributing its factory overhead, the company
use predetermined overhead rates applied as
percentages of the direct
l abor cost. Tho company shoul d use
predetermi ned rates based on nor'
mal capacity rather than actual overhead rates because of the wide
cyclical flustuations in its business. Using actual rates would, due to
targe frxed overhead costs, make the per unit overhead cost high in the
l ow producti on peri ods and l ow i n the hi gh
producti on peri ods. Usi ng
predetermined
rates, the per unit overhead cost would be level the
year
round. For quoting prices
and
pricing inventories
per unit, costs which
are neither Inflated nor deflated by the cost of factory facilities are best.
The company shoutd use departmental overhead rates because the
rateg obviously
yary
so markedly between departments. An overall rate
would not be correct for any department. Summerville lnc.ts overhead
is
a large part
ol factory cost, and any inaccuracy in the per unit cost
caused by the use of an overall rate would be material. lf all the
products
made used all departments
proportionately, an overall rate would result
i n a substanti al l y accurate
total
(but not departmental ) uni t overhead
cost. Howeve6 i n Summervi l l e
l nc. the products do not use al l the
departments proporti onatel y.
Furthermoner
use of de partmental rates
ai ds i n pi npoi nti ng cost control
responsi bi l i ty'
( 1)
Chapter 13
C1'3.3 (Concludedl
(21 Wage rates are substantially uniform within the separate depart-
ments, and departmental labor costs ara closely proportlonata
to labor
time. Therefore, distributing the factory overhead on the basis of direct
labor cost would in this caso effest about as accurate a distribution as
would the direct labor hours baso. The clerical erpense of the dirsct
labor cost base would be low because the method does not requiro accu
mulaUon of the number of direct labor. hours applicable to each
job.
Applying overhead on the basis of prime
cost is not recommended
because of the wide differences in the costs of the materials used to
make a given lamp or fixture. Factory overhead is the cost of factory
facilities. The factory facilities used to make a lamp of silver are not
morc'than those used to make the same lamp of copper. For this nsason,
the use of
prime
cost (since it includes materials cost) would rasult in an
ercessive charge to lamps using erpensive materials.
Sincerely,
cl 3-4
(1) The ten cost items can be categorized into four basic gnoups
for purpos-
es of discussion:
Item
Al l ocati on
Method Justification
All ltems in this
category shoul d be
distributed.
(a)
Salaries and
benefi ts .....,.,,..,,.,
(bl
Suppl i es ..,......,,.,....
The costs of these two items
are directly incurred by the
activity centers and can be
controlled by the supervisor.
A part
of the salaries and
benefits might be ercluded
from a variable cost charging
rate.
3t
l.
Direct
Di rect
l l .
311
Cl3-4
(ConUnued|
Item
All ltemr In thlr
category rhosld be
dlstributed becauge a
dlrast caussl baslr
erlstr, but theY
ghould
be crcluded
from a variable cost
charging
18t8.
(cl EqulPment
malntenallclg
.......
(dl lnsurance......-.....
(gl Equipment and
furniture
dePreclatloll ........
(el Heat and alr
conditlonill! ..'..'.
(hl Buildlng
lmprovements
depreciatig ll ........
lll. This item should be
distributed because a
reasonable measure
for estlmatlng the
caugal relaUonshiP
eristg.
m
ElgctricitY.........'..
Chapter'13
Justification
The costs of these items are
directlY Incurred bY the activitY
conters but are controlled bY
corporate PollcY'
TheY would be
included in a lull cost charging
rate and excluded from a
variable cost charging rate'
The costs of these items are
diroctly incurred bY the activitY
centers. TheY are not
controllabte
bY the centerc
in
the usual sense. TheY would be
inctuded in a lull cost rate and
excluded from a variable cost
charging tate.
Allocation
Method
Direct
Direct
Direct
Direct
(onc eenter onM
Direct
(one center on$
Equi pment
and
wattage
ratings
A reasonable
estimate can
be made of the electrical
charges
that can be controlled
by effieient use of equiPment.
The cost should be included
in a full cost and a variable
cost charging rate.
g
Chapter t3
Ct3-4 (Conctuded)
Itam
fv. Tlrc roJi6Gis
ftems
thould be dlstributed
lf r fufl cost charging
rato lg required.
m
Buitdins
3 t 5
There is no cost controt
benefit
from allocation
of these
costs.
The only reason
to ailocate
is
for a futl cost charging
rate.
other generaf
basis
Thc number
of hours serected
for.determining
the charging
rate depends
upon
the purpo:"
9f
estabfishing
the rati.
ii tie ouiectiie
is-to "i"rg"
utor departments
for all the coslts-of
computer-operations,
the actual
hours
that can ba identified
wittr ur?
$;e;p"ir"nt"
wiil be incruded
In thc base hours.
This amounG-to
3r5oo hour:,
determined
as fogows:
Actual User Time
Tesung
and debuggi ngffi
Setup
of
j obs
.......,.....,.
Procgssi ng j obs
...r......,...................
Total hout....
r a a a a a a a a a a a r a a a . o . a t a a a a a . r a r a a a a a a a a a a a a a a
To promote
cost contror, the company
might
consider
a duar charging
rate,
whereby
the variabre
costs wouid uJ crrirg"d
or",. actuar user time
(31600
hoursl
and fired costs over avairabfe
timl (cre42
hours).
occupancy
and
security...............
Squaro
ol
Gorporate
feet
admlnlstrative
chargesr..............
i l umbgrof
employees
or some
Allocation
Method
Justification
250
500
2,750
3,5OO
250
500
2,750
742
4,242
(21
Chapter 13
316
cl 3-5
(rl
I
Actual
factory overh
gad
"""""""""t""""
Applied
factory overhgad
.....""""""""""
Underapplied
tactoly overhe3d
""""""""
$85,OOO
60,000
(15' O0O hrs. x S4l
l2l
(al The too overtime
hours resulted
in $4oo
additional
applied tactory
overhead.
The overtime
premium increased
ttre astual factory over-
head of the department 3525
(StO.5O
+ 2l r lOO hoursl' The extent
to which these items ifect the underapplied
factoryoverhead
depends on whether or not they weno included
In esumates
used in
compuUng
the $4
factory
overhead-rato'
(bl Wagi l;cia""" to direJ laborers do not affect lactory overhead
directly, However, such incteases
will cause an increase in numer-
ous lringe benefii costs such as FlcA tar, unemployment
taxes'
worter{ compensation,
and
pensions. lt the incttase
wers also
granted to indirect
worierc of all categories,
the increase in factory
overhead might be substantiat,
causing
a largor underapplied
over-
head amouni, or a smaller overapplied
amount'
(cl The Fabricatlng
Departmentb
share of the loss would be sll2'5O
and would be a tactoi in causing a targer, underaPPlied
overhead
"roun{ * a smalter overapplieO
amount'
Slnce the distribution
was
mosi tlkely a management
decision,
the reason(sl
should
be
given in
an erplanatory note in the cost reports
and the superuisor
relieved
of the responsibility.
Clppter 13
cl 3-O
(tl Allocation basis:
3t 7
October November
Hours
% Hours %
f,lachine hours:
Fast lood f urniturg .....r........
Gustom fu rnitur9.......r...r.....
Direct labor hours:
Fast food furniturg .........o....
Gustom fu rniturg.,........,......
Cost reallocation: October November
Dollars
% Dolfarc %
1r32O
18r48O
19,8OO
IO' OOO
30,OOO
40,o99
6.67
93.33
l_9o,oo
25.OO
75.OO
100.oo
17r 5OO
28)25O
43r75O
13. 06
86.94
100.oo
40.0o
60.oo
100, oo
21560
17,O4O
_1_Uoo
Machi ne hour base:
Mai ntonaDCg.................,.....
$ 5orooo
Depreciatioll ,..,......r.r..,....... 42tAgO
Property tgx .....,.......,....,r..., IrOOO
All othgrr........,.....,............,. 32rOOO
Total to bg allocatgd .,,...,............@f99
Fast lood furnitur9.,....,.......
$ 8r8OO
Custom furniture,,..r.......r..., 123r2OO
s132,OOO
6.67
93,33
$ 48,OOO
42,OOO
IrOOO
24,5OO
_grzpeg
$ 16, 000
l 06,500
13. 06
86.94
1oo.oo S!_egoo 1_gg.oo
October Novomber
Doflars % Dol l ars %
$ 13, 0OO
1O9, 5OO
$122, 5OO
Fagt food furn|ture..............ffi
25.oo
Fffi
rasf rgog rurn1run9..............
$ zTrogo z5.oo
$ 49IOOO 4O,OO
Gustom furni ture..r..t,.....,.... 81' OOO 75.OO Z3' 5OO 60.00
_$log,ogg l_oo.oo _$123,s99 !-oo.o0
Whon gross profit
is recalculated, with the factory overhead reallocated
on the base necommended by the controller, as shown in the fotlowing
Schedulo, the figures tend to support the controllerb conclusion. Also,
the al l ocati on bases suggested appear to have a neasonabl e rel ati onshi p
to the costs bei ng al l ocated.
Labor hour base:
Supervi si o| l .........,...r,..r,......
$ 13rO0O
Empl oyee benefi ts...,.,........
gS,OOO
Totst to be attocated ..................,5io6, oE
(21
318
I
Cl 3-O
(Concl udedl
AEiler 13
AOUA FURNISHINGS COMPANY
Revlsed Statement of Gross Prolit
(ln thousandsl
October November
Fast Food Custom Fast Food Custom
Furnituru Furniturc Fumituro Furniture
Gross sa1os...........,......r............. $400.0 $900.0 S8O0.0 $
800.0
Dirgct matgriats.................r....... $rOO.o $225J $4OO"O $ ,OO.o
Direct labon
,FOrming...o.............,.......r..... 17.O 82.O 31.O 72.O
Finish|ng.............,............... 4O.O 142.0 7O,O 125.0
Assemb1y.....r....,...D...r.......... 33.O 8O,O 58.O 53.O
Factory ovsrhoad allocation:
Machi ne hour base...,........, 8.8 123.2 16.0 106.5
labOf hOUf bi!1O.................. 27.A 8l.O {9' 0 73.5
Cost of
goods
gotd....,.........r.....,
$gzs.g $713.2 $624.0 $ 830.0
Gross
profit
s 74. 2 s180. 8 $176. 0 s 170. 0
Gross
profit percentaffo............ 18.6oh 20.f|oh 22.Ooh 21.?lt1,:h
Ql.t-1. C.;qnpared to tradticnal coeting, ABC b I rpro
l horough appl i cal i on of cost traceabi l i ty.
Tnditioal corthg traccr crly dirccl matcrial
rrd dirrsl labor to odput; ABC ncogni:er that
rnany cther cosils aro traceabb, it'ncl to ouput,
Uten looftercod obieEtr called activitiec.
Q1+2. The rcle ol aciiviilbs h assigrrhg cctr to prod,
ucl r , ur i ng ABC, i r t o r cr vo ar t hc l i nk
b.l wcon products
and cogl s; acti vi ti ec arc
nquired to producr cr.rtput, and it b hc activi-
l i cr l hat consumo rcaourccg, thur causi ng
codr to be hcuned This dtten lrorn traditbn-
el cooting h whicfi output ir ossurnod !o cause
cod!.
Q14.3. Examples of rignificant, costly activities in
manuf acl ur i ng ef r r ct t i ng up, changi ng
dcri gns, recci vi ng matori al s, regui si ti oni ng
mal eri al s, movi ng materi al s and products,
oderhg lrorn
yendo6,
and inspecting.
014-4. Thc two circumgtancer that mugt be presenl
for a traditbna, cocthg ryrtcm to repod distort-
ed prodwt
cst! arc a oqnplax cosi strusture
and a diverss prodrrt
line.
Q1+5. A conrplex sl Elrusture is presenl if a signifi-
cant parl o{ overhead cocl b not related to the
volume ol ouput
Q146. A dversc prdwt
lhe is me h sfibh diflerent
producls
consumr different mixes s{ volume-
relcled and nonnolume-relaled
ccts.
Q1+7. Thr four leveb cil cqb and drivers in ABC are
tho tnit level, the batch level, the product level,
and the plant level.
O1+8. l l a product
conrumer l 0% of al l uni t.l evel
astivities and 3ogl of all batch.level activities,
lradilbnal costing will under-report its cost by
assi gni ng 10% of al l overhead costs l o tho
product,
including l096 of batch-level costs,
whon 3096 of batch-l evel costs shoul d be
assigned
to tho produc{.
Q14-9. When both bw-vdume and higft-rolume prod.
uctr arc produced
h a cornpany using tradi-
li<mal cethg, lht lorutolume prodrrt is likely
to havr ils coet distorted by a hrger percont-
agr than lhe high-volume product.
The low-
CHAPTER '4
DlscusstoN
ouEsTtoNs
volumr product'r cost b gencrally distortcd
downwad by tradilinal ctinq and thr high-
volurnc prcdrrfr cct b diCodod rpwerd
01+10. In assigning pbntdvol coil! to prcclrtr,
ABC
offen little or no advantagt ovor traditbnat
clh9.
01+11. Thr dillercncc bctwecn CM and ABC tr pri-
rnarily rrplahed by thc fact thd AgC b a bng
run decicion-making technique, while CM ic
ahql-run analysis.
Ot+12. lf a procl.rct
b dirqrthued, lhe cocir reported
lor that producl by ABC will rpt necessarily bo
rvoided, bocaucr ABC only measuns how
rasource3 arc cgrsumed by products,
not how
spending will be affecled by discontinuing a
prdusl. AvoHhg a cosl requircs ttrat lesr br
spstl
ql
sorrp rosqtnoo(s), and ABC docc,pt
predbl
changos h spending
Cfhis
it also lrur
of Iraditboal absorption costhg.)
01+13. The relstbnship between ABCand ABM b hat
ABM uses inlormation obtainod fronr ABC to
rnake improvornents h thc finrr
Q1+14. The area ol ABM that l ol l ows di rectl y from
ABC's revisbn of product
ccts b the strategic
realigrnment of thc tirm,r prbhg
rtructuro and
product
line, permitting
thr firm to retain or
regnh high-volume business h spitc of prbhg
pressur,
and pronrpling
managoment lo reex-
amine lhe roles ol sorne lorv-volume prcducts.
Q1+15. The high costs ol eqne activitiea, especially
non-value-added act ivit ies, can f ocus aientirr
m lhe need to reduce or elimirate them.
014-16. ABC can lead to improved dociriona h design-
ing a producl becauco ABC tella thr coot c{
each activity required h prcduchg
thc product
Thi s i nformati on permi ts
desi gnen l o makc
design decisionr more acsuralely, eo that the
npsl cosl-ettsctive design can bc selecled
Q1+17. The link between ABC and TeM is that ABG
reveals the cosls ol each activily, including
lhose that do not add value, and TeM aeeks to
reduce or elimhalo non-value-added asliviliec.
Thus, ABC can focus attenticn h a TOM ollort
and can prbritize TOM's imprwernentl.
3 1 9
l2l
Chapter 14
Pl 4-4
(Conti nued)
329
SHAUTON COMPANY
Product Costs from ActiviW Eased Costing System
overhead rates:
tl3ttrooo
aetup-related costs divided by 90 aetups = 81' 5oo
per setup
S24O,OOO design-related costs divided by 8,OOO design hourr = 33O
per design hour
S825,OOO ou:er overtread divided by 3O,OOO direct labor hours = 327.50
per direct labor hour
Fancy Plain Total
Di rect materi al .....,.....r......... S 60,000 $ 160' 000 S 22O,OOO
Di rgct fabor......,..............' ..' .............' ..
28r0OO 272rOOO 3OOTOOO
Overhead:
Sl r 5OOx45set ups, . . . . , . . . . . . . ' . ' . . . . . . . . . . .
67r 5OO
$1r 5OO
x 45 set ups, . . . . . , . . . . . . . . r . . . . . . . . . . .
$3O x 3rOO0 desi gn hrs......' ........,.....
9OTOOO
S3O x S' OOO desi gn hr s. . . . . . . . . . . . , . . . . . . . .
S27. 5Ox2, 800DLH, . . . , . . . . . . . . . . . . . . , . . ' . , ,
77' OOO
S27.50 x 27
r2OO
DLH ,.......,,........r.,...
67, 500 135, OOO
15O, OOO 24O, OOO
szoO, 0OO sl , OOO. OO
122, 5OO 612. 5O
993?,s99
q,6l3.59
748,OOO 825,000
(3) Because the exi sti ng system used di rect l abor hours as the onl y al l oca-
ti on base and Fancy consumed 2,8OO| 3O' OOO = I
rrcoh
of di rect l abor
hours, the existing system allocated 9
lrcoh
of all overhead to Fancy. The
acti vi ty i nformati on i ndi cates Fancy consumed 45/90 = SOoh of setup-
related activity and 3,OOO/8,00O = 37.ioh of design' -related activity, so the
reconci l i ati on i s as fol l ows:
per
Total Uni t
Cost of Fancy from tradi ti onal system,
cal cul at ed i n r equi r ement ( 1) . . . . . . . . . .
Adjustments fon
Understatement of setup costs,
$135, 000x( 5O%
- gt r cohl
$54, 900
Understatement of desi gn costs,
S240,OOO x (37.Soh
- g t,coh| ..,...,..
67,600
Total adj ustme nts.........
Cost of Fancy from ABC system, as
cal cul at ed i n r equi r ement ( 2) . . . . . . . . . .
Chagter 14
321
El 4-5 The exi sti ng system al l ocated onl y 5O/5O,OOO = O.l
oh
of al l overhead to
'
Product RK last
yean but Product RK accounted for 120161000 = 2oh ot
design change activity last year. Therefore, with respect to design
change costs only the existing system understated RKb cost last
year by
a total of:
(2%
-
O.1%l r S2,ooO,0Oo
=
S38' 0OO understatement
E14-6 The existing system allocated $40' OOO/S2OO,OOa
= 2Ooh of all overhead
' to
Product BB last
yea6 but BB accounted for only 2I2OO = 17o of the
activity of maintaining supplies of purchased subassemblies last year.
Therefore, with respect to the cost of maintaining supplies of purchased
subassemblies only, the existing system overstated BBts cost last year by
a total of:
l 2o%
-
1%l x S5o,ooo
=
$9,5oo overstatement
El4-7
(11
$126 of overhead cost wi l l be al l ocated to a uni t of f456, cal cul ated as
follours:
sl , 4OO, OOo
x 9O machi ne hour s =
$12
,
600;
l O, OOO machi ne hour s
$1 2, 600
=
Si eo
per uni t
1OO uni ts of Product f 456
9554 of overhead cost wi l l be al l ocated to a uni t of #456, cal cul ated as
fol l ows:
##
x 6 setups =
$15, boo of batch
-l evel
cost;
$5O0, 000
x 2BO desisn hours =
,r"ot"T:[t"t",olo",,
l2l
x 90 machi ne hours =
s5' 4oo of uni t-
l o, ooo machi ne hour s
" ' r ' v " v. ' s -
and pl ant - l evel cost .
4, OOO desi gn hour s
Therefore, the overhead al l ocated to a uni t of Product #456 i s:
(S15,OOO + $35,OOO + $5,4O0) l l OO uni ts =
S55,4OO/1OO uni ts = 5554
per
uni t
ChWter t4
El4' 8 Because itt" toCiti:ltlsJstem
uses machine hours as the onty alloca-
tion bas-e' Product f456 is allocated 9o/1o,Ooo = O.9079 of all overhead.
The actlvlty data indlcate f456 shoutd be assign ed 6112o = 5oh of batch-
level costs, 28ol4ro00 = 7Vo of product-level
costs, and o.g7o of all other
overhead. The reconciliation
is:
Per
Total Unit
Cost of #456 from traditional system, as
eafculated
in part (f
l
of El4-7,.........,..,.
Adiustments
for:
Understatement
of bateh-tevel
costs,
$3OO,OOO r (Soh -
O.g%1............
Understatement
of product-level
costs,
S5OO,OOO r (Zoh -
O.9%) .....,..,...
Total adj ustments
.......,............,rr..r...,.' .
Cost of f456 from ABC system, as
cafcul ated i n part (21
of E14-l ,..,....t......
$12, 600
$t eO
$12, 300
30. 500
$4z,goo
s55,4OO
428
s554
E14- 9
( 1)
5140 of overhead
cost wi tl be al l ocated to a uni t of #456, cal cul ated as
fol l ows:
sl , 4OO, OOO
20, OOO DL hour s
r 2QO DL hour s =
Sl 4, OOO;
sl 4, O00
=
$140
per
uni t
1OO uni ts of Product # 456
S74o of overhead
cost wi l l be al focated to a uni t of #456, catcul ated as
fol l ows:
$soo, ooo
5OO setup hours
x 3O setup hours =
$i B,OOO of batch-tevel cost;
ssOO, OOO
4O desi gn
changes
S2O0, 0OO
+
S4OO, 0OO
2O,OOO DL hours
(21
x 4 desi gn changes
-
S5o' ooo of product-tevet
cost;
2OO direct labor
S6,000 of unit-
X . =
houni and pl ant-l evel
cost.
Therefore,
the overhead al l ocated to a uni t of
product
#4s6 i s:
( S18, OOO
+ 35O, OOO + 56, OOO) l l OO uni t s =
S74, OOO/ 1 OO uni t s =
SZCO
per
uni t
Chapter 14
E14- l O
323
Because the tradi ti onal system uses di rect l abor hours as the onl y al to-
cati on base, Product f456 i s al l ocated 2ool 2o,ooo = 1oh of al l over-
head. The acti vi ty data i ndi cats f456 shoul d be assi gned 3O/5OO = 6oh
of batch-level costs, 4l4o = looh of
product-level
costs, and 1
oh
of all
other overhead. The reconciliation is:
per
Total Unit
Cost of #456 from traditional slstem, as
cal cul ated i n part (1) of El 4-9...,,....
Adjustments fon
Understatement of batch-level
costs,
$SO0,OOO x (O%
-
1oh1.........
Understatement
of product-level
costs,
Ssoo,ooo x (1o%
-
1oh1.......
Total adj ustments ...,...,.
Cost of #456 from ABC system, as
cal cul ated i n part (21
of El 4-9 ......
sl 4, OOO 5140
$15, 000
45, OOO
s6O,OOO
s74, OOO
600
s740
E14' 11 Acti vi ti as gr
u, y,
and dd are the onl y ones that defi ni tety add val ue.
Activity k is questionable,
because a single deburring aiter drilling
. would be sufficient to remove all burrs. The first deburring, k, is proba-
bly performed
to make it easier and safer for workers to handle the
product
i n the i nteri m. l f the need for so much handl i ng can be el i mi -
nated (perh-aps
through automated material-handling
eguipment), k
coul d be el i mi nated wi th no toss of vatue to the custbmer
i and
perhaps
at a net savi ngs to the company), so i t i s real l y a non-val ue-added
activity.
Chaoter 1n
PROBLEMS
P14- l
(f
l
The overhead rates in the eristing costing system are S20
per machine
hour, and 31 4
per direct labor hour, calculated as follows:
SSO,OOO of machi ne
-rel ated
overhead
S28O,OOO of remai ni ng overhead costs
2O, OOO DLH
(21 Maki ng onl y the changes suggested by the study, the structure of the
ABC system woul d be:
Pool Dri ver
machi ne operat i on. . . . . . . . . . . r. . . . . . , . . . machi ne hours
setup and materi al handl i ng ....... setups
*
other materi al s-re|ated.,.,..,........
purchase
orders
al l remai ni ng overhead.....,.. di rect l abor hours
. !
The study di d not suggest any change for machi ne operati on cost, nor
for the
"other
overheadtt category.
, _
(31 The ABC slEtem's overhead rates (driver rates) are S16.25
per machine
hour, $45
per
setup, $5o
per purchase order, and $1o.ZS
per di rect l abor
hour, calculated as follorlrs: -
565, OOO of machi ne oper at i on over head
=
Sl o. 25
per machi ne hour
4, OOO machi ne hour s
515, OOO of machi ne- set up over head
pl us
S3O, OO0 of materi al s handl i ng overhead
=
$45
per
set up
1, 00O set ups
SgS,ooo of other materi al s
-rel ated
cost
=
S5o
per purchase order
7OO purchase
orders
S215
, 0OO of
t r
ot her over head
t l
ZAf f i
=
Sl O. 75
Per
di rect l abor hour
=
S2O
per machi ne. hour
=
S14
per
di r ect l abor hour
I
I
Chagter 14
P14' 2
-
'
11)
The three overhead rates i n the edsti ng costi ng system are S17.5O
per
l r
machi ne hour, S.8O
per di rect materi al
dol l ar, and $1 .25
per. di rect l abor
s
dol l ar, cal cul ated as fol l ows:
S8OO,
OOO of materi al s
-
refated overhead Sooh of direct material cost or
@
-
S.8o
per di rect materi al dol l ar I
material cost
$2, 5OO, OOO
of ot her
overhead cost 125% of direct labor cost or
m
=
$1.25
per di rect l abor dol tar
di rect l abor cost
l1l
Making only the changes suggested by the study, the structure of the
ABG system would be:
Pool
Dri ver
maChi ng Opgfati On.......r.....,...,...,
maChi ng hOUfS
setup and materi al handl i o$ ,...... setups
materi al s admi ni strati on..........r..
purchase orders
f f ei ght -i n r. . . r. . . . r. . . . . . . r. , r. r. . . . . . . . . . , . . .
mat gf i al
pOUndS
al l remai ni ng overhad.......,..."...
di rect l abor cost
The study di d not suggest any change l or machi ne operati on cost, nor
for the
"all
remaining overhead" categoly.
(3) The ABG system' s overhead rates are $12.5O
per machi ne hour, 51' OOO
per setup, $35
per purchase order, $.75
per pound ol materi al s, and
$1.25
per di rect l abor dol l ar, cal cul ated as fol l ows:
$700,O0O
of machi ne
-rel ated
overhead
=
$12.5o
per machi ne hour
4O' O0O machi ne hours
$5OO, OOO of machi ne
-
operat i on overhead
=
$12. 50
per machi ne hour
40, OOO machi ne hours
b
$2oo, ooo of machi ne
-set up
overhead pl us
$3OO,OOO of materi al s handl i ng overhead
5OO setups
S35O, OOO of mat eri al s
administration overhead
=
$1, Ooo
per set uP
I O' OOO
pur chase or der s
=
$95
per purchase
order
326
I
P14-2
(Concl uded)
$150, 0OO
of f rei ght
-i n
=
$.75
per pound
of materi al s
2OO,0O0
pounds of materi al s
S2,5OOr00O
of other
overhead cost 125oh ol direct labor cost or
m
=
$1.25
per di rect tabor dottar
direct labor cost
Pt 4- 3
tl)
DRAPER COMPANY
Product Costs from Eristing Costing System
Chaptar 14
Overhead rate: 94,5O0,0OO of overhead di vi ded by $3,OOO,OOO
of direct labor cost = 150oh of direct labor cost
Standard Custom Total
Di rect mat eri a1. . . . . . . . . . . . . . , . . . . . . . . . . , . . . . . . , . . , $ 882rOOO S 1215OO $ 894r5OO
Di rgct l ?bor' . . . . . . ' . . . r. . . . . . . . . . . . . . . . . . . . . . . . r. . . . 219t 0rO0O 9OrO0O 3rO0Or0OO
Overhead:
150ohr $2r910rOOO........,..r,r..,.....,.... 41365rO0O
1 SOoh x 59OrO0O. . . . . . , . . . . . . . . . . . . . . . . t . r. . . , . . 135,OOO 4,5OO,OOO
Tot al cost . . . . . . . , . -. . . . . . . , . . r. . . . , . . . . . . . . . . . . . . . . .
$8r157rOOO $23715OO
Uni t s pr oduced. . . . . . . . . , . . . . . - . . . . . . r i . . . . . . . . . .
+ 731500 + 125
Cost per uni t . . . . . . . . . . . . . o, . r . . . , . . . . . . . r . . i . . . t . . .
$ 1l O. r B S l r r OO
gg,3eds09
I
I
E
v
Chapter 14
P14-3 (Conti nued)
l2'l
Product Costs
.v
DRAPER COMPANY
from Activity Based Costing System
Overhead rates:
Si:IOOTOOO aetup-related
costs divlded by 6O retupr =
$STOOO per
aetup
s9oo' o00 deslgn-related costq divlded by 15rooo deolgn hourr =
$oo
per
design hour
$il' 300,000 other overhead divided
@
1' loo/o of direct labor cost
Standard
Custom
Totat
Direct material
Di rgct 1abor. . . . . . . . . . , . . r. r. r. . . . . . . . . . . r. . . . . . . . . . .
Overhead:
S5TOOO r 3O setups .....................r,....
35r0oo x 3o setups .......................,...
$60 x 12rO0O desi gn hl s.........,........,
$6O x 3,OOO desi gn hrs,........,.,....r....
I fi oh x $2,91 Or000.........r....,r...........
1 1 O% x S90r00o.......,....,..r,..,.,.,.,...r..
Tot al
cost . . . . . . . o. . . . . . . . . . . . . . . . . ! . , . . . . . r. . r. . . . . . .
s 882,OOO
2, g1Or 0Oo
150, OOO
720,OOO
3, 20l , OOO
s?effipoo
##
s 12, 5OO
9O, OOO
15O, O0O
180, OOO
s 8r4FOO
3, OOO, OOO
3OO, O0O
9OO, OO0
3, 3OO, OO0
2r352
s4E2
s8,394,599
125
_L _1,252
Because
the eri sti ng system used di rect l abor cost as the onty al l ocati on
base and custom consumed
$9o,ooo/s3,ooo,ooo = JTo of di rect l abor
cos.tr-the
existing system allocated 3oh of ail overhead to custom. The
activity
information
indicates custom consumed 30/6o = sooh of setup-
refated
acti vi ty and 3,ooo/15,ooo = zooh of desi gn-rerated
acti vi ty,
so the
reconci l i ati on
i s as fol l ows:
Per
Total
Unit
(3)
Cost of Custom trom tradi ti onal
system,
as cal cul ated
i n regui rement (1)..,..,..
Adjustments
for:
Understatement
of setup-rel ated
. _
costs,
$3oo,ooo x (So% - g%1........
51 4 i
,ooo
Understatement
of desi gn-rel ated
cost s,
$9oo, ooo x (Zo% - g%1. . . . . . . .
1s3, ooo
Total
adj ustments.........
Cost of Gustom from ABC system, as
cal cul ated i n requi rement
(2) ............
$237, 5OO
s1, goo
294,OOO
s531, 5OO
\
* \
Chapter t4
P14-3
(Concl uded)
(41 The only costs handled differently by the two costing systems were the
S3OO,OO0 of setup-related costs and S9OO,0OO of design-related costs,
for a total of $l,200r00O; this nepresents only 27% of the total overhead
of $4' 500' 00O.
The change in the costing system caused the reported cost of Custom to
change from $237,500 to 9531,50O, whi ch i s' an i ncrease of 124oh.
P74-4
(rl
SHAUTON COMPAI{Y
Product Gosts from Eristing Costing System
-
Overhead rate: $l ,2OO,OOO of overhead di vi ded by $SO,OOO
di rect l abor hours =
$4O
per
di rect l abor hour
Fancy Plain Total
Di rect mat eri a| . . . . . . . . . . . . . . . . . . . . . ro. . . . . . . . . . . . .
S 601000 $ 160, 000
$ 22O' , OOO
Di rgct f abor. . . . . . . . , . . . . . . . . . . . . . . . . r. , . . . . . . . . . . r. . 28' OOO 272. OOO 3OOTOOO
Overhead:
S4O x 2r8OO DLH . . . . . . . . . . . . . . . , . o. . . . . . . . . -. r l l Z, OOO
S4O r 27r2OO DLH . . . . . . . . . r. . . . . , . . . . . . . . . . , . . l rOBSrOOO i r2OOrOOO
Total cost ...........................o..,.,.......,...
Srooi l ooo $1FzO^ooo $1r?ro^0oo
Uni ts produced..........r......,................,
+ 2OO + l 6' 000
Cost per
uni t,.....,.....,.....r....................
S l ^OOO S 95
l2l
Chapter 14
Pl 4-4
(Conti nued)
329
SHAUTON COMPANY
Product Costs from ActiviW Eased Costing System
overhead rates:
tl3ttrooo
aetup-related costs divided by 90 aetups = 81' 5oo
per setup
S24O,OOO design-related costs divided by 8,OOO design hourr = 33O
per design hour
S825,OOO ou:er overtread divided by 3O,OOO direct labor hours = 327.50
per direct labor hour
Fancy Plain Total
Di rect materi al .....,.....r......... S 60,000 $ 160' 000 S 22O,OOO
Di rgct fabor......,..............' ..' .............' ..
28r0OO 272rOOO 3OOTOOO
Overhead:
Sl r 5OOx45set ups, . . . . , . . . . . . . ' . ' . . . . . . . . . . .
67r 5OO
$1r 5OO
x 45 set ups, . . . . . , . . . . . . . . r . . . . . . . . . . .
$3O x 3rOO0 desi gn hrs......' ........,.....
9OTOOO
S3O x S' OOO desi gn hr s. . . . . . . . . . . . , . . . . . . . .
S27. 5Ox2, 800DLH, . . . , . . . . . . . . . . . . . . , . . ' . , ,
77' OOO
S27.50 x 27
r2OO
DLH ,.......,,........r.,...
67, 500 135, OOO
15O, OOO 24O, OOO
szoO, 0OO sl , OOO. OO
122, 5OO 612. 5O
993?,s99
q,6l3.59
748,OOO 825,000
(3) Because the exi sti ng system used di rect l abor hours as the onl y al l oca-
ti on base and Fancy consumed 2,8OO| 3O' OOO = I
rrcoh
of di rect l abor
hours, the existing system allocated 9
lrcoh
of all overhead to Fancy. The
acti vi ty i nformati on i ndi cates Fancy consumed 45/90 = SOoh of setup-
related activity and 3,OOO/8,00O = 37.ioh of design' -related activity, so the
reconci l i ati on i s as fol l ows:
per
Total Uni t
Cost of Fancy from tradi ti onal system,
cal cul at ed i n r equi r ement ( 1) . . . . . . . . . .
Adjustments fon
Understatement of setup costs,
$135, 000x( 5O%
- gt r cohl
$54, 900
Understatement of desi gn costs,
S240,OOO x (37.Soh
- g t,coh| ..,...,..
67,600
Total adj ustme nts.........
Cost of Fancy from ABC system, as
cal cul at ed i n r equi r ement ( 2) . . . . . . . . . .
t - \
330
Chapter tl
P14-4
(Concl udedl
(4) The only costs handled differently by the two costing slrstems were the
$135' OOO
of setup-related costs and S24O,OOO of design-related costs,
for a total ol $375,00O;
this repnesents only 31.25oh oI the total overhead
of $1r20OrOOO.
-
The change in the costing system caused the reported cost of Fancy to
change from S20O,OOO
to $322,500,
which is an increase of 6l .25oh.
P14-s
( 11 TUNNry COMPANY
Product Costs from Etisting Costing System
Overhead rate: $1,OOO,O0O of overhead di vi ded by 5O' OOO di rect
l abor hours =
$2o
per di rect l abor hour
lrlormal Enhanced Super Total
Di rect mat eri a| . . . . . . . . . . . o. . . . . . . . . . . $
6OTOOO S
2OTOOO S S' OOO S 85rOOO
Di rect t abor, . . . . . . . o. . . . . . . . . r. . . . , . . . o 30O, OO0 35' OOO 5rO0O 34O' 0OO
Overhead:
S2O r 45rOOO DLH. . . . . . . . . . . . . . . . . 9OOTOOO
S2O r 4r5OO DLH. . . . . , . . . r, . . . . . . D,
S2O r 50O DLH. . . . . . . . . . . , . . . . . . . . ' .
9O, OOO
1O, 0O0 1, 0OO, OOO
91,425,oO9
Tot al cost . . . . . . . . . . . . . . . . . . . . . . . , . . , . Sl r 26Or OOO $145100O S2OTOOO
Uni t s pr oduced. . , . . . . . . . . . , . + 30, OOO + I ' OOO
+ 5O
Gost per
uni t . , . . . r. . . . . . , . . . . . , o. . . . . . $
CZ $
.
t AS $ 409
Chapter ll
P14-S (Concl uded)
(21 TUNNEY COMPANY
Product Costs from Activity Based Costing System'
331
Overhead rates:
3400,000 batch-level overhead dhvlded by 500 rcgulslUona = 38oo
pcr requlsltion
$800,000 other overhead dividedby 5O,0OO direct labor houn = 312
per direct labor hour
Normal Enhanced Super Total
Di rect materi a1....,............... s 60,000
$ zorooo s 5,ooo s 85,ooo
Di rect 1abor,......,...... 3OOTOOO 35,OOO 5' OOO 34O' OOO
Overhead:
$8OO x 150 t ' ee. . , . . . . . . . . . , . . . . , 120r 00O
$8OO x 2OO | 1ee..............,..,
$8OO x 15O Fee..........,.......
$12 x 45r 0OO DLH. . . . . . , . . . , , . . 54O' OOO
$12 x 41500 DLH . . . . . . . . . . . . . . .
$12 x 5oo DLH
12O, OOO 4OO, OOO
6, 000 600, 000
160, OOO
54, OOO
Tot a| cost . . . . . . . , , . r . . . r . , . . . . . . . . ! . .
Sl r o2or o0O S269' 000 $136r ooo
Uni ts produced.....,...r........r. + 3OTOOO + I' OOO + 50
s1, 425, 099
Cost per uni t , , . . . . , . . . . . . . . . , . . . . , . S 34 S 269 $ 2r 72O
(31
Because the existing system used direct labor hours as the only alloca-
ti on base and Super consumed 5OO/5O,OOO = Ioh of di rect l abor hours,
the existing system allocated 1o/o of all overhead to Super. The activity
i nformati on i ndi cates Super consumed 15O/5OO = 3O7o of batch-l evel
acti vi ty, so the reconci l i ati on i s as fol l ows:
Per
Total Uni t
Gost of Super from traditional system,
as cal cul ated i n requi rement (1).....,.........
$
2O,OOO $ 4OO
Adiustment for understatement of batch-
fevel costs, S4O0,O0O x (3O%
-
1%1..,,..., 116,000 2,32A
Cost of Super from ABC system, as
cal cul ated i n requi rement (21..........
S136,000 $2,720
(4)
The onl y costs handl ed di fferentl y by the two costi ng systems were the
$4oO' oOO of batch-l evel costs, whi ch represents onty 4}oh of the totat
over head of $1, OOO, OOO.
The change i n the costi ng system caused the reported cost of Super to
change f r om S2O, OOO t o $136, 000, whi ch i s an i ncr ease of Sa}oh.
3g2
Pl 4-6
(rl
Chapter tl
TEKSIZE COMPANY
Product Gosts from Eristing Costing System
Overhead rate: $1,500,00O of overhead divided by 5O,OOO direct
labor hours =
$gO
per
direct labor hour
Regular Large Total
S 4o,ooo
48O, OOO
l
r20OrOOO
$43O,00O 91,72O,OOO
+ | OTOOO + I O' OOO
I 1o,ooo
120,OOO
3OO,OOO
s 5O,OOO
6OO,OOO
I , 50O, OOO
s2d90,999
(21
4 3 $ 172
TEKSIZE GOMPANY
Product Costs from Activity Based Costing System
Overhead rates:
S515,OOO setup-rel ated costs di vi ded by 1O3 setups =
SS,OOO
per setup
S985,OOO other overhead di vi ded by 5O,OOO di rect l abor hours =
319.7O
per DLH
Regul ar Total
$582, O0O $1, 568, OOO 52, 15O, OOO
+ l O, 00O + 1O, 00O
I l O,OOO
120,OOO
255,000
197, 00O
Large
$ 4o,ooo
48O,OOO
26O,OOO
788,OOO
s 5O,OOO
6OO,OOO
5l 5, OOO
985, OOO
s 58. 20 s 156. 80
Chapler 14
33?
Pl 4- g ( Concl uded)
(31 Because the exi sti ng system used di rect l abor hours as the onl y al l oca-
ti on base and Regul ar consumed 1O,O0O/50,00O = 20oh of di rect l abor
hours, the existing system allocated zooh of all overhead to Regular. The
acti vi ty i nformati on i ndi cates Regul ar consumed 51/103 = 49,51456oh ot
setup-related activity' so the reconciliation is as follows:
Gost of Regular from traditional
system, as cal cul ated i n requi rement
(11 ......' .... S43o,0oo S43.oo
Adiustment for understatement of setup-
Per
Total Unit
refated costs, $515,O0O
r (49.51456%
-
2oo/o1...
Cost of Regular from ABC system' as
cal cul ated i n requi rement
(2).".........,......' .,.' .....
9582' OOq 998.20
Yes, Teksi ze Company does have a di verse product l i ne i n the sense i n
which the term is used in ABG. The fact that the two products have the
same annual unit volumes does not matter, because the existing cost
system does not use units as the atlocation base. Regular represents
only 2Ooh of direct labor hours but nearly SOoh of setup-related costs,
whi l e Large has a very di fferent mi x, so a di verse
product l i ne i s present
i n Teksi ze Company.
152, 0O0 15.20
(4)
334
c14-1
( 1)
Chaoter t4
CASES
DALI-AS DIVISION
Product Costs from Existing Costing System
Overhead rate: SSOO,OOO of overhead divided by 2OTOOO direct
l abor hours = S{Qper di reg! l abor hour
1327
s 6,000
3O,0OO
288, OOO
s324,OOO
+ 2r4OO
s 13s
#333
S l so
600
4, 80O
s5, 55O
+ 6
s 92s
(21
DALI-AS DIVISION
Product Costs from Activity Based Costing System
Overhead rates:
S24O, OOO bat ch-l evel cost s di vi ded by 1, BOO eet upe =
Si 5O
per
set up
S2OO, OOO product -l evel
cost s di vi ded by 2, OOO desi gn hours =
Sl OO per desi gn hour
s36o' ooo ot her overhead
di vi ded
by 20, 0oo di rect l abor hours =
si g
per
DLH
#327 #333
$ 6, 000
S
30, 000
6, OOO
32, 00O
12g, 600
1 5 0
600
600
2O, OOO
2, 160
$2O3, 6OO
+ 2r4OO
s
84. 83
s 23,510
+ 6
gegeeg
Chaptor l1
Cl 4- 1
( Cont i nued)
( 3) Usual sel l i ng
pr i ce. . . . . . . . . . . . . o.
Pf OdUCt COSt . " . . . . . . . . . . , . . . ' . . . . . . r . ' . . . ' . . . . . . . . . . . . r . . . . . . . . o.
Usual sel l i ng
pri ce ...............,.' .,................' .......
Product cost . . . . . . . . . r. . . . . . ". . r. . r. . . ' . . . . r. . . . . . . . . . . ' r. . . r. . . .
Gross margi n
0oss)
......................r..........!.........
Pgrcent of sal gs r. . . . . . . . . rr' . . . r. . . , . ' r. . . . . . ' . ' . . . . t . r"t . . . . .
(4)
#321
sl so
135
9_!s
10%
#321
sl so.oo
84.83
s 6s. 17
430h
3a5
f 333
s1, 50o
925
s 575
3goh
f333
s 1, 5OO. OO
3, 918. 33
(s)
s(2, 418. 331
The ABC system shows that the relative prolitabilities of the two prod-
ucts are the reverse of what is shown by the edsting system: the existing
system shows a very modest
gnoss margi n of l Ooh on f321r whi ch i s
probably not enough to cover its marketing and administrative costs,
whi l e showi ng a respectabl e 38% gross margi n on f333. l n contrast, the
ABC system shows a 43oh
gross margi n on #321 and a substanti al l oss
on f333. The l ow-vol ume
product appeans to be the more profi tabl e of
the two under the exi sti ng system, but appears to be a money l oser
under ABC; the hi gh-vol ume
product appears weak under the exi sti ng
system, but hi ghl y profi tabl e under ABC.
Based on the resul ts of the ABG study, Dal l as di vi si on management
shoul d consi der meet i ng t he compet i t or ' s
pr i ces on f l 321; t hi s pr i ci ng
strategy can be profi tabl e i n the l ong run and shoul d avoi d l oss of market
share. The strategy for f 333 i s not as cl ear. Gustomers are not l i kel y to
accept the 20O% pri ce i ncrease needed to make #333 reasonabl y prof-
i tabl e, and Dal l as coul d l ose some customers who al so buy l arge
amounts of #321, i f management di sconti nues #333 or i ncreases i ts
pr i ce
t oo much. Management shoul d consi der sever al
possi bi l i t i es f or
l ow-vol ume products
such as f333:
(a)
Reduce batch- and product-l evel costs enough to become an effi -
ci ent producer of l ow-vol ume products. Thi s may requi re creati on of
a smal l
j ob-shop
envi ronment i n a porti on of the pl ant (or i n another
faci l i ty) where l ow-vol ume products
coul d be made more effi ci entl y.
The case i ndi cates the exi sti ng pl ant
was desi gned to
produce
l ong
runs effi ci entl y, whi ch may expl ai n the hi gh batch- and product-l evel
costs.
(6)
Chaoter l4
336
I
C14- t
( Concl uded)
cl 4- 2
( 1)
(b) Reduce the number of
products by desi gnl ng " new one that can be
substi tuted for several l ow-vol ume,
unprofi tabl e
products that can
then be di sconti nued; thi s essenti al l y erchanges several l ow-vol -
ume
products for one of much hi gher vol ume, wi th substanti al
batch- and
product-l evel savl ngs'
(c) Convince one of the current buyers of the low-volume
products to
become a di stri butor of several such
products; buyi ng them from
Dal l as i n l arger
quanti ti es, mai ntai ni ng smal l i nventori es, and sel l i ng
them to othJr customers.
Thi s can reduce
Dal l ast batch-l evel costs
and marketi ng costs, but i t ri sks the l oss of customers who l i ke to
buy the ful l l i ne from one suppl i er.
(d) nai se
pri ces gradual ty unti l al l
products ane neasonabl y
pri ced. Thi s
does not mean al l
products must show
profi ts. (l t i s acceptabl e for a
good customer to occasi onal l y buy a money' l osi ng
product.) Rather'
i t means that the company shoul d not conti nue maki ng a money-
tosi ng product wi thout a
good reason. l t i s not acceptabl e to have a
customer who buys onl y the money-l osi ng
products, nor for the
company to conti nue maki ng a money-l osi ng
product that no
"good
customerstt are buying.
(e) In addi ti on to the usual
penuni t pri ces, charge a l ump-sum amount
per order for any smal l order of a l ow-vol ume
product. Thi s charge
. coutd be set at a l evel to cover esti mated batch- and product-l evel
costs.
WARRENTON DIVISION
Product Costs from OPICS
Over head r at e: s1, 930, 000
l abor hours
of overhead di vi ded by 25' ooO di rect
= 577.2O
per
DLH
fl 33 #44
sl 5, ooo
s120, ooo
6, 000 60, 000
341740
463, 20O
s643,2OO
+ 2'OOO
s55,74O
+ 1 OO
s5s7. 40 s 321. 60
:
J) /
Chapter 14
Cl 4-2
(Conti nued)
(21
WARRENTON
DIVISION
Product Costs
from TPTCS
Overhead rates:
$gCOTOOO
machine-related
costs divided by 2O,OOO machine hours
=
S17
per MH
iigO,OOO
materials-related
gosts divided by $1'32O,OOO
direct material cost
=
25% of direct material cost
S360,000
+ $9OO,OOO
of remai ni ngcosts di vi ded by 25' Ooo di rect l abor hours
=
S5O.4O
per
di rect l abor hour
#33 r 44
Di f gCt mat gf i a1 . . i r . r . r . . . . . . . . . . r . . r . . . . r , . r . . . . r . . . . . . . . . . t . . . . . . . . . t t . . t . . . .
Di r gCt 1abOf . . . . . . . . . . . r . . . . . . . . . . . r . r . . . . . . . . . . . . . r . . . r . . . . r . r . r . . . . . . . . . . r . r . . .
Overhead:
$17 X 300 MH . . , . . . . . o. . . . . . . . . . . ' r. . . . . . . . . . . . , . . . . . . . . . . . . . . . t . . . . . . . . . . . . .
$17 f 3rOOO MH . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . t . . . . . . . . r. . . . . . . . . ' . . . . . . .
25oh x $l 5rOOO
r. . . . . . . . "r' . . . . . . . . . . . . , . ' . . . . -. . . . . -. -. . r' . . , ' . . . r. . . . . ' . . .
25oh x $12Or OOO
. . . . . . . . . . . . . , . . , . . . . ' . . . . '
55O. 4O X 45O DLH. . . . . . . , . . . . ' . . . . o. . . . r, . . . ' . . . . . . . . . . . . . . . . . . . . . . ' . . . . . . .
S5O. 4O X 6rOOO DLH. . . . . . . . . . . . , . . . . . r. . . . , . . . . . . . . . i . , . . . . . . . r. . . . o. . . . . .
TOt al COSI . , . . . . , . . . . . . . . . . . . . . . , . . . . . . . . . . . . . , . . . . . . . . . . . . r. . . . , . . . . . , . . . . . . . . . . . .
Uni t s
pr oduced. . . r . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . r ' . . . ' . . . , . r . - .
COSt
pef Uni t . . . . . . . . . . . . . . . ' r . . . . . . . . , . r ' . . . . . . ' . . . . . . . . . . . . . . . . . . . . r .
s15, OOO
6,0o0
5, 1O0
3, 750
2216fjo
s12O, OOO
60, 000
51, OOO
3O, OOO
302, 4OO
s52,530
+ 1OO
s563,4OO
+ 2,OOO
I
s525. 30 s 281. 70
(3) TPICS i s not an ABG system because al l the al l ocati on bases are at the
uni t l evel . The changes management made do show many of the attri but-
es typi cal ty associ ated wi th a change to ABC: the i ncrease i n the number
of overhead cost
pool s, the attempt to create homogeneous cost
pool s'
and the use of three di sti nct al l ocati on bases. These changes show an
attempt was made to capture di fferences among the demands
pl aced on
resources by the different
products. But because there are no batch- or
product-tevel
dri vers used, the system cannot capture the demands
pl aced
on batch- and
product-l evel acti vi ti es, i .e., i t i s not an ABC sys-
tem.
3g
Cl 4-2
(Conti nued)
WARRENTON DIVISION
Product Costs from Proposed New Gosting System
Overhead rates:
SI OO,OOO troubleshooting costs + $140,000
machine setup costs divided by
3,OOO setup hours =
$8O
per setup hour
S135,OoO materi al handl i ng costs di vi ded by 15,000 l oads =
39
per l oad
S195,Ooo
materi al i admi ni strati on costs di vi ded by IO' OOO vendor orders =
919.5O
per
vendor order
3260,000 engi neeri ng desi gn costs di vi ded by 4,000 desi gn hours =
$65
per
desi gn hour
$2OO,OOO
machi ne operati on costs + S90O,O0O other overhead di vi ded by
2O,OOO machi ne hours =
$55
per machi ne hour
f 33
(
Chapter tl
(41
sl 5, OOO
6, OOO
24|OOO
180
1, 755
18, 2O0
16, 5OO
s81, 635
+ I OO
#44.
sl 20, OOO
6O,OOO
32,0OO
540
2,925
19, 5OO
165, OOO
$399, 965
+ 2' OOO
s816. 35 S 199. 98
(5) The proposed
new costi ng system i s an ABC system because i t uses cost
dri vers that i ncl ude non-uni t-l evel dri vers. The uni t-l evel dri ver i s
machi ne hours, the batch-l evel dri vers are setup hours and l oads han-
dl ed' and the product-l evel
dri ver i s desi gn hours. Vendor orders coul d
be ei ther a batch- or product-l evel dri ver, dependi ng on whether orders
are pl aced
for each batch; the case does not tel l whether thi s i s so.
(6)
For the l ow-vol ume product, #33, the proposed ABC system shows a sub-
stanti al l y
hi gher cost than di d ei ther of the other two systems. Thi s i s the
general
resul t when ABC i mpl emented and compared wi th tradi ti onal
systems. At the usual sel l i ng
pri ce of S8OO, the ABC system says thi s
product
i s a money l oser. Equal l y, or
perhaps more i mportantl y, the pro-
posed
ABG syst em shows t hat t he hi gh- vol ume pr oduct
can be
pr i ced
very competi ti vel y.
Chapter 11
.t r:t
C14- 2 ( Concl uded)
f/)
Based on the resul ts of the ABC study, Warrentonb management shoul d
consi der meeti ng the competi torb
pri ces
on #44; thi s
pri ci ng strategy
can be profi tabl e i n the tong run and shoul d avoi d l oss of market shat.
The strategy for #33 is not as ctear. Some customers may not accept the
price increase needed to make il33 reasonably
profitable, and Warrenton
could lose some customers who also buy large amoqnts of #44 if
management di sconti nues
i l 33 or hi kes i ts pri ce too much. Management
shoul d consi der several
possi bi l i ti es for l ow-vol ume
products such as
f 33:
(a) Reduce batch- and
product-l evel costs enough to become an effi -
cient
producer of low-volume
products. This may reguire creation of
a smal l
j ob-shop
envi ronment i n a
porti on of the pl ant
{or
i n another
faci l i ty), where l ow-vol ume
products coul d be made more effi ci entl y.
(b) Reduce the number of
products, by desi gni ng a new product that
can be substi tuted for several l ow-vol ume, unprofi tabl e
products
that can then be di sconti nued; thi s essenti al l y exchanges several
l ow-vol ume
products for one of much hi gher vol ume, wi th substan-
ti al batch- and
product' l evel savi ngs.
(c) Convince one of the current buyers of the low-volume
products to
become a di stri butor of several such
products; buyi ng them from
Warrenton i n targer
quanti ti es, mai ntai ni ng smal l i nventori es, and
selling them to other customers. This can reduce Warrenton' s
batch-l evel and marketi ng costs, but i t ri sks the l oss of customers
who l i ke to buy the ful l l i ne from one suppl i er.
(d) Rai se pri ces gradual l y unti l al l
products are neasonabl y
pri ced. Thi s
does not mean al l
products must show
profi ts. (l t i s acceptabl e for a
good customer to occasi onal l y buy a money-l osi ng
product.) Rather'
i t means that the company shoul d not conti nue maki ng a money-
l osi ng product wi thout a
good reason, l t i s not acceptabl e to have a
customer who buys onl y the money-l osi ng
products, nor for the
company to conti nue maki ng a money-l osi ng
product that no
' i good
customers" are buyi ng.
(e) l n addi ti on to the usual sal es pri ce, charge a l ump-sum amount
per
order for any smal l order of a l ow-vol ume product. Thi s charge
coul d be set at a l evel to cover esti mated batch- and
product-l evel
costs.
d l
01$t. Profil plarning oncompasses (a) sales estirnat-
hg and sales plannhg prograrns; (b) budgeting
progra,nr lor contol cf all costs, both rnanufac-
turhg lnd nqrrnanufacturing; (c) planning and
programming addilions to or deletions lrom
working capilal an'd plant hveslmenl; and, (d) a
review of all laclors that have an impacl m
retum on inveslmcnt, both from a shorl.lerm
viewpoinl of one year and longer periods of
lime. Thr profil-planning function must not be
merely financial in scope. ll must disckrse the
melhodg and programs by which the financial
groals are to be achieved.
O1$2. A budgel is the oxpcted targt that manage-
mont strives lo achieve, whereas a lorecasl is
a level of revenue or cosl that an organizalion
predicts will occur.
Olt3. The three approaches lor setling profit objec.
lives are:
(a) A oriori. Management specifies a given
ratc of rolum to be achieved in the long
run ard then draws up plans lor achieving
that rale.
(b) A msteriori. lr/lanagemenl draws up plans
and.then sels lhe rate resulting frorn the
plans.
(c) Praomal i c. Managemenl uses a target
pr of i t st andar d t hat has been t est ed
empirically and sanctioned by experierrce.
Qt$4. Long-range phnning deals wilh specilic areas
of the cornpany's plans, such as future sales,
long.lerm c-f ilal expenditures, research and
developmenl astivilies, financial requiremenls,
and the proti l goal . Short-range budgeti ng
plrces the plannhg
and particulariy
control into
perirds of three. 3ix, or twlvo mstths.
Ql $' 5. A budget i s a detai l ed fi nanci al stal ement of
the organizalion's
strategy. lt converts generEll
st r at egy st al ement s i nt o speci f i c pl ans ol
acti on, measured fi nanci al l y. l t i s rel ated to
control, because it is the fundamental guideline
for whal the organization should do. Thus, it is
l he benchmark
agai nst whi ch acl ual perfor.
manco is cornpared. This process
of ccnpari-
son is a vital gart
ol the conirol function in lhe
organizaticr.
Ql S. I n car r yi ng
out managoment ' s l unct i ons of
phnnhg,
organizing, and control lor lhe deveF
opmenl
ol a budgetary conlrol program, il is
neco3sary
to:
(a)
organize the budget commiilee
(b) organize the entire budgtary control pro-
gra!71
(c) plan sales wilh the sales manager
(d) determine the linished.gods inventory
CHAPTER 15
DlscusstoN ouEsTtoNs
requi rement i n harmony wi t h t he sal es
budget
(e) plan production with the production
man-
ager based on the sales budget
(f)
-meel with heads of all dopartments-toth
producing and service-relative to direct
rnalerials, direcl labor, and lactory over-
head cosl r requi red f or t he product i on
budgeted
( S) est abl i sh mat er i al s pur chase r equi r e-
menls based on production planning, a
doparlment' s malerials raquiremenls, or
tho produclbn budgel
(h) esl abl i sh xpsnso budgel s wi l h market -
ing, administrative, and financial division
heads
(i ) budget capi l al expendi t ures and prepare
a researeh and development budgt.
0)
develop a cash budget
(k) coodinate and surnnrarize ccrnpany.wide
budgets into a masler budget..+umma-
rized in the budgeled incorne stalEmont
and balance sheel
O1$7. Thc periodic budget ropresents a formal com-
munication channel within a company for the
lollowing rasons:
( a) The per i odi c budget i nvol ves a l or mal
comrnitment on lhe parl of management
l o l ake posi l i ve act i ons t o make act ual
events conespond to the formal budgel.
(b) The peri odi c budget i s usual l y ravi ewed
and approved by a higher authority and,
qrco
approvod, is changed only in unusu-
a.l specif ied circumslances.
( c) The per i odi c bucj get conl ai ns expl i ci t
slaiemonts of the imolementation of man-
agomenl objectives for a period ol time,
publ i shed t o al l par l i es wi l h conl r ol
responsibility.
( d) Compar i son ol act ual r esul t s wi t h t he
periodic budgel forms lhe basis tor man-
agoment control, motivation, and pedor-
rrance evaluaticn.
Q15-8. Budgels are required for planning, moniloring,
and molivating, and because they include esli-
mat 6s, t hey al ways i nvol ve uncert ai nt y. The
procass ol budget preparation forces idenlifica-
l i on ol vari abl es and at t smpt s at esl i mat i on.
Rei t eral i on shoul d i mprove t he process, and
the process should cause a positive atlhude to
at l ai n goal s. Of cour se, a poor l y est i mal ed
budget can causs dysf unct i onal behavi or.
I n t hi s si t uat i on, t he budgst shoul d pr ovi de
incentive lor going after bids. The inclusion of
budgst ed and act ual conl ri bul i on margi n dat a
I
t-
[ ;
a0
Chaptor l5
h periodic roporb c{fers an early hdkxtion c/
'
bobtf,
par ccrlributbn, or the pesible noed lo
reduce bid prices,
or olher corroctive action
thst rnay be reguire'd.
CGA-Canada (adantcd). Beprinl with permis'
airr.
Q15-9. All omployeec (including txoculivr manago'
rncnt) must accoPt fir inportancr of budgeting
and bo wi l l i ng to parl i ci pal r ful l y i n budgol
prcparatbn and irnpbmentatirxr, or hc budgnt
. will nst rtork.
a1$10. (a) Etlective ur cl budgrthg rholH rocult in
botter perlorrrlinc. by the organizatbn
because ol betlcr pe rformance by the
rnanagonr. Tho behavirral bonefit lies h
the ability crf thr budget and he btdgeling
proqgss to rnolivalc tnatragtB to accorn'
plish thc orgranizatbn objec'lives. This is
done by ushg the budget ss a vehble for
communi cat i ng company obj ect i ves,
etablishhg subobjectivee in accord with
rnanager objectives, and providing a thq-
qrghly
undcrctood ccrrvno.r bssie for por-
fonnenco rrreuuilTlont ard fcedbck.
(b) The budgeting procoss has been sublect
to criticism by behavioral scienlislr and
clhers on sevcral counls:
(1) The mosl scrbus charge is that the
budgeling proer faib to recognhc thal
i ndi vi dual s may not accopt company
objective as their own. The resull is hck
cl eflort to achieve these objectives.
(2) The l evel of obj ecti ves sel may be
eslablished without regard lo how this will
mot i val c l hc manager l o achi cve l he
obj ect i ves. Tho r esul l s may i ncl ude
underachievcment ol polenlially obtein-
abl e l evel s ol per f or mance and/ or
dostruclbn of employee nrorale.
( 3) The budget i e used as a pr essur e
device lo force conlormity lo and accop-
tance of lhe objectives eslablished in the
budgel. This often resuhs in employees
finding ways lo beat' the budget rather
than actually impoving pedormancc.
(a) The budget b adrnhbtercd by hdivU-
uals noi direclly hvolved in the operaling
elivrty ol thc organizatbn and not partic-
ubrty skillful h dealing wiih people.
(c) Thc rnosl coriour problem lhat must be
overcome h
qdor
to rclve the problems
i denl i fi ed by tho cri l i ci sms i n (b) i s the
u 1
bck o{ understanding of the lorccs that
cause ma Bgcrs to 8cl as they do. ll musl
bc recognrized that the tradilbnal assumP
tims undedying thc budget and budgel
Pr oces!
at c nol . nt i r . l y val i d. Such
agsurnPliats includo:
(l) Managcn tulqnaticslly acc.Pt cqn'
pany obiecfivee as lhcir
qwn.
(2) Tighl
gtandards
ate best bocaur they
ropr.rent hard-to-reach goal s, whi ch
rrwt pcople strivc lo achicvc.
(3) Uppor levolc of managcment an bol
equFped lo ostablish operathg subobirc-
tives.
ll is necesssry to rccognize thc bchav-
brsl influence (psychobgi=l and rcb
bgbal) 6r tho rrprk ol menagers.
The rnost corr[Tron specific neoorrvrpn-
dali'on is thc use cd parlbipative budgel-
hg, sinco il prwide lor an opportuniiy lo
identify objeclivos of thc managcr and
ccrrrpany, hcreaseg the ability of both to
develop opcralhg activitier to reach thr
objcclive, and onhances iho likolihood ol
setting objectives at levels elfcctive in
mol i val i ng managors l oward company
goals.
01tl1. Conrnercbl xponsos are grouped into lunc-
tions by their actions or operalhg units. Thesc
functisrs are boked upon ae departmenls end
should br
gel
along organizalional lincg in
order to identify lhe expente with an autho'
rized and responsible individual. Grouphg by
prcducls and by lenitqies may be desirabL al
wel l .
015.12. The budgeled incorne stalement summarizer
in one stalernent the result! of lhe complelo
plan of aclion. lt expresses in financial lerms
the erd resuhs of proposed plans. ll can also
be used lo lesl the adequrcy or inadeguacy of
those phns.
Ql F13. The budgel ed bal ance sheet r eveal r l hc
expected l i nanci al condi ti on ai the end of I
particubr perird. One ol the measurec of tho
adequary ol propoeed operaling and linancbl
planr is the etfed ol the cxecution of thcro
pbns on the linancial condilbn of the buainesr.
lf the budgeied balance
gheel
shoflg a polen-
lial unsatisfactory condilion, propooed plant
csn be reviewed end perhapo revised lo ptc.
ducs sallsf aclory resulls.
Chapter 15
342
Ei 5- 1
E)GRCISES
BROWI.I BROTHERSi
Budget of Sales Revenue 8nd Grcss Profit
For t he Year 2OB
Rer-Z
Sip-X
Tok-Y
2O,OOO
12, 000
7r5OO
Sal er In
Produst Poundsr
Averagc
Saler
Pricc
per
Poundr
$34.50 $25,00
24.15 18.00
18. 90 14. 30
20a.oooh
140.OAoh
1OO.O07o
lncrease
115, 00%
I O5.OO%
l O5.O07o
I 9A GP
Cost of GrosE
Goods Pttlit
Sold
per por
Poundffi Pound
s9.50
6. 15
4.60
198 Sal es
Salec
Revenue
$
690'000
304,29O
141,750
s1, r36, O4O
Grcgs
Profit
sl 90, OOO
77r49O
34,5OO
$3O1, 990
' Product
Rer-Z
SiP-X
Tok-Y
"Product
Rer-Z
Sip-X
Tok-Y
*'!'od*!
Rer-Z
Sip-X
Tok-Y
E15- 2
l9A Sales lncrease
l O,OOO
9,00o
7,50O
l 9A Pri ce
s30.00
23.00
18. OO
19A Pri ce
20,OOO
l 2, 600
7,50O
198 Pri ce
s34.50
24.15
18. 90
19A Cost
$20.oo
l 5. oo
l 3.oo
l ncrease
125.OOoh
12A.OAoh
t l O. OOTo
198 Cost
s25,OO
18. OO
14. 30
s30.oo
23.OO
18. OO
$l o.oo
8,OO
5.OO
FINEFLEX CORPORATION
Producti on Budget'
For t he Second Quart er Endi ng June 30, 20-
Units ol
Fl op
21, O0O
6, OOO
27,OOO
(s,5oo)
21, 5OO
Units of
Ol ap
37, 50O
I o,5oo
Uni ts of
Ryke
Sal gs forgcast..........,... ...,.........r,
Add desi red endi ng i nventory (June 3O1,...
Quanti ty requi red for tho quarter.............,
Less begi nni ng i nvent or y ( Apr i l 11. . . , . . . . . . . . .
Requi r ed pr oduct i on f or t he quar t er . . . . . . . . .
54, O0O
13. OOO
48, OOO 67, 000
qf_,o99) (14,soo)
9Z99 l-z'seq
Chagter l5
E15- ?
'
u3
MAGIC EHTERPRISES
Production Budget
For t he Quart er Endi ng March 31r 20-
Moon Gl ow Enchanti ng Day Dream
Units required for sa|9s..............o...,..
Add ending lnvontory of finished
Uni t g . . i . . . . . . . . . . . . rr. . . . . r. . . . . . . . . . rr. . . . . . o. . . . . t
Total units roguinad ..o.,o,................
Less beginning Inventory of finished
Uni t S r ar aaa. . . . t or . . r . . . . . . . . r ! r . r . . a. aa. . . . . . . . . r r . .
Units to be transfered to finished
gOOds o. . . . . . . . . . r r . . . a. . . . . a. . r . . . . . . . oo. . . r . . . . r aa.
Add endlng work in process
i nvent Or y . . . r . . . . r o. . . . . . . . r . . r . . or . . . . . . . . . . r . . . .
Less beginning work in
process
i nventOry ...............r..........r....o.........
Equi vafent uni ts to be
ptl duced.......
E15-4
( 11
25O,OOO
t 5rooo
265,OOO
1O, OO0
249,0OO
4r2OO
253r2OO
2rOOO
251,2OO
Mi d Hi gh
Band Band
300
30
175rOOO
I O, OOO
185, OOO
12, OOO
173, OOO
2,OOO
175, OOO
1, 8OO
173,2OO
Low
and
Mi d
Band
250
50
3OO, OOO
2O, OOO
32O,OO0
25,00O
295,0OO
6,OOO
301, OOO
5. 600
?p5Jp9.
Mi d
and
High Three
Band Band
350
50
Units reguired to meet sales
budget . r. . . . . . . . . . . . . o. . . . . . , . . . . . . . . . r. . . .
Add desi red endi ng Inyentoty....
Total units required during
peri od
. , . . . . . . . . . , . r. . . . . . . . . . r. . . .
Less
begi nni ng
i nventory ..........
Requi red
producti on
quanti ty....
Low
Band
200
40
200
30
400
50
240
(sol
190
330
(30)
_999
450
(701
_380
300
eal
280
400 230
(3ol (201
370 210
344
El 5-4
(Concl udedl
(21 Materialg
purchases'req uirements:
Mrtrl
Tublng
1O f eet
7
5
1 7
Mctrl
Tublng
l
r9OO
leet
2r1OO
l , 9oo
4r780
4,44O
41620
lnduc-
tort
Chapter 15
Fccd-
llnc
Con-
ncctorr
190
300
380
280
370
z'ro
l r 73O
500
2'23O
1. 500
730
Pcr Unlt Matcrbb Rcqulrrmcntr
Total Metcrlrlr Fcqulrcmcntr
Produc'
fbn
Requlri-
Modcl mcnt
190
300
380
280
Fccd'
llnr
Con'
Inducton nccton
Low band......
Mi d band,......
Hi gh band......
Low and
mi d band. . . .
Mi d and
hi gh band. . . 37O
Three band.... 21O
Quantity rsquired to meet
production budget....
Add desired ending materials lnventory.....'.......
Total
quantity of materials required for the
peri od
1
I
I
791720
7,0oo
261720
6. OOO
z,SJ20.
190
300
380
560
740
630
2r8OO
800
3,6OO
I , OOO
-2'609
I
I
I
1
I
1 2
22
2
3
Deduct matori al s on hand at the begi nni ng of
t he per i od . . . . . . . . . . . . . . . . . . . . . . . t . t . ' . . . . . . . . . . . . . . . t . . . t . . . . . t . . .
Matgrials punchases
rgqui re m e nts .......'.......'.'...
E15- 5
(1) Sal es budget for fourth
quarten
Unit
QuanUty
Price Product
x 4,5OO
Y 2,OOO
z 3,0oo
Budget ed sal es i n uni t s. .
Desi red endi ng i nventory
Quanti ty requi red ..............
Begi nni ng i nventory
R e q u i red p
ro d u cti ort..,.,..................
$12. OO
25.OO
20. o0
Sal es
Revenue
$
54,OOO
5O,OOO
6O,000
s184, OoO
_
Product
(2)
Total budgeted sa1es...............,...t....
Producti on budget for fourth
quarten
x
4, 5OO
900
5, 4OO
600
2, OOO
400
2AOO
500
1, 900
3, OOO
500
3, 5OO
400
Y
lf99
3, 100
Chapter 15
E15-5 (Concl uded|
(31 Materials usage budget for fourtfr
quarten
Product
Pl anned
Pro-
dustion
-
4,8OO
l , 9oo
3rl oo
(41 Materials purchase
budget for fourth
guailen
Material
345
Materials Required Per Unit Total Materials Required
A
3
2
I
c B A c
2
4
2
I
2
3
x
Y
z
l 4r4OO
3r8OO
3, l oo
4r8OO
3, 8OO
9, 3OO
9, 6OO
Trgoo
o,2oo
23,4OO
Total
s83, O5O
21, 3OO 17, 9O0
c B A
Productlon requiremgnt r.......,...
Desired ending inventory .....o....
Quantity required ..................r...
Beginning inventof' ' lf .......,..........
Quantity to be purchased
..,..,....
Uni t COSI . . . r. ' . . . . r. . . , . rr. r. . . . r. . . . . r, . r, .
Purchasg req uiremoot....,..........
E15- 6
( 1)
Units required to meet sales budget
Add onding inventory
Total units 1equirad.......,.............
Less beginning inventory ..,,..............
Pl anned producti on............
21, 3OO
2,5OO
23,8OO
2,0oo
21, 8OO
s
,50
17, 9OO
2rOOO
19, 9OO
{ . 000
18, 9OO
3 z. oo
63z.goo
23t4O4
2,AOA
25,4OO
2, 5O0
22,gOO
3 1. 5o
slo,9oo $34,359
Tribolita Polycal Powder X
8O,OOO
6r0oo
86,OOO
5,OOO
81, OOO
4O,OOO
2,OOO
42,OOO
4rOOO
38, OOO
l OO,OOO
SrOOO
l OSrOOO
I O,OOO
98, OOO
a6
Et 5-6
(Concl uded)
tzl
Tri bOl i t g r. . . . . . . . . r. . . . . . . . r.
Pol ycal .......................
Powder X ............,,.....
Add endi ng i nventory
Less begi nni ng
i nvgntorY...........' ......
Uni ts to be
Purchased
Cost
per ki l ogt' ar[ ......
Total cost ot
pU nC h aSgS . . . . . . . . . . . . . . . .
(31
Material A
8 1 , 0 0 0 1 1 = 8 l O 0 0 k g
38, OOO 12 =
76 ooo
Chapter t5
Materi al B
8i , OOO 12
= 162 OOO kg
g 8 r OOOr l
= 9 8 O;
260 00o kg
15 000
275 ooo kg
1 1 0 0 0
264 OOO kg
x
$ . 1 0
$ZOrlaIl
Total
I
16, 200
l 5, 2OO
16, 20O
9, 8OO
s 57, 4OO
s 32, 4OO
38, OOO
9, 8OO
s 80,2oo
Materi al s:
A:
gt ' OOO
x I x S. 2O r . . . . . . . . . . ' .
38r OOO x 2 xS. 2O . . ' . . . . . . . . . .
B: 81r OOO x2xS. 1O. . . . . . . . , . . . '
98, OOO x I x S. 1O, . . . . . . . . . . . .
Di rect Labon
8t r 5O I 38 . . . . . . ' ! . . . ' . . . . t . . . . . . . . .
38 r 125 r $8 ...,...............r....
98 x 12. 5 x58, . . . . . . . . . . . . . . . . . . . . . .
Factory overhead-vari abl e:
81 X 50 X 56. . . . . . . . . . . . . . . . . r . . . . r . . r
39 r 125 r 56. . . . . . . . . . , . . , . . . . . . . . . .
98 x 12. 5 r S6 . . . . . . . . . .
157 Ooo kg
12 000
169 oOO kg
I 500
{ 59 5oo kg
x
s.20
s3{. 900
Tribolite Pol ycal Power X
$16, 2OO
s15' 2OO
16, 20o
s 9, 8OO
$32,4OO 915,2OO
s 9, 8OO
s32,4OO
s38,OOO
s 9, 8OO
s
9,800
$32,40O
s38,ooo
s24,3oO
$24,3OO
Total vari abl e manufacturi ng
cost . . . . . . . . S89, 1OO
s28,5OO $ 7, 350 s 60, 150
99l , 7oo
S26, e59 s1e7' 75O
s28,50O
s 24, 300
28, 50O
7, 35O
$ 7, 350
Fi xed manuf act ur i ng cost
( not at t ocat ed
t o
pr oduct s) . . . . . . . . . .
4O' OOO
Tot al manuf act ur i ng cos1. . . . . . . , . . . . . . . . . . , . . .
' g?%t t g
Chaptor l5
El 5- 7
u7
wt(z lNc.
Budgeted Gost of Goods Manul actured and Sol d Statement
For the
Year
20-
Materi al s:
Begi nni ng i nventory....
PUr ChaSgS. . . . . . . . . . . . . . . . . . r . . . . . . . . o. . . . . . . . . . . . . . . . i . . . . . . . . . t . t . .
Matgri ats avai tabl g for usb .........o..........r......r.....
Ending invgntory' ...........' ..' ........o...o...-..............' ..
Cost of matgrials usgd....................................t' t.
L3 bO1. . . . . . . . . . . . . . . o. . . . o. . o. . . . . . . . . . . . . . . . . . . . . . o. o. . . r . r . . . . . . . . . . . t t . .
FactOry ovgrh
gad
.........r........r.........r.t....................
Total manufacturi ng CoSt .,......................' ..............
Add begi nni ng work i n
process i nventotl f........' .....
Deduct endi ng work i n
process i nventory.......,..,..
Cost of
goods
manuf act ungd r. . . r, . . . . . . . . . . ' . r. . . r. . . . . ' . . . .
Add begi nni ng fi ni shed
goods i nventory.....' .."......
Cost of
goods
avai l abl g for sa|e.......,' ...,.....r.' .r.' ....
Deduct endi ng fi ni shed
goods i nventory .,...,..,...,.r
GoSt Of
gOOdS
SOl d . . . . . . . . . . . . . ' . . . . . . o. . . o". . . . . . . . . . . o. . . . . ' . . . .
tEarnfngr
l E
h of S2O,OOO,00O
= tl r200,OO0l
Marketi ng, admi ni strati ve, and fi nanci al erpense3
Cost of goods
sol d (Sa, 280, 00O). . , . .
$ 5OO, OOO.
2. 600. 0oot
$3, 1OO, OOO
600.ooo
l ooh ol sal es
21
31ah of sal es
69
lOOc/c of sales
s2,5OO,000
4, 34O, OOO
1' 840' 000e
S8' 68O' 0000
1O0, 000
s8,780,OOO
3OO, OOO
S8r 48O, OOOz
SOO, OOO
s9, 280, 00O
1, 000, 000
s8, 28O, 000r
zCost
of goods
rol d
s8, 290, 000
rCost
of gooda
manufactured
88,480,000
.Total
manufac-
turl ng
cost
88,gg0,ooo
o
Cost
ol
mat erl al s
used
s2, 500, 000
Endi ng l i ni shcd
goods i nventory
81, oO0, ooo
Endi ng work In
process i nventory
q3o0, 000
Labor
lSOc/o
ol
manutacturi ng cost)
94,340,000
Endi ng
mat eri al s
Inventory
s600. ooo
Beginning finished
goods inventory
s8oo,00o
Beginning work in
process inventory
sl oo,ooo
Cost ol materi al g
used
32,5oo,ooo
Begi nni ng
mat eri al s
i nventory
s500, ooo
Cost of
goods
= manufactured
s8, 48O, OoO
Total manul acturi ng cost
(materi al s, l abor' and
= l actory overhead)
s8, 680, OO0
= Factory overhead
s1, 84O, 000
= Mat er i al s
purchases
s2, 6OO, OOO
-----7
ChaDter 15
348
E15- 8
PATZ COMPANY
Budgeted Income Statement
Second Quarter, 20-
Sales (S500r000 first
quartgr sales r 2) '..'..,......r...'.."...
cost of
goods sol d
($1' ooo,ooo sal es x
(1o0%
-
4o%l l
Gross
profit (9 t
rOOOrO0O
sal
gs
x 4Ao/o1,..............,......!o...
Commerci al erpenses:
Uncotl ecti bl e accounts
($l ,o0o,ooo sal es r2%1.' .' .. $
2OrOo0
Depreci ati on
(($8OO,OOO + 2O yearsl r 114
year! ..-' ... 1O' OOO
Marketing:
Vafi abl e ($l
rOO0rO0O
Sal eS X l O%1,..,......r...D..,......
{OOr000
Fi Xed. r . . . . . . . . . r . . r . . . . . . . . . . . . . . . . . r . r r o. . . . . t r . . . . . . . . . . . t . . . . . . . ' . o. . .
SOt OOO
Admi ni strati on
(al l fi xed).....or..,,...
.............' .
3o.ooo
l nCOmg bgfOfg i nCOmg tax ..,.....,..,.............' .,..,..............
sl rooo,ooo
6O0,0oo
$
4OO,OOO
2{ O. OOO
3 l 90. ooo
El s- 9
GGA-Canada
(adapted). Repri nt wi th
permi ssi on'
ME)OA CORPORATION
Budgeted Income Statement
For t he Year Endi ng December 3' l r 2OB
Sal es (S9,OOO,OOO i n l 9A x 1.O5
quanti ty i ncrease x
1 . 1 0 pr i ce i ncr ease) . . . , . . . . . . . . . . . . D' . . . . ' . r . . . . , ' . . . . . . . . . . .
Less cost of
goods
sol d
(56,000,0OO r 1.O5
quanti ty i ncrease x
I .O6 cOSt i nCfeaSe!...,............,...,..' .,..' ...............
Gr OSS pf ot i t . . . r . . r . . . . . . . . r . . . . . . . . . r . . . . . . . . r . . r . . . . r . . r r . . . . . . . r . . . t . . . . .
Less commerci al expenses:
Marketi ng expenses
(S78O,OOO + S42O,OOO
i ncrease i n adverti si ng).
Admi ni strati vg
gxpens gs,......,...' ...............r............
Operati ng i ncome before taxes and i nterest.........-....
sl ,20o,0oo
9OO, O0O
$1O, 395, 000
6, 578, OOO
s 3, 717, 000
2, 1OO, OOO
Less i nterest expense
($14O, OOO + ($4OO, O0O asset i ncrease
x
1oo/ o rat e))
l n com
g
bgf org i ncome I EI X. . . . . . . . , . . . . . , . . . . . . . , . . . . . . . . . . . . . . . . ' . .
Less i ncome
t ax expense ($l
, 447 . OOO
x . 4O t ax rat e)
Net l ncome. . . . . . . . . . . ,
. . , . . . . . . . . . . . , . . , , . . . . . .
s 1, 617, O0O
180. OOO
$1, 437, 00O
574. 800
s a62.200
-
anpbr 15
349
Pt 5-1
( 11
PROBLEMS
Sales Budget
Unit Price Total
b
Thi ngonc .....................!......oi r..oo....oor.....r..............
OO' OOO S 70 34t2OOtOOO
Thingtwo......
. . . . . . . r. . . . . . . . . . 4Ot 0OO l OO 4t OOO; OOO
PfOi eCted 881OS.r..r........oo...o...........rr..r.............
Produstlon Budget
f f i f f i
Oej i red i nventori osr Decamber 3l ' 2O8..
25' OOO I' OOO
85,OOO 49,OOO
Less elpected inventories, Januar! 1, 208...' ..... 2O' OO! 8t0!9
99,ooo
41, OOO
Raw Materials Purchases Budget
l2'l
(31
Raw Mrtcrlrlr
C Total
Thlngoor (O5'OO0 unltr
prolcctcd to bc produccd) 260,OoO lbr 130'OoO lbr"
Thlngtwo (41,OOO unltr
prol ectcd to bc producr' d) 2O5,OOO
123' OOO 41' 000 unl tr
Produc,t|on
rrqulnmrnt..........- 485rOOO br. 5it'Oog br. {1'OOO unltr
Add dcllnd lnvcntorlcr,
Dccrmbrr 31, lg8*...- 3E,ooO
32'OOO 7'OOo
Totel nqulrrmcntr..* 5OI,OOO br, 285'000 lbr. 48'OOO unltr
L.cr rrpcctcd brvcn-
-
torl cr, Jrnuary 1, 198.--. 32,000 20' OOO
5.ooo
h,rrchar roqulrcmcntt....- 469'OOO lbr. 256'0OO lbr. 43'000 unttl
Cort pcr pound
or unlt.* $8 35
'sr
Totel coct of purchaeGr......
33,252,000 3i,2go,!o9
'g13gggg
sl,rclpoo
Chaoter l5
3fi
I
Pt5-l
(Concl uded)
(41
Dlrect Labor Budget
Prolected
Hourr
Productlon Per
Unit
Total
Ratc
Total
Thi ngonc
. . . . . . . o. ot t t t "r"t "t "t t '
Thi n
gt wo . . . . . . . . . . . . r. ot "t "t "t t t t '
(Unltsl
g5rooo
4t , ooo
t3o,ooo
l 23,OOO
$l,o4orooo
Irl oTrooo
s2,147' OOO
$8
9
2
3
(sl Flnlghcd Goods Inventory
Budgc!
Deccmber
3l' 2OB
Thingone:
Raw materials:
A-4
pOUndA O $8 ...r.....r....r...r..' .' .........' ."""'
b2
pOUndS O $5 ...............r..............r...r.......
Direct fabor-2 hourg O $8 o.r............r.......'.."""
Factory overhead-2 hours O $2
per direct labor
h o l l l a. . . . . . ar . . . a. . t aa. . . a. . a. . . aa" t t r ' ! " " " t " t t t t " " t t " t
$82 r 25tOOO unl ts r...........o..' ........"t"""tt"ot"
Thingtwo:
Raw materials:
A-5 poundS O $8.......................r.' ..r......r......
B-3 pounds O $5 ..........o..o......o.""""""""""
C- l uni t O $3 . . . t . . . . . . . . . . . . . . t . . t t ' r "t ' o' o""t "t t "t t t '
Dirgct laborq? hours O $9 r.....................'..""""
Factory oyorhoad-.? houra O 32
per direct labor
hour . . . . . . . . t t . . . . . . o. . . t 1. . . t . . . . . . . t . . t . " " t " t " t " t " t " "
591 r I rOOO uni t 8. . . . . ' . . ' . . . . . . . . . r. . . . . . . . . . . . ' . . ' . o. . . . .
Budgeted finished goods inventory,
December 31, 2OB
$gz
l o 9,42
1 6
4
s62
:
$l , 55O, OOO
$co
1 5
3 $ss
27
6
rlel
8l 9, OOO
I34w
Clwptor 15
P15-2
,
( 11
35t
ROLETTER COMPAT.JY
Budget for Produetlon and Direct Labor
For the Quarter Ending March 31r 2OB
Month
January February March Quarter
Salgs (uhitsl .....................' ............
IOTOOO l2rOOO I' OOO 3OTOOO
Add ending inventOt' .........,...,....
l6' 000 12r5OO 13r5OO 13r5OO
TOtal UnltS feqUifed ....,,..o,....,..,....
26' 000 24r5OO 21r5OO 43r5OO
Less begi nni ng Inventoryr...o......... l O' OOO.. l 6' 000 12r5OO 1or00o
Unlts to be
producod.................... IO,OOO 8r5OO 9' OOO 27r5OO
Di rect l abor hours per uni t.........' . r 2.O r 2,O r 1.5
Total hours of diract labor time
n
ggd
ed ........o...........r....... 20,0OO t 7, ooo 13, 5oo 5o, 5oo
Direct labor costs:
Wages
1$8.00
per DLHI ........r... $l oO,OOO $136'000 $1 O8,OOO S4O4,OOO
Pension contrlbutlons
($.25 pef
DL10...........r..r.,..... 5' OOO 4t25O 31375 121625
Workergt componsatlon
Insurance ($.1O psr DLH)..... 2' OOO 1r7OO 1r35O 5' O5O
Employee medlcal Insurancc
(3.4O per DLI[.'.......r............ S'OOO 61800 5r4OO 2O'2OO
Employerb social security and
unemployment tares
(ss. oo r. 1o =
g8o
per DLH| 16, 000 13, 600 1O' 8OO 4O' 4OO
Total direct labor G(tst......... $191rooo $182,350 s128,925 s482,275
: : -
rl OOc6
of the fi rst fol towi ng monthb sal es
pl us 5O% of the second fol l owi ng
monthb sales.
- - -
Chagter l5
P75-2
(Concludei!)
(2) (al Gomponents of the perlodic
budgot, other than thc
producUon budget
and the direct labor budget, that would algo use tte saler data include:
(1) the sal eg budget
l2l
the cost of
goods manufastured and sold budget
igl
the markating and administraiivc oxponsos budget
(4) the budgeted Income statement
(b) Gomponents of the periodic budget other than the production budget
and the direct labor budget, that would also use the
production
data
i ncl ude:
(11 tho dlroct materiab budget
l2l
tho tactory overhead budget
(3) the cost of goods manulactured and sold budget
(cl Gomponents of the periodic
budget, other than the
production budget
and the direct labor budget, that would also use ttro direct labor hour
data i ncl ude:
(1) the tactory overhead budget (for determining the overhead applica-
tion rate il based on direct labor hours!
(d) Components of the periodic budget, othcr than thc production budget
and the direct labor budget, that would elso use the dirsct labor cost
data include:
(11 the lactory overhead budget
(for determining the overhead applica-
tion rate il based on direct labor dollars and for dstermining the cost of
employee benefits attributable to wages earned by direct labor)
t2)
the cost of goods manufactured and sold budget
(3) the cash budget
(4) the budgeted i ncome statement
Chagtor 15
P15-3
'
(1) EsUmated cales lor third
guarter (July-Septemberf .........r.,.....
Add ending Inventory
p' OOO
r 8O96)....,.r.o.....,..........o..o.,............
Lgss bgginning lnventoly ..................r....' .....
313
18, OOO
5, 600
23,6OO
5.600
18. OOO
t2l
Material
Unl ts to bo producgd' .' .........r.o...............
Matgrials I' irto ...,.......,...o,.,.
Unltg of matgrials required ...,.......,...o..,..
Add ending Inventory:
5t 60O I 6 . . . . . . . . . . . . . . r . . . . . . . . . . . . t . . . . . . . . . . . . . . . .
5t6OO I 4 ...............t.' rr...t................o.t.
5t0OO I 2 .........r............r..........r..i .......
1 0 1
l 8r OOO
I 6
211
l Srooo
t 4
242
18, OOO
x 2
36, OOO
1 1, 2OO
l OS' OOO
33,600
72,OOO
22r4OO
141, 600
Less beginning inventory.,.....,.,......,.r..o.. 35rOOO
PUrChaSgS......r...........r............................ f OO"gOO
Hours
por
Production Unit
94,400 47,2OO
3OTOOO
13. OOO
34r2OO
x$1. 20
$4'to4Q
Total
Labor
Gost Process
FOrmi ng .o.........tr...rr...
ASSem b ly ....r..............
Fi ni shi ng . o. . . . . . . . , . . . . . . . . ,
Cost per
unit r s2.40
64,4O0
x $3.60
Total cost of purchasoS.............,.............
9255r84O $231,84O
{31
Total
Hours
Total
Labor
Rate
18, OOO
18,000
18, O0O
,80
2.OO
.25
l 4,4OO $8,OO
36,000 5.5O
4.500 6.00
54,9OO
$115, 2OO
198, OOO
27
|OOO
9940'299
(41
Erpectedannual producti oJl .............r........
60,000 uni ts
27,OOO
Astual producUon
through June 30
:
,
Erpocted production
during last six months of 20A...,.. 33pOO units
Variable
factory oyerhead per unit ($i
gZ,Ooo
+
27,0ool x $6.00
Budgeted
vari abl e factory oyerhead...........,.r.,,..o....,..... $l gBrOoo
Budgeted
fi red factory overhead 93,OOO
Total budgeted factory overhead
3gt
Pl 5-4
(tl
Chagter 15
Revlsed Salea Budget in Unlts Bagod on tho Inder
Terrltorles
1
-lb. pack3ff o......."'
2-lb.
packago...o.---.-
Total ....' ....' .........
t l O, OOO
r . 9 = I ' OOO
212' OOO
r . 9 = l O' 8OO
(21 Sal es Budget i n Dol l ars
I
IrO00
t
1O, 8OO
r
llf99
. i l
l 3,5OO
l o,2oo
29'-7OO
l l l
torSOO
l o,8oo
21, 600
:-
Other
551r7OO
704,7OO
1, 256, 4OO
6-Month
Total
585,OOO
7{2,5OO
tl327,5OO
Territories
I
l l
$2,ZSO'
$
gPZS
5,4OOr
I,l OO
E?rsso
9!Jr475
lll
Other
$2,7OO $137,925
5,4OO
352,350
$8.roo
$2,25o
s5,4OO
s490,275
$glJ.soo
6-Month
Total
$146, 250
371,25O
l
-lb. pack?ff o..........
2' lb.
package..........
Tota 1................
|
9,9oo revised estimate r i25
(per packago! =
,1o;8oo
revised estimate x $.5o
(per package) =
Materials Purchases
(3)
Grain R
Grain S
Total
January. . o. . r. . . . . . . . . . .
February ........o..r...
Mal t h. . . . . . o. . . . . . ' . . ' . . r
Apri l ,...,.................
May . . . . . . . . . . . . . . . . . . . . . o.
June,............,...,..,.
2,OOO $
2,4OO
I , 0oo 1, 2OO
3, OOO 3, 750
.,:o .,ojo
4,OOO 4,OOO
13. OOO sl 4, 350
: :
Bu.
5rOOO
t,oro
I,OOO
3,OOO
4,OOO
4,OOO.
@t
$ 6,5oo
''rjo
l 2, ooo
4,5OO
614OO
$32,200
Bu. Gost Bu.
7,OOO
3,0o0
3,00o
11, OOO
3,OOO
8,0oo
35doo
@t
$ 8,9oo
4,OOO
3, 75O
15, OOO
4r5OO
1O, 4OO
E4Or5s9
Chapter t5
Pl 5- 4
( Concl uded)
(4) Materi al s Requi rements for Producti on
a q E
Producti on of 585rOOO 1-l b.
packages..' .....-..........................r.....
Producti o n ol 7 4215OO 2' l b. packages ...r....-............-......
Total materi al s requi rements for si x months ...............' ...............
585, OOO l bs.
1, 485, 00O
2,O70,0OO l bs,
Three bushel s of
grai n i n the
proporti ons of 2R:1S
produce 198 l bs. of fi ni shed
producl R wei ghs 7O l bs.
per bushel and S wei ghs 80 l bs.
per bushel .
Wei ght
per
Grai n Bushel s Bushel Lbs.
R 2 7O l bs. 14O
S 1 8O l bs. 80
220
1O7o l oss
22
Wei ght of f i ni shed
Pr oduct . . ' 198
Si nce each 198 l bs. of product cal l s tor 22O l bs' of
grai n, the total wei ght of
grain required tor 2.O7O,O0O lbs. is:
at t at
t#
r 2,070,O0O = 2,3OO,OOO l bs., to be apporti oned as fol l ows:
l Y o
Gr ai n R = x 2, 3OO, OO0
= 1, 463, 636 l bs. = 20' 909 bushel s @ 70 l bs. each
1 4 0
220
Grai n S =
#
x 2, 3OO, Ooo
= 836, 364 l bs. = 10, 455 bushel s @ 8o l bs. each
Materi al s Account
(Fi fo Basi s) (5)
Grai n R Grai n S
Bu. Cost Bu, Cost
1O, OOO
22,OOO
32, OOO
1O, O0O
5, OOO
2, OOO
3, 909
sl 2, OOO
32,2O4
s44,2OO
$12, ooo
6, 5O0
2, 8OO
5, 864
3,OOO
2,OOO
1, OOO
3r OOO
11455
$
3, 000
2r4OO
1r2OO
3r750
11455
3,0oo s 3,ooo
13, 0OO 14, 350
16, OOO sl 7, 350
2O, 9Og s27, 164
1 1, O91 Sl 7, 036
1 0, 455 sl 1, 8o5
5, 545 s 5, 545
, r
I
Chaotar 15
356
P15- 5
( 1)
Budgeted Incomc Statoment
(Ooos omittadl
Quarter
Sales:
CommglciSl
.........."""""t"
GovgrnmgJlt.' ..........t"""""
t ot a t . r . . . . . . . t . . . . . . . t t t t o"t t " "
Cost of
goods 8old ..".,....' ..' ...
Grosg
profit .........r.....' .......".t.
Other oprating arponses:
Advertising ..' .............-----.--
Sgl l i ng . . . . . . . . r. . . . . . . . . . . . . . t """'
Admi n istrativg ............' ...r..
Gengral ofti cg ...........r.' ....-.
TOI Sl . . . . . . . . . . . r. . . . . . . . . . t r. . . . t .
lncome before income t?r..' ...
Incomg t3I.....' .................""...
Ngt i ncomo .............................
ft$
s250
l oo
33sO
t ot
$l 05
Sl 03
41
$ 5 6
' $ 6 2
Second Third
3268 3275
120 l t o
Fourth Total
$goo sl ,o91
115 445
9{1s
l 9l
$113
s 41e
$r r r s
410
44 163
$1 8e
$ o
35
32
23
$ g o
s e 3
37
s1, 536
707
$ ezg
$ 2 4
155
140
100
b
- i
s386 s38lt
178 177
$208 3208
$ 6
39
35
25
$ 6
39
35
25
$,224
9 o
42
38
27
$l os
31 03
41
s 6 2 $ 6 7 s 247_
j
I
-
357
Chapter 15
P15-6
(Goncl uded)
(21 Budgeted Income
Statement
with 5% Incrtaso In Gommercial Sales
(OOOs omitted)
Quarter
Fi$
$zsg
l oo
$36s
1A7
$1
e6
$ 8
$27e
120
s390
184
s2l 5
$ 6
$l 08
$1 07
43
9_g!
Second Third Fourth Total
Sales:
Comm
grci8l
................trt' ttr
. GovgrnmOrlt...........t' .....' ."'
Tot al . . . . t . . . . . . . . . . o. . . . . "t rt "t '
Gogt of
goods Eold ............-....
Gross
protit ............o......' ...t...'
Other operating expensos:
Advertising
Selling .............................t'
AdministraUvc ...................
Ggneral oftico .........t....t.r...
TOt Sl . . . t . . . . . . . t . . t . . . . t . . . . . . . . . '
lncome befora income tir"....
lncOmg t3L.....r.....-................
Ngt i nCOm| Et t.....r...............tr.....
$zss
l l o
$3e9
184
$31s
1 1 5
$21
5
$ 6
9f30
198
s232
$ 6
43
39
2a
$108
sl
07
43
S s e s 7 0
s| , 146
445
s1r 591
733
36
33
24
40
36
2g
40
36
26
s 858
$ 2 4
159
144
1o' 4
$ e g
$ e 7
39
sl 16
$1
r s
46
s 431
9
427
171
s
256
3 5 8
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Clapter 15
o
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Chaptar
15
w
P15-6
(Concl uded)
(3)
JOHNSON
AI*ID SMITH,
CERTIFIED
PUBLIC ACCOUNTANTS
Budgeted Income Statement
For Year Endi ng June 3Or zON
Revenue
from
chargoabl e
Ume:
Emplovee
Johnson
Smi t h
t . r . . t ' t t t t t t t ' r ' r t t o" t " " " " t t " r " " t "
Vi ckg r 3. . . . .
t t t t ' l " t r " t " " " " t t ot " t t t " " " '
Lowe
Blllable
Hourr
700
l , l oo
1, 5OO
l , 600
1re25
11625
500
I , l oo
1, 0o0
si l i i ng
Rate
$90.oo
70.oo
52.OO
39.OO
32.OO
32.OO
17. 50
l 5. oo
15. OO
Gross
Fees
$
gg,ooo
77,OOO
78,O0O
02,4OO
52rOOO
52,OOO
8, 75O
l 61500
15. OOO s424, 650
stoo,ooo
97r76O
39r520
35,OOO
02'37o
334,650
s-lgpoo
- a a a a a a a a a a a a a t a a a a r a "
KennedY. . . . ""'
a a a t a a a a a a a a a a r r r r r o o o o r t r r r r o
Qui nn
' ...
Gar Ci a . . . ot t . t " " " t ' l t t " t t t t t " t t " " " t ' l " t '
Hammond
' .
LyOnS . . . . . . . t t oo" t t " " t ' t t " t " t " t t t " " " " "
Erpenses
of
Producing
revenue:
Salaries:
Partner:8....
Profgssi onal staff ....,r.r."""'
Sgcrgta ri
g3""""tt
"r" "t "" " "
Frin
ge bgn
gfits""""""' o"""""'
Other oporating
erpenseg
.o.."'
Gross
prcfi t.......o.."t' o"t"tt""tt"""'
Chapter 15
P15- 7
l
36t
Schedul e 1
Sal oc Budget
Areas
Model l 5O
Uni ts ...r..r.....t..ot.
Unit
prico
Tot al . . r r . . . . . . . . . . . . . . . t . . . . . o. t . t t . r . o. . t .
Model l OO
Unitg
Uni t
pr i ce
. . t . . . . . . . . . r . . . . . . . r r . . . . . . r . . r . r . .
TOt al . . . . . . r . . . . . . . . . . . r . r r . . . . . ' . r . . . ' . r . . .
Model 50
Units ..............
Unit price ...............
TOtal r..' .....r....
TOt al a. aa. ar . . . . r t r r a. r . . . . r . . r . r . a. aaaa aa aa a. . o. r r t
South
3' OOO 4' OOO
9__!-75 9_l_Zg
t__92599
g_7ooeg
Southwest Total
TrOOO
775
g!,?ailoo
5rOOO
q__!
20
9_eoop.99
7,OOO
t_eo
9-_e9999
fllTsE.OOO
I,OOO
s___99
gl20{99
$3fgg,ooo
15, OOO
90
il-egpoo
s{ptlpgg
7,OOO l 2rOOO
$ r zo
$_139
E__glgpoo 91,41!.ooo
s
Schedule 2
Production Budget
Model
Units required to meet sales budget (Schedule
l)
Add
gndi ng
i nvent o}y. , . . , . . , . . . . . . . . r. . r. o. , r, r. . . . . . . . . . . . . . . r. .
Total units requirad..............r..........................r,.....
Lgss begi nni ng i nventory.,....,...,...o..,..............r....,.
Pl anned producUon
tor thc year........r...............-..
7, OOO 12. 100 14. gOO
t-s
TrOOO
200
7
r2OO
200
1_99 99
12, OOO 15, OOO
400 300
12,4OO 15,3OO
300 400
Chapter 15
fi2
P15-7
(Continued)
Schedule
3
Direct Materials
Budget in Units
Units
tq Be
Lumber
ln Board
Finish
l n
Pints
Model
15O
Utits to be manufacturod
(schgdulg 2! ""t""""""""""
Matgri al s
l Ste """""t""""t"tt"
Units of materials
rcquired
"""
Model l oO
-Units
to be manufactured
(schgdul g 2| """"""' t """""'
Matgri al s
l Sto "tttt"t"t""to""t"'
Units of materials
requlred """
Model 5O
-Units
to be manufactured
(schedule 2) ......"""""""""'
Matgrials lSto ....."""-""""""'
Units ol materials required...."
Total units of materials requirad
"
Manuiactured
Feet
9Peakers
7,O0o
1 2
84.OOO
35.000
14.OOO
l 2, l oo
I
96, 800
36. 300 12, 100
l 4, 9OO
29, 800
14' 900
lE-loo
91poo
89.400
270.200
Schedul e
4
Purchases
Budget
Materials -. - .
@
Finish
Total
27O,2AO
30,ooo
3OO,2OO
40.ooo
26O,20O
$
, 75
$_esJlg
Units required for
Production
(Sch edul e 3)..............-.......
Add
gndi ng
i nventofl .........-..
Less begi nni ng i nventol Y...' ..
Uni ts to be
Punchasod
..........
Estimated unit cost ..............
Total cost of purchaseS........
l ot , l oo
8.OOO
1O9r 10O
I O.OOO
99, 1oo
s
r5.oo
@
41, 00O
2.OOO
43,OOO
1. 500
41r 5OO
$
z.oo
$83. OOO
s1. 764, 650
Chaptor 15
P15-7 (Gonti nuedf
Schedule 5
Cost of Materiala Reguired lor Production
3&3
Materials
Lumber Speakerg Fi ni sh Total
Model l 5O
Unitr of materialr roquired
lor producUon
(schedul e 3|.........,.........
g4rOOO
35' OOO i 4rOOO
Unit cost..,..........,,.........r...
t__
.25
f_l!E.og
$ 2.oo
Total ....,....,....,................
t-lgrg0O U2SOgg $28.OOO $ 6i O'OOO
Model 1OO
Units of materials reguired
tor producUon
(Schedulc
3f .......,..r..r.,,..
Uni t coSt . . . . . . r. . . . . . . . . . . . . . r. i . . . .
Total
Model 5O
Units of materials raquirod
for production
(Schedul c
3) . . . . . . . . . . . r. . r. . . .
Uni t COSt r. . . . r. . . . . , . . . . . . . . . . . . . . . o
TOtal ...... r......r............r....
TOta1...........r.....r..r..r........r..
90r8OO 3gr3OO 12,1OO
t _-
. 75
L- 19: oo $ z. oo
L72oo $__gg{,5OO $24,2OO 641, 3OO
89,4OO
t---75
r_o7ggg
gg?.s5o
2grgoo
9__--1-g.og
$lrJse
e!E!
!,soo
l 4, 9OO
$ 2.OO
$29,800
$82.OOO
543.850
$1. 801. 150
f
url
P15-7
(Continued)
'
Schedul e O
Dirsct Labor Budget
Chapter l5
Cuttfns Assombll$ Finishinq Total
Model l 50
Hourg
per unlt ' .................. .375' 2.OOO .375
Unitg to be manulactured
(schedul g 2)..........o.....o.. 7.OO0 7.OOO 7.OOO
Hourg of labor lquiJd..... 21625 l4rOOO 21625
Labor cost
per holtt.' ."..' ... 3 6.00 3 5.oo
$
4.oo
Total l abor CoEt..,..........., S15.750 i 7O.OOO $1O.5OO $ e6' 25O
Model 1OO
Hci urs
per uni t................... .375 l ' 5OO -25,O
Units to be manufactured
( schedul e 2) . . , . . . . . . . 12. l OO l 2. l OO 12. 1OO
Hours of l abor rcqui rcd..... 41537.5 18rl 50 3' 025
l-abor cost
per ho1tt........... $ 0.oo 3 5.oo $
4.oo
TOtal l abOr COSI..........!.... 527,225 $ 9O.75O $12.l OO
13OrO75
Model 5O
Hours per uni t...' ...r' .......... .375 l ' 5OO ' 25O
Units to be manufactured
(Schedul e 2) ...................
.l
4.900 14.900 l 4.9OO
Hours of l abor rl qui red..... 51587.5 22.35A 3t725
L:bor cost per hour........,.. S 6.00 $
5.oo $
O.oO
Tot al l abor cost . . . . . . . . . . . . . , . 333, 525 Sl I 1. 75O $14, 9OO
160' 175
Total .......
376,500 $272.5OO $37,5OO 3386,500
----------T\
Chapter 15
P15-7 (Continuedf
Schedul e
7
Factory Overhoad
Budget
(Applied Overhead|
Cutting
ASSqrnb[lg
Finishins Total
Model 15O
Unlts to be manufactured"
(Schedul e 21 ..................r TrOOO TrOOO 7rO0O
Estlmated departmsnt
factory overhead.,,or......, $ {' OO $ Z.OO $ .ZS
Total cost..................,..... $ 7,OOO $l 4.oOO S 5.250 S 261250
Model tOO
Units to be manufactured
(Schedule 2f .....,,,.,......... 12r7OO 12r1OO 12r1OO
Estimated department
factory overhgad ..r......... $ 1.OO $ 1.5O $ .5o
Total cost........................ 912.1OO S18,150 $ 6,050 36,300
Model 5O
Units to be manufactured
(Schedul e.2| ...................
14r9OO
' l 4r9OO
14r9OO
EsUmated department
factory overhead r........... $ Irog $ 1.51 $_' l!!
Totaf cost........................
$14.9OO S22.35O $ 7,450 44,7OO
Total factory overhead.......... $34,OOO S54,5OO Sl8,750 SlO7.25O
365
\-
I
- \
\
366
P15-7
(Gontinued)
'
Chapter 15
Schedul e 8
Begi nni ng and Endi ng l nventori es
Materials:
Lu mb
g
r.............
Speakers ..........
Finish .r.....t.......
Total
Work in
process: None
Fi ni shed
goods:
Model 150. . . . . . . '
Modgl l OO ......' .
Modgl 50. . . . . . . . . .
Total r...........
Total
Uni ts
4OrO0O
l O, OOO
1, 50O
Cost
9
.75
15. O0
2.00
ry
$ 3O,OOO
150, 000
3,OOO
s183. OOO
Beqinning Invenlo_ry-
Endi nq l nventorv
Units Gost Total
3OTOOO $ . 75 $22, 5OO
8, OOO 15. OO l 2O, OOO
2,0oo 2.oo 4,0oo
$146. 500
200
400
300
200
300
400
se8.oo
62. OO
47.OO
s 19, 600
18, 600
18. 800
s 57,OOO
s240,ooo
sl os.50
66.75
50.25
s 21, 1OO
2617OO
15, O75
$ 62. 875
s209.375
Schedul e 9
Budgeted Cost of Goods Manufactured and Sold Staternent
Materi al s:
Begi nni ng i nventory (Schedul e 8)...............' ......,"
Add purchasgs (Schedul e 4!...........r............r.,......
Total goods avai l abl e for use............,r.......,..........
Less endi ng i nventory (Schedul e 8) .....' ..' ............
Cost of materi al s used (Schedul e 5l .............' ......
Di rect l abor (Schedul e 6) ....................t.....,.,.........,...
Factory overhead (Schedul e 7)..............' ......' .oo..' .,..' .
Total man ufacturi ng cost .,....,....r..........r.......r...........
Add begi nni ng i nventory of fi ni shed
goods
(Schedul e 8| ............,..r..........................' r....' ....
Gost of
goods
avai l abl e for sal e.. ....,.......,...
Less endi ng i nventory of fi ni shed goods
( Schedul e
8) . . . . . . . . . . . . . . . . . . . . . . , . .
Cost of
goods
sol d . . . . . . . r . . . . . . . . . . . . . . , . . . . . . . . . . . .
$ 183, OOO
1. 764, 650
$1, 947, 650
146, 500
$1, 8O1, 150
386,5OO
107, 250
$2, 294, 90O
57. 000
s2, 351, 9OO
62,875
3;!9,939
%7
Chapter
15
P15-7
(Concl uded)
Schedul e
Budget ed l ncome
1 0
Statement
Sal es-al l model s
(schedul e 1) ...."""""""""""""
Cost of
goods sol d
(Schgdul g 9) , . . ' . . . . . . . . ""oro"""' t '
Gross
profi t.......,......,.........,.,................,....
Markgi i ng'
erpgnsS ....--..' ..............' ..
$5o0rooo
Admi ni sti ati ve
expenses ........r.o...r..
3O0' OOo
l nCOmg bgf Of g i nCOme t aX, . . . . . , . . r. . . . . . . r. . . . . . . . . . . . , . . . . . .
Pf OVi Si On t Of i nCOmg t ax i . r. . . . . . ' . . . . . . . . . . r. . . . o. ' . . o. . . . . . . . .
Ngt i nCOm) . . . . . . . r r . . . , . . o. . . . . . . . . . . o. ' . . . . . . . . . . . . . . . . . . . o. . . . , . . . r r
P15- 8
Amount
s4,o15,ooo.oo
2,289,O25.OO
s1, 725, 975. OO
800.ooo.oo
s 925,975.OO
462.987,50
9192gZ.so
Schedul e 1- Sal es Budget
Economv Model
Western
US EuroPe
Asia Total
Uni t s. . . , . . .
-oqooo
5O, OOO 75, 000
25, 0oo 210' 000
Unit
price
S so S
so
A------5o
$ so S
so
Tota1...,.... s3sooJoo s2,soo.ooo I 3,?lo,o0o sl,25o.ooo
9J9r999rOOO
St andar d Model
Uni t s . , . . . . , 4OTOOO 45, OOO 6OTOOO 35r 0OO 18O' OOO
Unit price
S 70 S 70 S---7o S
zO
S_-7o
Tota1........ Si .AOO,OOO $3,15O,OOO SIT2OOP.OO
S2.45O.oOO Sl 3f99pOO
Del uxe Model
uni t s . . . . . . . 2o, ooo 25, oOO 35, OOO 3O, OOO I 10' OOO
Unit price
S 90 S
go
S---9o
$
90
9---9o
Totat........ 51.8OO.OOo
-S2.25o.OOo
q--9rl -99roo0 S2.7oo.ooo S--$99o.ooo
Total ........,... 57.600.000 S7,9OO.OO0 S11rl0op99
9499p99
q93-ro00p99
Chapter t5
368
Pl 5
(Conti nued)
Schedule 2-Produstion Budget
Units required to meet salec budget
Economy Standard Delure
Model Model Model
2lorooo lSorooo l lorooo
(from Schedule
1! ............o..o."'
lAi Ogslrod endlng Inventory.................o.........
20.OOO l5.OOO IO.OOO
Total units ruquircd lor
Year
zto,ooo 105rooo t 2o,ooo
l5.ooo ls.o(xt l5.ooo
Less beginning Inventory..........-.
Productlon required for the
year..........,....rorriror 2f 5p99
!-8OPOO 1O5P99
Schedule 3-Direct Materials Budget in Units
Economv Modcl
Unltr to bc msrutrcUrcd
Tranr Dlodc
Wlrc
Bor formcrr Rcstlflcrr Fltten Rcrleton 0n
tcet!
(Schcdufu 2)..*......,..*. 2151OOO 215' OOO 215' O0O 2l SrOOO 215' OOO 215' OOO
Met crl el rquen0Uporunl t
1 2 2 5 5
Total quanU$ o,f
mttcrl eb
pqul rcd..,..,.-.
215,OOO 2I5,OOO 43O.O0O 43O.OOO i .O75.OOO 1.075' OOO
Standard Model
Unltr to bc manufectrrcd
(schcdutc 2)...-.............. 18O,OOO 18O,OOO 180' OOO 18O' OOO l 8O' OO0 18O' OOO
Mat erl al rqut ndt Yperunl t t 2
3 8 o
Totel quentlty of
metcrl abruqul rcd.......... ISO,OOO 360.000 72O,OOO 54O,OOO 1.44q.OOO l ' 08O.OOO
Dcl urc Modcl
Unttr to bt manufecbrcd
(schcdufu
2],.-....-.-...... !O5,OOO lOtt,OOO 1O5,OOO 105'0OO 105'000 105'0OO
Matcrlstr quanflV pcr
unlt .3
5 6 10 8
Totel quanU$
ot
mstorl rl r rrqul rod.......... 1O5,OOO 3i 5,OOO 525.OOO 630.000
LOSO' OOO
840' OOO
Total unltr of matorlalr
rcqul redforproductl on.. SOO,OOO 89O.OOO 1.675,000 1,OOO,0OO 3.585!OOO
?f9EOOO
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Chaptor 15
371
P15-8, (Continued)
Schedule S-Dlrect Labor Budget
Economy Standard Delure
Assemblv Department Model Model Model Total
Units to be
produced
(schedul e 2|......,........' 215rOOO l SO' OOO l O5rOOO
Hou.rs reguired
per unit.. '5O .75 l.OO
Hours required...o...r....... 7O7'5OO 135rOOO lO5rOOO 347r5O0
Labor rate por ho1tr,.,.....
t__
los
t____l_o.oo
$ lo.oo $ lo.oo
Total departmental labor
cost for pnoduct.........
$!ro751Q99 t1gg'1Q99 $!ro5ooo 93.{75'1|oo
Testing Department
Units to be produced
(Schedul e 2!,.........,..., 215' OOO l SO' OOO l O5' OOO
Hours required per unit.. ,O5 ,O5 .O5
Hours requi red...D.....r..... 10r75O I' OOO 5r25O 25rOO0
Labor rate per hour...,....
A-___l3.oo E__13.o9 S__U.og S__!3,oo
Total departmental labor
cost for pioduGt......,..
t-_Izsoo s-l-9999 t__qg.ooo so.ooo
Total labor cost for the
period.............or.r.....,.
9!r?9!r00o $rlggfoo $!rl-!3rooo aJzjpgg
Schedule 7-Budgeted Machine Hourc in Testing Department
Economy Standard Deluxe
units to bo produced
Model Model rotal
(Schodul e
21 .......... 215' OOO l SO' OOO l O5' OOO
b Hours ol machi ne Ume
requi red to test ufl i t....... .15 .25 .35
b Total machine hours
requi red................,.....r...
g2r2so
45rooo 36rzso tl 4rooo
Chapter 15
372
Pl 5-8
(Conti nuedl
schedule
g-Budgeted
Factory overhead and Departmental
Rates
Variable
Budgeted
Variable
Fixed Coit Rate Hours
Gost
Assemblv
DePartment
lndirect materials and
suPPlies o..........."""'
lndirect labor.....-.'......r
Payroll t?ros'........-......
Empl oyee fri nge
bgngf i t s. . . . . . . . . -. . r. . . . . . .
Equi pment dePreci ati on
Repai rs and
maintgnar|c(t
............
Allocated building cost
Allocated
general
factorycosts............
241t125
TOtal depaftmental bUdggtgd OVefhead..' ...' .....o..,..........."""""o"'
BUdgeted OVerhead attOCati On baSe
(di reCt l abOr hOUrS),......""""
Predetermined departmental factory overhead
lElt ............o...r....
Testing Department
l ndi rect materi al s and
suppl i es. . . . . . . . . . . . . . . . . . . $157, OOO $ . gS 114, OOO S
39' 9OO S
196' 900
Indi rect 1abor..............t 25O;OOO l .OO t l 4' OOO 1 l 4,OOO
3641000
Payr ol l t axes. . . . . . . . . . . . . . . . 55, OOO . t O l l 4, OOO
l 1r 4O0
66' 400
Empl oyee fri nge
benef i t s. . . . . . . . . . . . . . r ' . . . .
l l 4r OOO
I l 4t OOO
Equi pment depr eci at i on 215' ooo
215' ooo
Repai rs and
mai nt enanco . . . . . . . . . . . . 35, OOO l . 5o I l 4, OOO l 71r O0O
2061000
Al l ocated bui l di ng cost I' OOO
9' OOO
Al l ocated
general
tactory costsr.........., |ftzr7}O
f32' 70o
Totat departmentat budgeted overhead r.....' ............' .....""""""' D"'
91t254tOoo
Budgeted overhead al tocati on base
(machi ne hours) .........!.t.........
114.OOO
Predetermined departmental tactory overhead rate...' ....
$158, O0O
$r. so
347, 5OO $521' 25O
35O' OOO
.5O 347r5OO
773r75O
382;5OO .05 347,500
17,375
347,5OO
65,000
25,OOO .4O 347' 5OO
139,OOO
l 2,ooo
Budgeted
Depart-
mental
Overhead
$
679, 250
5231750
399,875
347, 5OO
65, OOO
164, 000
12, OOO
241,125
$2,432,5oo
347, 500
$-_7.09
s3,9ggE99-
Assembly Department budget factory
Testi ng Department budgeted factory
Total budgeted factory overhead
..........j ....
s73
F c , l t o o o
F
r - N t o o o n | r )
F ( )
r F N N U } I D O I f )
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ol u? q
e
c! q ql r l q ql r l q
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ql cl l
gl
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o o
q q
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- e l o o o o o o t o t o o t o t o n l r o l r o l
( , l
ul ul
1
q q ' ql l l q ql el u? ql r l r l
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Chapter 15
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Chapter 15
371
Pl5
(conclud?n"or,e
io--Beginning
and Ending Inventories
Beolnnlng lnvtntety
Endlng Inventory
Matarlrlr:
Trrnrtorm crr ...--..-...--.
Dlodc rccttllen -..6-....
Fllten ........-.....-.H--.-x
S/lra ........-r....D,.'............
Totel mated8lt.--*...-
Worlr ln Prpcccr: llonc
Finlghed Ooodr:
Economy Modcl
Standard Modcl x............
Dg lurc Model..-..............
Total flnlrhcd
goodr .......
Total InvcntotY .....'.-.
I O, OOO 3 r . 5O
' t
l5,ooo 4.5o
zt,ooo .70
*t,ooo 1.75
to,0o0 .2o
l5,ooo 5,ooo
g7r3OO
-
IOTOOO
l7'5OO 2!',OOO
r75O 2O,OOO
2,000 5OTOOO
chranutv unlt cort Total cot Quanutv Unlt colt Tstalsost
I t.5o t 7"5OO
aso alt,ooo
.7O 17"5OO
1.75 3li,ooo
.2O IO,OOO
50 20,ooo
Ll3r0oo
3OiOOO .5O 15'000 4O'OOO
t l oo.750
15,OOO ti 2s.oo 3 375,000
15,OOO 38,50 7Tf
FOO
15,OOO 35.25 828'750
tL78'!-e!!9
91,942f0o
2O,OO0 325.15 3 5O3,OOO
15,000 30,25 588,750
10,000 58,4!t 564,500
tL,050,25O
$J9125o
Schedul e 1l -Budgeted Gost of Goods Manufactungd and Sol d
Materials:
Begi nni ng i nVentOfy (SChedUl e 10| ........................' or..............' .
Add pUf ChaSgS (SChedUl e 4). . . . ' . ' . . . . . . . . . . . o. . ' . . . . . . ' . . rr. . . . . . . . . r. . . . . r. . . .
Mat gf i al s avai l abl O f Of USe. ' . . r. . . ' . . . r. ' . . . r. r". ' . . . . . . ' . . r. . . ' . . . . . . . . . . . . . . . . .
Lgss endi ng i nvent Ory
(SChgdUl e i 0! . . . . . . . . ' . . r. . . . . . . . . r. . . . . r. . . . . ' . . . . r.
Cost of materials used in
production (Schedule 5) '..'..........-....
Di rgCt l abOr (SChgdUl e 6| . . . . . . . . . . . ' . . . ' . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . , . . . . . . . . . ".
FaCtOry Overhead (SChgdUle 8)....' ..' ..' .....' r............r......' ...............
COSI Of gOOdS manUfaCtUf8d dUfing the
pefiOd...........,.....,.........
Add finished goods
beginning invntory
(schedule l0) ...'.-......-..
GOst Of goOdS avai l abl e fof 3a1e..........................' .r.' .............r.r.r..
Less fi ni shed goods
endi ng i nventory
(Schedul e I Ol .--.' .--.---.-.-' ..
GOSI Of gOOdS
SO1d. . . . r . . . . . . . . . . . . . . . . . r . . o. . . . . . . . . . . . . . . r . . . . . . . . r . . . . . . r r r . . . . . . . r . . .
Schedule I 2-Eudgeted Incomo Statemont
$ l 60, 750
10, 912, 250
$11, 073, O0O
135, OOO
$1O, 938, OOO
3,775rOOO
3.686.500
$18, 399, 5OO
1. 781. 250
$2O, 18Or 75O
1. 656. 250
s18. 524, 500
Sal es (from
Schgdul e l l .,.......................,...............
Less cost of goods
sol d (Schedul e 11!....,............o.
Gross pl l ti t...............................r.r.o...rr..rr......r........
Less commercial
expenses:
MarkeUn g exponsgs . . . . . . . . o. . . . r. , . . . . . . . . . . . . . . . . . . . . . . . . r. .
AdministraUve
erponse3 .r............oor-.ri-r..r
l ncomg
bgf org t axgs . . ' . . . . . . . . . . . . o. . . . . t . . . ' . ' . . . . . . . . . . . . . . . . . .
Less income tar (4O% tar rate).
Net i ncomo. . . . . . . . . . . .
s6, 145, OOO
2. 330. 500
$33, OOO, OOO
18. 524, 500
$14, 475, 5OO
8. 475. 500
s
6,000,000
2. 400. ooo
s 3. 600. 000
: -
Clppler 15
Pl 5-o
'
( 1)
375
CL CORPORATION
ProspccUvo Ststoment of Incomc and Retained Earnings
For Year Endi ng December 31r 2OB
(OOos omitted!
Revonuc:
Sal ef aa. aa. . r . . . a. a. a4. . . . . . . r . . . . . . t . . . . t . . r . . o. . a. . r . . . . . . . a
Oth
gr'
l ncorl l C ..r..........r.....r...r...r...............t
Erpenrcr:
Cost of
goods
manutacturad and sold:
Materlglc
Dlrect labor
Variable fagtort ove rh ead ..'.......r...........
Firgd factory ovorh
gad
......o....' -' ...........
Boginning inventol]f ...' ...............o..........o...
Endi ng l nventory r.r.r...i .......r..................' ..'
MarkeUng:
Sal ari
gr
r.r..............r......r..,,..
Gommi ss1on3............r.rt.......r' t......r............
PromoUon and advgrtisln$ ........................
General and administration:
Sal arl es ....o..' .r' ...r.............
Thavel
S600,OOO
I,OOO S609,OOO
s5O7,OOO
81, OOO
$213,OOO
218,OOO
130,OOO
12,750
$573,75O
4g,ooo
$621,75O
_!l-t!J!o'
$ to,ooo
2OrO0O
45.O00
$ l g, ooo
2r5OO
Office cost3......
Incomc
flossl
bglorc Incomo t8r......'..o..'....'.
In comc tar rgfun d (4O%1............r,..............r.
llet InCOmO (IOSS|....r........................' .' ......' .' .
Beginning rctaingd earningS ..' .........r..rr..,....
Subtotal
Less dividends
Endi ng rgtai n
gd
earni ngs ..,........r.......o.........
t
t segi nnl ng
I nvcnt of l . . . . . o. . . r. . . rr. . . . . . . o. . . . . . . . . . . . . . r. r. . . . . . . . . . . . . oo. . . ror. . .
Addi ng
t o I nvgnt ory (45OrOO0
-
4OOrO0Ol r. . . . . . . . . r. , , . r. . . . . . . r. . . o. . , .
Endi ng I nvent ol y. . . . r . . oo. . . . . . c' . ' . . o. . . o. . r . o. . . . r o. r ' . . . . r . . . . . . ' . . . . . . ' . r r . . . . . . .
198 cost per uni t ($573175O + 45OrOOOl ...............,..,,..rr..,...,..
Gost of ending lnventory .......i......
9.000 27.500 015.500
$
(6,500l
2,60,0
$
(3,e001
108.200
$l o4,3oo
. 5.OOO
4O,0OO units
50.ooo
9OTOOO units
x s1. 275
s1 14, 750
Chaptar l5
376
P15-9
(Gontinuedl
CL CORPORATTO}I
Balance Sheet
Prospective
as of December 31' 20B
(0o0s omittedl
Current asseta:
GaSh r..............
Assets
a a o a a t a a a a r t a a a a a a a a a a a a a a t " t t o t t " t "
Accounts receivable
l nVent Of y . . . . . . . . . aa. . a. . . . . . . . r. . a. . . . . aarr. . . . . . . . . . . rr. . . . ar. . . . . . t . . . . . . -a
l nCOmg taf fgCel vabl A ...............' ....o...........D...o...r.....o...
Pl ant and eqUi pm6l l t-...........,............r.o......' ............' .....t..
LaSS ACCUmUl atgd
depfgCi atl On r.r.' .......' ..........D..t..."' t'
TOtal aSSets.....r......r.......1..r..........r..' ...r' .r.....r..............t
i
l ,2oo
80,OOO
1l { , 75O
2.800
$l 3o,ooo
4l . ooo
$198, 550
89.OOO
s287.550
Llabilities and Shareholdsrs'
Equity
Current liabilitieg:
Accountg
pa1nb1e.......o...........o.....rr.....r................' ....' .'
945tOOO
lccruaO
paya0tes..r.....................rr....' ....o.........rt.........
. 23r2SO
Notgs
pty"ble .,................!.o.............t......r.........t..........
5O.OOO Sl
l8t25O
Shareholderg' equltf
Common stOCk....o....o.........................................r.........
$7Ot0OO
Rgtai ngd arni ngs ...........................r.........r.......r.....' ..r.
99t3OO 1O9t3OO
Total liabilities and shargholderst QUit!......,.....r...r..... :9?!l?:55O
l2l
(al The
profit performanco lor 2OB is forecast to be much
pooner than in
2oA.-A loss after Income tar of 3.?.9
milllon ls
prodicted, companod-to
a
profit aftor Income tar of $12.6
mitlion. Tlre company erperienced
the
loss despitc a
ggoh
Increase in unit sales Yolumo. The maior
problem
sosmE t6 Ue in the inabitity to raisa
prices and/or in cost contlol. Tho
costs noso In every anoa of activitp
(i l Vari abl e manufacturi ng costs
per uni t i ncreased 7.l oh
(from $1.16
to
sl . 2464.
(21
Fired manufacturing costs increased s750,000,
or
g.3oh.
(31
Marketi ng costs, erctudi ng commi ssi ons,
i ncreased 316
mi l l i on' or
36o/o.
(4)
General and admi ni strati ve costs i ncreased $3.5 mi l l i on' or 15oh.
Chapter 15
3n
P15-9 (Goncludedf
(bl All srsas will require spectal cost analysis because the costs in all aneas
Increased, but apecial attenUon should be paid to:
(ll Produstlon cost Incroaseg, because although relaUvely small in pen
centage, the dollar amount ls high due to the volume of units.
l2l
Selllng and
promotlon coat Increases, becauae the rate of these
cost Inc;gaset was
lraater
tlran the rate of sales increase.
Tho saleo
prlce wa8 not Increa3ed in spite of the increased cost. The
hlgh sale! volumo Inciaase may be the result of too low a
price. Further
Investigatlon Into markbt
prico and
price-volums relationship is needed.
A review of tho balancc
gheet
Indicateg a material deterioration in the
companyb working capltal
position. Inventory has more than doubled.
This increaso appears to have been financed by a significant incraase in
current l l abi l i ti es
(more than a three-fol d Increase| and a materi al
decllne In cash. The need for so large an Increase In Inventory and the
effeet of dectlning
profitability on tho cash and working capital
position
need to ba thoroughly lnvestigated.
(cl The following lmprovements should be considered by management:
(ft lmproved coordlnatlon
between
gales,
Inventory contlol' and
pro'
ductlon, an a no-Yaluatlon of the
product pricing policy'
l2l
Development of a standard cost system to monitor
product sosts.
(31 Development ol a line of credit for short-term liquidity
problems.
Chapter l5
CASES
ct5-1
(ll Businesg
plannlng and budgetlng acUviUes lor Maiton Company ane impon
tant because:
(al A long-run commitment
of resoirrceg to specialized assets is about to
be mide.,A one-time decision for major erpansion that could involve a
large amount of financial resounces ovor a long
period of time is about
to be undertaken. Thi s Investment wi l l be commi tted to speci al i zed
assetg and can be rccovercd only from the
production and sale of one
particular YalYe.
(bl Tfte daily operatlong of the company will becomo mono compler. Mai
has had no erperience wlth the day-to-day operaUong of a large busi-
ness. The business
ptanning and budgeUng
proceduras will provide Mai
the opportunity to review the company
performanco and will allow the
company to develop and evaluate atternative counses of aetion to satisfy
corporate objectives.
(cl They will asslst in obtainlng capital from erternal souncss. An erpansion
pnogram ol this magnitude, with a significant amount of initial funding'
will require the
generation
of additional capital either through borrowing
or issuing stock Obtaining nacoliliary funds can be enhancad bY and
may requlra an orderly
presentation of, the business
plan and budget
acUviUes.
(dl They wi l l hi ghl i ght
potenti al probl em si tuati ons. Di sci pl i ned busi ness
planning
and budgotary
procedures could emphasize a variety of
prob'
lem situations that might be encountered during the
period of the plan.
l2l
Listed below are the major
probtems that would most likely
be
disclosed
because Maiton Company is about to erperienco a significant
growth.
(a) The lack of adequate
production facilities to manufacture the valve at
the quanti ti es requi red. The company has served a smal l
part of the
markeL The new segment is much larger, thus calling for more
produc'
Uon facilities than
previously needed.
(bl The tack of adequate Internal capi tal
gources
to fi nance the asset
erpansion (both working capital and
plant and equipment). The company
is smalt and
probably generates modest amounts of capital. The amount
is not likety to be enough to meet the new requiremonts. Gonsequently'
the company wi tl need to seek capi tal from the outsi de, and
probabl y
has little erperience because it grew slowly and had no
previous need
for outside capital.
(c)
The lack of adequate management nesources
(people) to administer the
company as lt gFo\ rs. The company ls small and, thus, probably solely
run by George Mai. As lt grows, there will be the neod for more manage-
ri al peopl e. Thi s need probabl y cannot be met wi th current empl oyees.
Chaptor l5 379
Cl 5-1' (Concl uded)
(d) Lack of pl anni ng and budget ski l l s. The company
probabl y has had l i ttl e
need for
planning. Consequently, it may experience difticulty in organiz-
ing for and developing a five-year
plan.
Specific
problems
could occur
with regard to forecasting,
production, marketing, and cost of capital.
c15-2
(1) Factorc that Marval Products needs to consi der i n i ts peri odi c
revi ew ot
l ong-range
pl anni ng i ncl ude the fol l owi ng:
(al The curent state of the economy and its expected future statusl
(bl The current and future avai l abi l i ty of resources, such as personnel ,
pl ant
and equi pment, and capi tal ;
(cl Consumer atti tudes wi th regard to product appeal , changi ng travel
modes and
patterns, and changing life styles and affluence;
(d) The l evel of i ndustry sal es, Marval ' s current and proj ected market
share, and Marvalb degree of influence or dominance in the industry;
(el The product lines with respect to the naturs of the production pnocess,
l engt h of t i me t he
product has been est abl i shed, and ut i l i zat i on of
nesources and
plant capacity.
(21 Factors that Marval Products needs to consider when developing the sales
component of i ts annual budget i ncl ude the fol l owi ng:
(al The pricing
strategy;
(bl The si ze of Marval ' s market share and the rel ati onshi p to i ts competi -
tors;
(c) The sales mix of products so that contribution can be maximized;
(dl Available production
capacity;
(el
The effect of advertising on sales volume;
(f}
Nati onal and i nternati onal economi c condi ti ons.
g0
Chagter 15
cl 5-3
(r) Di vi si on and
pl ant personnel bi ases that may be i nctuded i n the submi ssi on
of budget estimates include the tollowing:
(al Budget sales estimates
probabfV w9.9lO, tend to be lower than actually
expected because of ths high volatility
in
product demand and the cur-
rent reward/ penal t ysyst emf ormi ssi ngt hebudget .
(bl Budget cost'estimates
n itt u" higher [han actually
expected
in order to
protect the divisions against thJ effects of down'side
risk of business
stumps and the
possibility ol increased
higher costs' The reward/penal-
ty system encourages this action.
(c) Plant and division management
can incorporate
slack and
padding into
the budget without the litetitrooo
that it will bE temoved,
because c9r-
porate i eadquarters does not appear
to
get acti vel y
i nvol ved i n the
actual budget
PreParation.
l2l
Sources of information that corporate management
can use to monitor divi-
si onal and
pl ant budget esti mates i ncl ude:
(a) Regional and naiional leading economic
indicators and trends in con-
sumer
preference and demand;
(bl Industry and trade association sales
proiections and
performance data;
i"i
prior
year performance by reporting units as measured by their finan-
cial,
production, and sales rePorts;
(d) Performance of similar divisions and
plants'
(31 Servi ces that coul d be offered by corporate
management
i n the devel op'
ment of budget estimates are as follows:
(a)
provi di ri g
economi c f orecast s wi t h regard t o expect ed i nf l at i onary
trends and overal l busi ness cycl es;
(b)
providing
national and regional industry sales forecasts for
products as
devel oped by corporate ri anagement
or obtai ned by management
from
other sources;
(c) Sponsori ng trai ni ng
pnograms for
ptant and di vi si onal
personnel on bud'
geti ng techni ques;
(d) l nformi ng di vi si ons of overal l corporate
goal s i n terms of sal es, market
share, and
profit.
(4)
Factors that corporate management shoul d consi der i n deci di ng whether or
not i t shoul d become more i nvol ved i n the budget
pnocess i ncl ude consi der'
ati on of costs and benefi ts and the resul ti ng behavi oral effects.
(a)
Costs to be eval uated i ncl ude:
(f
)
tncreased costs at the corporate level, because mone time and
per-
haps addi ti onat staff wi l l be requi red.
(2)
possi bl e
tower
profi ts, due to an unfavorabl e change i n di vi si on
and
pl ant management atti tudes and moti vati on'
ffi1
Chaptsr 15
Cl 5-3
(poncl uded)
(bl Benefits to be considered
inctude
possibte profit improvement
from:
(il More accurate
budget estimates
that might reduce lost sales and/or
reduce costs incurred;
l2l
More effective management
because of more realistic budgets;
igi
lmproved coordinatlon
and control ol the budget
pnocess'
(cl bin"rioral variables
to be considered
Include:
(f
l
Effect on
goal congruence;-
izi
Effect on lhe communication
channels between corporate manage-
ment and divisional
management;
(31 EfeJ of restricting
authority over the budget
process at the divi-
sional level;
iossible negative
effect on motivation and morale, due to loss of
authority and autonom$
Effect oh
pertormance due to a
potential reduction or increase
in
bonuses.
(4)
(sl
Chapter 15
cl5-4
Schaffer
Company appears to havc a wol l ' dovel oped
budgetary
3ystom'
Budgetg
for each of tlre important areas requiring attention'-ales,
production'
i nventory
l evel s, ol pense",
Ji i capl tal
i nvesi ments-are
Incl uded In thc
pnocoss. Insufliclbnt
detailg are
frovided
to
properly evaluate
the constntction
and uso ol the UuJg"t"
lor ssleq capltal lnvegtmentr
and
prcduction and Inven-
tory levels. Thug, t{re analyslr
li this caso must focus on the arponse side of
the budgeting
Pnoeac8.
Although an elaborate budget
pmcosr odsts' analysia- of the elponse
proca-
dures raveals a number of
gtroricJrJng" for
ptanning and contrcl
purpose3: Tho
basic Input to the oxpsnso nuOgoi fotift" comlng
yoar i9 the first slr months
ot
the current
yearb actuat
pedofrance' tfic oxponso
budget
(modified to rsflect
unconttollable eventsl, and the corporato
olponse
rcduction
porcontage' The
next erpanse budget ii basically tait
yeart actual costs reducod by the com-
puted orpense
percentage.
This approach does not capture the full
potential of the budget
lor
planning
purpo"."l--niln shoutd Ue torward-looklng.
Thc Schaffer budget ls based
pri-
marily on
past r""rft" and doeg not tpcognizs
any
planned changes in operating
activi$es,
The acrcss-the-board
corporata
olponso
reduction
target does not
consider the diffenencss among
ptantg in opportunities
for cost improvemonF'
The review ol division r"n"g"iJni
t"V
permit the
lrstrong'
managers
to build
slack into the budget And tho lacts Ao not make ctear whether the
proposed
budget is based upon the currsnt
yearb sales
volume or ttre
planned volume
lor
the budget
year. Witnout such an idiustment,
an additional
weakness
exists
in
the
procedurc.
The process atso falls short for contrcl
purpose":-Tl"
maior shortcoming
is
i t s f ai l ure t o I ncorporat e changes i n operat i ons
t hat occur subsequent
t o
August. Comparisons of
perforriancos that inctude
these late changes'
with
budgets that do not, will not
provide usEful information
for control' The inclu-
-
sion of allocat"O "orporatton
and division costs
in
plant budgets would t-afo
the erpense budgets less ettecUre for control
purposel-Pe9.ausa
they contain
irrelevant data iJr
ptant-level cost control'
The
possibility that some division
managens may be iUte to Introduce slack into their budgets
also reduces
the
effectiveness for cost control.
The budget process appeaF to omit the
plant managels
trom active
partici-
pation in budget preparation "nC revision. Their
participationvould
improve
tho
cost control and'ptanning benefitg of the budget
pnoce:s'--The use of acnoss-
the-board oxpensc cuts and Inclusion
of allocatld
costs in tho budgets
u19d-f9r
performanco
moasurpment lr further avidence
that tha connpanlf
has 'failed to
consider the effect of lts system on management
employees.
With its budgetary syst-em, the company
tries to plan and control its opera-
tions. To this end, tne company
ls be*er off for having developed its_
_tJt"r'
However,
tuttft"r benefi ts coul i be
gai ned by el i mi nati ng
the weaknesses
i n i ts
procedures.
g3
Ct;gtpter
15
c15-5
(rl
(21
Tho manstaeturing managert vievrg can bo ssparatod
into two argu-
monts-thc ugc oi ttre Eamc lmprovement
tsrgetr lor all
plants snd
lnconsistent appltcation of target ravisions. In both casesr the manufac-
turlng managefe argumontg 8rc valid.
i hc manufaci uri ng
manager cl ai ms that the use ol the aamo
lmprovement
targets'tor att
plants fails to racognize the different abllities
oi-pf"nt" to achiive targeta. His,criUcisrn
ig valid because
plants do have
ditierent opporhrnlues
ior lmprcvemenl
and thls should be recognized in
"gtaUtfnind mprovement
tailetr. Wrilo hlr arguments- ma-y be valid to
aupport trir vie* thet older
plantr havo lesc opportunity
for impmYement'
tn6re are Insufficlont dst8
presented to vorify his claim.
The manufaclgring
maneger obiects to the nowor
plants' obtaining
revised targets and th6n being able to
perform better than the ruvised
targel ThJ modification
of targets in light- of new information is an
apiropriate budgefrng
technique. Newer
plants may need such revisions
because their lnixpeience
makes it morc difiicutt to
get
parameters and
crercise contrpl. ilo*erer,
the manufacturing
managerb alSumant
is
valld becauge adlustmentr
iravc not been avallable to ell
plants' and' tur-
thermorc, Ute "Oiu*rn"nts
granted to new
plants appear to make lt easi-
r lorthem to achleve
target*
The rssultng
treatmint in establishing
end revising targets' when
coupled with e
pertotmanco sppnrisal
and rcrvard system' does sppear
to discriminate in fayor of the newsr
plants. This would apparently lead
to lower bonuses, appraisats, and morale among management
of the
older plants.
Both old and new
plants have the capability
of concealing
slack in their
budgets. The otderptants cannot introduce
budgetary slack t*rrough their
cost estimates because their costs havo ostablishod a
pattern over'the
yoars. HoweYer, the
ptant managoment
knows thoso aneas of operations
wtrere changer and' i mprovements
can bs i ni ti ated. These operatl ng
changes c8n be Initiated after tho budget
io adopted'
The newer
plants can incorporato
budgetary slack in other ways'
Their coSt estimates ang mgno uncertain
because the
plants an6 newar'
The
plant operafions havo not stabilized,
so ptant management
may be
able to intlate costg slightly above what can be realistically
erpected of
thom. There may be more o-pportunities
for improved operations
that may
not be recogniz6d at the ti;; the budget is adopted. In addition,
there is
aomo l ag l n l ncorporat i ng
I nt o t he budget t he cost savi ngs of t ho
IncreaseJ erperience of tho workerg and the efficiency
in functioning of
the equipmsnt and machinerF
g1
Chlptt 15
cl 5-6
(f
l
The budget
practlcg? d?:c4bed ln thc cas. err not llkely to
prcduca eftec'
r-'
tfuo budget?ontrol
In thc long runr'bccsusc
rcveral weaknesscr can bc
ldentified:
(al There 8ppoars
to be no partlclpaflon of
plant poFonnol In thc budget
develoPment.
Ol
Cii"n ttrit ttrere have been flvc manage6
In lour
yoarE' thc manags'
havo had nobpportunity
to assess whether
thc budget lr rcalistic'
(cl. lt app""rr
ihst adlugtmentr
to tho budget, oubsequent
to ltr adoption'
are not
permitted even In tho tlght of newlnformatlon.
(dl The budget la being uoed to
pressuts
Fc
plant menegoa
(21 ile lmmedlite effect wltl Ue a tnrstrated manager,
who wlll not meet thc
budget and who will bc reptaced a! 8 noault of belng unwllllng to cacrilfcc
the luture for the
present, or s frustratsd managorr
who meets the budget
by making decisions that raerlflco thc futurc for thc
preaent. ln elther
casor Drake Inc. ls unfavorably affected.
Ttre long-term eflect wllt be to rcducc thc management
affectivenes!
of
Drake Inc. imployeeg. The arbltrary method of budget developmelt'
lack of
partlcipaUon, in,i ttrc usc ol the birdget as t
pnossurc devlca wlll result In
loss of talenied managors, development of nonproduetlve
methods by man'
agors to
nbeat'
ttre Uudge! decisions taken to meet the budget but wttich
arc detrimental to the company
in the long nrn, and low moralc and motiva-
tion.
ll the
present methods of budget administratlon
continue'
Davld Green
may adopi nonptoductl ve
methods and becomo an Inefl ecti vo managsr.
However, it tre is talented and conUnuas
to raise such lssues as the
poor
condition of thc
plant and hls short tenuto, lt lg likely ho will rssign or be
fired.
r t
' -
Ol&1. A capibl olgcndituro b an upcrditure hlrtd'
od to bcnelil futun pcrio6. ll ia nornally asro-
cblrd wilh thr acquiritbn or imprwemrnl of
plant asrcte. Thr rral dislinclist betweln a
copital and rcvenul cxpendilure is not lhe
i mmedi ato chargi ng of the expendi l urc to
ilcotnc, as
gppood to ita gradual atrprtizatim,
but thr bngth cil limr required lor ils recovery
in castr. Bccovericr ol rvenur expenditurel,
rtrch ee product c6ll, aro expected to lako
placr in a matlor ol weeks or, at the mosl,
monthr. Thc ti nanci al rccovery of capi tal
e:gendilures b measured h lerms of years.
O1&2. Purpoces cil e reoearch and devebpmonl Pte
Itarn
are:
(a) A pl anned gearch
l or new knowl odgc
pertaining to the industry withoul reler'
ence lo a specific applicatict.
(b) Crealion of a new producl or improve'
ment of an exislhg ptoduct.
(c) lrwcnlkxr cf a new or impoved
procost
or machhery lo mEke a fhishe'd produci
orgnponenl
Bcs,rsrg fc a research and devclopmont
Pro-
grarn arg:
(a) To protcct thc cabc dolbr, that ic, to
meet csnpotitbn. lmproving lhe quality
of pedonnancr cl produds or achieving
cod savhgr in eilher openting or capilal
erpenditurer falb hlo this categpry.
(b) To do research to promole new saleg
dollars, eiiher by enterhg a new market
or by aignili:anlly expanding an existing
msrket.
(c) To invesligate problems with respecl lo
environmental protrtbn, saletv"-rvorking
cordilirns, elc.
Q1S3. Budgetary prccecbres for research and deveh
opment expendituro are designed to:
( a) l or ce management t o l hi nk aboul
phnncd elgendilures;
(b) coordinate rosearch and developmenl
plans with thr inmediste ard lang-range
pbns of the conpany
(c) l orcc l hs research and devel opmenl
st af l t o consi dcr maj or nonl i nanci al
aspects cil lhc prograrn, such as person-
nel , equi pmcnl . and faci l i l i es requi re-
rnenb.
Q1S4, A cash budgct involveo detailed estimates of
anticipaled cash rcceipls and dicbursemenlr
for a rpccified perird cil time. lt Lr designed to
assbl monagemenl h coordinaling cssh tlow
lrcrn operaticr3 an a basis lor financial plans
and conlrol. The cash budget provides a sys-
CHAPTEB 16
DtscussloN QuEsTloNs
temalic approach lo lhe synchronization ol
caglr regorlrce3 with needs. n a$bt! mansge-
rnent h rnakhg hlelligenl dccbionc corccrning
capilal expcnditures, dividend polbies, hvegl-
ment3, and other financial matler3, and often
exerls a caulionary influencc on any ol lhe
abovc phns. Porirdic roporb wnparhg aciual
with planned receipls and disbursemenl! per-
mil effeciivc ard cqrtinuous csrtrol ol cash by
signalhg signili:ant deviations fronr the firan-
cial planr for |he perird.
O1S5. (a) Nqrmanulasluring busiresses musl plan
la the tulure
jusl
as carelully as rrra lu-
faclurhg cqtcerns. Seasonal pattemr in
ngyonuqr and expenditurs must be po-
vi ded f or , and r equi r cd r qui pmcnt
repl acement and expansi ons musl be
budgeled.
(b) Not-for-profi t organi zati ons general l y
operale on relatively fired incomes lhal
are received at ono time. Such recoipl
patlernr aro common for organi:ations
that rely sr tax dollars lor support. These
funds must be allcaled throughout thc
year i n order to mai nl ai n operal i ons.
Careful budgel plans are a necessity for
such albcalbns.
Ql S' 6. PPBS
gt Ends
f or Pl anni ng, Pr ogr ammi ng,
Eudgeting Syslem, and is an analytical lool
focueed on lhe outPul ot final results ralher
than input or inilial dolbrs expended. The oul'
put i s di rectl y rel atabl e l o pl anned goal s or
objectives.
O1&7. Zerobase budgeting
[ZBB)
is a planning and
budgeting lool using cost.benefil analysis of
projects snd functbng to imprwc an orgraniza'
l i on' s regoutce al l ocati on. Budgel requecl s
consist of declsbn packages lhal are analy:ed,
evalualed, and ranked in a priority order based
on cost-benelil analysis. lvlanagernenl can then
evaluate pqssble astivitier for the corning peri'
od, selecting those that will best achieve orga'
nizalioal grels.
Traditional budgeling tends lo concontralo
on the differential change fmm the gdot yean,
assumhg hat existhg astivitiec arc essenlial,
must be cmtinued, are currently performed in
a et-officient and optimum tr16tr1er. and will
be cost-effectivo h the canhg yest Cost! arc
devebped monr on a line-ilem tather lhan atr
activity basis. ZBB orgranizer all budget cootr
h the lorm of activilies ancl/or operaliau (deci''
sion packages) and evalualec tho effeclivc'
ness of each decision package as if it were a
new aclivity.
85
ffi
I
cl16-8.
(!) Zcro'btsc budgcting
tcquirc! mlnlgcrg
tb
justity thclr Lntirc budgat rcQuast' lt
Plates
-thc
burdan d
Progl
on thc
mantgcr lo
i|J3tify
why any.moncy tt tll
chould bc budgctc'd'
ll docs thb bY
sttrting
wilh thc essumplion lhet zcro
will bc rpcnl on arch tctivity' to thc
budgating
plocctr bcainr with r brrc of
zafo.
(b) Thc two kinds of tllcrnrlivca contidcrcd
'
for cach rcrNiry erc (1) diflcronl wrp oil
pcrforming thc ectivity end (2) diflcrcnt
lcvcls d cftort In pcrlcming thc lciivity.
(c) A dccirion
prckegc include en enrlyris
d an sciivitYt cat rnd
Purpotc,
sltcmativa courlcl of rclion' mcltura3
ol
pcrlormencc d thc rctivitY'
consaquoncct
of not
Pcrfaming
Urc
activity, and thc tctivity'3 bcncfitr.
(d) A packegc idcntifico end dcscribsr onc
tctivity in ruffrcicnl dcteil eo thtt it crn
bc cvaluatcd rnd compercd with olhcr
acllviticc.
(c) Succesr in thc imPlemcntation of zcro
basc budgcting rcquirer thc following:
1. Unkagc d :aro-balc budgcting
wilh short-.snd long-rangc
planning
2- Susteincd 3upport end commitmcnl
from axocutivc mlnlgomcnl
3. Innovelion bY mtnsgcn in
dcvcloPing dccislon
Prclcrgcl
4. Acccpttncc ol zcro'besa budgcting
by
Pcnont
who murt
Pcrform
thc
budgcting work
O1e9. Prorprtivr hformrtbn lhouH br prwitod h
oxl ornrl fi nenci al l trl om.nl r whrn i l wi l l
enham thr rli:rbility cil tho ucor'r pndi:ticnr.
016-10. PERT b prttbulatty rpProprhto u e rchlduF
hg and ccntotlhg trd'rniquo fot
Ptoioctl
sl'
rirling of e lergl numbor of trskr, roorr ol
whidt cannol bl strytrd unlil otrrn rt. corY}'
Plclr,
and lsno of rttrbh can br undrriakon
cdrcurtontly.
Conceptually. lhr rllrrrncl ir to e nrtrrprl
of intordependcnt ectivities wtrijr. rr I group'
roquiro cocli.tabb tlm to ccrnpbto. Thrn b
usually subctsntbl srt.up linr (and cel) a$o-
ciated with enatyzing, defhhg, and onln8lhg
c6ch discrot. prcied sstivity; thur, lhl bonefii
is h proicctl rcquirhg a cstsUerablo sttpunl
ol limo and consbth! of r reblivcly ccnpler
netrrorlc
PEBT albw: thr ucrr to uPdal. erd rovisr
rchrdubd activilis rnd thoroby drtrmilr thr
rilrts ol changor st tho worall
pojrct. lt b
Pattbubrty apprgrbte whon thl timing cl irdi'
vdual aciivitbr and thr
Proi.ct
cotplolict dale
arc criibal lo lr,rccatt.
016-1 1. Slack is c6npd.'d by rubtracting thr rarlicsl
oxpocled timo lrsn thc latctt allowablo limo.
Chaptdr t6
Th.
.rtlbtl ap.cl.d linr L th. .arl'Ltt titn
l hrl
rn rcti vi ty cl n br orprcl rd l o ttrrt.
b.ctutt
cl'ltn roldbnrhip to pondng rtivitior.
Thr btort ellrrrrbb tino b tho blst llna thd
9rr ldh;ily mey brgin rtd nca doby catpblbn
of tho
Poioa.
Sbck ir drlorminrbb onty in
rrbtbn !o an ontirr path th ngh thr noilorlL
Ol&12.
PEBT/iort
ir rmtly rtr .xl'nlion of PERT'
Wih linoqtins evailabb, il sootnt sdvttsbb
to .ltign cat to llnr end eclivilior, thoroby
proviling load fiu rcbl pbnnhg rd cc'rttol by
I rnctistsl rcPonribilitY.
Ot&t3. CanrPulr lrpport olfon dbtirrl advanlagor lo
PEFIT urn. PEF|T'tr e rnethrnltrtbalty'orionl'
ed itdrniqur rnd is thlr.ld. U.rlV ruilod to
thr hi gh' rpo.d t.tpont. of compul rn for
drri vi ng l hr cri ti cal
path' l l ack l i mrr, end
elr, elrd tor storhg erd rrporting tttultt !o
tnanagom.nL Flovisbnr to all sch'dulo olo'
mtnlt' whothor during thr initiel retirnaling
phar or durirg tho seiiv.
Ptoiccl Phar'
can
br updatod and thr rlvircd rcluhs
PrqnPtly
reporlrd.
Cornputrr'ruPPorf
b hdpful in dosling with
largr, canplox nrtworkt cil intrrdepondencior
and whon proi rct conl rol rogui rol ti mrl y
progt.3r rrporting againrt th. uPdat.d
Platl'
Most
program ptcktgrt ofl rr e vari rl y of
rrporl i ng frel unl and tormrl !. i ncl udi ng
gtsphic notwork dirphy !t w.ll er prinlrd
r.Porlt el verioul summrty lovrlr. Curronl
rrpodhg
prwidrl inlonrulbn !o
Ptoj.cl
tnsn'
agon, rnabling
qubk t.|ctigr to dovietiqts'
Cl'ppter 16
Q1&14. Tho lrcditioal budget focurer on
qrc
rel cl
'aseunptirtr.
Thc probabilbtic budgel povbes
for tval uati ng rl voral
gets
of acsumpl i ons,
ircludhg the prcbability od each and a ccrnPc'
ilc oxpected value, range, ard standard devrs'
tiqr lor eaci budget elemenL
g7
w
EXERCISES
E16-1
Begi nni ng cash bal ance
Budgeted cash recaipts:
Gollect accounts rtceivable:
November cradlt sales:
(S60TOOO r 1 Oohl ..o.' .....,.........' ..t
December credit sales:
GiTO,OOO
r OO96) ...
Gl TO,ooo
x 1o%l
January credlt sales:
GGGGtsO,ooo
r 25%l
Glso'ooo
r 6O%l
(S5O,OOO x lOTo| ....
February credit sales:
(S6Ot OO0 r 25%l .........o..............
($60rOOO r
gO%l
.........D.' .r' ..r..o...
March credlt sales:
(llTOrOOO
r 25ohl .,..r......r.,...,..r...
Total cash receipts....................r.t.r........
Cash avai l abl e duri ng month..............,.........
Budgeted cash disbursements:
Pay accounts payable:
December purchases:
S!2OTOOO
r S0ohl ........................
January purchases:
Stf
5' OOO t2Oc/o1 ....
Gl l 5rOO0
r 8O%1,...........,.....,.....
February purchases:
G$E2S,OOO
r2Oohl ...
Chagter 16
January
@s
March
$ o,ooo s2o,5OO 326,500
$ 6,000
42,OOO
l 2, 5OO
$ 7,ooo
3OrOO0
$ 5,000
f 5,ooo
36,OOO
17, 50O
$srilooo $sB"soo
$72,5OO s85,OoO
$6O,5oO
$86,5OO
$16, OOO
3rOOO
$l 2,ooo
5,O0O
$2o,ooo
4,OOO
23,OOO
6,OOO
26,OOO
$46,000 $4g,ooo
$2O,5OO $26,5OO
21, 0OO
6,OOO
22,OOO
TrOOO
s79,OO0
$ 6,000
ChaPler 16
E16-2
Finlshed Goodg
g9
April May June
UnitS reqUirad tO meet SaleS bUd9et..........-. I'OOO IOTOOO l2rOOO
-
Add desired ending inventory
l2ooh
ot
fotlowing monthb sales|.....o..r...o...o......
_4tOO
2r4OO 2r2OO
-
Total units required.....i,..r......r.............r...
l lpOO I2AOO l{/rOO
Less estimated beginning Inventory
l2}oh
Of CUrrent mOnthb 8a1e31.............
1r8O9 2rOOO 2r4OO
Planngd
productlolt' ...........
9, 2OO l Or4OO l 1, 8OO
Materialg
Aprfl May June
Units reguired to meet planned pmduction
(planned productioll r 3|....-.................
27rgOO 31r2OO 35r4OO
u Add desired ending inventory
pO%
of follow-
ing month' s
production requirements)
12r48O 14' 160
Total matgrials requ|red.....,......,......o..r....
4O' O8O {51360
-
Less estimated beginning Inventory
(4ooh ot
current monthb requiremoJltsl..........-..
11rO4O 12r48O
Planngd
purchases...,........r,........o.....
-2grO4A -92r88O
Gash disbursements during May for
payment of accounts
payable for material
purchases:
113 r 29, 040 r $2O x. 98 =
$189' 728
a3 r 32,880 r $2O x.98 = 4291632
$619,369
CGA-g3nada
(adapted). Reprint with
permission'
3 n l
Et6-3 Par
produetion budgets
Chagter 16
June Jul y
Unlts regulred to meet sales budget............o....... 5Or0OO 3OrO00
Add desired endlng inventot"lf ......... 3' OOO 3,OOO
Total units req 53' OOO 33' OOO
Lass beglnnlng Inventory S' OOO 3,OOO
3O,OOO
\
June Jul L
48' OOO r 3 ......... 144, OOO
3O,OOO r 3 9OTOOO ,
Add dgsired endlng inventot! .....,..........,,..........r. l4' OOO I I,OOO
158^OOO f Ol
"OOO
Lass beginning Invento1yo.................r......r..o.......r 2OTOOO t4' OOO
,
Unlts to bg punchasod..............................r...o......r
138rOOO 87,OOO
Cash disbursements In July for purchasss
of Tee:
138, OOO r $5 r 113 r . 98=
$ZZ5, 4OO
87,0OO r 35 r 213 x .98= 284r2OO
$5O9,8OO
GGA-Canada (adapted!. Reprint with permission.
Planngd
prcductf oll ................'o..
Tee purchases
budgets
Units required for
producUon:
48,OOO
CMptcr 16
E16-4
(rl CROCKETT COMPAT$Y
Gash Budget
For July
Cash balance, July I
Cash receipts:
June salgs
Sl3OrO0O
r 4S%1.....o...............o.r........-.......
July sales (S4otOoo
r 5O%1,o...r............o..r..........o.........
Cash aYai l abl e r..r........................................r.r...r...' r.........
Cash dlsbursements:
Jung purchasas ($r orooo I 75%1.......'..r...........'........,
July purchasgs ($l 5rooo r 25o/o1...,r,o.r.............-..........
Other marketing and administrative expeflsoS............
Incomg t3Xt....r.................ro.....r................................o...
Di vi dgnds. . . . . . r . . . . . r . . . . . . . . . . . . o. . . . . r . . . o. . ' . . . . . . . . ' . . . o. r . ' . . r . ' . r . . . . r
Gash bal ance, Jul y 3t o..r..o........................o.........r.o...r...r.
tCalculation
of June income tar:
Sal es . . . . . . aa. . . a. a. a. t . . . . . . . . r . a. . . . . . . t . r t aar . r . . . . . t . r . . . . o.
aa. . . ar a. . r r . ar r . . . .
Cost of goods
so1d. . . . . . . . . o. . . r. , . ! . o. . , . , . . . . . . . . . . . . . , . . . . r. . . . r. . . r. . . . r
Gross prot i t
t . . . . . . . . . rri . rr. . . . ' . . . . . . o. r. . . . . . . r. . . . r. rr. . . r. . . . . . . . . . . r. . . . . .
Commercial
erpenses:
$14, 4OO
20,OOO
39t
s 5, OoO
34,4OO
$39,4OO
I 7,5OO
31750
l O,OOO
2r OOO*
15. OOO
DepreCiatiofl
....................r.............,..........
Other marketlng and administrative.........
38. 250
$ 1 . 1 5 0
$:o,ooo
l 2,ooo
$l 8,ooo
13. 000
sl,gag
$.2,99q
arrangements should
$4, OOO
9. OOO
Taxabl g i ncome................r.........' .r' ...r.r...........r....!,...r.....
I ncom
g
tar ($4
r
gg
O r 4Oo/o1............................
(21
Since the desired minimum cash batance ls $5,OOo,
be made t o borrow $3, 850 ($S, OOO -
$i , 1SO),
CGA-g3nada (adaptedl. Reprint with permission,
392
E16- 5
I
(f
)
PERT netutork:
Chapter 16
l2l
Alternate paths
and times and the critical path
and the erpected project
time:
1-2-6-7 = 11 weekg r- critical
path
l-2-3-5-8-7 = lO weeks
1-2-4-5-8-7 = l Oweeks
The two activities In question
ano 3-4 and +5. lf these activities weno
eliminated, thelt would be no effect on the critical path
or the expected
completion time because 3-4 and 4-5 are not on the critical path.
(3)
Clppter l8
E{ 6-6
(rl Astivlty (to
393
hl
3
9
6
t 8
I
5
6
I
2
t
2
4
3
4
_bl
2 + 1O.67
3 . 8 3 + 4 + 5
5 , 8 3 + 6 + 5
= Total
-F
6
6
o
6
0
o
6
Total t,
12.67
12.83
16.83 + critical
path
+ tm(41 +
2(41
6(41
4(41
1r ( 41
6(41
4(41
5(41
2.OO
5.83
3.83
10. 67
6.OO
{.oo
5.OO
t8
1-2
1-3
1-4
2-6
3-5
4-5
5-O
Path
l 2
35
23
u
30
24
30
l2l
1-2-6
t-4-5-6
1-5-6
CGA-63nada (adapted|. Reprint with permission,
Chwtert6
E16-7
t f )
6 + 11 + 5 + 4 + 3
=29
l . + 2 - - 5 - . O - r - f 7 - d 9
6 + r l + S + i + 2 = 2 5
I
2
- - {
5
- r
0 I
- r . . 9
6 + I + 9 + 4 + 3 =3Ocr i t i cal pat h
1 . . . . r 2 + 4 . - d O - - . 7 ' d g :
O +
g
+
g
+ | + 2
= 2 6
I
. . . +
2 . d 4 6 8 . . - - . I
6 + g + 1 3 + 2 = 2 9
I
-.+
2
--.)
4
..-.+
8
g
6 + O + 3 + I + 4 + 3 = 2 5
1 . + 2 - 3 . + 4 6 . - . + 7 - 4 9
I + O + 3 + I + I + 2 = 2 1
I
- 2
-
3
.r-
4
.r..4
0
--+
I
---|
I
6 + O + 3 + i 3 + 2 = 2 4
l - + 2 - . + 3 - + 4 - { 8 9
i O + 3 + 9 + 4 + 3 = 2 9
' l - + 3 - - + 4 - . d 6 . . d 7 . + 9
i O + 3 + 9 + 1 + 2
= 2 5
1 - + 3 - - r 4 O - - 8 - 9
i O + 3 + 1 3 + 2 = 2 9
1 - . 3 - . 4 - + 8 - - . . + 9
',21
Earliest Erpected Latest Allonrable Slack
Event Time fime Time
CGA-Ganada (adapted!. Reprint with
permission.
o o
6 0
t l 1
1 4 0
1 8 I
2 3 0
2 7 0
2 A 1
3 0 0
1 0
2 0
3 t o
4 1 4
5 1 7
6 2 3
7 2 7
8 2 7
9 3 0
Cluptcr 16
E1 6 - 8 '
(41
Cf l UCal pat ht l t l | O". . . . . . . . . . . . r' . . . . . . . . . . . . . . . . . . . ' . . . . . . . r. r. . . . . , . . . .
Less time rsquired after event 2:
Activlty 2.6
Agtivity tl-7 ..............
395
(11
(21
to =
$o
+ 4t,,, + ty'
+ 6 = (1 + (4 r 2l + 9l
' F
6' = 3days
(31
Path Time Reguired
O- 1- 2- e- - T =4+3+6+5
=l Sdays
0-1-4-6-7 = 4 +4 + 3 + 3 + 5 = 19 daYs
O- l - 3 - 4 - 7 = 4 + 4 + 3 + O
= l T d a Ys
0 - 1 - 5 - 7 = 4 + 4 + E+ 6
= 2 Od a y s
The critlcal
path is O-1-3-5-7, because lt requires the
greatest total time
(2O days|.
6 days
5 days
2O days
1l dayrs
9 days
Marimum time lO
gVent
2 ......................"....'..............
Estimated time to event 2:
Agti Vi ty O-l .t.tr...r.....r...D.............r.........................r..
Astivity l-2
. a a . a a r a a a a a t a a a a a a l a a a t
a o a a a a a a a a a a a a a a a a a l a a a a a a a l
4 days
3 days 7 daYs
2 daYs
:::
Sf ack t i mg at evsnt 2. . , . . o. . . . . . . . . o. . . . . . . . . . r. . r. . . . r. . . . . . ' . . . . . . . . .
I
396
PROBLEMS
P16-l
(11 Budgeted cash di sbursements
duri ng June:
Purchase of materials:
May
(1 1r25o1x $2o
r 460/;1...,.' r....""""""
Sl o3tsoo
Jung' (l i rl go' r $go
r54%l r.........."""""'
l 3l t544
Marketing'
general, and administrative
expenses:
rufay
tSSi rSSOa
xa6%1,.......t.o.r.......,..........
$23r713
June'($a6reOOl x 54%1..............................
261622
Waggs and sal adS . . . . . . . "t """""t ' r"""t """"'
Tot al . t . . . . . . . . . . ' . . . . . . . . ! . . r " " " " " " " ' t " o" " ' t " " " t " " '
$
g,goo
38,000
$41, 30O
3, 40O
Budgeted
cash col l ecti ons duri ng May:
March sal es ($354,OOO x 9%).,t...,.............-,..-...
Apri f sal es ($gogroo o r 97
oh
r 607o)......................-' ........' .-.
Apri l sal es ($SoS,OoO | 25ohl
.' -....-....-.--...
Total
1
May 3l endi ng i nventory
(11,4O0 x 130%) ..,..... l 4r82O uni ts
Mai
pf OdUCt i On . r. . . . . r. . . . . . . . . . . . . . . . . r. r. . . . . . . r. . . . . . r. . . . . .
I l
t 9OO
Mat gf i al Snggdgdi nMay, . . . . . r o. . . . . . . . . , . . . . . . . . r . . . . . . . .
16r ??oUni t S
Apri l 3O endi ng i nvent ory
($309, 4OO +
$2O1. . . . . .
l 5' 470
May
pUrchaSgS ..r......r....r............t.........r..r......... :!j!r25O
UnitS
2June
3O endi ng i nvent ory
(12I OOO x 13O7o). . . . . . '
151600 uni t s
JUng
pf OdUCt i Of t . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . . . . . r. . . . o. . . . . o. .
I l r4OO
Mat gr i al snggdedi nJung. . . . ' . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27' OOO uni t s
May3l endi ng i nvent oryo. . . . . . . . . . . . . . . . . . . . . r. . r. . . . . . . . .
14r82O
June
purchases.........,......,.......,.............-- !-2J!9
uni ts
3
(S357,OOO May sal es x t5%)
-
S2,OOO
depreci ati on
=
Sst' 55O
1 a - ^ - ^ ^ -
(S342' OOO June sal es x 15%l
-
$2,OOO
depreci ati on
=
$49' 3OO
5
Accrugd payroll on Jung
'l
.,.......'...
Payrol l earned duri ng June.......r...r
Accrued payrol l
on June 3O. . . . . . . . . . ,
Cash pai d
out for payro11................ 937,90O
Chaptar 16
$235,O44
5O,335
37r9OO
5
$323,279
$
31, 860
211,266
90, 75O
99s9dz9
(21
397
(3)
Clvpter 16
Pl 6-1
(Concl uded)
July
purchases
Budgeted units ol inventory
to be
purchtg-d during July
-
3ilv 3l ending invento
ry l12,2ob
x f
goohl
"" 15'860 units
JUii'
ptOOUCtiOn ..,..............r....'.............r....'...
| 2tOOO
Mat gf i al Snggdgdi nJUl y. . . . . . . . . . . . . . . . . . . o. . t . . . ' . o. .
2?rS60Uni t S
June 30 endi ng i nventory
(12' OOO I 13O7o!"'
l 5' 600
..........
12e6O units
. t
398
P16-2
Beglnnlng cash balancc
Cash recclPtr
durlng monthl
Cottecttonr
of accounts
recelvable:
February
sales:
($2rOOOrOO O I 4O' /c1""""' o"""t""t"""""""'
March aaler:
(Sl
18OO'O0O
r 60olo)..'.""""""""!""""""""
Glf rSOOrOO
O I 4Oohl.-....................ro......""""' ts"' d
Aprll rales:
(S2,200,O00 r E0%)..-'.'..-...-...r..
tS212oo'ooo
r 40%)-....,..o..-.o...--....-....................d
MaY sales:
(32,500,000 x E0%)................-.'- ......o.x.
Total cash collecUons
Cash avai l abl e
tor use duri ng
Cash di sbursements
duri ng month:
Accountc
payable lor
Purchascs:
FebruarY Purchasec:
(S2,OOOpOO February sales I SOoh r 4O'/o t 20ohl
(S1,8OO'OO0 March sales r SOch r 600/o | 2Oo/ol ...-
March
purchases:
(S1'8OO'0OO March sale3 r SOt/t r 4Ot/o I 8Oo/.) ...-
(S2,200,000 April sales r 30o/o t 60'/. t 8O%)......-
(St,8OO,OOO Mareh eales r SOoh r 4Oo/o | 2O'/cl .....
(S2,200'OOO Aprll sales r 50% x 600/o | 2Oo/o1........
Apri l
purchases:
{32,2OO' OO0
Apri t sal es I 5O' h t 4O1/o r 8O%).....-'
(S2,5OO,OOO May eales r 5Oo/t t 8O'/o t 80%)......-.
(92'2OO,OOO Aprit
galG3
r 5Oo/c t 4O'h z 2Ot/ol.*...-
(S2,5OO'OO0 May sales r 5O'h r 6o'h t 2O'/c1...-...,.
May
purchages:
(S2,5OO,OO0 itliy salcg z SOth x 4O'h r 80t41.........
(S2' 8OO' OOO Junc csl er r SO' h r E0% x 8O%)"---.
Wages
l2Oo/o
ol current sales):
April (92'ZOO'O00 t 2Oo/o1...... -.-..-....o.........
May
(S2' 5OO' 000 x2Oo/cl -*.. ...................,.
Jun e
(32'800'000
t 20041..........
General and administrative expenses:
Saf arles
11
11 2 r 3480,000).
PromoUon
11
112 x SS60, 000).
Property tar6
1114
r S24o,000)
f n
guranca
11
I 1 2 t 936o,oO0)
Uti l i Uea (1 I 1 2 z S30o,00O)
l ncomc tarer (St,o2Orooo l ncomc t 4ooh tar rate) .-..-
Total cash di sbureements............
Cash bal ance beforc borrowi ng or l nvestment.-...............
Cash to be borrowed
(or i nvested)...-.-.-...-
End i ng cash bal ance' ............
April
t l oo,ooo
3 SoO, OOO
1, 080, OOO
May
3 l oo,ooo
t 72O,OOO
l 132O, 0OO
Chapter 16
June
3 l OO, OOO
t 88O,O0O
l ,Soorooo
31, 88O, OOO
s1, 98O, OOO
i32,o4O,OOO
32r14O, OoO
32,38O,OOO
s2,48O,OOO
3
80, 000
108, OOO
2g8,OOO
528,OOO
44O, OOO
40, 000
55, OOO
o
3O, OOO
25,OOO
408,OOO
3 72, oOO
132, OOO
352,OOO
6O0, OOO
5OO, OOO
40, 000
55, 00o
o
3O, OOO
25,OOO
o
3 88,OOO
150, OOO
400,ooo
672,OOO
50o,ooo
40, ooo
55, O0O
50, ooo
30, o0o
25, OOO
o
s2,Oo2,Ooo
3
(22,OO0)
122,OOO
3 l OO, OOO
$1, 806, OOO s2. 07O. OOO
3 334, OOO S 4' O, OOO
(234' 0OO)
tgro.oool
3 loo,ooo
s__1!-qp_q_q
Chaptor 16
Pl 6- 3
TVIAY1I E II/!A1
gP'4"-
BIH G COM PA}IY
Ca*r Budget
For thr Ycan Ending March 31
399
208
20c
Balancc of cash at beglnnln! ..........-.-......
Caeh generated from operatlons:
CollecUonc from curtomerg-
Schedule A....,..........
Digburgcments:
Dlrect materla ls-Sch ed ulc B ...,.,...,.......
Dlrect 1abor..........a.-6....F....
Varlablc overhead
Total disburrementg
3750,00O
Excess of caeh collectlong over cash
di sbursements f rom operati ong
Carh avallable lrom opcraUonr
Cagh recelvcd from llquldaUon of erlsUng
aicountr rcceivablc end Inventorier -.-.
Total cash avallablc ....,...........,......,_.....r....
Payments
to generat
credl ton
fl l gul datl on
proceeds)
Bal ance
ol cash at end
3825,OoO
3220,000
300,000
100,ooo
$1, O65, 0oo
3 245,ooo
360,00o
120, O0O
l 3o, 00o
3 855,OOO
s 75,OOO
2l 0, ooo
s285,OOO
s285,O00
270,OOO2
t ts,ooo
3 75,Ooo
t 75,000
eo,0oo
tl 85,OOO
90, O00
$ 7S, OO91
i
Thlg amount could have bcen uaed to ply gcnoral
credlton or cerried forward to thc begln.
nlng of the next-year.
2
6ooo,ooo r Eoo/c|
-
sgo,ooo
. :
Pl 6-3
(Concl uded)
Schedule
A--Collections
from customets:
Sal oS
t t t t t t " t ' t " t t t t " t " t t o" t o" r " ot " " t " t t " t " " t " " " " " '
igginning
accounts
rgcgivablo
""""""""""r"
TOt ! l t t t t t t t t t o' i t t t t t t " ' ot " t ot t " t l " ' or r " " " t t " t ' o" " ' ot "
Less ending accounts
rccgivabllB
""""""""""
Col Iecti ons' romcustomen;........................| .' .
Direct materials
requined
for
production """"'
Requirgd
ending
inventory
o""""""' ot"""""' t"
Tot 3l t t t t t t " " " " t " " r " t " t t " " " " " " " " " " " " " t t t ' l t "
Lgss beginning
inventory"' t' Do"""""' t"""""""
PU f C h a S93. . r . . . . . . . . . . . . . . . . . . . . . r . t . . . . . . . . o
t "t "t t ' o "t ' r " "'
Begi nni ng
accounts
payab1e""""""""""""""
TOt al . . . t t t t t " " " " t " " " " " t " " " " " " t " " " t " " t " " t t t '
Less ending accounts
payab|9 ......t.........1....,..
Disbursgmgnts
for diract materials
""""""""'
3
12,Ooo units | 2112
= 2.AOO; 2'Ooo x S2O
pr unit
=
.
is,ooo units x 2112
= 2-r5oo7 2,5oo x S2o
per unit
=
208
sgOo,ooo
o
$9OO,OOO
75,0OO
Chapter 16
20c
sl , 08o, ooo
75,OOO
$t , 155r OOO
9OTOOO
s2oo,ooo
4O, OOO3
$240,OOO
o
$24O,OOO
0
$24o,ooo
20,OOO
s220.ooo
$4O,OOO
sso,ooo
s 24O,OOO
5O,OOO
'
S 29o,ooo
4O,OOO
$
25O,OOO
2O,OOO
$
eTo,ooo
25,OOO
s 245.OOO -
Pl 6-4
Producti on
Budget:
Required
to meet sales fotecast
January
($3601000 sal es
+
915O
per uni t}""""""""'
Feuruary
(Sas6rooo sales
+ S15o
per unit) ""t""""r'
March
(54-gorooo sales
+
$150
per unit """o"""""'o'
Desired finished
goods ending inventorlr:
-
((S600,000 A-pril sales
*
5f
So
per r-rnit) a l0ohl'r 1o0)
Total
quantity of
product to
prociuce ""-"""""""""""""
214OO
3, 0oo
3,2OO
8,600
500
9, 100
s182, ooo
2, OOO
sl B4, OOO
Di rect Materi al s Purchases
Budget:
Materi al s *qui i "J
i or
proOutti on
(9,1Oo uni ts r S2o)..' ..
Desi red materi al s
endi ng
i nventotY
"""""""'
Total di rect materi ats
pu rchases
duri ng fi rst
quarter """""""""
s829roo9 $o65poo
Schedute
B-Disbursements
lor direct
materials:
-
2oB
20c
Clpptor 16
Pl O?4 (Concluded)
Cash Budget for First Quarter Ending March 31, 2oA:
January l, cash balanco .............o..o.........r.' ..o...r....
Cash receipts:
InYestment by owner
Mortgage taken out
CoflecUons of sccounts receiyable:
January saleg:
(SS8O,OOO
r 3Ooh r Seoh r 98%o1.o..,..,..
(s360rOOO
I 3ooh x 2O%1..,...,.o,.......o...
(S360,
O0 I 3 O 7of ......o....r,o.,..........r...,...
St3
6 O, O 00 I 38 7o) ...,..............oo....o.,.....
February
sales:
Gt4sOrOOO
x 3Ooh x SOoh x
g$o/ol,,...,..,r
G|45O'OOO
x 3Ooh r 20%1,.....r........,ts...
(S4 S O, 0 0o x 30
ch1...oo..........r....r.......r...
March sales:
101
o s
f 98%1 ...' ......
s 5OTOOO
t5o,ooo
941672
21, 6OO
108ro0o
t36rgoo
105r84O
27',OAO
135,OOO
1121896
28rgOO
G!48O,OOO
x3Ooh xSooh
(S480,OOO
x3Ochx2O%l
Total cash availabte for use during quarter,r.......D.
Cash disbursements:
Accounts payable
a a a a a a a t a a a a a a a a a a
$184, OOO
265,5OO
1361500
t5orooo
68, 8OO
36rOOO
IrOOO
3O,OOO
l 50,ooo
96O,608
$ 960,608
$
(69,1821
8,4.16.2
$ t s. ooo
Dlrect labor (grlOO
r $3O)
-
$7r5OO1r.,.............
Varlablg
oyerhgad (grlOO
x $l5i .....-.........,.......
factory
rent (910
r S' OOO capacity x 3) .,.........
Sales commlsslons (gr60O
unlts x-$g;...........,.,
Office rgntals ($t ZrOOo r 3! .,..,...........,.....,.,.,.r
fnterest payment
($iSOTOOO
x 2oh r 3|.,....,,.....
Payment
of princlpal
on long-term note..........
Equipment pu
rchasos..........-.
March
cash balance
before currsnt financing,._...
Currgnt
financing
reguired ..,............r,r..................
Desired
March 3i cash balance .................r....r.r..r
I
I
I
Chapter l6
102
Pt 6- 5
('t
l
TRIPLE.F HEALTH CLUB
Budgeted Statement of Income (Cash Basis)
For t he Year Endi ng Oct ober 31r 2OC
(000s omi t t ed)
Cash nevenue!
Annual membershi p fees' $gSS
r 1.1 r l .O3
Lgsson and cfass fggs,
$234
r $234 ' ......r............o..o.............' .......
- s180
$,402.2
304.2
2.7
92' 0
Miscellaneous,
;i"
I $ 2 a . . . a . . . . . . . . . . . . . . . . a . a a . a . . a a a . t . . a . a a a . . a a . a . . a a r a r a t o ' r " '
TOtal CaSh fgVgnUe.......rr.............rr........rr..........r............o...........
Cash expenses:
Managefb Sal afy and bgngfi tSr $gg X 1.15..' .......................r...........
RegUtaf empl oyeest Wages and benefi tS, S19O
f 1.15' .' .' ....' ..........
Lesson and cl ass empl oyee wages and beneti tsr 3195 x 1.3 x 1.15
TOWeI S and SUppl i gS, $16 f 1. 25 . . . . . . . , . , . . . . . . r. . . . . . . . . . . r. . . . .
Utititigs
(heat and lightl
,
522 X 1.25...................o.r......' r............i..,..
Mort gagg i nt ereSt , $gOO X . 09. . . . r. . . o. . . . . , . . . . . . . . ' r. . . . . . . . ' r. . . . . . . . . . . . . . . r. . . . . .
MiSCgllangOUS, $2 I, 1.25 ..................r...r....................r..............r.....
$
s709.1
s 41. 4
218.5
291. 5
20.o
27.5
32.4
2.5
30.0
2.5
15. 0
25.O
Total cash expgnsgs.....rr.................ar........r.........o...........t.....r..t..
3633.8
Cash i ncome. . . . . . . . . . . . . . . . . . . . . . r. . ' . . . r. . . . . . . . . . . . r. . . . . . . . . . o. . . . . . . . . . . . r. . . . . . . r. . . . . . . . . . . . . . .
3 ?53
Cash payments:
Mort gage
paymgnt
. . . . o. . . . . . . r. r. . . . r. . . . . . . . . . . r
AccountS payablg balanCg at 10131 IB ....' ......".".......o...............' ....
Accounts payabl e
on equi pment at l 0l 31l B....
Pl anngd new
gqui pmgnt purchase.................r.
TOtal CaSh paymgnts..r................r.........................r...............t..to. s 72.s
Cash surp1us. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . o. . . . . r. . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . . . r. . o. .
$ 2. 8
Begi nni ng CaSh ba1anC8. . . . . . . . . . . . . . . . . . . r. . . . . . . . . . ' . . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . ' t . . .
8. 3
Cash available for working capital and to acquire
propetty.......o.......... LlQ-t
(21 Operati ng probl ems
that Tri pte-F Heal th Cl ub coul d experi ence i n 2OG
i ncl ude:
(a) The l essons and ctasses contri buti on to cash wi l l decrease because tho
proj ected
wage i ncrease for l esson and cl ass empl oyees i s not made up
by the i ncreased vol ume of l essons and cl asses,
(bl Operati ng expenses are i ncreasi ng faster than nevenues from member-
shi p fees.
(c) Tri pl e-F seems to have a cash management
probl em.
Al though there
appeani to be enough cash
generated for the cl ub to meet i ts obl i ga-
ti ons, past due amounts occur. Perhaps the cash bal ance may not be
l arge enough tor day-to' day operati ng
purposes.
Ctle,pta-
16
pto-s
(concrudedf
tog
(31
Jane
c
':'::'*fli^d*Tl#$,
fn ttre
c
annuaf
i
clubb
rr
mentpun^has-e:6ffi
;iir"irH:rr:r,if
rri:fi
}H"Tl"v."qui;_-'-
purchas
cant
incll"-:9r"!"ins
prope'ty,
lil"-g;'i;"otr""Tlilt
ln: !":F
o"li.5"
,o
sl,ipuonTil.l""nffi
":*i[**_.':l;;*"ff
:"","j1*;i1fu:"
P' O.E
(1)
Schedufe
of b.gdgeted
cash
n (ooos
omitted):
- -r"
'| eceipts
by
month
for
the
thtrd
guarter
of zoA
Billings
Receipts
Actuat/
Itfonth
|ut"t"o
Percentages
n'6;.-......
# *
Timins
slv Auou-sr .jip:
frli-::-...-
T;SSS-
?:"
ffi
s
ffi
August
L.d;'
.1.:::...........
SrOOd
;:
40
J,ne""'...'.1
srooo
;9
#
2oo
{.::"....-;;
s,ooo
nl i9,
"'333
rf1JDo...,.......
;r;;;
uo
20
i{g
i'iii
;s
#
I,o
$;ss
u"ry..-...]
:,::g
to
,o
uurv..-....._
:':99
90
#
45
.tuf!"....,...,..
:':::
iJ
;3
2'o2s
{u1r.,..."'.....
iffi l3
20
t8o
&ff"; :,,1?:
d;
:3
$
ffS
i,T$* :;fri
J3
'o
eoo
septembe,
f;:::
il
;3
so
septembe,
F,:9g
eo
23
2'2so
."j:#idTfrilfrfu","'.:
*: >
;3s
rota,
";;
;"J;,f::::::::::.--#
S
_C--
qF
....................91980
@
d
Chaptar
16
&1
Pt6-6
(Goncludedl
l2l
schedule
of budgeted
cash dlsbursements
by month
for the third
quarter ol
2OA
(OOOs omi t t ed):
Disbursements
July
August
SePtember
Salarier
Variable:
$4,500
t 2Ooh
$5,OOO
t2Aoh
$5,5Oo
x 20oh
3
900
$l , ooo
$1, 1oo
Fired
Total variabl
g
.o.' o"""""""""
t a a aa aa at a aaaaa t t t t t
"
'
$
9OO
l ,5oo
St rooo
l r 5OO
$2r5OO
':"
$t , l
oo
l r 5OO
$z,6oo
l r Soo
450
13, 67O
$t g, g7o
I l , 9OO
$
2,O7O
185
S
1, 885
(3.700)
$J915)
Total salarigs
"""""""""t' trt
Purchasgs
of
prvious month
"""""""'
l nt gl t St . . . . . . t . """"""t """"t """t t t o"t ""o'
Depreciation
(not relevant!
""'o""""""'
Total cash disbursgmllt3
""""""""""
$3,750
#
s4,55O
$
300
s2,4OO
' :"
$3,60O
::
(31 (ooo omitted|
Cash bal ance-.ful y
1,
20A...,.....
Cash receiPts in third
quarten
J U l ! t t t t t t t t " " t t ' r " " t " " " t " " t t ' o" t " t
t " " " t " " " ' ot t t t '
August t t t t t " " t t t " t " " " t t t ' t " " " " t " " " t t " t " " " " r t t t
Sept embgFt t t " t t t t t t t r t t " t ' t t t r " t " " t ' r " " " t " " " " " t '
Total cash availablg
.r.................'.....................,.."
Cash disbursemcnts
ln third
quarten
JUl l t t t t t t t t " " " " " t " " " ' t " t " " t t " " " t " " t " t " " t " " " '
August
a a l a a a a a a a a a a a a " " t " ' Dt "
$4,580
4r43O
4,660
$3,8OO
3r75O
4,55O
Sept embol t t t t t t t t t t t " " t t t " t " " t " " " t " t t " ot " " " " t t '
Proiected calrh batance-September
30' 20A"""
Minimum end-of'month
c:rsh balance
noquirod
Gtt ;SSO
r IOo/o)
"""""o"""o""""""' t""""""'
Cash available to acquire capital
items
"""""""'
Gapital erpenditures
planned for October
l' 20A
Amount of borrowing
necessary
on October
l' 2oA
Cnaprcr
tA
Pr 8- 7,
(1'
46
1
7
I
7
t
r + 7 +
R
v + 1 0 +
E
e + T +
- - r _ 4
E
r + S +
1 0
5
5
t o
= 2 2
7 -
= 2 0
7
= 1 7
7
= 2 0
critical
path
(2'l
Et Activities
t
+-i--
2
A s
3
A' B
I
4 e
o
A' B
I Ec , D, E
: I ' C, D, E
; 5l ' o, t
16
3,1'
o,
t
ii
i 3;3;i
: :
F, C, D,
I
.t:
H,
c, I
: :
H, c ,
l
.,:
H,
C, I
.,:
H,
G, I
: :
H , G, I
J :
H, G, I
J :
H, G, I
: :
H, G, I
. ' r
H
2 2 H
Cost
: : : : *
s 8oo
=$1, 600
: : : : *
s 8oo
=$f , 6oo
: ^: : : *
$ 8oo
=$l , 600
ffi*ff*
$,ffiill;;li
-:,;;;
==s;,i;l
se,ood
--'-vv
;Si;lll
f
8 0 0 +
$ ,
: : 9 9 .
$ Bo o
=$ t , 6 o o
=
$2rooo
GGA-Canada
(adapted).
Reprint
with
permission.
Chapter 16
16
Pl 6-8
(rl
Start
Fi ni sh
(21 Path
A-B-E-G-H
=
A-B-E-F-H
=
A-B-D-E-G-H
=
A-B-D-E-F-H
=
A-C-D-E-G-H
=
A-C-D-E-F-H
=
Time Required
2 + 5 + 3 + 3
=
2 + 5 + 4 + 3
=
2 + 2 + l + 3 + 3
=
2 + 2 + 1 + 4 + 3
=
l + 4 + l + 3 + 3
=
1 + 4 + 1 + 4 + 3
=
13 weeks
14 weeks
l l weeks
12 weeks
12 weeks
13 weeks
The critical
path is A-B-E-F-H, because
it is the longest
path'
(31 The totat cost of the
proiect as
planned is:
Activity
A-B ...................tt
A- C. . . . . . ' . . . . . . . . . . . . o.
B_D. . . 4. . . . . . . t . . . o. . . t a
B-E . . . . . . . . . . . . . . . t . . ' . .
C-Dt . . . . . . . . . . . . . . . . . . . .
D-E. . . . . . . . . . . . . . . . . . o. .
E-F .....................
E- G. . . . . . . . . . . . . . r . . r . . .
F-H .....................
G- H. . . . . . . . . . r . . . . . . . . . .
Total normal cost
Normal Cost
$
{,ooo
800
1, 50O
5, 1OO
2,5OO
600
1, 70o
l r2oo
t , 4oo
1, 3OO
st T, t oo
B
G
o
rl ,%
&xx
H
A
D
E I
F
#
c
\
.\
Chapter 16 407
P16-8
{Concl uded}
(41 Since the critical path requires 14 weeks, at least 2 weeks must be cut
from the project
in order to complete it in l2 weeks. As originally
planned (determined from requirement (2)),
the following three paths
require mone than 12 weeks:
Path Time Required
A- B- E- G- H = 2+5+3+3 = 13weeks
A- B- E- F- H = 2+5+4+3 = 14weeks
A- C- D- E- F- H = 1+4+1+4+3 = l 3week s
The first place
to start reducing time is the critical path,
A-B-E-F-H,
because the largest amount of time must be cut from this path.
tn this
project'
each activity on the critical path
can be crashed, so the first
activity to crash should be the one that has the smallest crash cost per
week. By crashing activitr F-H, which costs S2r8oo,
path
A-B-E-F-H is
shortened by one week to 13 weeks. ln addition, since activity F-H is on
path
A-G-D-E-F-H, it is shortened to the required 12 weeks. Now one
more week must be cut lrom activity A-B-E-F-H and from activity A-B-E-
G-H to bring each
path
and the total project
down to 12 weeks. The
activity that costs the least to crash and that is common to both paths is
activity B-E, which witl cost $5,2oo to crash one week. The only other
way to reduce both paths
by one week would be to crash one activity on
each path (activity
E-G for 9rl,6o0 or G-H for
$2,300 on
path
A-B-E-G-H
and also activity E-F on
path
A-B-E-F-H for s3,zool, which will result in a
mi ni mum addi ti onal cost of $6,000. Therefore, the mi ni mum cost to
reduce the total proiect
timo from 14 weeks to l2 weeks is $g,ooo,
resulting
from reducing activity B-E and F-H by one week each for costs
of $2' 8oo and $5,2oo, respecti vel y. Si nce the mi ni mum addi ti onal cost of
9lqilg
two days off of the total time reguired to complete the project
is
$8rooo, the minimum total cost of compieting the project
in 1?weeks is
$25' l o0 ($12' ' l oo
normat cost from requi rement (3) pi us
$8,o00 addi ti on-
al cost).
I
L
Chapter 16
Pl 6-9
(ll The normal critlcal
Path
ls:
3 + S + I + I + I
=i l week s
A B E H - K
L
The normal cost to be incurrad in openlng the stors is the sum of tho
norrnal cost of all l4 aetivities-$85'ooo.
(2t The minimum time in wlrich the store could be opened is I weeks at an
additional cost of $l l,5OO, or a total cost ol $96,500
($85,0OO +
$t I
'5ool'
Potential
Alternative
ErPected Time New
Paths Time Redugtion Time
A-B-E-H-K-L
l l weeks 4(A-B' B' El Tweeks
A-C-F-!-K-L
7
A-C-F-.,-K-L 10
A.D-G.J.K.L 7
2
FJJ-n
'"
2 (D-G, J-R 5
The new critical
path
becomes A-C'F-.r-K-L.
Reduced Ume
pnograms would be initiated on the following activities:
Reduced Reduced
Activities Time Cost
A- B l week $4, 5OO
B-E 3 3,500
F-J 2 2,OOO
J- K I 1, 500
sl l ,5oo
The activity D-G reduction ls ercluded because it would not contribute to
reducing the total proiect time.
(31
The store should be opened on the normal schedule because the cost
Fllr5OOl
erceeds the benefit
Gt6,OOo).
The reduced
pnogram would save
3 weeks at a cost of $11r5OO,
while the earlier opening can be expected
to yietd an operating income of S2,OOO
per week' or a total of $6'O00.
\
409
I
1
t-
l
\.
I
I
b
i
b
l
b
I
I
\,
b
Chapter 16
l "
b
,
CASES
c16-1
(f
)
Network snalysis torces the company to plan
ahead and develop a
detailed plan
for proiect
completion, lt presents
a visualization
of alf indi-
vidual tasks and their interrelationships.
Network
anallrsis proyides
;;;-
sgement with timely information lor controlling
schedules,
shorrs the
effects on tho entira proiec!
of changes mado lo individuai activiiies,
ano
allows for the continual updating of project pnogFess.
DisadYantages
of netnrcrk analysis as e means of organizing
and
coordinating proiects
include the use of probabilistic
schedules
lh"t ."y
be highly subiective, a bias torvard overly optimistic time estimates often
based on management
erpectations, and the need for cooperation
smong a large number of units to estabtish
consistant priorities.
A dis-
proportionate
amount of management
time and effort may be required
for planning
for the benefit reclived; there may be other alternatives
that
could be mors effective.
(21
Norm Robertson
would be concerned
with the defay in activity A-D
because it would shift the critical path
from sta*-B-c-F-l-.J-Finish.
shiela
NeilPs estimate
of the time tor activity A-D (i o to r2 weeks) results in
start'A-D-G-J'Finish
requiring 23 to is weeks. Furthermore,
Neillb com-
ment that activity A'D cannot start until after activity-B-E
means that B-E
becomes part
of this new. criticat path,
making ttre criucal path
start-B-
E-A-D-Gd-Finish
with a time requirernent
of Cg to 3o weeks. Thus, the
change
in the relationship
of ths activities
woutd change the critical path
oven
moror so that the project
will be completed I to io weeks later than
the originaf
estimate.
(3)
Norm Robertson
developei tlre PERT diagram for the vector.12 project
with inadequate
input. Robertson
stroutJiave
consulted
alt tho depart-
ments
involved
in the project
to ensure that the expected times required
to complete
the activities wora attainable.
Because
Neill was not con-
sulted,
the Ume reguirement
for activity.q-D
was incorrect,
and the rela-
tionship
between
activities A-D and
g-E
was missing from tho network
(41
The behavioral problems
that could arise within caltron Inc. as a conse-
quence
of-the pranning
of tho vector.l2 project
incrude:
(al
A lack of commitmentJo
the proiec[on
the part
of the department
direstors, particularly
Neill, beciuse
of their exctusion
from the
planning
process.
(bl
conflict
among the department
directors
that could affect future
workin g
relationships.
(c)
A tack of goal
congi uenco
among
tho departments
i nvol ved.
l
!
-
Ol7-1. Respcrsbilirty
accounting b a program encotn'
paming all operalhg managomcn! f.ot whiclt
ihr accountlrg, oill' or budget dMritrrr pro
vidr lcclrni:al aristanc. h thr form ol daily'
wcckly. or rurthly ontrol t'pottt' Th' obiec'
tivt of rerponrbility
accounting ir to prcvilo
managcrnont with I weilul cod csrtrol Ool" To
bo cl frcti vr u I control mochani am, thr
rerpontibility accounting tyd.m rccordr and
reportr cootr ircurrod ar a neull of roch ecfivF
ty to the individual in thr company who ir
reoPonsbb lor cantrolling ho aclivity.
O17-2. Tho crnpharb of nrpcsbility reunting ia or
htemal coct csrtrol raher ttran on deierminhg
ptdtrt cod. Thb reguircr a rtritt h cnphasir
frqn delcrminhg tho cost of reoouncot used h
manulacluring e product to dctormining lho
amounl of control indivkjual managen hovc
ovor cost. Fblponribilily accounling deler-
minc thc cst ircuncd by an rlivity or group
ol aslivilier, rathcr than thc cost incurred lo
produce a
Producil.
O17. Cartrolbbb c6lt arr thool thal arc lrcunod
al thc rerult of. or lor thr bcnefil of' a businss
activity. Presumably, suclr a eocl will ircreaso
or decrease as a reaull ol lhe lovel of effriency
with which trc aclivity lhal genenles lhc cost
i s conducted or managed. To bc ctfecl i ve,
reoponsbility reunlhg mud hold e managcr
responsble fa crly tlpse cods thal he or she
can conlrol.
Ol 7-4. Tho organization musl br arrangod so thsl
thcro aro m ovortapphg lher of mrpcnibility
(i.c., no morc than onr indivkJual rhouH be
rcponcbL tor.adt eslivity). In edditbn, caclt
hdivi48l h thr organizalirr murl havo a cbar
understandhg cl hir or hcr rcsponsbilities, and
musl havr rul fi ci rnt aul hori ty l o l akc tho
actbnr necellary to meel ttroot respctsibili'
liec.
017-5. Thr cet of any oxpondilurc clarcifhalion ir
of t*p ebmenll: thr unit pricr and
thr quantity cl thr itenr ured. Ono irdivirJual
may havo cqrtrcl of pricr wtrile ano0ror hdivU-
ua! har control ol quanti ty. Evon i n caror
whoro prico door nol changr, lhc quanlity
urcd mey nol bo fully cofrollabb by tho irdi-
vUual ufio o\^rrilr.r fho acfivity that srrurnec
tho ilrn. Thr qrality cl tho itsn nrsy dtrt th.
guantity urod and tho quality may br delcr-
mined by thr purcfrascr, or tho ctfbiency with
whi ch tho i tem i a used may be affecl cd by
decbboa rnsd. at the executivo monagemrtt
levcl (e.g., porsannel ctranger and machhery
acgui si ti onr). Si ncr l ha accounl anl cannot
al wayr dcl cr mi no absol ut o cont r ol , cost s
CHAPTER
17
DTSCUSSION QUESTIONS
should be assigned on lho basis of relalive
conlrol, and variancor should be viewed al
quedbnr rather than as atlewcn.
017. Opi ni on i c di vi dcd on thi s subi ecl . Somc
believe that for thc mel effeclive overhead
cqrlrol, &partrnont headr shouH bo chargpd
crly for ho.. codl thal they ircur. lf lhey arc
cfiargod wilh uncsttrollable costs, they could
spend rignili;ant atrpunt! ol limo lryhg !o cct'
tlol cosl that they havl no ability lo cqltrol, or
they may bccqn hultrated and givc tP tryhg
to csrbol 8ny stt. On the ofter lrand, ssne
believe that deparfnent headg should aPprocF
atc thc fact that many auxiliary costs musl bo
incurred to tuPPort their activiliel; thereforc,
they $ould bo charged with a fair share of
suclr cct+ clearly labeled as uncsrlpllable,
Ol7-7. Total costs c/ servica departmenl overhead aro
included in overhead rales h order lo charge
irbs
and prod.rcts wilh all overhead hcurred h
their
production. Aclual service deparlmenl
cetl et. cqrtolled il they are accumulated in
seryice departmenl accounts where they can
bc assigrred to setvico deperlmenl managen.
ll rervice dePatltnent ccls atc charyed direct'
l y t o pr oduci ng depar t mont e, 3uch cost g
becsne an indirect, noncontrolhble item of the
departmantb receivhg lhe charges.
017. Servicc department costs should be charged lo
user deparl ments by predetermi ned bi l l i ng
rales rather than by allocating aclual ccat al
lhr end of the period. The use of predeler'
mi ned rates maker i l posri bl e l o determi nc
sewicc departrnent
gfticierEy
through lhe corn'
putalbn of spending and idle capacily
yari-
. anooa. ln addilixr, uscr department elficiency
can bo evaluated nrore elfectively by eliminat'
ing noncaltrollable cosb frorn service depart'
menl charges. This is parlicularly imporlant
where user dePariment3 have some control
over lhe anrount of the services usod. In such
csses, usors thould be held accounlable for
their usc ol seruices, but the rales lor pricing
ttpoc eorviceg strouH be known by the users in
aclvancc.
Ql7-9.
(a) No. Thc ctrargc is an arbilrary allocalbn
ol cost. lt cannot bc influenced directly
by acticrs of ihe divisinn rnanagorneni.
(b) Yea and no. The amounl ol computer
seruicc used ir within the contol of the
divbbn managemenl However, lho ct
pot uni l of servi ce vari eg wi th the effi -
ci ency of the computer faci l i l y and l hc
amounl of use by ot her di vi si ons.
Consequently, the charge is cnly partly
controlbblo by divisicn rnarragemenl-
110
I
I
1
!
Clnpter 17
417-10. (e)
(c) Yct. Thr chargr for goods purchaced
'
tro.n anothor diviridt is conlrotlablo by
thc diVisbn managcment, provided that
thr quanlity
of g@ds purchascd b car-
trollabL by tho divbbn managcrncnt and
lhat thr prb. it an rxtemally sCsblished
rnarkcl prict.
4 1 1
formed during the period into budgeted
Mai ntcnance Dopartment cost for thc
samo period. Using lhis predetermined
ral o, cach usor deparl mcnl ' s mai ntc-
nanor cost rouU deperd
qr
lhc nunber
of furrs of servbe il reeived. By using
thc predetermhed
ralr, lho aciual cqt
could be compared with totel charges
madc to u3ere and thc dilfcrrrrcr decqrF
posed
into spending and idb capacily
var i ances l or t ho Mai nl cnanco
Department. These variances arr useful
i n t val uat i ng t he el t i ci e ncy ol
liahtenanco Dopartrned scnivity.
A f udher r ef i nement woul d be t o
requirc ho lr,lahtenanco
Dopartmcnt to
-
lubrnit estirnates
cil cct lo users beforc
providirg
services. This rvoutd not mly
give the dopartment reccivhg the sorvbe
rqne idea of the cogt of tho work, bul
woul d afso restrai n the Mai ntenance
Department from spendi ng l oo much
time on a
icb.
Q17-12. The flexiblc budget (a) provides
the monthly
budgt allowance regardless ol the flucluating
nurlhly volume of produclitxr;
(b) permits
not
having to estimate the operating activity ol a
rnooh in advancc ol the period
lor wtrich the
budgot i s prepared;
and (c) recogni zes l he
fixed and variable nature ol costs, wfrich leads
to easy adjustments when evaluating actual
perfornancc,
Q17-13. A spendhg variance is the dilference belween
actual cost and the budget albwance (i.e., the
budgeted anrowtl sdiusted lor the aclual level
of aciivity erperiencod). tt is causd by difter-
encos btween the prices
and the quantities
of
the variotrs ilemr ol cost budgotod and actualty
i ncurred. To the extent that a manager has
conlrol over eilher price or quanlity,
or bolh,
the manager has control over the_amounl of
the spending variance. However, il the mrnagcr
doeg not have conlrol over both prices
and
quanlities,
lhe rnanager has mly lirnited csrtrol
over l hc amounl ol thc spendi ng vari ancc.
Ncvcr t hel ess,
si nce a managci may havc
somr control over spending variances, they
arp usd lo evaluale
efficiency h responaibitity
reportirg.
Q'l 7-14. To aiJ rnanagoment
in evaluathg and cqrlrol-
ling cosl, a spending narbnco tor each ilem or
cl assi l i cati on
of cost shoul d be reported l o
r esponsi bl e
management each per i od.
Itemizcd varianccl
tell responeiblc manago-
menl which ilem war inefficiently ured. Thic
detoilod hto.rnatbn phpohts
wtreie thc roarsh
io
iJentily causos shoutd begin.
at7-15.
An i dl o capaci ty
vari ance i s l he amounl of
ovor- or underapplied
budgeted tired faclory
overhead.
In responsibility
reporthg, it b used
b
Thr highor al.ctric pcrfler cob rnay be
thr resull of any ono or snbination of
thr folbring
(t) ircroaser h tir prbes paU tor tuel,
labor, rnsinlcnorco, rlc.,
(2) i ncfl i ci cnt oporal i ng pracl i ces or
macfiho lailurcr withh thc porrer deport-
,nont,
(3) l hr acqui ri ti on ol erpensi ve new
crFacity, ancl/or
(4) incrcarcd production
of electricity
requircd to rroot uror demand.
To lho oxtont thd any incffbiencies exist
h tho po'vor
drpartmcnt tho cunent slb,
calbn rctremr wilt pass them on to the
wcr dcparfncntr. Wlth the kind of alb,
catirn usod by Errmonr Cornpany, il is
nol possiblo
lo drlermine wtrat caused
lhc cost incroatr. A better syslem of
handhg lhis depsrtment's cosl wouH be
to chargc user deparlments for acluat
uragrr on lho basir ol a predetermined
variablc rdc, and lor available usage on
thr basb ol tho power
doparlmont,s abili-
ty to provUo
rowbo at maxinum capaci-
ty. Bndgetrd fixcd cogt rhould be allocat.
cd on l hc bari r of abi l i ty to provi de
oeryi co, becausr the El ectri c
power
Dopartnrent
canncl control aclual usage.
Thb apprc*h rucuH make it possible-to
compul a
spr ndi ng var i ances l or t he
Electric Powcr Dcpartment,
which are
ureful i n cval uati ng
l he department,s
optraling effir:iercy.
b
i
b
(b)
b
I
I
b
!
I
tb
Ot 7- 11. ( a)
Hi ghcr t ot al cor t i ncur r ed by t he
Mahlonsrrcr
Drpartrnent (i.o., hcreases
ir lht priceo
andor quantilies
ol the varF
our ilem! ol corl in the Maintenanco
Dcportrmrn),
fowcr tolaf hours of mshte-
nancr r or vi cr pr ovi ded
l o al l ur e r
6partn.nt!
during the period,
o, a com-
binatlxr of both could rcsull in a higher
acl ual
mai nl onancc
co3l pcr hour ,
Howcvor,
rucfi incrcaser
in cosfr should
remain
in thc Maintonance
Department
artd nd be drargred lo the usorc.
An i mprovcd
mcthod tor di stri buti ng
i/binlmancr
Dtpartnent
cost would bi
lo rslablbh
a prcdetermined
rate lo be
chargod
lor oach hour of maintenance
torvbo prwirJod
to users. Thc ratc wor,rld
bo octablirh.d
annually
by dividing thc
oudgcl cd
hours
of servi co to bc por_
l
(b)
112
l
er a mcarut.
of capacity utilizatkxl. To the
ortent thal rnanagement can cstlrol capacity
utilhatinn,
thr kilo capacity variancr can bo
controlled.
Howevlr, lho arnounl of capacity
utilhed ir cillrn a furction ct fotcs ot ttij' th'
cfittol d hdivHrrsl depadment suprrvboo'
Ql7-16. Thr two
primary
PutPolct
of rrsponsibility
raPotlt tra:
(a) To nrolivato inclvi<Juralr b achiovo a high
levol of performancr by reporting etli'
cieircbr and helliciencier to rerPonsiblc
rninager! and thcir ruPerirrs.
(b) To provi dr i nl ormati on that wi l l hel P
responcblc rnanagot'r3 ldernity ineff bien'
ciet so that thcy can rnoro rflicirnlly
conlrcl code
Afl-fi. Dyslunclianal behavion that can result |tom
'
the practice ol evaluating managerial
perfor'
,nanc. rathr tlrsr cvaluathg aclivitier lcilow:
(a) Managera trnd lo lakr aslirmr lhal an
rell acrvirg rathrr than bcndicittl b |hr
cqrtPany ar a wfiob.
(b) Managcru coflcontral. or mceling lhe
budgBt rather than an obtahhg the beet
l evcl of
Pr r f or mancc
t hal can be
achieved. Tht usr of budgelr lends lo
thwarl continuour imProvement.
(c) Si nce budgel l are bared on current
opcraticrr, rnanagoF lend lo fcur lheir
altontivr
qr
short.run targels and ignore
the bng.lerm needg of hc business.
(d) Managen *tro arl unablo to subwrl the
l ysl .m rutl i ci cntl y to gcl acceptabl e
evalualbnr, bd who are othelise corrt'
petrni and rfficient bccqno fruslraled,
do ttot gct prornolcd, and olten bave the
cornpany.
Ol7-18. Responsbility accounthg and reporthg should
not be abandoned despile lhe lacl trat its use
in evaluating lhr perlormancc of rnanagort
resultr h dyslunctirnal behavior. To overcornc
he prcbbm ol dydurrlimal behavix, tcsPo.l'
sbillty reportr lhorrld br Lrsod b ovalulr lhl
perlornrancr ol burinccs eclivilirr, nol tnan-
agen. Maragon rhouH bo ovaluatod
qr
lhc
basis of multiple ac-tivitjes cil whk*r ccl cstltol
is crty ane. lvlanagon shoub bo rncouraged
to expcrinent with now approachcr, lo irplwo
producl quality, lo onlist th. coop.ration of
thcir departmonl rc*on in irpoving output,
lo cooporalr with cthor departmontt, and lo
rcrk tor thr fmgttem succosr cil tht canpa-
ny. Using respansibilily reports ar an aid in
cvaludhg
thr olficbncy of busho$ aclivities,
hslead ol managroo, takcr procsurc off man-
ageru to defend hoir acticos ar thoy reble lo
cod, and rnaker il po+rblo for hem to pursue
cficr desirable bushess activilioc.
Q17-19. Somo probl emt
that l l mi t thr usoful nesr
ol
cootrol data repqld to rnsnagcr' in a rcspon'
sbility accornrhg and reporfhg
qFtom 8t :
Chaptor t7
( a) Most r csponsi bi l i t y account i ng and
repodhg rlalrns irnpmperly bese allour'
abl c budgrtl on vol ume' based mca'
ruret of astiv,ty thal havc litlle to do with
cosl i ncur r r ncr ( 1. 9. , l abor hour l ,
rnacfihc houn, rtc.). lf nqlvolune rnca'
surcr (o.g., m*hinl rcluP!, relooling,
nrwhg or do.ing parlr or prodtrl' ctc.)
arr maior corl driveru, aclivity based
cethg should br uced as thc basis lor
budgct i ng end
Pr cPar i ng
var i ancr
reportr.
(b) Conhol daia ryailablc in a nsponsibility
reporting ryrlem are lo aggregated lo
bc ucaful. Thb ctilicicrn slems frotn an
anemPt lo ur rcspotsbility reporis tor
operating control. Even ilemized vari'
ancr reporlr may nol bc suflicient lo
rolvo thic problern
(c) Cqrtrol data availabl. lo rnanagen ar.
financbl and not oalily intcrpreled by
operating lcvol managers' I'ho are nol
trained in accounting and finance. The
accounting slatf chould provide assil'
tance, when practbal h trainhg operal'
i ng pcrsonnel i n l he use ol ti nanci El
reporls. ln addition, nonlinancial mea'
surer that can bc easily understood by
operating managers shouH be reporled
along with lharcial data, when pnclical.
(d) Control data availablc lo tnanagore ate
not tlnefy onough to br weful. This critl'
cism cteint frqn an atlempl to use finan-
ciat based reponsibility roPorb for day'
today operathg controL Morc frequent
tePorting will not likely solvc lhir prob'
lem, because il slill takeg dalts or weeks
to collect tho necegsary dala and pre'
pare financial reportr. A better solutitx is
to use stati sti cal
procesr conl rol and
other operatirg control syslems lor day-
today openthg csrtrol ard lo use peri-
odi c fi nanci al rcporl r l o cval uate thl
financial elfcclivenclc of lhe businesr
t)Etomt and thr
Prees!
cooltol syslemr
used h mcriloring activtty.
Ot7-20. Despile thc tact that nsrfinancbl measures of
oporating podormancr arc mot. easily hter'
preted and can br nradc avaihble
qt
a moro
ti mol y baci r than l i nenci al data' fi nanci al
reports genrrated by a responsibility accounl'
hg syslem slill havr value bocau3e they
Pto-
vUc hformation about tho impact ol bueiness
systemr sr incornr. To bc effective, manago'
ment musl nd d|ty bclievo lhal roducing invcn-
tory, spcilagc, c rework will inprovc proCilabilF
ty, but also it must rrpnitor thc lmpact that
guch
cf f or l r havc on i ncomo. Thc t i o bel wcen
clrogor h bushess s)lstems and the effect of
thoo change3 on it6ne Lr provided by lhan'
cial ropodr-
\,
:
Chwter tZ 413
RCISES
E17-1
(11 Maintenance Department cqst should be charged to all dopartments on
the basis ol a
predetermined
charging rate and could be computed as
follorvs:
Fi xgd COSt...................r......................r.......r...........r........o
'I
!
b
b
Variable cost (15,00O r $8.5O|
$ z,5oo
l 27r5OO
Total Maintonance Department cost
sl 35,OOO
ffi
=
$g
Per
maintenance hour
The agtual Malntenanco Oepartnrent cost for November,
gl32rOOO
would
bo chargod dirscUy to that departmenl The
$9 charging rate is used to
charge other departments for Maintenance Department service received.
The November charges would be
$1261000
(l4,ooo
actual maintenance
hours x $9 charging rate|.
The same approach woutd be followed for Generat Factory cost, except
that transfem and charges for such costs would be made to producing
deparunents only. The rate woufd be determined as foilorvs:
Fixed cost
$3O,OOO
20,OOO
Variable cost (1rO0O
r $201..r..r...,...
Total General Factory cost
l
v
sso,OOO
$5O,OOO
=
$50
per
empl oyee
I,OOO empl oyees
The actual cost chargod to tho Gonoral Factory In November would be
$51r0o0, and Gonoral Factory cost charged to producing
departments
would be
${srooo (98o actual employees x
$50 charging rate}.
{' t1
1
efl-1
(Concluded!
t2l
Chapter t7
f,lalntenance DepL General Factory
ACtUal COgt ........D......o...... $l
32rOOO $511500
Budget ellomnce:
Variable cost:
l 4rooo hours I $85o.. $119,OOO
98O employees r $20 $19'600
Fired cost 7r5OO l20,5OO 3O,OOO 49,gOO
Spending varlancc..r........ S
5r5OO unlav. $ {.90o unfav.
Budget allowancc..,...,..,.. $128r5OO $491600
Cost charged oub
l{'OOO hourc r $9.........
990 employees r $50....
1 2 3 Total
Carpenter Shop. .................o...,.. $ 4rooo $ Irooo $ 4r5oo $l61500
E|octriciansn...............r............. l2'OOO lO'2OO 61600 281800
Tota1......t..........r....,....rrD.......r.
$l6rOOO $l8r20O $t I,too $45,300
r4oo
r $i o
=
34,o0o; Boo r $to
= $8,000; 45o r $i o
=
$4,5oo
-
1, ooo r $12
- t l l 2, OO0; 85O r $12
=
$l o, 2oo;
55o r $12
=
$6, 600.
126,OOO
49,00o
ldle capacity varialrcro...... $
500 unfav. $ 0oO unfav.
Total var|ance...............
5-TF
unfaY.
$ 2.5oo unfav.
El7-2
(11 Billins rates: Carpenter Shop:
#ffi
=
$lo
per hour
Electrlctans:
-qggjo-oo =
Si 2
perhour
2, 5OO hr s.
(2)
Charged to producing
departments:
Department
I
I
It
I
i
!
Chapter 17
E17-2 (Concl udedl
(31 Variances In each service department:
Varlablc
Gost
1r 5
Varlablc
Rata
Per Hour
Garpenter Shop
Electricians
Actual co!t-*-......
Eudgct ellowanccl
Varlablc coct (1,050
htt. r lXr,OOl.-, 3
Ftcd colt*.-*
Monthly Flrcd Cort
Budget Percentage
$2O,O0O 70%
3O,OOO 80
$l4,ooo
24LOOO
Acbral corEt-**
Budget allowancc:
Varlablc cost (21400
hn r 32,401 ..-. I 51780
FLod Go!t*...-- 24.OOO
Spcndlng
yarlancc
-
Budget El l ow8ncc...
Coat chargcd to
producl ng
depart-
mentr (ttg.2)-....
ldlc capaclty varlancc
$8.70
$6,000 s3.OO
61000 2.4O
Electrlclana
FLcd
Coet
Carpenter Shop
31e , 8OO
41950
14,000 18,050
Vari abl e rate per
mai ntenance hour
for other costs:
S up ervis io Jl ...,..,,.....
Tool s and suppl i es,.
Ml scel l angous ..r...r..
$.so
.75
. o5 1. 30 10, 00
s27,7OO
2017go
S
(2.06O)
fav.
t29,760
28,80O
3 96O untav.
$ 4, 00 per hour
$1{.99
per hour
$l o
per
empl oyee
2
Spcndlng Ytrlanc. -
Budget rllowlncc.,.
Cort chargcd to
produclng
depart-
mcntr
{mq.2}..-,.
ldlc capaclty varlancc
t 85O unfav.
s18, 95O
16, 500
S 2,450 unlav.
I
b
E17-3
(11 Billing rate for Maintenance Department
Fired rate!
$12r8OO total lired cost + 3,2OO normal
mai nt gnanCO hOUf 3. . . . . . . r. . . . . . , . . . . . . . . . , . . . . r
Variable rate: Variable rate
per
maintenance hour
f or l abor . . . . . .
T o t a l a a . . a a t a a a a t a a a a . . . . r . . . . . . . . . a a a a a a D. a . a o a r . . . . . . . r . . . . . . r r r . . . r . . . . . . . . . . .
Bllfing rate for Payroll Departmenb
Fixed rate:
$12'OOO budgeted fired cost + 1,290
aygr:l gg numbgr of empl oyggS ...........,.
Va ri ab I
g
ri Nt o . . . . . , . . . . . . r. . . , . . . , . . . , . , . . r. , . r,
Tot a1. . . . . , . . . . . . . r o. . r . . r , . , r , . . . . . . . .
_q!_?
per employee
The
billing rate for the Maintenance Department was based on the rurt-
ber ol maintenance hours worked, because it was the only variable given
on whi ch
a measure of operati ng resul ts coul d be computed. For the
Payroll oepartment, the billing rate was based on the number of employ-
ees' because i t was an adequate measure of operati ng resul ts for that
department.
416
E17-3
(Concluded)
(21 Maintenance
DePartment
E17-4
( 11
Firgd costt ...,.....r....
Variable cost (rate r hours)n........
Total.......
Actual CoSt..........."""
Budget allowance based on actual hours:
Variable cost
(31355 hours r $101..'.....
Fired cost
Spending variance
Budget allonrance based on actual houls.' .
Cost charged out
(31355 hours r $14)....,,...
ldl
g
capacity variar|G19.............' ................' .'
Payroll Department:
AgtUal 9OSt....' .....................' ...."""""t"""t'
Budget al l owance based on actual number
ol employees:
Variable cost
(l
rl65
employees r $21
Fired cost
Chapler 17
g47,2OO
933,55O
12r8OO
tf6r35o
9_99.9
unfaY.
s48,350
46,970
Spending variancg ............' .' .........t........' ...'
Budget al l owance based on actual number
of empl oyees
Cost charged out
fl ' 165
l dl e capaci ty vari anco...
empl oyees r $121
Producing
Departmentr
3oruice
Dcpartments
x B A
st,2oo $2,4oo
l,600 2,600
$1, 440 $960 $O, OOO
1r4OO 1,20O 6,800
$2,800
89p99
$2,849 $2,840 $2,160
q!?f99
% Fi r edcost
r A
= hls.
'
Dept. Hourc
l O, OOO
2OTOOO
l 2' OOO
I , OOO
$6, 8oo
hrs.
A
B
x
Y
200h
40
24
1 6
$l ,zoo
2r4OO
1r 44O
960
I , OOO
l 3,ooo
TrOOO
orooo
34,O99
B =
X =
Y =
$
(62o) lau
s13, 875
$ 2,330
l 2, ooo l 4r 33o
L:('t9!l
tar.
3l {,33O
l 3198O
3 35O unfav.
Total
5O, OOO lOOo/o s8,ooo
34, OOO hr s.
=
3. 20 vari abl e rat e
Cltwter 17 4 1 7
El 74 (Goncl uded)
(21 The two
general principles
for the allocation of service department costs
applicable under tho circumstances are (a) distribution on the basis of
servics or benefit received for the variable cost; and
(bl distribution on
the basis of readiness to serve or capacity that must be maintained for
the fixed cosL
This solution distributes all variable costs incurred. A predeter-
'
mined variable cost rate should be calculated, so that the efficiency of
the power plant
could be
judged.
The present
$.ZO rate is based on the
actual monthly consumption and cost.
E77-5
(11
Benefiting
Department
Cut t i ng, . . . . . . . o. . . o. .
Quarterly
Standby
oh
of Fixed Cost
Gapacity Total Billing
35' OOO 35oh
S2,45O
26' 000 26 1,920
Gri ndi n9,........r...........
Pol i shi ng ........,...........,..,.,...,.......... 3OTOOO 30 Z,I OO
St0JS.' ...o.......o..' .....rr............' r....... I;OOO I 630
TOtaf r...................................' .r........ I OOTOOO l OOo/o
Variable rate = Variabte Cost * ,*""*O Onnr"ilp""i
=
S30,OOO
+ 30O,0OO KWH
=
$,1o
per
KWH
s?,oo,9
ry
118
El7-S
(Concludedl
First Quarter
Bllllng:
Variable lilto.."""""-"'
Agtual consumPtloo
....
Variablg Gost ............'..
Firgd CoSt....."...""' o""
Tot al . t . . oo. . t . . . . . . . "t "" t ""
Second Quarter
Billing:
Variable lllto.........-.' .t..
Actual congumPtion ....
Variable cost ...............
Fired GoSt............""""
Total ...........r........r""tt'
Third Quarter Billing:
Variabl
g
itlto........' .......
Agtual consumption ....
Variable cost ...' ...........
Fired GoSt....................
Total .....o.............' .......'
Fourth Quarter Billing:
Vari abl e rato......,..,......
Actual consumption ....
Variablg cost ...............
Fi xgd CoSt' .........r.........
Total ' .' ...........
Chapter 17
Benefiting Department
Grindlng Pollshing Stores Total
$ . 1o
29r5OO
$ 2,950
2A50
$ 5,400
$
. 10
20,0OO
S . 1o
2910OO
$
zrgoo
2rl oo
$
850
630
s 2rooo
1r82O
$ 3,820 $
5,OOO 3l ,2gO S15,5Og
$
. l o $
. t o
33,5OO 24r75O
$
g,gso
$ 2,475
2r45O 1,820
$
5,goo $ 4,295
$ . 10 3 . 10
8,250 9O,O0O
$ ' . 1 0
23,5OO
$
2,350
2rlOO
s 4,450
$ 2,550
2, 10o
s 825
630
$
I , ooo
7, OOO
$1, 455 sl 6, 000
$ . 1 0 $ . 1 0 $
. l o
25,5OO 6,500 86,000
$
. l o
32.-750
$ 3,275
2,45O
$ 5,725
$
. l o
21,25O
$ 2,125
1r82O
$ 3,945
$
650
630
$
8,600
7,00o
$ 8, 5OO
7, OOO
$62,60O
Annual
Total
$ , 1o
28,25O
$
2,825 $
2,3oo
2r45O 7r82O
$ 5,275 $ 4,120
$
. 1o $
. 1o
23,OOO 27,75O
i
2,775
2r l OO
$ 4, gso $1, 280 $15, 600
$ . 10 $
. l o
6,000 85,OOO
$
600
630
$
4,875 $1, 23O $15, 500
$5,345
Fourth
@
sl 5, 4OO
$15, 450 $16, 200 sl 5, 9OO
$ 62,950
$ . t o
85, OOO
$ . l o $ . 1o $
. 1O $
. 1O
9O, OOO 86, 000 85, OOO 346, 000
$ 8, 5OO
7, OOO
s
I,ooo
7, OOO
$ 8,6O0
$
8,5OO $ 34,600
7,OOO 7,OOO 28,OOO
$15, 5OO $16, 000 $15, 600 $15, 5OO s 62, 600
s
(so)
s 2oo s 3oo s
(1oo) s 35o
: - : : :
l2l
Actual cost.......
Less budget al l owance:
Variable rato ..............
Actual KWH provided
Vari abl e cost..............
Fi red cost..,....
Budget al l owance ......
Spendi ng vari ance ......,.,.......
First Second
Quarter Quarter
Third
Quarter
$ . l o $
. 1 o
61500 85,OOO
s 8,5OO
TrOOO
lav. unfav.
unfav. fav. unfav.
Ctapter 17
E17-{'
4 t 9
\-
UNTYERSITY MOTOR POOL
Budget Report for March
Gasoline
Monthly
Budget
$ 5, 513
37t'
236
525
2r5OO
2,31O
$!1d93
. 2 1
63,OOO
$ . 1819
2,5OO
2, 31O
March (Overf
Actual Under
$ 5, 323
$ t go
38o (21
186
9!rf99 9--32!
21
63,OOO
$ .1700
$,ooss
Oll, mlnor repairc, parts,
and supp||gs........,......r.
Outside repairs
lnsurance
Salaries and benefits
Depreci ati on.......' .r............o..o..!r.rr.,,....r....o...r......
Total
Total m11g3............................r..r.r.......rr.................
Gost per
mile
Supporting calculations for monthly budget amounts:
Gasol i ne:
Oil, minor repairs, parts,
and suppl i es:
Outside repairs:
Insurance:
Salaries and benefits:
6(l,000 miles
16 mi l es per gal .
50
525
b
b
Depreciation:
x $1. 4o
per gal l on =
$sr sl z. So
63,000 r $.000
per
mi l e =
$.328
=
$23o. 25
Annual cost for one auto:
$0,O0O
+
20 autos
=
$3OO
Annual cost for 21 autos: 21 r $3OO
=
$61300
Monthly cost $g,3OO
+
12
=
SSZS
No change
$3O,OOO annual cost
=
$2, 5oo
per
mont h
12 months
Annual depreciation per
auto:
$26,400
+ 2O autos =
$i r32o
Annual depreciation for 2i autos:
$lr32o
per
auto r 21
=
$2T.T2O
Monthl y depreci ati on:
$27l 2O
+
12
=
$2r3l O
. :
120
E77-7
CLAYTON COMPAITY
Assembly DePartment
Flerible Bud
g et-9Oc/o lovel
Dirsct materials l9O%
r $2O'0O01
Dircct labor
lg0%
x $l
1'2501
SUpef Vi Si OJt . . . . . . . . . . . . . . r. . . . . . 1. . . . . . . . . . . . . . . . o. . . . . . . . . . . . . . . . . . . . . . . t . . . . . . o. . . ' . ' . "t ' r"t "
"' t '
hdirect materiats
($zsO +
lgOoh
r ($l
t75o
-
$2sQlll
"""""""'t"""""""
Pf Opgf t y t 3I . . r . . . . . . . . . . . . . . . . . . . . . . . . t . . . . . . . . . . . . . . . . . . . . . . . . . . . . t . t . . . . t . . o. t . t . ""t "t t "t t t "t t '
Maintgnanco
($600 + (9O% r
Gtlr600
-
$600111...' ........r....o....................
Power
Gt2oO
+
Paoh
r ($3OO
-
$200jll
'.........
Insurancer....r.r......' ........
Depreciatioll ..................
a a a a a a a a a a a a a a o a a a a a a a a a a a a a t a a a a a a a a a a a a a
Chapter 17
$18, OOO
1O1125
500
I , 600
300
1r 5O0
290
17s
l 1600
Tot a t . . . . . . ro. , . . D. . . . . . . . . . . . . . . . r. . . . r. . . . r. . . . . . . . . . . . . . . r. . . . . . r. o. . . . . . r. . . . r. . . . . . . . . . . . . . . . . . t . r.
S34 t
09O
:
Chapter 17
E174 ONE MONTH FLEXIBLE BUDGET FOR FINISHING DEPARTMENT
Ooeratinq level
Based on l abor hours.....,.r.. 8OO 9OO I' OOO l rl Oo
Percentage of cipScit!....... 80o/o
g0oh
l00oh l7Aoh
Variable cost:
Indi rgct | abor.........o.........o.. s l r2oo,oo s 1r35o.oo $ l r5oo.oo $ 11650.00
Factory suppl i es....r.r......,.r.. 1r88O,O0 2rl 15.OO 2' 35O.OO 2r585.OO
Power.,...,......,..r..,............... 600.00 675.00 750.oo 825.OO
Rework operations.............. 4OO.OO 45O.0O 5OO.OO 55O.OO
Payrol l tares....................... IrO40.OO 1r17O.OO l r3OO,OO 1' 43O.OO
Repai r and mai ntenanco..... 320.00- 360.00 4OO,OO 44O.OO
Generaf factory.......,........,.. 160.00 18O.OO 2OO.OO 22O.OO
Total variable cost........... $ 5,600.00 S 61300.00
$ TTOOO.OO $ 7' 7OO.OO
Fixed Cost:
Indi rect | abor................,...,.
$ 4r000.oo S 4roo0.oo $ 41000.00
$ 4rooo.oo
Superui si or| ......,.....r......,...., 2' 5OO.OO 2,5OO,O0 2' 5OO.0O 2' 50O.OO
Factory supp1ies............o..,.. 9OO.O0 9OO.OO 9OO.OO 9OO.OO
Powgr' ..........' ....r..........r...... 5OO.OO 5OO.OO 5OO.OO 5OO.OO
Rework operati ons......,....... 2OO.OO 2OO,OO 2OO.OO 2OO.OO
Payrol l tares.....,....,....,....... 8OO.OO 8OO.OO 8OO.OO BOO.OO
Repai r and mai ntenance,.,.. 600.00 600.00 600.00 600.00
Property insuranca.........,.... 7OO.OO 7OO.OO 7OO.OO 7OO.OO
Property taxes..................... 3O0.OO 3OO.OO 3OO.OO 3OO.OO
Vacation p3!.....,......D..,...,....
2r2AO.OO ZT2OO.OO 2,2OO.OO 2.2OO.OO
Empl oyee pensi on
costs.,... l ,2o0.oo 1,2oo.oo 1,2oo.oo i ,2oo.oo
Empl oyee heal th p1an...,......
1,8oo.oo 1,8oo.oo i rgoo.oo f
,goo.oo
Machi nery depreci ati on,..... Irooo.o0 l ,ooo.oo 1,ooo.oo i ,ooo.oo
Water and heat..........o......r.. 600.00 600.00 ooo.oo 600.00
Bui l di ng occupanc!......,...... Irooo.oo l rooo.oo Irooo.oo Irooo.oo
General factory...................
l r5oo.oo i rsoo.oo i rsoo.oo i r5oo.oo
Total fi red Gost................
$i r"goopo $1r"goo"oo $i r"BooJo $l r"Boooo
Total co$..................r.........
$r5,4oo.oo
$A6rtoo.oo
$r6"900.00 $r?Foo^oo
421
Chapter 17
El7-9
Spendi ng
Original Budget Aetual Variance
Budget
@
Cost Unfav. (FaY,l
Gapacity hours
Variable costs:
Supplles $2, ooo $2, 2oo $2, goo $l oo
Repairc and maintenance ...... 8OO 88O 9OO 20
lndifeCt 1abof.......................... 4rO0O 4r4OO 4r3OO (f OOI
Powgr and !|ght.....r..............,. lr2OO 1t32O lr4OO 80
H63t................r........,...r.....' .r.. 40O 44O 5OO 60
subtotal ................,.......... $ Sroo $ ,"r4o $ ,roo
Fixed costs:
Buifding orpense.................... $ 8oo $
8oo $ 84o 4o
Depreciation-machinely....... 2r4OO 2r4OO 2r4OO O
Property tar and insumnco.... 4OO 4OO 42O 20
Subtotal $ 3,600 $ 3,600 $ 3,060
8,0oo
Total costs sr rpoo $l
r^s4o $13,060 s 220
unfav. Appl i edf act oryovgrhgad. . . o. . , . . . . . . . r. . . . . , , . o. . . . . 13r2OO
l dl ecapaci t yvarl aDCo. . . . . . . . r. . . . . . . . . . . . . . . r. , . . . . . o. $
(36Ol f av,
Actual factory ovgrhgad........,..r...,..,..........o. $l3r060
Applied lactory overhead l 3, 2OO
Overapplied factory overhead 3
(r 4ol
Spendi ng vari ance
ldle capacityr variance
Overappl i edfactoryoverhead.r....................
$
(140)
S 22o untav.
(36O! fav.
I
L
i
l-
L
I
L
Direct labor hout' r8.....' ......' ............ IOpOO ,"gOO ,1600
: = : : :
Variable costs:
Clppter 17
Er7-I o
lndirgct 18bor......r........' r.........
Payroll t3xg3.............r......o.....r
Factory suppli
gs' ..r................r
El
gctric
utility......-.!...r............
Gas utility...oo....o..-.o.....' .......or.
Wate r Util ity.......'...........,........
Machinery ropairB ..................
Maintenatlco ...............r..r....' ..
Ovgrtimg
pnomium
..,.r....r.......
Subtotal ....o........r......r.."..
Firgd costs: ............r..................r..
Supgrvisiofl ...........r.....' ........r.
Indirgct labor.......' ........r......r' .
Vacation p?!....................."....
Payrol I t8I33......r................' ...
Employee insurancg...............
Factory 3upp1i6s.......r.r.....' ..r.'
El
gctri
c uti1ity................r.......,
Gas ut i 1i t y, . . . t . . . . . . r. . . . . . . . . . . . r. r. . . .
Watgr uti l i ty.....' ..!....ror...... r.....
Mai ntgnance ............,........,...,
Machi nery depreci ati on .......,.
Building rlB!1t.........' .....' .r.........
Pro p
g
rty targs ....,..........tr.......
Pro perty
insu ra n c
g..,.....,........
Subtotal ............o......r.,....,
Total costs .r.........D...
.123
Spendi ng
Original Budget Aetual Variance
Budget Allonrance Cost Unfav. (Fav.)
!
I
I
b
b
t
L
$
7O,OOO
6l r 5OO
27rOOO
l2,ooo
6,OOO
l r 5OO
io,ooo
2l ,ooo
IrOOO
$
gz,zoo
59r04O
25r92O
11, 52O
5,76O
1r44O
9,60O
20, 1OO
8,640
$ 7o,ooo
6O,OOO
28,OOO
' t2,ooo
6, 1OO
l 15OO
l 0,ooo
'
15, OOO
IrOOO
32,8oo
960
2rO80
480
340
60
400
(5,t 60l
360
48,OOO O
36' 000 O
4O,5OO 5O0
I,OOO O
72r25O 25O
19, OO0 O
l 5, ooo o
I,OOO O
5,OOO O
23,OOO O
5O,OOO O
15, OOO O
13, OOO I , OO0
15,250 25O
$2O9,28O $2t t,600 $2l 8,OOO
$ 4g,ooo
38,OOO
4O,0OO
8,OOO
l 2,ooo
l 9rooo
l 5rooo
I,OOO
5rOO0
23,OOO
5O,OOO
15, OOO
l 2,ooo
l 5ro0o
$ 48,OOO
36rOOO
4O,OOO
8;OOO
12, OOO
19, OOO
15, OOO
I,OOO
5,OOO
23,OOO
5O,OOO
15, OOO
12, OOO
l 5, ooo
S
i-
I
$307,OOO
q3O7,OOO
$3O9,OOO
91'329
untav.
ldle
capacity variallcg ...................,.....r........
Und erappli ed f actory ove th ead ........,,.....,....
3525,OOO $51O,28O $52O,OOO
S 4r32O unfav.
12,280 unfav.
il_6,6OO
Appli ed factory overhoad ..........o........t...,.....
ldle capacity variallco ..,...,..,..........r.o,..,.....r
5O4,O0O
$ 12,280 unfa%
Agtual factory overhgad....r.r...........r............
$Szorooo
Appl i edfactoryoverhead.......,.....................
5O4rOOO
Underappl i edfactoryoverhead....................
$ l 61600
t_
Spendlng
varianco
i-
424
P77-7
( 1)
Chapter 17
PROBLEMS
Factory overhead applied for each
prcducing department:
Dept. A: 20r48O hrs. x $4.2O
=
S881016
Dept, B: 291850 hrs. x 3.10 = 921535
Dept. C: 2O,l0O hrs. x 3.75 = 751375
Oner. or underapplled factory overhead for each
producing department
Producing Departmants
Erpenses
(21
c A
Actual department factory
ovgrhgad, . . . . . . . r. r. . .
Proration ol seryice departments:
Utilities
(on actual hrvh)..........
Repai rs and mai ntenance
(on
actual dlhl .-....o...'......
Total actual department factory
overhead ..o.r......r.................rr.
Applied lactory ovgrhgad ........,..r.
(Oven)
or underapplied factory
overhead
$56,02O
131755'
181432r'
$88,207
86, O16
s52,85O
161170
26,865
s95,885
92,535
$42,580
12r 53O
18, O9O
$73,2OO
75,375
r
39r3OO r $.35
=
s13r755
t ' 20, 48Or $. 9O=
18. 1432
(31 Total variance for each
geruice
department:
Repairs and
Maintenance
Actual cost befors allocation of Utilities
Depart ment COSt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r. . . r. . . . . . rr
Utilities Department cost allocation
(1 8195O kwh x S. SS; . . . . r. . , . . . . . r. . o. . . . . . . . . . . . . , o. . . . . .
$ 2,191 unfav. $ 3,95O unfav. $
(2'1751 fav.
Utilities
$56,320
6,633
$5O,O4O
$oz,sss
Servi ces
al l ocated (sol d) to other departments:
ffOt43O hrs. x $.90;.............' ........' .............' .. 63t387
(1 4orz5o
krrh r
gssl
r...........,....................... 4gro88
$
(434! fav. $ 952 unfav.
L
t
L
I
L
I
I
Cllo,pty 17
P17-2
(f
l
Maintenancs Department
Total estimated cost
Total osUmated malntenance hours
UUlitles Department:
Total estimated cost
-
S8'40o
-
Total esUmated kwh 70'OOO
425
= 3 3 per
maintenance hour
_
st o, Soo
3, 5OO
9. 12
per kwh
l
b
b
b
I
b
I
L
(21 Service
Variable overh
ga
d..........D.......Dr' .
Fired ovgrhead .....,...r....,..,,...r...
Direct departmental ovefiead ..
DistribuUon-eeruice d epts.:
Maintenance:
(2r5OO x S3) .,................,
(1
, OOO
r 33). . . . . . . . . . . . . . r. . . .
Utilities:
(45rOOO r $.1 2| .,............
(25' OOO
r $.1 2)..............
Total factory ovgrhead..,.,......r...
Dirgct labor hours .o..,................
Overhead rate per
dlh ...............
333,oOO $24,oOO $f o,5oo s8,4OO
3rOO0 (1O, 5OO)
5,4OO
3rOOO
_$15,eoo
12, 0O0
$3.825
$l 5rooo
l 8r0oo
I I,OOO
l 5, ooo
$ 4,5OO
6rOOO
Otilities
s3,6OO
4, 8OO
(8,4O0)
igo,ooo
7,50O
$4
126
I
P17-2
(Conti nued!
(31
Spending
variance:
Astual factorY overhead
Add distribuUon-
garvice
dePartmentsr
Total departmental
factorY
ovgrhgad ..........r..o....
Budget allowance based
on actual hours:
Variable:n
Pl anera
(1' O2O x
$2.325;..........r.r.
$21371.5O
Radial Drills
(680 x $2f .........'
Fi rgd. t . . . . . . . . ". . . ""t ""
l t SOO' OO
Spendi ng Yari anc8..........
Planerg
93,l 2o.oo
l , 44O. OO
s4,560,oO
3, 871. 5O
S 688.50 unfav.
Chapter 17
Radial Drills
s2,3OO
480
$2,780
2, 61O
S 170 unfav.
Radi al
Dri l l s
480
$2, 61o
$1, ggo
1r25O
rDistribution
of service department
costs to
producing departments:
Planers
Mai ntenance:
Ptaners(32O hrs. x $31
r,.r..............' .........' ...r....' .r..........
S 960
Radi al Dri l l s (8O hrs. r $31.........' ...' .....................""""'
Uti l i ti es:
Pl aners (4,OOO hrs. x $,121
Radi al Dri tl s (2,OOO hrs. r $12' ..........-.........
$
24o
240
s1, 44O
$ 480
Radi al
Dri l l s
"Variable
ovorhead rate:
Pl aners: 33.825
-
($tS' OOO + 12,OOO}
=
$2.325
Radial Drills: $4
-
($1510oO + 7,5oo)
=
$2
l dl e capaci ty vari ance:
Budget al l owance basod on actual hourE......
Lass applied factory overhead:
Pl aners (1,O2O hrl s. r $S.aZq..
Radial Drills
[680
hrs. r Sa].....' .
l dl e capaci ty vari anco ........
Planers
$31871, 5O
3, 9O1. 5O
2r 720
$
( 1 10)
s___19_99) fav.
fav.
Actual sgrvi cg department cost..............................,.... $ t1170 $ 710
Distributed to
producin g
departments:
Mai nt enance(4OOhrs. x$3| . . . . , . . . . . . . . . . . . . . . . . , . . , . . . . . . . . l r2OO
Chaptor 17
P17-,2 (Conti nued)
(4)
f df e capaci ty vari ance...,.....,....,..
g
(i
gS.7
2l tav.
Net vari ance........
$
(go.oo)t"*r.
427
Mai ntenance Uti l i ti es
720
9l1l:o9)
rav'
$
(l o.ool fav.
s
(3ol
s
(tol
Spending variance:
Actual service depart-
ment cost .............,.
S1' 17O.OO
STi O.OO
Budget al l owance
based on actual
hours:
Vari ab1e.,r........,......
$ S14.Z8l
$Og.4O2
Fi xed................,...... 5OO.OO IrO74.28 4OO.OO 7OB.4O
spendi ng vari ance.....
-
$ i ss.?z unfav.
$ i ^6o unfav.
l dl e capaci ty vari ance:
Budget al l owance based
on actual hou1s.....................r..
$1roi 4.2g
$Zog.4o
Less appl i ed overhead:
Mai ntenance (4OO
hrs. r S31 ..., i ,2OO.OO
uti l i ti es (6,000
kwh x $.121 ......
72o.oo
t
Esti mated vari abl e expense
$4, SOO
gst i mf f i -
3, soo
'
Fr
$1. 2857 r 40O hour s =
$5i 4. 28
Esti mated
vari abl e
expense
$31600
ffi - zo;ffi
-
$.0514
Perkwh
2
. .
$.0s14 x 6,o0o kws =
$gog.qo
Chapter 17
P17-2(Concluded)
(51 Reconcillatlon
of total variances:
Agtua I ta
gtory
ovg rh
gad
...........r........
Lsss: Applled to work In
Process-
Planers...........' ..............""tt
$3t9Ol' 5O
Ngt total Yariance.......' r.r..............o...o
Variances:
$713OO.00
Applied'to work in
Procsss-
Radiat Dfit13,..........r......o......
2' 72O.OO 61621.50
$ 678,50 unfav.
Spending variance-Pt3ll9!'t3....... $
688.5O
Spending variance--Radial Drills 170.Oo
ld le capacity variance-Plan 8t3..
ldle capaclty variance-
Radial Drills ."..........'...............
Spending variancFllllaintenance
155-72
Spending variance-utilitios.'.....
1.60
ldle capacity variance-
MaintgnaDCO ..........' .......r.......' .
ldl e capacity variance-lJtilities..
Unfavorable Favorable
$
3O.0O
110. OO
185.72
l l . oo
s1,o15.82 S 337.32
$ 678.50 unfav.
Net total variance
Chapter 17
Pr7-q
(1) Budget al l owance for each
produci ng department i n Januarp
(a) Based on scheduled
production hours:
Variable factory overhead:
(5,000
units r S.45t
per unit) or
(1r25O hours x S1,8O
per hour) .r......r........
(5,OOO units r $.gge
per unit) or
(l
rOoO
hours x S1.9O
per hour) ..........,......
Fixed factory overhead:
($17r52O + 12 mont hs). . . . . . . . . . . . o, , . . . . . . . . . r. . . . . . . . .
($34r23O + 1 2 months).........' ..............r.r......r
Share of service department cost:
Mai ntenance (1r25O hours r $.SOs
per hour)
Mai ntenance (1,OOO hours r S.5O
per
hour) .
Jani tori al (9l rggO + 12 months).....,...,..........
Jani tori al (S2r97O + 12 months)....................
Total budget al l owanc ...."...,.......,..r.......,.........,..
Machi ni ng
S2,25o
1, 460
' 625
165
Machi ni ng
$2, 412
1, 460
670
165
429
Assembly
sl ,90o.oo
2,852.5O
500, oo
247.50
sdggg s5,5OO.OO
r
Machi ni ng:
S2T' OOO + 6O,OO0 uni ts =
S.45
per uni t; S2Z,OOO + l 5,OOO hours =
$1. 80
per
hour
z
Assembl r
$22' 800 + 6o,ooo uni ts =
S.gB
per uni t;
$22,Boo
+ l 2,ooO hours =
$1. 9O
per
hour
3
Mai ntenance:
$13,5OO + 27.OAO hours =
$.5O
per di rect tabor hour
(b)
Budget al l owance based
Vari abl e factory overhead:
on actual producti on
hours:
( 1, 34O
hour s x $1. 8O
per hour | , . . . . . . , . . . . . . . . . . . .
( 1, 030
hour s x Sl . gO
per
hour ) . . . . . . , . . . , . . . . . . . . . ,
Fixed factory overhead:
Gl 17r52O
+ 12 months).,........,r.................r....
($34r23O + 12 months),............................,...
Share of servi ce department cost:
Assembl y
st , 957. 0O
2r852.5O
515. 0O
247.50
s4,707
99,s?2.0o
Mai ntenance (1,34O
hours x $.50
per hour) .
Mai ntenance (1,03O
hours r $.5O per hour) .
Jani t or i al ( 91, ggO + 12 mont hs) . . . . . . . .
Jani t or i al ( $er gZO + 12 mont hs) . . . . . . . . . . . . , . . . . . , .
Total budget al l owance
Chapter 17
P17-3
(Continuedf
The budget atlowances catculated in (af and in (b) include the service
department shares by two different mothods: the share of the
Maintenance Department cost is based on the charging rate of $.5O and
the actual hours worked, which is in harmony with the general procedurs
advocated. The share of the Janitorial Department cost is based on 7112
of the apportioned cost. This approach ls used because it is believed that
ianitorial
services have no relationship to the number of hours worked In
the producUon departments, In fact the lllustratlon could be made moFo
realistic by basing the apportionment of Janitorial Department cost on
the basis of the relative amount of floor space occupied by the producing
departments. As long as no change in the spaco has been reportedr the
share would remain as established in the budget figures.
It should be noted further that the maintenance cost could be
charged to the producing departments on the basis of maintenanco
hours and not direct labor hours. An additional refinement would appor-
tion fixed cost on the basis of a
predetermined maintenance schedule'
and the variable cost on the basis of maintenance hours actually used.
(21 Spending and idle capacily variances for each
producing department'
based on astual produstion
hours:
Machining Assembly
Aetual departmental factory
ovgrhgad ..............r....... s4,2OO S5,24O.OO
Add share of budgeted service
departrnent costs:
Mai ntenanco Department r.......... 670
Jani tori al Department................. 165
Total actual factory overhead..........,, $51035 $6' 002.50
Budget al l owance based on actual
production
hours.. 4r7O7 8,572.OO
Spending variance .,....r......r.......r...... S 328 unfav. S 43O.5O unfav.
: :
Budget
al l owance based on actual
producti on
hour:s,......,...........,....o S4r707 S5r572.OO
Applied
factory overhead:
(1' 34O
hours r $3.6O
per hour).... 41824
(1' O3O
hours x 95.50
per hour).... 5, 665. OO
s15; oo
247.50
ldle capacity varianco ...,....
9_Ill
f) ta* $
(93.oo) fav.
Chagter 17
Pf 7-q (Concl uded)
(3) Spendi ng vari ance for each servi ce department:
Maintenance
431
Jani tori al
Actual cost (month
ol January) .,....,.. $l r3SO.Oo
$i ro4o
Budget a| | owancgt..............r.............
1rl 4Z.g3
g?s
Spendi ng vari ance.,,..o................r......
$ ,OrJ? unfav. S 215 unfav,
*Variable
lactory overhead:
($S,t AO + 27rO0O budgeted hours
=
$.189
per
hour)
l2r370
actual
hours x $.199
per hour) r......,..
$ 447.93
($ZTZOO + 12 months)..............h..
S zas
Fixed factory overhead:
(SA,COO + 12 months)........ 7OO.OO
(S7' 2OO + 12 months) ..............t...
600
Budget a| | owancg....,.,.....,..,..............
$1rl 4Zr3
$
g25
P17-4
Capaci t1r...t...,...r............................o....,........ g}oh gooh
l OOoh
Di rgct l abor hou!s.....................r...,........,,...
4OroOO 4srooo sorooo
Vari abfg costs:..r........t....o......o.....o..............
$ 4rOOO
$ OrSOO
$ SrOOO
Indi rgct | abor..................r....r................
IBTOOO ZO' .2SO 22rSOo
Payrol f taxes and fri nge benefi ts.......... sl rz4o oc,ggs 71,5sol
Power and | i ght . . , . . , . . . . . r . . . . . . . . . , . . . . r . . . . . . . . ,
1r 2oo r i gso 1r 5oo2
Inspecti ott.........,........r.........,o,..............
4rgOO SrAOO
grOOOg
.
Other sgmi vari abl g
costs....,.,.,.,,..........
6' OOO O' ZSO 7r5OOa
Total vari abl g
costs.r..r..o....r........,..r.r...
g
91
,24o $i o2r64s $1 l qoso
Fixed costs:
Depr ec i at i on. . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . r . . , . $gr ooo$gr ooo$gr ooo
I nsurance
. . r. . . , . . . . . . , . .
1r5OO t , soo l
r5OO
Mai ntenance
cost......,......,.......r....,..r.,.
Z4rooo Z4' rooo
24rOoO
Propgrty tdr.,...........r....o.....,.........r...,...
l
r5OO f
' SOO l
r5OO
Supervi sory
staff ' ..,..' ....o...r.....,.....t..o... gorooo gorooo
361000
Powgr and | i ght.,....,..........r...,..,...........
2OO
2OO 2OO
Inspecti on......,.............r....r..............r....
4r2oo
4r2OO 4r2OO
other
semi vari abl e
costs......................
i ,4oo i ;a;o 1,40o
Total
fi xed costs,..,....,.....
......
$ 77,goo
$ ??"soo
$ ??"goo
Total
factory
overhead
...-.....,--...
..
slqt,t*
lirttras
$t "t,t*
432
P17-4
(Concl uded)
rPayroll
taxes and fringe benefits:
Direc' t labor cost
= 50' OOO ht. x S7.50
Indirect tabor cost = 5OTOOO hr:s. x $ .45
2Power
and light:
s300
$.
03 per di rect l abor hour
10, OOO hr s .
Total cost
s375,ooo
22,5OO
S397' 5OO
x
Chaoter l7
. 18 =
S71r 55O
Hours Cost
Lt:-t-
t l l U a a a a a o a a a a a a a . . a a a a . a a r a a a a a a a a t a r a o r a a . . . r . . . . t . . . . . . . . a a a a a a a a a a a a a a a a a . . . . . t . . . .
L OW. . r . a . r . . a . a a . a a . . a a . . . . . a a a a a a a . . r . . . . . . . . . . a a a a a a t . a t . . a a a a a . r a a a a a a . a a a a a a a o . a a
5OTOOO
4O, OOO
5O,OOO
4O,OOO
st,7oo
1, 4OO
s1o,2OO
9, OOO
a a a a a r r a r a a a a a a a a a a . a a a t a a a a a a a t a a a a a a a a a a a a a a a a a a a a a a a a a a r l a a r a a a
10,0oo s 3oo
s1, 7OO
1, 5OO
Fi xgd cost . . . . . . . . , . . . . , , . . . . . . . . . . . . , . . , . . ! . . . . . . . . . . . . . . . . . . . . . . . . . . . . r. . . . . r. . . . S 2OO
:
cl nspecti on:
Hours Cost
Ll t- r.
I l l ! r a l a . a . . . . . . . a a a a a a a . a a a . a a . . . r a a . a a a a a a . a a a r a a a r o . . . . . . a a a . . a . . . a a a a a . t a a a t a . a a t a l a
Low..... a t a a a a a t a a a a a a a a a a a a r a a . . a a a a a t a a t a a t a t a a o a a a a a a t a a a a
Di f f gr gn cg. . . . . . . . . . . . . . . . . . . . . . . r ! . . . . r . , . . . r . . . ' . . . .
s1, 2OO
.
ie-dffi;
-
S' 12
Per
direct labor hour
10499 $ 1, 2oo
Tot al CoSt . . . . r r . r . . . . . r . . o. . . . . . . . . . . . . . . r . . r . . . . . . . . . . . . . . r . ' . . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . Sl
Ot 20O
Vari abl o cost (5OrOOO hrs. x S. 12). . . . . . r. . . . . . r. ' . ' . . . . . . . . . . . . . . . . . . . . t . . . . . . r' . . . . .
6t OOO
Fi xgd GoSt . . . . . . . . . . r r r . . . . . . . . . . . . . . r . . . . . . . r . . . . r r . . . . . . . r . . . . . 1. . . . . . . . . . r . . . . . . . . . . . . r . . r t . . . . $
4t 2OO
l Other
semi vari abl e expenses:
Hours Gost
5O,O0O
4O,0OO
1O, 0OO
$8,90O
7, 44O
s1, 5OO
s8,9OO
7, 5OO
sl , 4OO
Fixed cost
t
Chapter 17
P77- 5.
(1}
ONE MONTH FLDOBLE BUDGET FOR FABRICATION
DEPARTMENT
Ooeratino level
Based on machi ne hours,,..
Percentage of capacity .......
Variable costt
Indirect labor .....o..
Factory supp1ies,,r....,...,......
POWgr . . . . . . . . . r . r r . . . . . ' . . . . r . . . . . r . . . . r
Rgwork operations.......,.,....
Payroll targs ..,.r......r.r.........
Repai r and mai ntenanco.....
Ggngral factory ..,.............o..
Total variable cost...........
Fixed cost:
l rgoo 2,OOO
2,2OO
_so% | _oo%
11o%
$ 3,87O.OO
$ 4,3OO.OO
$ 4,73O.OO
1' 35O.OO
l rsoo,oo
l 1650.00
goo. oo
I TOOO. OO
l r l oo. oo
540.Oo 600.00
660.00
630.00
700.oo
770.OO
450.oo
500.oo
550.OO
360.00 400.oo
440.OO
$ 8,1OO.OO
$ I,OOO.OO
$
grgOO.OO
1r 600
gooh
--
$
gr44o.oo
t,2oo.0o
go0.oo
490. 00.
580.0O
400,00
320.0O
s 7,2O0.0O
Indi rect |abor....,..o.....,..r.r,..
s 2rooo.oo
$ 2rooo.oo
$ 2rooo.oo
$ 2TOOO.OO
Supervi si on..,......................
2rooo.oo 2rooo.oo
zj ooo.oo
erooo.oo
Factory supp1i es.,................
600.00 600.00
600.00
OOO.OO
Power...,....,..,..............,t..,...
4SO.OO
4SO.OO
4SO.OO
45O.OO
Payrol l taxes """"""""""' ..
l rooo.oo
i rooo.oo
rrooo.oo
rrooo.oo
Repai r and mai ntenance,....
i ,!oo.oo t
j ooo.oo
l r4oo,oo
1r4oo.oo
l -p"tty
i nsurance.....,........
z5o.oo
7so.oo
z5o.oo
7so.oo
l-p"tty
taxes............,...,....
5oo.oo
5OO.OO
5OO.OO
5OO.OO
vacati on pay.......................,
l ' 7OO.OO l ,TOO,OO
l ' 7OO.OO
l ' 7OO.OO
Empl oyee pensi on
costs.....
Irooo.oo trooo.oo
Irooo.oo
Irooo.oo
Empl oyee
heal th p1an.......,.. goo.oo
goo.oo
goo.oo
goo.oo
Il tl achi nery
depreci ati on......
3,5oo.oo
3,soo.oo
3,soo.oo
3r5oo.oo
Water and heat..o..............r..
4OO.OO
4OO.OO
4OO.OO
4OO.OO
Bui l di ng
occupancy.............
9oo.oo
9Oo.oO
9oO.Oo
9oO.oO
General factory...,.........r.....
l rog,g
j g
ITOOO,OO
ITOOO.OO
Irooo,oo
Totat fired cost.........,,.....
!@f9
$lgpoooo
!!t
sr;ffi
Total cost.....,.,..r..............o..
ffirr* $rrrrrr",
*rr*gg
ffi
s * ' .
134
I
P17-5
(Goncl udedl
t2l
Based on machlnc houn..o-...
Parccntagc ol capacl$ o.........-.-
Varlabla cott:
Indlrcct labor
Factory suppllct
Power
Rework opo rat!ont........,..'.....'.....
Payroll taret ..........x......,....o,.......
Repal r and mal ntel EDCC......' .......
Gen era I lactory ..................o..o......
Total varlable cost .'............xo
Flxed cost
lndlrcct labor
Supcrvlglon
Factory auppllel
Powcr
Payroll taxeg
Repal r and mal ntenancc..........--
Proporty In su rancc ......................
Propgrty t8jf 8t......,.oo..............-...
VacaUon pay -.-..-.
Employee penslon
cocb
Employec health plan
...-.-.
Mach Inery d eprcclaUon ...,.....-..-
Water and hcat .............,.,.
Eulldlng occu
pancyoo...................
General factory
Total fired cost
FABHCANON DEPARTMENT
Variance Report
For the Month of Februaryr 2O-
Chapter l7
Spendi ng
Vari ancc
unfav.
(lav.)
Budget
Allowancc
Hormal
Capaclty
1, 800
00%
I
g,azo.oo
1,35O.0O
000.00
540.O0
so,oo
450.00
360.O0
Budgct
Allowancc
Actual
CapaclV
Actual
Coct
t 4,125,00
1r5:t4,00
e7050
11088,25
675.50
125,75
3a5.OO
$ 8,370.00 3 8,924.99
1,88O
93'/o
3 3,999.00
1,395.0O
930.0O
558.OO
651. 00
465.0O
372.OO
3l 2E.OO
150.OO
40.50
530.25
24.50
(ql0.25)
13.OO
o.oo
o.oo
0.oo
o.oo
o.oo
o.oo
35.OO
(1O.OO)
o.oo
o.oo
+t.qo
0.00
olt,o0
0.00
o.oo
3 8, 1oO. OO
3 2,ooo.oo
2,OOO.O0
000.00
&50.00
1rooo. 0o
1, 40O. 0O
750.OO
500.0o
1, 70O. O0
1,ooo.oo
800.0o
3,500.00
400.00
900.00
1r000, 00
sl 8,ooo.oo
3 2,OoO.OO
2,OoO.OO
600.00
4no.00
1, ooo. 0o
1, 40O. OO
750,OO
500.oo
l , 7oo. oo
1,O0O.OO
800.0o
3,500.0o
400.0o
900. 00
I , 00o. oo
t 2,ooo.oo
2,009.0O
o00.00
4!to.oo
IrOOO.OO
1,4OC,OO
785.OO
490.00
1,7Oo.OO
. 1, OOO. OO
845.O0
3r500,OO
405.00
900.00
I , O0O. OO
Total cost
Applled factory overhoad
(S14.5O
rate x 1,880 actual hours)...,-......,.......
l dl e capacl ty varl ancc
Actual tactory overhead cost..........
Appl i ed factory
ovsrhead..
Un derappl l ed factory ove rh ead
Spendl ng vari ance
l dl a capaci ty vari ancc
Underappl i ed factory ove fi ead
st S, ooo. oo $18, 135. 00
$2O,loo.og s26,370.00 9p' o5o.o9
28,g7O.OO
@f "".
s27,059,0O
2g,97O.OO
9__-_@
3 689. 00 unf av.
(800. 0o) f av.
3 89. 00
3689.0O
untav.
' l
Chaptar 17
P17-6
'
(T}
ONE MONTH FLDOBLE BUDGET FOR ASSEMBLY DEPARTMENT
435
1, 5OO 1, 650
Iga%
yo%
$ 3r375.OO
$ 3,712,50
l , goo. oo 1, ggo. 0o
525.OO 577.50
750.00 825.00
525.OO 577,50
225.OO 247.5A
300.oo 330.OO
_--
S 7,5oo.oo
$ 8r25o.oo
Ooeratino levef
Based on direst labor hours
Pelcentage of capacity.......
Variable cost:
Indirect labor
Fagtory supp11es..................
POWOi . . . . . . . . . . . . o. . . . . r r . . . r . . . . . r . r . r
Rgwork operations..............
Payoll targs ......................r
Repai r and mai ntenance.....
Ggngral factory r...........r......
Total variabl
g
Gost...........
Fixed cost:
Indirect labor ...................r..
Supervisioll ............r............
Factory
guppll gs......D...or......
POWer.....r.......r.rr.r...............
Rgwork o
p g
rations ............,.
PayrOll targs r..............r.......
Repai r and mai ntenance.....
Propefi
insurance..............
Propgrty taxes.....,.....o.........
Va cation p8|....................r...
Employee pension
costs.....
Employee
health p131t..........
Machinery
depreciation
......
Water an d h
gat..............,..r..
Building
occupancy....r........
Ggn
gral
factory ........o..........
Total
fixgd cost.,......r.,.....
$ 6,000.00
lr2OO
_80%
$ 2rzoo.oo
1,44O.0O
420.0O
goo.00
420,OO
180. OO
240.00
l r 35O
_90%
$ 3r037.5O
ITO2O.OO
472.50
675.OO
472.50
202.50
270.OO
$ o,z5o.oo
$ 2,5OO.OO
l rSoo.oo
500.oo
150. OO
600.oo
I TOOO. OO
350.OO
150. OO
200.oo
l r8OO,OO
1' 20O.OO
500.oo
450.0O
400.oo
900.oo
IrO00.oo
s 2,500.00
1,80O.0O
500.00
150.00
600.00
I , OOO. 0O
350.0O
150.00
200.0o
l ' 8OO.OO
11200,00
500,00
450.00
400.0o
900.00
ITOOO.OO
s 2,5OO.OO
1, 8OO. OO
500.0o
150. 00
.600.oo
I TOOO. OO
350.OO
150. 0O
200.0o
l r8OO.OO
l,2oo.oo
500.oo
450,00
400.oo
goo.oo
I,OOO.O0
$13r50O.0o
$ 2,5oo.oo
1, 8OO. OO
500.o0
150. OO
600.oo
I TOOO. 0O
350.OO
150.OO
200.00
1, goo. o0
1r2OO.O0
500.oo
450.oo
400.oo
goo.oo
l r0oo.oo
sl 3, 5OO. OO $l 3, 5oO. OO
$13,5O0.0o-
$21' 75O.OO
Total
cost.......r............r....r..
sl gr500.oo $eor2so.oo s2l rogo.oo
16
I
P17-O
(Concludedf
t2l
Bs$d on dlnct hborhourr *
Prrccntagr of cePaclU F@n
Verleblc cosi:
hdlrrct bbor
Fecloty stppllcl
Powrr
Rcwort opcraUonrffiForu
Plyroll tarcr ...-o.Hffi6...o.d
Repalr rnd nulnteflttlcl --*--
Oencrel tactory ---...*.E.--.-
Totel varlrblc @tt ..-.'...D...s
ASSEMBLY DEPARTMENT
Varlance RePort
For t he Mont h Endi ng August 31r 20-
Budgct Budgot
Allowancr Atlowencr
Norrnel Actual
Capacltil CaPecltY
Actuel
Cod
Chapter 17
Spendlng
Varirncr
unfev.
tfavJ
t 0,750.00 3 6,450.00
tFsO
90.t
3 3,Oil75O
IrO2o,OO
172.5O
675.0O
172,4O
202-50
tlo.oo
t
2'5OO.OO
lBo0,oo
500,oo
l50,oo
ooo.oo
I,OOO.OO
3rio,o0
l50.oo
200.00
l 18OO.OO
1300.00
9o0.00
450.00
400.00
000.00
t,ooo.oo
lr2,0
80%
t aoo2-5o
1r5a&oo
45150
o45.OO
41t1.50
103' 50
258.0O
t 2,5OO,OO
lpoo.oo
500,o0
150.00
oo0.co
I , OOo. oo
3:io.00
150. 00
200.0o
1BOO.O0
1300.00
500.00
450.00
400.00
900.oo
I,OOO,0O
3 srso.oo
1,6!t+OO
405.OO
4a,3rt
alt150
1,173.75
3a5,OO
3 7,800.50
3 2,5OO.OO
I,aoo.o0
500.o0
130.00
ooo.oo
1,o0o.oo
3:to.oo
1s5.OO
21050
2120O.OO
1300.00
500.00
4llo.00
a65.00
000.00
I , OOO. 0O
3a7.50
100.00
13.50
(150.751
o.oo
982.25
127.OO
o.oo
o.oo
o,oo
o.oo
0,oo
o.oo
0.oo
15.00
10. 50
400,0o
0.00
o.oo
0.oo
05.oo
Fhed coaE
lndlrcct
Factory ruppllcr
Powcr
Reworl opcratlonr-offi-.-.ffi
Papoll terar
Repalr end malntenlnc!...,......-
Propcrty lnlurancc -tr*-ffi
Propcrty t-rcr,..-*
VacaUon pat
Employco pcndon
oortt -**
Employcr hcrlth phn
*.*.-
Machlncry dcproclatlotr -o--*
Watcr rnd hoet
Bulfdlng occuprnqy
Oencrel factory
Totel lhcd cod tl3,50o.oo
Total cst, tt20,250.00
Appllcd factory ovcrhred
Fl5.00 retr r 1'290 rctuel houn),.-...,......,-...
ldlc capaclty varlrncr..-
ActrtI tectory ovrrhud eort...-....,
Appl led factory
ovcrhcrd...
Undonppllcd
fectory ovrrhced
SOondlng varlanct
ldlo capeclty verlancr
o.oo
0.oo
Itt3,5OO.oo 313,090.50
319,950.00
321,800.00
19,3!10,00
3 OOO.0O unfav.
321,89O,OO
19,35O.0O
3 2, 510, 00
3 1, 910' OO unf av.
OoO.O0 unfav.
3 2, 51O. O0
t1,010,09_
unfav.
Undcrappllcd
fectory ovc
Chapter 17
43t7
c17-1
'
QASES
(f
l
The factors that influence the behavior of the production
managers,
described in the case, conflict with the factors that motivate the mainte-
nance managens" The production
managens have been given
a monetary
incentive to improve the costs in their own departments. They require
the support of the other departments, (e.9.,
Storrrcom and Maintenance|
to achieve their objective; but the incentives (monetary
and otherwise)
have not changed in the other departments.
To lmprove their costs and earn the incentives, the pmduction
man-
sgonr have postponed
repairs; demanded emergency repairs more fre-
quently
than in the past
demanded repair work be done mone quickly
to
reduce downtime; demanded special treatment in some cases; pfaced
undue pressunes
on maintenance manageni; and complained
about the
mai ntenance charges.
The results of the demands by the production
managans
conflict
with the following tactors, which appear to be important io the mainte-
nanca managens and reflect on their performance:
good
relations with
other managens;
high quality
repair work, inctuding making machinery
safe and maintaining its normal life; and orderly work schiduting.
(21
lf monetary incentives to the pmduction
managens are to be continued,
complaints and conflicts could be reduced by revising the charging sys-
tem as follows: develop predetermined
hourly charging rates for each
ski l l l evel wi thi n the Mai ntenance Department;
Oertl oi predetermi ned
or
budgeted hours for routine or repetitive maintenance
work; develop bud-
geted
costs for parts
and materials; use maintenance job
time cards that
are initialed
by
production
managers when the
job
is done; and develop a
penalty
rate to be charged to those production
man"g"o ;rho need quicf
service that could have been avoided by timely maint-enancs
schedut'ing.
lncreased productivity
and reduced conflicts between managens
probably
could be more effectively achieved
by revising the renrard and
evaluation
structure.
Evaluations lnd rewards tor indiv'idual efforts
should be eliminated,
and cooperation and continuous imfrovement
should be encouraged
and tewarded. High rejection rates and internal
conflict
suggest
that far moro is wrong wittr ttre current "yit"- than
just
the charging
rates.
KB
c17-2
(11
Chaptor l7
Various alternative answerE may bo considered acceptable depending
upon the
lustifications
given and top managementb reacUons to any
resutgng wriances. The main objective ig to ensure that the costs are
allocated to the aneas that ara rasponsible for the incurrenco of the
costs.
(al
$8,OOO cost of idle time in the Assembly Department-This should
be charged to the Machining Department because it is a direct
result ol their decision to change
production schedules. By charging
Machining with this cost, they beeome awano of the overall effects
of scheduting changes and the overalt cost to the company of their
decision. Some
justificaUon
could be
given to charging $3OO of this
to the Purchasing Department becauss.that would have been the
added cost to the company i f the schedul e had not been changed
and it is a direct result of the Purchasing Depaftmentb decision to
go wi th a new suppl i er.
(bl
$1,OOO savings in costs due to layoffs in Machining Department-
This should be credited to the Machining Department because it is
a direct result of their decision to lay off machinists'
(c)
S1,5OO cost of training in the Machining Department-This should
be charged to the Machining Department because it is a direct
result of their decision to lay off machinists who must be subse-
quently replaced, This would ensuno that they ane aware of the total
effegt of their decision on the overall company instead of
iust
their
own department.
(d)
S2OTOOO lost profit on sales resulting from Assembly Depaftment
downtime-This ls an opportunity cost that is not normally recog'
nized in the accounting records and, therefore, would not be
charged to any departmenl In evaluating the Assembly Department'
consideration should be
given to the shutdown that occurred in the
Machi ni ng Department and i ts effects on the output of the Assembl y
Department,
Overall, the companyb present budget and leward
(bonus) system would
appear to be causi ng a fack of
goal congruence,
poor communi cati ont
and an overatl employee dissatisfaction caused, in whole or in
part' by
the fol l owi ng:
(a)
The company does not appear to be fol l owi ng the basi c concepts of
responsi bi l i ty accountl ng and reporti ng
(as evi denced i n (1)). The
company should try to ensune that the responsibility for a cost is
directly retated to the authority to control the cost in order to estab-
l i sh a fai r eval uati on system.
(b)
The company appears to have a
"budget-constrai ned"
styl e of eval -
uaUon, i n that al l managers seem to have thei r pri me
concern
focused on meeti ng thei r budget regardl ess of tho overal l effect on
the company. A
sprofi t-consci ous"
styl e woul d be more appropri atot
(21
Clppter 17
Ag
Cl 7-2 (Concl uded)
whery a
-manager
would feel free to exceed his budget
if it would
benefit the overall company
{without fear of aoreoJlv
affecting
his/her evaluation). For example, Winston
woutd have been prepared
to have the added cost of air freight charged to hirs oepartment,
resulting In a considerable
cost savings
to the overal company
(el
The companyb present
renrard system
of giving
uonuses
based on a
managerb ability to meet budget tends to ptaci
ioo mucrr emphasis
on the short-term,
to the possibte
detriment
of thelong_term.
Managers are making decisions
to ensuno their bonuses
instead
of
maximizing
the overarf
ggrpany objective".
An "-,,.,pr"
of this
might be the decision-of Valquez
tolay off workers
tJsave
$l,ooo in
this period
and, therefore, gat
the bonus,
evsn though
output was
reduced.
This action wourd rssuft in adaed "o=t" ;ili,5oo
to
replace
the workens in the next period.
(dl
Generaily,
an ail or nothing bonus "y"i".
such as this is a poor
motivator,
because too much emphisis
is praced
on meeting
the
budget'
This may lead to a lack oi goal
congruence
as evidenced
in
this case-manipulation
of the dati to meet the budget
in one par-
ticular period
and/or overatl employee
frustratio;;;;1,
their inabit-
ity to meet unreatistic
budgets.
'
(el
The companyb
overalf attitude
seems to be that
yariances
from
budget represent poor performance
by the ,"n"g"r;-This
courd
lead to serious motivational
and Inot"i" problems
with the staff.
Emphasis
should
be ptaced
on the raci tirat variances
are only
attention
directors
and indicate the need to invesiig"t;
why things
were different
frcm expected.
The variances
may indicate
that tho
originar
budget uras wrong and shourd be up_dated (for
exampre,
the
price
of part
# 88 would appear to be unrealistic),
that overalt
com-
pany
objectives
and/or procedures
need to be ";;;;a
or that
things
hava happened
that are oifterent
from ext;;ilbut
beyond
the control
of anyone
within tfr" org"iLtiorr.
(0
The company
woutd appear to be u-sing a static budget
for its evalu-
ations,
as evidenc-ed
by the fact ttraivitquez
and Diron received
their
bo-nuses
for being under ilteiioriginal
budgeted
costs for the
period'
ft is also evidenced
by the ractirrat
Wnston
had an annuat
rimit
to the amount
of air freiiht
costsattoweo
instead
of an
ailowance
based on the totar purcrrases
made in the period.
Evaruations
shourd
be based.il
r
""ip"ri"on
of actuar resurts and
erpected
p.sults using a fterible
uuog;t,
based
on actual levels
of
activity
achieved'
Thi; is to isolat"-trtll"riances
caused by efficien-
cies/inefficiencies
as op.posg{
to
ttrose
caused
by a change in vor_
ume of activity from
that whict'"r"i
o-riginariy;#;i";
440
c17-3
( 11
Chapter 17
I
(al Danielb
perception of scott, the controlle4
is that she is:
(i) an accountant
who knows and cares little about the
production
aspects ol organization;
(21 unsympathetic
and not helpful in
providing sertices to the
pro'
duction dePartments;
(3! an accountant
who is unwilling to change or nequest executive
management
to make changes in reporting requirements.
(b) DaniePs
perception of corporate headquarters is that it is:
(11 unfai r beci use they are usi ng the cost report as the sol e-i udge
of
performance, thereby ignoring monE realistic cost comparisons'
product quality, employee
pride, and motivation;
i Z1
i ns"ni i ti ue i o the needs and concerns of
producti on peopl e;
i gi
resi stant to change i n reporti ng
pol i ci es and budgetary
pnocess'
es,
(c) Daniel's
perception of the cost report is that it is:
(il a shortsighted
report overemphasizing
cost minimization as a
si ngfe obi ecti vei
(21 l nfl exi bl e and not subj ect to the changi ng
producti on l evel s and
operati ng condi ti ons of a dynami c
producti on process;
til
a biaied repoft highlighting shortcomings
and failing to
give
pnoper recogniiion to lmplovements
in
performance or innovative
pnocesses.
(dl Dani el ' s percepti on of hi msel f i s that he i s a:
(i l qual i i i ed producti on manager i nterested
i n a qual i ty product at a
reasonabl e
pri ce;
(2! frustrated manager unable to
get satisfactory cooperation
from
the Accounti ng Department or executi ve
management;
(3) discour"gJd
production manager recognizing that the current
reporting situation is nearly hopeless,
and that others before him
have been equal l Y unsuccessful .
(21 Dani el ts percepti ons adversel y affect hi s behavi or and
performance as a
producti on
manager. Operati ng i n a
ttno
wi ntt si tuati on i n whi ch he
bel i eves performance neports do not fai rl y represent hi s accompl i sh-
ments, pi us the i nabi l i ty to communi cate
hi s desi res or needs to appro-
pri ate peopl e
i n top management, can i nhi bi t moti vati onal desi res and
curtai l i ncenti ve.
(3)
Ghanges that coul d be made i n the cost reports that woul d make the
i nl ormati on mons meani ngful
and l ess threateni ng
to the producti on
manageni are as follows:
(a)
Incl ude a mone detai l ed
breakdown
of l abor and overhead costs.
(b)
Use a budget al l owance
based on actual acti vi ty rather than a stati c
mast er bul get
f or measuri ng
perf ormance' so t hat changed condi -
ti ons, vol uni e changes,
and fi xed versus vari abl e costs are recog-
ni zed i n the rePorti ng Process'
-
ChWter 17
Cl 7-3,(Concl uded)
cl 7-4
l Ul
(cl
(d)
Separate
controllable
costs from noncontrollable
costs and clearly
identify those erements
or the report for whicrr the production-man-
ager is diresily nesponsibte.
Tlrese actions
wiii p-ride
a mors
meaningful
anarysis or operations
and manago;
wil kn;;Lsponsi_
bilities.
A variance
column that highlights both favorable
and unfavorabre
circumstances
would provide
a less negauve
report.
significant
variances
could be hightighted
to drawlftention
to them.
(11
Functi onal _anddysfuncti onal behavi oral nesponses:
(al
Delaying
action on certain reports during pttioo"
of peak
activity
could be dysfunstional.
lf the reports
contain information
requiri-ng
immediate
attention'
any delay in action woulJ h;r; tr be dysfunc-
tional.
lf the reports continue io accumulate
with no action taking
pl ace
(i .e.,
the department heads do not catch up duri ng
the tul l s),
this definitely
is dysfunctionat
behavior.
(bl
Having too many reports so that no action or the wnong
action is
taken is a dysfunctional
nesponse
and a gooo
eia;;i"
of informa-
tion o.verloqd.
The department
heads were unable to assimilate
the
supplied
information pnoperly,
and therefore
ttreyeiitrer
did not use
it, or used it incorecily.
(c)
Del ayi ng
acti on unti t remi nded
by someone
can be dysfuncti onat.
l f
9"!")rs
continuafly
take place
"nJ re"ult in complications
and/or
del ays i n other departments,
thi s tack
of acti on i s dystuncti onal .
(d)
The department
heads' acti ons ""n u" consi dered
both functi onal
and dysfunctionat.
The development
of information
f;m alternative
aourrcss
is dYsfunctionaf
to the firm because
the formal
system is
not producing
the information
in a usable form ano irtl process
of
deveroping
information
from other "our"", probabry
has a cost.
However,
the fact that the departmeni
tr""o ,r"" "dl" io generate
the needed
information
from other "our"""
in order that action
courd be taken i s a functi onat
nesponse
to the probrem.
ra
I
\
Chapter t7
I
C17-4
(Goncluded)
l1l
The dysfunctlonal
behavior that occurred
In McCumber Company was a
dlrect rcsult of management's
lailure to recognize
that inlormation sys-
tems "r" Jyn"mic.
Once a system is designed and lmplemented'
it
should
be iontinually
rcviewed
to acknowledge
and incorporate
any
changes.-A
"y"i";situCy
committeo'
c-omposed of bolh systems staff
and users, siiould Ue estatrtished
to reYiew
the
present system and to
educate ui"rs as to Information
needs and the uses of information.
During U," systems review, the committeeb
attention should be directed
toward informagon needei by department
heads and the information's
form and timing. Unnecessary reports
ghould
be eliminated, and individ-
ual reports sno-utO be rsdesigned- so tlrat only relevant information
is
included. once the reporting system is rovised,
the systgm should be
reviewed
periodically to seJttrat it is functioning smoothly and to make
any necessarY corections.
Ol&1. Standard clr ar. thr predetermhed
coet! of
rnelru{ac{uring prodrdr
durhg a specifb pod-
od mdcr cunonl or anthipded opcrathg cr-
dtkrrr. Stsndardr airJ in phrning
and wrtrol-
lirp opcntims.
Q1&2. A ftw uscr cil etgrdard catr are:
(r) oatablirhhgbrrdgntt
(b) conlrclling coetr by nrotivating .rnploy-
oot and rnrarurhg rtfpbncier
(c) rirplityhg coting preeduroo
and epc.
diilhg cod roportr
(d) aaaigning cortr lo materials, work in
proc.sr,
and finklhrd god inventqicr
(r) forming the barir lor ostablishing con-
lrecl bidr and for retthg saler prbes
Ot&3. To tol rabr pricct,
exccutives need cogt hfor-
malion lumished by tho accounting depart-
rnont Sinct $ardard cod! repr$nt the ost
that shorrld bc a&ained h a weil-nanaged plant
oporalrd al nollral capacity, thcy arr ideally
cuitrd lor fumishing hfonnati:n that will enablc
lhr aalor depaimont to prbc products.
Eudgetr are urcd for planning
and coordi-
nalhg lulurc activitics and tor curlrolling cur-
rrnl rliviticr. ttlhcn budget figurec erc baged
qr
rtendad clq the aocuracy ol lho resulting
brrdgct i! strwrgly
hfluenced by the retiability J
tho rtandard costc. With standards avaihLb,
prodtrction
figurer can be translated into the
manufacturhg
costr"
Q18-4. Sbrdards are m htegral pE t of
irb
order and
proce$
co3l accumulation,
but do nol com-
pdr
a lydom that ouH b. utilized h licu of
sro of lhc accumulaftxr
rnothoclr. C,ets rnay
be r.cumuhtcd
wilh or without thc use d stan-
ct rdr.
Q1&5. Critcria to bc used wtron rolecthg thc opera-
lirnal activitiea
lor which rtEndar& are lo be
rrl includc thc fdbrrhg:
(e)
Thr acti vi ty
shoul d be repeti ti ve i n
nalur., with thr repetition occurring in
reldively
short qrcles.
(b)
The hpd-and output (product
or rervice)
of thc aclivily shoub be measurabte and
unilonn
(c)
Tho obmonl t
ol coal , ruch as di recl
meltriab,
d,act labor, snd facto.y orer-
hoa4 mud b. dsthed cfoarly at the unit
lovol of act vity.
Qt8-8.
Norrtel
or currntly attainablo
standards arc
proforablo
to th.oretbal
or Ueal siandafdr for
(a) porformancc
rvalualion
and/or emptoyee
rnolivation, qn!, (b) budgeting and ptanning.
Thoorctirl
or Ueal ctan&rds-are nol realisti-
cllly attainabtr.
Ar a con3oquenc. of using
CHAPTER 18
Dlscusstoil
QUEST|ONS
rucfr standards, employees
rnay bocanr dir.
couragcd ralher lhan rrolivated,
and budgetr
or pbns arr likely to be distodod end unroli-
abL,
Qt&7. Behavinral bsuer lhat need b br cqrsUend
wfien selec.ling tho level of portorrnsnc.
to b.
ircorporated into ctandards inctudo tho fdl*,
hg:
(a)
Thc standards musl bo fcgitimatc. Tho
atandads noed not rellect thr actual cogl
ol a ahgb ilem or o7clo. Fbrrew?, lhcy
iteally will repraent the coci bst thould
bo incuncd in the productbn
of a giron
produgt
or the perlorrrlance
ol a
jiven
operatian.
(b) The standardr musl be attainable. tt/trcn
t he at andar ds
ar c set t oo hi gh, t hc
ropealod failure to chievc them wilt tond
lo reduca thc rrotivatbn
lor attahment.
Thc cqrvenr b sbo trur. Standadr h8t
aro loo looro represonl
an invitatiqr to
relar.
(c) The participant
shoutd havc d voice or
influencr
in the establirhment
of rlan-
derda and reeulting pedormancr
mea-
sures. Innolvement in the formutatbn ot
standards gives the participant
a gmalor
sense ol understandi ng
and commi l -
ment.
Q18-8. (a) The role of the accounting
department in
l he est abl i shment
of st andar ds
i a t o
determine
their ability to be quantified
and lo provide
dollar valuee for
ryecific
unil standards.
(b) In the establishment
of ctandards.
tht
lole of the depariment
in wtrbh thc pcr-
formance is being mearured ir to prwido
hformatim lor realistic dandards, and to
albw tor subsequent perfonnance
evalu-
atkrn lor the purposc
of delecthg prob-
lems and irprwhg perfomance.
(c) The rol e ol the i ndustri al engi neeri ng
. department h thc estsblishment
of ctan-
darde b to provide
reliable nreasurer c,
phyaical
activitieg related lo thc rtan-
dardr ol performance,
and lo vcrity tho
consirterry
of the pertomancr
botwcon
departrnents.
Q1&9. Thr factory overhead
variablo etficiorrcy varF
anco b ! ,nea3ur.
of tho efficient or ineflbirnt
uac ol lhe tase. thet wac used in allocating
fectory overhead
to production.
To thc crnont
that the activity
used as an allocatircn
baso
driver variable lactory
overhead, lhc variablo
efliciency
varisncc
is a mearurc oil tho cort
/t43
444
savings or cost ircJnence that is attributable to
tho etlicieot or hefficient uso cl lhal acfivity'
01&10.
Thr factory overhead spending variance ir a
mealurr cl the ctficient or inefficient use of the
varbur itsns of tsctory ovefiead ll ir caused
by dilfcrmcea in thc prices paiJ lor thc itens cf
ovcrhcad actually used
(i.c., lhr differences
between tho ac'tual
quantity at thc aclual prbe
and the sctual
quantity at the standard prico for
all ilomr ol lactory. overhead) and lhe ditf er'
encee h the
quantities ol the varbus ilerru of
tactory ovefiead adually used (i.e.' the difler'
ences between the standard
quantity allorved
for the actual level of the aclivity base at the
etandatd
price and the actual quanlity used at
thr
gtandard price lor all items ol lactory over'
head).
01&11. The factory overhead vol umc vari ance i s a
measute ol the under' or over'utilizalion of
pbnt failitier' lt it tho diflererre between the
total budgeted lixed factory overhead and the
amounl charged to (or chargeable to) aclual
producti on based on the standard
quanti l y
allowed for thc activity base used lo allocate
over head. Thc vol ume vat i ance may oo
thought of as ttle emount cl under' or ovraP'
plied budgeted fixed lactory overhead.
01&12. Atter variances have been dEtermined' rnar:'
agemenl should:
(a) deci de whether each vari ance i g suffi '
ciently signilicant to require invesligation
and explanaliro
(b) hvettigate and obtain, frorn the resPo.r-
sible department head, explanations of
signilicant variances
(c) take coneclive acticn and recognize and
reward desi rabl e
performance, whsro
(d)
018-13. (a)
sppropriale
revise standards if needed
Features ol lolerance limils include:
(' l ) A standard cost control sysl em i s
established, specilying exPocted
perfor-
rnance levels.
(2) An hforrnation syslem is designed lo
highlight the areas most in need ol hves'
tigntkrn and poesible coneslivc action.
(3) Variancc rangos for areas and ilems
are compul ed. Managemenl does not
spend tirne on parts of the operations
thal producr
satislactory pcrlormance
leveb wilhh theso ranges.
(4) lvlanagemenl's Ettenlion and etlods
arr csrcentraled on signifi-nt variancec
frorn expccted resuhs. which sigoal the
prosonca of unplanned condilions need-
ing investigalion.
(b) Tolerance limils have potenlial benefits
because they may resuh in more eftec'
live use ol management time. Thc rnan'
Chapter l8
age/s tirne b not wetod on lho prcest
ol kJentilying important problems or in
workhg m unirnPottant ones. Thc man'
ager shoul d bo abl e l o concenl r at b
etforls on inPottant problems' becausc
the teclnkPc highlightr lhern.
(c) lt may br difficult to determine which
variancor ere rigrrilicant. Also. by focus'
ing on varianceg abovc a cadain level,
other sscful hformatbn, suclr as trends'
rnay not be notbed at atl oatly stago.
ll thc evaluatbn lYltrn b h anY waY
dircctly tied to thc variances, subordi-
nals! ttlsy be ternpled lo cover up n$a'
tive exceptbns or not tePort lhem al all.
Jn addilirn, subodinatea tnay not receivo
t ei nf ot camnt f or t ho r educl i on and
rnahtenance cf coat leveLg, but only rep'
rimands tor those itemc which exceed
the range. Subordinate morale rnay sut'
fer because of the lack ol
Positive
reh'
lorcemenl for work well done. Using toF
erance limits rnay also atfest supervisory
emgloyeer in an unsatislactory m'vlner'
Supervisors may feel that lhey ars nol
getthg a cornplete review of operalions
because they are always keying on prcb-
lems. ln addiliqt, superisors may think
that they are excessively critical of their
subor di nal es. A negat i ve i mpact on
supervisorY rnorale rnaY resuh.
01&14. Overemphasis on prico variances can resull in
a large number of lorr cast vendors, high levels
of invenlory, and poor quality materials and
parts. Since lhe emphasig is on price rather
than quslity or reliability,
purchasing will likely
have a large number ol bw cct vendors avaiF
.
able, who can be played cre against the other
to got the lowest pqssible prices. ln addition'
purchasi ng wi l l l i kel y purchase i nvenl ory i n
largo
quantities to take advantage ol purchase
discounls and to redwe the need to place rush
orders that resull in premium prices. Inventory
tends to becorne unnecessarily large, resulting
in excessive rryhg costs, and rnaterial
qualF
ty tends to decline, resulting in poor producl
quality andor excessive spoitage, scrap, and
rework
Overemphasis on efticiency variances
can
reault in long production rung, largc work in
ptocoss inventories, and attemptr to control
quality through hspestbn alone. Long
produc'
tion runr reguire lewer mschino set ups and
reduce tho amounl ol i nel fi ci ency resul ti ng
frorn thc leaming tequired to changc
produc'
tion lrorn one product to snother. Large work in
ptocoss inventorier resull frgn bng prodrrclion
runs, and l arge i nvenl ori eg are l i kel y to be
vi ewed by department managors as buftero
Clppter 18
thet ern bo utod to rbrorb rnschino broak-
rdownr, rmpl oyrt ebrrnl ori sm, end rl ack
demand for thr product.
Atthough carrying
hrge hvernori.. b 3ty, thr carryhg sn do
not affri thr offbienqy yariansf,
whi*r in tum
oncourlgor d.plrtmantrl
rnrnagrn to ovrr-
producr.
Shco offlcioncy variencot meerur.
lho utr cJ inRlr h nhtixr to ouput volum,
rtto.tr b sttrol
Crrsfrty
l.nd to bo orisrtd to
45
i ntprctbn el one.
Stoppi ng l ho procorr
l r
rrprrinrnl wlh allemdivc prodrrtbn nrethoc!.
lo pormanen0y
conect a problem or improv,,
Cualty
can rccult h an unlarorable labor rffi
cbncy v8rianc.. In cqrtrast, increasing tht vol.
umr of prodrstbn
and rrrodrhg or di*arding
dotccb har e rnaller inpact sr rtrr cttbienci
varianca.
El 8' l
Aetual materlals Purchasod
at aCtual
OOSI """"r""""'
Actual matarials Pur'chassd
at standald
cogt""""'o""
Materiatg
Punchasc
Pricc
Yariancc
Actual matariala
used 8t
actual cost
Astual materialg
usod at
standard
GoSt """""""""
Materials Prico
usago
Vafi anCO
...."t"tttt"ot"tttt"'
Actual materiat3
usod 8t
standard
|ElO8t..."""""""'
Standard
quantltY allowed
at standald
cogt.' .....o"""
El 8-2
Actuat materiab Purchasad
at actual ClOSt ..'.....-.'.....'.
Actual materials
Purchg$orl
at standald coSt......'t'....'
Materials
purchaso
Prico
vari ance .r........r..r............
Unlt Cost
=
$13' 4{
act ual
13.5O standard
Ll.ogi
Unlt Cost
=
$13. 41
act ual
13.5O standard
9l.oe)
Unit Cost
=
$13'50
standard
13.5O standard
13.5O standard
Unit Gost
=
522.10
actual
22.50 standard
$__J.49)
Unlt Cost
=
$22.50
standard
22.50 standard
22.50
standard
Chapter 18
Amount
$60,345
60,750
S
(4O5)
f av.
:
Amount
553, 640
54. OOO
S
(36O)
f av.
Amount
s54,OOO
51, 300
3 2.7OO unfav.
Amount
${ 1o, 5oo
I 12. 500
S
(2. 00O)
f av.
Amount
$112, 5OO
99. OOO
: B 13. 5oo
unf aY.
pGBClsES
-
a
QuantlW
{,5OO lbc;
4,5OO
4r5OO
Quantltv
4'OOO lbg.
4rOOO
4,OOO
QuanUtv
i,o6o lbs.
3.800
Materials
quanUty variancc
-2AO.
lbs'
Quantltv
5,OOO
5,OOO
5rOOO
QugnUtY
Actual nnaterlals purchased
at standard cost.,.,...or..-. 6,000
Actual materialg lssued at
standard cost..,,....,.o...r.., 4.4OO
Materials inventory
yariancc
__q99
Clppter 18
El8-2" (Conctudedl
Aetuaf materials
issued
at
standard
CoSt .....,...r........
Standard quantity
of
materlals
at standard
GOSt aa...aa..........r..o............
Materials guanUty
varlanoo
Et8..?
(rt
Astual
materials purchased
at actual
Cost..................
Actuaf
materials purchased
at standald
cost........r.....
Materials punchaso
price
Yafi anCO
..rr....r.................
Astuaf
materials
used at
gtandard
Gost ......r....ro.....
Standard guantity
allowed
at standatd
cost...........r....
Materials quantity
variance
(21
Materials
beginning
_
inventOt]f
.........................
Materials punchasod
during
If|O11th...................r..........
Materials
avallable
for use..
Materiafs
lssued
to
Unit
Cost =
$22.50
standard
22,50
standard
22.50
standard
Quantitv
4r4OO
Quantitv
6,OOO
6rOOO
6,OOO
Quantitv
Trl oo
6.9o0
200
Quantitv
2rOOO
I,O00
I,OOO
Quantitv
7rl OO
Trl oo
7rl OO
Unit Cost =
$4,2O actuaf
4.OO
standard
$ .2o
x Unit Cost =
94.OO standard
4.OO
standard
4,OO
standard
x Unft Cost =
$4.12 actual
4.2O actual
4.f B average
4.18 avor:l go
4.18 averago
r
Unit Gost =
$4.18 average
4.OO
standard
_Lli2oo unfav.
unfav.
4.300
_t_99
Amount
$99,OOO
447
unfav.
96,750
l -3e9
Amount
$25,2OO
24,OOO
produCtiOr1.......................
7rf OO
Materials
ending
inventory
Too
Amount
$28,4OO
27.600
g__e99
Amount
$ 8,240
25.200
s?3,44O
29.679
_$_9,762
Aetual
materiats
used
at
-
actual
averago
cost........
actual
materials
used at
stan
dard
GGISI ................r.
Materials
price
usago
varlanca
......o.......
Amount
$29,678
28..400
$ . 18
-$_ff78
unfav.
Chaptar 18
El 8
(Concl udedl
(31
Materials
beginning
inventory
.t"t""t"' rtt"tttt"'
Materials Purchased
during
mOnt h. . . t t t t t " t t " t " " t " ot t t t t "
Materials available
tor use"
Materials issued to
pfOdUCUOfl ."t"t""""""""
Materials
ending inventorY
Actual materials
used at
actUal GOSI """"""""t""'
Astual
materials
ussd at
standard
cost.........."' r"ot
Materials Prico
usago
Yaf i anCO . r . . t ""t t ""' Dt t t t "t t '
(41
Materi al s
begi nni ng
inventoql
Materials Punchased
during
mOnt h . . t . . . . " t t t t " t " " " o" t t " '
Materi al s avai l abl e l or uss.'
Materials issued to
production
Materiats ending inventorY .
Actual materials used at
aCtUal COSI .........' .........' .r
Actual materials used at
standard GoSt.......r..........
Materials price usago
vari anCg . . . . . r. . . . r. . .
Unit
Cost
=
9.12
actual
4.20 actual
4.12 ol dest
4.29 nowost
4.2O newest
Unit Gost
=
$4.12
ol dest
4.2O newest
4,OO standard
Unit Cost
=
$4.12
actual
4.2O actual
4.20 newgst
4.12 ol dest
4,12 ol dest
Unit Cost
=
$4.20
nswest
4.12 ol dest
4.OO standard
Amount
$
8,240
21.420
$29,66O
28.400
l-11260
unfa%
Amount
$
8,240
25.200
$33,44O
25r2OO
4.532
S 3,708
. -
Amount
$25,2O0
4,532
329,732
28'400
3 1,332
unfav.
r
QuantiW
210oo
Amount
$
8,240
25,260
$33,44O
8r24O
21,420
6,000
8rO0o
2rOOO
5. 100
_900
Quantitv
2rO0O
5. 1oo
Tr l oo
7, 10O
Quantitv
2,0oo
It.ooo
8r0oo
6t0oo
1. 100
_900
QuantiW
6,000
t l oo
Trl oo
Tr l oo
-
dlg.ptcr rs
Et8:{
Aetual tabor hours rvorkod..
Actuaf labor hours work6d,.
Labor rate varialtco.............
Aetual labor hours workod..
Standald
hours allowed
(l r2OO
unl ts r1l 2 hour
1abOrf ...r....ror...............o....
Labor efflclency
varlancc...,
Et8-5
(11
Actual
materials purchased
Actual
materlals purchased
Materlals purchase
prtce
Vafi a nCg .r........D...............
Agtual
materlals
used ........r
Actuat
materlats
used,..r,....
Materfafs prica
usage
Vaf i anCO
. . . o. . . . r . . . . . r . . . . . . . . . . .
Actual
materials
used .........
Standard quanilty
allowed
..
Materlafs guanUty yariance
Rstc =
$ 9,8O
8ctu8l
lO.OO stsndard
qj.2qt
,
Rate =
$t o.oo standard
lO.O0
standard
|O,OO
gtendald
Unlt Cost =
$3.8O actual
4.OO
standard
-Unlt
Cost =
$3.8O actuat
4.OO-Etandard
r Unlt Cost =
$4.Oo standard
4.OO standard
1.OO
standard
x
Rate =
$12.20 actual
1z.oo standard
$ . 20
r Rate
=
$12.0O standard
72.OO
standard
72.OO standard
Houn
650
650
650
Hourr
650
600
Amount
$51370
6. 500
S
(i3o) fav.
Amount
$6,5oo
I,OOO
Amount
s5,7OO
o.ooo
l-(3OQl
fav.
Amount
$5,130
5.400
50
$ 5OO unfav.
Quantltv
l,5oo
l r5OO
1,5OO
Quantity
1, 35O
' 1,35O
1, 350
Quantltv
1, 35O
I , O20
_930
Hours
3l o
340
(301
$
(.2o1
$ r.201
I2l
Houns
Astual
labor hours
workod..
-Tio-
Actual labor
hourc
workod..
3rO
Laborrate
variallcrg.............
3lO
l$uqt
fabor
hours
worked..
Standard
labor
houre
allowed...r,.....
labor
"rri;;;;#il::.:
$_EZO
fau
Amount
$5,4OO
4,Ogo
$!,329
unfav.
Amount
$3,782
3.720
$_0?
.unfav.
Amount
q?,72O
119
4,OgO
$
(geQ)
tav.
150
Chaptcr 18
E18- 6
$166,000
Actu
a l la
gto
ry ove dl ea d "" " " """' -'-'::
::;':'::: :: ^ -
" "" " " "'
ililari-o""?rt
" " d. chare eab I e to
:"Y:1 tP1.::17
iil,ffir-"t-"i;;ffip
;
."."d
r 312.5o
overhead
rate)..
137. 500
-
S 28,5OO unfav.
o"Lraff
factory
ovefi
ead varianco
"""
t a a o a a a a o a a a
Volume variance
a o a a a a a r a a a . a a
" t " " " o " t " " '
control l abl g vari anc9....""""""""""
""""""' r"""o' o
vol umg vari ance ......""""""""""o'
""' r""""""""""
Overatl factory ovefi ead
vari ance
s166, OOO
ACtUal
taCtOfy
OVgfh
gad
..........t.......""""' o' t"""""' !"""t"""'
Budget
allowancJ
Uased on standard
hours allowed:
--v;;;tle
overhead
(11'ooo standard
machine
hours
attowedi'sn.so
variable
ovefiead
rate) s49'5OO
Fi;;;;;;rreal
ruageted
"""""""""""""""'
96'000
COnt f Ol t abl g
Vaf i anC1O. . . . . . . . . . . . . . . . . . . . . . . . . . . o. . . . . o. . . . . . """"""""""'
Budget atl owance
based on standard
hours al l owed
( f f Om abOVe) . r . . . . . . . . . . . . . . . . . . . . o. . . . . . . . . . . . " " " " " " t " " o" " ' o" t " " t o" '
Sta nda rd factow
o"e rhead chargeabt^"
!o
g"duction
(t I
rooo
standard
hours ailow;o
r sl2.5O
overhead
rat6)'.
VOl Umg Vaf i anCg
r r or r or or or Lr o. . . . o. . . r ot . . . " . " t " " " " ot " " " " t t " t t " " o" oo'
COntfOllablg
VafianC8.......................""""o
$20t5OO
UnfaV'
volumg
yariance............................!o...' r.....
8.ooo unfav'
orrerall factoly
ovefiead
variance
""""o"r 128' 5oo
unfav'
Et 8- 7
ACI Ual f aCt Of y O. Vef h
gad
o. . . . . . . . . . . . . . . . . . . . . "
" " " """o""""""""r"
CianOarO overhead chargeabte
to actual
producUon
-
iS,ZOO
standard hours allowed
x822
overhead
rate)""""'
Ove ra tt. f actory overhe ad variance
""""'
""'t""""""'
Agtual factory overhgad
"""""""
"""""""o""""""'
Budget allowance based on standard
hours:
variable o""ttt"iJis,zoo
standard
hours
r 36) 33!'?99
Fi xgd ovgrhgad """""""""""o""""""""""""
90t 0OO
GOnt f Ol l abl e
Vaf i anC18. . . . . . . . . . . . . . . . . . . . . . """""""""'
Budget al l owance based on standard
hours
( f f Om abOVe) . . . r . . . . . . i . . . . . . . . . . . . . . . . . . . . . . . . . . ' . r . . . . . . . . . or . . . . . . . . . . " " " " "
Standard tactory overneaO
chargeable
to
production
( l f Om
abOVe) . . . . . . . . . . . . . . . . . o. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . " " t " " t " t " ' oot '
145. 500
S 2O.5OO
unfav.
_
s145, 5OO
137. 500
-t
8.OOO
unfav.
$13O, OOO
125. 400
S 4.600
unfav'
r
$13O, OOO
s130, 20o
t 25.400
3 4.8OO
unfav.
_
$
(2oo| fau
4.8OO
unfav.
-$-:!J99
unfav'
v
130. 200
Ctnpter 18
El g-g ,
Overafl factory ovorhsad variance
Actual factory ovgrhgad ..'.........o..........t.o............,....o..o.........
Budgat allowance based on actual machine hours:
Variable overhead (41600
actual machine
t*51
Agtual factory ovgrhgad ...-...........-...rD.....................--...........
standard overhead chargeabre to actual producuon
(4r2OO
gtandard
hours aflowed r
$2{,gb overhead
rate}....
sl 2l , OOO
l 04. l
go
hours r $5.8O variable overhead ratef .....,..
Firgd ovgrhead budgeted ..,..o...Dr.........r..........
Spendi ng vari ancg ...........,..oerorr--r' orr
Budget allourance
based on actual machine hours.......D......,
Budget allowance
based on standard hours attowed:
variable
overhead
l4r2oo
standard machine
hours
allowed r
$S.8O variable overhead rate).....
g
ZCTSOO
Firgd ovgrhgad
budgeted r'........r.......i............ g5.5oo
variabla
efficiency variance....r.o.......' .r.......o.,.............,r..r......
Budget allowance
based on standard hours allowed.,..........
Standard
overhead
chargeabrE
to actuar production
(4,2oo
standard
hoursailowed
r
$24.gb ;verrreaa
rate)...,
vol ume
vari ancg
t' o...........r......r.............o..r..r.......rr.o.........r.....
spending
variance
"...............' ........o.....r....r......................o....
variabfg
efficiency
variancg......r....................r.............r.........
vol umg
vari ancg
"' . . . . r. . . . . . . . r. ' . . . . . . . . . i . . . . . . . r. . . . . . . . . . . . . . . , . . . . . . rr. . . r. . .
overal l
f act ory
ovgrhgad
vari ancg. , r. . . . r. r. , . . . r. . . . r. . , . . . . . , r. . . . . . . . . .
_S
2.320 unfav.
$f 09,860
f 04,t 60
E_5'7O9
unfav.
$ 8,820 unfav.
2r32O unfav.
5.7OO unfav.
_$_16.840 unfav.
_L!grq40 unfav.
$12f
, ooo
$26,gBo
95, 500
I l 2, 1go
j$__e,820
unfau
$112, 180
109. 960
r t \
\
. \
El 8- 9
AgtUal
l adtOfy
OVgfi gad ...............................o......tt"""""""t'
sundard
oyerhsad chargeable to actual
prcductlon
--(''OSO
Standard
hOUrS atlOWed f $5
OVerhead rate1...........
Q1fgfall
faCtOfy OVgfhgad
VaflanCe ............o....'....""""""'o""'
Astual lastorY overhead
Budget atlowance
based on actual hourc:
VJriaUle overhead
(l,9OO actuat hourg r Sl.5Ol S 2'850
FiXgd OVef hgad ...............................................
7.OOO
Spendi ng vari ance
Budget aftowance based on actual hours
ffrom
above) """"'
Budget atlowance based on standard hours:
Variable overhead
(2'O5O
gtandard
hours r
s1. 5Ol
rr. r, . o. . . . . o. . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i .
s 3t o75
Fired overhead
7.OOO
Vafi abl g effi Ci gnCy Vafi anCO........r...o...!..' ...r.......r.......t....."t"'
Budget allowance based on standard hours
(from
gbovol....
Standard factory overhead chargeable to
productlon
(from above)..,..
a a a a a a a a a a a a a a a
Chpler 18
3 1O,5OO
I 0.250
_$
25o unfav.
3 1O, 5OO
9,850
3
65O unfav.
:
t
9, 850
fav,
3 65o unlav.
(2251lav.
(1751 tav.
3 25O unfav.
sToo,ooo
684. OOO
3 1O, O75
10, 250
s
(17s1
Vol ume vari anCg .....r.....o"' .o.' t....' ....."t""'
Spendi ng Vaf i anCg. . . . . . . . . . . . . . . o. . . o. . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . o. r. . .
Vari abl e ef f i Ci gnCy Vaf i anCO. . . . . . . . . . . . . . . . . . r. ' . . . . . . . . . . . . ' o. . . o. . . . . . . o. "'
Vol ume Yari ance...
a a r t o a a a r a a a a o a a a a a a a a o a a " " t t t t o " " "
Ovgrall faCtOfy Ovgfhgad VafianCe r..o.........r..' ....................""
El 8 - 1 0
ACtUal faCtOfy OVgfhgad r.....r.r............,......r...r.......r.o.....r.r.t..r
Standard overhead chargeabte to actual
produc$on (38'OO0
units r 2 standard hours
por unit r $9 ovefiead
rate|"""'
Ovgral l f aCt Ory OVgf hgad Vaf i anC9. . . . . . . . . . . , , . . . . . . . . . . . . . . . r. . . . . . . . . . . .
S 16, 000 unf av.
I 0. o75
Chapter ta
E18-1 O, (Concl uded)
(1)
Tlro-variancemethod:
Actual factory ovgrhgad
...........rrr.r...r...........r.r.......r.........r.r..
Budget allowance
based on standard
hours ailowed:
Variable oyerhead (ggrOOO
units r 2 standard
hours per
unit x $6 variable rate) .....r.........
$456'000
Fixed.overhead (SO'OOO
budgeted
hourc
X $3 fiXed riate)..................................,......r..
24O.OOO
controllablg
rrarianc.-...........r...' .........r........................rr......r
Budget allowance
based on standard
hours ailowed
-
( f r om
above) t t t t t "t "4. t . . . . t . . . r . . . . . . . . . . . . . . . o. . . h. r . . . . . . . . . . . r r r . . r . . r r D. . . .
standard
overhead
chargeabre
to actuar producffon
(sa,ooo
units x 2 standard
hours per
unit x $9 overhead
rate).......
vofumg vari ancg
"tt1..r....rr...r...........r.D...r.rr......................r......
control l abl g
vari anc8....r...r............t.....D..r...........,r.....,......or...
vol umg var i ancg
t " . r . . . . . r . . . . . - . r . . . . . r . . . . . . . . r r . . . . r . . . . . . . . . r . . . r . ! r . . . r . . . r . . .
ovgrafl factory
overhgad
var|ancg.......,...................r.r...D....,,.
(21
Three-varlance.method:
Actual factory
ovgrhgad
r.....r........ro.r.r..........r....r..........r..t.....
Budget
allowance
based on actual
hours worked:
Variable
overhead (TTTSOO
actuaf hours
x$6 vari abfe
rate)........,..,......,.....r...o........,.
$465rOOO
Fixed
overhead (gOrOOO
budgeted
hourc
x93fi xgdrate).,..,............1..........,..r............
24o,ooo
Spgndi ng
var i ancg. . . . . . . . . . t . r . . . . . r . . r r . . . . . . . . . r r . . . . . . r . . . . r . . . r . , . . . . .
Budget
allowance
based
on actuat
hours worked
-
tl ry
1!ove)ttt.tr..r.....................r....r.......!...tr....r................r
Budget
ailowance
based
on stanoard
hours ailowed
. -
(f rom
above)t t t . . . . . . . r. . . . . . . . . . r. . r. . . r. . . . . . . . . . . r. . . . . . . r. . D. . . . r. . . . . . . . . r. . . .
variablg
efficiency
variancg...r...D......r.......r....r.................r.....
453
s7OO,0oo
6g6.ooo
_L {.OOO
unfuv.
$696,OOO
694.ooo
$7O5,OOO
696,000
Budget
allowance
based
on standard
hours
atowed
^ -
(from
above)...............r...,.......
sta n da rd ove rir ea d c rr a rg ea b il i;'#;;
ilil;;;;'&ft;
units
x 2 standard
hoJrs per
unit x $g overtreJd
otry.......
vol umg
var i ancg
r " " ' r ' r " r . . . r . . . . . . . r . . . . . . . . . r . r , . . . . . . . . . . . . . . . . r . . t r r . . . . . . . r .
.Spendi ng
vari ance
.............,........
_YbflA
b le effi Cie n Cy Va fia n C
g.....,..'
" " " "' t " " " " " " " " " " " " " r " " "
vol umg
var i ance. : . . - - _- ___- __r . , . . , . . . . r . . . . . . r . . r . . . . . . . o. r . r . . . or . . . o. . . . . . . . .
overari
r*iil;;;;';;;.:::.:.::...::::::..::.:.................
r a a a a a a a a a a a a . a a a
]L__grgqA unfav.
$696,00o
684.000
]EIS.OOO unfav.
$
(5,ooo)
fav,
9r0OO
unfav.
12.0OO
unfav.
_L _10pgq
unfav.
S_j!-&ggq unfav.
$ 4' OOO unfav.
12.OOO
unfav.
_$
16,]0o9 unfav.
$7OO,OOO
705,OOO
1 { \
El &11
Materials Price
variance:
Actual Standard
QuantitY
Cost
Ingredients
{LFs'},
-
Per
Lb'
Cocoa nedtls'.....
325rOO0 $eO
Mi | k. . . . . . . . . . . t . . . . . . . .
1t 425I OOO
' 5O
Sugar. . r. ' . . . . . . . . . . , !
25O' OOO
' 4O
Materlals mix varlance:
Standard
Gost
$
195,0q,
712,5OO
100.0q)
31.OO7,500 - -
Actual
.
Cost
$2Ol,5oO
684,0(X'
97.500
:198{l,ooo
::
Chapter 18
Materlals
Prlce Varlance
$ 6,500 unfav.
(28,500) fav.
(2,5OOl fav.
$(24,500)
fav.
-:
Standard
Forrnula
Actual
for Actual
QuantitY
QuantitY
Ingredients
(Lbs.l
(Lbs.)'-
-
Cocoa Ue?DS...'.. 3251000
32OrOOO
Mi 1k....................
1r425rOOO
1r480r000
Sugar.t.r,....,.......
250.000
200.000
2.OOO.OOO 2,0oo,0oo
-
Difference
in Lbs.
5,000
(s5,0001
50,000
0
Standard
Cost
per Lb.
9.60
.50
.40
Materlals
Mix Variance
$ 3'0OO unfav.
(27,500) fav.
20.000 unfav.
fav.
'cocoa
beans = (8oo + 5,000) x 2'0o0'ooo
Milk = (3,7OO'+ 5,OO0) x 2'OOOTOOO
Sugar = (5OO+5,OO0) x 2' OOO' OOO
Materials
yield variance:
Expected
yield: 2'OOO'OO0 lbs. input
+ 51000 lbs'
="""'t"o""
ACtUal
yield in Ong-tOn batChS....,........,...' ..' .............' ..r.t.' ."
Unf aVOf abl g
yi gl d
i n bat Chgs . . . . . . . . . . . . . . . ' . . . ' . r. ' . ' . . . . ' . . r. r. . . . . . . "r"'
Standafd COSI
pef
One-tOn batCh...........' ...............r' ..rr....r.."'
Mat gri al s
yi gl d
Vaf i anC9. . . , . . . . . . . . , . . . . . . , . . r. o' . . . . . . . . . r. . . ' . . . . . . . ' . . . . . t "r
400
387
13
s 2,530
932,890
unfav.
Chapter 18
ela42
(1) Materials purchase price variance:
Actual Standard
Quantlty Gost
Purchased por
Standard
Actual
lnErcdients
in Llters Llter
$]_
Cost
Echot:..;.........,.....
2s ooo
$-zoo f srooo
$ sr36s
Plotgx.....t..r....r.r!....
i3 0OO .425
S'S2S 6'1240
89n2.......' ...............
40 ooo .iso orooo
srgao
CT-40"' ...r...r...,.,.....
7 5OO .3OO
2.ZSO 2' .iO
$18, 775 $' l 9.665
(2)
Materials mix variance:
Standard
Actual Formula
Quantlty for Actual
Used ln Quantlty
lnqredients
Lttens in Litersa
Echo| .....,....1...,...,...
26 SOO 2g OOO
Ptot9r............,........
i2 660 i4 OOO
Bgnz ...,r.........,.r...,..
3Z 4OO 95 OO0
CT- 4O. . , . . . . . . . . . . . . . . , . . . .
Tl 4O TOOO
g1-org
84 ooo
'Echol
= (2OO
+ 600) x
g4
O0O llters
Protex = (1OO r.
6O0) x 94 000 llters
lenz
= (25O
+ 600) x 84 O0O titers
CT-4O = (5O + 6O0i x 84 0OO titers
Materials yield
variance:
Erpected yiefd:
84 OOO llters input + 6O0 liters E''..--.-'r,
Agtual yield
in 50o-lltgr
batchgi.........,..r..r.......D.....r.r............
I:frYoTbte
yield
in batchgs ............r..r.....r.........rr..,.,...r..r.,..
-o-"-noltd
cost per
SOo-lltgr batch .........r,..............................
f,' l atgri afs
yi gl d
vari ancg..r............,.........r....r...r.....r........r.......
455
Materials
Purchases
Price Variance
$365 unfav.
715 unfav.
(160)
fav.
(3O)
fav.
$99O unfau
Dlffen Standard
ence Gost per
j4
Liters Lfter
(1
2001
$.20o
(1
340) .425
2 400 .150
140 ,300
o
Materials
Mlx Variance
9(24O.0O) fav.
(569,50)
fav.
360.00 unfav.
42.OO unfav,
fav,
@s)
740
136
4
$13s
$SCO unfuv.
Chagtar 18
1fi
El 8- 13
BENJAITIIH PRODUCTS COMPAHY
DePartment
2
FaEtoly )vertread
Varlanco Report
Foi Mont h Endi ng June 3O
Dlrgct labor hourg ................'.
CapaCl U
t . . . o. . . . . . . . t . . . . . "t t t "t t t "t '
Variable factorY overhoad:
l ndi rgct 18bo1.........r..' t' t"t"'
Man ufagturing SuPPli3......
Repairs t....t..........tt!"ttt"t' o"
Heat
poworr and llght...-....
Total Yarlablg cost ..........
Fired taetory oYefisads
Supervision
lndirect labor
Manufagturing 8upp|183......
MaintgnallCo .' ...r................
Heat,
powor, and light r.....r.
Machinely depreciaUotl .....
lnsurance and targs ".' r.r.r..
Total firgd co8t..'............
(rl
Budget
Allowable
Normal
GapaclW
6000
loo%
$
2,4OO
2, 1OO
800
100
$, , 5. 4oo
$
o,ooo
514OO
l r02o
960
120
540
360
$14.4oo
$ 2, 1OO
1, 8O5
850
l 05
$60
20
(301
2A
$ 4.660
$
61200
5,40O
I , O20
960
720
540
372
200
o
o
o
o
o
12
w
unta%
_l
0.830
s 2, 180
319r272
16. 830
3 2.442
s 282
2.1g0
3 2, 442
Totat factory overhead ...........
J!-gOo
Standard factory overhead chargeable
to
work In
process (5'tOO standard houra
r $3.3O ratel
Vol umg Y4ri ancg.r.o..rr.........D............r......
Reconciliation
of variances:
Actual tactory ovg rhead .-.ri.....!.......'.
Standard factory overhead chargeable
to work In procesS ........' .....""""' o'
Glerall factory overhead
v8rlsnce .....
Controllable nrlanCo .."""""""""""'
VoI u m
g
Yarianc e.' .""' o"""""""o""""'
Overalt factory overhead
varlSnco ""'
l2l
Budget
Allowance
Standard
Houru
Sl oo
-Eolo
$
2,o4o
1, 785
680
85
3
{.59O
$
o,ooo
5,4O0
7,O2O
960
120
540
360
$14.400
$18, 990
$14. 612
s19,272
unfav.
unfav.
unfav.
unlav.
unfav.
(3)
Actual
Cost
(4)
Controllable
Varianco
UnfaY. (Fav.l
(31- (21
< \
Clnpter t8
E18.I4
APPENDD(
$15,OOO budgeted
overhead
=
$8 overhead
tato
=
$2 variable
rate
457
$f 6,500
t 4. 400
lliloo
unfav.
$f 6,500
15. 400
2,5OO budgeted m-chino
houF
SSTOOO variable
overhead
2r5OO budgeted machine
hours
ovgrall factory ovgrh
gad
variance
.............r.r
Overafl
factory
overhgad
variance
...........
Agtuaf factory overhgad.' ........................r.....rr........o.....r..r.....
standard
overhead chargeabfe
to astuar producuon
(2r4oo
standard hours attowed r $o ovirtrJal ratel..-..or...
Agtual factory
ovgrhgad...........' ......D...................,...........Dr.....
Budget
allowance
based on actual hours:
Variable
overhead
l2rTOO
actual hours r $2|...
$ 5r4OO
Fi Xgd OVgrhgad.........................r..r.............r....
1O.OOO
spendi ng vari ancg.........r.r..r...r.......r..........t..D....r.r,................
Budget allonrance
based on actuat hours (from
abovef
.........
2'7oo actuaf hol,' r
$o factory overhead
ratg...,.,................
l dfg capaci ty vari al l co..r..........-r..r..r..rrro.rr.rrrr.r...o..r............rr...
2r7oa astual
hoTs
r $6 factory overhaad rate (from
above|
standard
factory
overhead
chirgeabre
to pruduction
(from
abovef t t """t """t ' . . . . a. D. . . a. a. . . aa. r . . . . a. . . . . . . . . . . . r . . . . . . . . . . o. . r . . . . . . . . . . .
Ef f i ci gncy
vari anco
. . . . . . . ' . . . . r. . . . . . . . . . r. . . . . . . . . . . . . . . . oi . . . . . r. r. t . . o. . . . . . . . .
spendi ng
Yari ance.........-......r.....r..............r......r....................
l-d.l-e
ganacfty varialtcG)
.........."::::'..,................r....r..,......r........
Efficiency
Yariancg
.............r......r....................r............ro.......r
_S_l,.:!gq unfav.
$t 5, 4oo
16. 200
fav.
$to,zoo
14, 400
_$_l.8OO
unfav.
$ 1,1OO unfav.
(8O0|
fav.
1.8OO unfav.
-jFl.lOO
unfav.
Chapter 18
ACtUal taCtOfy
OVefhgad......................""tt"""tt"tt""t""""""
-Ct"nJ"tU
ovirhead
chargeable
to actu8l
producUon
-
d;to
standard
hours allowod
I $14
overhead
rsto)""""'
iFoTuageted
labor
hours
$4,8oO
variable
overhead
iFo-oE-dg
eted
la b or h ours
orreratl
factola overhoad
variance
Agtual lactory ovgrh9ad..r......."""""""'
48
E18.t5
APPENDX
$t6'8oO
budg"t"d
o""th""g
Budget allowancs based
1.J2O actual hours r $14
ldle capacitY variance
=
$14
overhead rate
=
$4
variable rato
$15,8OO
16. 380
Budget allowance
based on actual
hours:
Variabte overhead
(7r12o actual hours x 94|"'
$
4t48O
Fi rgdovgrhgad"""t """"""""""' o' t """""' t ""
I 2t OOO
Spendi ng
Vaf i anCe . . . . . . . . . . . . r. . . . . . r. r. . . . . . . . . t . r. t . . . . . . . t t t t """ot "t "t "t '
I t a a a aaaa a - a 4" " "
a a a a a a a a t a t a t a a a a a " a t t t t t " '
3
(58o1 fav.
'
$15,8OO
$16,480
15.680
on actual hours
(from above)
""""'
lactory
ovgrhgad
13t8 """"""""""
1r12O astual hourg r $4
Variable factory overhead
rate .t......
tittO standard hours x $4
variable
factory overhead
r8t6...'
Vafi abl g
gffi Ci gnCy
Vafi anCg ........................t......r' t"""""t""r'
1r12O actuat hourS r $1o
fiXed factory overhead
F3to...........
f
rtZO
standard hOurs x $10
fixed factOry Overhead
Fiito """'
Fi Xgd
gffi Ci gnCy
Yafi anC18 .................r..r....r....ttr..t.."""t""""r'
Spgndi ng Vaf i anCe. . . . . . r . . . . . . . r . . . . . . . . . . . r . o. r . . . . . . . oo. . . . r . . . r . . . . . . . . . . . t t t "
l dl g CapaCi ty Vafi a11CO..............rr.........' ...................o........""ti
Vari abl g ef f i Ci enCy Vaf i anCg, . . . . . . . . . . . . . . . . ' . . . . ' . . . . . . . . . . . . . ". . . . . . . . ""'
Fi f gd
gf f i Ci gnCy
Vaf i anCO, . . . . . , . . , . , . . . . . . . r. . . . . . . . . . . . ". . . . . . . . . ' . . . . o. . . "'
Ovgral l f aCt Ory OVerhead Yari anCO . . . . . . . . . . . . . . . rrr. . . . r. . . . . . . . . . . . . . ' . "
S
(5ool
fav.
:-E:
$
(6801
800
(2ool
(5001
$
(5801
16,480
S 8oo unfav.
#
$
4,480
4.680
S
(2OOl
fav'
-
$1t , 2OO
11. 700
lav.
untav.
fav.
lav,
fav.
\
\
'----
ClpOlcr 18
PROBLEMS
Pt 8- l
(f
l
Factory overhead per
unit:
Variabl e ($3
o r 2l
gl
..'.........,..................o.............
Firgd ($go
r 1/31 ..............................................r..
Variable tactory oyerhoad por
unit
Dlrcct tabor hours per
unit
451
(21
Agtuaf quantity purchased
.....
Agtual quantl$ punchased
.....
Materlals punchaso
prlce
VAfi anCO ....-.r.....r................
Actual quantity
usgd ...........r..
Standard quantity
allowed .,...
Materials quantity
varian co....
Actual hours worked ......,,....r.
Ac-tual
hours workgd ..............
Labor ratg variaJlGo ........r..t.o,,
Actual
hours worked .......r..,...
Standard
hours allowed .........
Labor
efficiency
vgt'ianco .......
r Unit Cost =
$1.35 standard
1.35 standard
1.35 standard
x Rate
$9.15 actual
9.OO standard
x Rate
$9.O0 stanCarC
9.OO standard
9,OO standard
s20
t o
$go
=
$?O
_
$5 variabfe
overhead
rate
4 per
direct labor hour
l'lormal
capacity dircct labor hours (2r4ool
r Fired tactory
overhead
rate
per
direct labor hour
Gtto
* 4l = 2r4oo r
$zso =
$6,000 nr"Ji"Jory
overhead
based on norrnaf monthfy capacitp
Yards r Unit Gost =
Amount
ls,ooo
$rssaffit
St4tiiii;
l8rOOO
1.3S standard
24-.gOO
= Amount
$19, 215
19. 900
$ 315 unfav.
= Amount
$t8,9OO
19, 000
$ 909 unfav.
$16, 650
t8,ooo
Yards
9,5OO
10. 000
Hours
2, 1oo
2rlOO
2r7OO
Hours
2, 100
2,000
t oo
$ .o3
$ 54o unfav.
fav.
unfav.
Amount
$f 2,825
13.500
s l67sl
s . 15
lctual
factory
ovgrhgad....r................r........................,....,.....,.,
Budget
allowance
based on standard hourc aflowed:
Variable
overhead (2' OOO
standard hours attowed
r
$5 variable
ovgrhgad riltg|.......r......................
$lOrOOO
Fired
overhead
budgeted.o..........,....................o....
O.OOO
controllablg
varianco........' ..................r....................................
Budget
allourance
based on standard hourg allowed ...............
Orerhead
charged
to production (2rOoO r
$2.5o!.......,..........,.r.
Vol umg vari ance
..,........... ......................,
f 6.ooo
$ 650
$16, OOO
15. 000
$
1,000 unfav.
\
1@
P18-2
(1)
Units com
pleted and transferred out this
period
Less all units In beginning Inventofl.....'....,...
Equivalent units started and completed this
pef i Od
. . . . . . . a. . . . . . . . . . o. r . . . . . . . a. . . . . . . . . . . . . . t . . . . . D. . . . . . .
Add equivalent units in spoiled units..............
Add equivalent units required to complete
beginning Inventory this
period.................,
Add equivalent units in ending Inventory.......
Equivalent units of
production
this period......
Standard quantity allowed per
unit of
pfOdUCt
....r.......r.........r
Standard
quantity
allowed for current
5, 2OO 4, 930 5, 150
2 uni ts 112 hn t hr.
Materials
A B
4,600 41600
500 500
Chwter 18
Direst Factory
Labor Overhead
41600 4,600
500 500
4r l OO 4r 1OO
200 0
500
ooo
4r l OO 4, 10O
t 40 200
0
600
150
540
250
600
4,9OO
3 units
Amount
$73,600
72,OAO
9_11609
unfav.
Amount
$66,600
66. 150
9__450
unfav.
Amount
s23,4OO
24.OOO
product i ol | . . . . . . , , , . . . r. . . . . . . . . . . r. . . r. . . . . r. . . , . . . . , . . . . . . 14. 700 l O, 40O 2, 465 5. 15O
(21
Actual material A
purchased
at
aCtUal COSI ........r......o.......r.
Actual material A.purchased at
standard Gost .....,,..............
Material A purchase price
vari ancg ...........,..,............,.
Actual material A used at
standard cost .....................
Standard quantity
of material
A allowed at standard cost
Material A quantity
variancs..
Actual material B purchased
at actual cost..................r.r
Actual material
B purchased
at standard
cost .................
Material
B purchase price
vari ance
.r...........................
Quantitv x
16, 000
16, OOO
l 6, ooo
Quantitv
14, 800
14,700
___t_99
Quantitv
12, 00o
12, OOO
12, OOO
Uni t Gost
$4.60 actual
4.50 standard
$
. t o
Uni t Cost
S4.50 standard
4.5O standard
4.50 standard
Unit Cost
S1.95 actual
2.OO standard
$
(.os1
$
(oool
fav.
Clppter 18
P18-2 (Continued)
Actual material B used at
standard COSI .....................
Standard guantity
of material
B allowed at standard cost
Materlaf B quanUty
variance..
Actual labor hours worked at
actuaf labor riatg.................
Astual labor hour: workod at
stan dard labor it1to.....,.......
Labor ratg variartco ............,...
Actual labor houru worked at
standard labor lilt..,..........
Standard labor hours allowed
at standard labor JZlto ........
Labor efficiency vSrlilncg .......
r Unit Cost
S2.oO standard
2.OO standard
2.OO standard
r Rate
$lo.2O actual
461
Quantitv
l l rooo
10.400
_6OO
Hours
2,550
2,550.
2,550
Hours
Amount
$22,ooo
20.goo
$ l,2OO unfav,
Amount
$zo,oto
25.500
lO.OO standard
$ .2o
x Rate
$ 5tO unfav.
Amount
$25,50o
24.650
fctuql
factory
ovgrhgad ................r........................o................r..
standard overhead
chargeable
to actual production
(5rl50
standard
houns allowed r $lS overhead rate) ...,.....r...
Overall factory overhead variance................
................
Actual factory ovgrhgad
.....' ...............................,........,....,.........
Budget
allorrance
based on standard
hours:
Variable
overhead (5rl50
standard
hours x
$5!...... $2S'7SO
Fi xgd ovgrhgad' ......o............r.............!..r..r..r.r.....ro..
SOTOOO
Control l abl g
vari ancl 9....' ....................r..................,.......r............
Budget allormnce
based on standard
hours (from
ilbovf........,.
Standard
factory
overhead
chargeable to production
- - t f r om
above) t t t t . . . . . . . . . . . . . . . . . . . r . . . . . . . r . . . . . . . . . . . r . . . . r o. . . r . . . . . . . r . . r . r . . r . . . . r .
2,550
$lO.OO standard
2.465
IO.OO standard
85 lO.OO standard
S 85O unfav.
s75,0oo
77.250
.il399
fav.
$75,OOO
fav.
fau
75,750
_$ _l7so)
$75,75O
77,250
l.ll_,gg)
$
rtsol
( 1. 5001
$
(2,2501
Vol ume
vari anca
. r. . . . . . r. . ! . . . . . . . . . . . .
Gont rol l abl g
vari anGo. . . . . . . . . . . o. r. . . . . . . . . . . . . . . . . . . . r. . . . . , . . , r. . . . . . , . . . . . . . . . . . . .
Vol ume
vari ance. . . r. . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . r. . r. . . . . . . . . . . . . . . . . o. . . . r. . . . .
ovgral l
f act ory ovgrhgad vari ance. o. . . . . r. . . . . . . . . . . . . r. . . . . . . . . . . . , . . . . . . . . . . .
fav.
fav.
fav.
62
P18-2
(Concludedl
(31
Standard cost ol units transferred to finished
goods:
(41600 units r $37.50
Standard cost
per unit of
product!,............
Standard cost of apoiled units charged to factory overhoad:
Materlal A (2OO units of
product r l0ooh complete r 3 units each
f 94a5O)
aa. . . . . aa. a. aa. a. aaaaa. . aaa. . . . . a. . . . r . . . a. . . . . aaa. . . . . . r . . D. - . aaa. a. aaaa. . . . aat at t t '
Material
g
(ZOO units of
product rOoh complete r 2 unitg each I
S2aOOl aa. a. . . aaaat . aaaaaa. a. aaaaa. a. aa. . oa. . . . . .
a. aa. . . aa. . ar a. . oa. aaat . . . aaa. aaaa" " t " t t t t '
Direct labor (20O units tTOoh completa t1l2 hn each r $lO.OOI
,
Fastory overhead
(20o unlts r l0o% completa x I hr. oach
x S15.OO|
TOtal COSI Of SpOi l gd UOi tS,.........rt.....r.o,.........r........
Work in processr ending inventorP
Material A ((iOO units of
product t lAooh complste r 3 units oach
f 34. 5O) a. a. aao. a. . . aa. . aaa. . . oaaa. . . aa. . . . . . . . aaaaa. l . . . . . . . . r a. . t . aa. . . aaa. o. a. . aa' at t t " t '
Material A
IOOO
units of
product r loOoh complete x 2 units each
f S2aOOl t aa. r r . . aaaa. . . . . a. . . . aaa. aar a. r . . . . . . . . . . aa. . . . r r . . . . . . . l . . . . . a. . . . . at r " t t t o" t t t "
Direct tabor (6OO units r 9O% completo r1l2 hr. each x $1O.OOI
Factory overhead (6O0 unlts r IOO% complets r I hr. oach x
$l
5 a O01 . . . ao. aa. . a a. . o ar . . r . ao. . . . a. . . . . . a. . . r . r . . . . . o. . . . . . . . . . . t a. . . t aa. . 4. 4aa. . . . .
a' 4" t "
TOtal Standard Cost Of work in
process, ending inventory......r....
Pl 8-3
(11 January equivalent
production:
Chapter 18
sl 72, 500
$
2,7OO
o
700
3,OOO
s 6,400
$
I , l oo
2,4OO
2r7OO
9.OOO
g
22.200
TFansferred out
Less beginning Inventory
(all unitsl....
Started and finished this
period,.,.....,
Add beginning invontory (work this
period)
Add ending inventory (work this
periodl
Add abnormal
gpoi l age
.............,.....,...
Material
A
8,00o
3.000
5,O0O
o
5rOOO
1. OOO
llpoo
units
Material
B
8,OOO
!t.o0o
5,OOO
3,OOO
Conversion
Costs
8,OOO
3.O00
5,OOO
o
l . OOO
9.OOO units
2rOOO
2rOOO
1. OOO
I O,9OO units
I
L-
ClpOter 18
Pf 8-3 (Continuedf
(21
Actual guantity
of Material
A
USed r...r.....
Aetual quantity
of Material
A
Uged . . . . . . . . . . . . . r . . . . . 1a. 1. . . . a. . . . r . a
Material A price
uliago varianee
Astual guanfity
of Material A
USOd ...............
Standard quantity
of Material
A a11OWgd.....or.....................
Material A quantity
varianco..
-
Actual quanUty
of Material B
, USOd . . . . . . j . . . . . . . . . . . . . r. . . . . . . . . o. . . .
s
Actual quanfity
of Material B
USed . . . . . . . . . . . a. a. . . . . . a. . . . _. . . . . . . . .
Materlal B price
ulritgo
-
Vafi anCe....r...........rr.........,.
Actual quantity
of Material B
USed
..............................
,tA
Gal l ons
5O,OOO
50,0OO
50,0oo
Galfons
5OrO0O
44.OOO
6,O00
Squarc
Feet
l 8ro0o
l 8,OOO
l 8r0oo
x Unlt Gost
$t.0o actual
l.2O standard
$
(,201
x Unit Cost
$1.2O standard
1.2O standard
l.2O standard
x Unit Cost
$.75 actuaf
.7O standard
r Unit Cost
$.7O standard
,7O standard
.7O standard
r Rate
$12.oO actuaf
tl .5O standard
.50
x
Rate
$11.5O standard
11.5O
standard
1f .5O standard
60.000
_$(!-e'.!999) fav.
Amount
s6O,OOO
52.goo
Amount
$ so,ooo
$,05
Standard quantity
of Material
B al l owgd
....r..r.................D.
Material
B guantity yarianco..
Agtual
hours
workgd
............r.
Actual
hours
workgd .r,.....,.....
Labor
ratg
variaJtco
................
Actual
hours
workgd
............r.
Standard
hours alfowed
......:::
La bor
effi ciency
ydriancg
.......
Square
Feet
1g,o0o
l 8,0oo
__q
Hours
7Or2OO
10, 200
7Or2OO
Hours
lor2oo
I o.o00
_
200
=
Amount
$12, 600
12. 600
__!
=
Amount
$722,4OO
t 17, 300
=
Amount
$l t 7,soo
I t5.ooo
S_5OO
unfav.
_Lzi2og unfav,
=
Amount
$13,soo
12. 600
S
gOO
unfav.
]9_
3i99g unfav.
&l
Pl 8
(Concl udedl
Actual
tactory
ovgrlr
gad
..D."""""""""'
$t8,ooo
39.OOO
COnt f Ol l abl g Vaf l anCO, . . . . . . . . . . . . . . . . r. r. . . . . . t . t ot . . . "t """"""t t "t t "' t t "t "
Budget allowance based on standard
hOUfg allOWgd
(abOVe1r...r....r......r.............rt.t.....t...tt' o"tt"ttt"tr
Standard overhead chargeable to actusl
producUon
(lO'OOO
gtandard
hOUrS allowed r $6.80
oyerhead
rate) ...'."'
VOl Ume Yaf i anC4. . . . . . r. . . . . . . . . . . . o. . . . r. . . . . . . r. . . . . . or. . . . . . . . r. r. . . . . . . . . . "t t t t t "t '
CGA-Ganada
(adapted). Reprint with
permission'
-euJget
altormnce
based on standard hours allowed:
--Viri"Ole
overhead
(lOrOoO equivalent units r
--i
*anOard
hour
per unit r $l'8o
Yariable ratel
Fired overhsad
budgeted
(7'8OO labor houra
at normat
capacity
r $5
fixgd l?ltof ....,.....'.......'.
Pl 8-4
(11
UnitS COmpleted and tfanSf
gffg
d OUt'.......................
LoSS bgginning lnVentOfy
(all UnitS) ..........' ....r....r.....
Units started and complgted this
period .....' ."""""'
Add beginning Inventoly
(work this
period) ........"""
Add ending inventory (work this
period)........""r"""
Add abnormal spoilage
(work this
periodf ..........."""
Equivalent units of production this
period..........r""'
Chaptor 18
$ 60, 100
57,OOO
3 3.l oo unfa%
#
$ 57,oOO
Materials
l 7' OOO
4.OOO
13, OOO
o
2, 150
850
16. OOO
(21 Quantitv
r
Actual materials
purchasod at
actuat CoSt .........................
6O OOO kg
Actual materiafg
purchased at
standard GoSt..'..................
60 OOO
Materials punchase price
vari ancg ............r................ 6O O0O
Quanti W
50 OOO kg
48 000
2 OOO kg
Unit Gost
$3.95 actual
4,OO standard
Unit Cost
$4.OO standard
4.OO standard
4.OO standard
$Js)
$
(3.0001
fav.
Actual materials used at
standard clost .....................
Standard quantlty
allowed at
standard cost
(l6,000 r 3 kgl
Materials quantity varianco....
68.OOO
$(11,oOOl
fav.
Conversion
Costs
l Trooo
4.000
13, 000
3,20O
860
850
17. 910
= Amount
$237rOOO
240.OOO
Amount
S2OO' 0OO
unfav.
192. OOO
S 8,ooo unfav.
\
l?1to........o.o......r................... 9r0OO I l.OO standard 99.OOO
Labor rate varia11cg................ 9r0o0 $ 1.oo $ 9.ooo unfa%
Chaptar 18
,
Pt8-4
(Goncl udedl
H o u r s x R a t e = A m o u n t
'
Actual labor hours at actual
'
lZltG!.................' ..' ................ 9rO0O $1
2.OO actual SI OS;OOO
.
Actual labor hours at standard
H o u r s r R a t e , = A m o u n t
Astual labor hours at standard
ri rto..................................... IrOoO $t t.OO standard S99r00O
Standard labor houns allowed
at standard rate (l 7r9l O
equi val ent uni ts r 1/,2 hour
per uni 8.955 11.OO standard 98.505
Labor efficiency variance....... 45 1 l.OO standard S 495 unfav.
Actual factory overhead.... $134, 9OO
Budget allowance based on actual hours:
Variable overhead ($6 rate r
grOOO
actual hours) S54,OOo
s
Budgeted f|Igd factory ov9rhead.......r........r...... 8O.O0O i 34.OOO
Factory ovgrhead spendi ng vari anc9.r........................r........r.... S 90O unfav.
:
.
Budget al l owance based on actual hours
(compUted
abOve). ...r' .....,..................................................... S134tOOO
Budget allowance based on standard hours:
Variable overhead ($6 rate r 17,91o equivalent
uni ts x 112 standard hour
per uni t).,...........,.. $53r73O
Budgeted fixed factory overhead...........,... 8O.OOO
Factory overhead vari abl e effi ci ency vari ance .........................
Budget al l owance based on standard hours (computed
above|
S133r73O
Factory overhead chargeable to production at standard
.
'
($14 rate x 17191O equi val ent uni ts x 112 standard hour)...- 125,370
Factory ovgrhgad volumg variancg.......r,...................r..............
$ 8r360 unfav.
GGA-Ganada (adapted).
Repri nt wi th permi ssi on.
133, 730
s 270unfav.
ffi
Pl 8-5
(rl
Units
completed
and translerrsd out this
period"""
LgSg all UnitS ln bgginning
InVento;1f ...................""'
Equivalent
units started and completed
this
period
ld6 equiyatent
uni6 nequined to complete
beginning
inVentOfy
this
pgfiOd ......................r.......' .......r......
Add equivalont units in ending lnventory""""""r""'
Equivalent unitg of
producUon this
period""'r"""o'r'
Standard
quantlty atlowed
per unlt of
product """"'
Standard
quantlty allowed for current
produetlotl""
Materiall
32rOOO
5.000
27,OOO
o
2.000
29,0oo
- 3 unltr
87,OOO
Chaptar 18
Gonversion
Gosts
32rOOO
5.OOO
27
rOOA
3rOOO
1. 600
3l , 600
114 hn
7.900 hrc'
Amount
$654,OOO
600.ooo
$ 54,ooo unlav.
:
(21
QuantiW
x
Actual materials
Purchased
at actual GoEt ......-r-..........r.
I OO' OOO
Actual materials
Pur,chased
atstandard cost........'-..r....
lOO'0OO
Materials
punchase price
variance
Actual materials
Purchased
at
standard G(l8t ..................'....
Actual materials issued at
standard cost ...'.............'.....
Materials inventory varianco..
Actual materials issued at
standard cost
Standard
quantlty ol materials
at standald CO8t.....r...!..r'.....
Materials quanUty Yarianco....
Astual labor hours worked at
agtual labor riato........,,.........
Actual labor hours worked at
standard labor riatc........o......
Labor rate varianco ........'.......
Unit Cost
= Amount
$o.OO
standard $600'000
552.OOO
Unit Cost
=
36.54 actual
6.00 standard
s ,54
6.0O standard
6.0O standard
Unit Gost
$6.00
standard
6.O0 standard
6.00 standard
Rate
$l
0.60 astual
l O.OO standard
s .60
1OO,0OO
Quantitv
l oo,ooo
92.OOO
I,OOO
QuantiW
92,OOO
87,OOO
5.000
Hours
I , OOO
g,ooo
I , OOO
3 48.OOO unfav.
= Amount
$552,OOO
522,OOO
3 3o,o00 unfav.
:
= Amount
$84,8OO
80.ooo
3 4,8OO unfav.
\
Chapts 18
Pl 8-5 (Concl uded)
Hours x Rate
167
= Amount
$8O,OOO
7g.ooo
ll.OOO
unfav.
fav.
fav.
83. gOO
l__
2oo unfav.
$83,8OO
79. OOO
$ 4.8oo unfav.
fav.
unfav.
unfav.
fav.
Actual labor hours worked at
standard labor t'gto............. 8rO0O
Standard labor houru allowed
st
gtandard
labor tilto ........ 7,9OO
Labor efficlency
yarianco.......
____!_gg
$lO.0O standard
lO.0O standard
IO.OO standard
Agtual factory overhead..r..............'......................'...................
Standard overhead chargeable to actual prcductlon
(7r9OO standard hourg allowed x $1O overhead riStrB),...,.,.......
Overall factory overhgad variance .,...r...........r..........................
Astua| fagtory overhead
Budget allorrance based on astual houra:
Variable ovefiead (81000 actual houns x
$21..r...,.. s16,000
68,OOO
Fired overhead (8r5OO budgeted hourc x $81,.......
Spending variance
Budget allourance based on actual hours (from
above! ,,....,.,...
Budget allonrance based on standard hours:
Variable ovefiead (7r90O standard hours x $21..... $l5r80O
Fixad ovgrhgad............. ., 68.000
Variablg
gfficigncy
varianclg ......................................,........r.....,
Budget allonrance based on standard hourg (from
above) i.......
Standard factory overhead chargeable to pruduction
(from
abovef.o....r........................r.....................................r....
Volume variance
Spendi ng wri ance. . . . . . . . . . r. . . . . . . . . . . . . . . . . . r. rt . . r. r. . . . . . . . . . . r. r. . o. . . . . . . . r. . . .
Variablg efficiency variance.......r.,.......................r.,....o.............
Vof umg var i ancg. . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . r . . . . r . . . . . r . . . . . . . . r . r r r . . . . . r . . . . . . . .
Ovgrall factory ovgrhead varianca ..........,..........,.....r.......o,.......
975,OOO
79. OOO
_s_rcpgg,
$75,ooo
84,OOO
3p.ooo)
$g4,ooo
$
(e,o00l
200
{.800
_$_(!poo)
a
--
4@
Pl 8-6
(1) Standard
cost of
Production:
QuantitY
Lot
(dozensl
22
l,ooo
23
1, 700
i
1,2ao
(direct materials)
980
(direct labor and
factory overhead)
Yards
x
Sbndard
Gost
per dozen
$53.10
53.10
26.&
26.70
Total
Standard Gost
i
s3' too
gor27O
31, 680
25.632
s200,682
-
= Amount
$t06,100
104.500
3 1,9O0 unfav.
.
Lot 24
28,825
Chapter 18
28.800
25
xl-L!-g.
_$27.50
unfav.
Lot 24
2,890
2.880
1 0
x $4,90
$
49 unfav.
Lot 24
s5,oo
4.90
$ . 10
(2)
Actual
guantitY
Purchased
.....
Actual
quantitY
Purchased
.',..
Materlals
purchase
Price
vari ancg . . . r. . . . . . . ' . . . . . . . . . . . . . . "'
(3) (al
Achral
quantity used .........
Standard
quantlU allowed:
'l
rOOO
r 24
Yatds
...........
1
r70O
x 24
Yards'....'.....
1
r20O
x 24
Yards
.'.....'.'.
(b)
Actual hours worked r.......'
Standard hours allowed:
11000 x 3 hours...."..r....
1170O x 3 hourcr.' ..,.......
960 x 3 hours' ..r.........
Standard cost
per hour..' .' .
Labor efficiency variance ..
(c)
Actual labor rate.........,......
Standard labor rate ...........
Actual hours worked .......' ,
Labor rate variallco ' .....' -...
95'OOO $1.12
actual
95'OOO
1.1O standard
g5,oo0
_$
.o2
Unlt Gost
-
Lot 23
40t4d,O
40,800
(360)
x $1. 1o
$(3961fav.
-
Lot 23
5, 130
5, 100
30
x S4.9O
fav. 3 147 unfav.
100
Standard cost
per yard..'... x $1.1O
Materials
quantity variance
-$
l f O unfav'
Lol 22
24r1OO
24,OOO
Lot22
2r98O
3,000
Lot 22
$5.OO
4,90
$
. r o
x 2,980
3 298 unfav.
(2-o)
x $4,90
-tjgg)
Lot 23
$5.oo
4.90
$ , 1o
x 5, 13O x 2, 89O
$ Srg unfav. 3 289 unfav.
- \
l m
Pt8-7
Chapter 18
CI-AFFY MAilUFACTURING
COMPA}TY
Department 2
Factory
Chlerhead Varlance RePort
For Month
Btrdgd Budgd
t3l
Brdgtrt
Allomlrr Allowrncr Allowrncr
lforrill Strtrdrrd A.td Acfirrl
9:negry
]bun Houn Coet
(.1
(21
(r) trl
VrrlrHo
Et|lctongt
Yertrnoe
lJnilv.
(Frv.l
Fl -f i D
3 1 7
{o}
Spcndlng
Vtrlencc
Unfrv.
(FrvJ
f.l
-
{31
tl2t2
unfiv.
Proccrelng Umc
In houn....,...'.. O'OOO 5r7OO
Ccprclty,......F.- IOO% 95%
6r84O
97.33%
I 1,047 t tr92o
2,gto 2$125
073 I'OSO
a2 szlt
t 6Ji48 3 6.620
Varlgblc factory ovcriud:
lndlrcct labor... 3 2'OOO
Manufacturlng
ruppllcr....-.,. 2r4AO
Repr|rl..,......... I'OOO
Hcet, powcrr tnd
llght......--.-. 3OO
Total varhbl c
'Fhcd
factory ovcrhcrd
Supcrvirlon -...
g
ar(XX)
lndlroct lrbor... 6'200
IOOO
t r l oo
1/0OO
ar5oo
9q)
t lr9OO
428{)
opo
246
q27l
(r 1)
77
3.t
o
o
o
(201
o
o
70
50
23
7
cort........-. li 6.700 E 6,415
Menufecturlng
rupplloc.........
ilalntcnanco..,.
Heet powcr,
end llglht..,.....
Mechlncry
deprccl aUon..
Inrurencc tnd
l rtc!.......,...-.
Totel lhcd
cort...........
32O,1OO t2O.t0O
Totrl frctory
ovcrhcrd
32!t,8OO $21t,"5f 5
Strndrrd fostory ovtrhoed
chargceblc to wort In
procrsr (5r7OO
rtandrrd
houn r 3l3O rrtcf .r.-.-... 2a.6lO
Volumc verienca... E 1.oo5 unfev.
t a,o@
63OO
aooo
l r l OO
1r4OO
416oo
900
3 +Ooo
63OO
aooo
1110O
ir4oo
a'5oo
900
3 +OOO
63OO
IOOO
I'OSO
lr4oo
4r!OO
070
o
o
0
o
o
o
o
s20.loo 3a0,160
s25.O48 !326,770 31gr
unfrv,
I
171
s8, "sFp,
l gl l g
ooFoooso
l gl l g
ggF" ggS'
l Faa
s Fs e
F ! t
' Y
e
f*ifl
s $ae
? ?
r t Y
E
fi
g
6. 6a6
o F l ) 6
F
- Y F
5 Y
o
iflg
s
f$!fl
Hili
D
o o o o o o o o
l g l i
s
lJl
i$uqfl
;s33i3-Hdl
=!tiigl
i*uilg
ii$sss,iflg1
a
silsl3-ll
$$'31fl
ii3333'ff1flI
:
s
tii;le*il
i3uqg
ils$33"1g$
fl1
e gilfl3Fll
i$s:lfl
iisi*ru1$g1_
'n
' ' i i
i si i i
i i j i i i i s,;
i ,s i
i i
: l
i i gi
i gi i
i i ;i i ;rsFi ;
f:S;
tiig;ifi
i;ff3jF;friifi6;
l' --
I
I
t-
l
I
L '
I
L
t-
I
5
Clapter 18
I
L
t_
t
L-
I
!
2
3,E,
s=iF
P 5 s ;
9 5 r , S
$ FE
E" I E
f
$F,
o l
t-
I
E
o
I
o
F
G
l
Chapter 18
I
Pt8-8
(Concludedl
Reconciltatlon
of variances:
ACtUal
faCtOfy
Oygfhgad
..................."' t""""""""""""tt""t"'
Standard
oyorhead
chargeable
to work in process """"""""
OVgfalt
faCtOfy OVgfh
gad
Yaf ianC9..""""""""""""""""""""
Spending
variance:
Spending
quantity variancg """o""""""""""
Spgnding
price Yarlance """"o"""""o""""""
variablg efficigncy
YarianctB .,............,......' ....' .......
VOl Ume Vaf i anCe . . . . r. . . . r. r. . r. r. . . . . . . . . . . . . r. . . . . . . t r. . . t "rt ' t """t t t t t "t t """"
OVgfal l faCtOfT OVOfhgad
Vafi anC9.........""""""o""' r"""""""""
$3O,OOO
28.800
$ogo
unfa%
150 untav.
S l .2oo unfaY.
-
$
84o unfav.
(36O) fav.
72O unfav.
$ 1,2oo unfav.
P18.9 APPENDIX
Equivalent
production for Septemben
Than sf
g
rrg d o lrt.... t. t " " "t " tt"" " t' t " " t' t t t " " " t t t "'
Less beginning inventory""""""""""""t""""
Startgd and finishgd this
period' ""r""rt"i"""t'
Add beginning Inventory
(work this
periodf ""'
Add ending inventory
(workthis
period!"""""
Equivalent units of
product ....""""t"t""i""""
Materials
42,00o
1O, O0O
32,OOO
o
5,OOO
37.OOO
:z:
.49 standard
.4g standard
.48 standard
gonversion
42r0oo
lo,ooo
32rOOO
510oo
4,50O
41. 500
Pieces
x Unit Gost
Actual
quantity used.,..,.........
Zopoo $'5o
aetual
Actual
quanti ty used..............
ZOTOoO
,' 48
standard
Materials
price us:lgo variance
76'000 S'02
Pieces
x Unit Gos!
Amount
$38,ooo
36.480
$ 1. 520
r
unfa%
Actual
quanUty used ..........r...
Standard
quantitY allowed
76,00o
(37rOOO I 2! ..................' .."' ZI' OOO
Materiats
quanUty variance.... -3p99
Hours
x
Rate
Actuaf hours workgd..............
lzrsoo $8.0o
actual
Actual hours worked....r.........
22'tsao
7'60 standard
Labor ratg varia11co................
22r5g0 -$-'4O
Actual hours worked .......-....-.
Standard hours allowed
(4t
r5OO
I 1 121.""""""""""
Labor efficiency
variance
...""
Hours
x Rate
Tz,soo $7.9o
standard
2O.75O
7.6O standard
1,75O 7.6O standard
= Amount
936' 48o
35.520
S 960 unfav.
=
Amount
$18O, ooo
17l . OOO
S 9.OOO unfav.
-
= Amount
$171' ooo
157.700
S 13.3OO
unfav'
Chapter 18
Pt &e
APPENDTX
(Conctudedf
173
Actual fastory overhead
....................
$42rOOO
Budget allorrance based
on astuaf hours worksd:
Varlable cost (22r5OO
astual hours r
$1.4O variable overhgad ratef r..........r............ g3l ,5oo
Fired cost budgeted
Spendi ng rrari ancg......r.................................r..or....D.r.r......r.......
g,ooo
39,500
,......,.......
_L3rsOOa unfav.
'll|e
spending varianco Includes the difference between
actual and budgeted
fired cost,
$zoo
($8'200 -
$8,oool. Thil portion
coufd ue separately
labefed
as
a fired spending variancc,
leaving a batance of S2,3oo ss the varia-ble
"p"roiig
varianco.
Budget allovyance
based on agtual hours worked..r...r,,..........r
Actual hours
l2Z,SOOl r standard overhead rate (Si.BOi:.:::::::::
l dl e capaci ty vari aJl co ' ..........' ........".....r..............r.,rr.......o......o.
Actuaf h9gr"
l22rSOOl
r standard overhead rate ($l.gO).,.....,...
Sl9f! hours (4t,5OO
r1t2lr standard overhead
rate
Gt l
t B 0l t t t t "t "t " t t t ' o. . . t . . . . a. . . . . . . t . . . . r . . . . . . . . . . . . . . . . . . . . . . o. . r . . . r . . . . . . r . . . . . . .
Eflicigncy varianco
.........-....r......o...........,.............................r...
CGA-Canada (adaptedl.
Reprint with permission.
Pl 8.1O
APPENDIX
Raw material:
Actual quanti ty
purchased..,.,
Actual guantity
purchased
...,.
Materials purchase
price
Yari ancg
. . . . . . . . . , . . . . . o. . . . . . . . . . r. .
Drums:
Actual quanti ty
purchased,....
Actual quanti ty
purchased.....
Materials
purchase
price
vari ance
............................,
Raw
material:
Actual quanUty
used
Standard
quantity
altowed
.....
Materials
quantity
variance....
g39,5OO
40.500
$
(1.OOOI
$4O,5OO
fav.
Gal l ons
6OO,OOO
6OO,O0O
600,o00
Drums
85,000
g5,0oo
g5,oo0
Gal l ons
TOO,OOO
600.ooo
too,ooo
x Unit Cost =
$t . ef 7 act ual
. 2.OOO
standard
o
r Unit Cost
$1 actual
I standard
Unit Gost
$2 standard
2 standard
2 standard
Amount
$ 8s,ooo
g5,ooo
= Amount
$1, 4OO, OOO
1. 200. 000
$ 2OO,OOO unfav.
37,350
l__9'!5g
unfav.
Amount
$1, i 5o, ooo
1. 200. o0o
Chapter 18
171
I
Pl 8-l O APPENDIX
(Continued|
Drums:
Actual
quanUty used ....r.........
Standard
quantltY allowod .-...
Materials
quantltY varianco....
Dirsct labon
Actual hours workgd .......'......
Actual hourg workgd ..............
Labor rate var|atlGo................
Actual hours workgd'......r...'..
Standard hours allowed '...or...
L-abor efficiency varianco ......'
Rate
$l
gtandard
I standard
I standard
r Rate
37.231 actual
7.OOO standard
g_.231
x Rate
37 standard
7 standard
7 standard
S l 5,OoO unfav.
= Amount
s455,OOO
420,OOO
Drums
6O,OOO
60.ooo
_____9
Hours
65,00O
65,OOO
65,OOO
Hours
65,0OO
60,000
5,O00
= Amount
$8O,OOO
60.ooo
_9
= Amount
s47O,OoO
455.OOO
Factory overhead:
ACIUal faCtOfy OVgfhead....................,....................' ..................
Budget altoumnce based on actual hours worked:
Variable overhead (65,000 actual hours r
36 vari abl e overhead ratel .r.o,..' ...r..,............r.
S39OroOO
Fi rgd ovorhgad budget......................................
275.OOO
Spendi ng vari ance r. . . . . . i . . . . . . . . . . . . ' . . . . . . . . . r. . . . . . . r. . . . . . . . . . ' . r. . . . . . . . . . . . . . . .
Budget atlowance based on actual hours worked
(see above)
Actual hourg (ssrOool r standard overhead rate
(S10) ..............
l dl e CapaCi t y vari aJ| C8. . . . . . . r. . . , . . . . . . . . . . . . . o. , . . . . . . . . ' . r. . . . . . . . . ' . . . . . . . . . . . . ' .
_S
35-OOO unfav-
$666,5OO
665. OOO
$ 1,5OO unfav.
$665,OOO
650.OOO
$ 15.OOO unfav.
Crlaptr 18
Pi &1 q APPENDIX (Concludedl
hr,
O8r75O normal capaclty hours r 94 fixed overhead titto...........
651000 actual hours worked r $4 ffxed overhead ri8tg,,.......,....
ldle capacity variancc (3175o
hours r $rll .......................o.........
Budget allowancc bassd on actual hours worked (see
above)
Budget allourance based on standard hours allowed:
Varlable overhead (60,000 standard hours
allowed r 6 mriable overhead rate).o.......,...,.
Fired ovgrlrgad budgeted r.....r..rr.r.' .....r............
175
$275,OOO
260.Ooo
Va ri abl
g
cffi ci e ncy varia nce .ro............,..,.
hd
65;O00 actuaf hours r $O variable overhead rate
601000 standard hourg allowed r $o variabre overhead rate....
Variable efficiency variance (5rOOO
hours r $61 ,......,..r.........o..
651000 actual hours r 34 firgd ovgrhgad rirtrg ..........................
60,000
standard hours allowed r 30 fired overhead J?to.....,...
Firgd cffi ciency variance (STOOO
hours x $4).............................
... S 3O,OOO unfav.
$39O,OOO
360,Ooo
$ 3o.ooo unfav.
$zoo,ooo
240,000
$ 2O,OOO unfav.
S l5,OOO unfav.
$665,ooo
s?6O,OOO
275.OOO 6:15,OOO
Chapter 18
CASES
cl 8-1
(il
Fl
The use ol
participgtive cost
gtandards
to motivate
plant managorg
and department heads has several benefits. These benefits rcsult
from contact with erecutive managoment through the interchange
of ldeab, negotiation between the
partles, and a final compromise in
establishing the standard. This allorvs the
plant managers and
department heads to personally idenUfy with these standards'
which wilt increase their desire to achieve a
goal they have accept-
od.
In this caso, howeve6 the standard-setUng
pnocess does not
sppoar to be
partlcipative. Erecutive management appears to follow
through with the interchange of ideas, but the negotiation and final
compnomise are missing. Executive management merely reviews
necommndations before setting the standards, without discussing
the standards further with
plant managemenL As a consequence'
plant managons may become frustrated with the standard-setting
system and a negative irnpact upon motivation could result.
(bl The use of tight, but attainable, standards can have a positive moti-
vation effect on department heads and
plant managers. Ttris is
par-
ticularly true if they participated In setting the standards and are
confident that
good performance witl be recognized and rewarded'
However, if the standards aro
perceived as being unattainable'
then
the motivation'will probably be negaUve because they leel there is
no uso in trying lor an unreachable
goal, The unfavorable variances
being the norm seems to imply that the standards aro too tight' and
this coutd be part of the causo for the low motivation among first-
line supervisors.
(21 Under the present
system, there is no motivation for department heads
to control overhead costs because all overhead costs are allocated on
the basi s of actuat uni ts
produced, and the actual
producti on output i n
other departments can have a si gni fi cant i mpact on the overhead cost
charged to each department.
The use of standard,
pradetermined department factory overhead
rates, apptied on the basis of standard activity allowed for actual
produc'
Uon, shoul d provi de useful cost control i nformati on and enhance cost
control
on.,the part
of department heads.
Chapter ta
c18- 2,
(r) (a)
477
The characteristics that should be present
in a standard cost sys-
tem to encoufiage positive
employee motivation include:
(f) partlcipation
in settlng standards from all levels of the organiza-
tlon including purchasing,
engineering,
manufacturing,
and
accounting;
(21
the integration of olganizatlonal communication
by translating
the organizational goals
and objectives into monetary terms for the
employees;
(3)
support of the standard cost system by executive
management;
(4)
standards that ane perceived
as achievable
and accurate and
apply to contlollable costs.
A standard cost system should be implemented
to motivate employ-
ees positively
by:
(1)
communicating the corporate objectives of a standard
cost sys-
tem;
l2l
solicitlng imprcvement in standards fipm employees;
(3)
using a standard cost system to prcvide
a guide-to
action, not a
straight
lacket.
(Although
signlficant variances should be expiained,
employees
should not feel that the standard ls a mandate.
Gontinuous
imprcvement shoufd be the goal.);
(4)
not overemphasizing
variances, although
standard cost vari-
ances often are used for individual perfotrnance
review and reward,
(Employees
should be encouraged to take actions that will benefit
the company as a whole rather than simply to meet standard.)
Management
by ercepilon focuses management' s
attention only on
those ltems that deviate significanily
frc; the standanl,
The
assumption
is that by foregoing a thorough,
detalfed analysis of all
Items, the manager has morre time to concentrate
on other manage_
rial activities.
The behaviorar rmplications
of management
by exception
Incrude
both positive
and negative implications.
on thl positive
side, this
technlque
increases
management
efficiency
by concentrating
only
on slgnificant
variances,
ailowing time for the h"n.gg to concen-
trate on other activities. on the negative
side, managens tend only
to focus on the negative variances
rather than the positive
ones,
limitlng their employee
interactions
to negative
reinforcement
or
punishment.
This technique
may not indicate
detrimentar
trends at
an early stage, and fragmentation
of efforts can occur fipm deallng
only with the specrfic probrems
rather than gtobar
issues.
(b)
(a) (21
(b)
Chapter 18
I
ClA-2
(Concluded|
(31 Employee
behaylor could be affected advercely when standard cost vari'
snces aro the sole basis for performance evaluaUon. Employees may
gubyeft
the system and attempt to build slack into the standard so that
they can meet or exceed the standard. There can be a mlnimal level.of
motivation sinco erceptional
performanco is not rewarded' Employees
may tend to engage In acdvlUes that atp not In tlre best overall Interest
of the companffust
to mest standard. Oveltmphasis on
price variances
can rtsutt in a large number of low cost vendorsr hlgh levels of Inventoryt
and
poor quality materials and
parts. Oyetmphasis on efficiency vari'
ancas can ltsult in long
production run3, large work ln process invento-
ries, and attempts to control
quality through inspection alone.
cl 8-3
(1) Had Stevens not confined his initiat remarks to telling the employees that
producgon standards were too tow, but rather erplained whyr the results
of the confsrence would certainly have been mono effective.
Furthermore, he should have lemained with the
grouP and
ioined
the dis-
cussion. He lailed to establish two-way cotnmunication'
to exchange
ideas, to air differences of opinion, and to
provide neasons why certain
practices could or could not be followed. Had he remained with the
groupr Stevens coutd have stated that he had been thinking about the
problem
of
production standards and, In his opinion, such and such
should be done. Then he could have asked the
group what lt thought
about fottowi ng the ouUl ned approach. The ensui ng di scussi on shoul d
shape a suggested course of action nopresenting
tho
groupb opinions as
well as those of Stevens.
lt is poor pracUce for a manager to abdicate, as Stevens did in this
incidenl An important
part of a managerb iob
is to
provide effective
leadership, to show tha way by offering a
plan, by
giving neasons' and by
taking into account suggestions offered by the members affected by tho
plan.
Using this approa-ch, the managerls ideas, the
groupb wishes, and
the needs of the enterprisa can be blended into an effective
program.
h might be that the employees wene correct, that standards should be
reduced. For example, errors In calcutating
the standards ano
possible.
The employees
must be
given the opportunity to present reasons for
their nocommendations.
Both facts and experience are important in determining the level of
production
standards adopted. Stevens should abstain from forcing any
decision.
lt may tako several weeks or months for events to demonstrate
what
standards shoutd be establ i shed, for they wi l l bo i nfl uenced, among
other thi ngs, by the veri fi cati on of the empl oyees' maj or bel i efs, the cor'
rectness
of Stevens' statements,
the extent of modifications requiredt
and the ful t comprehensi on of the si tuati on by tho empl oyoes.
Chapter 18
179
Ct8-3 (Concludedl
The subject
of raising production
standards,
in itself, is
not a
popular
ono among e-mployees. Ons must be quite
naive to betieve that an
-
employee will_accept
an increase in production
standards without
some
explanation of the reason it is requested or required. The issue in this
Incident could be better identified as
sHow
can the enterprise
survive?'
or
sHow
to Increaso our production
outputD or
.rHow
to regain
" st-ng
competitive position
for our company.t
one might also raise the question
of whether Stevens was adequately
in touch with the attitudes and beliefs of the Department
B employ"u"
'
torrard their workn especially prcduction
standards,
He does not appear
to be. Better communication,
improved
supervision,
and effective leader-
ship apparenily
are in order.
(21
Stevens should calt another meeting with the production
employees
of
Departmelt-B'
indicating that he wishes to off-er to the group
additional
per t i nent i nf or mat i ononpr oduct i onst andar ds. Next , t r e1t r oul oget
together all data dealing with the companyb produciion
it"ndards
and
fair profits
on the ownerb investment, the continuity of the enterprise,
and other significant and applicable dlta. Preferabli it " "aoitional
data
shoufd be in a visual form to increase their effectivdness.
Also, it is
advisable
for Stevens to talk informally
with leaders oi o"p"rtment
B
empfoyees
t-o discover why-the group
recommended
tower production
standards.
He can use this information
to shape friJpiesentation
at the
forthcomi ng
meeti ng,
The best approach for Stevens to fol tow at the meeti ng i s to:
(al
thank each member for hi s or her i nterest and past parti ci pati on,
(bl
advise that additional information,
vitat to the modification
of pre-
sent producti on
standards, wi l l be presented,
fol towed UV a g.oup
di scussi on,
(c) present
the adrJitional information
in a forthright
manner,
(dl
remain
with the group
and
join
in the discussion
from which the
deci si on
on producti on
standards
wi fl evorve.
CGA-Ganada (adaptedf.
Repri nt wi th permi ssi on.
Chapter 18
)18-4
:il
Standard direet cost of I ton-gallon batch of raspberry sherbert follows:
Direct material:
Raspberrles
(25 qtst r $gO
per qt.l ..............'. S8.oo
Other lngredienb
(1O gal.
I $45
per gat.!........ 4.5O S1O.5o
Direct labon
Sorting
(((3 min. r 6 qts. raspborries)
+ 6O min.)
r$gperht -| . . . . . . . . . . . . . . . . . . . . . . rr. . . . . . . o. . . rr. . . . . . . . . . . . . $2. 70
Bl endl ng (l l 2 mi n.
+ 6O mi n.) r $9
per hB)........ 1' 8o 4.5o
Packaglng (4O qts.- r $.38
per qt.l 15, 20
Total dirsct standard cost
per ten-gatlon batch of sherbert ...
99o.2o
'6
qts x (5 qts. + 4 gts.! = 7.5 qts. reguired to obtain 6 acceptable
qts.
"4
qts. per gal.
r 1O
gal. = 40 gts.
l2l
(al For the most
Fartr
the purchasing manager is responsible for unfa-
vorable materials price variances. Gauses of unfavorable materials
price variances at GoldKing are likely to includo one or mone of the
following:
(11 failure to correctly forecast
price incraases
l2l
purchasing
nonstandard or uneconomical lot sizes
(31 purchasing
from suppliers other than those offering the most
tavorable prices
(b)
The production
manager or foreman is usually held responsible for
unfavorable labor efficiency variances. Causes of unfavorable labor
effi ci ency vari ances coul d i ncl ude one or mora of the tol l owi ng:
(ll poorly
trained emplolrees
(21
substandard or inefticient equipment or machinery
(31 inadequate supervision
(41 poor quality
of materials (in particular, the raspberries that must
be sorted by handl
Clppter 18
cl 8-5,
181
$4 .5o
.20
9l.zo
(11 Standard unlt cost per cutting board
Diract material:
Lumber (1.25 board feet r (F + f)
+ 5| r $3
per board foot)..
Footpads (4 pads
r $.O5
per padl
Total direct materials
Direct labon
Prcparc and cut
112
+ 6O hour
per
board r ((5 + 1! + 5 x $80
Assemble/finish (15 + 6O hour r $8;,.... a a a a t a t a a a a
si .92
2.00
$3.e2
s8.93
(21
Total dirsct labor
Total standard unit cost......r.......r..........r................,..........r.ro.
The advantages of implementing a standard cost system include the lof-
l owi ng:
(al
Standard costs are incorporated into the accounting system, making
record keeping easier and facilitating cost anallsis.
(bl
standard costs
provide the basis for building a company budgeL
(c)
standard costs ssrvo as
goals;
they encourage cooparation and
coordination among all elements of the corporation. The variance
analysis associated with standard costs provides
a feedback slrstem
to those responsible for controlling costs.
(a)
The role of purchasing
manager in the development of standards
includes establishing the standard cost lor material required by the
bill of materials, determining if the company shoutd take advantage
of price
raductions available through economic order quantity,
and
obtaining data regarding the availability of materiats.
(b)
The role of industrial engineer in the development of standards
includes preparing
the bill of materiats that specifies the tlpes and
quantities
of material required; establishing, in conjunction with the
manufacturing
supervisor, any allowances for scrap, shrinkage, and
waste; and participating
in time studies and test runs to facilitate
the establishment
of time standards.
(cl
The role of cost accountant in the development of standards
includes reviewing all information regarding material and labor stan-
dards received from other departments,
establishing the labor rate
gtandards
based on the type of labor required, deteimining apptica-
tion rates for indirect costs such as material handling and factory
overhead,
and converting physical
standards such aJ hours and
quantities
to monetary equivalents.
(31
/t82
cl 8-6
Chapter 18
(rl
Actual Standard
Unit Gost Price
Material
Quantitv Cost
.
Cost
\/afiancg Variance
Maran................
8r48o $2'05 $2.oo
So5 $ 424 unlav.
SatOI..................
25r2OO .7O .75
(.051 (11260l laV.
cra|yn..o.....r.......
l8r54o .9O 1.OO
(.tol
(1.8541
faV.
Ngt matgrials
purchase price varianco..........r.........'...r.....o...' -$(39Ol
fav.
Actual
quantifies at individual standard materials costs:
Maxi l o...,.... 8r48O
gal l ons O $2.0O......-.r..
S161960
92220-gallons
Standard
(expectedl output from actual input
(52,22O x
.8O = 4lJTAI multlplled by $1.3O wolghted average ot
standard materials COSI Outpftt ...,..' ...................r........o.....
Matgrials mir Varial|CO......r................' r.................' ......o...' .....
Materials yield varianc
Safer......... 25r2OO
Cral yn....,... 18.54O
Ma:en....
o . 75. . . . . . . . . , .
18r 9OO
o 1.0o.......,... 18.540 s54r4OO.OO
54.308.80
a a r a r a a a a a a a a a t a a a l a a a a a a a t a . a a a r a a a a a
,La.trl
OulndV
Totrl Urlnc
at nd.td [lrtrrirb
. Actu.l ttrrd..d Acfirl ltryrdrrd Qurntity
lJnlt }Ir
Qr,rrnttt Forrnslr r gg3ggl r Fonnrdr Yrrirdon r- Co.t I Vrr!gg911
8,48o
sab.
:H
52,220 gay 8,355
salr
1%
gab.
32.00 S25o.oo
unfav.
Sel cr.....253OO
Crayln... 18,540
62,220 25,060
32"220 18,799 l%0,
300
o25
2t23
625
.75
1. OO
l OO.5O unfi v.
(259.oo) fav.
(.30)
f_9!39
unfav.
t_9!.2O
unfa%
Standard (expectedl output from actual input at weighted
averagO Of etandafd matefials COSI OUtpUt.,.....,..,............. S541308.8O
Actual output
quantity
at weighted averiage of standard
materials cost
(4OrOOO
r $1.3O! ...,................,...,................
52.OOO.OO
$1i998.8o
unfav'
An analysis of the portion
ol the mix varianco attributable to each material
follorvs:
34-9c"r. Wgar". J
Roundl ng
dl f l erencc.
Clppter 18
4&t
Cl8-6
{Concluded}
(21 Belore LAB Chemical Company management
can controt costs, they
need to know which costs ara out of line, within
whosa area of-responsi-
bility has the cost varianco appeared, what is the
ggtuse
of the cosi vari-
snce' and who has the responsibility to correct the cause of the vari-
gnce.
Standard costs and the variances from them help management
to
begin to answer thess issues. Specifically, the variances
indicate where
management should begin its invesfigation:
(al Price variations-the
information
to identity the causes
of the price
variances usually can be obtained in the Purchasing
Depart-unt.
A
review
of
purchasing procedures
and rccords woutd disclose
whether
the variances wena caused by permanent
changes
in
pri ces, poor purchasi ng practi ces,
or poor producti on
sJhedul i ng
requiring
incurence of extra costs to expedite shipments.
The
information
obtained wifl identity the department
responsible
for
the extra cost and provide
clues to improve
the control.
(bl
Mix and yield
variances-the information
to identity the cause of
thesa variances
usually can be obtained in the proiuction
depart-
ments. A review of materials records and handling procedurcs
would
disclose whether the mix variance was caused by the use of
wrrong proportions,
entering excess materials into the process
because
of carel essness, or adj ustment
of the mi x to accommodate
off-standard
materials quality
caused by the same factorr. Thus, the
yi el d
vari ance
woul d often be expl ai ned by the same i nformati on.
Nonstandard proportions
would often result in nonstandard yields
and excess
materi al s i nputs. Tho i nformati on
obtai ned woul d hetp
i denti fy
the department
responsi bl e
and provi de
cl ues to i mprove
the control,
c18- 7
( 1) (al
(b)
(c)
Materi al s-quanti ty
purchased
..............,.........,.....,..
5,2OO l bs.
Unfavorabl e
uni t cost ($2.i O -
32) ........,...........t.......
x $.l O
Materi al s purchase
pri ce
vari ance.......,...............,,...
$ S2O unfav.
Materi al s-quanti ty
used.o.....,......
5,30O tbs.
Materials-qu
a ntity req uire d at sta ndard (5, OOO
uni ts produced
x 1 l b. per
uni t).............' ..:.............
S.OOO
Unfavorabl e quanti ty.................o............,......r...........
3oo l bs,
ItanOlrO
cost per
lb. ........................
r $2
Materiats quantity
variance
......,.....:.::::::::::
.
$ ffi unfav.
Di rect
l abor
used
Unf avorabl e
uni t hourl y
rat e ($4. 1O _
S4). . . . . . . . . . . . . . . . . .
8,20O hrs.
x $. 1O
S 82O unfav.
Di rect l abor rate vari ance
r
i
481
1
C18-7
(Continued|
(dl Direct labor used
Chapter l8
8r2OO hrc.
Direct labor required at standard for 5'000 units
pf Od UC
gd
. r. . . . . . . . . . . . . . i . . r. . . . . . . . . . . . . ooo. . . r. . . . . . . . . . . . . . . . . t . r. . .
8. OOO
Unfavorabtg dirgCt labor llS...................................' . 2OO hrs.
Standard wagg rate
per
direct labor houl...-' ...r........ x $4
DirgCt labOf
gffiCignCy
VarianC8.............,....rt...........,
-9999
unfaU
(el Analysis by expenses of the factory overhead controllable variance
for 5rOoO units of
production:
J:*"9.
'Ji:-''l:'"f;'
or":*'ilo
J,:";'9, !:Jll1il,i
"ilH:l'.:.
Chargcd Output Ovcr (Undcrl
Variable factory overhead:
tndi rgct 1abor.......o......r.....r.....r......r...,. $
gr84O
$l OrOOO s
(1 6Ol
SU ppl i eS. -Oi l . . . . . . . . . . . . r. . . . . . . o. . . . . r, . . . . . . , o. . . .
3r3 0O 2t 5OO 8OO
Allocated variable seryice department
COSI . . . . . . . . . . . . . . . . . . . r. . . . r. r. , . . . ' . . . . . . . . . . . . . . . . .
3. 2OO 2. 5OO 7OO
Total vari abl e factOry overhead....o....r. $16,340 315.OOO 31.34O
Fixed factory overheadz
Superui si ol l . . . . . . . . . . 92, 475 $2, 250 S
225
Depr eci at i on . . . . . . . . . . . . . . , . . . . . . . r . , . o. . . . . , . . . . . r .
3r 75O 3r 750 O
Other fi xed costs ..,........... ,.... 1,250 1,250 O
Totat fi xed factory overhead .. $ 7,475 $ 7' 250 $ ZZS
Totaf ........ro....,......................................... 523.gl 5 522,25O Sl ,5.99
(21 Cl earl y i ndi cati ng where the responsi bi l i ti es for
pri ce
and
quanti ty vari -
ances ti e and chargi ng the vari ances to the departments wi th i ni ti al
responsi bi l i ty reduces the confl i ct but does not el i mi nate i t.
The speci fi c cause(sl of the vari ance needs to be determi ned before
there can be certai nty that the proper department i s charged. For exam-
pl e'
i f materi al s were purchased at hi gher than standard
pri ces because
the Manufacturi ng
Department requi red a rush order, then the
pri ce vari -
ance i s the responsi bi l i ty of the Manufacturi ng Department. l l the materi -
:
al s provi ded
by the Purchasi ng Department were of sl i ghUy l ower
qual i ty
than
speci fi cati ons requi red, due to carel ess
purchasi ng,
the excess
quanti ty
used by Manufacturi ng i s the Purchasi ng Department' s respon-
sibitity.
Clppter tg
.rEs
Cl 8-?
[ConUnued]
Even if the variances
anB pnopedy
charged
to the two departments,
it
can be argued
that the
purcjrasing
b"p"rtrentb
varianli
is influenced
by the orcsr_quantity
requirod
bi M;;-"cturing.
fi this case,
the extra
3oo poun
ds will increase.
itr.e.
ryrd_rrasin
g
-oepartrienit
G ri"n"e (accu-
mulated
over_several periodsl
by
$SO
t36O
lbs. I $,iO;. The
S3O is the
foint
responsibility
of the two dipartments.
(31
Generally,
the Manufacturing
Department
manager
cannot
controf the
price
of the overhead
items'
T?r"'r-rore,
$te prices
srrouiJ
not inffuence
the data in the departmental
repo*.
r,irn"r,
the allocation
method
for gervice
department
costs is not "umci"nliv
erptained
ioletermine
what
part (if
any) of this variation
can be identirilo
iliut il; ;-";"rtment.
The
fixed overhead
items listed in this case iirmattv
"r. ort"ioe
a depart-
ment managerb
control. Supplies
and indirect
labor remain.
control
can be erercised-it
ne o"p"*r"ntal
level over the amount
of items
used'
Therefore,
emphasis
srroirci
be placed
on the quantities
within the variances'
wittr iittte ;r;;;ii""i"
on dolar vatues.
The
major use of the doliar values
woutd
be io estabfish
the guantity
level
of each vari ance
that woul d be economi catl y
worth
managementb
atten-
tion.
I
I
I
Chapter 18
1
Cl 8-7
(Concl udedl
TO: Departmont
Managen-Manufacturing
FROM: Performance
AnalYsis
RE: Gontrollab I e Factory Orerh ead Perf orman ce-N ove mb er
Percent
Gompared
rndirect tabon
Quantitv
to standard
Favorable indirect labor use
(doltar value-94O01
Supplies-olt:
Unfayorable oil use (dollar value-SSOOl
I'O0O
gals. 2ooh
Commentarv:
The dollar value of the oil variation and its large
percentage require iden-
tifying the cause and applying control
procedures.
The indirsct labor variation, although favorable, should be investigated to
be sura that it does not represent unaccomplished activiUes affecting
other aspects of the operatlons.
Gomoutati ons:
lndirect labor:
Hours usgd. . . r. . . . . . . ' . . , . . . r. . . ' r' . . . . . o. . . . . ' . o. . . . . . . . . . ' . . . . . . . . . . .
214OO hrs'
Standard hours for 5,OOO units of output
(5rOOO r .5 hrs.)...............,o...,....r....' ................' ..,
'
Favorabl e i ndi rect 1aborvari ati on...,.......................
Dol l ar val ue at standard wage rates.........,.......' .
Suppl i es--oi l :
Oi l consumed....,..............r................,.......r....' .....' .'
6rOOO
gal s.
Standard quanti ty
for 5,OOO uni ts of output.......' ...
5.OOO
Unfavorabl g oi l consumpti on........o.........,............... l rO0O
gal s.
Dol tar val ue at standard oi l
pri ces,..................r' .....
l SOt
(4)
The i mmedi ate reacti on mi ght be to di smi ss the department managen
However, careful thought would require analysis of the situation to deten
mi ne (al i f, on an overal l basi s, the department i s bei ng operated eco-
nomi cal l y (i f so, then di smi ssal may be undesi rabl e| ; and (b| i f the cause
of such behavi or i s due to management reacti on to unfavorabl e vari -
ances wi thout regard to si ze, or to undue emphasi s by managsment on
i ndi vi dual
vari ances to the ercl usi on of measurement of overal l
perfor-
mance.
lf it is assumed that the manager is porforming satisfactorily on an
overal l basi s and shoul d not be di smi ssed, then two possi bl e
sol uti ons
can be consi dered:
(al Revi se reporti ng methods to emphasi ze overal l performanco.
(b) Revi se reporti ng on l abor to combi ne di rect and i ndi rect l abor i nto
one i tem for performance eval uati on-
1OO hrs. 4oh
2.500
__199
1199
hrs.
I
Chaptor l8
cl 8-8
( 1)
487
(21
(a)
Revising the standards immediately
would facltitate their use in a
master budget. Use of revised standards would minimize production
coordination probfems
and facilitate cash planning.
Revisld
stan-
dards would facilitate monE meaningful
cost-volurie-progi
anafysis
and result in simpter, mono meaningfuf
variance analysis.
Standards
are.often
used in decision analysis such as make-o".-lrv, p-ar"t
pricing,
or product
discontinuance.
The use of obsolete
standards
would impair the analysis.
(b)
Standard
costs are carried through
the accounting
system in a stan-
dard cost system. Retaining the current standaroianJ
eifanoing
the anal ysi s
of vari ances woul d el i mi nate the need to make changes
in the accounting
system.
Changi ng
standards coul d have an adverse psychol ogi cal
i mpact
on the persons
using them. Retaining the current standards
would
preserve
the well-known benchmarks
and aftow for conJi"tln"y
in,
reporting
variances throughout
the year.
Variances
a-re often computed
and ignorcd.
Retaining
the current
standards
a1d expanding the anallrsis
of variances
wou-tJ-io.r"
"
diagnosis
of the costs and woutd increase the lirerirroooltrit
signifi-
cant vari ances
woul d be i nvesti gated.
(a)
changes
i n pri me
costs per
uni t due to the use of new di rect
materi al .
Changes
due to di rect materi al pri ce:
((new
materi al pri ce -
ol d materi al pri ce)
x new
materi al quanti ty
= ($T.Zt -
$Z,OO) x t pound).,
Changes
due to the effect of di rect materi al
quanti ty
on di rect materi al usage:
((old
material quantity -
new miterial quantity)
x
ofd materi ar pri ce = (1.25 -
1.ool r
i z.ooi .:.:..... (r.75)fav.
Ghanges
due to the effect of di rect
materi al
quanti ty
on di rect l abor usage:
((ofd
l abor ti me
-
new rabor ti me)
x otd rabor rate =
((24 + 60)
-
(22 + 60)) r $i 2.6oj ............:.:...........
(.42l tav.
Total changes
i n pri me
costs per
uni t due to the
use of new di rect materi a|............,.....,..............
$(i .4Ol fav.
(b)
changes
i n pri me
costs per
uni t due to the new
l abor contract
((new
rabor rate
-
ord tabor rate)
x new rabor
ti me
= (S14.4o -
Si 2.60l rl 22 * 6d))............:.:.:.........
.66 unfav.
Reducti on
of pri me
costs per
uni t ($1S.OS _
$13.79)
$
(.7al fav.
$ .77 unfav.
, r
- \
O1$'1. Whm rtandetd cotr an nof ircorponlc4 hry
rnay b. uced fotth.
Putpocs
cl prichg' budgrel'
hg, and canlrolling 6t bd if |hcy an not uscd
tor twrntory cocthg, tho advaniager lrqn lho
Bving cl clodcal dlorl in accounthg cannol bc
oblahed
O1$'2. With actual cost methodq it ir tirsl noceesaty lo
rolect a coat flow melhodJifo, fifo, averago,
ob. lt
'l
lhen ncccsgary to keep detsiled rccordr
ol quarililicr and prbo atd b mrko laidy cun'
phx calcubticrs cl invontory cods. Wilh a statl'
dard cocting syclm, crly quantitieg, nol prirxs,
murl br taken into accounl' facililaling both
ncod keephg and cabubtbnr. Stan&rd codl
abo prwiJr el stllol
Ol 9'3. Tho nurnber of variance occountg is delermhed
by (a) the nunrber ard typc cil variancec lhat are
to lppeat in ttatomont! for managemont u!c,
and (b) lho need for casy dbpal of variarcer
at thr ond O ,6" ;ircal prrird, particularly whon
thr variancec are not trested uniformly h finan'
cial Catementg and for analyrcs.
Ol$.t. (a) The standad coct ol prcduc-tr csnpleted
and pr oduct c sol d can be det or mi ned
inmedbtely withord wailing lor lhe aslud
cl to be cabuloted. With stsndsrd costr,
rnmhly stalomontr can be prepared nrorc
qubkty.
(b) A firm producing a greal many dillerent
products finds it praclically impossible to
delermine the actual cost of each product
The use ol standard costs will facilitate the
preparaticn of hcorne statements by prod-
ucl lines.
(c) Keeping linished goodr stek recor& in
quantiiier mly will result h derical savhg,
si nce l hi s el i mi nal es l he necessi l y f or
recordi ng l ho acl ual uni l cost of each
nceipl and i*ruc or strbmml.
0195. Thr standard cethg ol invcntorics depends cr
(a) l he types of standardr cmpl oyed, (b) the
degree of
guccesg
that the company haa i n
kceping overall sstual cost! h lhe with standard
cod!, std (c) the ccrrcept hcld with regard io the
nsl suilablc khd of cost.
at$. (a)
Defenal of variancor is supported
qr
the
grounds that. il th. rtandardg in usc arc
basod
qr
nqmal prbr, efficienqy, and orn-
pul levels, posilive and negstivc varionces
can be expoctod to offget src anothcr h
thc long run. Becaule varisncc account
belances al any givon point in limo aro
duc to recurri ng rcasonol and busi nesr
CHAPTER 19
DtscussroN QuEsTloNS
cycb llwtuatbnr. and brcaur prrkdic
reporlhg requirementr rcault in arbilrary
cutcill daleq varianc. smt balarcer d
a parlicuhr culrff dalc ar nd astignabb
to oprrating r!!ull! of lhr prriod lhrn
ondd They will carrcel oul ortr lino and
herefore shorrH br carriod b |hc balarrco
rheeL
Varbrccq appesrhg ar clrarger or credilr
qr
|frr ircqnr rtdemrnl an rognrdrd ar
approprbr ctrarges or crcdils in thr pcrF
od in whk*r they arise. Thcy an conski
rrcd tho resuh t larrorable or nfavorsblo
dcpadurcs frqn nonnd (ttatdatd) condi'
tione and aro disckcscd rcparalely frorn
cot of goodr soH at stendatd" Thb
pro'
vUer rnanagemerd wih mobscured hlo.'
mElbn for inmedialc correclivc aclkxt
lnventory etl and cod cil goods sold
shouH not b. digtortod by variancer that
represenl abnormal etficienciet or ineffi'
cionci.t. Thc slandard cocl roprorenlr
thal Irnount which is rearcnably fieces'
sary to produce fi ni shcd products and
should lherelon be considored the bcct
measure of the scst of goods mgnufac'
tured and inventory cool, as bng ar the
underlying operating conditionr remain
undranged.
The argumenl for al l ocati ng vari ancea
bel rvon i nvenl ori es and cost of goods
sold is that standard cogts are a uselul tol
for purposes ol managerial control, bul
shqrld not bc substitutes for actual hictorF
cal cetr h the financial slatemenla Only
aciual historical costs shouH be used for
tinancbl reporlhg, even though lhey arc
greater or leas than stEndatd cootl, and
wilhgut regard to lho reasqlr for their dif-
fersnceg lrom stan&rd costt. Standard
cod varianco3 are no{ gahs or loeses but
costs (or reducti ons therei n) ol goodl
manufactured and shoul d be al l ocal ed
between i nvenl ori eg and cosl ol goodr
rcld. To treat |hem ar gahs or lcser h
the period h which they arise disfofi both
tho inventory and gres profit figurea. Thir
distortbn will bo cven gtealer if tho clatl'
dardr are Lackhg in rccuracy or rcliability.
Further, lo tubsliluto standard coslt lor
actual historicaj cost8 h thc lirancbl atal*.
rnrnb rgptslontr an unwarranled cacrilicr
ol objeclrvity.
(b)
(c)
488
Clupter t9
Er9-1
E)GRCTSES
Price Yarlance rocorded
at the time materials
are received
and pfacad
in the
storcltom:
8,400
600
6rggg
42
189
ilaterials (2oroo0
r $.421 ..r.o.r..........o..........D..........,....
Materials
Purchase
prico
Varlance (2O,O0O r
$.O3)....
Accounts
Payabl e,(2o,OOo x
$.45)..,..,,.r.,...............
Work In Procass (8r2oo
r 2 r ilZl r...............,..........o.
Materf atd euanuty Varlance (t
oo i $.42; ...,..:::.::::,,.,..
Matgrlalg (l
0r5Oo r $' lzl .................,.................o...
Materials
rscorded
at astuaf cost when- reccived,
and price
variance
determined
at the time materials
ars lssued to production:
Mat er i al s ( 2O, O0O x
$. 45) . . . .
Accounts
Payabte
.' .......' .....,..r.r.r......r.....o..-....r...r..
work in Proggss (8r2oo
x 2 rg42l ..,..,..........,.o,....D....
Materi al s
Pri ca Usqge Vari anca
l i o,soo
,
S.0g1.........
Materials
euanUty Variance (t oo , i.ce;...J..:...::::,.....
9, OOO
6,930
9, OOO
9, 0o0
6,ggg
495
42
7
1425
Materi al s (16,500 x
$.as).
Prica variance
determined
when the materials
ara- received,
but not charged to productlon
until the materiars
are actuarty praced
In process:
Matgri al s (2oro-oo
r
$a2)....,........................,............,.
grfoo
Materi ats
purchase
pri ci
vari ance ,i i d,doo x
$.o3).;.
600
Accounts
payabl e
(2o,oo0 ,
S.asi .....
9,ooo
Work In Prccgss
(gr2o0
x 2 r-$.42) ..,,......,...........o..r...
6rggg
Materi al s
l uqnti trVari ance
(i oo;C.4t::.,.,...,,n..,....
42
Materi al s (i
6rsoo r $,42) .-................,:::........,.......,.
6,930
Materi al s
|ri g
Usage Vari ance (16,500 x
$.o3)
4ss
Materi ars
purchase
pri ce
vari ani e.,1..,.,.................
495
E19- 2
(1)
Materi al s
(l 2' O.OO
Ae purchased
r
$S Sp) ..........or..,.o.
961000
Materi al s
purchase
pi i ce
Vari "n""..,...,:.:.:....,............
g60
Accounts payabl e
96,9g0
Work i n
process
(12,BOO
Se r Sg Sp)
l OZ,qOO
Materi ats
euanti ty
Vari ance
.........::.:.::.:::::......
1,600
Materi ats (r3,ooo
Ae i ssued
r 38 apt::::.........:.:::::
1o4,ooo
#n
1
E19-2 (Concluded)
l2l
Averaqe costing Total Cost
$ 15r88O
96.900
Chaptor t9
Unit
Cost
s7,94
g.og
8.OO averago
96rg60
96, 96O
780
I 04,78O
Beginning inventof!..,..............
PUrChaSgg.........".rr..................
Available for use.
Quantitv
2,OOO
12. OOO
14.OOO
Materials...
Accounts Payabl e ...r..........o....r..r...' ................r.r....
Work ln Process (12r8oo
SQ r $S Sn,............o......t...! lO2rdoo
Materials Quantlty Vadance (i3,OOO
-
l2rBOO) r $S Sn i,600
Materials Price Usage Variance (t3' OOO
Ae r
(s8.o6 AP
-
$8 SP))
Materi al s (13rOOO
AQ r $8.O9 AP}.,..,..,..,,..........,...
(3)
Fifo inventorv
Work in Process (same
as abovg|...............,.............r.
Materials
Quantity Variance (same as above|.,........i..
Materials Price Usage Variance
Materials (($Z.ge
r 2'OOO units) +
(S8' o8
r I l
rooo
units)) ..........o......o...............,..r.,.
(4)
Lifo inventorv
work in Procgss (same
as above) ...........................o...
Materials
QuanUty Variance (sarne
as above}..........,..
Materi al s
pri ce
Usage Vari ance.....,.......r...,..,.......r.,...
Materi ats ((SB.OA
r 12,OOO uni ts) +
(S7.94
r l
r0oo
uni ts)) ............,...........o..........,......
E19- 3
Payr ol l ' . . .
. . . . . . . . . . . . t , . . , r . . . . . o. r . . , . . . . . . . . . , . , , r . . , . . . . . . . . .
Accru
gd
Pa1rrcl t . . . . ' . , . . . . . . . , r. . . , . . . . . . . . . . . . . . . . . . . . . . , . . r. , . . r, . .
Work
i n Process (2rdOO
x 314 r Sg. 5O). r. . . . . . . . r. . . . . . r. . r, r.
Labor
Effi ci ency
Vari ance (1Zo
x Sg.i o)
Labor
Rat e Var i ance ( 1, g2O x
S. 1O) . . . . . . . . . . . .
Payr ol t ( 1, 92O x
$9. 4O)
102, 4OO
1, 600
760
102, 4OO
1, 600
900
18, 048
17, 1O0
1 , 1 4 O
1O4,760
104, 90O
18, 048
192
18, O48
Ctlr,Ots t0
Elg-4'
191
Work in Prpcess
(lO'OO0
unltg r 2 SQ
per
unlt r $2 Spl'....,..r.,....
Materials Prlce Varlancc
(($e.tO
AP
-
$Z S4 r 2lrO0O AQI .....................,..
Materialg
QuanUty Varlancc
($2 SP x (2O'OOO SQ
-
2l'OOO AQ)).........r...,.....,..
Materlals (21,OOO
AQ r S2.1O API
Work in Procass
(l o,oo0
unl ts r 114 SH per
unl t r $i 2 SR)
Labor Rate Variance
( ( $1Z. ZO
AR
.
$12 SR) x
2, 4OO AH) . . . . . . . . .
l-abor Efficiency Variance
[$12
SR r (2,40O
AH
-
2,500 SHD
Payrol l (2, 4OO AH x
SI Z. ZO AR) . . . . . . . .
Work in Process
Gt7
FO rate r l2rO0O SH)..................
Applied Factory Ovefi ead ..,...,,,,...................,.......
Appl i ed Factory Overhgad ....r.........r........,..................
Fa
gtory
Ovgrhoad Contro1...r.,..,...r.........-,..roo.
Volume Variance
(S4.5O
fix. rate r (l5' OOO
BH
-
l2' OOO SH)f ........,
Control l abl g
Vari anc6.....................r......,.......,........
Factory Overhead Control
( S91, 00O
act ual
-
S84, O0O appt i ed) . .
Factory
ovgrh
gad
Contro1....................r................,.....
vari ous crgdi ts r-...,..r........r.......,............................
Work i n Process (i l ' OOO SH r $5 FO rate)..,........,......
Appl i ed
Factory Ovorhead .o....,........
Appl i ed
Factory Overhead ............r.,....,..........,.......,...
Factory
Overhead Controt..
..,,.....,....
Control l abl g
Vari ance ....,........r.......' ...............r....,.,...
Vol ume Vari ance
_
(S2
fi r. rate r (1O,OOO
BH
-
1i ,OOO SH))
Factory Overhead Control
40rooo
2,too
2,OOO
44, l Oo
Er9-5
( f )
l2't
(31
3OTOOO
480
84rOOO
84, OO0
l 3,5OO
56,OOO
55,OOO
55,OOO
4, 00o
1, 2O0
29,2go
84, 0OO
84, 00O
6, 5OO
7, 00o
E19- 6
( 1)
(21
f3)
(4)
56,0OO
55rO0O
55,O00
2rOOO
2, OOO
( S57, OOO act ual
-
$55, OOO appl i ed) . .
r - l
- \
KP
=79-7
llt
Work In Process (4rgOO SH x $10 FO tiato),.,...............
Applled Factory Overhead
i2l
B}
Applied Factory Overhead
Factory Overhead Gontrol
Variable Efficlency Variance
($4
var. rate x (5r2OO AH
-
4r8OO SH)l ............,.,.r
Volume Varlance
($12 llr rate r (5
Spendlng Varlance
;OOO
BH
-
4800 SHll .......,,r.......
Factory Overhead Contml
($78,200 actual
.
$7618OO appl i ed)..r,..,.,.,...,...,...r.
: 19- 8
f
l
Work in Process (Z' 0OO
SH r $11 FO ritof ,..........r,.....
Applied Factory Ovgrhgad r...........o........r.........o.....
2l Applied Factory Overhead
Factory Overhead Control
3) Variable Efficiency Variance
(98 var. rato i (Z1600
AH
-
Zroog SHlt ..........,....,.
Volume Variance
Gt3
fix. rate x (BTOOO
BH
-
T' OOO SH}!...........o......
Spendi ng Vari ancg' .........r.r...............r..r..r.........r.....,r..
Factory
Overhead Control
( $86, 500
act ual
-
$ZZ, OOO appl i ed) . . . . . . . . . . , . . r , . . , . . . . . .
7618OO
76,8OO
Chagtor 19
76,8OO
76,8OO
I' OOO
214OO
77,OOO
77,OOO
4,8OO
3,OOO
1, 7OO
2, 6OO
1r4OO
77
|OOO
77
|OOO
9, 50O
I
l-
I
:
Clppter rg
Ei 9- 9
.
Percentage
of curnent-year
labor
cost element In finished goods
and cost
goods
sol d:
Flnishad goods,
lgrooo units
x $,0 1abor..,...............D..
##:;
Gost of goods
sold (ftom
cumont production),
(91ro0o
unib
-
lSroOO
unitsix
Sl faiot ............._g94.ooo
of
sgsq@9
oh
20
80
t oo
b Allocation
of cumant-year
tabor variances:
I
b
Allocation
of variances:
Finished goods
(*?f0_9o_l
2o%o1,.............r...r..............
Sior4oo
cost of
soods sotd (g52,ooo
r tioy"1...............:::::.......
4t.600
lga99
End-of-year
batances:
Finished
Goods
$t Ti r ooo
l O' 4OO
Bal ance
at standal d...' .........r......o........r...r...o...............
P:f:ll:arb
Jabor variances
aiiocation...................,.
I
!t
Last yearb
variances,
alt appllcable
to "o"i-oi-;;il;
sofd on a fifo ftow
assumrition
.r......................-__-_--
E19- t o
Percentage
of units in inventories
and cost of goods
sotd:
Direct
Labor
and
Factorv
Overhead
Units
%
5OO
lOVo
7
r2OO 24oh
3.300
660h
5.OOO
10c.o.h
Gost of
.
Goods
Sotd
$819,OOO
41, 600
5,goo
s866.400
-
Gost of
Goods
Sofd
$ (82.so)
275.OO
396. OO
7g2.oo
990.oo
( 1, 188. OO)
$:,i-g3.sg
Materials
Units
o/o
1' 500
2soh
l
r2OO 21oh
3,300
55oh
_q@@@@@@@@@@@@@@@@g
7_oo%
I
I
>
I
Total
Amount
$ (150.001
500.oo
600.0o
l 12OO. OO
1, 5OO. OO
( 1, 800. 00t
$r,sso.gg
Work in
Process
$ (37.501
125. OO
60.oo
120.oo
150. oo
(180. oo1
Fi ni shed
Goods
$
(3o.ool
100. oo
t 44. OO
288. OO
360. oo
(432.OO1
s43o.og
- \
$1
E19.I I APPENDD(
Work In Procest
($4 FO rate r 3'{5O unltr I 1.5 SH
per unltl
Applled
FaCtOfy OVgfhgad.............................'..............F...
Appllgd FaCtOfy OVeffiead .r........o............x'or8r.o.,............-.o.
Lifci"n"y Varlinco
St4
Fo rate r (5'320 All
-5'175
SHll """
ldle Gapiclty Varlanco
(33 llr rats r (8,000 BH
-
5'320 Al0!
Spendlng Varlancc
Fagtory Overhead contJol ..-.
EI9-i 2 APPENDX
Work In Process
($2o FO ratc r 9'4OO SHI
App ll
g
d Factory Overh ea d .......r....rr.....
Apptled FaCtOry OVefhgad....o...........' ....o..o....' .....o.' ........D..
Varf able Efticlenqy Varianco
Gt4.5O
Yaf. I (f 0'600 All
-
914OO SH))..'......'.'...........
Flxed Efflclency Varlanco
GNl5.5O
fh. r (10'600 Alf
-
9r4OO SHll ..'.""r"""'o""
Spending Variance ...o.o....
ldle Capacity Variancc
Glt5.5O
fir. r (lO' OOO BH
-
lOr6OO Al' l)1.............' .o...
Factory Overhead Control
a a a a t a t a a a a a a
2Or7OO
2Or7OO
680
4040
188,OOO
188,OOO
614OO
18,600
ChWtor 19
20r7OO
1r 97O
21r35O
t88,OOO
7,2OO
9r3OO
195, 5OO
1lE
t
\,
t
I
t
l
\-
I
L
I
t'
I
I
\,
I
L
I
!
Clpptcr19
PROBLEMS
Pt 0-l
Materlats
(33rOOO
AQ
purchased x 32 SPI ..'........r................t
Materials Purchasg Pricg VariancO ..............,............o'....
Accounts Payable (33,OOO AQ purchased x
${.96 AP) ..,.
Work In Prcces8
(OroOO
oqulyalent unlta r 6 SQ r $2 SPf '.'...
Materials Quantlty Variancc
Materlals (4O,OOO AQ lssued r 52 SP)
Work In Prtcess (5r8OO equivalent unlts r7l4 SH r $8 SRl.,.
Labor Rate variance ($g.zo AR
-
$s snl r 1r5o0 AH)......,.....
labor Efficlency Variance ($8 SR r (1,5oo A]l
-
1,45O SR]l....
Payroll
Gb8.2O
AR r l
'SOO
AH|.....,.......,....o...........,...........
Factory Ovgrhgad Contrc|..,...r.....
Various Crtdits...
Work in Process
(5,5OO equivalent units r 314 SH r Sl0 FO rate1........
Applied FaCtory Ovgrhgad ' .D......' .......' ......o.................t...r
Appli
gd
Factory Overh
gad
.' ...' .' ............o...r...........r................
Controtlab lg Varianco ......,.,..r..........r..........r.r....r........r.,..,.....
Volume Variance ($12 fired rate r (4,OOO BH
-
{,125 SH}}
Factory Overhead Control ....,r...............,.................,.......
Finished Goods (5r2OO
units r $26 standard cost),......r....o....
Work ln Procgsg ..........,,.......,.,,.., ..r,.,.r....r,
Accounts Recei vabl e (5r50O uni ts r 940 sal es
pri cel
..,..,......
Sa1es. . . . . . . . . . . ' . r. . r. . . . . . . . . . . . . . . . .
. , . . . . , . , , . . . . . . . .
Cost of Goods Sold (5r5O0
units r 326 standard cost).,.........
Fi nl shgd Goods. . . , . . . r. . . . . . . . . . . , . . . . . . . . . . . . . . . . . . t . . . . . . . r. . . . . . . . , . . . . r. . .
b
tt
I
L
tr
iD
!
I
>
I
!
I
66rOOO
1r32O
64,68O
72rOOO
SrOOO
80,OOO
l 1, 600
300
400
12,3OO
65rOOO
65rOOO
66rOOO
g6,ooo
66,OOO
500
1, 5OO
5,OOO
135, 2OO
135, 2O0
22O|OOO
22O,OOO
f 43,OOO
143r OOO
t
I
'''
1#
P19-2
Materials Labor
2r4OO 2r4OO
300 300
Chapter 19
Overhead
2r4OO
300
2rloo 2,1oo
Units completed
gnd
transferred out this period
Less all unltg In bgglnning Inventofi,...............,r
Equlvatent unlta
gtsrted
and completed thla
period 2r1OO
o
2ao
Add equiyalent unlts requlred to completc
beginnlng Inventory
Add eguivalent unlts In endlng lnventory r......-..
Equivalent unitg ol producUon
this
period.........
Multlply by standard guanUty
of lnput
per
unit
of
product
Standard quantity
of Input allowed for work
produced
during the period
Materials (l1,0OO
AQ purchased
r $0 SPI
Materials Purchase Price Vari
Account s Payab1e. . . . . . . . . r. . . r. . . . . . . . . . . . rr. . . . . . . . . . . r. . r. . . . . r. . . . . . . . . . .
Work i n Process ($O SP x 11r5OO SQ al l owd).....,.,,......,.......
Matgrials
QuanUty Variancc r...........o................o....................
Matgrials ($6
SP r 12roO0 AQ lssugd|............o.....,,........r
Work In Procesg ($i2
SR r lrT25 SH aflowodf .............,...o.....
l-abor Rate varlance ($12.10
AR
-
$rz snl r l,7oo AH!........
Labor Efficiency Variancc
($12
SR r (1
,7OO
Al l
-
11725 SH)l ...,...ri ..........,,.......r.
Payroll
a a a a a a a a a a t a a a a a a a a a a a t a t t a a
150
50
2r3OO
2MH
1_J25 !.600
66rOOO
1, OOO
67, OOO
69rOOO
3rOOO
72,OOO
20t7OO
170
69,OOO
64,4OO
64,4OO
840
4r48O
300
20r57O
09, ooo
64,4OO
720
69, OOO
213OO
5 unlts
l_l.5oo
t oo
100
2r3OO
3/4 DLH
Factory ovgrhgad Controt..............................o.....,.................
Vari ous Grgdi t s. . . . . . . . . . ro, . . . . . . . . . . . r. . , . . .
. . . . . . , . r. . , . . . . . r,
Work in Process (Sf
4 FO rate r 41600 SH a!!owod|...........,....
Applied Factory
ovgrhgad........,..-.r.r.,r.......,..r..........,,....
Appl i ed
Factory
overhgad
......o.,........,r............r..o.r....,..r........
Variable
Eflici
ency Variance
(S2.80 yar.
rate' r (4,9OO
AH
-
d,6OO Sl Il ) .................
Volume
Variance (St
t.Zo fix raten x (5,oOO BH
-
4,600 SHI)
Spendi ng
Vari ancg.t,........,,..
...........r,.
Factory
Overhead Control ,..........,.....................
' S14
FO r at e x2Ooh var i abl o =
S2. gO var i abt e r at e
"
314 FO rato
-
S2.8O vari abte rate = 311.2O fi red rate
I
I
\-
I
L
I
b
I
b
I
I
-
t
\
Ctaplstg
Pl g'
-Unlts
ggmqfot-od and transfermd
out this period
.......
L'8gs all unfts In beglnnlng
lnventoty........:......:.:.,......
Equlualent
unlts startod
and compteteO
this perlod...
Add equlvalent
u-nfts rcqutred to complete
beginnlng
lnvantofl
...r.......D...t...................
Add egulvalent
unlts ln ending Inventory....D...o....r....,
Equlualent
unlts of producUon
Urtg penoA
....,........,...
Multlpfy
by standard quanilty
of lnput p"i
uiii
---'
_
Of pr OdUCt . . . . . . . . . . . . . . . . Dor . . ea11. . 11. . . . 1. . i . . . . . . . ! . . . . .
Standard quanilty
of fnput altowed
for work
produced
durlng
thc perfod,............o.,........
197
Conversion
Materials
Cost
5,ooo
-Efoo
3, OOO
3. OOO
2,OOO
2' OOO
o
2,OOO
4,O0o
2rOOO
1. 500
5,5OO
6 unlts
1t2 hour
24. OOO
Z, I SO
Materlals ($'5q
sP r
gorooo
Ae purchasedt
.,,.........,..o..........
lsrooo
Matgrials
Purchase
Price
variancg.........ror.....................,o..r.,
lrooo
Accounts
Payab|ett"rr.........r.........r.....' ...........r...r.r..........
16rooo
work fn PrccesL.F:?o
_sp
, 24rooo
Se altowed),..................,
izrooo
Materlals
euantity Variance
.....
Materiars
($.sb
sp;-;d#iliiffiil':::::.::.::::.::.::::.::::
2so
72,zso
Work In
prccess
6f
9-9!
, 2r7SO SH
-a-fl91ved|
.............,....o..o.
2TTSOO
Labor
Rate
varianco
((sro:t6
AR
-
sro $ii;'iiiiooAH
usedt
r,eso
Labor
Effi ciency
Variance
Gl f
o sR r (2r8oo
AH
-
2r7s_?sl 0).....,..............ro,..........
1r5oo Payron
Gto.zs AR r 2,600 ax useii:::::::::::.:...............:::
27,e5o
Work
In Process
($12
FO rate r 2rlSASH
allowrod),...............
33rooo
Appl i gd
Factory
ovgrhgad.' .......................,....t,...............
33rooo
Factory
Overhead
Contro|.....,.....
various
credits......:.::::::::::::::.::::::..::::.:.::::.:.:..:.,::::::..::.::
3 i
,ooo
sr,ooo
Applied
Factory
Overhead
....,..,..
control tabl e
vari an""
.....,....:::::::,
""""""""""' ..r....' ...........,.
33rooo
vofume
varfance
Fe
nred;;;i{iilH;ffi;1iil.
2so
2,2so Factory
overhead
controt
.-.::............,r............,...,......o....
3i
rooo
r
I
i
Chapter 19
P19-3
(Concludedf
Finished Goods Inventory
(5,OOO unlts x $14 standard costr) 7O,OOO
WOfk i n PfOCeSS ..r.........o...r.r...........o.........r..................... 70tO0O
'Materials
(6 unlts O $'50 eachl'.'... $ 3.oo
5.(X' Labor
lll2hovr
O $1O
per hour)
Overhead: Varlable
lll2hour
e 33
por hourl...... 1'50
Fixed (1/2 hour O $9
per hour).......,.. 4.5O
Total standard cost
per unlt of
product..............
9!4.00
Cost of Goods Sold (5r1OO units x $14 standard cost).,......... 71r4OO
Finishgd Goods lnventory...................'.'...o...........'.......... 71t4OO
Accounts Receivable (5r1OO units x922 sales
prlce|....,....... 712eOO
1"l2r2OO
P19- 4
GGA-Canada (adaptedl. Reprlnt wlth pe rmlsslo n.
ENSLry CORPORANON
Income Statement
For Year Ended December 31. 2OA
Sales ((2O'0OO
unlts + 1101000 unlts
-
12r0O0 unltsl r $251.....r...... $2,950,000
Cost of goods
sold at standard (118,0OO unlts x $17.60) .. 2.076.800
Gross prof i t
at st andard . . . . , . . . , . . . . . . . r. . . . r. , . . o. , , . . . . . . . , , . . . . . . , . . . . . . , . . . . . . . . . . , . . $ 87312OO
Add ngt manuf acf uri ng vari ancg. . . . r. . . . . , . . . r. . . . o. , . . . . , . . . . . . . . . . . . , . . . . . . . . . . . . . 9O1
Gross profiq
adjusted to actua1...,..... $ 873,290
Lgss markgting and administrative expe[ss,...,..............r,...t........ 68O.5oO
Opef at i ng I nCOme. . . . . . . . . . . . . . . . . . ' t . ' . ' . . . . . o. . . r. . . . . r. . . . r. . . ' . . . . . . . . . . . ' . . ' . ". t . r. ' r. .
$ 192. 79O
I
Manufacturing
variances: Unfavorable Favorable
$ 3,750
44,OOO
1 , 100
s48,85O
48,780
Net favorabte vartanco ........
s48.760
!:-s
fa*
I
I
I
v
I
L
s37tr25O
375.OOO
E_e,7sof
I
:
Clnpter 19
Pl9-4 (Gontinuedf
Materials:
Agtual quantity
r average cost
[25OtoOO
fbs. r 1.485 per
lb.]..........,...,.........rr.r....,.........
Astual quantity
r standard cost
(250,OOO
lbs. t $i.5O
per
lb.f
199
fav.
$360,OO0
345.OOO
-L _!5l0o9
unfav.
I
l-
!
I
Matgrials purchase price
variance .........,..........,..............r.
Thansferred into production (24O'O0O
lbs. x $1,So1 ...ri.......
standard quantity
for l is,ooor eguivafent production
yni ts
(23O' OOO
l bs. r $1.5o
per
l b., or l i S' OOO uni ts r
$3
pgr
uni tl .t...............r..................o...r..............r........o....
Matgrials quantity
variance...........,.,.........
Thansfgrrgd
out of work in process..,...r.............,.,.r..
Beginnlng
inventory (all
completed|..........................
Startgd and compfgtgd this period
.............,.r...........
Add
gndi ng
i nventol y....,.......................o.........r...,.....
Tot al ' Dr " t t . . . . t . . . . ot . . . r . . . . . . . . . r r . . . . . r . r . . . . . . . . . . . . . . . . . . . . r . . . . . r r
Labon
Pound
Basis
22OLOOO
20.ooo
2OO,OOO
30.ooo
?39e9
Unit
Basis
110, O0o
lo.ooo
I O0,oo0
15. OOO
115, OOO
Ac' tual l abor cost.......D......"..' ...r............r.,......r....o.........,.
$l ,3l 3rzGo
Actual hours r standard rabor rate (16r,ooo
hours r $81
-iiiea,ooo
l-abor ratg variallco ,'.'."........'.'......r...,..,....r,,.,........,.,.,.i.
E-zsrzeo unfav.
v
-
$1,288,OOO
1. 332. 000
S__(4!.,OOO}
fav.
Actual hours
x standa rd labor r?ttG)....,................,........,...
Standard
hourc
r standard labor rate (l661500
hrs.il I
.
$8
per
hour, or l l i rooO uni ts
*
r $i 2 per
uni U..........
Labor
effi ci ency
Yari ance..,..,.,........................r......,.,......
I
ffi
Chapter 19
I
P19-4
(Concluded)
r*
Computatlon
ol equivatent
pmductlon for labor and tactory overtread:
Hour Unit
Basis Basis
Thansferred
out of work In
Process
165, 000 11O, OOO
15.OOO IO,OOO
l 5OrOOO l OO,OOO
I,OOO 6,OOO
7.500 5.OOO
166.500 I I l ,OOO
Factory overhead
(two-variance rnethod):
ACtUal fagtOfy OVgfh
gad
....o....,.r.' ...r..........r' ..........' .....' ..o.' .
Budget al l owance:
Variable overhead
(1 I t
'OOO
units r $1 .5O| ... $169'500
Fifgd OVgfhg4d........,...r..,.....,...,...........r....... -!3L@
COnt rOl t abl g Vaf i anC8. . . . . . . . . . . . . . . . . i . . . ' . ' . . . . . ' . . . . . . . . ' . ' . . . . . . . . . . t . . . . .
BUdget a11OmnCO. . . . . . . . . . . . . . . o. r r . . r . . . . . . . . r . o. . . . . . . . . . . . . . . . . . . . t . . . . o. . . .
Applied lactory ovorhead
(t I l
r0OO
units r $2.601
..............
VOl Umg var i anCg. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . o. . . . . . o. . . . . . . t t . . . . . . . . . . . . o.
287.500
Beglnning
InVentOltsflOfk
In
pfOCeSS.' ....................
Staftgd and COmplgted this
pefiOd .,...........o.............
Add 3/5 tO COmplete beginning inYefltgtJ..........r......
Add I /3 Ol endlng inVentOfy.r..t..........' ............o...r.....
TOt al . aaaa. . r a. . . r . r . . . a. o. . o. . . . . aaaa. aaa. . . . . r . . . a. aoa. . r ar . . aaar . aar . aa
KALMAN COMPANY
lnterim Income Statement
For t he Second Quar t er , 2O-
$295,5OO
$
8.OOO unfau
$287,5OO
288,600
S
(l ,1ool fav.
:
P19- 5
SalgS (SOOTOOO f $3Ol ....r....o.....o..................r....................' ............
COSI Of
gOOdS
SOld at Standard
(600' 000 f Sl 81 ......' ..' ...t.o' .......o...
GrosS prOf i t
at St andal d . . . . . . . . . . . . . . . . . . . . r. . . . r. . . . . . . . . . . . . . . ' . . . . . . . ot . . . . . . . . . . . . .
Adjustments for standard cost variances:
Matgri al s pri ce
vari ance
1..........' ...' ...o.................
Labor efficien cy Yarianco2......' ...........................
Overhead spendi ng
yari ancos....
Variabl e oyorhoad eflicie ncy
yarianco4
..............
Ovgrh
gad
Yol umg
yari ance5.....................o.....' ...'
---j
Adj usted gnoss profi t
o...,........, ......,.......
.............
Less commercial
erpenses:
MarkeUng
orpensos ($t8,OOO,OOO r 1Oo6)..' ....... $1' 8OO' OOO
Admi ni strati ve
oxpensos
(SOTOOO,OOO r 25oh)' .... 1' 5OO.OOO
l ncome
bef or e I ncome t ax. . . . . . . . .
Loss i ncome tar erponse (S3,483,4OO r
( s3, 75O, O00
/ 57, 5OO, OOO) ) . . , .
Ngt i ncom
. , . . . . . . . o. . . . , . . r . . . . . . . . . . . . r . . . . . . . . . . . . o. . . . . . . . . . . . . ' . ' r . . . . . . ' . ' . . . . . ' . " " "
$
237,800
38,OOO
t 35, OOO
8,00o
$18,o0o,ooo
10. 800. ooc
$ 7,2oo,ooo
416. 600
$
6, 783, 400
3. 300, ooo
S 3, 483, 4oo
' 1, 741. 700
sJJ4E-9e
501
t
t
L
I
l>
I
I
=
I
!
i
I
E
l
b
Chapter 19
Pl 9-5,(Conti nued)
rrhe
materials price
variance
should be prorated
between work in process,
ished goods,
and cost of goods
sold as ioltows:
Endi ng bal ance of
work in process
-
Endi ng bal ance of
finished goods
$72, OOO
$18
per
uni t
Total uni ts i n endi ng i nvgntori s...,........................
Jo!"!
units produced
during second quarter..........
Total uni ts i n endi ng i nventori s.....,....,.........,.......
Uni ts produced
and sol d duri ng second quarter..,
fin-
$18
per
uni t
$goo,ooo
-
4'OOO units
5O,OOO uni ts
5!_,ooo
units
45O,OOO
54. ooo
3g6.ooo
-
I
b
\,
I
lL
Materi al s pri ce
vari ance
charged 396,OOO
to cost of goods
sold
-
T56:FOO
x 27O,OOO =
5237'600
zsince
the tabor efficiency
variance is not regarded
as significant,
all of it is
charged
agai nst second quarter
i ncome.
oA
portion
of thE overhead
spending variance
is attributable
to the overtime pre-
mium paid.
since the overtiire-premium
was incurred
in order to meet sales
forecasts
for the entire year'
the portion
of the spending
variance
resutting
from the overtime premium
isg.ob
rabor p",'
unii at regurar rate x Sooh =
S4' 50/uni t)
shoul d
be prorated
over the enti re y""r.
i n proporti on
to the sal es of
each quarter
as fol l ows:
Production
in excess
of capacity (euarters
1 and 2 onry):
Quarter
1 = 465,000 _
43OrOOb = 35,0OO
uni ts
Quarter 2 = 4SOTOOO -
43O,OOO =
2O,OOO units
overtime premium
resurting
from ercess production:
Quarter I = 35,OOO
uni t! x $4.SO/uni t =
$f SZ,SOO
Quarter 2= 2OTOOO
uni ts x$4.5o/uni t =
9O.OOO
Total
overtime premium
for first six months
_S24Z,SOO
Prorati on
of overti me premi um
porti on
of spendi ng
vari ance
based on sal es:
Quart er
2 =
-s600' ooo
A' Et . -^r^^-.
$l
FoAooo
x s247' 5oo
total overti me premi um
=
$99rooo
I
>
-
Chapter 19
Pl 9-5
(Goncl udedl
The overhosd
spondlng varlanco charged against second
quarter income is
calculated
aa follorvs:
Total overhead
spending
variance for second
quarter.-............... 91261000
AmOunt resulting frOm SeCOnd
qUartef OVertime
premiUm......,... 9O'OOO
Amount rgtatgd io unexpgctgd Ingff|cignc|93.................r............
$
36tOOO
Amount ol overttme
premium chargeable to second
quarter on
the basts of salgs attocatlon dgtgrmingd
abovg ....................
99.OOO
Total spending variance charged against second
quarter income
SI-95'O0O
aSince
tactory overhead is charged to production on the basis of direct labor
hours, an unfavorable variabte overhead efficiency variance occurs because of
the inefficient use of direct tabor. The amount of the unfavorable overhead
variable efficiency variance is determined as follorvs:
5The
company
pollcy is to report a volume varianco on Interim statements only
il actual
producgon Oitters irom the
ptanned production schedule. Sincs actual
production is equal to budgeted
producUon through the end of the second
quarter, there is no volume
yariance
to be charged against second
quarter
i ncome.
labor eff lclency varlancc
l-abor coot
per unR
P19- 6
(1) Materi al Materi al
A B
Uni ts compl eted and transferred out...... 15r0OO 15rOOO
Less begi nni ng Inventory (att uni tsl .......' . 6.000
6.000
Started and compteted thi s peri od.....' .... 9rOO0 IrOOO
Add work this period
in inventories:
r varlablc ovsrhead
per unlt
=
#
r 32
=
$g,ooo
o 2,OOO
5,OOO 2.500
14, 0OO 13r 5OO
x i x o
FactorY
Labor Overhead
.|
5,0oo 15,OO0
6.000 6,000
9,000 I,ooo
3,OOO 2rOOO
1,250 2.500
13, 250 13, 5OO
x 11l 2 x 113
Beginning inventorlf ..........,.r.' ....r......
Endi ng i nventory .............r.................
Equi val ent uni ts of Wgstco.....,..,......,......
Standard quantity per
unit of Westco......
Stand ard quantity
al I owgd.................,.....
Materials ((15,OOO
r 314) + (BO,OOo x $21) .
14.OOO 81,OOO 6,625
--l !I!i oo
: :
, . 3TO' OOO
65rOOO
435, OOO
358, OOO
5, 4OO
363, 4OO
Materials
Purchase Price Variance,..............,.r......' ........
Accounts
Payabl e (15,OOO r $13)
+ (8O,OOO x S3l )....
Work i n Process ((14,OOO r $f e} + (81,OOO x $2)1...........,.
Materi al s Quanti ty Vari ance ........r.......' r............
Materi al s ((14,2oO r $14)
+ (82,3oO r $2l l
503
t
I
I
t
I
-
I
\-
I
\t
!
C@ter 19
I
Pl9-6
[Goncluded]
Work In Plocgss (0t825
r
$r o) ........................,...r.........r..
labor Rate Varlanco (61500
r
GltO
-
$l l)l ror,,,......,.,.....,..
labor Efficienciltariance
((6,025 _
tirsoo, r $lO) .....
Payroll (8t5oo
r $l ll ..o...o........' ..rts...,...........,........o.-.
Work In Procggr (4r5OO
I $24.............................r..........,
Applled Factory Overhead.....
Applied Factory Ovorfi o8d .......
Volume Variance ((5,OOO -
{,5001r
$241 ........,..............oD.
a a a a a a . a a a a
o6,25O
6,5OO
12l , 5oo
t 2t , 5oo
l 2, OO0
1, 25O
11r 2OO
300
76, 150
7r25O
71, 50O
121, 500
11, 2OO
300
722,OOO
65rOOO
5,4O0
61500
12, OOO
:
b
I
b
S
b
\
Spendi ng
Vari ance
..............o.......-.........o...o...ro.....oo..
Variable Efticiency
Variance ([4'SOO -
dr4oOl x $3]..::
Fa
gtory
Ovgrhead control ....r..........................,.........
(21
Labor-Efficiency
Varianc4.................o..............................
Spending Variance.D............r...............................r..,........r
Variablg Efficigncy
Vartanco...........,................................
I ncome^ Summary. . . . . . . ! . . . r. . . . . . . . . . . r. . . . o. . . . . . . . . . . . . . . . . . . r. . . r. . . . . . . .
Materials
purchase
price
Variance .......,......:::..........
Materials
QuanUty Varian ce,..........o....r.,......r..,..,......
Labor
Rate Variancg............o.....o..........r.o..................
Volumg
Variance....r.r.......r.......r...o.....................r......
PACIFI C MANUFACTURING
COMPAilY
Incomo
Statement
(3)
I
v
lales
((4r0oo
+ l5rooo
-
3roool r $601......t,...........r...r.....
Cost ol goods
sold (f 5r4oo x Slol r............o........,o........o..
9-*
profh
at standald
..............D...................................
Adjustments
for standard
cosi variancos:
Matgrlals purchase
price
variancg....,.........,.............
Matgri al s
quanti ty
vari ancg
..............................,r...,..
Labor
rate
vari anto..........i ........!..............o..r.........r...
La bo r effi c i en cy va ri a n ce ........,......,..r.......
t....,.........,
. spendi ng
vari ancg. . . . . . . . . . . . ' r. . . . . . . . . . r. . . . t . . . . . . . rD. . , . . . . r. . . . .
Va ri a b I e e ffi ci e n cy va ri a n ce :..........,.......r.,....,.t.........
Vol ume yari anco. . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . . . . . rr.
Adjusted
gross
profit.....
Less
commenci i r
expen";;
::::::::""""""""""""""""""'
::.::::.:::::::::.::.
::.::::::::.::::
l ncome
t ax expense ( 3O7o x
S111, gSO) . . . . .
Net i ncome, . . . . . . .
s924,OOO
.
6t 9.000
s3O8,OOO
s65,ooo
5, 4OO
6,5OO
( 1, 2501
( 1t , 2ool
(3oo)
l 2. ooo 76, 150
$231, 850
120. OOO
$1 I 1, 85O
33. 555
s_7q.?95
I
, t
I
w
t2o,ooo
4,OOO
35rOOO
2, O16
75,0OO
8l r 5OO
230,OOO
184, OOO
32OlOOO
5O, oOo
Chapter 19
800
159,2OO
124rAOO
I , 4OO
351016
75rOOO
81, 5OO
23O,OOO
184, OOO
320,OOO
5O, OOO
?79-7
ill
Materialg
(4O OOo llterr AQ purchasd r
Materiale Purchase Prico Varlancc ..
ACCOUntg Payable ....'...r.......................................ro..
Work In Process
flO'OOO
units r 3 liters SQ
Per
unit r
$4 SPI
Matgrials QUanUty VarianCe ...,......r.' r.............o.r.....' o......
Materials
(31 ooo llters AQ issued r $tl SP|...........".
Work In Procegs
(lOrOOO unlts r 112 SH r $Z Sn1.'-'...---t
Labor Rate Variancs
($7.42 AR
-
$7 SRI r {1800 AH).-....
L^abor Efflclency Varlanco
Sl7
SR r
(4'8oo All
-
St OOO SH)| . . . . . . . . . . . . . . . . . . . . r. . . . . . r. . . ' . . . . . . r. o. . . i . . . . . . . . . . . . . . . t .
PayfOll
Gt7142
AR f 4180O AH) .......,......r.o....r.r...........
Work in Process
(iO'OOO units ,,112 SH r $15 FO ratel...
Appl i e d FaCt Of y Ovgrh
gad. . . . . . . o. . , , . . . . ' . r. . . . . ' . . . . . . . . . . . . . . . .
FaCtOry Ovgrhgad COntrOl .o.r.............o...' ...................t.....
Vari ouS Grcd1t3....r...o.r.........r......................t..............
Finished Goodr (l O'OOO units r $23 standard costl ........
Work I n ProcgS8. . . . . . . . . . . . . . . . . . . . . . . . . , o. . . . . . . . r. . . . . . . . . ' . . . . r. . . . .
Cost of Goods Sold (8,00O units x $23
standard cost) .'.-
Fi ni shgd GOOdS. . . . . . . . r ' . . . r . . . . r . . . o. . . . . . . . . o. . . . . . . . . . . . . . . . . r . . t . ' .
Accounts Receiyable (81000 units x 340 sales
ptieo) ""..
Sa1gS. . . . r . . . . . r . . . r . r r . r r r . . r . . . . . . . . r . . . r . . . . . r . . . . . . . . . . t . t . .
Markgting and Administrative Expenses......' ...D..' ...........
Vari ouS Ct di t s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r. r. . . t t . t . . . . . .
94 Sn.r............ IOOrOOO
Chapter 19
P1s-7
iContinueCl
121
Aetual factory overhead.
Budget aflowance
based on ir8OO sctuaf hours:
Variable overhead ($8 variable r:ate r
4rgoo Al{ .......
...........4.....
S28r8OO
Firgd ovgrhgad.............r...r....................r.,...r
4g;5oo
Spending variance......r.......' .......r.o.......rr.r.......rr...r........rr..r
Budget allorlrrance based on 4r8OO actual hours
(from
above).........' D.....r..r..rr....t....r.......' .................
Budget allourance based on B'OOO standard hours:
Varlable overhead ($6 varlabfe rate r
5rO0O SH) . . . . . . . . . . . , . . . . . . . . . , . . . . . . , . r. . . . . . . . . . r. . . . .
33OTOOO
Firgd ovgrhgad.' .o...-....r' .-....r.o...r.' .D..............
lgrsoo
Variable efficlency Yariance....' .........o...........r.,..........,....or..
Budget allonrance
basod on S'OOO standard
hours (from
above) ........o..' ......r..r...............,...r.....,r
Appl i ed factory overhead (Sf S FO rate r 5,OOO SH)............
Vol ume vari ancg. . ' . . . . . . ' . . . . . . . r. . . . . . r. . . . . . o. . . . . . rr. , . . . o. . . . . , . . . . , . . . , . . r.
505
s81, 5OO
78,3OO
$ 3,2OO
unfav.
s78,30o
s79, 5OO
75, OOO
$ 4,5OO unfav.
(3)
GRINDLE
CORPORATION
Income Statement
For November
Sa I es t t t t t t " " " " " t t o " " ' . o. . . . t . . . . . . . . . . . r r . . . . . . . . . . . r . r . . . . r . . . . . r . r . . r . . . . . r . . . . . . . . . . . . . . . . . . r
Less cost of goods
sotd:
Standard
cttSt............i ............o..,r................ri .
$l
g4rOOO
Net unf avorabt evari ances(Schedul e
i 1. . . . . . . , . . . . . , . . . . . .
1O. 316
Gr oss pr of i t
t t " " " t o" . . . . . . r r . . . r o. . . . . . . . . . . r . . . . . . . . . r . . . . . . . . r . r . r . . . r . . . . r . . . . . . , . . r D. . . . r . . ,
MarkeUng
and admi ni strati ve
orpenses..............
...,r............
I ncome
bgf org
t ar95. . . . . . . r. . . . . . . ' . . . . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . . r. . . . . . . . . r. . rr. . . . . . .
$320,OOO
194, 316
s125, 684
50. o00
$ 75. 684
i l '
I
ffi
P19-7
(Goncluded|
Chaptar 19
Schedule 1
GRINDLE CORPORATIOII
Schedule of Variances
For November
Materials
purchase price variance
Materiala
quantlty variance ...........
Labor rate variallco .................'.....
Labor effi ciency variance
Factoly Overhgad epending YarianC9..................................r..
Fa ctory ovg rh
gad
va ri a bl
g
eftl ci
gncy
vari anc8 ...............r...'..
Fact oryovgrhgadvol umg vari ancg. . ' . . . . . . . . . . r. . . . . r' . . . . . . . . . ' . . . . . . . . .
4r5OO
t a a a a a a t a t a S 8oo
1r 4OO
1r2OA
$ 4,OOO
2rO16
3r2OO
$13, 716 $3, 4OO
(3.4001
Ngt unf avorabl g Yari anCg. . . . . . r. . . . . r. . . . . . r. r. . . . . . . . . . ' . ' . . . . r. . r. ' . . . . . . . . . .
Sl Ot 316
CGA-Canada
(adaptedf. RePrint with
pennission.
P19- 8
( 1)
Materi al s pri ce usage vari ance......r..
Materi al s quanti ty vari ance.......,.......
Direct labor rate variaflco .......,.........
Factory overhead spending variance
Total variances ..r..r.,.................,.......,
Di scounts l ost on
purchases............,
Allocatad to Coct
of Goods Manufachrred
Coat ot
Flnlghed Goodl
Total Gooda
Sold
sl,ooo $gzs s625
440 165 275
2AO 75 125
l24ol _(99J
(1501
4
$1,4OO $SZS 9875
80 30 50
Allocated
to
Wor|r In
Total Procaar
sl,5oO ssoo
660 220
250 50
(30o) (60l
$z,t 1o $7ro
120 40
Tota1 ..................................,.....,,.... $2,23o $75Q Si ,48o 355- S925
: : : : :
Materi al s
Pro-
ducti on
Units
Work in Procesg:
Materials (t
r2OO
units r I O006).....,..,..
.l
r2OO
Di rect l abor (1r2OO uni ts t 5O06).......,.
Factory overhead (l,2OO units x 5O%)
Fi ni shod goods ( 9OO uni t s x l OO%) . . , . . . "
9OO
Gost of goods
sol d ( 1, 5oO uni t s r 1OO%l 1. 5Oo
Tot al . . . . . . . . . ' . . . . . . . . . . . . . . o. . . . . . . . . . ' t . . . """""'
3t eOO
FactorY
Direct Labor Overhead
33
lrs
25
41
2B
1_99_
Pro-
ducti on
Units %
600 20
900
1, 500
_gpoo
Pro-
ducti on
Units %
600 20
900 30
1, 500
50
3. OOO t oo
: -
%
30
50
100
Chapter 19
Pl 9-8 (Conctuded)
(21
Work in
process
at standard
cost
lOOVol ...
Direst labor
17r2AO
units r $g r SOo/o1..
Factory overhead (ir2OO
units r
$2 r SOTol . . . . . . r. . . r. o. . . r. r. . . r. . . . r. r. . . . . . r
Finished goods
at standard cost:
tt tai"@.....,r,.......
Dituct labor (9OO
units x
$g) .....D......r..
Factory
overhedd (9OO
units x $2)....,..
Cost of goods
sold at standard cost:
tvtatg
.........
Direct labor (i'SOO
units r Sgl ............
Factory
overhead (lr5OO
units x S21..,.
Total mfg. cost at standatd cost...
Less work i n process,
Dec.
gi ,
t9_...
Gost of goods
manufactured
at
Standard
COSI ....................r....,...r.
Add:
Vari ancg
a11ocati on.................,.r
Allocation
of discounts lost on
purchases...............,........r......
Cost of goods
manufactured
at actual
(3)
Materi al s
at standard
cost
...........,
Materi al s-pri ce
vari ance
ai l ocati on........' ..
-quantity
variance
allocation .......
-allocation
of discounts
lost on
purchase3............,............r....
Total
matgri ats.,........,...
,........r
Di rect
l abor
at standard
cost .....,.........,.,.....
Di rect
labor-rate
va riance
allocation
..........
Total
di rect
| abor....................................
!a
ctorV
overh
ead at sta n dard cost...D..r........
Factory
overh
ea d--op.n
ain g
r"ii"n ""
al l OCati on
.........,.....................r.....r...
_ . Igt"l
factory
overhead
....,.,....,
l oul l
i nventori es
at actuat
cost...
fi7
Materiafs
s 8,4OO
Fastory
Direct
Oven
Labor head
$ 4,8oo
Total
6,3OO
1O, 5OO
7r2OO
12, O0o
sl , 2OO
$t 4, 4OO
l , goo
15,3OO
s25,2OO
9.400
$16, 800
1r44O
80
s24,OOO
4,800
$1g, 2oo
200
3.OOO
s6,OOO
1, 200
$4,8oo
(24o1
25,500
$55,2OO
f 4.400
s4O,80O
1, 4OO
80
cost...,.......r...............r.....,.,...........
[q20
$l grgoo
$4so s4e/80
Work in
Process
S 8,4oo
500
220
40
$ 9. 160
$ 4,8OO
50
$ 4.950
$ 1, 2OO
(601
$ 1 . 1 4 0
$15. 150
Fi ni shed
Goods
$ 6,300
375
165
30
$ 6,870
$ 7,2oo
75
$ 7.275
$ i , Boo
(e0l
$ 1 . 7 1 0
$15. 955
Total
$14, 7OO
875
385
70
$18. 030
$tz,ooo
725
$12, t 25
$ e,ooo
(150)
$ 2.850
$gl . oo5
*t
PI9.9 APPENDIX
Cotton
Cloth
Units comploted and transferred out this
period....,. 3'OOO
Lgss all units In beginning Inventol'1f ........................ 1,00O
Equivalent units started and completed this period 2,OOO
Add equiyalent unitg required to complete
bgginning InvgntOfl .t................' ..........r.............. O
Add equivalent units in ending inventory.............r..., 75O
Equivalent units ol
producUon this period.........,o...., 2r75a
Multiply by standard
quanUty
of Input per unit
Ol
p
rodu Ct ........................o...........r.o.i ..........r.......3-@.g.
Stardard quantlty
of input allowed for work
produced
duri ng the peri od......,..,............,.........
Eg99
Materials-Cotton Cloth (5,OoO yards
AQ
purchased r $f SPI
Materials Purchase Price Variance--Cotton Gloth ................
Accounts Payable (5r0OO yards
AQ purchased x $1,1O AP)
Materiats=Dyes
[2r5OO
pints
AQ
purchased
x $,50 SP]......,..
Matgrials Purchasg Pricg Variancg-f,l1/s ........r...,.........
Accounts Payable (2,5OO pints
AQ purchased
x $.49
API
Work in Process (5r5OO yards
Se allowed r $l Sp) ..,.,..,..,....
Materials
Quantity Varian ce-Cotton Ctoth ....................,..,..,
Materials--Cotton
Ctoth (5,OOO yards Ae issued r $1 Spl
Work in Process (2r75O pints
Se atlowed x $.5o Sp) ........,....
Matg ri a I s Q ua ntity Va rian c e-Dys ......,..........,,...,........,.
Material-Dyes (2r7O0 pints
AQ issued x S,50 SP|.....,....
Payrol l (1
,55o
Al l r $5.9o AR| ................................................
Accrued Papoll (and
employee withholding accounts),..
!' l /ork i n Process (l r5OO
SH attowed r $6 SR)............,..........t.
Labor Effi ci ency
Vari ance ($e SR r (1r5SO AH
-
I,SOO SR)}..,.
Labor
Rate Variance ((gs.go
AR
-
$6 sRl r i,550 AHi .....
Payrol l
"' . . . . . . . . . . . . . . . . . . . r. . r. . . . . . . r. . ' . . r. r
r. . . . . . . . . . . . . . . . . . . .
Factory
Overhead
Contro1....,......r..,, ..rr.....
Vari ous
Credi ts.......,.......................
Work i n Process (1r5OO
SH al towed r $1O FO rate)....,..
Appl i ed Factory
Overhead..........,... ......o....r.......
Dver
3rOOO
LOOO
2rOOO
o
750
2r750
I
pi nt
2J50
5rO0O
500
1r25O
5,500
100
1, 375
9, 145
9,00o
300
Chapter 19
Convcr-
alon
Cost
3rOOO
I , OOO
2rOOO
750
250
3,OOO
tt2hour
1. 500
5,5OO
25
7
1225
5, goo
25
1, 35O
9, 145
155
91145
1 6 , 1 OO
15, OOO
l 6r l OO
15, OOO
I
C,lWter 19
Pt 9-9 )APPEHDIX (Conctr.rdedl
Applled Factory
ovgrhead
......r...........r....,.............r...............
Chlerhead Spending
Variancg...o........r...r..............or................
Overhead Effielency
Variance gllO
rate r
llt55o
fH
-
lt5oO
Slfl) .............r.....................r.r........
Overhead fdle Capactty
Varianco
Gt7
flxed rata r
(t
t600
BH
-
1
t55O AH)l ....:...' ...............r,o......o............
Factory
overhgad
Cohtroi.......r...........,..................,.-,...r.
Finished
Goods (3'OOO
units r $i O.5O standard
c(lst!.....,,.....
Work In Process......o.............o..........r...r...r..rrrr......D.........
Accounts
Receivabre (3rroo
units sotd x $rc sales price)...,.
Sa1gs t t t r " " t t t " " t t . . . . . . . r . r . o. r . r r . . . . D. . r . . . . . . . . . . . . . . . . . . . . a. . a. . . . . r . r . . . . o
Cost of Goods
Sold (3rlOO
unlts r
$lO.SO standard
costl...,..
Fi ni shgd
Goods ' ....r........o.tr.................o......r.rt..o............r,
Cost of Goods So|d tt...........o.......r.r.o.......................r..............
Matgriafs
Purchase
price
variance-DyiErg..,.,......,....or....o......
Matgrials
Quantity varf ancg-.Dygs.............r,........!.........,,...t.
Labor Rate Variance............rr.....t..............o........o..........r.......
Materiafs
Purchase
price
Variance_Cotton
G|oth..........
Materlals
Quantity varianc+--cotton
croth.,....D......r..,....
Labor
Effi ci ency
vari ancg
......r.......,............,......,.......,....
Overh ead Sp_en d i n g Vari a nce,....,..,.................................
Overh ead Efficien
cy Varia n ca ..r.....................,,...............
overhea
d I dle Ca piclty
Varia n cr) .,..,...::.::::::...,...............
Pl 9.IO
APPENDIX
Materi afs (1o
ooo kg Ae purchased
r $z sp).........,...............
Materi al s
Purchase
Pri cg vari ancg,..,...,.,........r..............
Accounts payabte
(tO
OOO kg Ae purctraieJ
r $i.9S Apl
Work in Process
(90O
units r 9 kg Se per
unit x $2 Sp1......;..
Matgrl al s
Quanti ty
vari ancg
' .:..............................,.........,......
Materi ats
(B
600 kg Ae i ssueo
r $z spt.:::::::..................
Work
in Process (9OO
units r 2 SH per
unit r $1O.5O SR) ......
Labor
Rate Vari ance ((Sl r.55
An-_-S_to.so
sR) r 1,74oAH)...
l -abor
Effi cl ency
Vari ance (Sl O.5O
SR r
(71740
A|l
_
1,goo sH)) ...,....r..........,..
Payrol l
fSt r.ss AR r i ,7do AH) ........::::::::::::::::::::.::.:..::::
509
I
lr
I
>
15,OOO
650
500
350
31, 5OO
{3,4OO
32r55O
2r195
25
25
t 55
2O,OOO
1612OO
1, 0o0
18, goo
11927
16, 5OO
3l , 5oo
43r4OO
32, 55O
500
100
300
650
500
350
500
1g, 5OO
17r2OO
630
20,Og7
t.
I
5to
Pl
g-l
o APPEIIDX
(Concludedf
Factory Ovgrhead Conttpl.....-...........'............................'...... 24rOOO
VarlOur Crgd1t4...r....................................r.....o................t
Work In Procegg
(9OO unlts r 2 SH r $13 FO rgtel .............ror. 23r4OO
Applled Factory Oryerhead
Applled Factory Overhead 23r4OO
2rOOO
ldle Gapaclty Varlano
SilO
fhed rate r
[2,OOO
BH
-
I,74O At0'
Spendlng Varlancc...
Varlable Eftlclency Varlancc
Str?
var: rstc r
ll,74o
Alf
-
1,8OO SHll
Fixed Efticloncy Variance ($f O fir. ratc r
11,7
40 All
-
1,800 SHll
Factory Overhead Gontrol
Chagtor 19
2d,ooo
23,4OO
520
180
000
24,7OO
Finished Goods (9OO units r $65
gtandard
costt..........o......... 58r5OO
Work In Procgss r..' ...........................r..rr.......................... 58t5OO
CGA-Canada (adapted|. Reprint with permiesion.
-T
I
I
5t l
L
I
\-
i
I
f-
L
L
t
I
b
!
I
t:
Chaptcr tg
l
CASES
cl 9- t
(1)
The guotation
implies
that
sactuaf'manufacturing
costs form
tha prefer-
able basis for inventory
costing because
they we; incurred
in producing
the inventory,
The notion
that actuaf costs are the only acceptable
costs for inven-
tory purposes
has been ctrallenged
by advotates
of stanoard
costs.
Accountants
who advocate usinl stanoaru
"o=tr-1or repo*ing
purposes
believe that standard
costs ate iore nepnesentative
of the true
cost of
the product
than
actuat
costs. Ttr"v r"intain
that r"t"n"us
ars mea-
sunes of abnormal
inefficiencies
oiabnormal
efficien"i"";
therefore,
vari-
ances cannot
be inventoried
and should
bs immeJiai"iv
t""ognized
in
determining
net income
of the period-rather
than p--#"o
to inventories
and cost of goods
sold. Thus, tire costs
attached
t'o irre-product
aru the
costs that
shoufd
have b?:n in"uo"J,
not the costs itr"t rrur"
incurrpd.
Many accountants
believe that u"ri"n"""
do not have to be invento-
ried as long
as standards
ale currentty
attainable.
gut
it standalds
ano not up to date,
or if they reflect ttreoriticat
pe*orm-ance
rather
than per-
f ormance
und er t""=onib
ty efficieni
"onoition",
irr "i, l-on""ptualty,
th e variances
should
be split uet1vg.en,rr"
o"r,ion tirai;it}"
departures
from attainabre
standirds
and til;;i;n
that does
not.
Most
accountants
agree that unfavorabfe
r"ri"ni"lresutting
from the difference
between
standarus
uaseJ
on theoleticai
parformanca
and those
based-on
normat p-erforman*
"r,ourJ
i" ti"ffi'i"
product
costs and pr''orated
to inventoiiu"
"nJ-il"t
iiiooo=
sotd.
n ; is ress
agres- ment relating
to variances.
resulting
fror;
the diffeilr""'i"t,reen
actuat
performan
ce an d standards
based
;; ;;;,nd (attainabrel
perforrnance.
standard
cost
advocates
befieve
irr"lii-"=e
variances
should
be expensed
because
they
nepresent
abnormal
conditioi"-.'t,,"ny
other accountants
believe
that tirese t"ri*t""
nepnesent
part
of the actuat cost of produci ng
the goods
and, theref;,
shourd
u":i rr"t"d
as product costs
and prorated
to i nventori es
and
"o"t or goods
sord. (21
The three
To"t-appropri ate
atternati ve
me$rods
of vari ance
di sposi ti on woufd
requi re
the i ol towi ng
entri es:
{a} Cost
of Goods
Sol J..
Finished
cooJ"
rn;;;i;:::::::::::::.::::.:::::::::.:::.::
r,l3l
Var i ance. . . . . . . . . . . . . . .
f b) Cost
of Goods
Sot d. . . . . . - - - - - - -
- - - """""""""""o""'
l t so0
vari ance........:.::.:::"""""..
l ,soo
(c)
Finish.ed
Goods
rnr"ntorr::::::::::::::::::::::::::::::_:::
1,soo
t,soo
vari ance...............
.............:.:..:::::..::::
,
1,soo
I
I
r ' l
5t2
Chaptor 19
Ct 9-l
(Concl udedl
(3) The first
journal
entry is in accordance
with the discussion in part (ll as.
the most appropriatE method of handling variances. Cost of Goods Sold
is charged-with
the excess cost above what it should have taken to com-
plete the
proiect, based on a nonnal
(attainable) standard. Tho costs
ivariancei|
resutting from the differencs between the theoretical stan-
dard the normal standard should be
prorated to cost of
goods sold and
inventories,
based on the relative
proportion of the associated cost con-
tained in each. ln the situation
presented, the entire $l'OOO is charged to
Finished Goods tnventory instead of being
prorated to inventories and
cost and
goods sol d because the
producti on i s i ncl uded sol el y i n fi ni shed
goods inventorY.
The second;ournal entry can be
j usti fi ed
as an appropri ate method
for disposition of the variance
primarily on
practical considerations but
has litge theoretical
justification.
The
practice of charging all variances
to Cost of Goods Sold
(or against current revenue! often has been
justi-
fied on the
grounds of simplicity, convenience,
and immateriality.
The last entry woufd be appropriate where it is desired to adiust the
standard cost inventory to actual costs. Many accountants would advo-
cate this entry in the circumstances
presented because the inventory
would then bi stated at actual costs of
production. However, when this
method of variance disposition is foltowed, the asset inventory will be
carried on the financial statements at an amount that exceeds the cost
that shoul d have been i ncurred. Thus, i neffi ci enci es i n operati ons
ane
bei ng capi tal i zed as assets i n the fi nanci at statements when thi s method
i s appl i ed.
O2Gl. Diracl cosls arc dirccl tnaletials, dirccl labor.
and clhcr cost3 ditccuy assignrabb to e product
Aj1qgl-Cailigg
ir r procrduro by which only
prirn costt plur variabb faclory ovrrhoad aro
rttigrt d !o !
Ptoducl
or irvrntory; ell firrd cods
aro srrUorcd
porbd cstc.
O*Z Ptoduc{ ir rt esrcietd wilh thc mrnulac'
turo of e product end ircludo di?cct mat.tieb'
dirrl labor, and lactory orcrhead. Thcs. catr
arc chstgod againsl rcvcnuc Es ssl of goods
rold. or shovn on thr bahnco sheel as invenle
ri er of work i n pt ocet t and f i ni shed gooda'
P.riod costs are asseiatcd with thc passage cil
t i mc and sre i ncl uded as cxponggs i n l he i n'
cdrrc stalemerd. Under dircct esting, lired frc'
tory overhead is trealed as a pcriod coet nther
than !s a produc'l cosl.
O2O3. Under di rect cost i ng, onl y Yst i abl . manul ac'
turing 6ts are ircludcd in invcntory. Undcr ab'
rcptioo costing (thr cunrnt. gcncrally acccpled
method of cor'ling invtnlory for extemal rcporl'
hg), all nranufeeturing coets, bolh variablt and
tixed, are included h invontory.
O2G4. lt iB argued that lired manulacturing cosls 8te
thc expnses of mahtahing productive capacfy.
Such expenses ara mo.c closoly associatod with
thc passage ol time than with produciict activity
and r houl d, t her ef or c, bc char gcd l o
Per i od
erp.nre ralher than to tho product.
O2$5. The direcl costing method ir useful lor hlemal
roport i ng because i l l ocuses at t ent i on on l ho
fixed-variable cosl relalbnshp and the contribu-
l i on mar gi n concept . l t f aci l i l at es manager i al
decisioo making, product pricing, and cosl con-
I rol . l t al l ows corl ai n cal cul al i drs l o bo readi l y
rnade,
guch
as break-even pohts-and contribu-
tian mirgins of products, cales lerrilorios, oper-
alrng divisions, otc. Tho leus on the contribution
margrn (sal os revonue l ess vari abi e cost s) en-
ables managemont lo cmphasizo prolitabilily in
mshi ng shor l - r un busi ncss deci si ons. Fi xed
cosls aro ncl oasiv cstlrollable in the short run
and hence may not bo parl i cuhdy rel evanl f or
rho.l.run bushess decisistr.
O2O.
Argumenls lor thc urr c{ direcl cosling hclude
tho lollrwing:
(a) For prof i t -pl anni ng end deci t i on. maki ng
pur po3es, ml nl gem. nl r equi r 6r cosl -
vol umo-prof i l rol el i onshi p dat a t hat 6r.
moro rradi l y evei l abb f rom di recl cort
l t al . mcnt r t han f r om ab3or pt i on cor t
rtalements.
(b) Sincc lixcd laclory overhead is abrcrbed
as a perird cogt, fluctuatbns in production
and di f f crcncrr bri wcen t hr numbcr ol
uni l s produccd ahd t ho numbcr rol d do
CHAPTER 20
DrscussloN ouEsTloHs
nd aflect the per unil
Ptodttt
cosl.
(c) Di rrct cost i ng t oport s Et e mot e oasi l y
undcctood by managemcnl becausc lhc
Etal.mmi! f ollo* mrna genronl's doctsbn'
rnsking
Ptoc.r33s
morc closely than do
a\rorption 6l
gal.ments.
(d) Rrpodhg thc tctal fixed ccl lor thc perird
in tho incorrrr rlatcrnent dirccts manag.-
rncnfs dlentian lo the relatirnship of such
6l to
Prolils.
(o) Thr dirninatbn ol allocated jcint fixed cet
pr r mi t r a mot . obj ecl i ve appr ai sal ol
incornr conlributions according to prod-
ucls. tafes areas, kinds of cuslorners, elc.
Cot-nclurnr rclaticnships are highli ghled.
(f) Thr rinilarity ol lho undertying concepts ol
diroc' l cosling and flexible budgels facili-
tatca th. adopibn and use of theso meth-
ods for reporting and cost conlrol.
(S) Dircct coeling provides a means ol cGting
invrnloqy lhat ir similar to managemenl' s
cqrcopl of invenlory cosl as lhe currenl
oul -of -pockel erpendi t urei necessary l o
produco or replace the hvenlory.
(h) Cle&al costs ate lower under direcl cosl-
i ng because t he ml hod i s si mpl er and
dosr nol requi re i nvol ved al l ocal i ons ol
fired cosis o special analyses of absorp-
tion data.
(i) The cornputation ot product cosls is sim-
pler and rnore reliablo under direct ccling
because a basi s l or al l ocat i ng l he f i xed
costs, which involves eslimales and per-
aonal
ludgment,
is sliminatod.
0, 20-7. Argumenl s 8gai nsl l he use of di recl cosl i ng
include the follaring:
(a) Separalian of costs inlo fixed and variable
mi ght be di f f i cul t , especi al l y when such
cosl s ar o semi var i abl e i n nal ur e. Mor e-
over, all coslsincluding fixed c6ts{tc
variable at sorne level ol produclion and in
the bng run.
(b) Long-range pricing ol products and olhr
l ong- r ange pol i c y deci s i ons r equi r e a
knowl edge ol compl el e manuf act ur i ng
cost, wtrich would reguire addilirnal sepa-
rsto computalions to allocale lixed over-
head.
(c) Thc pri ci ng of i nvenl ori cr by t ho di rect
cot l i ng met hod i 3 not accopt abl e l or i n-
co.r|c lax cornpulation purpo!os.
(d) Direcl costing has not been recognized as
conl ormi ng wi t h general l y acccpl ed ac-
cotnling principles applied h lhc prepara'
tbn of financial statomonls for rtockholcl-
orr and lho gencral public.
5 1 3
511
(r) Prbfitr dotorminod by dirrct cothg en
not'trua rnd prcpor, b*llr cl lhr uclu-
rixr cl fnrd prcductixt qtr
thrt rn prn
of tolel prcductbn
corl. .nd invontory.
Pradwtion rculd nd br porbb wilhort
plrnl frilitiel, rquipmonl, olc. To dirrr
g.rd lh. fu.d str violdeo tho grrnl
pdrrcipb cl mrbhhg co.t, with rov'rrnu..
(f) Tho olnirdim ol tir.d str lrqn hvrn.
tory r.rultr ir r lowor figuro end @rut
qurot red|rticn G|| rrpodod *odrhg crpfd
fq firerrciel rnrr),!b purpor.
A2O. Assrrnhg thrt h. qurntity cf rndhg invmtory b
larger than thr qurntity ol btginning invrntory
and lhr lilo mothod b urod, op.nling incqnr
urhg dirrt strrp rpuld br rrnallor tun oprr-
ating irrornr urhg abtorptbn corting. Diroct
corling oxcludor firod lrctory ovrrhord fronr
invonlorio boceul ruclr cotr rro conridrrcd
to bo porbd
cortr which rf. axponrod whon
incunod. In cqrlrerl, ebrcrptin sthg ircludot
tirrd frtory ovtrhred in invrntorio bocruro
sirch cotr en suidond to br product ots,
whbh aru rxprcrod crly whon thr prcdLnt
arc
sold. Whrn tho guentity
of invrntory irrcrotrl
during a poriod,
dr.st c6ti1g producco
a brrer
dolbr ircroaro in hvrntory than obcorptbn ccot-
ing, bocaurt firtd cortr aro oxp.nsod rathrr
l han cher g. d l o i nvr nt or y. Si ncr e r mel br
anpunt of cuntrl prird
sl ir chargnd epirut
incornr
undrr tht lbrorptioo corting mrthod
whrn invonlorior
incrour, ebrorptioo cating
I ncom. woul d br l er gor t hcn di r r ct cot t i ng
ncgTl..
Q2G9. Thr brrah-ovm pcirl b the
Xint et rtrbh costr
and r.vcnua irrc h eguilbrium, rlowing noither
pofil nor lora lor thr busirrsr.
O2Gl0. Thc ccntrbutixr
rnargh it lhr nsutt ol rrrbtract.
n9 variablo cql lrcrr tho ralcs figun. Tho con-
.
tributiqr margh indicatcr lhr arrpunt rvailablo
fq th. r.@.ry
of tirrd co.t arrd lot proltl.
o2Gt 1.
, F
(a)
R(BE) = -
t
- v
or (ir *ordr):
Brv$uo rt tho Totst tir.d c6t
brrakrvrnpc*rt
=
EJ,ilf,Gffilr
por
dollar cl ralos
(b)
O(BE) =;L
P _ C
or (h rords)
Unilt of ubr at
broehrvrn pc*rt
=
Total tix.d coot
Cartribulbn rrrargin
Clnpter fr
(3) Totrl cat lin .
(4) Verieblo cod rna.
(t Firrd coet rrrr,r
(0) &rl-rvon pcirl
m
Lorenr-
(8) Pnlil enr
(9) Sd..litr.
@o13. An rdpb of tho rrpra.d bohrvbr cl a firm.t
frporrr.f end rtvrnur lor thr purpo
of csr-
dructhg r bn hvm ch.rf b uruetly nrtrictod
lo tho
qrtpr,
lovrlr rt whi*t Uro firm i likrly to
oponh. Artumplbor rbout thr lovrl of firod
god,
tro nlo of verirbb st, and salcs prbos
rn buod
qr
tho oprnting srditisrr ard msn.
rgrriel policior
thtt will bo in olfrct ovor tho
reoclrd ostpul bvob. Thesc oxp.cled output
lovrlr roprcsrnt thr firm,r rrltvanl rangc, and
thr sl-vplumr-prc{it rrbtlxrr}ripr r}ronn in e
brodr.evtn ctrerl err applkrblo mly to output
ltvob within thir rango. Tht bohavior of fixcd
cod. variablo cod, md ralot prbco at tcvob ol
orjtpul bobw or oboyr thr rebvenl rangc er.
lik ty lo ruuft in an ontiroly dilforrnt rt of cool-
yoluntr-prc{il
nlaticxrshiu bccauro of cfungrd
op.trling csrdtbnr c nranagrrbl polbio. Tho
trl Srat hr cct and nvtnuo lirer
qr
e breal.
rvon cherl arc typically txtrndcd past thc uppor
and lowcr lirnitt of thr rcbvant rango thouH no!
thordoro, bo intrrprotod to mean that thcy aro
vrJU for lhrao bvob of ouqpd.
A bnakrvon chart rtr*ing cot-volumoprof.
it relalicnrhigr for rll bvdr ol ovtput could bt
drvolopod. Tho rhrpor of hr cod and rovonuo
l i nrr i n euch r chart coul d not, howcvor, bo
trpocl od l o approri matr rtrai ght-l i nr (l i nmr)
p.ncrnt.
By rcstricting thc undorlying ccl.and
.
rov.nua bchavi or asl umpti onr i n broak-ovon
Inalys.s to a relatively narrow output range (tho
rang. orcr whi:h thr firm b likcly to opcrate), it
i r urual l y poesi bl o l o rl sumo l i near bchavi or
pal tornr
wi l houl any ri gni fi cant di etortbnr i n
sl-volurno-prc{il rc latianrh pr,
th e reby a irnplify-
ng the analyris.
tf tho rangr wer wtrich o firm ir likely to opor.
a|l ir guitr widr, curvilinear funclionr may bo
ompbyrd; or it may bo dcsirsblo lo dcvclop e
numbl r of brcak.ovrn charl r, oach hl vi ng i l r
own rl l ovanl rang., for whi ch thr undrrl yi ng
cort and rcvcnua bohavi or arrumpl i onr erc
valiJ.
O2G14. Woaknesses
hherenl h thc preparatbn and usc
of brcak.cven analpis arc:
(a)
Whon morc thst ane product ir producrd,
lhr cqrtribulicr
margin of ooch producl
will probably
diflor. Accordhgly, a broak.
ovon analyrb for tho urholo oprratbn wiil
not hdbat.
tho csttribtuirn of rach pred-
uci to firod co.t and thc volunr rcquirod
lor oach product
o2or2.
(r)
Dolr' of 'vonw
#;1of
product
(21
Volurrr oa orrtp{rt, rxprrsed
h unrb, ptr-
cant of capaci t y, l el ol , or l om. ot hi l
rnaatun|.
Ctugtcrfr
,
(b) Somo'costr en elrnosl impouible to
dalsify ccrduJvcly ar bchg ri{rer fired
avarbbh
(c) Grnrnl rcqronic conditioor and othrr
rrtrmal hcton rmy rflect ho dete urod
h th. rrtsl)ttb.
(d) In thr final enalyrb, fird coct b nlatod
!o productir:n end ralor rn4 thrrofon,
may drcnrtr romrwhat dur to
docreard
production
and ralcr-cnd
vbr vonr.
(r) Ouilr oftcn cstr hcrcare tharpt el crr-
. tah pcirn! in prcdraion
and raler lcvett
and lhen levol or,lt until a ccrtain gmster
rl agr of producti on
andl or rahs i r
rcedrcd, el wtrbh tino hc phrnanoncr
ir rcpealcd ar production
and/or talrr
are agair ircreased.
(0 Pedormancr murl bo conrlanlly com-
parod to thr bnal-ovcn analyab h older
to determhr whrihcr thr csrdilirrrr that
rxirlrd at tho timr of thr colculatlons
havc heH lruc, and whether any changes
have been cqrsUered.
42S15. (a)
With cales pricr prr unit and totat fired
cogl rcmaining cqrrtant, thr brcak.evcn
poinl movcr up rapidly ar unil variabb
- cool ir increased;
at thc samc timc. the
brcak-ovon poi nl
moves down as uni l
variablc cost ir decreased
.
(b) A decrease h fired cst krwerc the break-
even poi nl .
An i ncrease i n fi red cost
npver the break-cven poht
higher.
Q2S16. The mangh ol salefy b a seleeted Lbs fgure
less break-even sales. The rnargh cl satety is a
cushion agninst sales decreases. The greater
the margin, lhe groatef
the cushbn against suf-
fering a bsc.
Q2Gl7.
Cct-ye1g6r-profil
relationship
i: lhe retatron-
ship of pofil
to sales volurne. Thb relaticrship
is importsnt lo,rnnagement
because ,rEvrago-
ment l ri es el al l ti mos to keep vol ume, cost,
pr r ce,
and pr oduct
mi x i n a r al i o t hat wi l l
achievc a desirod level ol profit.
O20-'t8.Thc.Tf,"9ty
of Conrtreints lr r spccializad
ycnion
d dirud corUng for urc in
ghorl-run
optlmizaton dccirionr. A dittincUon
batwecn
TOC and dircct costing ir thgt TOC focuscc on
only thc purely
verieblc coltr rnd doa not
consider dlrcci labor to bc puroly
verieblc.
Q20-19.Mosl cornpenict thrt deesify 6nt tnto ftxeO
and variablc c8tcgoric! bcst dircst lebor ar
verlablc, co In dirrl cottinE, dircct lebor i,
arigncd to productr
ar e wrleblc or
-
incramantsl cort-of producilon.
tn thc Thcory
of Conrtreintr, dlrcct labor lr sdpuletcd to ba
not purcly
vsriablc rnd lhcrclorc is not traltcd
ar an incramcntsl
cost of output.
Thc diffcrcncc betwccn thc contribution
margln rnraruru ln dlrcct coillng snd thc
lhroughput mcalurc in TOC lr that ilroct lebor
lr onc of thc cost! daduclcd from sslcr to
celculsle conlrlbutjon mergin, but dircct hbor
is not r coEt to bc drductcd hom relcr in
calculetin0 throughput
Thcrc arc mrny dtflcrencs in Grnphesir
bctwecn dlrcct corting and tha thc6ry ol
conrtraints. For aremplc, whllc dlrect coitlng
ir widaty ug6d er sn eccounling epproach foi
i:t!"ln"t
reporting of incomc and pioduci
cort.
TOC dcalr hcavily wlth thc improyorncnl
ot
conslreinl! or botilaneckr In .
producllon
syslcm.
Q2o-20.Throughput ir tho rata at which a rystem
gangratas
moncy through s8ler. lt i3
cslculsted ar srlcr minur thc purrty
varisbte
coslq and ottrn th. only purcty
varieblc cost ig
lhc cost of materials.
Q20-2l .El evati ng a conrtrai nt maanr i mprovi ng tha
conslrairtimproving
thc condltions at a
bonlenecl In the lystsm. tts slgnificanca is
grcatrst
lf the constraint ls thc fightast one in
'
l hc
aystom: thcre, any i mprovcmcnt wi l f
i ncreaaa l ho totsl throughput of l he enti re
3yEl em.
An i mprovoment i n product gual l ty
can hetp
elavalr a constraint bccausc lt can iaducc the
workload on r bottlcnecl resourca. For
oxemplo, ramoving -
dctecilva unilt
_bafora
ralhor lhan eftor thsy roach thc bottteoeck
meens therc wl l l bo fewer uni ts passi ng
through lhe botilanock. Thig har approrimatetf
thc samo cffect on thc bottteneck ai
i ncreesi ng i ta capaci ty.
5t 5
\
\
516
E20-l
a a a a a a a a a a a a a a a a t a a o a a a
$ 72O,OOO
18,OOO
s 702,O0O
340. OOO
$ 362. OOO
S3O
per
uni t
35 per
uni t
Chapter2O
sl rOSO,OOO
14O, OOO
l OO, OOO
4O, OOO
s30
sl , 20O, OOO
Variable marketing and administrativeexpenses
(9o,00o
r
$2ol
Contri buti on margl Jl ........' .........o...r.......r.r.r...r...o....r............r,
Less fixed expensess
FaCtory Overhgad .' ..' ................................o..
$2OOTOOO
Marketi ng andadmi ni strati veexpenses.....
14o.ooo
Oper at i ng i ncomg. . . . . . . . . . . . . r . . . . . . . r . . r . , . . . . . r . r . . r . . . . . , . r r . . . . . . . . . . . . . . . . r r
E20-2
(1)
Vari abl e cost per
uni t:
.
ST,OOOTOOO total variable cost
eO% manufacturing
cost portion
ql2oo'999-
total variable man ufacturing cost
S4,2OO,OOO total variable manufacturing cost
1n
Fixed
cost per
unit:
S11,2OO,00O total fi xed cost
59o/o manufacturing
cost portion
q_5,6oo,00o
total fixed factory overhead
55,600,00O
total fixed factory overhead
160,000
uni ts normat producti on
votume
E)(EBCISES
Operating income tor 2OA using direct cost i ng:
Salgs (9Or0oo r $1 21.............r.r
Variable cost'of goods
sold (gOrOOO
r
Gross contribution margin
Ful l
cost per
uni t at standal d ..........................
Number
ol uni t s sol d duri ng t he year. . . . . . . . . , . . . .
Cost
of goods
sol d at standard under
absorpt i on
cost i ng . . , , . r. . . . , . . r. , . . , , . . . . . . , , . . . . . , . . . r.
s65
x l OO, OOO
s6fggooo
(21
9ni t "
act ual t y pr oduced
dur i ng t he year . . , . . . , . . . . . . . .
Uni t s
sol d dur i ng t he year . . , . . . . . . . . . . .
Uni t
i ncrease i n i nventory
St andar d
var i abl e manuf act ur i ng cost per
uni t . . . . . . . .
Endi ng i nventoty at standard di rect cost ..............r.........t..
Chagterfr
E9,O-z (Concluded)
(31
Normal producUon
volume
a a a a a a a a a a a a a a a a a a a a a a a a a a a a
5t 7
l go, ooo
l 40, ooo
20,ooo
$ss
$ Too,ooo
-
$ tg,ooo,ooo
3, OOO, OOO
$ 15, OOO, OOO
2,9o0,000
$ l 2,2OO' OOO
l l ' 2OO' OOO
$ I , OOO, OOO
$ 27O,OOO
135,OOO
$ i3s,ooo
50. ooo
$ 85. OOO
-
$ zzo,ooo
go,ooo
$ iBo,ooo
Unlts actually produced
during thg
ygar,..o..........,r..........o.
Ercgss of budget over actual productiort
.............r.............
Fixed fagtory overhgad per
unll...,....D..........o...o..............r..
Factory ovgrh
gad
volume variancg...,..-..,..............,,......o,...
(4) Sales (tOO,0OO
unlts r $f AOl
Standard varlable cost of goods
sold (iOOTOOO
units x $?O
unlt variable cost!.........r............r.......r...r......r.....r..r........
Gtoss contribution margin...D....,........
variabfe selling erpense (sz,oooroOo
variabfe cost r 4avol.
Contribution margill ........,.' ...............D.' ...o...........o...r..........
Less fired costs.
operating income undgr dirgct costing.......,,........,.,.....r....
E20-3
(11
Income statement using absorption costing:
Sal gs (9' OOO
r $SO1 .....,.' ...........,......."...,....,...,.......,.......,...
Cost of goods
sol d (9r00O
r ($l O +
$S)l .....r,..........r.,...r......
Gr oss pf of i t . . . . . . . r . . . . . . . . . . . . . . . . r . . . r . . . . . . . . r . . r o. r . r r . . . r . . o. . . . . . . r r r . . r . . . . . .
Less commerci al
expenSBS . . . . . . . . . . . . ' or. . . . . . o. . . . . . . . . . . . . . . r. . . . . . . . . .
Operating Incomg..o............r"....o...rr.........o..,............,,........
(21
Income
statement using direct costing:
9al es
(g,OOO
r $30)..........,.... ....r,............,..r.........
Vari abl e
cost of goods
sol d (9r000
r $1o)................D....,..o..
Contribution
marg ilt ...................or..,,,.........
Less fired erpenses:
(3t
Fact ory
ovgrhgad. , . . or. . . ro. . . . . . . . . . . . . . . . . . . . . . . r,
$COTOOO
Commgrci al
erpensS...,...,..................,..
so.ooo go.ooo
Operating
incomg ' ....................,...,.........r,..,.r....,..........,.*
ll_goJqg
computati ons
expl ai ni ng the di fference i n operati ng i ncome:
Absorpti on
costi ng operati ng i ncome..,.....o,.,.....,...o,.o..r.....
$
g5rooo
Di rgct
costi ng operati ng i ncomg.,,.........,...,.,.....................
go.ooo
Di ffgrgnc8""..................r.....,o...................r.......................,.
l _.(5,oogl
Unl ts produced
duri ng the peri od.....................,........,.,..r...
grOOO
Uni ts sol d duri ng the peri od................,............
grOOO
Uni t decrease i n fi ni shed goods
i nventory
...,...,....o.
f
f
"OOOI
Fi red factory
overhead charged to each uni t of product
under absorpti on
costi ng
.......................,........
r
35
Di fferenco............
....,.,...,.......r.......r.....,
g_ (SrOOO}
.=
I
518
E20-5
Dirgct 18bor..........
Variable lactory oYefiead a a
Variable marketing
gxpsnsG)...' .....' ................o!......' .......r.r...r........' ....r..
Totaf variable cost
per
unit
Sal gS pri ce per
Uni t . ' . . . . . . . . . ' . . . . o' . . . r. . ' . . . . . . . . . . . . r. .
Vari abl g cost
pgr
U11i t . . r. . . . . . . . . . . . . r. . . . r. r. . r. . . . . . . . . r. . . . . . . . ". r. . r. . . . r. . . . . . . . . . . . . . . . . .
Cont ri but i on margi n per
urt i t . . . . . . . o. . . . . . . ' . . r. r. . . . . . . . . . . . . . . . ' . . . . . . . . . . o. . . . . rr. . . . ' . .
Fi xgd f act ory ovgrf rgad. . . . . . . . . ' . r. . . . . . . r. . . . . . . t . . . . ' . . . . . . r. . . . . . rr. r. . . . . r. . . . . . . rr. . . . . . .
Fi rgd markgt i ng erpensrg . . . . . . . . . . . . . . . . . . . . . . . . . . . . , r, . . . . r. . . . . . . . . . . . . . . . . . r
Fi rgd admi ni st rat i ve expef l Sg. . . . . . . ' . ' . . . . . . . . . . , . ' . . . . . r. ' . . . . . . . . . . , . . . rr. . r. r. . . . . . . . r.
Tot al f i xgd
grpgnse, . . . . r. . . . . , . . . . . . . . . . , . . . . . o. . . , . . . . , . . . .
r. . . . . . . . . . . r.
(1)
326,000 total fixed cost
= 13,000 units of sales to break even
$2 contribution margin
Chagterfr
E20-4
$6ro00
=
$e'ooo - $g,ooo
=
$iorooo break-eyen
point
in dollars
t E- i - . eo - 60
s2.OO
$lO'OOO
+
$2
= 5rOoO break-even
point
in units
(orl
$8'ooo - $,6'ooo -
srooo break-even
point in units
Stroffi-o m-
5,OOO units r $2
=
$lO'OOO
break-even
point in dollars
$ 1. oo
1. 20
,50
.30
s__g,og
$
5. OO
3,OO
(21 13,OOO uni ts r $5
per
uni t =
S65' 000 sal es to break even
(3)
$26,00O lixed g.ost.+ $1O,09O
profit
= i8,000 units
$2 contribution margin
(41
18,OoO
uni ts r 35
per
uri t =
$9O,OOO sal es
E20-6
Pl annod
sal gs r. . . . . . . . . o. . . . . . . . . . . . . . . . o. . . . . . . . . . . . , . . . . . . . , . . r, . . . . . . o. . . . . .
Break-even
sal es .....r........
Margin
of safety
-oo'90=o llryin
of,stP
= zs'h Margin of safety ratio
52,OOO,OOO
Pl anned sal eJ
S 2.oo
$15, OOO
5,OOO
6,OOO
s26,OOO
$2,OOO,OOO
l
r5OO,OOO
s
5oo,ooo
L
L
L
L
L
L
L
L
L
L
L
L
L
Clpptarn
E, . o-7'
5r9
$82,5OO
25,OO0
$37,5OO
r{r
$9r3OO
l
- ,
.42
$l 5,OOO break-even salos
t2l
(31
S'o99=
$16'ooo
=
g2o,ooo
agtual saleo
1
-
.25 .76
PR = C/M r M/S; PR = .62 t .25 =.155
32O,OOO r .155 =
$3rlO0
profit
for the month
E20-8
(r)
$3o'ooo
=
$so,ooo brsak-evon saleg
.oo
(21
T0'oo:o
=
$59'9oo
=
$o2,5oo sales for the year
1
- . 20
. 80
PR = C/ M x M/ S; PR = . 2O t . 6O = . 12
$92,500 t .12 =
S7,5OO
profit
for the year
(3) Sal
gs
aa. . r aaaa. . . aaa. . . a. aaar aa. r a. . r . aaaaa. . r . . r . o. . . . . .
variable cost
stg2rsoo
r (l
-.60)).......
contrfbution margin (38215oo
r .8o)..,..r...,........,....,.,..............
!
I
lb
L
L
E20-9
Sales:
(1 OOTOOO r
$S! ..o.......r......r........,...
(2OOTOOO
r $61 . , , . . . o. . . . . . . . . . . . . r. . . . . . . . .
Variable cost:
GIaOOTOOO r 30g6)............r....
GfrDl ,2OO,O
OO r "5oA1....,............,....
Co ntri b uti o n ma rg i n...r...o.,......r........
Pl anned
operati ng prcfi t.........r.o......
Fi rgd
cost .r..............,.........,.
Chi p A
$8OO,OOO
24O,OOO
Chi p B
$l,2oo,ooo
Total
$2,OOO,OOO
540,OO0
$1, 460r O00
270.OOO
$1. 190. O00
3OO,OOO
$560,000 $ 9OO,OOO
I
i-
5m
E20-10
Chai rs
$gs
20
_81_
$l ' 5OO,OOO sal es
to break even
Chaptor2O
=
$st
Sales
price per
unit.
Variable cost
per
un|t,.......r.........
Gontribution margln per
ultit ......
$72O,OOO fixed cost
1
-
((Sso
+ (4 x
$zop
* (9t
1o + (4
x $3s))l
or alternativelp
$72O,0OO flxed cost
($60 + (4 r $15)l
* (911o
+ (4 r S35)l
$1,50O,OOO sal es
to break even
Produst L
$20
1 2
s 8
x 2
s 16
Tbbles
$110
50
s 6 0
$l r5OO,OOO sal es
rc
= 6,0o0 hypothetical packages
or alternatively;
S72O,OOO fixed cost
61000 packages
r I table per package =
61000 packages
x 4 chai rs per package =
360 + (a
r Sis| CM
= 61000 hyryothetical packages
6,000 tables to break eyen
24'OOO chairs to break ven
6, 000t abf esr 31i Oper t abl e
=
$ 660, 000
24,oOO
chai rs x $ 35 per
chai r = B4O;OOO
Total sal gs to brgak evgn.....,...o....,.
$l r5oorooo
E20-1 1
Sal gs pri ce
per
uni t ................-...r...
Vari abl g cost per
uni t,..........r.....r,r..
Uni t contri buti on
margi n..................
Expected
sal es
mi x,........,r,..........r...
Contri buti on
margi n per
hypotheti cal
pi cki go
..................
+
Product M
sl s
1 0
s s
x 3
s15
Ctpptcrfr
eo-1i
(Concluded)
(11
S372'OOO fired cost
$31 contribuUon margin
l2'OOO
packagee
r
l 2' OOO
packager r
24rO0O units of L r
36,000 units of M x
l 5' OOO packages
x
15,OOO packages
r
3O,O00 units of L x
45,O0O units of M x
Bfgak-gVgn Sa1gS.t......r..................r.
$372,OOO fired cost + $93,OOO
profit
-
$31 contribution margin
521
= l2rOOO
packages
to brsak ovon
= 24rO0O units of L
= 38,OOO units of M
$ 48o,ooo sal es of L
54O,OOO sal es of M
9l,o2o,oo9
l 5rO0O packages to achi eve profi t
= 3OTOOO units of L
= 45,OOO units of M
l2l
2 unlts of L
3 unlts of M
S2O
=
$ f 5 =
2 unlts ol L
3 units of M
$zo
=
$15 =
$
600,000 sales of L
675,000 sal es of M
$2to,ooo
8O,OOO
105, OOO
6O,OOO
_$4s9,oo9
(21
(3)
Sal es to achi eve profi t....D......,...r.....
$1 1275,OOO
E20-12
(il
Variablg manufacturing CoSt........r......' .........r.........r.,.........
Fi rgd manufacturi ng Gost.,....,.,.........r...r..,..............,.........,
Vari a bl e marketi ng expenso ..........,..r..,.........r...o..D....r.
Fi red marketi ng and admi ni strati ve axpenses .r.,,,.............
Total costs to produce
and sel l 70,0OO uni ts...oo............,...,
S455,OOO total cost
=
S6,50 sal es
pri ce per
uni t to break even
70,OOO units
($80r9OO.+
360,0O0) fired cost
= Si,g52 units
38- $4. 5o- ( r o%r $B)
( $124, ooo +
$5o, ooo) f i xed cost
= 8o, ooo uni t s
38
-
$4.5o
-
(r 5% r S8l
CGA-Canada (adapted).
Repri nt wi th permi ssi on.
AnW20
P
( t S
- =
o - 6
t o
t
o U ,
< t
9 a -
e -
a
m
N
C'
t
J
(t
tp
e
E
r
I
o
o
:t
o
E
;r
a a
. ' t t r l | | o J l g l t - t , | a
= - l J
9 = N ! f r q q ! o r g o
o o o o c r o c r o c r o 6 c t
s s E s B ' s E ' s s s E g
8 g : g E 3 E 3
g E g g g g s g
o
'o
o
o
6r
31
o
C,
O
t
a
att
a
a
a
t
a
a
a
c
t
a
E
a
I
I
m
a
:
'o
g
t
I
o
a
o
o
r
o
3- -
1 6 O I
- o t
o o l
. o - ' o - l
q o l
P - O I
o 1 9 l
o i t
; b
' 3 )
] t
t 8 o
s E 3
5 o a r . . J t J t 3 l
3 6 B 3 3 t s t d B
s s E E g ' s E ' g g
l , 5 0 o a J 1 9 6 6
- N O - U d l ! O @
o o c l o o o o o o
9 a - o ' o ' o - o ' o - o ' o
9 O o O o l O o c '
e g c r c r c t O o c r O
g-r
3
c)
o
2
c
f
a
o
3
0
a
o
CT
e
E
r
I
o
o
:'
o
tr
t
r
.
o
I u,
I
o
t
:0
o
o
o
t-
o
(D
o
t
-
m
E
E
;
o
o
r
5
o
o
t 2
./
'o
/ ?
o
o
t
I
!
!
L I
L
173
. E2&|4
I
L
(i) throughpuUunit
=sales-materiats
cost= $45-($fC+ ${)
=
$i:}0
,
(2) Maximum thmughput
per mon0r is
${44000.
Total thmughput tur a period is tre
L
g3o/unit (hom rcquircmed f) multiplied by the number of units shipped; units are
limited by ttre loyrestcapacdy operation, which ls Surface Prep's
4800
units per
i
month:
d800
units/monfi x
$3olunit
=
${44y000lmonth.
I
(3) Surface Prep is the tightest constraint with a
dS0Gunit
capacity.
r- E2o|5
(f
)
No, Orey should not acquire tre equipment Gloss Coat ls nst the tightest
!
constraint so increasing its capacity will not help.
(2') Tgto,llaximum monfily tlrroughput will not increase'
!
(3) Yes, an addifonal Surface Prcp (SP) crew should be hired. The increase in overall
thmughput rnore thaniustilles ffre cost
!
.
(4) Maximum ttrrcughput witl increase by about ${5'000
per montfi (500 unitsfnronth
x $3o/unit).
SP is the tiglrH constrain! so increasing its capacity will incrcase
: $roughput of the entire system until SFs improvement causes anofrer
conslraint to become tfre tightest Glcs Goat, tre secon&tightest constraint
!
presentfy has capacity 500 units higherifian SFs.
E2G' 6
s (1) Yes, an inspection should be created
just prior to Surface Prep (SP). For each
1,000 shipped, 50 defectirrcs enter SP-26, 1d and 10 arising in tlre tfree
s
preceding operationq rcspectivcly. SP trs tlre tightest constraintr so removing
de{ectives priorto SP will increase total system tfrroughput At
S30
throughput
,
pruni! the 50 added units (perthousand shipped) doiustify the added
\'
inspection.
',
(2)
Removing all defuctives
just prlorto SP will increase tfie number of good units
!
entering SP by 5U1r000 or atrout 5"/o. Vyilfi SP presenffy handling
4800
units
per
rnonffr, a 5o/o inclease in units shlpped lE .05 x
d80O
= ?4r0.
Additional thtoughput
\.
will be 240 unitstnontr x
$30funit
=
f/r200
per mon0r. BGGau$e ltre inspection
will cost
$1,800
per montlr, tre monfirly adrantage of the added inspection
'
operation will be
Ft,200
minus $11800, or $5'4O0
per nrcnffr.
I
I
521
ChwterZ0
PROBLEMS
P20-1
IIIASTERPIECE TOOL CORPORATI ON
Product-Llne lncomo Statement
(ContribuUon Marg in App roachl
Ecctronlc PncumaUc Hand
Total Tooh Tooh
lpolr
Sslct.-,-....-.....o*...s--...roo.ru- StrOOOrOOO 31 '5OOIOOO tir00O'OOO 35OO'OOO
Locr varlrbb co.t of goodr told-..*. lrOOr00O 7O0r000 5OO'O0O 2OO'OOq
Orocr.contrlbuUon mlrgh.....o-o.F. llr6O0rOOO t 800'0OO 3 SOOTOOO 33O0'OOO
l-acr wrlcbb markcUng crpcnrc!
(packl ng rnd drl ppl n!).....-..-...-.-.. 25O,OOO 1OO,99q IOO' OOO 5OTOOO
Contrlbutlon nargln sl,3:to,ooo t 700,000 3 aoo,ooo 3250,000
Leu tracceblc thcd opanlc*
Manufacturlng t 25O,OOO t loo,ooo 3 loorooo 3 5o,ooo
MarkcUng (advertblng)..,.............-.. 450'O0O 200'O0O 2OO'0OO s0r0q!-
Totel tnccrble lked
arpcntc...-.
! 7OO'OO0 t 3OO,OOO 3 3OO'OOO 31OO'OOO
Product contrlbuUon-.*..-.-H-- t E|IO,OOO f aoo,099-
U9'009. l1!0'@_
Leo common lkcd arpontrt:
Manufuctrrlngl.
MarkeUn92
Adml nl gtraUon ...--.
3 3r0,ooo
I OOr OOO
150. O00
Totel common thed crpcnrc3 --.
S 550.000
Opor aUngI ncomc $ I OO. OOO
r
$1,950,000 abaorpUon coat of gmdr rol d
-
$tTAOO,OOO
vnrl abl c costr
-
$250' 000 traceabl c
fhed coct
2
Ssoo,ooo total marlcettng cottr
-
i2sgrooo
yarlabto
openao
-
3+5o,ooo advertlalng expenaa
Ctpptcrfr
P2A-2'
(rl
$78O,OOO
2,OOO
525
787,OOO
c
513' OOO
232.OOO
s 281. O00
5O,OOO
49,O0O
I ' OOO
$s
$ 5,000
ROBERTS CORPORATION
Income Statement
For Year Ended 2O-
Sales
(52,OOO r $251
Cost ol
goods
gold:
$1, 3OO, OOO
Standard full cost (52rOoO r $f
5! ...'...'.....
Net unfavorablo variable cost variancos '.
Untavorablo volumg varlancer.' .' .......r...... SrOOO
Grcsr prlflt.
Less commenclal erpenseo:
Variable orponses (52'OOO r $11.,......o......
Fired orpsnses
Operating fncome under absorption costing
rUnlts
budgeted for
production during ttte year.........r......,
Unlts actually produced during the
year ....o.....................
Fired factory overhead chargedto
gach
uni t.......,..,...,....
Unfavorable volume variance
ROBERTS CORPORATION
lncome Statement
For Year Ended 20-
$ 52, OOO
t 80. ooo
l2l
Sales (52,OOO
r $251
Cost of
goods
aofd:
Standard variable cost
(52r00O r $lO)...... $52O,OOO
Net unfavorabl a vari abl e cost vari ances.. 2,OOO
Gross contrlbution margin......D.....' ...' ...........................o.....
Variable commencial expensgs (52rO0O x $11 .....,,....,..,...,..
Contribution margill ...........,.,r.........Dor..........
Less firsd costs:
Factory sverhead
(5O,OOO
units budgeted r $51 $25O, OOO
180. OOO
Commgrcl al expensBs .........,o...,,...r...,......
Operati ng Incomg undgr di rgct costi ng..,.............,Do....o....r.
(31
Operati ng i ncome under absorpti on costi ng.......,..,.....,.....
Operati ng Income undgr di rgct costi ng...,o..o..i .........r....,....
D1f f gr gnco. . . . . . t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ' . r ' . . ' . . . . . . . r . . r . . r
Unl t s produced
duri ng t he year. . . . . . . . . . . . o. o. . . , . . . . . . i . . . . . . . . . r. . . r. .
Uni t s sol d duri ng t he year . . . . . . r. . . . . , . . . . . . . . . . . . o, . . . . . . r. . . . . . . . . . . . . . . r
Uni t decrease i n fi ni shed goods
Fired factory overhead charged
i nventory.
$1,3OO,00O
522,OOO
$ 778,ooo
52,00o
$ T26,000
430. OOO
$_?egJgq
to each uni t under
$ 281, 000
296. O00
l__0_9'o991
49,OOO
52,OOO
(3,OOO)
35
$
(15,OOO)
r
I
I
g l
526
720-3
( 1)
Chapter 20
PLITCID CORFORATIOH
Income Statement
For Year Ended 20-
Sales
(48,000 x $161 $768,0OO
Cost of
goods
sold:
Standard full cost (481000r
$9)............... 9{32'OOO
Net unfavorable
yariable
cost
yarlancos,,
lr0OO
Favorable volume variance' (3,OOO}
Gross proflt
Less commenclal erpenses:
Varlable erpenses (48'OOO r $l)...............
Fixgd oxpenses......o..........t......r..........r.....
Operating Income undgr absorptlon cosdng ...,o...........r.,...
tUnlts
budgeted for productlon
durlng the yoar.................
Uni ts actual l y produced
duri ng the yoar...,r.....,..r.......,.,...
$48rOoO
99. O00
o,ooo
$338,OOO
147. AOO
$_1e,Lqoo
50,OOO
51, 000
(r,o0o)
x 3 3
tzl
Fixed factory overhead charged to each unit
s
(3.OOO)
PLACID CORPORATION
lncome Statement
(3)
ded 2(F
Sal es (48t000
x $f 0) ......r' .....................' ..............,......o.r.r...
Cost of goods
sold:
Standard variable cost (481000 x $61......., $2g8r0OO
Net unfavorable variable cost
yariances..
1,OOO
Gross contri buti on
margi n.......................o.............,,
Variable
commercial
expenses (48,000 x $11
Cont ri but i on margi J| . . . . . . . . . . r. . . . . r. . r. . . . r. r. . . t . . . . . r. . . r. r. r. r. . . . . . . . . . . .
Less fixed costs:
Factory
overhead
_
(50' 000
uni ts budgeted r $3)...-........,.. $15o,o0o
Commercl al
expenses.................,..,...r..... gg.0oo
Operati ng
i ncome undgr dl rgct costng.,.......,...................,
Operati ng
i ncome under absorpti on costtng,..,,.......o.,r..,...
uperati ng
i ncome undgr di rgct costi ng........................o.....
D i f f g r g n c, e . . . . . . . . . ' . . . . r . . . . r . . . . . . . . . . . . . . .
o o. . . . ' . . r . . r . r . . . . . . . r . . . . . . . . . . . . . . . . .
Uni ts produced
duri ng the year.......r.........,...,..r,................
Uni t s
sol d dur i ng t he year . : . . , . . . . . . . . .
Uni t i ncrease i n fi ni shed goods i nventory
Fi xed factory overhead charged to each uni t under
absorpti on costi ng
Di ff erence............
$768,0OO
289,OOO
$czg,ooo
48,OOO
$431,0O0
249,OOO
$1_g2J9g
$19{ , OOO
t 82. OO0
$__9,OOO
51, OOO
48, OOO
3, 0oo
$ I,ooo
s3
Qppterfr
P204
(rl
527
I
Absorption costing;
Sa1
gS
r . . a. . . . . . . . . . . . r . . . . . . . r . r . . r . . . r . . . r . . . . . . . . . . t . . . . . . . . . .
Dirgct matgrlals ......,..............,......
Di rgct 1abor..........' ..,r.r....' ..' ...' ......r.......rr..r.
Variabl
g
factory overhead ..,...........,......r.....
Fixgd fagtory overhoad ......'.................'..o.r.
Cost of
goods manufagtured ....r,......,.........
Beginning inventory
Cost of
goods
available for 8a19..r............,..
Ending inventoryor..' ..........' ................' ..r.' ...
Gost of
goods
so1d......................,...r........o..
GrOSS pnOfi t..............' ...........r....rrt..............t
Marketing and administrative oxpenses,....
Operating incOme ....' ................r.......r.........
|
$1
+ $2 + $1.5o + ($62,coo + 30,0001 =
$6.s8
$6.58 x IO,OOO units =
$65,9OO
2
$1 + $2 + $1.5O + ($6Z,COO + 2O,OOO) =
$7.O2
$7.62 x 4,ooo units =
S3o,4Bo
Direct costing:
Sal gs . . . . i r . o. . . . . . . ' . r r . . . . . . . . . . r . . r . . . r . . . . . . r . . . r r . . . . . r . . . .
Di rgct matgri al s .......,..r....r..r..............r...,....
Di rgct 1abor...........................r.....,.....,,........
Vari abl e factory overhead ........r..................
Vari abl e cost of
goods
manufactured......,..
Begi nni n g i nventory......o...,.....r.....,r............
Vari abte cost of goods
avai l abfe for safe....
Endi ng i nventory........,.....,.,................,.....,.
Vari abl e cost of goods
so1d,..,....,................
Gross contri buti o n marg i n,...........,...,.........
Variable
markeUng
and administrative
exp9ns9s..............
Gontri buti on
margi n...............................r....
--
t-Hfi".iffffffi:.............
.......
Marketi ng and admi ni strati ve
Total fi red expenso
..r.................,,.
Oper at i ng i ncome
. . . . r . . . . . . . r . . . . . . . . . , . .
J
Quarter
First
$2OO,OOO
3 3O,OOO
6O,OOO
45,0OO
g2,4OO
$197, 4OO
sl 97, 4OO
65,800
t
s131, 600
$ 68,400
25,OOO
$ o3.4oo
Second
s26O,OoO
s 2O,OOO
4O,OoO
SOTOOO
62, 40O
s152, 4OO
65rgOO
s2l 8, 2oO
3o, 480
2
s187,720
3 72,zao
28, OOO
s_9.289
(21
Quarter
First Second
s2oo,ooo $260,ooo
$ 3O,OOO
$ 2O,OOO
6O,OOO 4O, OO0
45,OOO 3O,OOO
$135, OOO $ 9o,ooo
45,00o
$135, 0O0
18, OOO
$1 17, OOO
$143, O00
13, O00
$13o, ooo
$ 82,400
15, OOO
$ 77, 4oo
s 52.600
$l 35, OOO
45, OOO
$
go,ooo
$l l o,ooo
1O, O0O
$1oo, ooo
$
gz,4oo
15, OOO
$ 7z,4oo
E
22,609
'528
P2O-4
(Concluded|'
(31
OperaUng Income under absorption costing
Operating lncome under direct costing......
Di ffefgnC
g
............!..........r.r............i ...r.......t
Change In inventoly under absorption costing:
Endi ng i nvent ory, . . . . . r. . . . r. . . . . . . . . . . . . . r. . . . . . . , . .
Begi nni ng i nvent of l . . . . . . . . . . . r. r. . . . . . . . . . . . r. . r. .
lncreasg (decrease|
in invento[.....,.......
Ghange in Inventory under direct costing:
Endi ng i nventory......,i ,....,...,...D........o......
Begi nni ng i nventorl f ................o.,,.....r......
In crease (decrease) in inve ntor]......,......
Differencs
between absorption and
di r gCt COSt i ng. . . . . . . o. . . . . r r r . . . . , . . . . . . . . . r . . . . . r . r . . .
P20-5
( 11
Chapter 20
Quarter
First
$4g,4oo
22,AOO
$2O,8OO
$65,8OO
o
$os,goo
$4s,ooo
o
Qrri nnn
w v t v v v
_$2o,8og
Second
$ e4rzgo
52,600
glg'3291
s 3O,48O
65,80O
s(3s,320)
S 18, ooo
45,OOO
s(27,O001
Capital
Intensive
s
(8,320)
Labor
Intensive
Sal es pri ce
....,........,
Variable costs:
Matgri al s ............,...........,...
Di rect l abor
....,....,.,..
Vari abl e
factory overhead.,..........,........
Vari abl e marketi ng expenss ...............
Gontri buti on
margi n per
ufl i t......,..........,.r
$30.oo
$5.6o
7.20
4.80
_l_6.0.9
2.oo
sg
s30.00
19. 60
sl o. 40
$2, 44O, 000
5OO, OOO
_S2,94o,oog
break even
s1, 32O, oOO
5OO, OOO
_S1,829,ogq
to break even
ss.oo
6. OO
3. 00
2.OO
(al
Gapi tal -i ntensi ve
manufacturi ng method:
Fi xed factory ovgrhgad..........r.' ....' ..............r.rr.' ...r..r...r
Fi xgd
markgti ng
grpenses....,.................r.....,..........,....
Total fi xgd cost....................,
...........r..r......t...
S2,940,OOO
fi xed cost
= 21O,00O uni ts of sal es to
sl 4
(b)
contri buti on
margi n per
uni t
S1, 820, OOO f i r ed cost
Sl O.4O contri buti on margi n
per
uni t
= 175, OOO uni t s of saf es
-\
Clppter fr
P2O-5,(Concludsdl
(21 Klmbrgll Company would be indifferent betweon tho two alternaUve man-
ufacturing methods at the volume of sales for which total cost was egual
under both alternatives. Let O equal the quantity
of units of
product
man-
ufactured and sold.
6lo
r al +
$2,94o,oo0
=
l$ig.oo
r el + $f ,B2o,ooo
$2' 94O' OOO
-
$1,82O,OOO
= (Stg.eO x Ql
-
($fS r O1
$i ' 12O' OOO
=
$3. 6Or Q
3 1 1 ' l l l =
O
Total cost will be the same for both manufacturing methods at 311,l i l
units of sales.
P20-6
(11
The number of units to break oven at a per
unit sates price
of $38.5o:
Variable costs:
$ 60,000
4O,OOO
2O,O0O
1O, O00
Di rgct 1abor. . . . . . . , . . . r. . . r, . . . r. . . .
Variablg factory ovgrhgad,.r..............
Variable marketing and admlnistrative erpensgs r,.......o......
s?o'ooo + $15ro99
=
Y,ulo=o,o
= 3,60o break-even units
s38.50
-
$26.00' 512.50
(21
(3)
g
$13O, 0OO
' S13O,OOO
-r
5,OOO uni ts =
$26 vari abl e cost per
uni t
units that must be sold to produce
an $1g,ooo
profit,
at a
g4o
per
unit
sales price:
$45' 990 + $18,ooo
=
su?' 99o
= l,soo units
90o
-
$zs
S14
The pri ce
castl eton must charge at a SrOOo-uni t sal es l evel , i n order to
produce
a profi t
equal to 2Ooh of sal es:
Let r =
sal es pri ce per
uni t
S,OOOx = 5,000(926) + S45,OOO + 5,OOO (.2x1
4, OOOx =
$175, OO0
r =
$Cg.ZS sal es pri ce per
uni t
CGA-Canada (adapted).
Repri nt wi th permi ssi on.
T
't
ChWter fr 5g
P2A-7
I
Saleg
prlce
Per
unit
Less:
92 E4
$180. OO s176. 00.
Variable manufacturing cost per un|t......,..,.... $121.oo $ 96.00
Variable
gelllng
erpenso
per
unit
15oh
of sales
pricel 9.OO 8.8O
!
Total varlablg cost
per unit...........,....i............. $1 3O,oO $1 04.8o
ContrlbuUon margin
per unit 3 50. oo $ 71. 20
*S160
sales
price per
unit In 1 9A + (9f 00 r 107c increase in 19Bl
Total fixed factory overhead
((2O' O0O B2b + 4Or00O B4ts) r S25
per
uni $,....,.....,,...... Sl r50OrOOO
Totaf fixed selling and administrativa orpenseS............r..r, 2O7r33O v
$1, 7o7, 33O
S1,7O7,33O fired cost + (S135,OoO protit + (1
-
.4!f
l2B2\
x $5O GM eachl + (3 B4b r $71.20 CM eachf
$1,7O7,33O fixed cost + $225,OOO
pretar profit
=
$313. 60 CM per package
$1, 932, 390
= 6, i 62 packages
si !13.60
6,162 packages
r 2 units of 82 = 121324 units of 92
9,162 packages
x 3 uni ts of 84 = 18,486 uni ts of 84
Clpptcr fr
-
,
P2Gg
(l) The 2OA sales mir in units is l:2
(7O,OOO
tape recorders; 14O,OOO elec-
-
tronic calculators).
Lat r = Number of tape recorders to break oven
2t = Number ol elastronlc calculators to break even
At break ovon:
Salec = Variable cost + Frred cost
$tsx + 2
gt22.5or)
=
$8r + 2
gi9.5o$
+
$l,32o,ooor
$15r + $,45x
=
$8r + $l9r + $1,32O,0O0
$8Or
=
$27r+$1' 32O' OOO
$33r
=
$1,32O,OOO
r = 40,OOO tape-recorders
2r = SOTOOO electronic calculators
r
Fired costs;
Factoryovgrhgad.o.,...,..r.............r
I 2gOrOOO
MarkeUngandadmi nl strai l vo......
ITO4OTOOO
Tota1...........,.....................,......, gl!92o,ggg
:
53'
,Q Chaptorfr
t2o (Contlnuedl
2l The followtng lormula can bc used to calculatc the
galcs
dollars required
to carn an aftertar
proflt ol 9oh on ralec, using 2OB estimates:
s = vc(sl +FC+
#]}
Where: S = NecessarY sales dottars
VC = Variable cost stated :ur a
pencentage of sales dollars
(Sl
FC = Fixed costr
p
= Desired
profit stated as a
pencentage of sales dollars
(S)
T = Income tar rato
.
s = .4esr+$1r3??rqoo2*-' O9(Sl -
'
(1
-. 551
s = .465 + $1r377rOOO
+ .2S
.34S =
Sl ' 377' OOO
S =
S4'O5O'OOO
'lVariable
cost rate for tape recordels and electronic calculators:
Tape Electronic
Recorders Calculators
Per Per
U n i l % U n i t % _
Sates pri ce...,.......... .,.........' ......
91!.OO
l 00oh$?g{q l OO.O%
Variabfe costs:
Mat gri al s . . . . . . . . . . rr, . . r. . . . , ! . . . . . . . . . . . . . . ' . . r. . . ' . $
3. 60 $ 3. 60
Direct labor
2.2O 3.3O
Factory overhead............,.
2.OO 2-OO
TOtal vafiable COSI...............,.,......... $ 7.8O 52c/o $ 8,9O 44.5oh
Composito variable cost rate
per dollar of sales:
s
(.2O r Tapo recorder variabte cost rate| + (.80 x Calculator variable cost
rate| = .2O (.52)
+ .8O (.445) = .l 04 + .356 = .46
zFired
costs:
Fagtory
ovgrhgad .............,.,...............,..,...r....,,.' ..' .......,' . $
2SOrOOO
MarkeUng and admi ni strati ve
I
' O4O' OOO
ooi:u,:::.:::::::.].].::..:::.::::::::::::::::::::::::::::::::.:::.:::.::::#,-
Contri butl on margi 11............r.......t...........
$f-.n &
qU.l o
W
Chagter2O
P?IO-A.(Goncluded)
(31 Let x = Number
of tape recorders to break even
3r = Number
of electronic calculators to break even
At break even:
Sales = Variable cost + Fixed cost
$lSr + 3($20xl =
$7.80x + 3(g8.9oxl + $t,37Z,OoO
9l 5x +
$6Or
= 7.gox +
$26.ZOx +
$trgZT,OOO
$75x =
$34.5Or + $1
,377,OOA
$4o.sor =
$1r3z7rooo
r = 34,OO0 tape recorders
3x = 102,O0O electronic calculators
= 5OO unlts
533
P2A-9
(11 (al
In order to break even' Al mo must sel l 5oo uni ts determi ned
as fol -
lows:
E
$100, 000
O(BE} =
P- C
3400_s 200
where F = fixed cost,
p
= safes price per
unit, and c = variable
cost
per
uni t.
(bl
To achi eve an afteptax profi t
of $24o,ooo, Al mo must sel l 2,5oo
uni ts determi ned
as fol tows:
a =
F*"
_
$1OO, OO0+( S24O, oOo+( l - . eo) )
_
$i Oo, ooo+$4oo, ooo
S5oo, ooo
p- c
$4oo_s2oo
=F=- 66_-
= 2,500 units
wfi erE
R
F, and c are defi ned the same as i n (l xa),
and n i s the
after-tar profit
objective.
534
Chapter 20
P2O-g
(Conctuded|
l2l
Almo Gompany should choose alternaUve
(a! because it will result in the
largest aftertar
Profit.
Attematlvc
(al:
Revenuc =
G34OO
unlt ralct
prlcr x 350 unltrl + ((3{OO
-
3lO
prlcc rcductlon} r 2,7oO unlta}
*
\
=
!14O' OOO
+ $972' 000
= t l r l l aOOO
v \
Varfablc Coct = 32OO
por
unlt x (350 unltr rold + 2r7OO unltr to bc roldl
= i810,000
Atter-tar Prcflt= (Rcvcnuo -
Varlablo C5gt
-
Fhod CorQ r (l
-
Tar Batel
-
=
Gtl,l12,ooo
-
3o1o' o00
-
31OO' Ooo)
r (l
-
"t)
= 3{O2,OOO r.6
= t241,2OO
-
Alternattvc
(bl:
Revenuc =
Gi4OO
unlt asler prlcr r 350 unlts) + ((9400
-
3SO
prlce reductlon) r 2,2OO unitg)
=
3140rOoo + $814' Ooo
= 3954rOOO
Varlirblc Coct =
{320O
per
unlt r 35O unttr} + ($2OO
-
t25 coat reducUon) r 2,2OO units)
=
37O,OOO + 3385,0OO
= $4.f5,OOO
Atter-tar Proflt= (Revenuc -
Varlable Coct
-
Fked CosQ r (1 -
Tar Rate)
=
S1954,000
-
$455,000
-
3100' oo0) r (1
-.4)
= 3399, 000 r . 6
= $230,400
Alternattvc
(c):
Rwenuc =
CI4OO
unlt rabt
prlco r 350 unltrl +
$4O0
r
11
-
5%
prbo reductim) r ?rOOO
units)
=
314O' O0O + 370OI0OO
= 39O0,00O
vartabl o Cost =
i zoo per
unl t r
{35o
unl tr aol d + 2,ooo unl tr to bs aol d}
=
9470,00O
After-tax
Prollt= (Revonuc -
Vartablo Coct
-
Fhed Coge r (l -
Tax Rate)
= ($9oo, ooo -
S47o, ooo
-
Gl l 0o, ooo
-
31o, 00o cost reducUon)) x (1 -. 4)
=
S34OTOOO r. O
= $2O4,00O
Clppter fr
P20-70
(1)
Egtimated
brpak-even point
based on pro
forma incomc statement
3819t ttttt"""............tr.........................r................................
$l orooorooO
Varlablc costs:
costof goods80ld...-....r-...........t.'....,.....
$6rooorooo
Commlssions paid
to agents...................
ZTOOOTOOO
8TOOOTOOO
Contribution margill.....' .............r....................o.o.....r......,....
$ ar"ttrt*
Gontribution
margin ratio
-
$.
?'oo0'ooo
= 2oo/o CIM
$t0r0oo,0oo
$loorooo fired cost
,
'
zortffi
=
$5o0,o0o break-even point
(21
Estimated
break-even point
with the company
employing its own safes-
pen;ons:
Variable
cost railos:
gost ol goods
sold to sales (g6rOOOrOOO
+
gIO,OOOTOOO)........
Commissions
on salgs.......r.-......r......r.........r............D...........r..
Totaf variablg
cost ratio...r...' ..r....,..r..or...r...,................r..,...
contribution
margin ratio = 1
-
6soh variable
cost ratio = 3soh
Fired
costs:
Admi ni st rat i ve". . ' . o. . . r. . . . . . . . . . ' . . ' . . . r. . . . . . . . . . . . r. . . . . . r. . . ! r. . . . . r. r. . I
! af
es manager
"t . . . . . . . . . r. . . r. . . . . . . . . . r. . . . . . . . r. . . . o. r. . . . . , . . . . o. , . , . ro. .
Salaries
of satespersons (3
x $30,ooo) ....::::::::.....,.........
Total
fi xgd costs.' ..................' .........,...,..r...r.,..r..,.,r.....
S35O,OOO
fixed
cost
gsoh
CIM
=
SI,OOO,OOO
break-even poi nt
600h
5%
65%
$1OO, 0OO
160, 000
go,ooo
_$3sg,oog
536 Chapter 2O
P2O-10
(Concluded|
(31 Estimated sales volume to yield net Income proiected In pro forma
lncome statement with Independent sales agents receiving 25oh commis-
sion:
Total Income bgforg Income t3I ..........' r..r..!r.....' .........r.....r.t Sl T9OOTOOO
Fired cogt l OO, OOO
_Eooo,ooo _
Total lixed cost and pJEfit...,.............................
Variable cost ratios:
Cost of
goods
sol d to sa1gs.................o....,....,..
Gommi ssi ons on sal gs .......' ...,..............r.....
Total variablg cost ratio .,..,r,....o..r..,.,.,....
g50h
w
600/o
*
250h
Gontribution margin ratio = 1
-
85% variable cost raUo = 15oh
S2,OOO,0OO fixed cost and profit
=
S13,333,333 safes
15% CtM
(41
Estimated sales volume to
yield
an identical income regardless of
whether the company employs its own salespenions or continues with
i ndependent
sal es agents and pays them a 25oh commi ssi on:
. v
Total cost with agonts = Total cost with companyb
recei vi ng 25oh commi ssi on own sal es force -
(85%
variablo cost r sales| = (95% variable cost x salesl
+ $100,00O fired cost + $350,0O0 fired cost
-
29ohxsal es =
s250, 000
sal es =
$1, 25o, Ooo
Chapterfr
c20- l '
537
(ll
Becausa star
Gompany useg absorption costing,
Income from
opera$ons
la Influcnced
by both sales v_otume and productfl;
volume. sales volume
wag Incrcased
In the tlovember 3o forecast, and at standard gross profit
ratag this would incroasc Income-
from operafion"
lv
SSri-oo. XorrLJ"i---
during this same period, production
volume uras belo* it e January
I
forecast
causrng an unprannad
votume va;anc;
;i $;ffi. Tho vorume
variance
and the increased
marketing
erpenses (due
to the lo%
Increase in sales) overshadowed
ttre aoaid pronL
trom
""1"", as folours:
CASES
InCrgaSgd
881O8...............r...............r.......r...
Increased
cost of goods
cold at 8tandard...
Increased gross profit
at standa1d.,............
Less:
Volumg
variancg
...rr....o..........r.........r......
lncrgasgd
marketing
erpenso.,.....,........,
Decrease
in income from operations,.,....,..
s26,800
27',2OO
$ 5,goo
$6,OOO
1r34O
7. 340
$
(1, 7401
-
t
5g
Chapter 20
STAR COMPAMT
Forecasts of Operatinq Results for 20-
Foracasts as ot
Januarv I November 3O
.,....,......,... $268'000 $294r8OO
C2A-1
(Goncluded!
l2l
Star Company coutd adopt dlrect costing. Under direst cosUng, fixed
manufastirrin-g
costs would be treated as period costs and woul.d not be
asJigneO
to
pfoductlon, Gonsequently,
earnings would not be affected by
proA-ucUon votums, but only by sales Yolume. Statements
prepared on a
direct-costlng
basis ars as follows:
Sal e3. . . . . . . . o. . . . .
Variable costs:
Manuf act uri ng . t . . . . . t . . . . t . . t . . . t o"t o""""o' ot "r"t t '
Markgt i n$ . . . . . t . . . . . . . . r. t t . . . . . . t . . . . . . . """o"t t "t t t t t t t
Tot al vari abl
g
CoSt . . . . . . . . . t t . ' . ' . """""""' r"'
COnt f i bUt i On maf gi f t , . . . . . . . . . . . . . r, . . . . . . . . . . . . . ". ' o. . . ' . .
Fired costss
Manufacturi n
g .......t............o.i r.o.....""tttrt"r"
Admi ni st rat i vg o. . . . t . . . . . . . . . . . . . . . . . . . . . . . . ""' r"t """
Tot al f i xed cost ' . . . . ' . . . . . . . . r. . . . . . r. . . . . -. . . . . . . . -. . '
$182, OOO $2OO, 2OO'
l 3, 4OO 14r 74O
sl 95, 400
s214, 940
S 72,600
$
3O,OOb
28,80O
I 79,860
$ 3O,OOO
26,80O
$ 56,800 I 56,800
Income from operati ons ' ......".......r.....r...r..,..... $ 15r8OO
9-23' 960-
' S182,000
x l l ooh =
S200' 20O
Reconci l i ati on of di fferences i n i ncoms from operati ons:
January l : No di fference In absorpti on vs. di rect costi ng because
$3O,OOO fixed factory overhead was expensed
in both cases.
November 30:
Di f eCt COSt i ng. r. . . . . . . . . . r. . r. . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . r
AbSOf pt i On COSt i ng . , . . . . , , . . . . . .
. . . . . . . . . . . . . . . ' . . . . . . ' . . . . . . '
Di f f
g
r g n c g . . . . . . . . . . . . . . . . r . . . . . . . r . . . . . . . r . . . . . r . . ' . . . . . . t " r " t " " t t t t t t " t t " '
Fi xed factory overhead i ncl uded i n cost of
goods sol d at
November 3O l orecast
(S3O,0OO i n January 1 forecast
+ l Qoh sat es vol ume i ncr ease)
. . . . : - . . . . . . . .
Januar y 1 f or ecast . . . . . . . . . . . '
. . . , . ' , . . . - . . . .
Und erappl i ed fi xed factory overhead
l ncome from
Ooerati ons
$23,o60
14, 060
s
9,ooo
standard:
s33,OOO
3O, OOO
s
3,ooo
6, OOO
Di f f
grgncg. . . . . . . . . . . . . . . . . . 1' . . . . . . . . . . . . . . . . ' . . . . . . . . . . . r. . . . . . . . . . . . . . . r. . t . ' . . S
gt OOO
Clppter fr
c20-2
539
(rl
In absorpuon
costiDgr Bts curently omployed
by RGB Corporation,
fired
factory overhead is considered
a
product
cost rather than a period
cost.
Firad tadory overhead is appfied to production
based on a normal
capacity of I'ooo,ooo units. Thu3, the fixed factory overhead
is applied
to products
in the samo manner as variable
costs, even though
it does
not vary with production.
In addition, lf production
ano sai.s are not
equal during the year,
fired factory oveihead is deferred
as part
of inven-
tory costs-(when production
erceeds sales) or releas"o
,pon
sales of the
Inventory (when
sales erceed producUon)-
During 2oA, production
exceeded sales, rcsulting in a portion
of the
fired factory
overhead being Inventoried
in finisheigooo-s-rather
than
being expensed
in 2oA. This resulted in 2oA operatin!
income being tar-
ger
than lt woufd have been ll all fired factory overhead
had been
charged
agai nst
20A sal es revenue. Then i n 2oB, sal es exceeded produc-
tlon, resulting
In more fired factory overhead
being ctrargeo
against 2oB
sales nevenuo
than was incurred
ii 2oB. First, RniJtreo gioos
were sotd
out of inventory
which meant
lhaf
th9 part
of fired factiry
overtread
that
was incurred
in 2oA and inventoried
in 2oA was charged
against
2oB
sales revenue.
Second, fired factory
overhead
,^r"" uid"raiptied
in 2oB
because only 85o,ooo
units
lvere
produced
(isorooo
units less than nor-
mal capacity
used in determining
itre tactory
overhead
iaie). This result-
cd In an unfavorable
votume variance that was charged to the cost of
goods
sold in 2oB. Both of these occurences
increased
the cost of
goods
sold and resulted
in a reduction
of gnoss profit
and operating
i ncome i n 2OB.
5
ffi
C2O-2
(ConUnuedf
l2l
(rt
Chapterfr
ROB CORPORATIOII
OpcnUng lncomo 9tatamcnt
For the Years Ended November 30, 20A and 20B
(h thourend$
Vrrlrbb cst of
goodr rold:
g0OrOOO
unltr et 35,00---
IOOTOOO unltr rt 35.OO-*-
TOOTOOO unltr et 3550**-
@ntrlbuUon nrrgln *...*,.-s-.
Fh.d.pcntc$
Fllcd frctory ovcrlrced D...s.'. 33'000
20A, ?OB
30,ooo
.3r500
tr'5oo
311, 2OO
3p5O 5,350
t4,5OO t 5,850
33'3oo
8cllhg rnd rdmlnlttntlv. -.* 1.500
.f'5OO
f
"5OO
4"800
OpcnUng Incomr ....'.-......o'o...ts
tr)
RccmclllaUon:
OpcnUng lncomc-
rbrorpUon corUn
g .,.-.....--.{
OperaUng Incomo-
d lrcct coaUn9,...........-.,.......,.
3 900
Dlfferrncr 3 9oo
Dtffsroncr eccounted for rr
followr:
hvcntory changr undcr
rbrorpUon cocUng:
Endlng Invcntory:
30O,0OO unltr rt 38,00..., tZragg
150,000 unltr rt 38' 80,...
BcAlnnlng Invcntory:..-....... 0 32r4oO
SOO,0O0 unl tr rt 38.00....
hvrntory changr under dl rcct
coaUng:
Endlng lnvcntory:
3OO,OO0 unl tr at $S.0O.... t1"500
150, ooo unl t r at 35. 50. . . .
Bagl nnl ng I nvent orp O 1, 5OO
3OO, O0O unl t r at 35. OO. . . .
o 1, 050
r ro*r
31, 320
2, 1OO 3
(1, 080)
$ 825
1, 5OO
( s75)
t eoo
3 {4o5)
0
204
3 l ro5o
208
3 o 4 l t . u
Dlflcroncr
Clpptrfr
Cz.G.? (Goncluded)
(3) The advantages of direct costing for internal reporting include the follow-
l ng:
(al Direct costing aids In lorccasting and in erraluaung reported income
for internal management decision-making purposes,
because fixed
costs alt not arbitrarily allocated between accounting periods (or
among different products,
eafes territories,
operating dlvisions,
etc.!.
(bl Fired costs ars raported at Incurred vatueg (and
not absorbed val-
ues|' Increasing opportunity for mono effective controt of these
costs.
(cl
Profits vary directly with sales volume and are unaffected
by
changes in inventory levefs.
(dl
Analysis of the cost-volume-profit ralaUonship is facilitated,
and
management
is able to determine the brsak-oven point
and total :
profit
for a given
volume of prcduction
and sales.
The dlsadvantages
of direct costing for Internal reporting inctude the fol-
lowing:
(al
Management may fail to consider properly
the fired cost element in
long-range pricing
decisions.
(bl Direct costing lacks acceptabitity for external financial raporting or
as a basis for computing tarable income. As a consequonce, addi-
tional record-keeping
costs must be incured to use direct costing.
(c)
The separation of costs into fixed and variable elements is a costi-y
pnocess.
In addition, the distinction between fixed and variabte coit
is not precise
and not reliabte at alt lEvels of activity.
541
c20
( 11
(21
Dal y woul d determi ne the number of uni ts of Product
y
that i t woul d
have to sell to attain a 2oo/o profit
on sales, by dividing total fixed costs
pl us
desi red profi t (t.e.r
2ooh of sal es pri ce-per
unl t mul ti pl i ed by the
unfts to attain a
!o%
profit)
by unit contribution margin
{i.o.,
sales price
per
uni t l ess vari abl e cost per
uni t).
l f vari abl e
cost per
uni t i ncreases
as a pencentage
of the sal es pri ce,
Daly would have to sell mone units of Product Y io break even. Because
the
unit contribution
margin
0.o.,
sales price per
unit less variable cost
per
uni t) woul d be l ower, Dal y woutd have to sel t mora uni ts to cover the
fired
cost in order to brreak euen.
i
t
-r
t12
C2O-3
(Goncludedl
Chapterfr
(31 The llmitatlons of brpak-eyen and coat-volume-profit analysis ln manage-
rlal declslon maklng follow:
(al The snalyslg lg fundamentalfy a
gtaUc
enalysis' and, In most casor'
changeo can be determlned only by recomputlng ltsults. lf a break-
oyen chart la used, changes can be shown only by drawing a nYv
chart or
geries
of charts.
The amount of fired and
yariable
cost as well as the slope of tho
eales llns, ls meanlngful ln a defined riange of acUvity and must be
redefined for actlvity outside the relevant range.
The analysis ls hlghly dependent upon a meaningful
geparation
of
llred and varlable costs, whlch may be dlfficult to obtain In actual
pracUco.
The analysla is based on a slngle mir of producta. lf the mlx ls
erpected to change, the rpsults must be rpcomputed.
The analysls assumes that
production technology (i,e., labor
produc-
Uvity, level of automation, and
product specificaUons| will be
unchanged. ll changes In production technology are erpectpd to
occur, the analyst must consider tho expected effects on costs.
The analysis assumes that selling
prices, input prices' and other
market conditions will not change. Erpected changes must be
Incorporated Into the analysis. lf a rango of
possfble
changes can
occur, e different rasult must be determined for each
possible corl-
bi naUon.
(bl
(cl
(dl
(el
(0
@1-1. Dillcrential6t b thr ditference h the cct of
allrrnative choicoc. Thc cconqrrist calb ruch
cdb marginal, and the engineer calls them
ircnrncntal.
A21-Z Marginal cosl (or ditlerential cost) is the cost
ircunod by increasing thc present
outptrt The
coeil, lhenfore, would nol have been hcuned il
l hr
- addi t i onal
uni t r had not been made .
Marginal cosling (or diract costing), on the
o,trer hand, is a cclhg approach h wtridr crly
variablc rnanulacluring cost! are charged to
'
prcducls, and thur to invenlory, while fixed
manufacl uri ng coel t ar. l reated ar peri od
coslr and are charged olf withourt becoming
psrl of hventory cools.
@1. Incremcntal coslr are important in decision
rnakhg, bccausc the least cosily or most prof-
.
itablo allemative cannol be determined unless
i ncremental costs are known. l ncremenl al
coslr are lhe costs that musl be incurred in
order to cornplete sn ctivity that is being con-
riicred. These co3tt must bc known h oder
lo onrpare each arrailable Eliernative.
O21-{. Differential cets do nol clrrespond to any pe.
eibb accounting calegory, because they are
oriented loward the future rather than the past
and lhey treat producl
costs on a differential
rather than a total cost basis. Furlhernroro, cor.
tain costs relevant for ditferential cost analysis
(o.9.,
opporlunity cost and imputed cost) are
nol recordod h lhe accounls. Conversely, cer-
tain costs recorded h the rccounts (e.g., fixed
cosls thal will remain urchanged) are inelevanl
for dilferential cost analysis. The diflerential
cod corrcept is a corcept for cosl analysis and
nol cosl accumulatbn purposes.
O2t-5. The flexible budget b uselul h differenlial cet
anal yses,
because l he i ncrementg bel ween
each ditferent tevel ol ouiput represent tho ccl
thal must be incurred il additisral business is
undertaken.
As bog ar lired costs rernah con_
rtant under all rates o{ oulpul, variable costs
are alwala the ditferontial costs. lf fixed costg
change in the flexible budget, differential costs
wi l l i ncl ude the i ncremenl al el ement of fi xed
cogl rellected
in the llexible budgel
O21. Historical
costs are usually irrelevant because
they have been created by a past decisbn lhat
cannot bc changed by a l ut ur e deci si on.
Historical
costr obtained frorn accounling rec.
ords ofl en i ncl ude arbi trari l y al l ocated fi xed
cosl thal rnay not be relevant to dilferential coet
analysis.
CHAPTEN 27
DISCUSSION
QUESTIONS
@,1-7. Vari abl c corl i r i mportant bccauso i t can
al ways be i danti fi ed as a di fferenti al cost.
However, dillerentbl ccls msy also includr
addltiqtal fixed cctr.
O21. Sunh coeils are incccrerable ccts that ar not
relevanl b futuro decisisrs.
O2t-9. A fixed corl would bc relevant in deciding
bctwecn altcmstiver il the lhed erpenditun ir
an oul -of-pockot cost requi red i n ordor to
undertake an allemative (e.g.,
the cet d rcnt-
i ng egui pment needed l o provi do
sul fi ci enl
capacity in deciding whelher or not to accepl
an offer); or if a fired erponcfture can bt avcii
ed by undertakhg an altemalive (e.g., supervi.
eory ralaries that will be discontinued in the
evenl of a plant cbeing).
Q21-10. Oppoatnrty coctr are the measurablo value ol
an opporlunity blgassed by rejecling an alter-
nalive use ol resources.
021-1 1. Appendir Lhear prograrnming
b a rnathemati-
cal l echni que deci gned l o ar gi al
decision makers in detcrmining thc
allocalbn of resources that would be
reguired to mEximize or mhimize the
objeclive lunctim; i.e., it b a tool that
can be used by business ,nenagerll
lo determine the mix of inpuis hecer-
sary lo maxirnize contributbn rnargin
or mi ni mi ze cost. Li near program-
ming is an algorithm that maximizes
or mi ni mi zes a functi on ol several
variables subject lo one or,Tpre con.
sl r ai nt s. The f unct i on bei ng opt i -
mi zed and t he consl r ai nt l
sr o
agsumed to be linear wilh respect to
produclion
activity.
Q21-12. Appendix The unit costs usod in linear pro_
grammi ng probl ems
are the l racc-
able variable costs. Costs murl be
traceable lo the prcduct
and variablc
with respect to prcducticr quantily in
order to affect changes in total po-
.
ducl i on cost and total contri buti on
margin when changes in productbn
quantity and mix occur.
O21-13. Appendi x(a)The
area bounded by the ti nee
AB, BC, CD, and DA b calfed thr
sohrlbn space because il repre-
senls thooe quantilies and cqnbi.
nal i ons ol standard and dol uro
model s l hal can be produccd,
given the available caprity o{ thc
grinding and polishing
mrhiner.
g3
I
!
544
(b) Trl angl e BCF represenl s l hose
combl nat i ons of sl andard and
dolura models that could bc
PtD
duced by thc poltshing maclrlnes
hJt mt by the gdnding rnaciinee.
Trlanglc CDE reposonte $c lovol
ol productlon that tho gtindlng
nracfrhcs could atlain, bul nol th.
poliahfng macfilnor.
(c) Pol nt C denol es thc oPti mum
solutbn bocause anY olher level
of snalnablc
prodwtbn will result
ln a srnaller total contdbulion mar-
gin. ll can bc identilied bY com'
putlng lhe lolal conttibulion mar-
gin available lrom thc productbn
and sal e of thc combi natl on of
standErd and del ure model s-
dcnotcd by cach corncr
point-
and choosl ng thc cornor poi nl
wilh thc largosl total conltibution
margin. Altematively, a series ol
CM l i nes can bc const rucl od,
which havc a slopc cgual lo
-l
multipliad by lhc unit conlribution
margin available lrom lha produd
Ct@ter 2t
identified by thc horizontal eris,
di vi ded by thc uni t contri bul i on
margin availablo trorn Utc prodrcl
idontified by tn verticsl 8xb. Thc
ptofit lino farthest frorn lhc ori$n.
poinl A, rcPtts.nb lht gtcalosl
totel contrlbullon margin. and In
thb casc, il
Passas
thtottgh
Poinl
c.
021.14. AppendixThc simplex msthod i3 an ilsrativc
ptoaas tul finds lhc oPtimum so|tr
tion to a llnoar pmgramming
Prots
lem. Thc simplex method, which is
based on malril algobta, is a sys-
lematic way ol cvaluating sacfi cor-
-
nor
point in the teasiblo araa. Tha
prooass begins at thc zero level of
prodrclion and systematically rnoves
lrorn onc comct poht to anothcr until
tho optimal soluuon is found. Each
movc provitJes lhc lsrgosl
por unll
improvement in the objeclivo func'
tion. Th ptocess continuss until lhe
objsdivc fundion can no longer be
improvod.
Clnpter 2l
F27-7
E)GRCISES
Saleg ($1.90
r 5 0OO kg).............r....,...........r........
Gost to manufactut:
Dlrcct materlalr ($.eO
+ $.0i| r 5 OOo kg).._...
545
$9,ooo
Dircct labor (3,50
r 5 O0O kg)..,..
Factory overhead:
Indirect labor ($.2O r 5 000 kg) ...........,.......
Power ($0OO + 3O'OO0) x 5 0OO kg).,.r.........
Supplies
S1.02
x 5 OOO kff)...............r...........
Maintanance
and repair ($.027
r 5 000 kg)
Deprcciation (i3r00o +
24 months),..........-j..
lnsurancg ($,OOZ
r 5 oOO kg)......,.....,......,,.r
Payrol l targ!.......oo.......r......r........rrr....o.....o..r
Gost of goods produced
and so|d,......,.................
Gross profit
contributiGtll
..,............rD....................r
Administrativg gxpenso......D....ro...,.................,.....
Profit contribution
from accepting new business
E21-2
(1)
Estimated
cost of the additional loo,ooo units:
Mat er i at s ( ( $150, OOO
/ 1SO, OO0 uni t s) x
i OO' 0OO uni t s)
Di r ect
l abor ( ( ${f
z, 5oo / 15o, oo0 uni t s) x
l oo, ooo uni t s) . . . .
Vari abl e
factory overhead
( ( $75, 0OO
/ 15O, OO, uni t s) x
10O, 0OO uni t s) or
($125,o0o
at loo% capicity
-
bzs,ooo:Jt dol% capacity)
Fixed factory
overhead
(9125' o0o
at 1 ooo/o capaci ty
-
$f oo,oo0 at 6o% capaci ty)
Total differential
cost of manufacturing
the additional
10o, o0o
uni t s ' . . . . . . . . . o. . . . . . . ' . . . . . . . . . . . . . . . , . . . . . . o. . . , . rr. . . . . r. . . . . . . . . . . . r
Total
cost of producing
250,O00
units in Janua4n
s3,O50
2,5OO
I , OO0
100
' too
135
725
35
160
{2}
Budgct for
15O^0OO Uni tr
$150, OOO
112, 500
75, 000
10o, ooo
$437,5OO
Diffcrcntial
Cost
for l OO.OOO Uni tg
$too,ooo
75,OOO
5O, OOO
25,OOO
$2gg,ooo
. 7. 205
s1, 795
150
s1. 64s
sl OO, OO0
75,OOO
5O,OOO
25,OOO
$25O,OO0
Total Cort for
25O.O0O Unl tg
s25O,OOO
187, 50O
125, o00
t 25, OOO
J68Z@
Mat eri al s
. . . . . . . . . D,
Di rect
| abor. . . . , . . . . . r. . . . . . . . . .
Factory
overhead:
Vari abfe.
....,...
Fixed
Total cost
l
r \
546 Chagter 2l
E21-2
(Concluded)
(31 Saler
price rcguirsd to achiev e a 2Ooh mark up on production
cost:
Production cogt
per unlt ($6871500 + 25O'O0O units)..,....r...........r
$2.75
Plus 2Oo/c mark up on cogt ($2.75
r 2O%l .55
Safer price reguired to achfeve 2Ooh mark up on cost............o.....
$3,3O
E21-3
Revenue from ttre rpecial cale (15,0OO units x $12,5O each).. $1BZ,5OO
Lesr differontial costs:
Direct materialr ($2O,OOO + lO'O0O units) x
15,000 unftsl
$3o,ooo
52r5OO
Direct labor (($3S,OOO + 1Or00O units) x
l 5rOOO uni ts| .......
Additional overtime premium
on apecial order l0r0OO
Variable factory overhead (($1Or00O + 1O'0OO
units) x 15rO0O units).......................,,.ro. 15, 000
7, OOO
Additional fired overhead from equipment
tnta1 ......
Variable marketing oxpen3es (($201000 +
t 0r O00uni t s) xl 51000uni t s) . . . . . . . . o. . r . . . . . . . ^. . . ,
3OTOOO
i 44. 5oo
Additlon to annual company profit
resulting from
speci al 3a1e...........,.....,.......
q
:
!
|-
!
I
S
Chapbr2l
F214
e3-5
547
l
No, Hunungrton
should not accept Lufkinb offer because it would be
$5'OOO cheaper to make the part.
Gost lf purchased
from Lufkin (1O,OOO
r ttf S)
Cost lf manufactured
by HunUngrton:
s180,O00
Direct materiab...
Direct labor....,o.r
variable factory overhgad ............-.o.......,......r..
Rent from thlrd party
forgone lf part
manufactl l F9d........r...........r..t......r...ro...r.r.....
15rOOO
Additional fired factory overhead eliminated lf
part purchased
from Lufki n (1O,OOO x
$3)..,.
3O.OOO
165.000
Savings lf part
manufactured
by Huntin!fto11...,....
$
,|5.ooo
This solution assumes that a mono profitable
use of the fucilities
does
not exist than that derived frcm the saving
of $is,ooo. oth;;;,
ir woufd
be preferable
to buy Part M-l from Lufkiriand'use
Huntington's
facilities
for the mono profitable
activity.
s2O,OO0
55,OOO
45,000
\-
The company
ehculd purchase
the pistons
from the outside supplier
because
lt woufd cost
$6,oo0 less than manufacturing
them at the
Tlcson plant.
The differential
cost of manufacturing pistons
at the Ttrcson prant:
Dircct
matgria|s.r.....r...........r........,......t..r...r.....
$i 6OrOOO'
Di rgct
| abor. . . . . . . . . r. . . . r. . . . . . . . oo. . . . . . . . . r. . . r. . . . . . . r. , . . . . .
SOTOOO
Variable
factoly overhead (2Oo/c
r S24O,OOOi....
48,OOO
Incrpmsntar
fixed cost for machinery
r6ttri....
gorooo
lncremental
fired cost for additionai
supervisol
..........,..r.o................
4O,OOO
Total
differential
cost to manufacturr
80ro00 pi stons..........o..r...r.r....,.,.......,.......
$3SgrOoo
Gost to purchase g0,OOO
pistons
lrom Wichita
Machine
Works (ge.CO per piston
x SO,OOO
pi stons)...r..,......,.,,..,............r...........
352rooo
Cost savi ngs
avai l abl e from purchasi ng
the
pi stons
from the wchi ta
Machi ne
w-orks rather
than manufacturi ng
them at the TUcson pl ant.
$ 6,O0O
I
-
548 Chapter 2l
E21-6
(ll Yes, the sales managert pnoposal to drop Tift from the product line and
increase the
produetlon
of Mift should be accepted because it will
Increase the companyb income by $4,OOO, determined as follows:
Contribution margin from sale of Tift:
Revenue from sale of Tift (So r T,OOO units)...,. $czrooo
Less variable cost of manufacturing Tifts
Materi al s ($Z x T' OOO uni ts|....... $14' OOO
Labor
stl
x 7r0OO units)............. 7r0OO
Variable factory overhead
($f x T'OOO units!.......o.....,.... T'OOO 28'OOO
Gross contribution margin from sale of Tift ..,.. S14,OOO
Less variable markeUng erpense from sale of
Ti ft ($1 r 7rO0O uni ts|..................r..........,...,.. 7ro0o
$
7ro0o
Contribution margin from sale ol4,0OO additional units of Mift:
Revenue from.sale of additional Mift
{$l Or4rOOO
uni ts}.......,..r.....r....,..,......,........ 9{OTOOO
Less variable cost of manufacturing additional Mift:
Materi al s ($2 x 4r00O uni ts)......, S 8r0O0
Labor ($2
x 41000 uni ts| ..,.......... 8r0OO
Variable factory overhead
($1
r 4' OOO uni ts1o.................r 4' OOO 2OTOOO
Gross contribution margin frpm
sal o of addi ti onal Mi ft..................r..........., 92or00O
Less
yariable
marketing oxpense from sale of
-
addi Uonal Mi ft ($f r 4,OoO' uni ts| .....,....,r....o. 4' OOO 16,000
Additional contribuUon margin from converting capacity to
to producti on
of 4' OOO addi ti onal uni ts of Mi ft...,......,......... $
I' OOO
Addi ti onal
adverti si ng expense requi red to sel l 4,000
addi ti onal
uni ts of Mi ft ..r............................,.......r..........,..... 5r0OO
Addi ti onal
i ncome from droppi ng Ti ft from product l i ne and
converti ng
capaci ty to producti on
of 4,000 addi ti onal uni ts
of Mi f t . . . . . . . . . . . . . . . r . . . . ' . ' . . r . . . . . . . . . o. . ' . . . . ' .
r . . . . . . . . . ' . . . r . . . . . . . . $ 4,ooo
\
Clppter2l
E2l-e (Goncluded)
(21 Montreal should consider whether dropping Tift from the product
line will
result in decrcassd sales of Mift and Lift in the long run. For erampte, if
the three products
ara complementary, customers may prefer
to maintain
only those Eouncs3 of supply from which the full product
line is available.
The present ability to sell moro Mift by dropping Tift may be a short-run
condition. lf this is a concern, the cost of resuming Tift production
at a
later date should also be considerad.
CGA-Canada (adapted).
Reprint with permission.
E21-7
Si l ver Pol i sh
per
Jar
Sal es pri ce..,...
,.r,,............,.............
$a.oo
E21- 8
(1)
Di rect tabor hours (DLH)
=
1,000,000 doses to be packaged
requi red
for the
j ob
I,OOO doses per
DLH
= 1, 000 DLH
Di rect l abor ($S
x I
' OOO
hours)
......,..,,,........r.
Vari abl e
factory overhead ($2
x l ,OOO DLH)....,..
Administrative
expense
Total traceabl e out-of-poc ket costs.............
Minimum price per
dose =
Total traceable
out-of-pocket
costs
1 ,
=
.sPl o9?= =
$.ooe
l
r Owr . r r vuu
$ .4o
2.50
.30
s3.20
Contribution margin
. . . . . . . r . . . r . . . . . . r . . . . . . . r .
$ . 80
Opportunity cost from further processing
rather than
sefl i ng Gri t 332 (7/D4 r ($2.0O
-
Sl .60)).r,....,.......,...,........
.l o
Ngt contribution
margin per
unitr.................................,,....
!_
,tg
$5,600 avoidable fixed cost +
$.7O
= 8,OOO, the minimum number of
jars
of silver polish
that must be sold to
justify
further processing
of Grit
g37.
s5,OOO
2,OO0
1, OO0
_gg,ogg
1 - -
; \
sfl
E21-e
(Concluded)
l2l
Marimum allowable
=
return belore tarog
Marimum rsturn after tares
Chwter2l
$
g,ooo
5rOOO
$13, O0O
1, 95O
(l
-
Tax Ratel
' Og
!!
' O9
= -t5 or
15o/o =
FZoi = so_=
r r oi r
Total traceable out-of-pocket costs
(from requirement (1ll--r-....
FiXgd laCtOry OVgrhgad
($5 f I
rOOO
DLFI r.........o.r.....' ..' ..r...........
TOtal l Ul l COStrr....................o.............r...........t..............t....r....t....
MaffmUm allOWable f6tgfn
115%
f $1
3rOO0),...,........r.............o' ..
(3)
TOt al bi d
pri Ce. . . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . r. . . . . . r. . . . . . . r. r. . o. . . . . . . . . . t . . . . . . . . . t . . . S14t 95O
:
Bid price per
doso
=
sl 4. 950
= s. o1495 =
iFociFoo
The factors that Hall Company should consider before deciding whether
or not to submit a bid at the maximum allowable
price include whether
Hall has orcass capacity, whether there aro available
iobs
on which oarrl-
ings might be
greater, whether the marimum bid of $.O15 contributes
toward covering the frxed costs, and whether this
iob
could lead to moFo
profitable
business with Wyant in the future.
The competitive environment of the industry should have been consid'
ered by Wyant Memorial Hospital to determine whether or not a lower
pri ce
coul d be obtai ned through competi ti ve bi ddi ng. The hospi tal shoul d
also have considered that cost-plus
pricing is not usually viewed uni'
formly by
prospestive
bidders, is difficult to compute lor products pro-
duced in
smass'
quantity, and is better suited lor
products that are
uni que and hi gh pri ced.
(4)
Total bid
price
ITO0O,OOO doses
Chapter2l
v3-0
Franchlse fee collections per
day
Average gllss
rovenuag per
tnanchise per
dEl|............,..........
Numbgr of franchiSOS............' ..................o........o...o..r..............
Total gnoss
rBvenu8.......r.....o......' ..............r' ............orr.......r.r...
s2l O,OOO
x .25
Franchisg fgo .............
Avgragg daify franchise tge collgctiofls ..........,.,o.......,..r.........
_$
52r5qg
First
proposal (i.o.,
use local messonger service to collest and mait checks
only):
s 52, 500
x2
sl 05, OOO
x 15%
s 15, 750
2O,OOO
55',t
$ soo
r 42O
Average daily franchise fge coflegtions ,.....,..........,...............o
Days savgd.,...r,..
Total float saved.,,,,.
Beforg-tar opportunity cost.' ..o...."..........,r.......ot.r..........r..,..r.
Avgragg annual savi ngs. . . . . ' . r. . o. r. . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . , . r. t , . . . r. .
Lgss cost of mgssenger sg| ' i cg. . . . . . . . . . . . r. . . o. . . . . . . r. . . , . r. r, . . . . , . . . r. . .
Annual reducti on i n i ncome i f pmposal
i mpl emented.............
Second proposal (i.o.,
use local massonger.service
with a lock-box arrange-
ment):
a a a a a a a a . r a a a a a a
_s
(4,2sO)
s 52,5OO
x5
$262,5O0
x 15o/o
$ ss, 375
22,25O
Average dai l y franchi se fee col teeti ons ....,....,r...........,.,.......D.
Days saved. . . . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . r . . r . r . . . . . r . r . . . . . . . . . . i . . r . . . . . . . . . . r ,
Tot al f l oat savgd r. . . . ' . . . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . r. . . . . . . . . . . , . . . . . .
Bef ore-t ar
opport uni t y cost . . ! , , . . . . . . . . .
Average
annual savi ngs. . . . . r. . . . . . . . . . r. . . . . . . . . r, , , . , r. . . . . . . . . . -. . . . . . . . . . . . . . .
Less costs:
Messenger
service
$2o,ooo
2,25O
Gompensati ng
bal ance ($i S,OOO
r i 5yo)...,......
Annual i ncrease
i n i ncome i f proposal
i mpl ement ed. . . . , , . , . . . . . .
$ l ?Jr5
I
-
' H
552
Ezl-10
Silk-gcreen method:
Prepare tcraon
17
1/2 hours r 2O'OOO circuit
bOafdA f $6.5O).........r.................................r...r.
Scrsen
patterns (1/3 hour r 2O'OOO circuit
bOafdC I $0.501......r.........................r................
TOtal cO8t.................rr.........
AZ-17 pnocess:
Labor
(1t2hour x 2O'OOO circuit boards x $6.50)
Monthly cost for materials and equipment
rental
gnd
operation
($41000 r 12|.............--....
TOt al GC)3t . . . . . . . . . . ' . . r. . . . . . r. r. . . r. . . . . . . . . . . . . . o. . . . . . . . . . . . . . . . . . t .
Annual savings from changing from silk-screen method
tO thO ngW AZ-l 7
prOCes3..........' ....r.........r.r.....t..
$l 95,OOO
#t,333
$ 65,000
48,OOO
Chagter2l
$238,333
113, OOO
$125,333
Chapter2l
E27-11 APPENDIX
553
Let Mr = marking board as.semblod in automated assembly
department
Ml = marking board assembled in labor assembty depirtment
Te = tack board assembled in automated assem6ly
department
Tr. = tack board assembled in labor assembly oepirtmlnt
Me Mr-
Tr. Tr
Sal gs pri ce per
uni t........o..................
$60.OO $60.00 S4s.oo
$4s.oo
Less
yariable
costs:
Direct materials:
BaSg ...........r.....
$ o.oo
s 6,00
14. 50 14. 50
8.25 8.25
2.OO 2.OO
. 60 3. OO
2.45
2.45
3.30
2.25
3.OO 3.OO
6.00
S 6.00
7.75
7.7s
4.25
a.25
2.OO
2.OO
.60 3.OO
2.45
2.45
3.30
2.25
3.OO
3.OO
Covering
Frame .r.................r....................
Direct labon
Cutting Departmeftt.....,...........,.
Assembly Departmellt
...............
Variabla factory overhead:
Gutting DepartmeDt.....,.......,.r.,.
Assembly
Departmellt ...........,...
Variable
marketing expenss ......,.
Total variable
costs per
unit....r.,...
Contribution
margin per
1111it.............
$40, 1o s41. 45 s33.35
$19. 90 $18. 55 $11. 65
@
$10. 30
Obj ecti ve functi on:
Maxi mi ze
CM =
$f
g.gO
Ml + $i 8.55 Mr- +
$t t.OS Te + $i O.3O Tr-
Subject
to:
.2O M^
.05 M^
.15 M^
OM^
.O5 M^
1M^
0M^
+20
+ .25
+ . 15
+ .O2
+O
+1
+0
Ml +
Ml +
Ml +
M! +
Ml +
Ml +
Mt +
.2O Tr + .2O Tr. <
3O,OOO DLH In Cutting
.05 Tr + 35 TL S 4O,OOO DLH In Aesembly
.15 Te + .i 5 TL s 25,OOO MH In Cutti ng
O Te + .02 Tr s 1,5OO MH In LaborAssembl y
.05 Tr + O Tr. S 5,OOO MH In Automated Assembly
O Tr + O 7r, ) 3O,OOO unlts eales contract
1 Tr + 1 Tr-
>
3O,OOO untts sal ee contract
. 5r1
E21.12 APPENDX'
OU
50
4 E
40
30
20
10
A
B
c
D
Let L = the number of legal
pads
R = the number of rcgular
pads
Objective function:
Maximize CM =
$f 8L + $12R
Subject to:
2OL+l ORs9OO
Chaptor zt
90R
= SOCM
= $a1o CM
= S9OO CM <- Maxl mum CM
= S72O CM
mi nutes l abor
(2 peopl e x 7.5 hour r 60 mi nutesl
boxes daily marimum demand
(3O0 boxes
per week + 5 work daysl
L+ Rs 60
0
' r0
20 30 40
= ( L=0,
R=O) =
= ( L=411,
R=0) =
=( L=30, R=3Ol =
=( L=O, R=60) =
50 60
(S18Xo)
+
(318x4tt)
+
(318X3o1 +
(S18Xo) +
70 80
(312X0)
(312X0)
(812X3o)
(sl 2xso)
L + R
(
60 boxes dai l y' demand
10R s 900 mi nut es ol l abcr
CGA-Canada (adapted). Repri nt wi th permi ssi on.
Qppter 2l
E21-13 APPENDIX
Graphic method:
555
Objective functlon: Marimize
CM = 4 a + 3 b
Constraints:
Za + b
a+b
a
When: a = O
b = 11000 Ti me
b =
gOO
Leather
No b Buckl es
I
' OOO Time
8OO Leather
4OO Buckles
When: b = O:
a=5OO
e=gOO
a=4O0
s
't200
1' t 50
1 100
1 050
1 000
950
900
850
800
750
700
-
650
500
550
500
450
-
400
' l (n
300
-
250
200
150
100
4 n
Ti me Const r ai nt
,Bocxl e
Constrai nt
Leat her Const r ai nt
A- l l
l _1 "
s0 I 1s0l zsol ssol asol ssol osoi zsoi asol
gsol r osol l l sor l 25or
100 200 300 4oo 5oo 600 7oo Boo 900 1o0o
. 1100
1200 1so0
Tlying
values
at each of the corner points,
A=( a=o
,
b=o) ;
4( o) + 3( 61 =g
OCM
B = (a = o--, b= Boo); ai oi +
gi abot
=
$2,aoo cM
c = (a
= 299,
p
= 600); cizbol
+ sioooi =
Sz,ooo cM <_
D = (a = 499,
p
= 2oo); cicooi
+ sieooi =
Szizoo cii
E = (a
-
4o0, b = o); nicooi + 3iot
-'
=
Sr,ooo cii
Opti mum
combi nati on
woutd
be 2OO a and 600
b
2OO (4)
+ Goo (3) =
$2,6OOCM
:
sffi
E21-14 APPENDX
Graphic
method:
cost function is: Minimize C =
$3x
+ $4y
Subiect to constraints: 4r + 8Y
7r +2y
1. 51 + 5Y
3. 5
( 1, 3. s)
Product a Constraint
r . 5*
I
0
Possi bl e
sol ut i ons:
q
,
Chapter 21
Uge 1 ton of x
and 3.5 tonr of Y
tor
a ml ni mum total
cost of 317
,,',K%w
Poi nts x
v
3x 4y 3r + 4y
A o 7 o 2A $28
B 1 3.5 3 14 t 7
c 5 1. 5 15 6 21
D 10 o 30 o 30
-+
OpUmum
gol ut l on:
Chapter2l
E21.15 APPENDIX
Subject to: x
,gr
.2x
557
+y
+ .5y
+ .5y
Let x = pounds
of hardwood per
batch
y = pounds
of softwood per
batch
Mi ni mi ze: C =. sOX +, 4OY
30.000
FEASI ELE
AREA
5.000
Gorner poi nt
B val ues:
, 2x + . 5y= 6' 000
. 9r + . 5y= 12, OOO
. ox =
6, 000
Cor ner poi nt
C val ues:
. 2x +. 5y = 6, 000
x + y=24, OOO
I
]
x = l o, ooo
Mul t i pl y by 2z, 4x + y = l 2, ooo
Subst l t ut e:
- r +
v=?9. 99o
.2 (lo;oobJ+
.sy = 6,ooo
'6r
=
ff33
,5y = 4,ooo
Substi tute:
y = 8,O0O
.2 (2O,OO0)
+ .5y =
g,OO0
.5y = 2,OOO
Tryrng
vatues
at each of the corner poi nts:
y = 4' ooo
A = (r =
o.
v
=
24,ooo!;
$.19!
-ol +
s.4o (z4,ooo)=$ g,sooc
B =
{x=1o, ooo, y=
si oooi i
i . : qi r o, oooi
*i . oo(
s, ooo}=$
8, 200 c+
c = (r =2o, ooo,
y =
e, oooi i
$. soi zo, oooi .
i . co (
4, ooo)=$1i , 600c
opt i mal
sol ut i on:
1o' ooo pounds
of hardwood per
bat ch
and
groo0
pounds
of softwood per
batch resurts
i n a cost equar to
tho
Sg,2oo standard-per
batch
. 2r
.
. 5y>6. 000
x . Pounds Ot Har dwood
Der Bal Ch
5g
Chagtar 2l
PROBLEMS
P21-1
(il The dlfferenUal cost analysls for the Glasgow Industries' order for
I 20,O0O valves lollows:
tncremental revenue
($18 per uni t
x
120' 000 uni ts) $2' 160' 000
lncremental costs:
Variable costs:
Dlrect materials
($5 per unlt r 120'0OO
unitsl
$
8OO,OO0
'
72O,OOO
36O,OOO
120,OOO
$1, 8OO, OOO
48, 000 1, 848, O0O
aCCept l ng t hg Of f gr. . . . . . . . . . r. . . . . . . . . . . . r. . ' . ' . . . . . r. . . . . . . . . . . . r. ' . . . . . r' . . $--XZ' 99O
The ml ni mum uni t sal es
pri ce that Sommers coul d accept wi thout reduc'
ing net income must cover all differential costs
(i.e,, tho variable costs
pl us the out-of-pocket fi xed costs). Therefore, the mi ni mum sal es
pri ce
per
uni t woul d be:
Variable cost per unit:
Di rgct mat gri a| s. . . . . . . . . . . . . , . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . $ 5. oo
Di rect l abor . . , . . . . r. . . . . i . . , . , . . r,
O. OO
Vari abl e overhead ($6 per
hour r 112
hour per
uni t)........r...................................
3.OO
Shi ppi ng
grpgnse. . . . o. . . . . . . . . . . . o. . . . . . . . . . , . . . . r. . . . . . . ,
1. O0
Addi ti onal fi xed cost per uni t:
Supervi sory and cl eri cal costs (S12,000
total cost + 3OTOOO uni ts!.,........................
Di rect l abor
(96
Per
uni t r 120' 000
U nl t Sl . . . . . o. . . . . . . . . . . . o. . . t . . t . . . . . . . . . . t t . . . . . . t . . . . .
Variable overhead (36 x 1/2 hour
per
unl t r l 2OrOOO unl t s). . . . . r. . ". D. . . . . . i . . oo. . .
Shi ppi ng expense
($1 per uni t r
I 2OtO00 uni tS) ..o...........................t.....
Total vari abl
g
costs .....r.............r.' ......
Fixed costs:
Supervisory and clerical costs
(12O,O0O + 3O' OO0 per month x
$1 2r000
pgr month| ...............r............
Incrsment to pretax profit as a result of
tzl
. 40
L
Mi ni mum uni t sal es pr i ce. . . . . . . . . . . . . . . . . . . , . . r . . . . . . . . r . .
$15. 40
Clnpls2l
559
P27-7,(Concl uded)
(31 Sommers Company managament should conslder the following factors
before accepting the Glasgow Industries orden
8' The effect of the apeclal order on Sommers'aales to other cus-
tomers at tfie rcgular sales
price.
b. The possibillty
of establishing contactg in the internaUonal market-
place
as a nesult of the sales to Glasgow Industries, which could
lead to market erpanslon.
c. The wear and tear on machinery that might increase maintenanco
and rcpairs and result in a
premature
replacement of the machinery.
d. Possible retaliation by competitors who may learn of Sommens'
deep
price-cutting
actlon, including risk of a
price
war that would
disrupt rcgular selling prices;
P21-2
(tl
lmpact on net income if APA accepts bid:
Submi t t gd bi d. . . . . . . . . . rr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . r. o. . , . , . . . . . r
Lgss sal gs commi ssi of l . . . . . . , . . . , . . . . . . . . . . . . . . . , . . . , rr. . . . . r.
Ngt sa1gs. . . . . . . . . . . . . . . . . . . . . o. . . . . . . . . . . . . . . . . . . . . . . . . t r r . r r . . . . . . . . .
Variable costs:
Di rgct matgri a|s......r.,,................r...........,.........
32gr2OO
Di r gct 1abor . . . r . t . . . . . . . . . . . . . . . . . . . . r . r . o. . . D. . r . . . . . r . . . o. . . . . r
56r OOO
Variable factory overhead (3O%
of
di rgct l abor)* . ' . . r. . . . . . ' . . . . . . . . . . , . . . . . . . . . . . . . . . . . . o. . . . . .
l 618OO
"J:*J";Tl',f,*:::::::::::::::::::::::::::::::::
l02,ooo
$ 46,500
18, 600
$ 27,9OO
'The
lactory overhead rate is Sooh of direct labor dollars. Based on the
erperi ence for the fi scal year
snded September-3o, the rate due to the.
variable factory overhead cost is
gO%
($2,ZSO +
$7,5O0).
(21
Framar would realize a
positive
contribution margin of $1z,goo before
i ncome tax, i ncreasi ng net i ncome by $7,380, i f the
$l 27rooo counter-
offer is accepted:
$t65,000
| 6,5OO
s148, 50O
$127, OOO
12,7OO
sl l 4, 3oo
102,OOO
$ 12, 3OO
4rg20
g__L389
ffi Chapter 2l
Pzl -2
(Concl udedl
(31 The lowest
price that Framar could
quote
on this machinery without
reducing lts net lncome ls
$1131333
($IOZ'OOO + ,9f. This bid woufd cover
exactly the sum of the variable manufacturing costs ($I OZ'OOO| and the
l0oh sales commission, thereby resulting in no increase in contribution
margin and no income tax.
(41 lf Framar Inc. accepted all of its work at
prices similar to the $127,OOo
counteroffer, a loss situation could result. The analyses for requirements
(11, (2), and (3f vvero short-nrn decisions In situations In which Framar
had ercess capacity. Consequently, the analyses concentrated or cover-
ing only tha differential variable cost. However, wfien all orders ane con-
sidered, Framar must cover both its variable and its fixed costs. A bid for
all work similar to the one for
$127r0OO
would not cover Framarb
fixed cost.
Galcufations restating the most recent entire fiscal
year
on the
$127,000
price/variable
cost relationship aro as follows (00Os omitted!:
Sal gs ($l St ZSO x 1. 2451' . . . r. . . . . . . . . . . . or. . . . . . . r. . . . . . r. . . . . . . . . r' . . . . o. . . . . ' r. . .
$1
91609
Lgss COmmi SSl Ol l . . . . . r. . . . . . . . . . . . . rr. . . . . r. . . . . . . . . . o. . . r. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1r961
$17, 648
Expenses (per income statement for year ended 9/3O|:
Vari abl e cost.......
$15, 750
$15, 75O
Markup on vari abl e costs =
9127' OOO -
7.245
s102, OOO
Clppter2l
P27-3
56't
(1t An analysis comparing costs of each alternative:
(al Sehedule overtime hours:
May
otrertime Hourc
Reouircd
I' OOO
2rOOO
2,OOO
215OO
2r50O
2,OO0
l2,ooo
600
_13oo
June
July
f n efficien cy fa ctor (25%r....r...,t..,
Total hourc tequi1ed...,.....r.....
AUgUSt .r.............o...' .' ....
Septemb91.,..................
Octobgr ............r...r....,.,
In efficien q (5oh1....-.....
Total overtime houns.....
Additionaf labor costs (72r8oo
r $6 r f .5)...........,..r........r
Rglated fringe bgnelits ($l
tgrcoo r .10f .........,.o.......,.r....
Differential
cost if overtime is scheduled ...D....,,.....,........
(b) Hire temporary workers:
Ertra hours ttquiled ....
a a a a a a a a a a a a a a a ,
a a a a a t a t a a a l a t a a a a a a t
$t 13, 400
11, 34O
$124, 74O
12, OOO
3r00o
15, 000
xSo
s 9O,OOO
Hourly rate for temp orary workgrc.....r....,.....t.....D.........D..
Differential
cost if temporary workerc hired.......,............
There ano no fringe benefit costs with temporary worker.
Y
, g
w
721-3
(Continued)
Clppter2l
(c) Erpand labor foree and rchedufe level productlon
of IO,OOO units
per
monthl lf the labor force le expanded co that level production
can be
gcheduledr
Valbec will produce
lOrO0O dolt house unitr per
month, requiring 5'ooo dlroct labor houn. This meanr that 12,ooo
additlonal regular dlreet labor houra will be roquired during zoa
with no ccheduled overtime or need for temporary wortens, ar
chown below:
Requlrements
Montfr
_Iggoo
5,OOO
4rOOO
_l'ooo
$72,0OO
14,4OO
Annual
Diroct labor hours required
Regular time (12,O0O
x $Ol
Forgcast production
In units.o....o................
Former direct labor constraint in hour!......
Addl tl onal regul ar hours In zOa ..,...............
Direct labor costs:
Related fringe benefits ($72,OOO x .2O|...
AddiUonal
inventory carrying costs (refer
to the achedule of lnventory levelr below):
Average monthly inventory with
overtimg or temporary wortol'tl ..........
Average monthly inventory with level
productiort
.,r,................
Diflerence
EsUmated annual cost of carrying
Inventory per
unit ....r.............r...,........
Differential
costs if level production
is
USgd i . . . a. . . a. . . a. . . . . r aaaa. r . . . . . . r . . . . . r r . r . . . . . . . . . . . . . . .
13,846
16, 231
l_?g,ooo
6O,OOO
48,OOO
12, O0O
$86,4OO
21385
sqgn85
2,38,5
r 31
drapter 2l
P21-3 (Concludod)
Lsrt Day
of Month
Docrmbcr.
Jenurry 8.............
Fcbnrery
Aprll'..-...........................
May.........-rt..o...............!r
JUl f ....r....-r......r........r...rr
Scptcmbcr.........r.....,......
Octobcr ....,............
Novtmbcr.......................
Dcccmbcr.
Avcngr pcr
montfi
crcludlng Etoty
rtock (divldo
by t3)......
Salaty rtock ............,....,.
Schedule of Inventory Lsvels
5A?
Urc Ovcrtimc
or Tcmporery
Workerr'
I,OOO
I,O0O
I,OOO
8,OOO
IrOOO
1O,O0O
12,OOO
12,000
13, 00o
13rOO0
t2,ooo
I,O0O
I,OOO
128,099
9,849
4,O00
Lcvcl Produetion
Bcolnnlnar Prcductlon Salcr
qooo
t0,ooo
ra(X)o
l 4' OOO
l6,0oo
l8,ooo
t8,000
f 8r0o0
t4,ooo
l l ,ooo
8,OOO
6,OOO
to,ooo
lo,ooo
torooo
to,ooo
lo,ooo
torooo
l 0r0o0
lO,OOO
to,o0o
1O,OOO
IO,OOO
l O,OOO
IrOOO
I,OOO
I,OOO
IrOOO
8,000
I O' OOO
12, 000
12,OOO
l3,ooo
t3,ooo
12,OOO
8,OOO
Endi no'
8,OOO
lo,ooo
t2,ooo
l4rooo
16,OOO
18, OO0
l g, ooo
16, 000
t4,oo0
t I
ro0o
IrOOO
o,ooo
I,OOO
159,000
12,231
4,O00
Avcragc monthly
invantory
13,848 uni tr
16,231 unltr
'Ercludcr
ralcty rtock of 4,OOO doil hougc unltr.
Alternative (c)
affords the lowest estimated differential cost.
(2',
There ane several noncost factors, or factors that are difficult to cost,
that Valbec should consider in conjunctiorwith
the cost analysis of tire
three alternative
courses of action. Relevant factors include:
(al
Consider the degree to which Vatbec's negular tabor force is wilting
to work overtime.
(b)
The tabor force may plan
on ovsrtime pay
as part
of their normal
work situation. lf wages should be reduced because overtime is not
scheduled,
due to the use of temporary worke6 or an expanded
labor folee, then the morale of the tabor force coutd deteriorate,
laborers
might seek wo$ elsewhere, laborers
might seek base pay
inc*ases,
or the tabor force might decrase its efficiency.
(c)
Overtime
does provide
a certain degree of flexibility, should sales
volume
and patterns
not occur according to the fo#casted plan.
(d)
lf the labor force is to be expanded, Valbec
must be sure there is an
adequate
suppl y of ski l l ed workers.
I
a i
I
l
i - l
I
I
P274
Group I production costs:
"
Matgrials
($9.27 + 251 .....................i......"......t....o....o...........
Labor (S19.48 t2.51 + 251........
Variable factoly overhead ($eee
x 150
Total variable unit cost......o.....o.....r.,..o,.r
Total variable cost (S2.5Ol x (3 + 2l r 2'OOO1..........t.............
Additional fixed factory overhead .......
Gmup ll productlon
costs:
Chaptor 2t
. 131
,948
1.422
$ 2.501
$25, 01O
..........r.. 7
rO4O
Materlals (93.9O + 20)
LabOr (($tZ.l6 X 2) + 2O!....r.r.....' .....r...r..........r.....................
Vari abfg factory ovgrhead ($t.ztO r 150%1................-.,......
Totaf variable cost (t03.22O
x (2 + 2 + 4l x 2r0OO1..r.....,....,....
Addi t i onal f i xgd f act ory ovgrhgad , . r. . , . . , r. . . . , . . . r. . . . . . . . . . ro. . . . . . . . .
Sal es ( $54 x
2, 000)
Group I costs:
Outsi de suppl i ers:
Dissection knives ($.f,ZO
r 3 r 2,OOO)...,......,.
Scal pel s ($3.SO r 2 x2rOOOl oo,..........,.,.,.......r
Group I producti on
costs (computed
aboye| ..,..
Group ll cosG:
Outsi de suppl i ers:
s32,05O
Scissors ($g.OO r 2 r2,0O0l
$
TWegzgrs ($2.97
| 2 x 2rOOO)..........r..............
Cl amps (Sg.za
r 4 r 2ro0o1........i .........,...o.....
Group l l producti on
costs (computed above|....
$19, 2oo
13, 2OO
q?2,40O
sl 2,ooo
11, 880
26'24o
s5O, 120
957,520
s 32,O5O
, 180
1. 219
1,824
9__3.22O
951, 52O
I rOOO
s57, 520
$116. O00
i$
32,05O
\
l so. t zo
t '
/
6r OOO
I , OOO
12,OOO
6, OOO
sl 14, 170
s 1. 830
Clppter2l
P214 (Goncluded)
Production of Group
I compononts
fc
l_ess costly than purchasing
fiom outsides.
and purchaslng
G-,u-p
lt componenta
lrom outsiders
ls fess
"o"tiv
i[;;;;;:'
fng them. However,
tho estimated
operating profit
contribution
ls only marginaf-
ly posluve ($1'830
or 1.60/o of the eifimated iares fi-gure) anJ"nv
oecossary
addiUonal marketing
cost ralated to the dlssection Instrument
sets would
fun-
tlrer reduce the erpected protit
contrlbuUon.
Present annual fired factoly overhoad
ls ercluded from the differential
cost analYSls' because these costs wllf be Incurrad
whether
oinot the sets
alt marketed.
Based on the information
assombred
by the study team, the proposar
has
little merll
I
I
-
ffi
Chaptor 2l
P21-5
lll
The lowest
prlce Chemco should bld for a one-Ume speclal order of
2STOOO
pou;& (25 totsl would be $?4r75O,
whlch is equal to the variable
costs ol the order, determined as follows:
Diroct materlals:
on a one-tlme-only speclal order, chemlcals used In manu-
facturing the firmb main
product have a relevant cost ol
their expected future cost, repnesented by ttre current
market
price per pound. chemicals not used In current
production have a relevant cost of their value to the firm.
CW-3 (4OO pounds per lot r 25 lotsf
= 1O'0OO
pounds'
substitute cN-S on a one-foFone basis to its total of
5,5OO
pounds. The relevant cost iS the salvage valuo.. s
The remaining 4'5OO
pounds would be CW-3 at the
relevant cost of $.gO
per poundr its expected future
COs t a a a r a r a a a r a a a a a a a a a . a a a a . r a r r . r a a a . a a a o . a a a a a a a a a t o a . a a a a a a a a a . . a a a a a t t . a a a a a "
JX-6 (3OO pounds per lot x 25 lots r $6O
per pound)
"""""'
MZ-g (2OO pounds per lot x 25 lots x $1.60
per pound) .."""
BE-7
(1OO pounds per l ot r 25 l ots r ($.eS cost
per
pOUnd
-
$. l O handl i ng
pgf pOUnd| ). . . . . . . . . . . ' . r. . . , . . . ' . . , . . ' . . r' . . . .
TOt al d i f gCt mat gf i al s COSI ' . . . . . ". . . . . . . . ! . . . . . . . . . . . . . . . . . t . . . . . . . . . . . . . . . "
Di rect l abon
(60 DLH per l ot r 25 l ots) = l ,5OO DLH
Because onl y 8OO DLH can be schedul ed duri ng regul ar
time this month, overtime would have to be used for the
remaining 7OO hours; therefore, overtime is a relevant
cost for this order.
l
r5OO
DLH x S7.0O
per DLH at regul ar ti me l i l te."' ..' ...""' r"'
7oo DLH r $?.50 overti me
premi um per DLH..""""""""."
TOt al di f gCt l abOf COSt , . . . . . . r . . . ' . . . . . . r . . . . . . . r . . ' . . . . . . . . . . . . r . . . ' . . r . . . . t . . . r
Factory overhead:
This special order will not increase fired factory overhead
cost, and it is not an order for a continuing
proiect that
shoutd contribute to the Fecovery ol fired factory overhoad.
Thereforo, the fixed factory overhead is not relevant, and
the retevant factory overhead charge is the variable factory
overhead rate.
1,5OO DLH x $2.25 variable factory overhead rate $
3,375
Total di fferenti al cost ol manufacturi ng
thi s speci al order and
the mi ni mum bi d
pri ce for the order....- g1/99
500
4r05O
4,5OO
IrOOO
1, 375
sl 8, 425
s1o,5oo
2,450
$12, 950
Cluptx2l
P2t '(Concludod)
l2l
Calculation of the price for rccurring orders of 25,OOO pounds (25
lots)
follours:
Dirsct materials:
Because
of the posslbillty
of ftrtura orders, all raw materials
must ba charged et thelr erpected future cost, reprasented
by the currrnt market price per pound.
CW-3 (4OO pounds per
lot r 25 lots r $.gO
par pound|..,......,
!t6
(3OO pounds per
tot r 25 lots r $6O
pgr pound|.,.........
MZ-9.(2O0 pounds par
lot r 25 lots r
$l,gO
por pound)........
BE-7 (l OO pounds per
lot r 25 lots r $,65
per pound).:.........
Total dirggt matgrials cost .........-...........t......o........r..........D...,
Direct fabon
$oo/c ol the production
of a batch (goo DLt{) can be done on
regular ume; the remaining 600 DtJl direcuy ciause oveF
time to be Incured and aru, thus, a retevani
cost of this
new prcducl
1r50o DLH r $7.0o regul ar rate per DLH..........,.r,.................
600 DLH r $3.5O overti mg premi um
per
DLH....D................
Total direct labor cost
Factory
overhead:
All new prcducts
should contribute
to the racovery of fired
factory
overhead as wert as cover ail variable costs. There-
fore, the overhead charge woutd be thE full overhead rate.
l t 50o DLH r $8. 0o
per
DLH. . r. . . . . ' . r. . . . . . . . . . . . . . . . . . . . . r. . , . . r, . . , . r. . . r. .
Ful l manuf act uri ng
cost . . ' . . . . . . ' . . . r. . ! . . . . r. . . . r. . . . . r. . . . . . . . . . . r. . . . . r. . . . . . . r.
Markup ol 4O"/o on cost ($44rZ2S x
.4O)
Fufl manufacturing cost plus 4oo/o rf.arkup........,...!....r,.,........,...
fi7
$ I,O0o
4r500
g,oo0
I rE25
s23,125
$l o, 5oo
2rlOO
$t 2, 6OO
$ I,O0O
$c4,7ZS
17. ggo
$62. 6{s
5ffi
P27-6
Sales:
5O,O0O r $10
25, OOO x $l O
Variable erpenses:
Direct materials:
5Ot0OO I $2..........r......rt.....' ......
25,OOO r ($2 x.94)
5O,OOO x ($Z x.O6)
Chapter zl
Present Additional
Caoacity Capacity Total
$5oor0oo
$25O,OOO $75O,OOO
$l oo,ooo
$ 47,OOO
(6,0ool
$l 4t , ooo
Di rect l abor (94 x' 1.O51......
Factory overh
gad...r.....,...r.
$4.2o
L30
JifJ"s,:ffi : . : : : : . : : : : : .
s*
Total variablg
gxpense,......o,o....
Contrib ution margifI.,........,.............o........
Fi red expenses:
Fa ct o ry ove rh
ga
d' ........ r.......r....... t
Markgtf n
g
erp
gnsg
................r.r....
Increaso i n adverti si ng
( 511, O0Ox. 1Ox. 251
Addi ti onal pl ant
depreci ati on:
3260,000 + 25 yrs. =
$1O,40O
S 84,OOO + 20 yrs. = 4r2OO
$14, 600
S14, 600 r . 95r =
Total fixed expense
$184, 5OO
$113, O0O
I
72, 5OO
1 1, 000
$ 15, oOO
275
13, 870
$ 83. 500 S 29. 145
$_298O_q
S 36.355
275,OOA
12, 00o
137, 5OO
6, 00o
412,5OO
$
87, 5OO
11,275
13, 870
s112. 64s
$__85,955
Oper at i ng
i ncomg
. . . . . . . . . . . . . . . , . . , . . , . . . . . . . . . . . . . .
' 57o
al l ocated
to i nventori es.
The expected operati ng i ncome from addi ti onal capaci ty
($36,355)
shoul d be
eval uated as to whether or not i t i s a sati sfactory return on the addi ti onal capi -
tal i nvestment of S344,OOO
($2OO,OOO + $84,OOO)
(See Chapters 23 and 241.
I
U
Chapter 21
P21- 7
( 1)
569
MAru( CORPORANON
Boston Plant
Gomputation of Number of unlts of Xoff Requlred ro Gover
Fixed Factory orerhead and Frxed Regional
promoilona!
costs
Total fOOOs omitted)
per
Unlt
Sa| 9s....,..r....,...1 a a a a a a t a t a a a t a a a t a a a a a a a t a a a
Variable factory costs:
Di fgct matgri al s ..ro..,r.....r.r........r.r........o..
Di r gCt l abOr ' . . . . . . . . . . . . . . . . r . . . . . . . . . r . r . . r . . . Dt . . . . . r .
Variable factory overhead.......r...............
Total variablg cost ..............r......ts....t....o,
Contribution margi11,..................rr..r..r....,....
s2,200
s2o
Units required to cover fixed factory overhead and fixed regular promo-
tional cosls:
$ sso
$s
660
g
440
s1, 850
2rO2O
1, 390
s5,250
s2, 150
sl s
ss
s 85O
$t,000
1,O2O
tr,000
680 700
sl,g5o
S sso
(21
MARX CORPORATION
schedule of Budgeted contribution Margin and operating Income
lf Boston Operations Are Expanded Under
plan
A
(OOOs
omlttedl
Total Boston Ghlcaqo
$7,400 s3,4OO
g4,OOO
l .
S3,4OO Boston sates
ffi x
t t -
54,000 Chi cago sal es
ffi
s2,55O
S Bso
s2,700
$1, 300
s1, 600
320
S 7oo
220
$ 9oo
100
$t , 920
$ z3o
310
s s20
$t,ooo
s 300
168-
$
(70)
142.
s (8o)
s(2121 $ 132
$31O Home offi ce cost =
$tAZ
x $3f O Home
offi ce cost =
$f Og
r l
' l
- l
-
Chapter 2l
570
P21-7
(Continuedl
MAR)( COBPORANON
Schedule
of Budgeted Contribstlon Margin and Operatlng Income
lf Boston Plant [s Closed and Ghlcago Operations Are Expanded
Under Pl an B
Chicago Operations
(ooos omittall
S3l OEa. . . aaaaaaaaaaaaa. . . . aa. r aa. . . a. . . . . . r r . . . r o. . a. . aaa. . a. a. aar a. . . .
$8,2OO
Variable factory costs:
Di roct matgri a|S........i ...r..r.......' r....r..r.' ...r.r
Sl t55O
Di rgCt l abOr ..r...........o..r.............................
1t55O
Variabl
g
factory ovgrh
gad............"""""""
Total variable factoly GoSt' .".........""""""
GOnt f i bUt i On maf gi l l . . . . . . . . . . , . , . . . . . . . r. . r. . . r. . . . . . . . . . . . . .
Fixed cosB:
Fixgd factory overhgador......--.....' .....-..o.-...
$
95O
Regional
promoUonal cost............,...r.r......
200
Total fixgd CoSt ...............' ..........................
Si t
1 50
Plant Opgfattng InCOmg ....r,........r........,....,.r......
$
865
Al l ocatgd homg offi ce cost........r.......................
3l O
operati ng i ncome...,.........r.".o............r.............-
$
555
I , O85
$4, 185
Chapter2l
P21-7 (Concl udedf
57'
schedure
"r
B"dsm"??ff
?iH:lI
oo"ratins
Incom e
lf Boston Plant rs ctosed_and
Royarty
Agre",n;;t
rs contracted
Under Pl an G
Revenues;
Sal eS . . . . .
. r. . ! . . . . . . rr. . . r. . . . .
ROyal t i eS
. . . . . . . . . . . r. . . . . . . . . . r. . . . . . . . . , . . . . . . r. . . . . . . . .
Total rgvgnu gs
.................r........t..r......r...
Variable
factory
costs:
DirgCt
matgrials
r................,..rr......r......,..
Di rgCt l ab or,....,.....r,..........o.......r.t,,r...o,...
Variablg
factory
ovgrhead.....r..D............r.
Total variable
factory
cost ...........,..o..,....
Contribution
margirt...........................,.......r
Fixed
costs:
fixe-d
fa ctory
ovgrh
ga
d ..........,.......r..o.....
Regional promotionat
cost,....,.......,........
Total firgd
cost .,.,......r..r...,....r.........o.r....
?l l nt
operati ng
i ncome
and royafti es.........
Al l ocated
home
offi ce cost..,..]...........,.....,.
Operati ng
i ncome (toss)
..........,....
$4,O0o
$4,ooo
$t,ooo
I TOOO.
700
$z,zoo
$1, 30o
$ eoo
r06
$t,ooo
$ 3oo
310
$ l t s
$12s
$ f l ot
. .
(o0os
omittedl
Total
Boston
Chiceoo
$4,ooo
275
$4,275
$l ,ooo
I r OOO
700
$2,7OO
$1, 575
$ eso
200
sl , t 50
$ 42s
310
$27s
$27s
$27s
$so
100
$rso
$1 2s
5n
Chaptor zt
P21-8
Source: lrhnagoment
Aa unting @npus Rofr,tt(lttonNale,
N.J.: lnstihrte of Managemonl Accountants
(br'
,rrrV N"ri*al-Associsttn
olAccoontants), Spring, 1987),
pp.4-5. Gopyd0ht Spring, 19f3fl'W Inslihtlo of
Management Accountants
(tcrmerly Natirnal Associatbn of Accountants). All rights reserved. Beprinted by
permisskrn.
Ler Gtass Gompany
should imptement the
pnoposod plan to
punchase silica in
the dlscount
quantitr rne annuat savings from implementauon
of the
plan
would be 9{8rl5O,
determined
as follouts:
Annual cost with
quantity discount
plan:
Interest orpense to flnance carrying Inventorp-
Average level of InventorY In tons:
Ler Glassb roquirements.........'
I OIOOO
Requirements ol other manufactuners
(3OOTOOO + 12 months
+ 2| average +
(3O0' OOO + 12 months
* 2)
mi ni mUm).' ........."tt"""o""' t"'
25tOOO
Pfi Ce
pgf tgn Wi th d|SCOUBt.......o..' .................o.
TOtal ayefage COSI Of i nVentOfy.....' .' .....' ..r.......
Ratg of intgrgst to carry inventory..............,....
Gost of
purchasing Inventory
(42ofooo tons x $1'801.....""'o"'
756tooo
Additional costs to carry additional inventorp
[ -abor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . . , . . . . . . . . . . . . . . . . o' . . . . .
$ZOTOOO
Admi ni strati ve expenses.................................'
I OrOOO
Lost revenue from rental of warehouse
requi red to store addi ti onal i nventory..,...."'
1O,OOO
4O' OOO
$799' 150
Less novonuo from the sale of silica to other
manUf aCt Uf gf s
(3OOTOOO t OnS X $2
pef t On| . . . . . . . . . ' . r. . . . . . . . . . . . .
Al nUal COSI Of
qUant i t y di SCOUnt
p13f l . ' . . . . . . r. . ' . . . . . . . . . . . . . . . . . . . ' . . . . .
Annual cost without quantity discount
plan:
Interest expense to finance inventory':
35,OOO
r $1. 80
$g3,ooo
x 5% $
3, 150
6OO,OOO
$199, 150
1O, OOO
x $2.OO
$ 2o,ooo
rSoh
$
l , OOO
24O, OOO 241,OOO
Average l evel of i nventory i n tons.........' .........r
Pri co per
ton wi thout di scount"......................' .
Total avgrage cost of inventory r.......,.....r.........
Rate of Intgrgst to carry inventory '.....-............
Interest oxpense ..............
Cost of
purchasi ng si l i ca
(12O,OOO tons r 32) .' .".
Annuat cost savi ngs avai l abl e
by i mpl ementi ng
quanti ty di scount
p| an....... ............................
s
(41, 85O)
I
i
-
Chagter2l
573
o
or l
o
; i e
NE9
8E
:
5-
5-; ;
8
g
8e ?-
i t
S' E
8
rr
nr q g
o' o
N
E
EB
x
r
r cj i
r : _o
8g
=Ea
5_-
:3e
p
x
qXE
6
g {D{r6ri
oi s x
x[
E =
. =N
l - r -
5; S
; i l
o
o
i i
qg
i i P
s
6
r/)E
.g ; X
_6 E, 5 F E I
G
Et r
=
o. A
a l
O_
O
o9
00
AFB E 33
Eir
;'*B
ItE
t|l=
s8;
E;5
qsF
gsg
gii
gi$
x
E. : x
E. :
55s ..
EEi
E Hi5
s B?;
[ $g
glr
g
f;s;
E
fg8
3333331 3l 3ll
g'
co N \ r l @f - l l
v,
'o
l;l;ll
ol
ot
ol
ot
ol
NI
- l
NI
6t
3t l
ol
f;fl
- g
lU
#Fl
*3F3Fqflfl
_s.ss.ag.al
g.t
ail
r
gR
$$l Fl$ll
ro
|
,of ,o-lf
s
l ol 6l l
ol
ot
ol
dl
ol
NI
NI
el
w
ol
ol
+tl
g
tr.l
Hr
$l :'F33lflFil
ssggssisisil
,h
F
'*l;l;il
L
o
ct
(9
G
o
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tc
t-
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EL
(!
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tt
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- y
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ED
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rhl
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i o
38
?c D
o. =
I ' t
EE
o b
J t l
t r C
oqt
i E
v, -c
OO
9o
(t
dl
. s bg
( ! q5l
E89l
o
I
NA
o. 3
I
- \
-
Chapter 2l
P21-g
(Concluded)
l2l
Net revenue
Potential:
The cofored
paper brochurg prcvides the most net revenue if it can be
mailed at bulk mail rates; however, there is a risk of earning only the
third best revenus if it must be mailed first class. The
glossy paper' if
It can be mailed on time,
produces tAe second largest amount of net
ngvsnue; however, the ranking slips to the fourth best net revenue if it
is mailed late. The
plain paper bulk mail brochure has a substantially
lower net levenue than any of the other alternatives'
lmage as a well-run organization:
The image would be based upon comparison of two things related to
. the mail campaign-the
quatity of the brochure
(appearance| and the
arrival of the brochure immediatety following the radio and television
coverage. The glossy brochure, if it arrives on time, would
probably
convey the best image; however, there is some risk that it would not
arrive on a timely basis. The colored
paper brochure would be the next
best in terms of
guality, but the bulk mail alternative raises some risk
of a timety receipt of the brochures by the
potential donors. The
plain
paper brochure would be ths poorest quality, and because it is to be
sent bulk mail, it runs the additional risk of not being delivered on a
ti mel y basi s.
l mage as a fi scal l y responsi bl e organi zati on:
The i mage of fi scal responsi bi l i ty wi l l be based on a compari son of
potenti al
donorst
percepti ons regardi ng the cost of the brochure and
cost of the mai l i ng. The
gl ossy brochure mai l ed fi rst cl ass may be
per-
ceived as an extravagance by the potential donors. At the other
extreme, the potenti al donorc may concl ude that the pl ai n paper bul k
mai l al ternati ve i s an i ndi cati on that the organi zati on i s unwi l l i ng to
devote adequate fi nanci al nesources to the fund-rai si ng efforts.
The foundati on staff must wei gh the consequences of each of the al ter-
nati ves and the ri sks associ ated wi th them on the three cri teri a to sel ect
a speci l i c al ternati ve. The staff has
good i nformati on on net revenue
potenti al ,
but needs to obtai n i nformati on on the effects of the
qual i ty of
the brochure,
the ti mel i ness of the mai l i ng, and the type of mai l i ng on
potenti al
donorst opi ni ons as to what i s a wel l -run and fi scal l y responsi -
bl e organi zati on.
Chapter 21
P2t -t o
(rl
JUSTA CORPORATION
Quarterly Income Statement
575
Total
Local
Sal gS . . . . . . . . r . . . . . . . . . . r . . r . . . . . r . . . . . . . . . . . . . .
Variable expenses;
Manufacturing (Schedule
A1....
Marketi ng (Schedul e
B).....,.....
Total variable expensg .....r..
Contri buti on
ma1gi 11,....,..........r...
Separabl e fi xed marketi ng
expense
(3)
Local Sal es
s4OO,O0O
300, 000
300, 00o
a a a a a a a a a a a a a
(4)
Local Vari abl e
Exoenses (21x
f 3l
s12, 000
6, 000
6, 000
824,0O0
(6)
Regi onal Vari abl e
Exoenses f2l r f5l
s3,ooo
2, 000
2, O0o
37,ooo
$ 63O,OOO
24rOOO
$ 654,000
I 346,000
Local
s6O,OOO
24,OOO
_$36,oog
m
Total Variable
Exoenses f4l + l8l
$15, 000
9, 000
9, 00o
a31,OOO
Reoi onal
s45,O0o
7, O00
S3B,ooo
Net mar ket cont r i but i on. , . . . . . r . . , . . .
$ 3TSr OOO
Gommon fixed expenses:
Manufacturi ng ($l ,Of O,OOO
-
sg2orooo).............o.........,....
Admi n i st rat i ve. . . . . . . . , . r. . r. . , . . . . . . . ,
Total common fixed expense
Operat i ng
i ncomg r. . r. . . . . . . . . . . . . . . . . . r
(1)
Product
A
B
c
(21
%
3
2
2
(s)
Regi onal
Sal es
$100, 000
100, 000
1OO, 0oo
Separabl e
fi red marketi ng
erpense computati on:
Total
marketi ng
expense.............r..,..t.............,
Less vari abl e (schedul e
B),.....................i ........
Fi xed
marketi ng
expenss...,........
sl ,3oo,ooo
$I
' OOO,OOO
$ 82O,OOO
3l , ooo
$ 851, OOO
I 449,O0O
74,OOO
$ 19O, OOO
52,OOO
$ 242,ooo
l_lg3,ooo
(r)
el
(3)
l4t
(sl
(6)
m
Local vari abre Regi onar
Regi onar vari abre Totar varrabre
Product
%
Local Sal es
Exoenses f2l x f3l s-al es Exoenses l 2l r
(5)
Exoenses l 4l + {gl
A 60
$4oo' ooo
$24o, OOO
$100, o0o
s 60, 000
s3oo, ooo
B 70 3OO, OOO
210; OOO
I OO, OOO
7O, OOO
28O, OOO
c 80 3OO, OOO
180; OOO
roo, ooo
BO, OOO
24O, OOO
Tota1.........
9630,009 $ro,ooo
S82o,ooo
36' 000
38,OOO
$
gl o, ooo
s 65, 000
Reqi onal
S3OO,OOO
sl 9O, OOO
7,OOO
s197, OOO
sl 03, OOO
I
Y
576
Chapter 21
P21-10
(Goncluded)
l2l
No. Ttre regional market should not be dropped.
The regional market
sates are adequate to cover variable expense and separable fixed
erpenso
of the regional market and contribute $65,000
toward the recov-
ety of the $242'OOO
common fixed expense and operating income.
lf the regional market is dropped, the local market contribution margin
must absorb its own separable
fixed marketing expense
plus all common
fixed expense as shown below:
'
Cont ri but i on
margi n o. . . . . r. . . . r. r. . . . . . """"' r
S
346, 000
Separabl e fi xed marketi ng expense
"""
36' 000
Ngtmarkgtcontri buti oJl ........................
$
31Or00O
Total common tixgd expgnsg.....o........."
242r0oo
Operati ng i ncomg.....,.' .....t........r...""
9-994OO
Thus the corporati on operati ng i ncome decl i nes from $133' OOO
to
56g,OOO.
Thi s $65,0O0
reducti on i s the amount of the contri buti on l oss
from the regi onal market.
JUSTA CORPORATION
Quarterly Income StalE!!en.!
(31
Product
A
Product
B
Product
c
Vari abl e expense:
Manufacturi ng
(Schedul e A)' ..................
Marketi ng
(Sch edu l e Bl ' .--.....1.-....
Total varl abl e expense ...
Gontri butl on margi n
Fixed erpen3es!
Manufacturl ng .......-,
MarkeUng
Admi ni strati ve ..........
Total fhed expense ......
Total
$1, 30O, ooO
sso0,ooo
s4OO,oOO s4oo,ooo
s28O,OOo s24o,ooo
$ 820, ooo
31, 00o
3 851, 000
$3oo,ooo
15, 000 8, 0oo
8, 00o
i ?15,ooo
s288,ooo S248,OOO
s152, oOO
(4)
3 449,000 3185, O0O s112, oOO
s l oo, ooo
74, 000
52, 000
3 31O, ooO
Operatlng Income.....
_!._19t,009
i Schedul es
A & B are i n tl re requi rement
(tl sol uti on.
When the new
product reptaces Product G, the mi ni mum contri buti on
margi n per guarter must be at l east S162,000
(the present contri buti on
margi n of Product C + SI O,OOO of new fi xed expense) i n order for Justa
Corforati on to be no worse off fi nanci al l y
than i t i s currentl y. Thi s contri -
but i on mar gi n wi l l st i l l
pr ovi de oper at i ng
i ncome of 3133' OOO.
Chapter 2l
577
,
cAsEs
c27-1
(f
) $21
per
unit, a total of
9210,000 for 10,000 units, is the lorpest price
the
company could accept without
reducing budgeted
income of tne coming
quarter'
At any lower price,
the speciat order woutd add mono to costs than it
adds to rcvenues,
rcducing
the coming quarte/s
budgeted
openating
income.
The price
is calc-ulatod
to equat ttre retevint
costs of filling the special
order.
First' calcufate the following per-unit
variabfe
costs of
$ubrunits:
Budgeted
manufacturing
costs for the quarter.
.
$5,400,000
Less: Budgeted
fixed co_st (3
mo. x $i,ioo,ooo;
-i,zoo,ooo
Budgeted
variabfe
manufacturing
costs
. .
$i,200,000
Budget ed
vol ume of r egul ar busi ness. . . . . . . . .
+ 100, 000
uni t s
Budgeted
variabte manuf. cost per
regurarunit
ffi
Budgeted
selling & admin. costs for the quarter
$3,200,000
Less: Budgeted
fixed cost (3 mo. x
$900,000)
2.700.000
Budgeted
variable S & A
gosts
for the quarter
$ S0O,0OO
Budget ed
vol ume of r egul ar busi ness. . , . . . . . .
+ 100. 000
uni t s
Budgeted
variabte
S & A cost per
regulatrunit
$ S.0O
Regufar
sales commission (S/o
of
$9i
pricel.
. . .
i.SO
Budgeted
s & A cost per
unit, exct. commigsion
i-,jEA
The case states how much to add to the regular
direct materiat
and
direct
labor cost
rwo other adjustments
must be calculated: (1)
The saw is
needed
for onfy two months,
At a rental of
$S,S00 per
month, its cost totafs
$11'000 for the speciar
order,
or $1.i0 p"r
*ir
1zy'v"ri"ot" oerrr"ad per
special
unit is tripte
that of a regutar
unit, and the case states that this applies
to total
variabre
overhead
and to the variabfe
overhead
of the cut_off
operation.
The totat variabte
overhead
cost of a regurar
unit is
92.50, and
variable
overhead-of
the regular
cut-off
operation
is a part
of that total, so the
entirc
s2'50 is.tripled
for th6 spec-iat
oruer
t.nJ
no separate
adjustment
ie
needed
specifically
for the cut-off
operation).
il"
sz.bo ig inctuoed
already
in
the budgeted
costs
of regufar
rllF, so the adjusbnent
needed
to cost the
speciat
order
is an addttina,
$s.00 p",
,nitJ6lSr.ro) _
$z.so1, or a total
adjustment
of
$50,000 for the special
order.
sufficient
capacity
must be availabte
for the special
order. (othenrise,
accepung
it wourd
require
cancering
"oru
,"gulr
oroe4s),
and an
opportunity
cost aqual
to the tost contribuuoi
margin
on cancetfed
orders would
be a rplevant
cost of the special
ord"r.i
Crinoing-rn""t
in"
""p""ity
ie limited
to 60,000
S.OuLar
units per
monilr,
"o
ih" quarterrs
capacity
is 1g0,000 regutar
units,
and the budgeted
y9rlt"
"r
roo,Job
regurar
units reaves
availablo
capacity
equivatent
to 80,000 reguilunit".
Each
special-order
unit uses triple
the grinding
time
of a regul"t ,init,
"o-io,ooo
special
units require
the equivarent
of 30,00b regurar
uni6' gri"Jiig
time, we[
within the 80,000
regul ar
uni ts
of avai fabl e ci paci ty.
t '
, l
- l
I
578
eI-1 (Concl uded|
Cttptor2l
Special Order
Relevant Gogt Analvsig
Total oer unit
Uni ts
.... .
_IO.0AA
Relevant costs of special order:
Regular manufacturing costs. . . ,
$120,000 $12.00
Regular selling & administrative
' ,
costs, excl udi ng commi ssi on..
S,0OO .50
Additional costs of special orden
Direct material.
20,000 2.OO
Direct labor
Var i abl eover head. , . . . . . .
50, 000 S. 00
Saw rental (2 mo. x SS,S00) 11,000 1.10
Metallurgisfs fee
4,000
.40
Relevant costs of special order. .
SA0-A09 $Zl,qA
The relevant cost of $21 per special unit, although considerably higher
than that of a regular unit, is far below the regular selting price
of $g0. This ia
becauge the company's costs are predominately
fixed costs, plrsumably
due
to high levels of automation. The company will try to negotiate as high a-price
as possible,
but the
$21 figure should be regarded as an absolute minimum.
(21
Nonquantitative
factors to consider include the foltowing:
(a) Effects
on regular sales
ls the customer
who placed
the special order a now customer? lf so, will
they become
a regular customer provided
the special order is successful?
will that customer
always demand large price discounts?
Will (or
does) the customer use a targe quantity
of the regular product
and
pay
the full regular price
lor it?
Will regular
customer-s leam of the speciat, low price?
lf so, will they
demand
rarge price
discounts on their future orders?
Will this special, low price
start a price
war that can erpde regular prices?
(b)
Effects
on empfoyeos and community
Will the special materiafs and equipment
affect levelg of safety,
environmentar
poilution,
and noise in the company,a prant?
wi l l emptoyees
and managers gai n
val uabl e new i ki l l s and knowl edge by
producing
the special order? (ihe
case states that this ig the company,s
first opportunity
to produ-ce
and
gell
thia particutar
type of producl)
Will the special
orderrs affect on totat production
volume enable the
company
to avoid laying off valued employeee
in the coming quarter?
(c)
Strategic
effects
lmJrtet
share, grou/thl
innovation,
etc.)
Does
the speciaf order product
rapresont a new or fastgrowing
market?
Are there
leaming-curve
effects oi other advantag""
t" 6r g"in"a
from
adding
the new type of product
sooner rather ttrair tatere
Are prices
and profit marg. ins on thig type of product
expected
to improve,
or is it a mature product likely to decline
goon?
Chapler2l
czl -2
579
flt continuing
to obtain
coverg from lts own Denver
cover
plant
woufd
aflow
Blg-Auto
to mafntain
rtg cunpnt fever
of coniroior",
the quarity
of the
coverE and the timing
of therr delive-p,--Keep-i-ng
the Denver
coyer
ptant
opon atso alfour
Brg-Auto
mon. nexiuitityif,"n-pu*hasing
tie ttve.ing
lrom outslde suppli-r*
BIg:Auto
coutd niore e"llty
alteit"ne'l-oJ"ring",
deslgn and change
the quinuues
pro.duc"+
""p""iaily
if rong-term
con_
tracts are raqulred
with outside suppliers.lilg-f,*r
should
also consider
the economic
lmpact
that closing denver
coier
will have
on the Gomfnu-
nlty and how this might affest ail-autot
otrr"i
op"rauons
in the region.
In addiuonr
nolationgwith
the woikforce
at ;th"; plants
could
be affected
by nenvs of a ctoslng
and layoffs
at Denver
C;;;;.
(al
The fofrorving
recurrini
annuar buogeteJto"t"
can be avoided
by
closing
the Denver
Gover
plant
(21
Matgri a
1s.a.o.r........r.............-..r....................o.o......r
r....,.
Di rgct
tabor.r......r...r.........o.r.......r
Indl rgct
costs:
,-..,..r.r...................' ..o....D....
supgrvisfot
....' ...-...r......or....r......or.....r
gSrooorooo
I ndi rAct
l abor
. . . r. . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4TOOOTOOO
Differentiaf
pension
erpense
(S4' 00orooo-$3r0o6rooo; . . . . . . . . . . . . .
l rooorooo grooorooo
( b} Thef ol | owi ngn9cut 7i ngannua| budget edcost s" , ' no. #
the decision
to close the Denver
Cover
ptant:
Depreci ati on--+qui pment...
..............
$ S,ooorooo
Depreci ati on-bui l di ng
.........r................,............,,......
3,ooorooo
Conti nui ng pensi on
erpenses
3,OOO,OOO
Pl ant
manager
and staff ......
corporate
a-rocation...*.....::::::::::::::.:::::_.._.::::.::::::.::
3:333i3S
s*,r*pgq
The depreci ati on
amounts
are not retevant
to the deci si on
because
they
represent portions
of sunk
costs tnat are being written
off dur-
ing 2oA.
Three-fourths
of the annuar pension
e)(pensa ($3,ooorooo,
i s not rel evant
because
i t wourd
"onti nr"
wi ettrer
or not the ptant
i s
cl osed'
The arnount
for ptant
manager
and staff i s not rel evant
because
vosi to
and hi s i t"n rrorrd
conti nue
wi th Bi g-Auto
and
admi ni ster
the three
remai ni ng
ptants,
i r,":"orporate
arocati on
i s
not rel evant
because
thi s represents
non-avoi dabre
costs, i ncurred
outsi de
Denver
cover,
that a?e assi gned
to the prant.
sl 2,ooo,ooo
13, O0O, 00o
I
I
- i
I
- I
I
Chapter2l
fio
C21-2
(Concl udedl
(cl The following nonrecurring
costs would arise due to the closing of
the Denver Gover Plant:
Termination
charges on cancelted material orders
($IZTOOOrOOO i157ofr..........,....,....r........................
$lrSOOtOOO
gnipfoymgnt
assistSl|C..............' ..o....' .r....................
1
tOOOtOOO
$t'tt"Pgg
These two costs are relevant to the decision because they are
incurred only if the Denver cover Ptant is closed. Gonsequently'
they can be avoi ded i f the
pl ant i s not cl osed'
(d) ltems not specifically mentioned in the case that should
be consid-
ered by Big-Auto before making a decision
inc|ude:
(i) The disposal vatue or alternate uses of the plant
(iii Any income tax implications; including
the income tax rates
r
'
'
appti caUl e to
gai n or toss on the sal es of
pl ant and machi nery'
cost of losing-depreciation
tax shields,
any depreciation and
investment tax credit recapture, etc'
(iiil Outside supplierb
prices in future
years'
fiui
Gost to manufacture coverings at the Denver Cover Plant in
future
years.
Chapter 2l
c21-3
I
(1) Factors Cal co shoutd consi der, before enteri ng the consumer products
market, follow:
(al
the productb
contribution
margin and break-even point
(bl
consumer demand for the proOua
i n the short nrn and l ong run
(c)
the companyb ability to produce
the quantity
needed in the short
and l ong run
(dl
the companyb l ack of erperi ence
i n the consumer
market and the
need for di fferent marketi ng
techni ques for products
sol d i n the
consumer markets
(e) qual i ty
of the competi ti on
(n the i mpact
of the deci si on
on empl oyees,
and the effect of the
diversion
of calco management
effo-rt on total business
(21
Alteration
ol linanciaf forecasts for use in deciding uetnreln
the atterna-
ti ves:
58t
(3)
Galcors
| ncomebef orei ncomet aI . . . . . . . . . . . . . . . . . t . . . . . W, f f i oo
Add fired manutacturing
cost:
l OOrOOGuni t
l gvgl . , . . . . . . . . . . . . . . . . . . . . . . . , . . . . .
TSOTOOO
l 2Oroo0-uni t
l gvgt . . . , , . . . . . . . . . . . . . . , . o. . . . . . . . .
-' - - -
9OOTOOO
Add share of current Marketi ng Depart_
ment , s
management
cost s . . . . . . . . . , r. . . . . . .
i OOTOOO
operat i ng
margi n r. . . . . . . . . . . . . . . . , . . . , . . , . . . . , . . . . . r
$1p?5poo
$l
prorooo
Instead
of a difference
of $35,000 in391ne
Fffit
Gal co,
the new catcurati on
shows a $ts,ood operati ng
margi n
(S-1'O75,O0O -
$f
'o9o,Ooo) favoring
Jasco. Ths financial
difference is
sl i ght'
addi ng
si gni fi cance
to the rel i abi l i ty
of the fi nanci al
esti mates as
well
as to the rerevance
of nonquantitative
factors,
9ng :rl
only speculate
about tire reliabitity
oi ttre two proposars.
The
fact that Jasco has experi ence
i n the consl mer
market i s si gni fi cant
i n
predi cti ng
success
or fai rure of the proj e"i ;b;
not necessari ry
for the
estimates
for the expected
benefits
of itre i""ii"ting program
or the
associ ated
costs.
l t shoutd be remembered
that the Jasco peopl e
recent-
l y l ost thei r j obs
and
pa.v be twi ng especi ai l y
hard to rook good.
si mi l arl y,
Gatcob
Marfeti ng' Department
may be bi ased i n i ts esti -
mates
i n an effort to avoi d eti -mi nati on
of exi sti ng
emproyee posi ti ons.
--L"nytTturi ng
costs are the same because
ci tco wi l l manufacture
the product'
The sares price
differs an_d an
"ipr"n"i[n
of the s% ($5 per
$t oo
of saf es) differencl
il il Jates
"orili"Joi
,ate is not given.
cal cob
i ncl usi on
of assi gned
Marketi ng
oepartm"nt
management
costs
i s perhaps
an at t empt
t o hedge i t s est i mat es.
I
Y
Chapter 2l
C21-g
(Concluded)
(41 Significant nonguantitative factorg that Calco's management should GOrl-
sider inctude:
(al impact of the decision of Galcors
present work force; 1.o., moralo
tosg of lamaining employees if layoffs happen versus the ability of
retained employees to work effectively in the new market'
(b) abiliUec and expectations of employees from Jasco, if Jasco is
selected,
(c) the possible diversion of Calco top management effort from its reg'
ular tine of business, if it does not hire experienced talent.
No single item may in itself be important enough to warrant selection
of one atternative ovsr anothea The information
presented in the caso is.
limited and does not
give an indication that any one nonguantitative fac'
tor is moro important than any other. However, any one of the factorc
could be sufficiently significanl For instance, the impact of eliminating
Calcots Marketing Department
positions, if Jasco is acquiredr ls
perhaps
the biggest single nonquantitative tactor for consideratlon. Since ttrese
new omployees displace existing Calco.employeesr the management
pnocess coutd be hampered by serious human relations
problems.
c21-4
(1) (a) The product-line income statement for Precision Gauge Corporation
is presented on a full costing basis and, consequently, is not suit-
abte for analysis and decision making. The fact that tho statement
does not distinguish between variable and fixed costs hinders any
analysis of the impact of volume changes on
profits. ln addition'
the
statement does not distinguish between costs that are directly
related (traceablel to a
product line from those that are shared
among all products.
An atternative income statement format that would be mone suitable
for analysis and decision making would incorporate the contribution
approach to costing, Expenses woutd be classified in terms of vari-
ability and controllabitity; such as, variable manufacturing, variable
selting and administrative, direct fixed controllable by segment
(dis-
cretionaryl,
direct fixed controllable by otherc
(committed)r and
common
fixed. The common fixed costs would not be assigned to
the product
lines bscause such an allocation would be arbitrary. The
contribution approach is mono suitable for analysis and decision
making because there is a meaningful segregation ol costs.
(b)
Chapter2l
5&3
C27-4.lGonUnuedf
(21 (al
The suggested discontinuance
of the T-gauges would be cost effec-
tive, but the suggestio;rs retating to Dgiuges
and
p-gauges
would
not be cost effectivo. These conclusions
ano based on ttre foilowing
quarterly
differential
cost anallsis.
Unit salg8 prico......r...t.....,....D.r..,...
P-gause
@
$2oo $18o
D-gauge
seo
(b)
Unit varlable costs:
-
Dirgct materials r.............,..o.......
$f Z
S
gl
S 50
Dirgct 1abor..................r......r......
20
40
60
Variable factory overhead.....,...,
gO
45
60
Selling
expenses.......r................
4
.;O
10
Total variable costs.................r..
$7f qF
Slgo
Unit contribution matgin........,...,.,.
$f
g
$ ?4
$ o
lncrcase (decrease|
in units
suggested:
D-gauge ($SOOTOOO
sales +
_
$gO
pri ce|
1.5O....o..,.........,....
x (5rOOOI
P-gauge ($l,600,00O
sales
_r
$2O0
pri ce)
I .15......,.............
x l r2OO
T-gauge ($soo,ooo
sates *
$tgo
pf i Cef
I
' l
. O, , . . . . . . r. . , . . . . . r. o. . . . . . . . .
X (5rOOOl
tncrease (decrease|
in total
contribution
margin ...................
$
(95roool
$
ggrgoO
$ o
Decrease (incrcase)
in fired costs:
D-gauge,
$10o,oOO
-
$2O,00O.... Bo,oOo
P-9auge. . . . . . . , . . . . r. . . . . , . . . , . . . . . . , . . . . . . . .
(1 OOTOOOI
T-gaUge
. . . . . . . . . . . . . . . . . . . . , , . . . . . . . . , . . . r. . ,
4OTOOO
lncrease (decrease)
in segment
contri buti oD
..........o.,........,.........
$
(l s,oool
$l l 1,2ogl
_S
4o,oog
Yes. The president
was correct in etiminating
the T-gauges.
The T-
g?.ug sales price
coverc only lts variabte
cost and doeC not con-
tribute
anything to the .ecoviry
of fired tactory overhead o,' p-ro-
tion costs.
Thus, the T-gauge
tris a zeno contribution
margin.
I
-
-
rrt
Chapter2l
C21-4
(Concl udedf
-
(cl Yes. The president
was corect in promoting the P-gauge line rather
than the D-gauge line because the unit contribution margin and
'
E
contribution margin per
labor dollar is
greater for the P-gauge line
than the D-gauge line, determined as follorlrs:
D-qauqe P-qauge
b
Uni tcontri buti onmargi n(see(a)1......r.............
$19,OO $74.OO
Contribution margin per
labor dollan
$19 contribution margin *
$2o labor..o..o.... .95
v
974 contribution margin +
$4o labor r.......o. 1.85
However, the presidentb
decisions regarding
promotion
expense do
not seem well conceived. The decreased
promotion
on the l)-gauge
'
l i ne and the i ncreased promoti on
on the P-gauge l i ne do not
pro-
duce sufficient contribution margin to offset the promotion
costs.
(dl No. The proposed
counse of action does not make effective use of
Precision's capacity. The 15% increase in
production
volume on the
P-gauge line will not require all of thE capacity that has been
rel eased by di sconti nui ng the T-gauge l i ne and reduci ng the
u
D-gauge line by S0oh.
(31 Yes. The non-quantitative factors that Precision should consider before it
'
-
deci des whether to drop the T-gauge l i ne i ncl ude:
(a) Customer rel ati ons-the sal e of D-gauges and P-gauges may be
rel ated to the sal e of T-gauges (i .e., Preci si on may neLd a compl ete
'
-
l i ne of gauges
desi red by many customers i n order to mai ntai n sal es
demand for D-gauges and P-gauges).
(bl Labor rel ati ons-reduci ng empl oyment may create l abor (personnel )
probl ems.
nt
ClWter2l
C21-5 APPENDIX
(11 Let r = rolls of commarcial carpet
V
= rolls ol resldential carpet
Heavy duty fiber constraint 80r + 40y = 42,OOO lbs.
Regular fiber constraint: 2Ar + 4Ay = 24,OOO lbs.
Solving by slmultaneous equations:
80r + 4Oy = 42, 000
2Ox+ 4oy = 24, OOO
60r = 18,OOO
r = 3OO rol l s of commerci al carpet
80 (300)
+ 4gy = 42,OOO
24,OOO + 4ty = 42,OO0
4Oy = t I' O0O
y = 45O rolls of residential carpet
Leastan cannot manufacture these quanti ti es
of commerci at and resi den-
ti al carpeti ng, because the di reet l abor constrai nt wi l l be erceeded:
Labor constrai nt 15r + 15y = l O,5O0
Using the requircment (lf solution:
r5(3001 + 15(450) = 17r25o, whl ch exceeds the di rect tabor hour
constraint of 1O,5OO by 75O hours.
Linear pnogramming
is a mathematical model for solving two or mone
unknowns in two or more equations. Linear pnogramming
is used to
determine
a mir of
products
that will marimize the contribution margin
or minimize costs by identifying the inputs, outputs, and their related
assumpti ons
and l i mi tati ons (constrai nts)
and combi ni ng them i n the
model . Li near programmi ng
can be used to al focate l i mi ted faci l i ti es and
resources
among thei r many al ternati ve uses i n such a way that opti mum
benefi t i s deri ved from thei r uti ti zati on.
585
t2l
(3)
I
I
I
ffi
C21
-5
APPENDIX
(Gonclud edl
Chagter 2l
-
(41
Commercl al Resi denti al
Sal gs
prl ce per uni t..........' .,.o............r.............r.r
$l rOOO $8Og
' | +
Less variable cost
Per
unit:
Hearry duty fi bgr........................o.r.,...............r
$ 24O $120
RegUtar fi b1..' .........r' ......' .............................
40 80
Di rgCt l abor. . . . . . ' . . . . . . . . . . o. . . . . . . . . o. . . . . . . . . . . . . . . . . . . . . . . .
1 50 I 50
Vafiablg faCtOfy Ovefhgad.......,r...,...........' .....
90 90
1. r . . . . . . . . . o. . . . r . . . . . . . . . . . . . . . . r r . . . . . r r . r . . . . . . . . . . . . . . . . . . . . . .
$ St r o S44O
Contri buti on margi n
per uni t................' ....o.......
9-199 -3360
Let x = rolls of commercial carpet
y = rolls of residential carPet
c = pounds of scrap of heany duty fiber
d = pounds of scrap of regul ar fi ber
Obj ecti ve functi on:
Maximize CM = 480x + 36Oy + .25c + .25d
Constrai nts:
8Or + 4Oy + c = 42r00O
pounds of hearry duty fiber
2Ox + 4Oy + d = 24rOOO pounds of regular fiber
15x + 15y s 1O, 5OO di rect l abor hours
Chapter 2l
C27.8 APPENDIX
fi7
The linear programming
modol
starts with an objecuve or
goal
to be
achieved aubject to a set of limiting factors, calted constraints. The lin-
oar pnogramming
model allours the usor to optimize (marimize
or mini-
mlze| the objecUve function subject to tha constrainG. The cantral
assumption ln all linear pnogramming
models In linearity. The linearity
assumption means that the objective function and the Constraints
in lhe
model can be expressed in the form of linear equations. The constraints
can be in tha form of strict sgualities, upper bounds (less
than or equal
to constraints)r and lower bounds (greater
tAan or equal to constraints|.
Li near pnogrammi ng
methods are appl i ed mai nty to al l ocati on probl ems,
1.o., allocating scance nesourcos among atternativo usas according
to
aome objective.
The scarco rosourcas for a business firm may include
personnel,
material, equipment, or capitat. The objective fun&ion
may
take the form of profit
marimization or soma other measuno of desired
benefiL In this particular
cass, linear pnogramming
is appropriate
because the firm of Miller, Lombardi, and
york
hasan o-uieciive in the
form of profit
maximization
subject to restricted r.sou.cis,
i.e., staff
available in the short run is restricted in each area.
The fol l owi ng
data woutd be needed to devel op the ti near programmi ng
model for Mi l l er, Lombardi , and
york
(a!
Total management hours availabte in each category of service pro-
vi ded.
(bl
Total hours avaitable for each category of service provided
by each
type of staff person,
i.e., erperienced and without experience.
(cl
Number
of mi crocomputers
and hours avai tabte
(dl
Bi l l i ng rates for management
and staff.
R. Ol i va shoul d consi der the fol towi ng al ternati ve
obj ecti ves before mak-
i ng the staff al l ocati ons:
(a)
Maxi mi ze
the computer hours avai l abl e
(b)
Mi ni mi ze
total vari abl o costs consi stent wi th mai ntai ni ng
a hi gh
level of professional
service.
(c)
NonquanUtative
objectives such as the preferences
of individuals in
management
to be i n speci fi c areas of servi ce.
(11
l2'l
(31
(4)
o2)-1.
Effective
phnnhg and control ol capital exPn'
dilureg are impodant because:
(a) financbl risk is increased by long'lerm
conmiUnentr;
)22-2.
(b) lhe magniludc of capilal expendilures is
aubstantial and the.penaltier for unwir
decbbnr arc us0ally severo;
(c) deciebnr mEde in this area provide the
supporting slruclure for operalhg activF
lies of he firm.
Exampler ol opportunities ard templations lor
unethbal behavbr in the caPilal budgeting area
include:
(a) prossuro applied to the cosUmanagerial
accountanl by superiors or associates to
ci r cur nvent t he capi l al expendi t ur e
approval process, in order lo gel a pel
projocl approved
(b) pressure to wrile olf or dovalue assels
below their lrue valur in order lo
jusiily
replocemenl;
(c) exaggerati ng the expecl ed economi c
benel i t s of a pet pr oj ect i n or der l o
i ncr ease t he l i kel i hood of get t i ng i t
approved.
The ccUnranagerigl accountant has an obliga-
lion to the company to make sure thal the corn-
pan/a legilimale polbies and procedures ar
not ci rcumvented and l o make sure that the
data used in the evaluation of capilal expendi-
lure proposals are as reliable and realistic as
possi bl e. l l an el hi cal vi ol at i on occur s, t he
cosVmanagerial accountant should f irst discuss
the perceived problern with his or her immedi-
ate supervi sor (i n order to cl ari fy the si gni l F
cance of t he pr obl em and i denl i f y possi bl e
counres of aclbn) and lhen with the individual
or individuals hvotued. lf lhe individual involved
is the accounlanl's irnmediale supervisor, lhe.
cosVmanagerial accountanl should consull the
next hi gher l evel of management. l l the prob.
lem cannot be resolved through discussicn, the
cosvmanageria!
accountant is obligated to prq.
vi de a ful l di scl osure ol al l the detai l s to the
oxocul i vos r esponsi bl e l or eval uat i ng and
approvh g capilal expenditures.
The econornic lile of a project ir the perird dur-
rng tvhbh il produces
eamings. lt need not, and
probably
will nct, be equal to the physical lile c/
the related asset(s). lts length depends primari-
l y upon l he obsol escence of t he pr oduct or
manufaci uri ng procoss i nvol ved or the nature
ol the product i tsel l . Managers usual l y fi nd i t
qutle diflicull to estirnate econornic life because
il depends upon future evonts ovr which they
may have little or no control.
1))-3.
CHAPTER 22
DISGUSSION AUESTIONS
A22-5. Gash oulflows lhat might be expecled for a
capilal oxpondilure includo:
(a) purchasc prbe of one or rnore assets (or
a down paymont il prcpe@ b purdrased
m irslalknont);
(b) conslruclbn pericd inlerest and taxes il
the prcperty b behg concructcd;
(c) machinery and equipmenl letup cost,
padiculady if mehhery behg evaluated
uti l i zeg a more advanced l echnol ogy
tfran that currently h use;
(d) cornPuter software development cost if a
cornpulgt aided design, cvnpuler aued
nranufacturing. or tully cornPutet integrat'
ed manul acl uri ng system i s bei ng pur-
chased;
(e) i ncreased annual mai ntenance and/or
power costs resulting frorn more canplF
cat ed or t echnol ogi cal l y advanced
rnachhery or equiprnent
(0 l ease paymenl s, i f some or al l of the
assets being acquired h the project are
leased:
(g) i ncreased worki ng capi tal regui rements
(i nventory, cash on hand, recei vabl es,
payables, etc.) may hcrease as a resull
of increased business generated by the
capital projecL
Q22-6. Cash inflows that might be expected fronr e
capilal expenditure include:
(a) rovnus lrorn additional business
gen'
erated by the project;
( b) cost savi ngs cr eal ed by t he capi l al
expendilure that resull in a reduclion of
cash outl l ows (8.9., mai ntenanco sav'
i ngs, l abor savi ngs, reduced i nventory
r equi r ement s r esul l i ng t r om r educed
setup l i mes, etc.);
(c) retention of market share that mighl have
been losl il the capilal expendilure were
nol made ( par t i cul ar l y i n t he case of
advanced t echnol ogi es t hat i mpr ove
pr oducl qual i t y, r educe cost s, pr ovi de
manuf act ur i ng l l exi bi l i t y, t c. t hat can
provi de a competi ti ve advantage l o l ho
firm wilh the techrology);
(d) salvage frorn the sale of the property at
the end of the economic lile c/ the capital
Prolect.
A?2-7. Sorne nonquanti l i abl e benefi l s l rom i nvesti ng
in advanced manulacturing technobgies, such
as Cl M, FMS, and roboti cs, i ncl ude:
(a) improved producl qualily (abilily to meet
cl oser producti on l ol erances and at tho
same ti me reduce l he vari abi l i ty i n pro-
ducticn output);
)224.
588
fuptsP
(b)
docmrod
nrrchhr trtup and rhorlor
, nrmufaclurhg
aTcb tirnra (wt bh prot ido
lho company
with tho ability to adjust
outpul quanlity
end veririy guickly
to
mo. l r api dl y
changi ng cur l omcr
dornane).
A2,4. Tar &procbtion ie guito
likoly to diffcr fronr
boofc dcprcciatbn
boceurc thc cool r.covery
podcrd ueod fc tex purpooor
ir. uaually rhorfci
than tho oconornic
lilr ol tho'assrt uted for
finarcial
@unting purp6er.
Abo, an ecccl.
onled melhod of depnciation is tlpbaly used
for tex purpo..r,
whrrosr tfre iiraigirt-tinr
molhod ir npn c{trn trcod for bok purpoer.
Q2-5. Book dopreciatbn lhorrH not be cqrsiJored in
ulindhg tho friun c8!h tbr, lrrn a projoct
belurr bok deprcciatinn
har no elbcl
qr
lho rnornt or linhg of cash tbm.
^)2-1O.
Tax deprccidbn
stould bo conrbered in ostF
maling lho luturc cach llowr frorn a proioct
bocaurc l ax deprcci al i on
reduces tarsbl o
ircqno and, thereforo, tax liability. Tax depro-
ciation rccult! h a tar ravhgs, i.j., a reduction
oa tar liability that is a caqh outtbw. The timing
of cssh flnn's lr affoctod by the tar dp.scratbo
rnothod and thc recovory period used-
@2-11. Fiunciel accotrnthg
dora sro nol mtirely ruit.
ablt for ucc h evaluathg capital expendilure
propocsb
becauss:
(a)
Finenciel accounling
uter lhc accrual
buir. Capilal oxponcftun
docioicrr
9en-
rrally rety on eslimales
of cash flows,
r al her l han r l vcnues
and expenl r e s
delermined
sr the rccrual basis.
589
(b) Firancial
accounting ir desiTrcd b rner-
ruro prricdb oamings.
Capilal rrpondi-
turc eva.luatbn is cqrcomed with tho lile
of a given prc,iecl,
rrhiclr reldorn corro-
rpqrds to urual accorrrting p.rkdr.
( c) Fi nanci al
t ccounl i ng mcal unr t ho
rccultr of oporati<xrr
ol a ccrrpany or a
aegmenl of a company. Although thir
ontity romelimrr
corrorpondr with r
capital cxpenditun prciect, il b urualty
composed of rnany interminglod capilat
erpenditure prciedt.
(d)
Fiuncial accorrrthg
capitalizer .p.ndi-
l urcr i f l hr cxpendi ture
i r dermed to
havs a futuro rraluo or benefit to the csrr
pany.
Capi tal i zati on
i r an attcmpt to
malch expendilurer
with revcnue! g.n.
tral ed by thoao rrprndi l uroc.
Whtn
lulun nalue or boncfit cannd bo roliably
rneasured, financial accornthg
treats thc
expendituro
ar a porlad
axpcnla rath.r
than ar an ascel acquisilbn.
o)2-12.
Benefitr of folblving up prciect
regulls irctude:
(a)
compari s.on
ol actual wi th proj ected
resulls to hsure lhat a project
b meethg
expecled performance,
or taking cofiec.
tive astbn or lermhathg
a projecl
that b
nol achievhg expected pedormancc;
(b)
eval uati on
of accuracy
ol proj ccti onr
trorn diff erent depsrtrnerrtr;
(c) i mprovemcnt
of futuro capi tal proj cct
eslimdes;
( d)
mot i val i on
of per aonnet
ar i r i ng l r om
knowledge that lolbw.up will occur.
59
E2t2-1
Year ln Unitr Price Cost Margin
@Salgg
I t2,ooo $25 $15 $ro $l 2o,ooo
2 12,OOO 25 15
3 12,OOO 25 15
4 12,OOO 25 15
.
5 12,OOO 25 15
Total net
pretar
cash lnflowr from 36OO,OOO
Inltfal cash outflow (cost of asset}r....r........ $55or0oo
Lesr
pretax
estimated salvage
y?hro..........
(i2s.ooo)
42s.ooo
Excegs of net
pretax
cash inflows over cost................. fl.75J9o
v2-2
Estimated Unit Unit Unit Net Pretax
Demand Sales Variable Contribution Cash lnflows
Year In Units Price Cost Margin f:g- S"l*
1 o,ooo $12 $g $3 $ 18,OOO
2 8,0OO 12 I 3 24,OOO
3 I O, OOO 12 I 3 3O, OOO
4 1O, 0O0 12 I 3 3O, OOO
5 10, 0oo 12 I 3 30, 000
6 1O, OOO 12 9 3 30, 000
7 1O, 0O0 12 I 3 3o, 0oo
8 8,000 12 I 3 24,OOO
I 0, 000 12 I 3 18, OO0
10 4, 0oo 12 I 3 12, 000
Total net pretax
cash inflows from sa|es.,....r........r...,.r $r46pOO
Ini ti al cash outtl ow (cost of machi ne).....,... $15O,0OO
Less pretar
esti mated sal vage va1ue.,........
(15,000) 135' OOO
E:<cess of net pretax
cash inflows over cost.......,.....,.o. $1 I I
rOO0
ChapterZ
E)GRCISES
Estimated Unit Unit Unit Net Pretax
Demand Salec Variable Contribution Gash Inflowa
to 12o,0oo
10 12O, OOO
10 12O, OOO
10 120, 000
dtWtsz
Year
I
2
3
4
5
6
Year
Estimated
Net Pretar
Gash Inflowr
$f 5,oo0
20,OO0
2O,OO0
20,OO0
l 5, ooo
l O, OOO
8% Annual
Price-level
loiu"t-g!t
( l +. 06) l = 1. 060
( l +. 06) z=1. 124
( l +. 06) r =l . l gi
( 1 +. O6) r =1. 282
( 1 +. O6) c=1338
( 1 +. 06) c=1. 419
Price-level
Adiustod Net
cast
Elgf
s 15,900
22,490
23,920
25,2&
20,070
14.190
59t
Total price-level
adjusted net pretax
cash
Inflows from operaUons
Plug cash inflow from salvage
Price-level adjustln
g!|t.............
.
$121, 700
$5,ooo
1. 419 7. 095
I
2
3
4
5
6
7
I
I
10
Total price-level
adjusted
net pretax
cash inflowa
$128,795
75.000
Larr Initial cash oufftow...,........r...
Ercess of net pretax
cash inflowr over
Initiat cash outflow,..,........,....r........o... Li3J95
E224
9% Annual
Price-level
Adjustment
( 1 +. O9) t =1. 090
( 1 +. O9) z = 1. 188
( 1 +. 09) a = 1. 295
( 1 +. 09) a=1, 412
( 1 +. Ogl s=1. 539
( 1 +. 0910=1. 677
( 1 +. O9) z=1. 828
( 1 +. 09) a=1. 993
( 1
+. 09; e=2. 172
( 1
+. oo) t o=2. 367
Estimated
Net Pretar
C"sn t"now"
$2o,ooo
3O,OOO
4O, 00o
80, o0o
60,o0o
6O,O0O
gor00o
6O,O0o
4O,OOO
2O,O00
Price-level
Adjusted Net
C""tr lnno*s
$ zr,8oo
35,640
51, goo
g41720
921340
too,82o
109, 680
| 19, 580
80,98o
47r34O
Total price-levet
adjusted net pretax
cash
Inflows
from operations...............r....o..
Pl us
cash i nfl ow from sal vage.
$i O,OOO
Price-level
adjustment.............
2.316l
$750,4o0
23,670
Total price-tevel
adjusted
^
not pretax
cash inflows
........
Lesr Initial cash oufi|ow.....t......r....
Ercess
of net pretar
cash inflows
over
Initial
cash outflow
$774,O7O
25O,OOO
$524,O7O
Chagter22
592
fil
- ! ol oooooor ool
'EgE3lgrgffglFEil
"Fifi?l
sRBeeg
-E
5
E
Flg's
s s E
^ - Ol oooooo
: : TI gOOOOO
- oE- l oooooN
s I Rgl dddj j ui
g1E
r l o
ct el el t o
- ==l r a
irl
r ! OOOOOO
! a i O O O O O O
- I
t r ! OON. 0Oc o
- A r -
( , ,
. o c L. =l os t u) o) ol r t
l -
o ?l N O r Cl
( O
Gt
O. r r -
( Jt g)
o
-E Eo Erg
g g g
-g
g
"lEtglfiRRniin
- F - ' - t o o o o o o
^ s * Pfi i 8 8 I 8I t
F F ! . . I
- r
-
F
-
) e ! O O O O O O
: : o =l o o o o o o
- SU) El St et r ! t ! t t t
ooooool ol t
ooooool ol l
00Nc' oer l ol l
- - - - t - t l
oNl oo) ot t l ol l
N CD r
(o (o g'
I Oll
? F ? l ( o l l
o t #) t l
F
o
u
x- 9
8Rt8i l
p
E
o
gl l ol l c L
R lr-ll
E
"
lsll
ol
l l r OooOOO
o ol oooooo
' d' 41000000
gfi l 88S8SS
g
l E' . o(o. o. o
8il
:il
ooNnl oq,
ONOTTU)
$l f i l r r r O
r t a a a a
h. 9
o ll,
?.cc
rI,
B
| , a)
$i
gg
L
G
I
' Ei
f i r :
c t :
G:
( ) !
P=
t o
!s -c
g5
oL
E3
Pf
is
*s
r . g
s >
t r ( !
<o
a
!
o
5
o
o
(!
o
at
L
(D
o
o
3
o
o
(lt
o
x

a
o
C'

o
o
n
o
o)
o
x
UJ
tr
q,
9'
o
o
o
f!
e
:'
CL
o
tt
!
o
t
o
o
nl
o
(ll
=
;
o
o
J
o
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o
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(g
o
x
(!
tt
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o
G
)
=
-o u)
I
e{
(\a
ul
- O{ ( ' ) r t n( o
l l -N.' ,$.,,.o
ClvpterZ
E22-8
Year
I
2
3
4
5
6
7
(1)
Estimated
lnflation-
Adjusted
Net
Cash Inflowa
(21
Tar
Deprc-.
ciation'
(3)
Tarable
Income
(Loss)
(tl
-
(2)
qlo,ooo)
(24,OO0)
t 1, 600
37,OOO
47,OOO
6g,40O
6O,OOO
(4',1
Tar Uability
With 4OVo
Tar Rate
a0% x (3)
$ (4,OOO)
(9,6O01
4, 64O
l 4,goo
18, 8OO
27,38,O
24,OOO
59?
(5)
Net
After.tax
Cash Inflows
$ 34,OOO
49' 600
4{i,360
45,2OO
51, 2OO
52' 040
36,OOO
$.?14rOOO
2OOTOOO
q!_u,o0o
$3O,O0O
40,000
5O,OOO
6O,OOO
7O,000
go,0oo
60,000
MA6pg
S-year
rear Recovoty
Rate
.200
,320
. 192
. 115
. 1 15
.058
Depreciable
Basis
$2OO,O00
2OO,OO0
2OO,O0o
2OOrOO0
2O0,0oo
200,O00
Tar
Depreciation
$ 4O,0o0
64,00o
39,40o
23,OOO
23,O0O
1 1, 600
gegg,ogg
$40,00o
64,0Oo
38,4OO
23,0OO
23,00o
11, 600
o
Total net after' tar
ca$h inflows.,,....t..................,........,.
Lesr initiat
cash outflow to purchase
system,_.ro.,.t......
Excess of net after-tax cash inflows over initial cash
outfl ow .......r..r..................i
t
2
3
4
5
I
1. 000
w
vJ2-7
Year
Chapter2
(11
Estlmated
Periodic
Net Cash
lnflows
$1O,OoO
15, 00o
20,OOO
25,OOO
25,O0O
25,0OO
25,OOO
20,OOO
l 5, 0oo
l O, OOO
l2l
Tar
Depre-
ciaiion'
(3)
Taxable
l ncome
(Loss)
(1)
-
(2)
$
(4,3ool
(9,5ool
2,5OO
12, 50O
16, 1OO
16, 10o
16, 1OO
15,5OO
l 5,ooo
10, 000
(4)
Tax Uability
wirh 40%
Tax Rate
q1,72ol
(3,800)
I r OOO
SrOOO
. 6,440
g,UO
gr44O
6r20O
6, OOO
4, O0O
(51
Net
Afteptax
Cash lnflows
(1)
-
(41
$ 11r72O
18, 800
19, OOO
20,OOO
18, 56O
18, 560
18, 560
13, 80O
I , O0O
6rOOO
9154, OOO
6,OOO
$160, 000
l 0o, 0oo
$ oo,ooo
1
2
3
4
5
I
7
8
I
10
$14,3OO
24,50O
17, 5OO
12,500
8,90O
8,9OO
8r9OO
4,5OO
o
o
Total ngt aftErt-tax cash inflows r........................,.........r.....
Aftentar cash Inflow from salvage at end ol economic life:
Pretaxcash i nfl owfrom sa| vage........r......... $1Or0O0
Lesr tax payable on sale at 49% tat rate.... 4,OOO
Total net aften tax cash inflows
Lesr iniUal cash outflow to
purchasg systemo...r..o........o...
Erces8 of net after..tax cash inflowg oyer initial cash outflow
'
MACRS 7-year Depreciable Tax
Year Recovery Rate Basis Depreciation
I
2
3
4
5
6
7
8
. 143
.245
. 175
.725
.089
.089
.089
.045
$l Oo, OOO
l OO, OOO
1O0, OOO
1O0, O0O
1O0, 00o
l OO, OOO
1O0, 00o
1O0, OOO
$ 14, 300
24$OO
17, 5OO
12, 5O0
8, 90O
8, 90O
8,90O
4, 50O
sl oo,ooo 1. 000
Chapter 22
P22-1
Year
595
PROBLEMS
$ 20,000
?2,OOO
24,OOO
19, 000
15, OOO
1O, 0OO
(1+.08)
(1+,0$)z
(l+.08)g
(l +.08).
(1+.O8)r
(1+.0$)c
(3t
Inlladop
Adf usted
Estlmated
Gash
lnflours
(1)
x (21
$ 21, 600
25,652
30,240
24,48,a
22,O35
15,970
s139,877
(1)
Periodic
Cash
Inflows
(21
I
"r6Jrlce-Love
I AdJ ustment
I
2
3
4
5
6
1. O90
1. 169
7.260
1. 360
1. 499
1.597
Year
9lgg,ogg
( 1)
Depre-
ciable
Basis
of
Property
$60,ooo
60,000
60,0Oo
6O,O0o
60,OO0
60,000
(21
S-Year
Property
Recovery
Perrentage
.200
.320
. 792
. 115
. 115
.058
(3)
Tax
Depre-
clatlon
(1)
r (2)
$12,Ooo
19,200
11, 520
6,900
6,900
3,490
$8O,OOO
-
I
2
3
4
5
6
ChagterZ 596
OpNCl r r ?l @Ol ( oi l
@ t \ l o
q
o r i N ol C{ t l
FOF900l OOl Ol l
- - - - l - - l i l
F
( ,
c { F l o OI F Ol Fi l
r - cr ot ?F' l 9t l ol l
o l o l { El l
I
I ?l o- oor t o
t r xYi \ t co! oc' ut ul
o' 6 xt @t or t ooo
t - A' r 9
6f F: t ' dt '
-l -
ssssss
oooooo
I t r t r t r t ! ' t t
=$ErEf
'g
!g ET
!
o
5
o
o
6
o
(g
tr
L.
o
0
o
q,
e
CL
tr
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o
'=
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o
qt
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an
o
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9:
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vr a
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gn
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t r ( g
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o. =
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ot oNoa) o
o- . q_\ n_ao-
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ooc{ ooq,
o_6gn- o_qq
NOT ( 9 g Gl
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Ou) l l CDg' F
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t l
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P22-2,
cost of now mach| nettt.................r..r....r........rr...........o...r.......o,.........r...
Thade-ln allouranco tor old machillo
..........Do........,...........o....r,....,.r........
llet cash outtlow at beginnlng
of proiegt
.......,.....r.D....o.........................
Tar basis of otd maching
tradgd |J| ...................o....ro.........r..D..r...,or...r...r
Tax basis of new machine ..........r.........t.........
a r a a a a a t a a a a
597
$t 8, ooo
grooo
S o,ooo
gro0o
sl T, OOO
S2o,ooo
1g,0oo
$ 4,ooo
Annual
cost of oporaung
ol d machi no..............,....o.......,..,r,.,................
Annual cost of operating
ngw machino......,......r.,
Annual cost savings
with new machino............
( 11
Ori gi nal
Tar
Basis
of Old
Machi ne
-
$lo,ooo
10, 000
to,0oo
t 0,000
l O, OOO
(21
S-Year
Property
Recovery
Rate
Depre-
ciation
on Ol d
Machi ne
(1)
x (21
s3,2OO
1rg2o
1r 150
I , l 50
580
(31
Tar
Year
Note that year
1 is
actually
the second
y6ar
the old property
is
depreciated.
Therefore,
the recovery
rate for
the second year
ls used
to compute
the amount
of depreciation
on the
old property
in the first
year
of the capltal
erpenditure proposal.
1
2
3
4
5
.320
. 192
. 115
. l l 5
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Year
(r)
Originat
Tar
Basis
of New
Machi ne
$17,ooo
17, OOO
l 7rooo
17' OOO
17, OOO
17, OOO
(21
5-Year
Property
Recovery
Rate
.200
.320
. 192
. t t 5
. 115
.o58
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(3)
Tax
Depre-
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on New
Machi ne
(11
x (21
$ s,4oo
5, 44O
31264
1r 955
1, 955
986
$17, ooo
1
2
3
4
5
6
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599
$l1600,000
$ 360,000
232,OOO
72|OOO
$ 664,000
$ 936. 000
-
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cost to purchage yar,ve gtem
from outside supprior
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costs......r.' ........r......r...D........r.....
Total annuaf costs
savings to make rather than blr1l ................
Year
1
2
3
4
( 1)
Tar
Basis
of New
Tools
-
$2,5OO,OOO
2,5OOrOOO
215O0roo0
2,5OO,OOO
l2l
3-Year
Property
Recovery
Rate
.333
,444
. 149
.o75
(31
Tax
Depreciation
on New
Tools
(1)
x (21
$ 8g2,5oo
1, 1 10, 000
370,OOO
187, 50O
$2,5OO,OOO
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Chaptor22
Year
1
2
3
4
5
6
7
$ 7,5OO
7r2OO
6,9OO
6,6OO
6,3OO
6,OOO
6,OOO
$46,90O
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Depre-
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Basis of
Machi ne
$4o,ooo
40,0oo
4O, OOO
40,ooo
4O, OOO
4O, OOO
Ll oo
1. 270
1.331
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1. 01 I
7. 772
1, 949
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Inflorvs
(21
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Price-Level
Adf ustment
(31
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Estlmate of
Het Gash
lnflows
$ 8,25o
8.r712
91184
9,662
1O, 149
10,832
11, 694
$68,399
(1+. 101 =
(1+. 1Ol z =
(1+. 1Ol s =
(l +. 10p =
(1+. 10; r =
(1+. 1O10 =
(1+. l O)z =
Recovery
Year
(21
5-Year
Property
Recovery
@l@
.204
.320
. 192
. 115
. 115
.o58
(31
Tax
Depre-
ciation
(11 x (21
$ 8,0oo
12, 80O
7,68O
4r600
4, 6OO
2r32O
$4o,099
1
2
3
4
5
6
Clppter 2
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(tl (31
Inflation-
Adjusted
Unadfusted Annual 10% Cash
Cash Price-Level Inflows
Year lnflows Adiustment (1) r (21
I $15, ooo
( l +. 1o) = 1. 1oo St g, soo
2 2O, OOO (1 +. 1O)2 = 1. 210 24, 2OO
3 25rO00 (1 +. 10)o
= 1. 331 331275
4 25rOO0 (1 +. 1O)r
= 1. 464 36, 600
5 25, OOO (1 +. 1Ol l
= 1. 611 4Or275
6 25' OOO ( l +. 1Ol o = 1. 772 44' 300
7 25' OOO (1 +. 1ol z = 1. 949 4B' 725
8 2O' O0O (1 +. 1O)8 = 2. 744 42, 880
I 15' OOO (1 +. l ol e = 2. 358 35' 370
10 1O, O0O
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(1)
l2l
(3)
Tax 7-Year Tax
Basis of Property Depreciation
Depreciable Recovery Available
Year Property Rate (1) x
(21
1
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14, 300
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4 l OO, OOO . 125 12, 5OO
5 1OO, OO0 . 089 8, 900
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610 ChWtor22
P22-7 (Conctudedt
,}r
(lt
l2l
(31
lnflatlon-
' e
Adiusted
Lost Periodic
Lost Periodic Gontribution
v
Contrlbutlon Arnual 696 Margin Saved
Margln Saved InflaUon with GIM
Year with GIM Adlustment
(1) r (21
'|U
I $20O,OOO
(1 +.O6| = 1.060 $212' OOO
2 2OOTOOO (1 +.O6!2 = 1.724 224,8OO
3 2OO,O0O (1 +.O8)s = l ,l gf 238r2OO
4 2OO' OOO (1 +.06){ ; 1.292 252r4OO
5 2OOTOOO (1 +.06)5 = 1.338 2671600
6 2OO, OOO ( 1 +. 06) o = 1. 419 283' 8OO
Chwter2 611
.
GASES
c22-1
Some of the factors that affest the decision of whether or not to delay the
investment in new cleaning equipment are
given
below. Each factor can have
two sides
(1.e., delay versus no delay) depending upon the circumstances
involved.
(al'
" "
r3l,?Hhiil:1i"J#l:
fi:Hl
"oT;: "
oiu o ns i n
s
e n e ra r'
Business outlook deteriorating-delay.
All of these factors affect the climate for business and should be consid-
orgd.
(b) Difficulty associated with acquisition and installation of equipment and
training of operators.
$f'?' J"#it',H;,
I ot d e ra,'
The greater the l ead ti me i nvol ved, the sooner the equi pment shoul d be
acquired so that it is ready when needed.
(c) Extent of operating efficiency improvements.
Great-do not delay.
Little-delay.
The greater
the efficiency, the less it should be delayed because costs
(d)
il[ffH:,T:3"T;i3l"H1;T'i:"""
not increase'
Cost of equipment not expected to increase drastically-delay.
Cost ol equipment erpected to inclease drasticalty-do not delay.
Company wants to minimize its initial cost outlay.
(e)
Dependabi ti ty of present
equi pment and l i kel i hood of breakdowns.
Dependability is good-delay.
Dependability is not good-do
not delay.
Company coul d defer, or have togo ahead wi th i nvestment due to conCi -
tion of present
equipmenl
(0
Chance for technol ogi cal advances i n equi pment.
Good-delay.
No chance-do not delay.
l f there i s a chance that technotogi cal advances wi l l devel op i n the desi gn
of the equi pment, the company mi ght want to take advantage of the new
,
desi gn.
(gl
Ability to obtain market advantage by providing
better quatity service at
-
Eame or l ower pri ce.
Good-do not defay.
Poor/neutraf-delay.
Better servi ce means more customers or
j usti fi es
hi gher rates.
I
612
Chaptor 22
C22-1(Conctuded)
(h) Gompetitors'
plans for obtaining similar equipment and achieving market
advantage.
High probabili$--do not delay.
Low
probability-delay.
Company wants to maintain competitive advantage or meet competition.
(il
Ability to predict timing and increased volume of demand fmm new or
edsting customens.
Good-better quality of decision; could defer switch longer.
Low,-less reliable criteria for dscision.
The better a company is able to predict new business, the more certain il
can be of i ts deci si on and, possi bl y,
the l onger i t can wai t to make a
change,
c22-2
Kni ght i s probabl y
corect i n her assessment that the proposed
capi tal i nvest-
ment framework grants too much freedom to the divisions. Neoglobeb long-run
performance
depends on i ts capi tal i nvestments. Whi l e di vi si ons must have
some responsibility for capital investments for the proposed
organization stnrc-
ture to be effective, corporate management must maintain adequate control to
direct the future courss of the firm. Under the proposed frameworlg division
management control s a substanti al porti on
of the capi tal budget, and i n some
year:i'
few funds would be available for investment by corporate management.
The present proposal
woul d reduce corporate managementb abi l i ty to di mi ni sh
a product
l i ne, and i t al so woul d i mpai r managementb abi l i ty to have adeguate
funds avai l abl e for i nvestment i n new busi nesses.
Capi tal i nvestment procedures
shoul d i nvol ve both di vi si on and corporate
managements
i n such a way that di vi si on management sti l t shoul d be abl e to
i nfl uence the future di recti on of the fi rm. Such
procedures mi ght i ncl ude cl assi -
fi cati on of capi tal proj ects
i nto groups,
some of whi ch coul d be approved by
di vi si on management wi thout corporate management study,
An al ternati ve
to the Neogl obe capi tat i nvestment program
mi ght have the fol -
l owi ng features:
(a) Al l proposed
i nvestment proi ects woul d be cl assi fi ed accordi ng to thei r
natunHepl acemen!
cost savi ngs, erpansi on.
(b)
Repl acement
and cost savi ngs proi ects
coul d be adopted by di vi si on man-
agement
al one, wi thout approval of corporate management, provi ded an
i ndi vi dual
proj ect
di d not exceed a speci fi ed dol tar ti mi t and the totat of
such proj ects
di d not exceed another speci fi ed dol l ar ti mi L The dol tar l i m-
i ts woul d
refl ect the nature and si ze of each di vi si onb operati ons.
(c)
Al l oxpansi on proj ects,
or other proj ects that exceed the dol tar l i mi t,
woul d
be submi t t ed t o corporat e management f or eval uat i on and
approval .
ClppterZ
c22-3
613
The
process
of planning
for and ovaluating long-terrn
commltments of resources
is normally relerred to as capital erpenditure planning,
evaluating, and controt,
or capital budgeting,
The capital budget is distinct in that it focuses on the
long-term effect of lesources committed. lts primary
objectives arc to
provide
management with (ll
a formal
process
to chart its futura coutlsef (21 a means of
ranking and selecUng among altornative nesounce commitments to maximize
rcturn on investment
and (3) I pnogr:lm
for ongoing evaluation of extant
nesourco commitmsnts.
Any significant resource commitment is viewed as a projecl
Hence, the capi-
tal budget i s composed of proj ects,
some of whi ch are i n pnocess
and some oi
which are pr,oposed.
Each project
affocts significant periods
of time in the
ongoing life of a company. A
project
often involves the evaluation of atternatives
and the purchase
of such assets as property, plant,
and equipment. lt should
also consider, howevor,
any
proposal
or pnogriam that reguires a signifieant
resounco commitment
over an extended period,
such as the development
of new
products'
opening now markets, and the design and development of major com-
puter pnograms.
Onca nesources have been committed to a particular project,
the project
reguires ongoing evaluation; i,e., are the projectb
objeciives being meti lf not,
it needs to be evaluated in terms of wtrether the project
should UJ iutained as
i s, modi fi ed i f possi bl e,
or abandoned.
McAngus can make significant use of capital expenditure planning,
evaluat-
ing, and control. At the division level, projects
will need to be defined in terms
of those el ements
of the pl ant,
or operati on of the di vi si on, over wtri ch the man-
ager has control . On the basi s of the facts gi ven,
the di vi si on manager has
authori ty
to operate hi s or her pl ant
essenti al ty as i f i t were an i ndependent
company.
Hence, anythi ng affecti ng operati ons, whi ch has requi red or wi l t
requi re
si gni fi cant resource
commi tment over i si gni fi cant peri od
of ti me,
shoul d form an i ntegral part
of that di vi si onb
capi tal budgel At the top manage-
ment l evel , the presi dent
may vi ew each di vi si on as a proj ect, parti cutarl y
for
eval uati on purposes.
The other descri bed
acti vi ti es
of top management (i nvesti -
gating
and evaluating_such
things as new markets, etc.) are projects
in the capi-
tal budgeti ng
sense. These and othel new proposats
may be defi ned, anafyzed,
and eval uated
usi ng a vari ety of avai rabre
tectrni gues.
c22-4
( 1)
Ametfs revision of the first proposal
described in the case can certainty
be considered
a viotation of the Sfandards of Ethical Conducl Arnett dis-
carded
the reasonabl e proi ecti ons
and esti mates
after bei ng questi oned
and pressured
by Earl g, and used fi gures
ttrai frave onl y a remote chance
of occurring.
By doing this, Amett viotated
tha standard of objectivity
(whi ch
requi res that the management
accountant
communi cate
i nforma-
tion fairfy
and obiectivety
and disctose fullyi"iur"nt
information that
611
Chaoter 22
C22-4
(Concl uded)
could noasonably be expscted to influenco an intended ussrb under-
standing of the report pnesentdl. By altering the analysis, Arnett also
violated the standard of integrity
(which requires that the management
accountant
(fl refrain from engaging in an activity ttat would prciudice
hig or her ability to carry out the rcquired duties ethically, and (2) com-
municate unfavotable as well as favorable information,
profes.sional
iudg-
ments, and opinions|. Arnett also violated the standard of competence
(which reguires that the management accountant
pnepano complete and
clear ruports snd rccommendatlong efter appropriate analysis of relevant
and reliable lnformation).
l2l
Based on the facts in the case, Earle was certainly in violation of the
Standafds
of
Ethical
Conduct as a result of pressuring a subordinate to pre-
paro a proposal with data that weno false and misleading. Earle has vio-
latad the standards of competence (failed to
perform professional duties
in accordanco with ,.. technical standards; and failed to prepare com-
plete and clear reports and reliable information!, integrity (engaged in an
activity that would prejudice his or her ability to carry out required duties
ethically, actively or
passively
subverted the attainment of tho organiza-
tionb legitimate and ethical objectives, failed to communicate unfavor-
able as well as favorable information and professional judgments
or opin-
ions, and supported activity that would discredit the
profession),
and
objectivity (failed to communicate information fairly and objectively and
di d not di scl ose ful l y al l rel evant i nformati on that coul d reasonabl y be
erpected to i nfl uenca an i ntended userb understandi ng of the report
presented),
(3)
The elements of the proiestion
and estimation
process
that are compno-
mi sed because of a predetermi ned,
mi sl eadi ng outcome i ncl ude:
(al the quality
of the base data,
(b)
the quality
of the assumptions used,
(cl
the probability
of the projection
occurring, and
(d)
the credibility of the people
submitting the projection.
{4}
The i nternal control s Fore Corporati on coul d i mpl ement to prevent
unethi cal
behavi or i ncl ude:
(a)
approval
of al l formal capi tal expendi ture proposal s
by the controtter
and./or
the board of directors,
tb) desi gnati ng
I non-accounUng/fi nanco manager to coordi nate capi tal
erpenditune
noguests and./or sogrogating duties during tho prepara-
tion and approval of capital expenditure requests,
(c)
requiring
all capital orpenditurs prsposals
bs roviowed by senior
operati ng
managemen! whi ch i nctudes the controtl er, bel orc the
proposal s
are submi tted for approval , and
(d)
requi ri ng
the i nternal audi t staff to revi ow al l capi tal erpendi turo
proposal s
or contracti ng wi th external audi tors to revi ew the pro-
posal
i f the corporati on does not have suffi ci ent
personnel .
QydsZ
6t 5
c122-6
(11
'
Referring to the specific standards in the IMA's Standards of Ethicat Conduct
for Pnctitionerc of Management Accounting and Financial llanagement, the
conduct of H. Dodge and G. Watson is unethical as discussed below:
(al H. Dodge! first rcvlsion of tlrc proposal
for the warrhousc coDyor-
eion was unethical becauso Dodgeb actiong violate the following
standards:
Gomoetence. Although thc sstimates used in the analysis are based
on managementb
judgment,
Dodgeb action in changing reasonabfe
estimatea to ramote assumptions ls unethlcal. Management accoun-
tants havo the responslbility to propare
complete and clear reports
and rucommandations after appropriate analyses of relevant and
rel i abl e i nformati on.
Inteoritv. Dodge has the rtsponslbili$ to avoid conflicts of interost,
refrain from subverting the attainment of the organizationb legiti-
mate and ethical objectives (profitability),
and refrain from engaging
in or supporting any activity that woutd discredit the profession.
Obiectivitv. Dodge has the rcsponsibility to communicate informa-
Uon fairly and objectively and to disclose fully all relevant informa-
uon that can influenco an intended userb underistanding.
(b)
G. Watsonb conduet in
giving
H. Dodge specific instructions on
preparing
the second revision of the proposal
is unethical because
Watsonb
conduct vi ol ates the l otl owi ng speci fi c standards:
Gomoetenee.
Watson has the responsibility to perform
his profes-
sional duties in accordanco with relevant technical standards, such
as using conservatism and realistic estimates in the net present
value analysis. Management accountants should prepano
comptete
and clear rspons and recommendations
after appropriate anaiyses
of relevant and reliable information.
confidentialitv'
Watson should refrain from using or appearing to
use confidential information acquired ln the courso of his work tor
unethi cal
advantage for personal gai n (savi ng
on commuti ng ti me
and costs).
Intearitv.
Watson has the responsibility to advise all partios
of any
potenUal
conflict of interesl Watson shoutd refuse any favor (tho
warshouse
rcducing his commuting time| that woutd appear to influ-
cnco his actions. Watson should communicate
unfavorable as weil
as favorable lnformation
and professional
Judgments and opinions.
obi ecti vi tv.
Watson has the responsi bi l i ty
to di scl ose ful y al t rol o-
vant i nformati on
that can i nfl uence
an i ntended
userb understand-
i ng of the anal ysi s.
I
6rO
ChaPtor 22
C22-S
(Concluded)
l2l
Steps recommended by the Sfaadards of Ethical Conduct for Pnctitioners of
*lanagement Accounting and Financial *lanagement that H. Dodge should
follow in attempting to resolve this situation are as follows:
(al Dodge should first investigata and see if Evans Company has an
estabflshed
pollcy for resolving confllct, and lf such a
polict erists'
Dodge shoul d l ol l ow l L
(bl Since it sppears tAat G. \f,/atson, Dodgeb superior, is involved, there
is no need to confront Watson or discuss this lssue with Watson any
further. Dodge should present the sltuaUon to the nert higher level,
the vice president of finance, tor rpsolution.
(c) l f Dodge does not recei vo any saUsfacUon, Dodge shoul d conti nue
to successi vel y hi gher l evel s, i ncl udi ng the audi t commi ttee and the
board of directors, if nscessary.
(d) Dodge should clarify the concepts of the issus at hand in a confi-
denUal discussion with an obiective advisor, i,o., a peor.
(el lf the situation is still unlesolved after erlrausting all levels of inter-
nal revieq Dodge will have no nocourse but to resign and submit an
informativo memorandum to an appropriate representative of the
organization.
(0
Unl ess l egal l y bound (whi ch does not appear to be the case i n thi s
situation), it is inappropriate to communicate this situation to
authorities or individuals outside the organization,
(g) Dodge may consult with personal legal counsel.
c22-6
(1)
By referring to the IMA's Sfandards of Ethicat Conduct and taking into
consideration
the specific standards of competence, corfidentiality,
integrity, and objectivity, L. Forrest should evaluate B, Rolland's directives
as follows:
Comoetence. Forrest has a responsi bi ti ty to present
compl ete and cl ear
reports and recommendations after appropriate analysis of relevant and
rel i abl e i nformati on.
Rol l and does not wi sh the report to bs comptete or
cl ear, and has provi ded
some i nformati on that i s not totatl y rel i abte.
confi denti ati tv.
Forrsst shoul d not di sctose confi denti at i nformati on out-
si de of the organi zati on; but i t al so appears that Rol l and wants to refrai n
from
disctosing
information to the board of directors that it should know
abouL
Inteqri tv.
Rol tand i s engagi ng i n acUvi Ues that coul d prej udi ce
hi m from
carrying
out his duties ethicatty. In evaluating RoltanOt Airective as it
affects
Forres! Forrest has an obl i gati on to communi cate
unl avorabl o as
wel l as favorabl e i nformati on and professi onal j udgments
or opi ni ons.
ChapterZ
C22-8,(Concl uded)
Obiectiviw. Tho responsibility to communicate
information fairly and
objectivety, as welt as to disclosa fully all relevant informaUon that could
rrasonably be erpected to influsnco reports and rtcommendations
pre-
sented, is being hampered. The board of directors will not have the full
scope of information they should have when they ars
pnesented
with the
anallsis.
l2l
By refening to the Slandards of Ethical Conduct, L Forrest should take
the following steps to resolve this sifuation:
(a)
Forrest should first investigate and see if lDl has an established pol-
icy for resolution of ethical conflicts and, if so, follow those
procedures.
(bl
lf this policy does not resolve the ethical conflict, the next step
would be for Forrest to discuss the situation with his supervisor,
Rolland, and see if he can obtain resolution. Ons possible
solution
may be to present
a
"base
casst' and sensitivity analysis of the
investmenL Forrest should make it clear to Rolland that he has a
probl em
and i s seeki ng
gui dance.
(c) lf Forrest cannot obtain a satisfactory resolution with Rolland,
Forrest could take the situation up to the next layer of management,
and i nform Rol l and that i s bei ng done. l f thi s i s not sati sfactory
Forrest should pnogress to the next level, and eventually to all high-
er levels of management until the issue is resolved (i.e., the presi-
dent, audit committee, or board of directors).
(dl
Si nce Rol l and has i nstructed hi m not to di scuss the si tuati on wi th
anyono el se at l Dl , Forest may want to have a confi denti al di scus-
si on wi th an obj ecti ve advi sor to cl ari fy rel evant concepts and
obtai n an understandi ng of possi bl e
courses of acti on. Forrest may
want to tal k to a cl ose professi onal
fri end or the IMA
"Ethi cs
Hotl i ne" l or thi s purpose.
(e)
lf Forrest cannot satisfactority resolve the situation within the orga-
ni zati on, he may resi gn from the company and submi t an i nforma-
ti ve memo to an appropri ate person
i n l Dl (i .e., the presi dent,
audi t
committee,
or board of directors).
(f)
Forrest may consult with personal
legal counset.
617
CHAPTER 23
DtscusstoN
ouEsnoNs
O2&1. The weighted average cost of caphal is com-
putd by lhe lolbwing steps:
(a) Calcrlale ech componenl of caFital as a
prconlage of total capital.
(b) Calctlale the after-tax cost of each indi-
vidual capital componenl
(c) For each capilal componont. multiply (a)
by (b) and sum lhe resulls.
Q23-Z Using the cosl of a specific source of funds
may l ead to l aul l y deci si ons. For exampl e,
when debl is used, low.return projects would
be acceptable while better investments nrruld
have to be ruled out in a following period, when
@mmon stock shares are soH lo obtain tunrjs.
023-3. There are two problem
areas associated with
eslimating the firm's weiThted avrage cost ol
capi tal -the proporti ons
of each source ol
funds and lhe cost ol each souroe of funds.
The proporti ons
that are expected over the
i nvest ment hor i zon shoul d be used. Si nce
these amounls are typically unknown, the pro-
porti ons desi red by management i n the l ong
run aro usually used. With fespct lo costs, the
market prices of each source of lunds should
be used. Si nce the market pri ce vari es over
l i me as credi tor and i nvestor expectati ons
change, currnl market pri ces adj usted for
changes expected by managemnt ar Com-
monly used.
CGA-Canada (adapted).
Reprint with permis-
si on.
Q23-4. The payback (or payout) period method mea-
sures the length of time required by a project lo
recoVer the inilial investment outlay.
023-5. In computing the accounting rale ol relum on
or i gi nal i nvesl monl ,
t he denomi nat or i s t he
orrgina.l investmenl, whereas in computing the
accounl i ng ral e of rel urn on avaraoe i nvesl -
monl , l ho denomi nal or
i s the average i nvest-
menl-
023-6. The presenl
vatus concepl states that a dollar
recetved
today is worth more than a dollar to
bs recei vsd
al a ful ure date because of the
earni ngs
the 1oday. dol l ar can generate i n the
i nt er i m.
l t i s i mpor t anr
i n capi r al budger i ng
because
ol the relativeV long perircds belween
lhe investment
of tunds and ihe return ol those
funds
as eamings (i.e.. dollars ,eturnod a long
Itme i n the tuture
aro wl rth consi derabl y l esi
than lhoso invested
today).
Q23- 7. The basi c di f l er ence
bet ween t he payback
method and the nel presont val ue method con.
car ns l hs r ecogni t i on of t he t i me val ue ol
monoy. The payback
method, whi ch i gnores
l he t i me val ue ol money and al l cash l l ows
beyond the payback pericd for the project, is
the measure od the time it will take lo recover
the inilial cadtal inveslmenl in nct cash infbws.
The net present
value method does consiier
lhe lime value d mony. This method involves
comparing the present velue d all future cash
inflols and outflows of a given project, using
some minimum desired rate ol return A posi-
l i ve resuh i mpl i es that the proj ect,s ral e of
relurn erceeds lhis minimum ralg, whereas a
negative resull indicales that the projed,s rate
ol retum is less than thb minimurn rate.
O23. ln the net present
value method, the discount
rate is known; whereas, in the intemal rate ol
relurn melhod, the discount rate is not known.
ln the internal rate of return melhod, the dis-
counl rate i s the one that wi l l resuh i n a net
prgsenl value ol zero.
023-9. The net prsent value method assumes that
earni ngs are rei nvesl ed at a ral e of rel urn
equal lo the tirm's cost of capitat, whereas the
i ntsrnal rate of return method assumes l hal
earnings are reinvesled at the rate o'f relum of
the parl i cul ar proj ect bei ng consi dered. The
firm's cost of capilal rate is more realistic. ll an
i nvest ment pr oposal
i s pr edi ct ed t o be
erlremely profitable (e.9., having an internal
rale ol return of 50%), it is unlikely that similar
pr oposal s ar e avai l abl e. Hol vever , a f i r m
shoul d or di nar i l y have sever al i nvest menl
opportunilies al or near the ralo of its cost ol
capilal.
CGA-Canada (adapted). Repri nr wi l h permi s-
sion.
023- 10. Sst l i ng t he di scount r at e at somet hi ng i n
excoss of the cost of capital in order lo com.
pensate for ri sk and uncerl ai nty associ al ed
*;16 3
r.qpilal
expenditure proposal is concep
l ual l y unsound, because t he r ei nvest mont
pol enl i al of cash l l ows i s overstated. Cash
received in early periods has more value than
cash received in later periods, because only
the cash received in the early periods can be
rei nvesl sd. As a consequence, the use of a
rat i n ercoss ol the rei nvestment rate i n the
nol presonl
val ue method wi l l resul t i n an over-
statement of the value of cash recsived earty in
the life of the capital erpendilure project. A bet-
ler approacfi would be to clmpute lhe terminal
value of the cash lbws using lho reinvestment
rate (i.e., compute the value of all cash flows at
the end ol the l i l e of the proj ecl ), and then di s.
counl tho total to presnl value at a risk-ad,iust-
ed di scount rate. An even bener approach i s to
expl i ci l l y consi der uncrtai nty by usi ng proba-
bility analysis, as discussed in Chapter 24.
618
E23-1
Funds-Sounce
Bondg
ll0%
r (l
-
45o/o tar rate)) .,....,....
Prcferrtd
gtOCk
......................r.r.' ....!......
Common stock and retained earnings...
QrWtsA
Capi tal Component
8ond3. . . . . . . o. . . . . . . r . . . . r . . . . . . .
Prgferrgd
gtock....,..,....r
Common
gtock
and
rstai ned earni ngs...
Capi tal Component
Lease.r.........,..
Bonds..................r.........
Preferred
stock.............
Common
stock and
retai ned
oarni ngs...
gERCtSES
Proportion
of
Funds
390h
20o/o
5,00h
1000h
Percent Pretax
of Totaf Cost
6r9
'
l12o/o
r $l
OO par value for prafered
stockl *
$96 market value
*
($TS,OOO + 5O,O0O shares of common stock)
.F
$f O markst price per
gharo
E23-2
Weighted averago cost of capital before bond retirement and sale-leaseback
transaction:
(r)
et
(31
(s)
Weighted
Gost
(21 r (a)
2. 40h
. s%
5.Ooh
9.30h
Amount
Wei ghted avarage cost of capi tat after bond reti rement and sal e-l easeback
transaction:
$ 5,ooo,ooo
1, 000, 0o0
4,0oo,ooo
_91_qogo,ogg
(r)
Amount
$ 1, o00, ooo
4, O0O, OOO
1, 00o, ooo
4, O0OrOOO
s!g,ogg,oog
50%
10%
400h
1000h
(21
Percent
of Total
100h
400h
l ooh
400h
1000h
8.Oo/o
9.Oo/o
72.50h
(31
Pretar
Gost
10.ooh
g.ooh
g.ooh
12.50h
(41
After.tar
Cost
4.8o/o
9.O%
12.5Vo
(4t
Afteptax
Gost
6.Aoh
4.goh
g.ooh
12.5o/o
Afteptar
Gost
5.5oh
l2.5%o
'
15.O7o
*f
Weighted
Cost
1.65o/o
2.500h
7.50oh
11.0,50h
(sl
Wei ghted
Cost
(21 r (al
.600h
1. 920h
.gooh
5.OOo/o
_8. 42%
"-\
w
F,.3-3
tl)
Annual cash inflow before fncome t3r.....,..,....,....r,....
Less depreciation (the samo for financial accounUng
and Income tar purposes (94O,OOO
cost +
8 years)f .,......o...
Annual tarable income ......,....o.....
Annuaf Income t* ($f or0oO taxable income r AOohl..
Annual income after tares
E23-4
$15, OOO
SrOOO
sl o,ooo
4, OOO
$ 6,000
Chapter23
sl 5,ooo
4, OOO
$l 1, ooo
t 1l
Annual aftgrttax cash inflow.,.....,...,.........o.,r,.....r,.,..r.
$4O, O0O Ini ti al cash outfl ow
=
3.636 years to payback
$11, OOO annual cash i nf l ow
tzl
S6,0OO averago annual Incomo
_
.15 or 15oh rate of return
on ori gi nal i nvestment $40, OoO ori gi nal i nvestment
$34, OOO i ni t i al cash out f l ow
Sl O, OOO annuaf cash i nfl ow
=
3. 4 years t o payback
Present value of annual cash inftows for six
years
($1O,OOO
annual cash i nfl ow r 3.284).,...o.......,
Less i ni ti al cash outftow to acqui re i nvestmsnt.,.......
Net present
val ue of i nvestment,.......r..........r..
cash dgsi rgd at
gnd
of si x yeani
.....D.....,.....r...r,.,..or........r...r...
Present val ue of $i co-pounded annual l y at l i oh,................
l nvgstm
gnt
requi red ....,................,.,,........,....r.
Net pr esent
val ue of i nvest ment
Present
val ue
i nder
=
$6, 520 net pr esent val ue
E23-5
tl )
Present
val ue
of annuar cash i nftows for i o years
(S20rooO
annual cash i nfl ow r 5.2i 6).....,...,...............,.,..
Present
value
of satvago value at end of i o-year life
(Sl
O,ooO
cash i nftow from sal vage r .2701..............
Present
val ue of al t cash i nf|ows.....r..r....,.r.......,.....,.
Less
i ni ti al
cash outfl ow to purchase pness
tzl
t3)
$37, 84O
34. 000
___3'940
534, O00
x
. 432
fl_4$sq
s 104, 320
2. 700
$107, O2O
( 1OO. 5OO)
L__
j.52q
tzl
$1OO, 5OO i ni t i al i nvest ment
=
. O65 or 6. 5" h
ClapbrA
E23-8
tr)
MACRS
FrcoYory
Brio
t2l
Stnlghl-
Uno
Rrtr
f3l
Co.l
Rocovrry
Undr
Mlg35
r)
Stnlght-
Ulrr
DrPr-
chUon
I lo,ooo
2OrO00
2O,000
20,ooo
201000
10,000
3100,000
(5)
Dlffon
onc4l
t3l
-
l.)
sl o,ooo
12, OOO
(8o0)
(8,5OOl
(8,500)
(4,200)
o
{01
lncomr
Ter
Srvingr
( ! l x. o%
9fr0oo
4l8OO
(320)
[3/4OOl
(3/4oO)
(1,6801
______9
c4
Prreont
Valrr of
t t 0 t a%
o.477
o.7E0
o.675
0, 592
o. 519
o.456
el
t8)
Prurnt
Vrfri ol
Trr
Srvingn
(ol rf 7l
t3,508
3, 691
(2r0)
(2,O13)
(1,785)
cr88)
_93'499
1
2
3
a
5
c
0.200
o.320
0. 192
o. 115
o. t t 5
o.o58
o.too
o300
0300
o^200
o-200
o. t o0
s 2o,ooo
32,OOO
19"200
11" 500
t I
r5oo
5r800
_$!oo,goo
E23-7
( 11
Year
Unadiusted Estimate
of Cash Infl ows
Inflation
Adiustment
1. 1oooor
l . 2l ooo
1. 33i OO
1. 46410
1. 61051
Infl ati on-
Adjusted Estimate
of Cash Inflows
$22,OOO.OO
2l , 78O. 0O
21, 296. 00
14, 641, OO
1 6, 1O5. 1O
1
2
3
4
5
s2O,OOO
18, O00
16, O00
l O,OOO
t o,ooo
$74,ooo
t ( l
+. 1O) n wher e n = number of
per i ods
(21
PV of
Adjusted
Gash Flows
s( 58, OOO)
19r 140
16, 466
14, 013
81375
8,004
$_z9eg
Unadjusted
Year Gash Flours
o $(s8, ooo)
I 2O,OOO
2 18, 0OO
3
16, 000
4
I O,OOO
5 l O, OOO
Adjusted
Cash Flows
s(s8, ooo)
22,OOO
21,78O
211296
14, 641
16, 105
PV of $1
Q 15o/ o
l . OOO
. 970
. 756
. 658
. 572
. 497
Net present
val ue of i nvestment.........
s95, 822. 1O
PV of
Unadj usted
Cash Flows
s(s8, oo0)
17,4OO
l 3, 6Og
1O, 528
5,720
4r97O
$
(s.7741
I
* \
e^
E23-8
(t l
Tar
Basis
Of New
$5OO,OOO
5OO,OOO
50o,ooo
500,ooo
SOO, OOO
5OO, OOO
5OO, OOO
5OO, OOO
o. 143
o.245
o. 175
0. 125
o.089
o.o89
o.o89
o.045
$ 71, 5OO
122r5OO
87,50O
62,5OO
44,5OO
44,5OO
44,5OO
22,5OO
$goo,ogg
Chapter23
Prrrnt
Vrltr of
(31
Tax
7-Year Depreciation
Property on New
Recovery Airplane
Rate (11
r (21
l2l
Year
I
2
3
4
5
6
7
8
(11 (4 (31 (4t
Ft {ot m
(8t
lncnar
(DocnerI
Annrrrl Trr In
lnclrrr
{Oocrosrl
In Aftenter Pnronl Aft*ter
Pr.trr Drpn- Tereblo lrcorrrr Incorrrr c.dr vrluo cuh
c..h clrtlon tncomo Ter Ter Inflowr of $1 lnflowr
Yrar lnflowr Dodugtlon (tl -
(4 Rrtr (3) r
{r}
(t}
-
{51
e 7gy. (ol r
ftl
1 313o'ooo t 7r"50o t 58,500 |;o'h 923'4oo $1oo,ooo o.87o t 92,742
2 13o' ooo 12!2' 5go 7r5oo 4o' h 3,ooo 127' ooo 0.756 96,012
3 l 3OrOOO
g7.5OO
12,50,0 l O' h 17,OOO l l SrOOO 0.658 74,39
{ 13o' o0o
02' 500 67' 500 4och 27
' goo
1o3,ooo 0.572 58' 916
5 130' 000
4ar500 8tt"5oo looA {}2oo 95' 8oo 0.497 47' 013
6 130' 000 a4r500 8!t' 5oo 4o' ,A u,2oo 95' 8oo o.{t2 41,386
7 13o' o0o 44' 500 8tt' 5oo 1o' h 34' 2oo 95' 8oo o.37o 36,021
8 13o,ooo 2!2,5oo 1o7r5oo 4oV. #l'ooo 87'ooo 0.327 28,'#}e
9 130' 000
o 130' ooo 40% 32,ooo 78' ooo o.2g 22,152
10 130,0OO
0 13O,OOO 40ch 52,OOO 78,OOO 0.247 1g,2$o
Prercnt valuc of pcrfodlc
after-tar caah Inflows 35' l O,911
Plur prercnt
valuc of cftar-lax ralvagc
Gtloo,ooo
r
11
-
4o%l | .24n...... "14,8i20
Prcrcnt valuc of carh lntlorvr ovcr urcful ttfc of new a1rp1rnc............... 3s31r73i
toq Inlttal caeh ouulow (cost
of new arrprane),.. 5oo,ooo
Net prcrent
valuc
of Invettment-.----.-
t 31,?31
Alrplane
CtppterTS
F23-0
GOSI Of neW maChi ne....,..' ..r.........' ..............' .....r.' .........' .............,' ....' ..'
Tt' adg-in allOWanCe fOf Old maChlJtO ............' ......' .................' ................
Net cash outllow at beginning of
proiect
Tar basis of old machino traded in
Tal ! baSi S Ot nOW maChi ne .' .....r..r.....' ...rr.r..rt...' ........r........
6?3
90o,ooo
34, OOO
$38,0O0
l 8, o0o
s2O,OOO
16, 000
_999'oo9
Annual
Annual
COSI Ot Opefati ng Ol d maChi t1O...........o.."........................or.' .......
COSI Ot Opgfati ng neW maChi l tt8 r...............r.....' ........................' r
Year
Year
1
2
3
4
5
$20,OOO
2O, OOO
2O, OOO
2OTOOO
2O, O0O
( 1)
Or i gi nal
Tar
Basi s
Of New
Machi ne
_
(21
5-Year
Property
Recovery
Rate
0, 320'
0. 192
o. 115
0. 1 15
0.058
l2l
S-Year
Property
Recovery
Rate
0.200
0.320
0. 192
0. 115
o. 1 15
o,058
(31
Tar
Depreciation
on Ol d
Machi no
(r) x (21
$ 6, 400
3,840
2r3OO
2r3OO
I , i 60
sl 6,ooo
(3)
Tax
Depreci ati on
on New
Machi ne
(11 x (2)
$ 7,2oo
1l , 52O
6r912
4r140
4J40
2,OBf,
$36,OOO
' Note
that year I i s actual l y the second
year the ol d
property i s depreci ated.
Therefore, the necovery rate for the second
year is used to compute the
amount of depreci ati on on the ol d
property i n the fi rst year of the capi tal
erpendi ture proposal .
1
2
3
4
5
6
s36,OOO
36, OOO
36, OOO
36, OOO
36, OOO
36, OOO
Annual cost savings with ngw machine........' ........."r' ......' ...' .' r' .' r.r.' .....
-$
6rOOO
( 1)
Ori gi nal
Tar
Basis
ot ol d
Machi ne
' t
e1
E23-9 (Concluded)
(tf
t4 t3l
AddiUonel
Tar
EbPn-
Allowablo Tar Doproclauon
*tfitfl
How Old Machlnr
Machl nr Machl no (11- (21
s 7,2OO
36,400 3 8OO
(41
Annual
Cort
Savingr
wth
Hcw
Machl no
FI
Incrrar
(Docnarcf
l n
TrHbb
Incomo
(4) - (31
S 5,200
(1,E8ol
1,399
4r l E0
3,020
3, 912
Incomo
Tax
Rrto
m
Inctrrlo
(Dccruarc)
l n
Incomr
Tar
( 51r ( ol
S2,o80
1fJ721
555
1, 8O4
' l , 208
1, 565
Chapter 23
(E
Hct
Carh
Infl ow
( 4) - m
s 3,920
6,672
5,44!i
4,3i10
4, 792
4,435
(0,
1
2
3
1
5
o
11,52O
6, 012
1,140
3p4O 7,880
2,300
+A12
2,300 1,940
so,0o0
0,00o
6, 000
6r000
0, 000
0,ooo
400h
400h
400h
400h
400h
400h
(4)
Present
Value
of sl
@ 14o/ o
4r14O l rl 8o 2rggo
2,089 o 2,Ogg
Total Increagc In periodlc
cash inftow
Lesg Inl Ual cash ouUay for new machi ne,..
l ncrease In cash l ntl ours over Ini ti al cash ouuay for new machi ne..,.
( 11
Net
Afteptax
Cash
Inflow
(Outflowl
$(2O,0O0)
3r g2O
91672
5, 445
4, 336
41792
4, 435
(21
Present
Val ue
of sl
@ 120h
1. OOO
o. 893
4.797
o. 712
o. 636
0.567
o.507
(3)
Present
Val ue
of Cash
Flows
@ 12%
( 1) r ( 21
$(2O,OOO)
3, 5O1
5, 319
3,877
2, 758
2, 717
2,249
!_139
s420
l . OOO
o.877
o. 769
o. 675
0. 592
0. 519
0. 456
s29,6oO
20,o0o
l_g'809_
(5)
Present
Val ue
of Cash
Flows
@ 14%
( 11x ( al
s(2o,oool
3, 438
5, 1 31
3, 675
2r567
2$87
2,O22
s (680)
Year
o
I
2
3
4
5
6
Internal
rate of return
S42O + $680
Recommendat i on:
The i nvest ment
may be accept abl e because t he i nt er nal r at e
of return
exceeds
the companyrs cost of capi tat; howeyer, the i nternal rate of
return
on.this project
shouid bt compared with the internal rate of return for
other proi ects
to determi ne
i f thi s i s the best use of avai tabl e funds.
-
l zoh .
(z"n
,(
) ) =
t z. 76oh
Chaptor23
E23-10
(rl Proiect A
Year
Year
o
5
Cash Inflow
(Outflow)
Gash Inflow
(Outflowl
ql 5,0001
35r0OO
PV of $1
@ 75o/ o
PV of $1
o 150h
PV of
Cash Fl ow
9(t5,OOOI
16, 760
_g_l-i60
PV of
Gash Flow
9(1s,000)
17r 395
$ 2,395
PV of 31
@ 200h
l . OOO
2. 991
PV of $1
@ 20o/o
1, OOO
. 402
e5
o $(ts,oool
l.ooo
l -5 5,000 3.352
Ngt
presgnt va|u9..,..............r..,.........r....
Pmiect B
Net present va| ug........................' .........!
Proiect A
Cash Infl ow
(Outflow)
$(15,OOO)
5,OOO
PV of $1
@ 18%
1. 000
3. 127
PV ol $1
@ 18%
1. OOO
. 437
1. OO0
.497
PV of
cgghllgw
$(1s,ooo)
15, 635
s 63s
PV of
cegb_Eow
$(15,OOO)
15, 295
s 2es
(21
Year
o
1- 5
PV of
Gash
Flow
ql 5,oOOl
14, 955
g__l4s)
19. g70h
l nt er naf r at e
.
/ /
S635
\ \ . ,
oi r"t rrn
-
-
18oh +
l zv"
t (f f i *
))
-
r9oh + (zw r. s34)
-
s295
S295 + S93O
(3)
Using the internal rate of return method, Project A is superior to Project
B. Using the net
present
value method, Project B is more attractive than
A. The deci si on hi nges on assumpti ons made about rei nvestment of' cash
inflow. Theory suggests resorting to the net present
vatue method
because the cost of capi tal rei nvestment assumpti on i mpl i ci t i n thi s
method i s consi dered more real i sti c than the i nternal rate of return
method, where a rei nvestment at the proj ect' s
i nternal rate i s assumed.
PV of
Cash
Fl ow
s(t5,ooo)
14, 070
$__19991
-
18. 48%
Project B
Cash l nfl ow
Year (Outflowl
o
$tls,ooo)
5 35, OOO
lnte-rnaf rate
-
fioh *
(Z"n
,(
of r et ur n
D
|
\ \
\ \
I l - l aoh+( 2" t " x. 241)
!
e6
P23-1
(rl
Alternative
Pl an
(al
Source of
Financing
Debt
PBOBLEMS
Aftertax Cost
Portion ol
Total Required
$lo,ooo,ooo
$l0,ooo,oo0
$ 5,ooo,ooo
$l OrO0O, OOO
$ 5. OOO, OOO
$I Or OOO, OOO
$l o,ooo,ooo
$' lo,ooo,ooo
Portion of
Curent Total
szo,ooo,ooo
s9O,OOO,0OO
sl o,ooo,ooo
Chagter 23
Wei ghted
Average
Cost
7.200h
3. 60%
4.6goh
_9.2e%
11.o9%
Wei ghted
Average
Gost
1. 330h
l . OOoh
7.OOo/o
9.330h
(b)
12oh r (1
-
40% tax rate)
Debt 12"@tel
Prefered
stock
goh
(1
-
4% issue cost)
Common
S2.1O earni ngs per
share
stock ($2O
x (1
-
S% issue cost)l
After.tax Cost
lOoh r (1 -
40% tar rate)
goh
(c)
(21
Source of
Fi nanci ng
Debt
Preferred
stock
Common
stock
sgo,ooo,ooo
.
$2,10 earni ngs per
share 560,000,OOo
*
$2o market pri ce per
share
Sgo,o0o,ooo
3,ooo,ooo
shares outstandi ng x s2o market pri ce per
share
Chapter?3
P23-1 (Concluded)
(3)
AlternaUve
Plan
(al
Source of
Fi nanci ng
Marginal cost
(from part (1)) .......o....
Current cost
(from part (2)) ......r....t
Total cost .........,.....r,.r.
Marginal cost
(from part
{1)}
.,..........
Current cost
(from part (2)l .,...,.....,
Total cost ............,.o...,,
(b)
After.tar Cost
7.200h
9.33o/o
8.29o/o
9.33o/o
Portion of
Total Reguired
$loo,ooo,ooo
$ 9O,OOO,OOO
sloo,ooo,ooo
$ lo,ooo,ooo
sl oo,ooo,ooo
$
9O, OOO, OOO
$l OO, OOO, OOO
&7
Weighted
Average
Gost
.720h
9.400h
_sJ2%.
.83%
8.4oo/o
9.23o/o
(c) Margi nal cost 11.O5oh
$ IO,OOO,0OO 1.11oh
(from part (1)1 ....,.......
$IOO,OOO,OOO
Current cost 9.3370
$
9O,O0OTOOO 8.4O%
(from part (2)) ..,.....,...
$1OO^OOO^OOO
Total cost,......r-' ri rororr
_gl _%
\
I
t s - t
I
i
r - l
e8
P23-2
Appraised value of the pnopertyr
excluding
storage tank and
wat gr l Yl l t t t t t t t " " " " " " ' aa. a. . . . r . o. . . . aa. . a. . . . ar . . . . . . ar . . . o. . . . . . . . . . . a. . . . r . a. . . . . . . oo.
Replacement
cost of storage tank .....,.,,..r......::::.................r.......r.....
Differential
cost of water resulting
from ross of wefr:
Water from
Glty
of Grant Welf
Chapter
23
$19O, OOO
250. ooo
$44q.ooo
WaterfromCity
re
of Darnett
At
g%
tenance present
at 8o/o Annuaf
Annuaf
and
ValuE of
present
Year
Increts-e-
-!"".eas"
Repair
Difference
Sili r o"z, value
2oA
$ zz,7zo
$ 35,2oo
s
gzreo
.9p-
ttffid
208
79,539
3g1016
40-,522
,g26
ggr477
zoc g4,g?!
4r',os7
49,264
.Tsl
sz,s6.
zoD
91,999 qqisaz
4z',264
.683
s2,2s1
zOE
98,?1?
ez,aag
$zo,ooo 31,046
.627
1g,28O
zoF
106' 850
s1' r72o
zo,ooo
35,r 30 .564
r 9,8r 3 zoc
1is,398
ssieig
zoiooo
39,540
.5i3
2o,2s4
zoH
tro,g-?Z
-
60;322
ggry 44',so2
.aoz
2o,6ge
Szzgllgz s324,4o9
Jqqpoo
Eqlr,oru-
s212,7s1
ertir"t"a-1"ffir"..ffi....-..:
sEZJel
The
city of Grant
must also consider the offsetting increase
in property
and
safes
tares
ari si ng
from the oni oi ng
economi t
heatth of thi s part
of the totat
business
activity
that occuo t^ritrrin-the
city, nri"
"onrideration
may cause the
negoti ated
l and pri ce
to be reduced.
of course,-$r,
i rncertai nty
of the vari ous
esti mates
must be recogni zed.
P23-3
( 1)
Year
PV
of
Sl
@12%
1. OOO
.893
.797
. 712
. 636
. s67
Projoct
1
Aftertax
Cash Ffows
$(120, OOo)
l O, OOO
2O, OOO
3O, OOO
6O, OOO
go, ooo
PV ol
Project
1
Cash Fl ows
$( 12O, OOOl
B, g3o
15, 94O
21, 360
39, 160
51, O3O
s 15,420
-
Project
2
Aftertax
Cash Fl ows
s{12O,OOO}
5O, OOO
45, OOO
35, OOO
25, OOO
2O, OOO
o
I
2
3
4
5
PV of
Project 2
Cash Ffows
s( l 2O, OOO)
44, 650
35, 965
24,920
15, 9OO
11, 34O
l__u,szg
Net pr esent
val ue
Q9
Chaptor?3
P23-3,
(Continued)
l2l
Project 1
Afteptax
Year Casn Flows
o
q12O,OO0I
1
1O,O0O
2
2O,OOO
3 3O,OOO
4
60,000
5 90, 0oo
Project I internal
rate of return
Proiect 2
After-tax
Year Casn flows
o $(120,0001
1 50, OOO
2 45, 000
3 35, O0O
4 25,OOO
5 20, OOO
PV of 91
@ 140h
1. 000
.tt77
.769
.675
.592
. 519
PV ol
Cash Flows
ql2O,OOO}
8177O
15,380
20r25O
35r52O
46t71O
-9--9193o
PV of
Gash Flows
ql 2O,OOO}
81620
14, 860
19, 230
33rl20
PV of
Cash Flows
PV ol $1
o 160h
l . OOO
,862
.743
,641
,552
.476
Net
preSent va| u9.........r........t."'
-
14oh .
( r *
,
( $0, oso + $t , 33o
))
-
r s, , , zoh
$6, 630
PV of PV of $1
Cash Flows @ 18oh
PV ot $1
o 160h
1. 000
.f362
. 743
. 641
.552
. 476
9(12O,ooo)
43, 100
33,435
22,435
13, 800
9, 520
$ 2,290
$(l20,ooo)
42,350
32, 31O
21,315
12, 90O
9, 7 40
$
(2,385)
l .ooo
.B,47
. 718
.609
. 516
.437
Pr oi ect 2 i nt er nal
_
. , 6oh
+( " o/ o,
rate of return
l.
)
-
t 6. s' oh
$2, 29O
( $2, zso + s2, 3Bs
)
42,840
Chapter Zg
P2g-g
(Concludedt
(31 The net present
value of Project I ls greater
than the net present
vatue
of Project 2 ($15r42o
compared to
$12,6751; however, the internal rate of
rsturn lor Proiect t ls less than the fnternal rate ol return for
proiect
2
ll5.A7%o
comparod to I e.9B%ol.
As a tosult, lt ls not altogether clear
which profect
ls the moro profitabte.
The difference In rankings occur:;
because of the dlffersnce In the pattern
of cash flows; 1.e., the cash
Inflor,Ys for ProJect 1 are smaller ln early yearc
and targer in later years
than those of Profect 2. The Internal rate of return for Proiect 2 ii sub-
stanUally larger than the companyrs weighted averago cost of capital. lt
may not be possible
for the cash flours roceived in early yea6
to be rein-
vested at a rate of return equal to the internal rate of return of
project
2;
consequently'
cash florrvs rcceived from Project 2 may not be as vaiuable
to the firm as indicated by tha internat rate of return. On the other hand,
the weighted avorago cost of capital is a realistic earnings rate erpected
by the company ovor the Investment horizon. Assuming that there is no
difference ln the riskiness of the expected cash flor,ns ior the two pro-
jects'
lt may be safer to raly on the net present
value ranking than the
intemal rate of return. This woutd mean that Project I shoutO Ue setect-
ed.
P23-4
( 1)
Year
1
2
3
4
5
6
After..tar
Cash lnflow
$3OO,OOO
35O,0oo
4OO,O0O
45O,OOO
SOO,OOO
55O,OOO
Needed
$2,2OO,OOO
1,g0o,ooo
1, 550, 00o
1, 150, o0o
700,o00
20o,ooo
Bal ance
$1, 9oO, OOO
1, 550, 0O0
l r t 5o, 0oo
70o,oo0
200,00o
o
Payback Years
Requi red
1. OO
1. 00
1. 00
1. 00
1. OO
. 36
Recovery of
fni ti al Outl ay
(21
Total payback
i n years......,,..,....r.....,........,.....,..,...r,...
Net i ncome
over economi c l i fe of asset...,......
_9.39
s5, 25O, OOO
2r2OO|OOO
$3, 05O, OOO
AccounUng
rate of roturn (
on ori gi nat
i nvestment
=
t
i
*
Ori gi nal i nvestment
*
$2
, 2oo,
ooo =
13, 9oh
=(
Net i ncome
Economi c l i f e
s3, O5O, OOO
10 years
Chapter?3
P234
{Goncluded}
{3}
Accounting rato of return
=
(
on averiage Investment
\ )
*,ar"oge i nvestment
63t
Net i ncome
Economi c l i fe
PV of $1
o 140h
PV of
Cash Flow
(41
Year
(51
Year
lnternal
rate of
return
Cash
l nfl ow
(Outflowl
PV of $1
Q 160h
/ 33,
o5o, ooo. )
* f
32, 2oo, ooo
)=
2T. t oh =(
ro-l -t 2
)
o $(2,200,0001
I 30O,OO0
2 35O,OOO
3 4OO,O0O
4 45O,OOO
5 50O,0OO
6 55O,OOO
7 600,000
I 650,000
I TOO,OOO
10 75O, OOO
Net present
val ug . . . . . . . . . . . o. . . . . . . . . r. . , r, . . . . . . . . . . . . . . rr. . . . .
- 1. 000
.877
.769
.675
.592
. 519
.456
.400
,351
,308
.270
$(2,2OO,OO0)
263, 10O
269r l 5O
27O,OO0
266,4OO
259,5OO
25O,80O
24O,OOO
2281150
215, 60O
2A2,5,OO
$ zos,zoo
Cash
Infl ow
(Outflow)
q2,2oO,OOO}
3O0,OOO
35O,OOO
4OO,OOO
450,OOO
5OO,OOO
55O,OOO
6OO,OOO
o50,ooo
TOO,OOO
75O,OOO
PV of
Cash Fl ow
PV of $1
o l goh
PV of
Cash Flow
o
1
2
3
4
5
6
7
I
I
10
1.OO0
$(2,2OO,OOO)
.862 259,600
.743 260,050
. 641 256, 400
.552 248r4OO
.476 239,000
.47O 225,5OO
.354 212,4OO
. 3O5 1gBr 25O
. 263 184, 100
,227 17O,25O
E--
jlr999
$(2,2OO,OOOl
25417OO
251, 300
243,60O
232r2OO
218, 500
203,5OO
188, 40O
172,gOO
157, 50O
143,250
g_(134lggl
x . 278
) =16, 6%
1. OOO
.947
. 718
. 609
. 516
.437
.370
. 314
.296
.225
. 191
=16oh
. ( " * ,
sst , 95O
)
, )
=160h
+
(2' h
$134, 75O ( $sl , 95o +
I
\ - i
I
6p
l
P23-6
( 1) Machl nc I
Chaptcr
23
Total payback
In years
Machi ne 2
Inl Ual outl ay
s500, 0oo
Unltonn cash lnftows
3125, 0OO
-
4 years
Recovery of
l nl t l af OuUay
Aftentar
Year Cash Infl ow
1
$ 60,000
2 75,OOO
3
1OO,0OO
4 i 25, OOO
5
15O, 0OO
I
2OO,OOO
Total payback
In years
Machl nc I
Needad
Bal enee
Payback Yoars
Rcqui red
1. OO
1. OO
1. 00
1. OO
1. 00
. 50
5. 50
S6OO,OOO
65O,OOO
475,0OO
375, OOO
25O, 0OO
1O0, OOO
355O,OOO
475rOOO
376,OOO
25O,OOO
l OO, OOO
o
(21
Net af t er*t ar
cash I nl l ows
. . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . , . .
Sl , ooo, ooo
Less deprecl ai l ol t
........
soo;ooo
Net I ncomo
ovor economl c i l f e of Machi ns 1. . . . . . . . . . . .
Fsoo, ooo
Account i ng
r at c of r ot ur n
i
Net i ncome
\ _
on or i gi nal I nvegt m. i t
-
l E"onor ni "
r i r "
J+
or i oi nal i nvest ment
/
Ssoo
poo
\ .
-
l - - - t + SSOOpOO -
12. 5%
\
8 years
)
Machi ne
2
Net aftentar
cash l nfl ows
Less
depr ecl at l on
. . . . . . . . . . . . . . . , . . . . . . . .
Net I ncome
ovsr economl c
l i f e of Machl ne 2
s' l , 4oo, 0oo
SOO, OOO
s SOO, OOO
Accoun' ng
ratc of return
- r
$goo
poo
)
. seoo
Foo
-
1s.7.h
on ori gi nal
Investmont
-
l .T yoan,
)
'
Clnpter I
P23-6 (Continued)
(31 Machi ne I
Machi ne 2
(4t
Accounting rate of roturn
on average investment
Machi ne {
Year
Cash lnflow
(Outflowl
$(5OO,0Ool
125, OOO
t ' gsoo' ooo ) / Ssoo, ooo )
=[ffiJ-[.:f)="u*
633
Accounting rate of return
_
(
on average investment
-
\ )
* ar"r"ge investment
Net i ncome
Economi c l i fe
o
1- 8
[$soo,
ooo
)
I
I y"""s
J
PV of $1
a 150h
l .ooo
4. 4g7'
Net present value of Machino 1
rPresent
value of $.| received annually for 8 yearc
from Table 23-2 of the
text.
Machi ne 2
PV of
Cash Flows
${50o,oool
56O,875
__9_99,87s
PV of
Cash Flows
$t6oo,ooo)
43r5OO
56r7OO
65r8OO,
71r 5OO
74r55O
86, 40O
112, 8OO
130, 80O
E_lefso
Net presont
val ue
@
$oor Bzs
=
. 122
$soo, ooo
-
"
$42, O5O
. : - r - =
$600, OOO
o
1
2
3
4
5
6
7
I
Cash lnflow
(Outflow)
$(600,000)
5O,OOO
75,00O
10oro00
125,OOO
15O, O00
20orooo
30O,OOO
4OO,OOO
PV of $1
o 150h
1. OOO
.fJ70
,756
.658
,572
.497
.432
.376
.327
Net present
val ue of Machi ne 2,,.........,..r.,......r.].
Net present
val ue i ndex for Machi ne 1
Net present yal ue
i ndex for Machi ne 2
. o70
I
P23-S
(Concludedl
(51
tt4aqlilel
Cash Inflow
(Outflowl
$(5OO,OOO}
l 25, OOO
Machi ne 2
PV of $l
Cl 18o/o
LOOO
4.O79
PV of Sl
@ 160h
PV of
Gash Flows
PV of $1
O 20o/o
l .ooo
3.837
Chapter 23
PV of
Cash
Flows
Year
o
1- 8
Year
$(5OO,OOO)
5Og,75O
srtlg
$9, 75O
PV of
Cash
Flonrs
$(soo,oool
479,625
_9_eo'gzgl
fnternal rate
l 1oh +
("n
,(
of ret urn
-
\ \ ) )
$9,75O + $2O
,375
-
18oh + ( zW x. 324)
-
18, 67o
Cash Inflow
(Outflowl
$(6OO,OOOl
5O,OOO
75,0O0
100, o0o
125, OOO
150, OOO
20O,0OO
3OO,OOO
400, 00o
PV of
Gash Flows
PV of $1
@ 78o/ o
o
1
2
3
4
5
6
7
8
l . OOO
.862
.7 43
.841
.552
. 476
. 410
.354
.305
l . OOO
.847
.7l fj
.609
. 516
.437
.370
. 314
. 266
$(600,O001
43, 10O
55,725
64, l OO
69,OOO
71, 40O
82,OOO
1O6, 2OO
122,OOO
$ 131525
$(6OO,OOOl
42135O
53, 850
6O, 9OO
64,5OO
65,55O
7 4,OOO
94,2OO
106, 4OO
s
(38,2501
Internal rate
of return
/ s13525 \ \
Y l : r r
\
$l 3,s2s + S38
pso
//
x. 261) - t o. SZo
-16oh, . (r*
-16oh
+12%
ChapterB
P23-6
(1)
635
f8)
Attcr-tax
Ctsfl
Flow
(4) -
{'t}
3
g,ooo
l 2,oo0
15rOOO
l 8' OOO
l 8, o0o
15rOOO
13, 500
sl oo,5oo
3,OOO
3104, 1O0
(5)
Tar
Eleprc-.
claUon-
StoBoo
17r28,O
1Or3O8
8}21O
4,21O
3r132
o
(s)
Taxablc
lncomo
(Loas)
K)-
(5)
t
(3,OOO)
(8,8O0)
7r72O
19rO5O
19, 850
191780
22,5OO
(71
Tarcr
(61r 40%
3(1'200)
(3,52O1
3,O88
7r80O
7,890
71912
0, 000
(4)
Total
Caah
Flow
(21+ (3)
t TBoo
81480
18rO88
u'Sao
25,880
22re12
22,3OO
1
2
3
1
5
o
7
{2)
(3}
Gash
Savinga Cash Flow
lrom trom
Reduced lncreascd
Malntenancc Capaclty
$1,500 I O,3OO
1,2OO 7,,80
000 17, 188
oo0 25,2AO
3Oo 25,560
o 221912
0 22,5OO
After.tax
Year Cash l nfl ow
1
$ 9, ooo
2 12, OOO
3 15, OOO
4 l
g, ooo
Caah Inflow trom aalvagc at snd of economlc lifc' net of tar
Gt6'000
aalYage x (1 -.,fO
tax rate)).
Total after-tax caeh lnflowr
rThc
tax depreciaUon lr determlned by mulUplylng the depreclable basla of 354,O0O 0.e.,
tho
cash purchaeo prlcc plur the tar baclc of zero) by the MACRS percentagea provlded In Exhlblt
224 of thc text for the five-year property class.
Recovery of
Ini ti al Outl ay
( 1)
Needed Bal ance
Payback Years
Regui red
s54,OOO
45, OOO
33, OOO
1B, OOO
$45,OOO
33,OOO
l B, OOO
o
I
1
1
I
_t
Tot al payback
i n years. r. . . . . , . , . . . .
. , . , . . . . . . , , . . . . , . r.
(21
Netafter-tax cash i nfl ows (excl udi ng sal vage),...,.............
Less fi nanci al accounti ng depreci ati on
(:ts4,ooo
cash +
g4,0oo
book val ue
-
56,000 sal vage)..
Less tax on salvage ($6,000
salvage x .4O tax rate)
Net i ncome over the l i fe of the property.
$1OO, 5oo
52,OOO
$
48,5OO
2r4OO
$
46, 1OO
!
'-ltt
I
P2g-6
(Concluded)
Accounting rate of return
on original investment
Accounting rate of return
on average lnvestment
/
Net i ncome
\
I -:;F 1
+ Original investment
\ ECOnOmTC i l re /
-
f
g-)
*
ssa,ooo
-
ir. ssoh
\
7 years
/
- /
Net i ncome-
)
* aretage i nvestment
\ Economi c l i fr
/
$l o, 1oo
\ |
- l ?ye*s/ *| .
+ $6, O00
\
2
) '
958, ooo +
Chapter2S
20. 580h
(3) Cash l nfl ow
(Outflow)
${54,OO01
9r0oo
l 2' OOO
15, 00o
18, 00o
18, OOO
15, 00o
17, 1OO
'
PV of $l
@ 120h
l . OOO
.893
.797
. 712
.636
.567
.507
.452
PV of
Cash Flows Year
Net present
val ug .............,...r.....,..,............,........
*$13,500
cash i nfl ow i n year 7 pl us
$3,6O0 aftentar sal vage.
Net pr esent
val ue i nder
-
sl l , 269
- . 2O9
s54, OOO
o
1
2
3
4
5
6
7
$(54,OOO)
9,037
9, 564
10, 68O
' 111448
10, 206
7,605
7
1729
___9_!!399
(4)
Year
PV of $1
@ 16%
PV of
Cash Fl ows
s(54,OOOl
7
1758
8, 916
9, 615
9, 936
8, 568
6, 150
6, 053
gl99
PV of $1
@ 18%
PV of
Cash Flows
$(s4,oool
71623
8, 616
I , 135
gr28g
7, 866
5, 55O
5, 369
$
(s531
o
1
2
3
4
5
6
7
Cash
l nfl ow
(Outflowl
s(54,OOOl
9, 000
12, 00O
15, 00O
1g, ooo
l 8, ooo
15, OOO
17, 10O
*
t S13, 5Oo
cash
l . OOO
.862
. 743
. 641
. 5s2
. 476
. 410
. 354
l . OOO
.847
. 718
.609
. 516
.437
.370
. 314
i nfl ow i n year 7 pl us
53,600 aftentax sal vage.
$2, 996
fnternaf rato of return
-
16oh +
lZ"t"
r
($z, sso +
$s53
))
-
t z. oaao/ o
ChapterB
P23-7
Year
(1)
Periodic
Net Cash
lnflows
(2',1
Annual7oh
Price-Level
Adiustment
(3)
Adjusted
EsUmate of
Net Cash
lnflorus
(r) x (21
$ 21, 4OO
28.1625
36,75O
39,330
42,OgO
45,03O
4Or 150
341360
2Tr5TO
191670
$334,975
87
I
2
3
4
5
6
7
8
I
10
$ 2o,ooo
25rOOO
.
3O,OOO
30,o0o
30,ooo
3OrO0O
2510OO
2O,OOO
l 5' OOO
l O,OOO
_$239,ooq
( 11
Depreciable
Basis of
Machi ne
$1OO, OOO
1OO, O0O
l OO,OOO
l OO,OOO
l OO,OOO
l OO,OOO
1OO, O0O
1OO, O0O
(l +. Oi l = l . O7O
( l +. of l 2 = l ' 145
(1 +.Ofl o = 7.225
( 1 +. Of a = 1. 311
(l +. Of l s = 1. 403
( 1 +. 04o = 1. 501
(1 +. 07}2 = 1. 606
( l +. Of l o = 1. 718
(1 +. O7)e = 1. 838
( 1 +. o71t o = 1. 967
Recovery
Year
I
2
3
4
5
6
7
I
(21
7-Year
Property
Recovery
@!ege
o. 143
o.245
o. 175
o.125
o.o89
o.ogg
o.o89
o,o45
t3l
T:ax
Depraciation
( 11x ( 2)
$ 14, 3OO
24,5OO
17r 5OO
12r5OA
8,9OO
8,9OO
8,9OO
4,5OO
_9!_oo,ogg
,-' l
v
ChWter23
6g
P23-7
(Continuedf
9 27,570
10 19, 870
Estimate of Tar lncome State Payment Gash
Net Cash Deptu-
(Lossl Income
(Reductionl Inflows
Year lnflours clatlon
(11- (21 Tar Rate (31 r (4) (11
-
(5)
1 $21, 4OO $l 4, 3OO $
Z, i OO 40% I 2, 840 $ 18, 560
2 281625 24,500 41125 40% 1,650 26,975
3 361750 17r5OO 19r25O 4goh 7r7OO 29,O5O
4 39' 330 12' 500 26' 830 4oo/o 7Or732 28' 598
5 42rO9O 8r9OO 33rl 9o 4ooh 731276 28.,814
6 45,O3O 8,900 36,130 4goh 141452 30,578
7 4Or15O 8r9OO 31,250 4ooh 12,5OO 27rg5o
8 34,360 4,500 29,860 4A% 11,944 221416
(11
@
(31 (41 (51 (61
Federal tncome Net
Adjusted
Taxable and Tax Afteptar
0 27,570 40% 11rO28 16,542
o 19, 670 40% 7, 868 11, 802
Total i nfl ati on-adi usted aften tar cash i nf!ows....r................,............. S24Or985
:
(f
)
Payback
peri od:
Recovery of
Initial Cash
$!!ey_
Net Aftentax Years Requi red
Year Cash l nfl ow Needed Bal ance Unti l Payback
1
$18, 560 $100, OO0 $81, 440
l . O
2 26, 975 81, 440 54, 465 1. O
3 29,O5O 54,465 25A15 . 1.O
4 28, 598 251415 o o. 9
Totaf payback peri od i n yeats.,..,.........,,,........,......,.... 3.9
(21 Accounting rate of return on original investment:
Total i nfl ati on-adj usted afteptax cash i nf| ow.................,, $24o,985
Less fi nanci al accounti ng depreci ati on ..................!......... 1OO' OOo
Net i ncome over economi c l i fe of proj ect..,..........,.....,.....
l 1.!g999
Average
"r,n.rJl
- -Nel l qqgrng-
-
S14o' 985
-
sr4.oes
return
Economi c l i fe 1O years
- - -
'
-
Accounti ng
rate of
r et ur n on or i gi nal
Aver age annual r et ur n $14, 099
_ 1410
or 14 . l ooh
i nvest ment
-
or i gi nat ' r n" est me" t
-
Sl oo" ooo
- r r '
- t -
Chapter 23
P23-T (Conti nued)
(3) Accounti ng rate of return on average i nvestment:
Average annual return
639
.2820 or 2A.200h
Accounti ng rate
of return
on average
i nvestment
Year
$14
, O99
$5O, OOO Ori gi nal i nvestment + 2
(41 Net
present val ue and net
present val ue i ndex:
o
1
2
3
4
5
6
7
I
I
10
Net
1
2
3
4
5
6
7
Total
( 1)
Net
After-tax
Gash
(Outflow)
Infl ow
(21
Present
Val ue
of $1
@ 150h
(3)
Present
Val ue of
Net Cash
Fl ow
( 11x ( 21
$
(1OO, OOOI
161147
2O,393
1 9, 1 15
16, 358
14,321
13, 21O
1O, 396
7, 33O
4, 698
2, 915
e__3199
$( 1OO, OOO)
18, 560
261975
29, 050
28, 598
28,814
3O, 578
27, 650
22,416
16,542
11, 8O2
1. OOO
o. 870
o. 756
0.658
o. 572
o.497
o.432
0. 376
o.327
o.284
o.247
pr esent
val ue
Net pr esent
val ue i ndex
Pr esent val ue
Net pr esent val ue
$24, 883
Requi r ed i nvest ment
Sl OO, OOO
payback i n year s:
-
. 249
(s)
Year
Present
Val ue of
After-tax
Cash Infl ow
$16, 147
2O, 393
19, 115
16, 359
14,321
13, 21O
t o, 396
Recovery of
I ni t i al Cash Out l ay
Years
Requi red
for Present
Val ue Payback
1. OO
1. OO
1. OO
1. OO
1, OO
1. OO
o. 04
6. 04
Needed Bal ance
$l
oo,ooo
83, 853
63, 46O
44,345
27,987
13, 666
456
$83, 853
63, 460
441345
27
1987
13, 666
456
o
payback per i od i n year s
l l
t -
640
P23-7
(Concludedl
(61 lnternal rate of return:
Chapter 23
Year lnflow
(t )
Net
Aftertar
Cash
(Outflowl
s(roo,oool
18, 560
26r976
29,05O
28r598
281814
3O,578
27
1650
22,418
161542
1l , 8O2
(21
Present
Val ue
of $l
r 20%
(31
Present
Value of
Gash Flow
Di scounted
o 200h
(rl r
{2}
s(1oo,oool
15, 460
18!721
16, 820
13r784
1 1, 583
1O,244
7, 714
5,223
3,2O9
1, 912
-I--!'670
(41
Present
Val ue
of $l
Gl 22o/o
(51
Present
Valua of
Gash Flow
Di scounted
o 220h
(r) r (4)
s( 1OO, OOOl
15, 219
18r127
16, OO7
12, 898
1O, 661
9,265
6, 885
4r573
2,763
1, 617
$
( 1, 98s)
o
1
2
3
4
5
6
7
8
I
10
l . OOO
o.833
o.694
o. 579
o.482
o.402
o.335
o.279
o.233
o. 194
o. 162
S4, 670
S4, 670
+ $1, 985
LOOO
o.820
4.672
o.551
o.451
o.370
0,303
a.249
o.204
o. 167
o. 137
. 2140 or 21. 40h
(ol
Addi tl onal
Mal ntonanco
Cort wlth
CIM SFtom
325,ooo
25,O0O
25,OAO
z' rO0O
25,OOO
25, OOO
I nt er nal
rate of
return
P23-8
( 1)
=
Zooh.
[t*
"
(
) ) =
Ycar
1
2
3
4
5
6
( t )
Roduco'd
Lrbor
Cort
315, O0O
25rOO0
30,0OO
30,O0o
30,O00
3O, 0oo
'
l2l
Roducrd
Machl no
Sotup Tlmo
34O,0oO
50TOOO
oor0oo
60, OOO
oo,ooo
oo,0oo
t3)
Boducod
InvrntorT
Carrylng
Cort
325,000
3:t,ooo
40,0OO
40,OOO
40, 0OO
40, 0oo
(41
Lort
Contri butl on
Mrrgl n
Avol dcd
320O,0O0
3{)o,ooo
40O,OOO
50O, OOO
ooo,ooo
TOO, OOO
(51
Total
Pori odl c
Srvlngt from
CIM Syrtcm
('l)+{2}+{3)+(ll
' 3280,00O
4l o,o0o
a3o,o0o
Gto,ooo
73O,OOO
Silo,ooo
c4
Nct Pcri odi c
Savingr
wi th CIM
Syrtom
(5)
- (6)
3255,000
385,0OO
5O5, 00o
605,OOO
7O5, 00o
BO5, 0OO
N.t
Porlodlc
&vlngr
Ycar wlth CIM
Chaptor2S
P23-f3,(Continued)
rr) {81
Tar
Dcprc-
(0) (1ol (r 1)
112l
Prriodic
Net
Trr Altontrr
Uablllty Carh
(Botundl lnflowr
(e) r (1ol
ft)-(1rl
al
lr4)
lnflatlon-
Adjurtrd
Prriodis
Nrt Aftor-
tlr C.fh
lnllorr
( 121r
l 13l
3 3ri5,32o
580,498
595,470
640,560
780,039
840,' 158
s3,798,051
95,22O
93,893,271
2,2OOrOOO
s1, 093, 271
c4
Total Tar
Amortl-
:atl on and
Elcprcciatlon
( 31+ ( 0)
$ 440,ooo
880,000
424,0OO
2TO|OOO
27O,OOO
118, 000
clatlon
rnd
Amorll-
ratlon'.
( t 3l
lndcx for
Antlcl-
prtrd
8% Ratr
ol
Inllation
1 3255,000 344O,OOO $(185,000) lOcA 3 rt4,Ooo) 3329,000 1.080
2 38ti ,O0O 88O,OOO (295,OO0) 40% (118,000) 503,0.00 1.160
3 5051000 424|OOO
gl,OOO
lgoh 32,400 472,OOO 1.260
4 605,000 2TOrOOO 335,OOO 4Oo/. 134,OOO 471,OOO 1.360
5 7O5,0OO 2TOrOOO 43{i rOOO 4Ach 174,000 531,000 1.489
o 805,000 110,000 889,000 40% 275,gOO 52g,4OO 1.587
Total annual InflaUon-adJusted sfter-tar saulngc lrom Investment In CIM system
Cagh Inflow from salvage of egulpment and machinery
(S1OO,O0O
salvage x 1.587 adJ. x
11
-
40% tax rate))
Total Inflation adJusted atter-tar cash lnflowl trom Investrnent In CtM system....
Less l nl ual Investment (S2,ooo,ooo In equi pment ptus
S2oo,ooo In software)......
Ercegs of cost of clM system over inflation-adjusted after-tax eavings
t
( 1t
Roeovcry
Proporty
Y="r_ Tar Earlr
1 82,000,000
2 21000, 000
3 2, 000, 000
4 2r 0oo, 000
5 2, 000, 000
o 2, 00o, 00o
Tarablo
lncomo Effcetlvo
[.ou)
Trr
fD
- (81 Bato
s2OO,ooO
200, o00
200, 00o
200, 000
200, 000
200, 0oo
(5) (4) (3)
l2l
0.200
0.200
0.200
0. 200
0.200
0. 000
(ol
Tax
AmoRl -
:ati on
(al x (3)
$ 4O, OOO
4O, 0OO
4O, 00o
4O, 0OO
4O, 0OO
o
Bato for Tar
MACRS Dcprc-
3-ycar claUon
_&gFrty
(1) r (2)
o. 20o
$ 400, 000
0. 320 640, 000
0. 192 384, 000
0. 115 230, 000
0. 115 230, 000
0. 058 116, 000
$2, OOO, OO0
5_ycar
Stral ght-l l no
Softwaro AmortiraUon
Tar Barlr Fatc
s20o, ooo $2, 20o, o0o
I
Chapter 23
P2g-8
(Concluded|
l2l
Inflatlon-
Adlusted
Periodic Net
PaYback
After.tar
Years
Year
@[!1.1[gl
Needed Balance Required
r $55,320
$2,200,O0O $l,844,O8O
1.OO
2 5861498 1,844,680 112581182 1.OO
3 595,476 1,258.J82 862,700 1.OO
4 640,560 662,706 221746 1.OO
5 78O,O39 221146 O O.O3
Total
paybaCk i n
yearS.......r..r..........r...' ..r.............o...rr 4.o3
lnflation-
Adiusted Present Present
Periodic Net Value
Afteptar of $1
Year Cash lnflorrs @ 14% Inflows
o s(2,2oo,oool
1.OO0 S(2,2OO,OOO)
(31
Value
of Gash
1
2
3
4
355,32O
588,498
595, 476
64O,580
o.877
o.769
0.675
o.592
311, 616
45t , O17
401, 946
379,212
5 78O,O39
.
0.519 4O4r84O
6 935,378' 0.456 4261532
_
Net present value of investment.............r.......r....
9--IZgrI-qg
t - -S84Orl 58
aftentax cash i nfl ow for
year 6 pl us
$95,220
after-tar sal vage val ue at
L
the end of year 6.
Chaptor23
P23-9,
Purchase alternative:
{1)
(4 (3)
mACAt lrrconre
D.prool. Ter
C..h rlon Drprocl-
Yoar lnllon Hatr aUon'
1 SAOO' 0Oo
2 600, 000
3 6001000
1 O0Or00o
5
g0o,o0o
0 0oo,00o
7 600,000
I 600, 000
I 800, 000
10 800, ooo
11 600, 000
12 600, 000
13 600, 000
14 600, 000
15 O0o, o00
.1*l $286,000
2# 490,000
.175 350,000
.1Ai 250,000
.080 178,000
.089 178,000
.080 178,000
.o4{t 90,000
.000 0
.ooo o
. o00 0
. 000 0
.ooo o
.ooo o
. 000 0
&B
l0) m
X.l
Incnoo Altrntex
ln Incomo C.dl
Tar Inflowr
lal
r (51 (tl
-
(ol
tl 25,OOO
44,OOO
l OO, OOO
14Or0OO
1O8, 8OO
1e8,800
16a,8OO
2O4,OOO
24O,OOO
24O,O0O
24O,OOO
24O,OOO
24O,OOO
24O,OOO
24O,OOO
$ 471r4OO
556,OOO
5OO, 0O0
4EO,O00
431}200
4i l 1,2OO
431,2O0
396, 0O0
36OrO0O
360,OOO
360, 000
36O, OOO
360,OOO
360,OOO
360,OOO
EE,2OO,OOO
l 2O' OOO "
s6,32OrOOO
2,OOO,OOO
(41
lncngr
ln Tenblo
lncomr
11)
-
f3l
$314,000
11O, OOO
25OrOOO
3ti0,0o0
aa2,ooo
422rOOO
122,OOO
510, OOO
000r000
800, 0o0
000r0oo
600, 000
g00ro0o
600r0oo
o00, 000
{q
lncomr
Trr
Frto
40
AO
AO
AO
AO
.40
AO
AO
,40
AO
.40
AO
AO
.40
AO
Aftsr-l-r
cagh lnftow from ratvago at ond of cconomlc |ife........
Total after-ter cagh hflbw frorn the purchacc
attarnaUvs
l-eca ln1g"1 cagh ouUtow -........,...
Total after-tar cash Inflow over aconomic tifc of project
90,32O,0OO
' Tho
deprectatl on
b determl ned by muttl ptyl ng the deprecl abte basl e of
g2,ooorooo
by tho
rilAcRg
cost recovery percantageg provldod
ln E$lbit 212.4 of the text for aeven-yosr proporty.
-P"
ealvage rscslvod at tho end of tho economlc llfe ol the asset would bo fuily tarablo
because the tar baslr of tho property
would be zero. The aftor-trr cash Inflow would bo
3120' 000, l -e., (s2oorooo
rorvago vui uo r (1 -
.,{o tar rate)).
644
P23-9
(Concluded)
Year
Net
Aftertax
Gash Flow
Chapter 23
PV of
Gash Fl ow
o
I
2
3
4
5
6
7
I
I
10
11
12
13
14
15
Net present val ug . . . r. . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . r. . . . ' . . . . . . .
Lease al t ernat i ve:
Annual cash i nfl ow before l ease payment.
$OOO,O0O
Annual l ease payment
....,.....,... . 32O,OOO
Annual pretar
cash i nfl ow and i ncrease i n tarabl e i ncome $28O,OOO
Annual i ncrease i n i ncome tax expense ($2BO,O00 r 4o%l i 12,OoO
Annual af t ent ar cash i nf l ow f r om l ease a| t er nat i vo. , . . . . . . . . . . . . , . . , . . , . . . , . . S168, O0O
PV of $1
@ 14%
$(2,OOO,OOO)
474,4OO
556,OOO
5OO,OOO
46O, 000
431, 200
431, 20O
431, 2OO
396, OOO
36O, OOO
36O, OOO
36O, OOO
36O, O0O
36O, O0O
36O, OOO
36O, OOO
s(2,O0O,OOOl
416, 049
427
)564
337r5OO
272,320
2231793
196, 627
772,48O
138, 996
1 1O, 88O
97,2OO
95, 32O
74, 98O
65,52O
57, 60O
5O, 4OO
$ 727,129
l . OOO
.f377
. 769
. 675
. 592
. 519
. 456
. 400
. 351
.309
.270
.237
.208
. 182
. 160
. 140
Cash
l nfl ow
PV of
Annui ty
sl @ 14%
PV of
Cash
Flows
1- 15
$168, OOO 6. 142
s1, 031 , 856
The l ease al t er nat i ve
appear t o be pr ef er abl e
because t he net pr esent
val ue of
the esti mated
aftentax cash fl ows i s greater
than for the purchase
al ternati ve
( s1, 031, 856
ver sus
$727, 1 29) .
ChaplerA
P23-1o
I
( 1)
Gencral-Rrrpoac
Equl pment
Leasc Purchasc
ils
Selt-
Constructod
Equlpment
Recurring cash flows from operiations:
Estimated sales volume in units.,....
Unit contribution maryin..................
Estimated total contribution margin
Less fixed costs:
SupervisioJl ........................' ..o..r......r
Propefi tares and insuranco....,,.,.,
Mai ntenafl CO .......................rrr.........r
Total fi xgd COSt .r' ................r.r......."'
4O, 0OO 4OTOOO 4O, OOO
$ l . ss s 1. 55 $ 1. 90
$62,000 S62,000 $76,000
$16, O0O
o
o
$1o,ooo
$16, 000 $17, OOO
3,O0O 5,O0O
3,OOO 2' OOO
s22,OOO $24,OOO
Annual cash inflovrrs before tax...,.,,...,.,..
946' O0O $4O' OOO $S2' OO0
Lease equipment altemative;
Annual
gash
i nfl ow bgforg tax.,..,.........o......,..r..,..r..,.....r..o...,r..r.
Annual l gasg paymgnt . . . . . . . . . . o. . . . r. . . . . . . . . . . . . . . r. . . o. . . . . r. r. . . . . . r. r. i r. . . . . . . .
Annual i ncrgasg i n taxabl g i ncome... ..,..o.........,,......-.r.
Annual i ncreasg i n i ncomg tar ($6rOOO x 4Oo/o1.,..,e.......r..........,..
Annual aftgrtax cash i nf!ow....,.r...........o....r.,..........r.........,r.....,.r
PV of $1 rgcgi ved annual l y for G years
O 14oh.........o........,.......,
Net present yal ue
of l ease al temati ve.................,........
sl 4,ooo
$46,OoO
40rooo
s 6,000
2r4OO
$ 3,600
x 3.889
646
1
P23-1O
(Continuedl
Purchase equlpment alternative:
ChWtor23
Yrar
1
2
3
4
5
6
l l l
Protlr
C.rh
Inflowr
(4
lncomr
Trr
Dcprrcl-
rllon'
l3l
TaHblo
lnconrr
(rl
-
(2t
$15, OoO
o
10, 000
25,0.25
25)825
72,750
({)
lncomr
Trr
at lO%
Tar Fato
l3l
r 40%
3 E,ooo
o
8,400
10, 250
10, 250
29, 100
(5t
Nrt
Allrr-t'r
C.rh
lnflowr
tlt
-
Ft
$3l,ooo
40,000
33,800
291730
29,750
5O,9OO
t0l
P{l of il
o 71%
$lo,ooo
4O, OOO
40, 000
4O,O0O
4O,OOO
gorooo
r'
$25,OoO
40, 000
24,000
141375
141375
7r25O
m
Pll of Net
Aftrntrr
C.eh
lnflowr
l3l
x (01
$ 29, 818
30,780
22,f,8O
17,fJ12
15, 44O
23,21O
s139, 520 "
125, 00O
.aT7
.780
.975
.592
, 519
.456
Preaant valuc of net cagh lntlow!
L"ecr InlUal caeh outflow
Net preaent value of
purchase
alternaUve s 14, 520
' Tar
depreclaUon le determlned by multiptying the depreclable basir of the equipment under
the purchaae
alternattuo (Si2s,oo0)
by tho tylACBS depreclaUon nlter provlded ln Exhibit 22-4
of the terL
-tncludea
aalvagc vatue of S4OrOoo, all ol whlch woutd be tarabler Blnce the equlpment would
be tully depreclatad for Incomo rtr purpo3es
at thc end of the ahth year.
Thc total after-tar
cagh flow from opcratlonr of S5OrgOO chown tn column (5) b compoaed of after-tax cash
Inllow trom operaUons of S20,goo (9co,ooo - ((S4o,ooo -
Sz,2so) r ,40 tax rate)) and the after-
ta: cash flow from aalvagc of $24,0oo (S4o,Ooo r (l -
.40 tar rate)).
Chagter 23
P23-1O (Gonti nued)
Self-constructed eguipment alternative:
(31
TrnHo
lnconrr
Ir)
- (21
31g,ooo
(5,800)
17r/UO
31, 300
31, 300
71, 580
647
1
2
3
1
5
6
(t)
Protlr
Crdl
lnflowr
352,0oO
52rOOO
5210oo
52,000
52,00o
g2rooo
"
H
lncomr
Ter
Doprocl-
rtlon'
$3O,OOO
5716OO
341560
20r7OO
2017OO
10r44O
t4)
lncomr
Trr
d 40%
Trr Betr
Fl
r ao%
3 o,4oo
l2,240l
6197A
121520
72,320
281624
(51
N.t
Allor-trr
C..h
lnflowr
( r l - t
l
3o5,ooo
54.'2.4O
4!iro24
3er48O
39/{80
st,37E
{0)
Ptl of tl
o 1a.h
m
FV ol ifot
Aftor-trr
C..fl
lnflowr
{5}
r
lol
3 3e, 991
411711
30r391
231372
20,49O
,
24,3:t9
s180,294
l E5' OOO' -
,a77
.769
.875
.592
510
,4.58
Prccent valuc of net ca3h lntlow!
Lclr Inltlal crsh outtlow
Net preaent
valuc of
purchagc
alternativc 3 15,294
' Tar
depreci ati on b determi ned by muttl pl yi ng the depreci abte basl s of the equi pment
undsr tho sel f-constructi on al ternaUve ($180,000, whl ch l s the ful l constructi on cost
Including allocated fired cost) by the IJIACRS depreciaUon rates provided In Erhibit 224 ol
thc text.
" tncl udes aal vage val uo of 530,000, al l of whl ch woutd be tarabl e, l i nce the equi pment
would be fully depreclated for Incomc
rrr
purpogeo at the end of tha rlxth year. Thc total
attor-tar cash flow from operaUons of 353,376 ahown ln column (51 b composed of aftcr-
tar cash Inflow from operatlons ot 335,376
(352,000 - (|3SZ,OOO -
31O,44O) x ,4O tar rate))
and thc after-tar cash flow from talvagc ol 318,000
(S30r00O x (1 -
.4O tar ratel).
-'
Because Egel ston Corporati on l s operaUng at normal capacl ty and the construcUon of the
new equi pment wi l l not Interfere wi th regul ar acUvi Ues, the company ahoul d not i ncur any
addlUonal flxed tactory overhead. Therctore, the 815,OOO of fixed factory overhead ls not
Incl uded In the di fferenti al cost of the sett-constnrcted asseL The i ni ti al caeh outl ay woutd
bo $180' 000 t ut l cost l ess $15, 00O of al t ocat ed f i red f act ory overhead, or 31O5, OOO.
Chapter2S
P2g-1O
(Concludedl
(21 Egelston Gorporation should consider sny
proposal
that is erpected to
have an.earnings rate In ercess ol the firmrs cost of capital. lf a
proposal
has a
positive net
present value, that proposalb erpected earnings will
yield a rate of return that erceeds the firmb cost of capital. In this caso,
the
purchase of
general-purpose
equlpment, the constnrctlon of special-
purpose equipment, and the lEase ol general-purposa
equipment are all
acceptable to Egelston CorporaUon, because the net
present
value of all
three
proposals is positive,
Egelston Corporation should attempt to marimize the earnings that
can be obtalned from the funds available for capital Investments. When
comparing a set ol mutually erclusive alternatives, the atternative with
the largest net present
value will result in a marimization of stockholder
wealth. Accordin gly,
constnr ctio n of special-p urpose eq ui pm ent ap
p ears
to be the most attrastive alternative. Howeve4 the net present value
shoul d be rel ated to any requi red i nvestment by cal cul ati ng a net present
value index as follours:
Construction of special-purpose equipm enb
Net
present
val ue
Sl 5,294
=
.4927
Requi red i nvestment
$165 ,OOO
Purchase of speci al -purpose equi pment:
Net present
val ue Sl 4,52O
=
. 1162
Requi red i nvest ment
$125, O0O
Purchase of general -purpose
equi pment promi ses a l arger net present
val ue i ndsr and woul d be preferabl e, provi ded that the i nvestment di ffer-
enco of $4O,00O
($t65,000
-
S125,OOO| can be used to earn a net
present
val ue greater
than
S774
($1S,eg4
-
$14,5201.
\
Chapter?3
&9
CASES
c23-1
(11 (al The
payback
method measures the number of
years required for the
aftertax cash inflows to fully nocover the initial cash investment in a
project. The
payback method emphasizes an organizationb financial
liquidity and the riskiness of the capital project in terms of invest-
ment recovery. Since long-term forecasts contain mone uncertainty
than short-term forecasts
(i.e., it is easier to predict what will hap-
pen
next year than what will happen lO years
from now), the least
risky projects will have the shortest
payback period.
(bl The net present value method recognizes the time value of money
by discounting the after-tax cash flows for a
proiect
over its life to
time zero using the firmb weighted average cost of capital. The net
present value is the difference between the present
value of the
,
after*tax cash inflows, measured over the life of the capital
project,
and the cash outflow required to undertake the capital project.
Projects that have a positive net present value are acceptable, while
those that have a negati ve net present
val ue are unacceptabl e.
(c)
The internal rate of return method (also
called the discounted cash
flow rate of return method) incorporates the time value of money by
determining the compound interest rate for a capital
project that
would result in a net present value of zero. A proposal would be
acceptable if the internal rate of return erceeds the weighted aver-
age cost of capi tal , and unacceptabl e i f i t i s l ess.
(21
l n order to maxi mi ze the val ue of the company, Cal edoni a Di vi si on shoutd
use the net present
val ue method or the i nternal rate of return method to
deci de whi ch capi tal proj ects
shoul d be i nctuded i n the capi tal budget
submi tted to Qui bl e Industri es. Both of these methods woul d i denti fy
Proiects A, B, D, E, and F as acceptable (each has a
positive
net present
val ue and an i nternal rate of return i n excess of the companyb hurdl e
rate)r and Project C as unacceptable (the net present
value is negative
and the internal rate of return is less than the company's hurdte rate).
However,
Proiects A and D are mutually exctusive (meaning that ultimate-
l y onl y one of the two can be pursued).
The sel ecti on between the two
depends
upon the cri teri a used to rank the proi ecB,
i .e., the capi tal "
expendi ture
eval uati on method empl oyed i n the sel ecti on process. tf the
net present
val ue method i s used, Gal edoni a woul d sel ect Proi ect D
because
i t has a hi gher net present
val ue than
proj ect
A (s24,g74 for D
compared
to 3691683 for A!. On the other hand, i f the i nternal rate of
return
method i s used, Cal edoni a woul d sel ect Proj ect A because i t has a
hi gher i nternal rate of return than Proj ect D (gsoh
for A compare d to 22oh
l or D).
6fl
Chapter 23
C2g-l
(Concluded|
(31 In order to maximize the value of the company in this capital rationing
gituation'
the net present
value should be used to select the
projects
to
be included In the capital budget because the cash inflows aro assumed
to be ruinvested at the hurdle rate (the company has a demonstrated
earning rate equal to lts weighted averiago cost of capita!|, The intirnal
rate of return should not be used, because it violates the rsinvestment
rate assumpUon and may be unrellable as a basis for maxlmizing the
value of the company in a capital rationing situation. Using the net pre-
sent value method, the most profitable
combination ol
proiests
within
the
$45O'00O budget constraint would be to include Projects
&
B, and F
because this combinatlon yields
the greatest
total net present
value (net
prssent
vafue of $l621929 for an initial investment of $4sorooo). (Note
that the combination of
&
D, and F is not
possible
because A and D are
mutually exclusive proiects,
and that the combination of B, D, and F is
not possi bl e
because i t woul d requi re a combi ned i nvestment i n ercess
of $45O,OOO.|
c23-2
(1)
The 18.2o/o rate of return on the investment differs from tha 24oh internal
rate of return because the methods used to measure the returns are dif-
ferent
Tha return on investment (18.2Vo1calculation
is based on accrual
accounti ng concepts. l f the reduced operati ng expenses-l egs depreci a-
ti on-remai n constant as pl anned,
the numerator i n the ROI fracti on wi l l
not change over the l i fe of the i nvestmenL The denomi nator i n the frac-
ti on, the i nvestment base, decreases each year
by the amount of the
annual depreci ati on. Gonsequentl y, the rate of return cal cutated wi l l
increase each year
oyer the life of the investmenl
The internal rate of return calculation
PA%l
is based on discounted
cash flow concepts. The cash flows erpected to be received over the life
of the investment discounted to the acquisition date aL 24Vo, eractty
equaled the initial cost of the machine. This measuns of return on invest-
ment provides
a percentage
that is constant for each year
of lifE of the
investmenl
This rate can be computed for each
yearb
actual operating
resul ts
i f the annual savi ngs i n operati ng erpenses ane constant and the
new equi pment
i s depreci ated usi ng the effecti ve i nterest method based
on an interest
rato of 24o/o. The method would be essentially the same as
that emptoyed
in amortizing leaseholds and bonds. Tho depreciation
charge
each year
woul d have to be such that the numerator and the
denomi nator
of the ROt computati on woul d change at the same rate i n
order
to keep the annual return on i nvestment rati o constant.
Cllagter23 65t
C23-2,(Concludedf
l2l
Recap Corporation can restructure the data from the cash flow analysis
to make lt consistent with ths accounUng reports (which contain
straight-line depreciationf received by the department manager. Once
the investment ls accepted on the basis of its internal rate of return, the
data can be converted into the lormat consistent with the accounUng
basis used for reporting. Annual contribution from the new investment
would be calculated by subtracting the straight-line depreciation from
the net cash operating savings. The accounfing book value for each of
the
years
of the investment lifo would also be calculated. The annual
contribution would be divided by the investment base (book value| for
each year to obtain the rates of return. This would then present
the man-
sger with the different rates of return for each of the yeans
of the invest-
mentb life. Thus, the rates would be more comparable with the actual
return on investment rates experienced each year.
Alternatively, rather than computing an annual rate of return, it may
be more expedient to comparo actual net cash operating savings each
year
with those forecast in the capital expenditure analysis, lf actual
periodic
savings equal those forecast, tho internal rate of return woutd
be equal to the 24% budgeted.
I
!
S
I
CHAPTER
4
DISCUSSION QUESTIONS
'I
O4-1. The five
Parts
arc:
(a) Direct nraterblg reqtbn
(b) Direct lsbor ceclbn
(c) Frlory ovefiead
(O Work h
Pr@oer
hventories
(c) Fhbhed
grood hvmtorbr
*2. iho bahnc" rhoet ir t 3tal.ment ct finsncbl
pcrttbt; the hcqrr ctBternont b a dalement of
sttYity. The incqne lbtement is ccnplementary
to thc babnce sheet, munthg in padicubr for
tho ctrange in hr prcprietary equrty Bs a resull
of operatims during the year. In |hat respecl' the
incornc atatemenl ir eeaentially nothing more
than a major rection of the retained eamings
accounl. Thereforc, tht rsvenue and expense
accounls in the income 3talemont have been
lcrmed'cxplanatoqf ac@unl3, explaining the
cbb and lkrw of r.YcnueE and cxpensee lhat
bod to thc new hcqno (or bce) and to the new
rrtahed camhgs balancc h the balance sheet.
O4-3. Thr ordinary babncr rhecl and incqne slate-
menl aro htended to ptwkJe hlormalist as lo
financial peilion and resulb of operation of a
burinesl, in sctordancc wilh several assump'
liqs that arc made h preparhg |he stalements.
Frqn the standpoinl cil the criticisms rnade, the
most important cil these assumptions are lhal
cocl lost appropdale arnortization of cost mea'
rurca unelgired cct, and that a business mey
bo a$umod lo bc gohg to conlinue operatbns
i ndcl i ni l el y i nto l he future. Accounti ng state-
mcntg sre usually prepared on lhe heory lhal a
cale or
gome
other definite event is essenlial
bcfore revenur i s recogni zed. Basi cal l y, the
aseot sUe of a balancc aheet coctaha a preson-
tstbn o{ the anrounts cl cost incurred, which can
bc pr esumed l o bencf i t f ut ur e per i ods. ' An
incornc slalement presents the srnounl of rov-
cnue recognized as having been realized during
thc period, less the podioo cl all cosls incuned
thsl doe3 not appear to be lairly delerrable lo
ftnurc perinds.
Thc ircome staternonl is prirrnrity a masure
cd what lres been camcd, and not a measure of
'camhg
power.' For plant assots, the balance
rheot b pdnarily a rnasure cl accountability for
cxp.ndi tureE,
rhowi ng acgui si ti on cosl s l ees
codr sllocalod to past operatbns. This rneasure
of accounlability may br quile diflerent from
1rur velue.'
To hcreese ilg usefuhess as one elemerd in
judChC
eaming porver, the ircsne stalement is
picparcd
with a dietinclion between operating
and nonoperaling items. For the samo roason,
c.rtain iterns may be climinoled frorn the incorne
sl st omenl and shown i n t he st at emont ol
nrtained eemings. However, the effec-t of nmre'
curring and nonoperaling transaclions is not
entirelY eliminated.
lnfonnalion revoaled by a serios of income
3tatcments b morc rignilinnt in
iudghg
eaming
power than informatbn revcaled by ane hcqnc
statcmstl. The incqne of a bushess rnay folbw
or .Yen exaggetat the ups and downs ol the
bueinesg cyclo and, therefore, lhe inccne of any
crc year will ncl represent eaming powor.
Changes in law or local zoning ordinances
may result in a marked change in lhe eaming
power ol a bushess. Ukewise, changes in public
taste, devebpment of new prodtrts' apPgarance
ol new conrpetilion, acquisition ol subsiJiaries'
changes in management and lhe like, all may
change earni ng power and yet not be cl earl y
rellecled, il reflected at all, ir one incorne stale'
menl.
The accounting use of historical. rather lhan
curront, dollars in measuring depreciation and
cost of goods sold may resull in distoding any
view of earning power obtained frorn a single
incorne statemenl.
ln regnrd to plant assls, il can be said lhat
their value to a going concetn is usually depen'
dent uPon the eaming power of the business.
Such s value is not necessarily the same as lQ'
ui dati on val ue, cost, cost l egs amorti zati on.
repbcement value, or any other kind of value'
The phrase
.true
value'has no definile connota'
tion.
O4-4. Actusl describes the way cosls are measured.
i.e., at actual historical arnounts; /ull absaption
describos which elemenis of cost are allocaled
to hvenlory accounls, i,e., all elements of rnanu-
lacluring cost are fully allocated to hventories;
p/ootss describes how cqsl infonnation is accu'
mubted, i .e., costs are accumul ated for each
procoss or deparlment in the laclory.
O4-5. Prime costing systems albcate only lhe prime
costs, direct material and direcl bbor, lo hvento-
ry accounts. Direct costing systms, abo called
variable costing syslems, albcale the variable
manulacluring ccts, direcl materbl, direci labor,
and variable factory overhead lo lhe inventory
accounts. Absorpticn costing systems albcate lo
Ilvenlories parl or all of tixed frtory overhead,
in addilioo to all varlrble manufacluring costs.
04. Actual costing masuros product costs at actual
hislorical arnounts, while standard ceting mea-
sures product costs by uei ng predetermi ned
arnounts ol resourceg to be coosurrned and pre-
determined prices o{ those resources.
62
Q,4-7. Preess costi ng ai cumul ates costs fot oach
pt@olts or department
in the ladory end rnah'
tains detailcd recordr and calculationr of the
cotl of *ork h preest. Job order cting accu-
mulales cotr lor oach
irb,
lc', balcfi' or contrasl
and mEhtains detBilsd records and calculalbng
od tho cost! of tork in prceas. BacHlush st'
ing accumulal.r coltr by working backwards
through ihc availablc inlormatiqr afler produc-
ticn is cornpleted
(i.e., at the end of the accounl'
hg pori<rd) and rnahtahr no detailed records ol
lhe costs cl ttPrk ir
Prcesr.
O.4. Actual cosihg il more cornmon lhan standard
coothg in defense'rebted industries, while stan'
dard cosiing ic adnewhat more cornmon else'
where.
O4-9. Super'full absorpfbn or suPer absorption refers
to tho income lax requiremenl thal some
pur'
chasing and storage costs be allocated to inven'
tory ac@unts.
O4-lO. Job order costing would be colrlmon in repair
shops. buiHhg cotslructicr, and prhting; and in
servicc bushesse
guclr
as medical, legal' archi-
leclurat, corutrucliqr engineering, accounling'
and consulling lirms, as mentioned in the lexl'
Other exampl es i ncl ude shi pbui l di ng. bri dge
bui l di ng, tool and di e manufacturi ng, arl and
antique resloratirn, and contracl rossarch'
o4-1 1. As mentixred h tho text,
Pr66!ts
costing would
be common i n thc mi l l i ng, brewi ng, chemi cal '
and textile industries; in sirnple assembly oPra-
tions: and in seryice businesseg serving large
numbers o( cuglorners simultanrcusly, ruch as
airlhes. Other erampleg include petroleum refin-
ing, basic food preessing, and manufacture of
ChaPter 4
low*ost @nsumor
products such as toys, dis'
posable
Pens,
na:ronr' and lighters.
04-12. Aspecls cqrtrnon lo
icb
order and prccess cost-
ing are:
(a) They can be used by rervi ce organi za'
tbns.
(b) They requin cqrsiderablo detail to calcu'
late tho cost ol *ork h
Procells.
(c) The wprk h process accotnl in the gener'
al l cdgcr i r l uppor t ed by subsi di ar y
tcordg.
O4-1 3. A blended cthg method uee
irb
order ccting
l o accumul ate sofl rc cl ement(s) ol cost and
prcces3 ccthg to accumulale ofien-
O4-14. Flcxible manufacluring 3yslems consisl of an
integrated collection ol automated production
pnocesges, autornated rnaterials rpvemonl, and
cornputerized systetn csttrob lo utilize facilities
ln etticiently rnanulacturing a highly flerible vari-
ety cl
Products.
Q4-15. The adnantages of a llexble nranufacturing sys'
le.n over the cther systems include shorl (near-
zero) setuP l i mes, l he absence of a l earni ng
curve, lflet lead times to chipmont' lower diresl
labor cost
per unil, lower direct labor cost in
total, and bwer work in prccess invenlories.
O4-16. Thc hilial cost of creathg a flerible rnanufactur'
i ng system i s much hi gher than l hat of ol her
rngnuf asturing systoms.
O4-17. l,lanufacturing setthg suiied for bacHlush cosl'
i ng are di sti ngui shed by very fasl processi ng
speeds, which rernoves both the incentive and
the opportuni l y to track the detai l ed costs of
work in
Pr@ess'
63
l-
I
t
L
I
\-
I
b
I
b
I
S
I
b
I
S
I
b
I
b
Chaptor I
.
EXERCISES
E4-1 Cal cul ati on of cost of
goods sol d
(i n thousands):
TOtal manUfaCtUfi ng COSt ...........' ................r.r.....t
Add work i n
process i nventory begi nni ng """""
Less work i n
process i nventory endi ng.r..........".
Cost of
goods manufacturgd r.......o.r.-........' ....r..' .,
Add fi ni shed
goods i nventory begi nni ng ........!....
GOSI Of
gOOdS ayai t abl g f Of Sa| g. . . . . . . . . . . o. . . . . . oo. . . . . . .
Less fi ni shed
goods i nventory, endi ng ...o......' ......
Cost of
goods sotd .....' . .-,....................' ..
E4-2 Cal cul ati on of cost of
goods sol d (i n thousands):
Di rgCt matgri al s used.....................r...,...r,...' ........
Di f gCt 1abOf . . . . . . . . . . . . . . . . . . . . . . . ' . r. . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . .
FaCt Of y Ovgf h
gad
. o. . . ' . . r. . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tot al manuf aCt Uri ng COSt . . . . . . . . r. . . . . . . . . . . . . . o. . . . . . . . . . . . .
Add work i n process i nventory begi nni ng ........' ..
Less work i n process i nventory, endi ng
Gost of goods manuf act ur ed. . . . . . .
Add f i ni shed goods i nvent or y begi nni ng . . . . . . . . ' . . . .
Gost of goodsavai | abt ef or sa| e. . . . . . . . . . . . . .
Less fi ni shed
goods
i nventory endi ng..............,..
Gost of
goods sol d .......o............. ..t......' ..
sl 10
80
$1eo
90
$t oo
150
$250
60
$.11D
$230
250
$480
210
$27o'
340
$610
27fJ
s340
$ s o
60
80
i
I
Clpptcrl
E44
(Goncluded)
(21 Gost of
goods
manufactured:
Stores, Apri l 30.......' .' ........r.,..
.....--..----.
PUf ChaSgS. . . . . . . . . . . . . . . . . r r . . . . . . . . . . . . . r r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . .
LoSS: StOrtSt May 3t ro....rr...........r.................r....o......r..o....or....
Di rgct mat gri al s COnSUmgd ' . . . . . . ". . . . . . . . . . . . rr. . . . . . . . t . . r. . . . o. . . . . . . . . . . r.
Di rgct tabor used (4r25O x5221..r,.....,.........o.,............r.,...o......
FaCt Of y OYef head . . . . . . . r . . . . . r . . . . . . . . . . . o. . . . . . . . . . r . . . . . . . . . . . ' . . . . . r . . . . . . . ' . . . . .
Total manufacturing cost
Add work in process, beginning inventory
Loss wgrk i n
process, endi ng i nventory................r.....,...........
COSI Of
gOOdS
manUfaCtUngd ....' .....' .........r......................' .......
Endi ng bal ance of fi ni shed
goods:
Finished Cost of Finished
goods,
+
goods goods, =
April 30 manufactured May 31
S 4 5 , 6 0 2 + $ 2 8 2 r O g O X =
X =
Therefore, the finished
goods ending balances is $47,662.
E4 (al
*",i135";;;;;il..:::.::::::.::::::::::::::-:::::: 35,ooo
(b)
Work i n Process............ t...........r.... 33' OOO
Factory olrgrhead Gontro| ..o............r...,........ 21000
Mat gr i al s . or . . r . . . . . ' r . r . . . . . . . . . . . . . . . . . . . . . . r . r . . . . . . o.
(c)
Payroll 4O,OOO
Accrugd Payro11.....,....,.r,.r..,.....r....,...r...,
Accrugd Payroll .r................,......,...,.............. 4OTOOO
CaSh. . . . r r . . . . . . . . r . . . . . . . . o. r . . . r . . . . . . . . . r . . . . . . . . . or . . . .
Work i n Procgss . . . . . . . . . . . . . . . . . r. . . . o, . . . , . , . . r. . . . . . . . . .
g2rOOO
Factory Overhead control,.. S' OOO
Payrol l . . . . . . . . . .
(0
Factory
gverhead
Control 4,OOO
65
(31
s 1O, 25O
105, OOO
sl 15, 250
12r7AO
sl 02,550
93, 500
77. 390
5273r4/,O
61.420
s334,86O
52, 80O
s282,O60
Cost of
goods
sol d
s28O,OOO
$ 47,662
35, OOO
35, OOO
4O, OOO
4O, OOO
4O, OOO
4, OOO
(d,
(el
Cash
ffi
E4-S
(Concl uded)
(g) Factory Overhead Control .."""' r"""""""""
Account s
Payabl e . . . . . . . . . . . , . . . . . . . . . . . . . . """"
Factory Overhead Gontrol .....-.................' ."'
Accumul at ed
Depreci at i on. . . . . . . . . . . . . . . . . . . ' .
Prepai d Expenses . . . . r, . . . . , -. . . . . . . . . . . -. . . . . . . . . .
Accrued Property Taxes .,..,........r........"'
WOf k i n Pf OCeSS . . . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . . .
Factory Overhead Control
Fi ni shgd GOOdS. . . . . . . . , . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . , . .
Wor k i n Pr ocess. . . . . . . . . . . . . . . . . . . . . . . . . .
Account s Rgcei vabl . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . "
Sal es
. . . . . . . . . . . . . .
Gash . . . . . . . . . . . r . . . . . . . . . . . . . . . .
Account s Recgi vabl . . . . . . . . . . . . . . . . . . . . . . . . . . . . "
Cost of Goods So1d. . . . . . . . . . . . . . . . . . . . . . . . ! . . . . . . . . """
E4-6
(al
Work i n Procgss ......................' ...............,..,.
Factory Ovgrhead Control .r....r..,r.' .............,.
Marketi ng Expenses Control ........-...............
Admi ni strati ve Expenses Control
Payr ol l . . . . . . . . . . . , . .
Factory Overhead Control
Cash. . . . . . . . . . . . . .
Factory Overhead
Control
Accounts PaYabl e
Wor k i n Pr ocess
. . . . . - . - . . - .
Factory Overhead
Gontrol
Fi ni shed Goods. . ' .
Wor k i n Pr ocess
""""""
Chapter 4
l 8, ooo
_
18, OOO
4, 130
2, 1OO
780
11254
36, 130
36, 130
92, OOO
92, OOO
8O, OOO
8O, O0O
4O, OOO
4O, OoO
60, 000
:
17, 5OO
'
17, 5OO
1, 800
1, 800
27,OOO
17, 0OO
2, 000
5, 000
3, 000
27, OOO
2r5OB
:
2,5O8
8, 5OO
B, 5OO
14, 8O8
14, BOB
60, 1OO
60, 1OO
(hl
(il
o
(k)
Fi ni shed Goods . . r . . . . . . . . . . . . . . . . ' . . . , . . . , . , """"
6Ot 000
13, 50O
Account s Payabl e
13' 5oo
(bl
(c)
(d)
Accrued Payrol l .....,.' ......
27
|OOO
(e)
(0
(gl
(h)
Chaptor I
E4-O (poncluded)
O
Accounts R9cgivab18.............o...............oo' ....
Cost of Goods Sold'
Finished Goods
' sl 5,ooo
+ $oo,roo
-$1s,roo
=
$8o,ooo
67
Sa
8O, OOO
6O, OOO
8O, OOO
60,o00
E4-7 WALLACE INDUSTRIES
Cost of Goods Manufactured Statement
For May
( i n t housands of dol l ar s)
Direct materials:
Direct materials, April 30, 20A.........o
Purchases ......,...,.
Fr ei ght i l l . . . . . . . . . . . r . . . . . . . . . . . . r . . . . . r . . . . r . r . . . t . .
Direct materials available for use.....t.
Less direct materials, May. 31r 2OA...
Dirgct materials consumed ..........
Di rgCt tabOr.........roo........i ..r.......o.,
Factory overhead:
Indirect factory labor ..............,...r.......
Utilities ($f
gs
r
go o/o).............,..,...o..r..
Propefi t?,if, ..........r.....,.............r.........
l nsuran co ($2O
x
gO%1..r...,...............r.
Depreciation
Sl2O
+ $3O).....
Total factory ovgrhgad,r...r..r.r.......
Total manufacturing
coSt..........o....r............
Add work in process, April 30, 2OA,...
Less work i n process, May 31, 20A.,.
Cost of goods
manufactured
s5f o
t 5
$ zs,
525
sss3
23
$ e o
108
60
1 2
50
s s30
260
320
$t , t 1o
150
$1, 28O
210
${ . 050
:
Chaptor I
ffi
E+8
cll{l{ABAR
69ffiplMf
Statement of Cost of Goods
Sold
For Year Ended December
31
Raw materials:
Purchase3
.........' ."
Less dlgcounts on raw
materials
Punchagod
.""
Lesg raw materials on handt
Dgcgmbgr 3{
e
2OA.........""t
Cost of raw materials consumod
Dirgct labor ...........o."""""""""""r'
Factory overheads
Factory mainte na!1co"...............
Factory suppllgs used ....""'t""'
Powgr and hgat-factofl
......'...'
lnsuranco erpense-factorY
bui l di ng and equi Prl l ol l t...."
Dep reciation-factory
bullding
and eqUi pmgnt .."""""""""
Factory superintendence
..........
tndirgct factory |abor.........."""'
Total factory overhead
........
Total manufacturing costs-,....--.....-.-.
Add work i n
Process,
January 1r 2OA
Less work i n
Process,
December 31t
204
Cost of
goods manufacturgd....-........
Add fi ni shed
goods,Jbnuary 1r2OA.
Cost of
goods available for sale o....-..
Less fi ni shed
goodsr December 3l '
2OA' . . . . . . . . . . . . . . . . . . . . . o. . . . . t . . . . . . " t " " "
Cost of
goods sol d ....................o.......
$40o,ooo
4,2OO $ggs,goo
24,0O0
s371' 8OO
l Eo, ooo
s?8,4OO
22t4AO
19, 400
4,8OO
l 7, 5OO
1O0, 000
20,OO0
222,5AO
$774,3OO
.
84,OOO
$858,30O
3O,OOO
$828,3OO
37, 5OO
s865,80o
.
7O.OQ0
szggJsq
CGA-Canada
(adaptedl . Repri nt wi th
permi ssi on'
Chaptor I
PROBLEMS
P4-1
(rl
BRTDGEWELL COMPANY
Gost of Goods Sol d Statement
For Month Ended Jul y 31
(i n thousands)
Di rect materi al s consumed,...,....... .....r......r...,.
Di r gCt 1abOf . . . . . . . . r . r . r . . . . . . . . . . . . . . . . . r . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . r . . r r . r . o. . . . ' r . . r . . r
FactOry ovgrhgad ................' .....................................' .....r............
Total manufacturi ng cost
(a)...............................rr..,....,............
Add work i n process i nventory Jul y 1.......,......,.....,............,........
s7s
Lgss work i n process i nventory, Jul y 3' l ..........,.......................,... 25
Cost of goods manufacturgd r.....,........r..,r....r...,........o..........,.......
55O
Add fi ni shed goods i nvgntory, Jul y I (b) .............r....................... 20
Cost of goods
avai l abl g for sal g r........r............,.,..........,.....o......... S?O
Lgss finishgd goods
inventory, July 31(G) ................_.-.-.u.r..........
15
Cost of goods
sotd ........,.........' ......r.r....................,..,.....,...r......,..
G
Cal cul at i ons:
(a)
Cost of goodsmanuf act ured. . . . . . . , . . . . . . . . . . . . . , . .
Add work i n process, endi ng
Less wor k i n pr ocess, begi nni ng. . . . . , . . . . . . . - . , . . .
Equal s t ot al manuf act ur i ng cost . . . . . . . . . . . . . . . . . .
( b)
69
s 16
24
20
s60
1 5
$50
25
s75
l 5
_999
( c)
Cost of goods
avai l abl e for sa| e.,.,......,..r...o.
$ZO
Less cost of
goods
manuf act ur ed. . . , . , . . . . . . , . . . 50
Equal s f i ni shed goods,
begi nni ng . . . . . . , . . . . , , , . .
14
Gost of goods
avai l abl e f or saf e. . . . . . . . . . . . . . . . . . . $ZO
Less cost of
goods
so| d. . . . . . . .
55
Equal s fi ni shed goods,
endi ng
gg
' 70
(b) Work In Process
a a a a a a a a a a a a a a a a a a a a a l a
a a a a a a a t a a a a a a a a a a a a a a '
Chapter 4
25, OOO
16, OOO
2,OOO
29,OOO
24rOOO
5,O00
25, OOO
29' 0oo
5O, OOO
5O, OOO
105, O00
105, 0OO
55, OOO
55r O0o
P4-1
(Concl uded)
l 2l
(al Mat ef i a1S. o. . r. . . . . . . . . . . . . . . . . . . . . . . . . . o. . . . . . . . . . o. . . . . . . . . . .
Account sPayabl e. . . . . . . . . . . . . . . . . . . . . t . | . . . . . . . . . .
Factory
Ovgrhgad
Gontrol ....."""""""""""'
Mat gri al s
. . . . . . . . . . . . . . . r' . . . . . . . . """""""""""'
(cl Payrol t
($ZCrOoO +$5' OOO)"""""""""""t""'
Accru
gd
Payro11 """"""""tr"""""D"""' r'
(dl work i n Procgss ..............r....r.....................' .
Factory Ovgrhgad
Gontrol r""""""""""t"o"
Payr Ol l t . . . . . . . " t " " " " " " " t " t " " r t " " " " " " " t "
(e) Finished Goods
18, OOO
29, OOO
Work i n ProcesS
"""t"""""""""""""""
(0 Accounts Rgcei vabte""""""""""""""""""
Sales
($60'000 + (75o/o of $6O10O0))
"""'
cost of Goods so1d............................,..o.......
Fi ni shgd Goods """""""""""""' r"""""
Chapten4
P4-2
(11
SCOTTSBURG COMPANY
Cost of Goods Sol d Statement
For Mont h Ended June 3O
( i n t housands)
Direct materials:
Materi al s i nventory June 1 ........................
Purchases........................., ..........
Mat eri al s avai l abl e f or use. . . . . . . . . . .
Less: Indi rect materi al s used.................... S 1
sl s
33
s48
Mat eri al s i nvent ory June 30. . . . . . . . . . . 19 ZO
Total manufacturi ng cost (b)........
Add work i n process
i nvent ory June 1. . . . . . . . . . . . . . . . . .
Less work i n process
i nventory June 30...............
Cost of goods
manufactured ......
Add f i ni shed goods
i nvent ory June 1
(c). . . . . . . . . . . . , .
Cost of goods
avai l abl e for sal e.,
Less fi ni shed goods
i nventory, June 30
(d)..........:.
Cost of
goods
so| d. . . . . . .
Gal cul at i ons:
(a)
i ndi rect l abor + di rect l abor =
$4g
i ndi rect l abor + (i ndi rect l abor x 6) =
$49
i ndi r ec t l abor x T=949
i ndi rect l abor = 37
d i r e c t l a b o r = 6 x $ 7 = 9 4 2
( b) Cost of goodsmanuf act ur ed. . , . . . . . . . . . . . . . . . , . . . . .
$120
Add work i n process,
endi ng
gO
sl 50
Less wor k i n pr ocess,
begi nni ng. . . . . . . . .
40
Equal s t ot al manuf act ur i ng cost .
Sl i O
( c)
Cost of goods
avai l abl e f or sal e
S19O
Less cost of goods manuf act ur ed
. . . . . . . 12O
Equal s f i ni shed goods, begi nni ng
S ?O
s ,
t,
$ 1
7
1 7
2
1 3 4
s l 1
4
s1s
3
sl 2
7
s l 9
3
sl s
72
P4-2
(Concluded)
(d) Cost of
goods avai l abl e for sal e r......' ..""""'
Lgss cost of
goods so1d......................,......,..
Equal s fi ni shed
goods, endi ng ..............."""
Chapter 4
33, OOO
29, 0OO
49, OOO
49, OOO
120, OOO
210, OOO
155, OOO
l2l
(al
(b)
(c)
(d)
(e)
n
Mat gf i al s . . . . . . . . . . . . . . r. . . . . . . . r. . . . . . . . . . . r. . . , . . . . . . . . . , . . . .
Accounts Payabl e ...,......r.....,.........o..,....
Wor k i n Pr ocgss . . . . . . . . . t r . . . . t t ' ot r " " " " " " " " t ' r " '
Factory Ovgrhgad Gontrol ............................
Mat gri al s . . . . . . . . t . . . . . . . . ' t """""""""t ""t ""'
Payr ol l . . . . o. . . . . . . . . . . . . . . . " " " " t t t t " t " t " " t t " " " " " t "
Accru
gd
Payro11...t..r..""""""""""""""'
WOf k i n Pf OCgSS . . . , . . . . . . . . . . . . . . r . . . . . ' . . . . . r . , o. . r . . . . . .
Factory Ovgrhgad Control ....t..r......"""""""
Payrol l ...............""""""""""""""""""'
Fi ni shgd GOOdS. . . . , r r , . . . . . . . r . . . . , . . . , . . . . . . . o. . r . . . . . . . . .
Work i n ProcgsS. . . . . . ' . . . . . ""r"""o""""""'
Account s Rgcgi vabl . . . . . . . . ". . . . . . . . """""t t """
Sal es ($14o, ooo + (50% ot $14o' o00)). . .
Cost of Goods So1d...................,....,..ro..........
Fi ni shgd Goods . . . ' . . . . . . . . . . """""""""""'
$1 90
{ 55
s 3 5
33,O0O
28, OOO
I , OOO
49,OOO
42rOOO
7, OOO
12O,OOO
21O, O0O
{ 55, OOO
-
ChaPtar I
P4-3
,
( 11
73
MADEIRA COMPANY
Schedul e
of Cost of Goods Manufactured
For Mont h Ended March 31
work i n
process, March
I .............r.......r,.......
Production costs:
Di rgct mat gri at s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$l o4rooo
t r
r Di rect l abor....r.-....."
"""""""" l 6otooo
ttt
Factory overhead
..............,......"""""""
8or999
*tt
-344t009
Lgss work i n
procgss, March 31 ............."""'
Cost of
goods manufacturgd..-.' ....,...............'
r
Cost of
goods sold
($345,O0O) + ending finished
goods inventory
($tos,ooo)
-
begi nni ng fi ni shed
goods i nventory
(sl o2,ooo) =
s348r000.
' rpurchases
of materi al s duri ng March
($l tO,OOO) + begi nni ng materi al s
i nventory
(S2O,OOO)
-
endi ng materi al s i nventory
($26' 000) =
Sl O4' OOO.
r.'
production
costs for March ($gCC,OOO)
-
direct materials
($t Oe
'OOO1
=
direct labor and factory overhead
($24O'0Oo).
Let x = di r ect l abor
1.5r =
S24O,OOO
x =
$l 60' 000
di rect l abor
.5x =
$8O,OOO
factory overhead
(21 Prime cost:
Di rect materi al s (requi rement (1)) .........,..r.o........, Sl O4r0gO
Di rgct l abor (requi remgnt (1))....:....,..................... l 6OIOOO
_9261poo
(31
Conversion cost:
Di rect t abor (requi rement (1))' . . . . . . r. . . . . , . . . . . . . . . . . . . . . . . $160rO0O
Fact oryoverhead(requi rement (1)1. . . . . . . . . . . . . , . . . . . , . . 80' 0OO
_9240,999
s 4o,o0o
s384, 000
36,000
$a8, @'
P4-4
CompanY
A:
Sal gs " " " " t " " " " " t " t t " " t t t " t t " " t " " " t t t " " " " " t "
Cost ol
goods sold:
Finished
goods inventory
Janualy
i """
Gost of
goods manutactlli9d"""""""""
Gost of
goods avai l abl o
l or sa|e""""""'
Finished
goods Inventory
December
3l
. Cost of
goods Sol d tt""t' o""t""""t"""t"'
Gross
profit
l2oo/o
Of Sales).o......'..............r.....
GompanY B:
'
ctst of
goods availablg
tor 3a1o.,..r.........,......
Less finished
goods ending
inventory""""""
COSI Of
gOods Sol d "t t ""t """"""""""r"""""'
CompanY C:
Sal eS . . . " " " t " ' r t " t " ' ot " " t " " " " " " " o" t 1" " " " " " t "
Cost of
goods sold:
Cost ol
goods manufacttlrl9d"""""""""
Add bsginning finished
goods inventory
Cost of
goods availablo
lor 8a1e""""""'
Less ending finished
goods inventory""
Cost of
goods Sold """"' o"""""""""""'
Gross
profit """"t""""' r""""""""""""""""'
P4-5
S
600,000
3,80O,OOO
$4,4oO,ooo
l r2OO' OOO
51, 5{ O, OOO
_
2'l o.ooo
slJggJoo
$
34O,OOO
45,OOO
$
385,OOO
52,OOO
Work in Process
Chaptor 4
s4,oo0,ooo
3, 20O, OOO
s
Soo,ooo
S
429,ooo
333,OOO
$
96, 000
346,OOO
13, OOO
55, OOO
2OO, OOO
268,N
End. 9, Ooo
Finished Goods
Beg.
(41
34,0OO
348r00O
38Ct,o(to
End.3O,W
2O, OOO
65, OOO
85,O@
End. 7S, OOQ
35O,OO0
2O,OOO
5O,OOO
70,O@
7,0oo
5O,OOO
20O,OOO
loo,0oo
357,W
End. 17, @
Beg.
M
L(2)
FOH
Materi al s and Suppl i es
Accnred PaYroll
(8)
( 11
259,OOO Beg.
75
Chapter 4
P4-5
(Concl uded)
Accounts Recei vabl e
54, 000
5OO,OOO
554,OOO
End.22,OOO
,Factory Overhead Gontrol
Accounts Payabl e
77, OOO Beg.
(7)
(6) 18, OOO
65, OOO
83,OOO
End.6,00O
2O, 000
55, 000
10, 00o
2, OOO
13, OOO
l OO,AOO
(3)
532, OOO
l OO, OOO
55, 000
2OO,OOO
255,OAO
Payrol l
Cost of Goods Sol d
350, OOO
55, 00O
20O, OOO
255,OOO
(5)
( 11
l2l
(3)
(41
(51
(61
rtl
(81
Materi al s i ssued to
producti on' 55O' OOO
Di rect l abor, $2OO,000
Total factory overhead' $1OO' 0OO
Gost of
goods manufactured, $346' OOO
Cost of goods sol d, S35O,OOO
Payment of accounts
payabl e' 577' 0OO
Col l ect i on of account s r ecei vabl e, 5532, OOO
Payment of
Payrol l '
S259' 0OO
GGA-Ganada
(adapted).Repri nt wi th
Permi ssi on.
Sal es
t
1
, <
76
P4-6
Work
in Process
Materi al 8...
Cost ol
gOodg SOl d ttt"tt""t"""""t""tt""
Add finished
goods inventoq/ inclase"
Cost of
goods manufactllhod..' ...' ...r..""'
Add work in
process inventory increase
Total manufagturing
cost -....--.-...........o"
Less : Factory overhead.t..... $35' OOO
Dirgct t:lbor.......,....o...
4OTOOO
Materials used in manufacturing .,.r,......
Mat er i al s . . . . . . . . . . t . . . . . t . . . t " " " t " " " t t t t t " t " t t " t t t t "
Accounts Payablg .....'.."""""""""""""
Materials ussd in manufacturing
(from above| .........o...."r""""""' rt"""'
Add materials inventory increase ....'.....
Matgri al s
punchasgd ".........""""' r""""'
Payrol l .....' .' .......
l a a a a t a
Chapter 4
84, OOO
84,OOO
91, OOO
9l , ooo
40,ooo
4O,OOO
4O,OOO
4O,OOO
35,OOO
35,OOO
35,0OO
35,OOO
t 57, 0oo
t 57, OOO
l 40, ooo
l 4o, ooo
$14o,ooo
l 7,ooo
s157, OOO
2,OOO
s159, OOO
75rOOO
l_84,OOO
$
84,OOO
7,OOO
$ er, ooo
a a t a - a a a a a a a
Accnrgd Paytoll.......' .........""""""""to"'
Wor k i n Pr ocgsS . . . . . . . . . . . . . . . . . . . . . . . . t t " " t " " " t t t r t '
Payr ol l . . . . . . . . . r . . . . . . . . . . " " t " " t " " " " " " " " " t '
Factory Overhgad Gontrcl ......r' .r.t,,.....""""'
Va ri o u s C rgd its.' ........ "' t " " "" " " "r' r t " " "'
Wor k i n Pr ocgs3 . . . . . . . . . . . . . . ' . t " " t ' o" t " t " t t t " r " ' t r
Factory Ovgrhgad Control o..r........ro""""
Fi ni shed Goods
(12' OOO + 84' OOO + 4O' OOO +
35t OOO
-
1 4t OOO) . . . . . . . . . . . . . """""""""t
Work in ProcgsS .............' ...r"""""r""""
Cost of Goods Sol d (28' 000 + 157' O0O
-
45t OOOl . . . . . . . . . . . . . . . . . . . . . . . . . ' . . " t " " t " t " " t " '
Fi ni shed Goods ..............
GGA-Canada
(adapted). Reprint with
permission'
n
(c) Payrol l ... 86,000
' '
Accrued Payrol l .............. 86,000
Work i n Process....................r............................. 6Or5OO
Factory Overhgad Contro| ..........,.,....,...........,..... 1215OO
Marketi ng Expenses Control ,..............t............., IrOOO
Admi ni strati ve Expenses Gontrol 5,OOO
86, OOO
92, OOO
26, 530
47,33O
188, OOO
241, 150
185, 5OO
(hl
Cash !........,r.........,......,..
ZOSrGO2
Sal es Di scounts,...........
...,...... 4r2i g
Accounts
Recei vabl e........... 212rg2}
(i )
Marketi ng
Expenses
Control ...,............ 18,ooo
Administrative
F.xpenses
Control 12,OOO
Accounts
Payabl e
3O,OOO
0 Account s
Payabl e
1O4, OOO
rt
Cash
1O4, OOO
78
P4-7
(Gontinued)
88,25O
l 04, o0o
't92,250
212,924
2,25O
86, OOO
Materi al s
Machi nery
Chapter 4
9O, 8OO
15, 5OO
92, OOO
26,53O
3O,OOO
,64\030
l /l Bal '
(hl
Cash
20,O0O
2O8,662
2i28,662
36,412
Accounts Receivable
(c)
0l
t7,2OO
l / 1 Bal '
(gl
25,O0O
241,15O
26art50
(hl 1/ 1 Bal . 4O' OOO
53J,3O
Fi ni shed Goods
(g) 1B5, 5oO
188, O0O
Accumul ated DePreci ati on
111 Bal . 1O, OOO
Accounts Payabl e
1t 7
(0
Bal .
t/l Bal .
(c)
(dt
(e)
9r5OO
l 88, OOO
,97,5OO
4,50O
6O,5OO
82,50O
47,330
(q4,>e3<t
Accrued Payroll
88,25O 111 Bal .
(c)
Sal es
104, OOO1/ l Bal .
(a)
(b)
(i)
Retai ned Earni ngs
111 Bal . 21,25O
Cost of Goods Sol d
(g) 185, 5OO
I
Payroll
(c)
111 Bal . 1o' ooo
I
(d)
(a) 92,OOO
102,OOO
Work in Process
241,15O
Sal es Di scounts
I
86,0O0
|
(c) 86, OOO
L
L
L
I
\
79 Clppterl
P4-7
(Concluded)
(b)
(cl
(d)
(cl
(i)
(cl
(il
t_
I
!
I
!
I
I
!
b
Administrative Expenses Gontrol
5,O0O
12, OOO
17,AOO
Factory Overhead Control
26,53O
l 2r 5OO
8r3OO
47,33tO
(e) 47, 330
Marketing Expenses Controf
810oo
' l 8,0oo
2l,ooct
(31 HOPKINS & WHITE COMPANY
Thial Balance
January 31
Common Stock
CSSh ' ........
AcCOuntS RgCgivabl...tr..............r............................r......
Fi ni shed GOOdS. . . . . . r . . . . . . . . . . . r . o. . . . ' . . r . . r . . . . . . r . . . r ' . . . . . . . . . . r . . . . . . r .
WOrk l n PrOCgSS.........' .o,.r.,.....,..r' .......r.' ....' .rr.' .....r........t
Materfals a a a a a a a r o a a a a a a a a a a t t a a a a a a a a a a a a
$ 36, 412
53,23O
12, OOO
6,830
11r 2OO
4O,OOO
4,258
185, 5OO
26,OOO
l 7' OOO
s
60,030
l O, OOO
6O, 0OO
21r25O
241,15O
Machine
Accounts Papble a a a a a a a a a a a a o a a a a a a a a t a a a a a a t t a a a l a a
Accumul atgd Depreci ati on....,...,......,,.,.....,....,................
Common Stock..,. a t
Retained Earnin a a r a o t a a a a a a a a a a a t a a a a
Sales
Salgs Discounts,...,..
1993,430 _$3e2,499
l
Ghapter 25
DfscusstoN
QuEsTtoHs
ezs-1, Porcontago d gral'tl
lo ralo b a nrasuro of
cun.nl operating activilirs. Fevenuo produc-
l i wr, coal i ncurrcnco, Ind corl control arl
rnbodied in lhir ratio. Thr capitatrmployd
lumovrr ratr ir ! moa3uro of lhc anrount of
agsol investment rehtivr to tho activhy lcvel cl
th. cornpany. This rato highlights the succcgs
o{ adrievirg ealeg vc{urnr with mirimum acsot
'
hvcaUnont ard measurcr lhc salesaeneraliqr
activity and overafl anscl menagemont.
e2s-2. Capitsl omployed cqrsbtr ol nqrcurrent a$ets
( i nvr st ment r i n bui l di ngr , machi nr r y, and
oquipmrnt) ar wrll !r currrnl asrctr. Somt
finnr do ttcrt ur. cuncnt aerr1ts but p6fer rork-
ing c-Fital; lhat is, lho nol balsnce of curnnt
egrtt ard currcnl linbililicr.
Q25-3. Tr+o major objectivet that managemonl may
havc i n mi nd when setti ng up a system for
meat ur i ng l he r ct ur n on di vi ai onal capi t al
crngbyed an:
(a) l o l ecuro a summary msasurc of l ho
profilability
of operations, products,
and
lacililies connecled
with each divbirn;
O)
to obtain hforrnation as to the success ol
division manag.rr in conducting thcir
. portirrr of thc canrpant'c rtivilies.
Q25-4. Dpfuncibnal astbnr that managemenl could
lak. lo irnprovc rhorl-term relum on caoital
ornpbyed at the expsrse ol bng-run prolitabili-
ty hclude:
(a) Defer or reduce preventive
mainlenarrce,
whi ch r educel
cur r enl cxpenae bul
t hor l enr l hc l i l o of ar e el s, t her eby
ircreaa irg I r.rtu rr cosi.
(b)
Rcducr cxpondi turr
on research snd
drvcl opmcnt,
whi ch reduces curronl
expcnr. bul makor thr cornpany l ess
canpelilivt
h tho luturc.
(c) Rcduco or arrc*J rrnpbycr trainhg and
dcvel opment ,
whi ch r educes cur r ent
cxp.nl ro bul makcc l he company l ess
cqryctiiivo
h thr future.
(d)
Sell ard then nnt nreded assets, I,ltich
9e!s
lhcm ofl thc balancc sheet but may
cosl the cornpsny rnorc h the bng run.
(o)
Deler, reduce, or arcid nrodemizaticn
of
faci l i ti es,
rspoci al l y
rubstanti al i nyost-
rncnb
h eutornaled manulacluring
frili-
lior, wtrich kecpr asrol cosl on thr bal_
anca sheot lotr bU rnalcs thc corngany
lcss carpetitivo
h tht futurc.
425-5.
Uac od lhc rato-o{-rolum-ori-cspilal.emptoyoc,
hag the folbwing
livr claimod achranlaoes:
(a)
l l focuses
menagemont' s
atte-nl i on on
oami ng thc bcst pro{i t possi bl e
on the
capital (tolal assets) avaihblo.
(b) lt lies lognther the rnany phasos
ot fiAan.\-
cial phnning.
sales cbjrlives,
c6l st-
trol, and the prolit gnal.
(c) l l ai ds i n detecti ng the strengthl end.
weaknesses
wilh respect to lho usr or
nonuse of hdivijual
assob.
(O h serves as a yardstbk
h measurirg por-,
fonnance and proviCes
a basis lor evalu-
a
ating inprovemnl
ovo, time ard arrstg
divbi:ns.
{o)
}t devebps a keener eenge of resoqtsi_
.
bility and leam eflort in divbisrol ,nan-
-
agcrr by enablirg thcm to measurc and
.
tvaluale their orvn astivilies in he light c/
lhe brdget and with ,Dspecl to thr resuttr
achieved by other divisisrsl rnanagors.
r'
025-6. The five lrequently encountered limitatbos of
usi ng the rate-of.retum_on-capi l al -empl oyed
follow:
(a) lt may not be reasonable
to expcct thr
v
aame rolum on capital employed lrom
each di vi si on i f the di vi si ons sel t thci r
respective products
in rne*ets that difler
_
widely with respect to product
develop-
menl , compel i l i on,
and conr umo
drmand Lack ol egreernont on thr gti-
mum ral e ol rcl urn mi ght di scourl g.
\r
rnarugen who believe lhe rate is ret at
an unlair level.
(b) Valuatiqrs of assets cil different vintager
i n di tferent di vi si ons mi ght gi vo
ri to to
*
compari son
di ffi cutti eg and mi sundcr-
atandings.
(c) Proper albcation
ol conrrnon clc and
assot s r equi r ea dst ai l ed i nf or mat i on
F
aboul tho budgeted
and actual uro of
cofilmon lacilities. Thc cost of kecping
track ol
guch
detaila rnay be higrh.
(d) For the sake of making itrr curiont pcri:a
-
rale of relum on capitaf empbycd
-loot
good,'managers
may be influenced to
mEke decisions that are not h thr best _
bngl,run hlerests of the firm. Thir prob-
l em i s especi al l y l i kel y i l managcr t
-
expecl lo be in pcitbns
for mly a rhorl
time belore behg reassignod, thur, por-
rv
sonal l y avoi di ng r csponai bi l i t y
f or ,
lmg-run corsequoncet.
(e)
A single moasure of performanco,
ruch
as rotum on capilal employed, rnay nrult
l-
i n a fi xati on on i mprovi ng
thc compo.
ncnts of the one moasurc to thc neglect
of needed at t enl i on l o ot hor dcai r abb
activilies. product
research and dovclop-
\t
rnent,
managerial
devebpmonl, progror-
.
sivc personnel
polbict, grood
onployoe
688
Chapter 25
l 1
moralo, and good custqncr and public
relolbnr arc
juol ar irnportanl in oaming
a grealcr prc/it and assprhg csltinuour
growllt
Q25-7. Multiplc
pcrformanco moaauro3 aro usod lo
oycrcorno tho limitetkrnl cl r rhgh financial
rnasur.. Multpll
prrlorrnam tnealut$
PttF
vidc central rnanagerncnl with a nprc cornpt"'
hensive
pictutr ol divisimal prdormancr by
consi deri ng a wi dcr rangr of managomenl
respansbililie3, nsllinamial activilies ar well
as fiuncbl performancl. Muhiple perfonnancr
mcal ur cr cen bo der i gncd t o pr ovi do an
incenlivo to divisimal tnanagon to cnlngo h
activitieo that havo long'lerm bcnlfil lo lhr
company but whi ch may havo r nl gal i vr
impact on rhort-run protit. Ersmpler includr
bari c roaearch, now producl drvrl opmrnl ,
guality improvcmrnt, produclion innovalion,
empl oyee devr l opmenl , . and new mar kel
dovelopmcnl. ln additiqr, mulliple moasutcs
miligalr tho problem cil trying to evalualc divF
sional performincc on the bagis ol a single
profil measuro that may be cornputed on diller'
enl bsser in each divisicn.
Q25-8. Cornrnan forml of managsmenl incentive csn'
pensatbn phnr irclude:
, (a) Co^rh bonuror, whbh erl urually paiJ in
a lurrp rum rl thc ond of lhr pcrird and
an basod
qt
a cornbirgtion of ccrporde
porl ormancr, i ndi vi dual porformancr,
and thr managernenl levol.
(b) Stock bcnusea, wtrbh arc delermined in
essentially lho same way a! cash bqtus-
ca.
(c) Delrrod canpmsalion, ufibh ir paid in
cash andor dock ttst dos ncl vest urdil
a future perird. In tryno c8ses, tht rnan-
agcr io rcguircd lo invrsl annually and
thc oqrany rnatchcr lhc stlrbuli<n.
(d) Steh qlinr, whi*t givo thr tnatragor a
ri ght l o purcharr rtock al a rrt pri ce
wilhin r rct pcrird Tho hccnlivo b to
hclp thr cornpany insrcalr tho market
pricc ol itr clock s! much ar possible
withh thr oplbo porird
(e)
Stek appreciot'ur rigrts, wtri*r art sini-
br lo ttck optbru crcopt that thc nran-
agcr is not roquired to purchasc rtock,
bul ircloed rccoiver an anpunt equal to
ils apprcciati:n at lho cnd ol a rel perF
od.
(t) Prrlormencr rharer. which arc rtock
awardl paid to lho rnsnagcr only aller
rorrr long*un groal har boen schioved.
Cash and stock borru.r.t ara barrd on one
prri'cd rosultr ard thoroforo provi<Je a rhorl-
tcrm irccntivr, ln csdrast,.ctek cptbn!. stock
689
appreciation righls, and pcrlormancc sharlg
sro valuabb only if thc cqnpany imprwee h
tho bng+rn. Since adbns thal resull h shorl-
tcrm ?nprovements catl have a negativc lmgr
term irrpact hng-lerm incentiver probabty arc
nPrc oltrlivr.
Q2s9. Ttrc basb methods used h pticing irlrcqrpa'
nY Itansil96 ar.:
(a) trander prbhC basod cr ccl
(b) rnatkel-basdtranslorPricing
(c) cosiflus transfer
Ptiing
(d) negrctiated kansler pticing
(e) arbilrarY transfer
Prbhg
425-1o. A markot-baced l ranster pri co provi des an
incentive for divisional managemenl lo mini'
mize cosir h
qder
to rnaximize dMsimal prof'
ilr. In csrtrast, e ccl?luc transler pricc pro-
vkJcs no incontive tor divisioosl managcmonl
to bo coot etlbiont. ln last il lhe ptdit rnartup
i r a percentago of cosl , there i s
gubsl anl i al
incentive to bc inelficienl h order to increase
total divisicnd
PrclfiL
a2s-1 1. (a) Negol'aled lransf er pticing:
('t) Advanlage: The profit'center man'
agot s haYe conl r ol over l ho l r ansl er
prices and can be held responsible lor
heir resufting irnpact on profils.
(2) Disadvantage: lndividual manageru,
in heir endeavor to msximize profits cil
their om divbbns, may rnekc decisiru
delrimental lo thc overall
prolil of the
lirm.
(b) ArbitrarY lransfer
Pricing:
(l) Acfvantage: ll'rs
Po.ssible
for execu'
tivo management to eet transfer pricea
thot will guide profilcenler managors lo
make decisisrs that will maximiza total
firm
Profits.
( 2) Di oadvanl age: The pr of i t ' cent er
manager! do not havc aulhorily in an
aree aflecting the prcfil pedonnancr lor
which they will be evalualed.
CGA-Canada
(adapled). Fteprint wilh permis-
rbn.
Q25-12. Under the dual lransfer pricing approach' lhe
produchg (selllng) division hcludes a profit h
carputhg itl revenue f rorn irdracornpany cales
whi l e t he consumi ng ( buyi ng) di vi gi on i r
assigned only variablo costs of lhe produchg
di vi si on,
pl us an equi tabl o
porl i on ol fi xed
costs. Thc produci ng di vi si on l hu+ uses-
g
t r Engl er
pr i ce t hal bel t et measur es
pr r f or '
rnanc., whitc tho ccnsuming divisbn has avaiF
abl c a pri ce more usel ul for deci sbn' maki ng
purposos. The producing divisbn's
prolil wor.lld
br ol i mi nat ed i n pr epar i ng company' wi de
tinsrcbl stalemont3.
690
EXERCISES
Sal es
Gapi tal empl oyed
Profit s200, 000
Sal es
$1, 600, 000
${ , 6OO, OOO
s2,ooo,ooo
=
.125
Percentage of
profit to sales
Chapter 25
=. 8
=
. 8
x
. 125
=
. 1O
E25-l
(11
Capi tal -emPl oYed
turnover rato
,^r
Percentage of
t zt =
profi t to sal es
t3l
Rate ol return on
E
Capital-employed
x
capftal empfoyed turnover rate
E25-2
(1) Total corporate assets
Total corporate assets
Di vi si on
Recreati onal Products....
Househol d Products ..,,,..
Comm
grci al
Too1s.,....,,.,.
TOt al rr. . . . . o. . . . or, . . . t r. . .
Division
Recreati onal Products....
Househol d Products
...,..
Gommerci al Too1s...,..,..,.
Ove rall Corporation .,......
( 1)
Sal es
s15, 75O, OOO
20, 16O, OOO
15, 435, OOO
51r 345, OOO
at begi nni ng of t he year . . . . o. . . . . , . , . ,
$ 6S' 000' 000
at the end of the year,..o..,..........o.
TOTOOO,O0O
$136, OO0, O00
-r-
2
Average total eorporate assets employed during the year
$
gg,ooo,ooo
Assets used by corporate headquarters 8nd not
al l ocatgd to operati ng di vi si ons..........r..........o......,...
Average assets used by operati ng di vi si ons duri ng
t he year . . o. . . . . . r . . . . . r . . . . . ' . . . ' . r r . . . . . . . . . . . . . r . . . . . . . . r . . . ' . . ' . . . . . o. . . .
(11 (21
Total Average Percentage
Assets Used By Used By
Al l Di vi si ons Di vi si on
563,000,000 25eh
63, 000, 000
40
63,000,000
35
j_oo%-
tzl
Gapi tal
Empl oyed
sl 5, 75O, OOO
25r 2OO, OOO
22,05O,OOO
6g,ooo,ooo
oooo00
E_99p9s999
i3)
Gapi tal
Empl oyed
(r) r (21
$15, 75O, OOO
25,2OO,OOO
22r05O,O0O
_$63fOOr0OO
(31
Gapi tal -Empl oyed
Turnover Rate
(l ) +- (21
l . OOO
. 800
. 700
. 755
69i
pter 25
E25-2
(Concl uded)
l2l
(21
(31
Dlvlslon
ffiUonal
Prodrrct8.,.,
Ho usehold Produetr .......
Commg rg!rl Tools........'..
Overal I Corporadroll ........
Dlvlelon
RecreaUonSl Prodtrctl.-.
H o usohold Produetr o...-.
Commerclal Toob ..oo...-.
Overall Co rporatlon .,...-.
or altomaUvoty
Dlvislon
Flecroadona I P ro.ductr-,
H o usohold P roductr Do..6r
Commorclal Tools..,-...-.
Ovc rall Corporatlon ..,,...,
( 11
Proflf
s4,725,000
4,032,OO0
3,8581750
9,86O,0OO
(11
Capltal-Employ.d
Tlrmovcr
Rsta
1.OOO
,800
.700
.755
( 1)
Pro,fft
9f,725,OOO
4,032,0O0
3,858,76O
9,860,O0O
Salcs
315,75O,0OO
20, t 60,000
15,4iNi,OO0
51r34lt,OOO
tr)
Percontago
of Profit
to Salor
,300
.200
2W
.192
(21
Capltal
Employcd
sl5,75O,(XX)
25,2OO,OOO
22,O5O,OO0
68,OOO,OOO
(3)
Percentago ot
Pmflt to Sales
( 11* ( 2)
.300
-200
250
,192
(31
Rsto of Rehrrn on
Capltaf Empfoyed
(1) r (2)
,300
. 180
. 175
. 1+5
(3)
Bato of Return on
Capltal Employed
(rl +
P)
,300
. 160
. 175
. 145-l
( 1)
692
825-3
(21 Present
Sal es (16,000
tons
l2O%
x 8O,OOO tons) x $9.)
Variable cost
(8OrO00
tons r $4.5O).......,..
Fi xgd cost . . . . . , . . . . . . , . r, , . , t D. . , , . . . , . r
Tot al . , , . . . , . . . . . . , r. r, . . . , . . . , . . . . . . . . .
rSales
price -
marketing costs
Proposed:
Sales (8O,OOO
tons x $6)
Variable costs:
Production...
53.00
Marketi ng.,..
.50
Chapter
25
t
The company must seek to mlnlmlze total
@st
Since there Is no other
market for the 64,000 lons, and since the variabfe cost of S4.5O per
ton
ls less than the outside price
of $5, the coke-producing profit
centerrs
supply should be used at least In the short run. In the long run, the S4.SO
varlable cost may change, and the flred cost must be covered whlfe real-
lzlng a reasonable roturn on capltal employed. However, the 35 outslde
price may also change when the contract ls ronegotiated. In determinlng
the transfer prlce for profit-center proflt
computatlons, the blast furnace
marulger has a sound basis lor a renegotfation of the transfer price
so
that lt ls competitive wlth the $5 external price
that ls available.
Revenue Costs
$ 96,000
$ 96, 000
$360,OOO
40,OO0
s4OO,00O=
5(304,009)
$3,50 x 80,000 tons
Fixed costs:
Present.,.,..r.,.......
S4Or0O0
Proposed......,....,.
60,OOO
Purchase of coke for bl ast
fumace (641000
tons x S5)..
Tot a| . . . . . . . . . . . . . r
. . . . . . . r
9480,000
s19999
-
$28O,OOo
1OO, O00
32O, O00
$7OO' O00 =
S(220' 0OO)
By making the additional investment,
the company woutd be better off by
S84'o0o (S304,ooo -
$22o,ooo), The cost of capital committed to this
i nvestment
shoul d be consi dered
by management i n maki ng a decl si on
on this proposal. (See
Chapter 23.)
693
( 1)
Ghapter
25
Ez'5'4
Outsi dg suppl i er CoSt (S1.25 x 1Or00O uni ts)....' ,,.' .....' ...o...............r.' .
Vari abl e cost to manufacture by Bl ade Di vi si on.......' .' ...' ...' ..r..........' .
Savi ngs to Dana i f the Lawn Products Di vi si on
punchases from the
Bl ade Di vi si on. . . . . . . r . . . . . r . . . . . . . r . . . r . . . . . . . . . . . . ' . . . . . . . " . . . r . r . . . . ' . . . D. . . . . t . . . . . . t . r
Ace Division should take on the new customer
because its gross protit
would be increased
by $6001000.
Aceb cost to manufacture would be the
same
por unit and in total whether they ars sold to Duece Division or to
ttro outside customer
(since the
quantity is the same)' Thereforer 3rY
increase In sates nevonue would immodiately
be translated into
increased
protit for Aco Division-
Sales novenug from nsw customer
($75 r 20,OOO UIlitS! ...... $l '$OOIOOO
SatgS noygnuO from DugCg Dlvision D' ..r..' ....' ..........t...........' .
9OOIOOO
InCreaSe In feVenUe and inCOme ffOm OUtSide S319S........' ...
-$
6OOtOOO
Initiat amount from new negotiated transfer
price
Gl 75
X 2OrO00 Uni tSl ...' .......oo.' o..."o...' ..."r....' o....".t.....' ..
Less manufacturing costs: Variabte cost...... 99OOTOOO
Fi xed cost ' ...' .....
3OO' OOO
l2l
200.ooo
GroSS
prgt i t f rom t ranSf er. . . . . . . . . . . . . , . . . . . ' . . ' . . ' . ' . . . r. o. ' . . , . o' . . . . . ' . . . r
S 30Ot OOO
LOSS aVOi dgd On Of i gi nal t f anSf ef pf i CO. . . ' . . ' . o. ' . . . . . ' . . . . , . . ' . . . . t . .
(3OOt OO0l
Additionat
gross profit from
proposed transfer
prico........'..
l-qOO'Ogg
Ini ti al Uni t tfanSfef
pri Ce .r..............,..' .....' .......' ...' ...' ......o...r.
S75
Less 112ot average addlUonal
gross protit
1112
r (600T000 + 2OTOOO uni t s)), . . . . . . . . . t . . . ' r. . . r. r"""""""
l 5
Actual transfer
pri ce
after spti tti ng the addi ti onal
gross
prof i t , . r. . . . . . . . . . . . . . . . ' , . ' . . r. .
' . . . ' . . . . ' . . . . . . . . "
-S69
E25-5
No, becauso maki ng bl ades woul d savo Dana Gompany $2,5OO,
determi ned as
follorvs:
$1, 5OO, OOO
sl 2, 5oo
1O, 0OO
S 2,500
694
P25-1
(rl
PROBLEMS
TOtal COSI...' ."r.' .' ..............o.....r' r..o
lncome bgforg Incomg t3r..........,.r,.r,
Capftal omployod: Variable .o..t.....r....
Fi xgd
............r.,' .r..
Total capital employgdro,.,........,,..r
Sal S. . . . r . . . . . r r . . . . . r . , . . . . . . r . . . t . r r r . r . . . r .
Variable
cost3
325,OOO uni ts x S.90.........o...
l OO' O0O unl t s r $i . 95. . . . . . . . . . .
Fi rgd cost . . . . . . . . . . . , , r. . . . . . . . . . . . . . . , o. . .
TOta I COSt .......... r.t.D.........,..o..
Incomg bgfore incomg tar.........
Gapi tal empl oyed: Vari abl e .......
Fi rg d. . . . . . . . . o. .
Total capital emptoyed.,....o...
Springy Leapy Total
s42O, OOO S292, 5OO 37t 2, 5OO
$252,O0O
Chapter 25
s202,5OO 3454,5O0
45, OOO 175, OOO
s247,5OO 3629,5O0
_L l!,opg
s 8g,o0g
$ 58,5OO
$.t oo,5oo
91, 5OO
239, 5OO
st 5o, ooo s34O, OOO
s 45, OOO
S
gg, ooo
$150, 0oo s34O, 0oo
300h 24.40h
Sales
Variable cost 2gOrOOO units x $,9O.,
l 5O,OOO uni ts r $1.35
Fixgd cost.....,
13O, OOO
$382,OOO
s_38,o09
$ 4z,ooo
148, OOO
_$leg,oog
$
gg,ooo
$19O, OOO
Rgturn on capltal emp|oyed.....,........ ZOoh
(21 (al l ncrease
spri ngy producuon
and i ncrease Leapy pri ce
by $.r5
per
unit:
Return on capi tal empl oyed,.....
Spri ngy Leapy
$487, 5OO $Zt O, OOO
s292, 50O
$135, OOO
4O, OOO
$175, OOO
s 35, OOO
s 42, OOO
81, 5OO
sr2g,sog
$ 35, OOO
$123, 5OO
29.30h
t 44, 5OO
$437,ooo
E50gg
$ 48, 750
158, OOO
_S2o6,?so
$ 5O, 5OO
$2O6,75O
24.40h
Total
$697, 50O
s427,5OO
184, 5OO
$612, O0O
$ 85,5OO
$ 9O,75O
239,5OO
_$33q2sg
$ 85,5OO
$33O,25O
25.9Vo
Ch-apter
25
, - 5- 1( Goncl uded)
Springy
$487,5OO
s292,5OO
_
144, 5OO
$437,O0O
$ 48,750
158,OOO
s206,750
-
$ 5O,5OO
s2o6,750
24.40h
Spri ngy
s487,5O0
$292, 50O
144Jtoo
s437,OOO
Leapy
sl 95, 0oo
$135, OOO
31, OOO
$166, 000
g2ep99
$
39,0OO
8l , 5OO
_9990o
$ eg,ooo
$12O, 5OO
24.10h
Leapy
s2oo,ooo
$135, 000
32,5OO
695
Total
s682,5OO
s427,5OO
175, 5OO
$603, OOO
$ 79,5oo
$
87, 750
239,5OO
$n,25o
$ 79,5OO
s327,25O
24.30h
Total
Soaz,soq
s427,50O
177, OOO
(bl Increase
Springy
production and continue
present Leapy price:
Return on. capi tal empl oyed ' .."'
(cl Increase Springy
producuon and increase Leapy
price by 3.o5
per
unit:
Sale
Variable cost:
325rO0O uni ts x 3' 9O."--.' ,.....
IOO' OOO uni ts x 91
.35...' ....,r.
Fi xgd COSt . . . . . . . . . o. . . ' . . ""t "t ' o"o""'
Total COSI.............ot....".""""
l ncome before i ncomg tax....' ....
Gapi tal empl oyed: Vari abl s o......
Fi xgd.."..' .....
Totat capi tal empl oyed....' ..,' .
Sa I
gS. . . . .
t . . . . . ' . . . . . . . . r . . ' . . . . . ' . . ' r
" "
t t
"
Vari abl e cost:
325rOOO uni ts x S.90..' ....,.' .,.
l O0' OOO uni t s x $1' 35. , . . . . . . ' r .
Fi xed cost.......
Tot al CoSt ' . . . . . t . . . t . . . . o. . . . r . . t " ot ot
tncorne before i ncome tar.' ...' ..-
Capi tat empl oyed: Vari abl e
Fi Xed ' .....' .' ..'
Total capi tal empl oyed....' .....
$167,500- s6o4,5OO
s 5o. 5oo s 32, 5OO $ 83, OOO
$ 48,750 s 4O,OOO s 88' 750
158, OOO
81, 5OO 239' 5OO
s2o6, 75o s121, 5OO 9328' 250
- - -
$ 83,ooo
9sza,z:so
25.30h
Note: Ercl udi ng nonatl ocabl e data understates costs and capi tal empl oyed, As
an al ternate sol uti on, the nonal l ocabl o fi xed cost
(S28' OOO) and capi tal
empt oyed ( S25, OOO) mi ght bo i ncl uded i n t he t ot al f i gur es, t hus hi ghl i ght -
i ng the nonaddi ti ve di ffi cul ty
that can ari se when ful l al l ocati on i s not
made to segments.
$
5O, 5OO s 32, 5OO
s2O6, 75O 9121, 5OO
Return on capital employed '..... 24.4oh 26.7oh
-r
\
696
1
P25-2
(1) Contri buti on margi n of sal es i ncrease
(2,4oo
r (3380
-
$7o
-
S37
-
S3o
-
S4s
-
$rB)1........,..........
Loss i n contri buti on margi n on ori gi nal vol ume, ari si ng from
decrease i n sal es
pri ce (15' OOO x S2O).o.......r..,.
Esti mated i ncrease i n contri buti on margi n and i n i ncome
before i ncomo tar i f sal es pri ce i s reduced 5%
(21 Contribution margin frorn sales to WindAir
(77
r4OO
x ($SO
-
9l O.5O
-
$g
-
$t O11 .,........,.....,....r,.......,....
Loss in contribution margin from loss of sales to outsiders:
Total unit capaci
75, 00o
Sa19stoVtl i ndAi r.....................,..........D,.......-...
i Zr4OO
Bal ance....,.
57, 600
64, OOO
_9,499
Ghapter
25
s432,OOO
3OO,OOO
sl32,oog
s374, 1OO
a a a a t a a a a t t a a a t a o a a t a a a a
(3)
Proj ected sal es to outsi ders...,.,.
(6,400
x ($f OO
-
$12
-
$8
-
$tO
-
$6)).,....,.,............,.......
Estimated decrease in compressor Division contribution
margi n and i n i ncome before i ncome tax i f wi ndAi rb needs
ar g Suppl i ed. . . . r t ' . . . . . t . . r . . r . . r ' . . . . . . . . . . . . . . o. r . . . r . . . . o. . . ' . r . r . . . . r . . . r . . . . . .
4O9, 6OO
s 35, 500
The Gompressor Division would find it desirable, from its own viewpoint,
to accept orders from Wi ndAi r above the 64rOoO-uni t outsi de customer
demand l evel , up to i ts 7s,ooo-uni t capaci ty, because there woul d be a
posi t i ve
cont ri but i on
margi n of $Zf . SO per uni t .
Gost savi ngs by usi ng uni ts from Compressor Di vi si on;
Outsi de purchase pri ce
r..............................r..,.,....,
S zo.oo
Gompressor Di vi si onb vari abl e cost to produce
Gl 1o.5o
+ $B +
$10).....r.o... . r r r r a r a a a t a
Savi ngs per
uni t . . . . . . . . . . . . . . . r ' . . o. r . . . r . . . . . ' . ' , . . . . r . . . r . . . . r . . . . . . , . r . . . . . . . . r . . .
Numbgr of compr essor : i . . . . . . . . . r , . . . . . . , . . . . r . . . . , . . . . . . . . . , . . . . r . . . , , , . . . . . , r . .
Tot al cost savi D$s' . . . . , . . r. . . . . . , rr! . . , D. . . . . . . . . . . . , . . . , . . . . . . . r. .
Less Compressor
Di vi si onb l ost sal es to outsi ders
{614OO
x $64 (see requi rement 2})}.....,,.......,,,,.....,,......t......
Increase i n i ncome before i ncome tax for Nati onat tndustri es
The deci si on
shoutd be based on what i s best for the total fi rm. l t woul d
be i n the best i nterests
of Nati onal Industri es for the Gompnessor
Di vi si on
to sel l the uni ts to the Wi ndAi r Di vi si on. The net advantage to
Nati onal
Industri es
i s
$312,5oo, as shown i n the above cafcutati ons.
Si nce each di vi si on i s eval uated based on i ts profi ts
and return on di vi -
si on i nvest ment ,
t he expect at i ons f or t he t wo di vi si ons shout d be adj ust -
ed because of t ho ef f ect of t hi s deci si on
on i ndi vi dual di vi si onat per f br -
mance.
28.50
s 41, 50
r 17, 4OO
$722, 1OO
4O9,60O
_$312,5O0
Cr.qpter 25
699
> -5-4
(1) Based on vari abl e manufacturi ng
cost to
produce the cushi oned seat and
the Offics Division's opportunity cost, tho transler
price is 911869 for a
1OO-uni t l ot or $18.69
per seat, computed
as fol l orvs:
Vafi abte COSt,....,.o....' ....' ....................'
Sl r329
Opportunity
cost"'or""""""o"""""""'
54O
Thansfgr
price........"""'o"""""'o""'o"'
91t899'
This transfer
price was derived as follows:
Variable Gost:
Gushi oned Materi al :
'
Paddi ng. . . . . r. . . . . . . . . . . . . , . . . . . . ". -' -. -. . D. r. ' r
32. 40
Vi nyl ' t . . . . . . o. . . . . . . r. "' . """"' o"""""""'
4' 0O
Tot al cushi onmat er i al . . . . . - - - r . . . . , . ' . ' . .
S6. 40
Cost i ncr eass
l l O%r . . - . - . . . r . - . . ' . , " . . . . .
xl ' 1O
Cost of cushi ongd seat.,.................,.......,.' ....' .' ..
I 7.04
Cushi on fabri cati on l abor cost
[ $7. 5O
r . 5 DLH] . . , . . . . . . . r. r. , r. , . . , . . . . . . . , . . . . . , , . , . . . . . . , .
3. 75
Variable factory overhead'
($5.0O per DLH x .5 DLH)............' ..........""""'
Total vari abl e cost
per cushi oned seat....' ..-r...-..
2.50
913. 2e
sl , 329
Total vari abl e cost
per
1O0-uni t l ot....
' Vari abl e
overhead for 3O0,OOO hours:
SU p pl i
eS . , . . . . . . . . . . . . . . . . . . . ' . r ' . r D . . . ' . . . . r ' . . r . . . , . o. . . . . . r . .
l ndi r gCt l abOr . . . . r . . ' . . . ' . . r . . ' . r o. . . . . . ' . . ' . ' . . . ' . r . . . . . . . . ' . . . . . . . . . o. ' . .
.
POWe f a a r a a a a . r a a a a i . a a a a . . r o a . a r r a . r a r o a r . . r a . . r a . . . . a . . t t t l . . t t . . . t . . . t t t . t t .
Employeo benefits:
2Aoh of di rect l abor and i ndi rect l abor (excl udi ng
zooh of supemi sors' sal ary whi ch i s a fi xed cost)
(S575rO0O
-
(2O% r $25Or000))
........' ....' ......' .' r.......
Total vari abl e overhead at 3OO' OO0 di rect l abor hours
42O,OOO
375,OOO
18O, OOO
525, OOO
slEoo,ooo
Variable overttead per DLH
($l 15ooroo0 + 3o0rooo DLF4...,,...o.,.o,...,.' ....' ..r...' .
35.oo
per DLH
\
1
700
P25-4
(Goncl uded)
Opportunlty cost
7.50
4.00
s33.30 $25.76
Chapter
25
. 8 hour
125 st ool s
Economy
Office
Stool
s41. 60
s15. 84
x 125
Labor hour constraint
Labor hours to make a 10O.unit lot of defuxe office
stool s (1.5o DLH r 1(x) unl ts).....' .' ..,........r..,.,..
1so hours
Less labor hours to make a loo-unlt ]ot of
cushi oned seats (,5 DLH x 100 unl ts)......,.,,....,
SO hours
Labor hours avallable for economy office stoor ,,, J66 ho,ro
Labor hours required to make one economy
of f i cg st ool . . r . r . . . r . . r . . . r . . . . . . . . . . . . . . r ' . r . . . . . . . . . . r . . . . . . r . . .
Use of extra labor devoted to economy office stool
producti on
(100 hours +
,8 hour)....,.D...o.r.,.,,..o.
Sel l i ng pri ce per
uni t......,......., ,...,.,....,...
Less manufacturing costs:
ss8.50
Mat gr i al s ' . . . r . . . . "' . . . . ' . . . . r t r . . . . . . . . . ' o. . . . . . . . . . . , . . , . o. . , . .
$14. s5 S15. 76
Labon ( S7. 50x
1' 5 DLH) , . ' . . . . . o. . . . . . . . . . . . . . . , , . . . . . .
11. 2s
($z.so
x .8 DLH)
.....,.,..o...,..,,.
6.oe
Variable factory overhead:
Del uxe
Office
Stool
s2s.20
x1OO
$2, 520
-Sl , ggo
(21
Opportunlty
cost of shifting production
to the
economy offi ce stool ($Z,S2O -
$t,gg0),...,......
t g4O
variable manufacturing
cost plus
opportunity cost woutd be the best
transfer price
system to use because lt woufd allow the supptying divi-
sion to be indifferent
between selling the product
internatly io another
division
or selting the product
in thelxternal
market This transfer price
method
assures-that the supplying division's contribution to profit woutd
be the same under either alternative. The sum of fhe variable manufac-
turing
cost and the opportunlty cost repnesents
the effort put forth by
supplying
division to the overalt weil-being
of the company.
appropriate
transfer price
must attempt to futfitf the company
obj ecti ves
of autonomy, Incenti ve, and goal
congruence. whi l e no one
transfer pri ce
can necessari ty sati sfy each of these obj ecti ves ful l y i n atl
si tuati ons,
the vari abl e manufacturi ng
cost ptus
opportuni ty cost transfer
price
should be the most appropriate
method for meeting these obfec-
tives in most situations,
ChaPter
25
j-5
701
ln order
to marimizd shod-run
contribution
margin'
the cole Division
silouro sccopt
the contract
from wares company.
This conclusion is sup'
ported by the following calculations:
Col o Di vi si on transfer
to Di amond
Di vi si on
ffi ' ooouni tsr$1,5oooach}..' .' ....' ...' ........
$4' 5OO,OOO
(rl
Variable cost:
Purchaso
from BaYrside Division
- -fgrooo
units x $iloO
oach) ......"""""'
$l t8ootOoo
Variabte
processing cost In Cole Division
--(Crooo' unl ts
x$sbo each).....""""""
l ' 5o0' oo9
Gol e Di vi si on sal es to Wal es
9ompany
each) o. . . . . . . . . . . . . . . ' . . . . . - . . t $4' 375' ooo
Variable cost:
Purchase
from BaYside Division
(3,5OO uni ts x $5OO
each)..,..,...."""'
Vari abte
processi ng cost i n Gol e Di vi si on
" (3r5oO units r $400
gachl
....""""""
Contribution margiJl .."""""' o""""""""r
$1,225,ooo
$1,20o,ooo
1.225,OOO
$
25,OOO
Gontri buti on
margi fl .' ...............
3,3OOr0OO
sl ,20o,ooo
sl , 75O, OOO
l , 4oo, o0o
3r15O' OOO
Concl usi on:
contribution margin from transfer to Diamond Division
Contri buti on margi n from sal es to Wal es Company
""""
Di fference i n favor of Wal es Company
contract"""""""
*{
- \
t !
i
702
Chapter 25
P25-S (Goncl uded)
l2l
Cole Divisionb decision to accopt the contract from Wales Company is in
the best Interest of Robert Products Inc. because the decision increases
the overall corporationb contribution margin. This conclusion is support-
od by the following cafculations:
RevenuEs and cost savings to Robert Products Inc.:
Sales by Cole Division to Wales Gompany
(3r50O unl ts r $1r25O 9ach1................o.
34r375rOOO
Sales by Bayslde Division to london
Company (3r0OO uni ts r $COO oach)..... t' ,2oO,OoO
Cost savings (variable
costs avoided by not
accepting the Diamond Division order):
Bayside Division's savings
(3r00O
uni ts r $30O each) .D.,..,.r... 9OOTOOO
Col e Di vi si onb savi ngs
(3rO0O
uni t s r $50O each) . . . ro. , . . o, . i
TSOO, OOO $7rg75, OOO
Erpenditures incurred by Roberts
products
Inc.:
Variable cost incured for the Wafes
Company orden
Col a Di vi sl on (3r5OO uni ts r $400 each)
$i ,4oo,oo0
Bayside Division (3,500
units r $25O
OaCh) . . . t . . . . r r . or . . . . . . r . . . . . . . . o. r . . . . . . r . . . D. . . . . ;
875r OOO
Variable cost incurred for Diamond Division
purchase
from London Company
(3, OOO
uni t s r
$i r5OO each). . . . . , . , . . . . . , . . . . 4, SOO, OOO
Vari abl e cost i ncurred for London Company
order from the Bayside Division
(3' OOO
uni t s x $ZOO each). . . . . . . o. . . . o. ' rj ooo
600, 000 7, 375 ooo
PosiUve overall contribution margin for Robert
Produgt s 111G. . . . . . . . . ' . . . . r. . . . . ' . . . r. . . . r. rr, . . . . . . r. , . . rrr. . , . . . . r. . . . . . . . . . . .
$ 6oOrOOO
703
. ChaPter
25
CASES
c25,-1
(rl The return
on capital employed has definite
limitations for evaluating tho
performanco ol ths Dexter PlanL Too many fastors used to compute the
return are not within the control of
plant managemenl
A significant
pon
Uon of the
"return''gide
of the measuno ls determined by the action of
higher tevel managament-+ales
and allocated costs. The
plant manage-
ment appsars to have effestive control ovor only a
part of the costs
incurred at the
ptant levet, and the same Is true for tho asset baso.
Corporate and dirislon assets are altocated
to tho
plant' In additionr it
appears that specific assets rnay be charged to the ptant
qven
though
tho deci si on was made at a hi gher l evel '
l2l
The case states that recommendations
lor
promotions and salary
i ncreases for
pl ant manageni are i nfl uenced
by the cornpari son of the
budgeted return on capital emptoyed to tho actuai return. lt appears that
this
ptant manager is reacting in direct response
to this measunement
syrstem. T\ro evJnts have occurred outside his control
(the sales decline
and extra tand charges|, which will reduce his return on capital employed
measure. He has responded by i nfl uenci ng
those components of the
measure that he controts and that will improve
this measure. The
red uced costs-traini n
g, maintenance, ne
pair, and certain labsr-wo uld
not affect sales volume in the short run. lt is also likely that reduction of
i nventory tevets wi l l not i nftuence the sal es i n the short run. Through
these acti ons hs has i mproved hi s return for 2oA, but i t may wel l be at
the erpense of 2oB, or later
Yea|:i.
c25- 2
(11 Tho shortcomi ngs, or
possi bl e i nconsi stenci es,
of usi ng rate of return on
capi tal empl oyed as the sol e cri teri on to evatuate di vi si onal management
performance
i ncl ude the fol l owi ng:
i ")
Rate of return on capi tat empl oyed tends to emphasi ze short-run
performance
at the expense of l ong-run
profi tabi l i ty. In order to
improve short-run
profits, managers may make decisions
that are
not i n the best i nterest of tho company over the l ong run.
(bl
Rate
of return on capital emptoyed is not consistent
with cash llow
model s used l or capi tal oxpendi ture
anal ysi s and, therefore, ffi aY
not be comparabto for di vi si ons that uso di fferent accounti ng
meth-
ods or that havo assets
purchased i n di fferent
peri ods.
(c)
Rato of return on capi tal empl oyed may not be control l abl e
to ths
same ert ent by al l di vi si on managers, i , e. , t he di vi si ons may sel l i n
di fferent markets wi th di fferent degrees
ol
product devel opment'
compeUt i on, and consumer
demand.
t \
: V
a
* - \
:
704 Chapter 25
C25- 2
( Concl uded)
(d) The use of a si ngl e measuro of
performance,
such as rate of return
on capi tal empl oyed, may resul t i n a fi rati on on i mprovi ng the com-
ponents
of the ono measure to the negl ect of needed attenti on to
other desirable acUviUes-research and development, employee
devel opment, and i mprovement ol market posi ti on.
l 2l
The advantages of usi ng mul Upl e measures i i eval uati ng di vi si onal man-
sgement
performance i ncl ude the fol l owi ng:
(al Mul ti pl e performanco measunes
provi de
a mone comprehensi ve pi c-
ture of
performance
by consi deri ng a wi der range of management
responsi bi l i ti es.
(b) Mul ti pl e performance
moasunes emphasi ze nonquanti tati ve as wel l
as quanti tati ve
aspects of performance, thereby provi di ng
an i ncen-
ti ve for di vi si onal managers to engage i n desi rabl e acti vi ti es, such
as, research and devel opment, empl oyee devel opment, and
i mprovement of market
posi ti on,
as wel l as to seek profi tabi l i ty.
(c) Multiple performance
measunes will mitigate the
problem
of trying
to compare divisional perforrnance with a single measune that may
be computed on di fferent bases i n each di vi si on.
(d) Mul ti pl e performancs
measunes i ncl ude l ong-term as wel t as short-
term i ncenti ves, thereby emphasi zi ng total performance
rather than
just
short-term profit
maximization,
(3)
The
problems
or disadvantages of impfementing a system of multiple
performance
measures i ncl ude the fol l owi ng:
(al The measurement cri teri a are not al l equal l y quanti fi abl e and, there-
fore, i t may be di ffi cul t to compare the overal t performance of one
division with another.
(b) Central managernent may have di ffi cutty appl yi ng the cri teri a on a
consi stent basi s. Some cri teri a may be subj ecti vel y more heavi l y
wei ghted than other cri teri a at di fferent poi nts i n ti me, and some
cri teri a may be i n confl i ct wi th other cri teri a.
[c]
A mul ti pl e performance
measurement system may be confusi ng to
di vi si on managen;, thereby resul ti ng i n di ffusi on of effort and i nsta-
bi l i ty i n performance.
705
i cnapter
zs
,3
(r)
(al Avorage
oporating
assets omploved:
Bat ance
at 12131120F"""" """r"
Bal ance'
at 12131 l 2OE
(512' 600' 000
/ 1' 05)"
" """' r
Begi nni ng Pl us
endi ng bal ances
Average
batanco
($24'600'000
* 2l'
Rate ol return on
capital emPloYed
Ineome trom operations
before taxes
@i ssetsemPl oYed
$2,460,0OO
$12,goo,ooo
I2TOOO' OOO
$24r600,OOO
$t
2,3OO,OOO
$l ZrgOo, ooo
=
2ooh
(bl Income from operations bgfore taxgs o,..il.' D.."' r.rt' ..' .
Minimum return:
$12, 30O, ooo
x 15oh
s 2, 460, 000
1r 845, OOO
Average operating assets employod
Gharge for invested capital '..--...'...'..
(31
ReSi dUal i nCOme. . . r r r . . or . . . r r . . . . r r . . o. . . . . . . . . . r . o. . . . . . . . ' . r . ' . . . . .
$
615, ooo
#=:
Yes. Presserb management
probably wOuld have accepted
the invest'
ment lf residual income wenB used. The investment opportunity
would
have lowered
presser's
2OF rate of return on capital employed because
the expected return
(16%) was lower than the divisionls_ historical returns
(f 9.3% to 22.1o/") as wel l as i ts actual 2OF ral e
(2Ooh). Management
reiected the investment because bonuses ane based in part on the rate
of return performanso measure. lf residual incomo weno used as a
per-
formance measuno
(and as a basis for bonusesl' managemont
would
accept any and all investments that wsuld incroase rssidual income
(i.e.'
a dol i ar amount rather than a
pencentagel , i ncl udi ng
the i nvestment
opport uni t y i t had i n 2OF'
presser
must controt atl ltems related to
protit (revenues and expenses)
and investment if it is to be evatuated fairty as an investment center by
ei ther the rate of return on capi tat empl oyed or the resi dual i ncome
per'
formanco measunes. Presser must controt all elements of the business
except the cost of invested capital, which is controlled by Lavvton
Industri es.
706
c25- 4.
(r)
1
Chapter
25 i
: - \
; f
Di vi si onal
pl of i t . . . . . . -. . . r. . . . . . . . . . . . . orr. . . . . o. . . . . . . . . .
Add corporate headquarters allocatiolt ......
Resi dual i ncomo
($oOo omitted)
Mari ne Ai rl i ne Pl asti cs
$ 5, 1OO S1, O5O $ 9, 360
3,4sO
lfsq
s70
j_gg gr,r*
$ r,ro Adiusted divisional profit
Di vi si onal capl tal empl oyed. s2O,4OO s5,0OO S36,OOO
Deduct corporate headquarteni allocaUon 970 252 941
Adjusted divisional capltal employed .......,.
_9!9,430
g!,?49
J35,999
Adiusted dlvlslonal rate of return on capltal
empl oyed
_!:q"n_ _
47%
____Ze%
_$
8, 550 $2, 235 S 9, 930 Adj usted di vi si onal pro
Less 20oh of adiusted divisional capital
empl oyed (mi ni mum l evel of i ncome).. 950 3, 886
-gl' 664
7, O12
t2l
(31
sl , 285 S 2, 918
All three divisions have a reported rate of return on capital emptoyed in
oxcess of the 2Oo/o target rate. However, Marine Division management
apparently turned down its Investment opportunity because tho invest-
ment had a lower rate of return than the division (24oh for the investment
yersus
25oh for t:lls division|, which if accepted would havE lowered the
divisionb rate lor the
year,
thereby lowering the annual bonus. Similarly,
Airline Division management appears to have avoided fleet replacement
tor the samo neason (i .e., fl eet repl acement rEturn i s 16% versus 21oh l or
the di vi si on for the year).
Pl asti c Di vi si onb management has achi eved
the mari mum bonus al l owabl e under the current bonus system and
therefore had no incentive to increase profit (which may have been
viewed as something that could simply increase next
yearb
budget). The
levised liguras indicate that all three divisions are performlng welt; how-
ever' Marine Division's residual income is greater
than the other two divi-
si ons combi ned.
Ai rl i ne Di vi si on l s maki ng an adj usted
profi t
of $2,235,OOO and resi dual
i ncome ol $1' 285' OOO. The adj usted rate of return on capi tal empl oyed i s
47oh, whi ch suggests that the target rate shoul d be rovi sed i n order to
properly
evaluate it. Nevertheless, since the division is achieving mono
than doubl e the present
target rate of 2Ooh and more than ei ther of the
other two divisions, it appears to be a very good
investment. Howover,
fl eet repl acement shoul d be exami ned al ong wi th the computati on ol a
new adj usted rate of return on capi tal empl oyed and resi dual i ncomg,
Assumi ng
that the $25,OOO,OOO capi tat i nvestment does not i nctude any
corporate
headquarters al l ocati on and that the otd fi xed assets have a
book val ue equal t o market val ue, t ho recomput at i on f ol l ows:
n*^
707
Chapter
25
(41
l
- 4 ( Concl uded)
lnCfgm
gntal
diViSiOn
pf0fit o........' ........r......r..' ...r' ...."o""'
Add COfPOfato
he adqUafte fS all OCaUO Jl' ....' ,"""""""oo""
AdiU5tgd
InCfgmental
diViSiOn
pnOfit r.' ...r..............' ......."
Ad-d adiustod
divislonal
profit without fleet replacemsnt
Adjusted divisional
profit with fleet replacefllsllt'..i.....'..
Di Vi Si On CUfnont aSSOt3...r' ..-o.....r.' ..t............t...t.......tttt"t
DiViSiOn llXed aSSOtS
(tleet feplagemgnt
COSI}""""""""'
Adtusted divislonal capital employed
with fleet
nOpl aCOmJ1t . . r. . . . . . -. . . . . . . . D. . . . . r. ro. oo. . r. . . . . . . . . . . . . t t . . . . . . . . t . . . . .
Adiusted rato of noturn on capital employd"""""""'ro"
Adj USt ed di Vi si Onal
pf Ot i t ' . . . . . . . r". . r. o' . . . . . ' . , ' . ro. . . . D. ' . . . . . . . . . . dt
Less zl ohof i ncrgmgntal capi tal
gmpl oygd' .' .................
Adi USt gd I nCf gmgnt al f gsi dUal i nCOme. . ' . . ' . . . . . . ' . . . . . . . r. o. . o. .
$
4,ooo,ooo
135, OOO
$ 4r135, ooo
2,235|OOO
$
6,370,000
$ 2r748,ooo
25,OOO,OOO
E?ulgfoo
230h
$
6, 370, 000
5r549,600
s__82o49
(5)
Even when adjusted, the rate of return on capital omployed is above
the corporate target l evel and the i ncremental
resi dual i ncome i s
posi -
tive. Furthermore, assuming that
profits do not fall in the future' the
roturn on assots employed should rise in the future because the amount
of assets employed witi Oeclino due to depreciaUon. As a result' it
appoans that from a
quantitative perspective tho airline should not be
soid. Nevertheless, the investment
required to replace the fleet should
be eval uated usi ng ono of the capi tal expendi ture eval uati on techni ques
that consi ders the ti me val uo of money
(e.9., the net
present val ue
method or the di scounted cash fl ow rate of return method).
Frorn a qualitative perspective, factors such as spill-over businesst
offering a futl line to customers, ulUmato
profitability vvhen the economy
improvls, possiblo advantags to a competitor from tho sate of the divi-
sion, tc,, may override
quantitative analysis.
Tho bonus schemo shoul d bo basod on nesi dual i ncomo rather than rate
of return on capi tal empl oyed i n order to avoi d the
probl em of manageF;
making suboptimal decisions from the corporationb
overall
perspective.
The di vi si onal performance measures shoul d be computed wi thout al l o'
cations of corporate headquarters costs or assets, because such alloca-
ti ons are arbi trary and di vi si onal managers cannot control such costs or
the uss of such assets. Al so, capi tal i nvestments
(such as the ones faced
by the Mari ne Di vi si on and the Ai rti ne Di vi si on) shoul d be eval uated
by
usi ng the capi tal budgeti ng eval uati on methods
(such as the net
present
value method or tho internal rate of return method)'
CGA-Canada
(adapted). Repri nt wi th
pei -mi ssi on'
7
708
Chapter 25
i
c25-5,
.
(l) Generaf crfteria that should be used
in selecUng psrformance measunes
to eval uate operatl ng managors Incl udo tho fol l owi ng:
(al The measunes shoul d be control l abl e by the manager and refl ect the
scfions and docisions made by the managor in the current
period.
(bl The measunes should be mutually agreed upon, clearly understood,
and accepted by all the parties Involved.
(c) The measunos should
(ll reward long-term performance; (2) tie
incentive compensation to achieving strateglc (nonfinancial) goals,
such as target market share,
productivity
levels, improvement in
product quallty, product development, and personnel
developmeng
and (3) evaluate opsraUng
profits before gains
from financiaf trans-
actions; before deductions for approved erpenditures on research
and devel opment,
qual i ty
fmprovements, and
preventi ve
mai nte-
nance; and before deducti ons for the i fcremental amount of accel -
erated depreciation,
(21 A major expansion of Star Paperb plant was compfeted in April, 2oA.
Thl s erpansi on i ncl uded addi Uons to the producti on-l i ne
machi nery and
the repl acement of obsol ete and ful l y depreci ated equi pmenl As a
result, the value of the divisionb asset base increased considerably.
Whlfe productivity
undoubtedly increased during the first
year
in the
erpanded plant,
the increaso was not immediate nor sufficient to offset
the Increase In the value of the capital employed,
(3)
.Apparent
weaknesses in the performance evaluation pnocess at Royal
Industries include the following:
(al There was no mutual agreement on the use of return on capi tal
empl oyed as the onl y measurement of
perforrnance.
(bl The feedback from Fortner was insufficient Fortner indicated that
Harri s woul d recei ve feedback about the questi ons rai sed concern-
ing the appropriateness of using the return on capital employed to
evaluate performance,
but feedback was not
prtrvided.
(c)
There i s onl y one si ngl e measure of
performance
that may
gi ve
a
distorted picture
of actual performance
at Star Paper. A single rtoa-
suro coul d oncourage di vi si on management to make deci si ons that
could lmprove short-run return at the expense of long-nrn
profits.
Exampl es i ncl ude deferri ng mai ntenance, avoi di ng pl ant moderni za-
ti on, el i mi nati ng empl oyee trai ni ng, di sconti nui ng research and
devel opment,
etc.
(4)
Mul ti pl e performance
eval uati on cri teri a woutd be appropri ate for the
evaluation
of the Star Paper Division. The criteria suggested by Harris
take i nto account more of the resul ts of the key deci si on bei ng made by
the manager'
ang not i n confl i ct wi th each other, and emphasi ze the bat-
anco of profi ts
wi th the control of current assets. These thrse measunes
are control l abl e
by di vi si on managers and, i n conj uncti on wi th return on
capi tal
ompl oyed, provi do
a mono compl ete pi cture
of busi ness success.
\*
.Chapter 25
,-('
( 1)
709
The 2oB
bonus
pool avai l abl e for the management teams of each di vi si on
follow:
Meyera Service Company
Bonus Pool = l0oh r income belore income tar and bonuses
= . 1O I S417, OOO
=
S41r7OO
Wellington Products lnc.
Bonus Pool = loh r (Revenue
-
Cost of Product|
= .01 I ($10,0001000
-
$4,95010001
= .Ol I $5r05Or0OO
=
S50' 5OO
TVyo of the advantages and two of tho disadvantages to Renslen Inc. of
the bonus pool i ncenti ve pl an at Meyers Serui ce Companl fol l ow:
Advantaoes
(al
The management team wi l l bs moUvated by tho bonus
pl an
because
they have the opportunity to earn addiUonal compensation lf they
work hard as a team and take some risks for the company.
(bl Because management sharos i n the benefi ts of effi ci ent operati ons,
there is an incenUve to control all costs
(product costs as well as
overhead costs) and to promote sales.
Di sadvantaqes
(al The plan
may rnotivate management to increase tho
rbottom
line"
only and concentrate on the short run. The pfan may encourage
managers to sacri fi ce qual i ty or avoi d new
product devel opment for
the sake of curent
profits.
(b) Management may postpone necessary expendi tunos such as mai n-
tenance or nessarch and devel opment i n order to i ncrease currsnt
net Incomo.
TVvo of the advantages and two of the disadvantages to Renslon Inc. of
tho bonus pool
i ncenti vo ptan
at Wel l i ngrton Products Inc. fol l ovn
Advantages
(al
Tho management team wi l l be moti vated by the bonus
pl an
because
each manager has the opportuni ty to earn addi ti onal compensati on
by working hard and taking some risks for the company.
(bl
The managers wi fl be encouraged to sel l the most profi tabl e
mi x of
products.
Di sadvantages
(al
The pl an
omi ts accountabi l i ty for al l costs except l or
producti on
costs.
Therefore, manager:i may leel no obligation to control the
costs
that aro shown below tho gross profit line.
(bl
The ptan
may cause managers to focus al l energi es to maxi mi zi ng
currsnt
sal es and producti on regardl ess of the i mpact thi s coul d
have
on the manufacturi ng pl anL
There i s a strong moti vati on to
defer
mai ntenance, empl oyee trai ni ng,
qual i ty
i mprovement, etc.,
because
t he i ncent i ve i s t o produco and sel l hi gh vol ume.
(21
7l o
C25- G
( Goncl uded)
Chapt er 25 :
(3)
(a) Having two differont incontive
plans lor the two operating divisions
coutd resul t In behavi oral
probl ems and may reduce teamwork/syn-
'
ergy between the two di vi si ons i f the managers of ei ther di vi si on
believe they are belng trsated untairly.
'
Themanagement t eamat Meyer sSer vi comaybe| i evet hat t hey
havo to work harder to achi eve thei r bonusos because they are
responslble for all costs and must achieve overall efficient opera-
ti ons to earn substanti al bonuses.
The management team at Wellington Products may believe that
they have l ess of an opportunl ty to affect the si ze of the bonuses
they recei ve because onty changes i n sal es and/or
product costs
will increaso the gross
ProfiL
These
percepti ons of Inegui ty coul 4l ead to decreased moti vati on
that coul d' resul t i n decreased di vi si onal
performanco,
(b) In order to
justlfy
having dlfferent IncenUve
plans for the two divi-
si ons, Rensl en management coul d argue the fofl owi ng:
(f
l
The
goals and
products of the two buslnesses are different
(one is a servlce organization while the other is a manufacturing
organizationl and, therefore, should be measured on different crite'
ria. For example, the control of manufacturing costs and improved
productivity may be the most important factor in maintaining
Wellington Prcducts'competitiveness, while lt may be critical for
Meyers Service to control all costs to maintain
profitability.
(21 The
pl ans weno In
pl ace
when the busi nesses were acqui red
and had
proved satisfactory
previously.
\
Chapter
25
'>-7
(rl
7f l
ln termg ol what is best for the total company
in the long run, omar
prob'
aUty
gt,ould
not supply Defco with Electrical
Fitting X1726 for ths 55
Per
unii
pri"". In this ;s;, I appears that Omar and Defco 6erve different
miriets and do not represent closely
related operating units. Omar oper-
ates at capaci ty;
Defco does not. No menti on
i s made of any other i nter-
divisionat business,
In the long run, Gunnco Gorporation is
probably bet-
ter served lf omar is
permitted to continue
dealing with its regular cus'
tomers at the market
price. lf Delco is having difficulties, the solution
p-uiury doeg not lie with temporary help
"!
!f"
sxpenso of another divi'
iion, *ttos"
gales
to regular custorners
could be lost' The
purposed
courso of acuon shoul d not be tol towed unl ess i t wi l l
yi el d a
greater l ong-
run
pront for the total company
(Gunnco)
T"n
will any o-ther alternative.
Gunnco would be $5.5o
better oif, in the short run, if Omar supptied
'
Defco Electrical Fitting 11726 tor $5
and sold the brake unit for 949'5O'
Assuming that the $s
ier
unit for fixed factory overhead and administra-
Uve erpensos r"pr"r"nts an allocation of tho costs Delco incurs, regard-
l ess of the brake uni t order, Gunnco woul d l ose $2.50
i n cash fl ow for
oach fi tti ng sotd to Defco, but woul d
gai n
$B
from each brake uni t sol d
by Defco.
ln tha short nrn, there ls an advantago
to Gunnco of transferring
Efectrical Fitting 11726 at the SS
price and, thus, selling the brake unit
for $49.50. To ilafe this happen, Gunnco witt have to overrule the deci-
si on ol Omarb managomenl
Thi s acti on woul d be counter to the purpos-
es of decentral i zed deci si on maki ng. l f such acti on wens necessary on a
regul ar basi s, the decentral i zed deci si on
maki ng i nherent i n the di vi si on-
al i i ed organi zati on woul d be a sham. Then the organi zati onal
structure
i s
inappropriate for the situation.
On the other hand, i f thi s i s an occurnence
of rel ati ve i nfrequency'
tha
i nterventi on of corporate management
wi l l not i ndi cate i nadequate orga-
nizational structuro. lt may, however, create
problems with division
man'
agements, tn the case at hand, i f Gunnco management
requi res that
Electrical Fitting 11726 be transferred at $5r
the result will be to
enhance Defcob operati ng resutts at the sxpense of Omar. Thi s certai nl y
i s not i n keepi ng wi th the concept that a managerb
performance shoul d
be measured on tho resul ts achi eved by the deci si on
he or she control s.
Omar i s operati ng at capaci ty and woui d l ose S2.5O
(S7' 5O
-
35) for each
-
ti tti ng sol d to Defco. The management
performance of Omar i s measured
by rei urn on i nvestment and doi tar
profi ts. Sel l i ng to Defco at 35
per uni t
would adversely affect thoso
performanco measures'
f
l2l
( l
7
r t a t t a a a a a a
=
.,h
I
b
712
c25-8
( 1)
Chapter 25
Thc Lorar Elegtric Company wlll earn higher
profits lf the necessary int.
gratod circutts
$Cs)
aro sold to the Systoms Division rather than to regu-
lgr customors. Ttrel improved
proftt will be $l.OO
per
clock system as
rhown
belor*
Contrlbutlon
margln from clock
gystem:
Propoged
galea prlcc $7. 50
i
5.2s
Less varlablo
ProducUon
costs:
Intcgrated clrcutts 1C378 (5 O S-f
q
..-.-.-..-'
Outsldc oompono11t8
"...."........."'o"""""""
Clrcuh bOard otchlng.' ...D.....D...' .......oD."' .."'
Argemb$ tesUng,
iackgglnlf
"'.'.-..'F......--
ContrfbutJon margin
por'unlt on clock system
Contrlbution margin forgone In Devices Division:
Salgg
price of lC 378..........' ,..r.' ,....o..' .......' D.D..
Variabl
g
production costs..'.'r....D..'......-.'.'.,.....
CorrtrlbuUon margin
per clrcult...Dr.D.'..o..'...'.'..
Unlts tor clOck Eystem....r.'F"...'.'......".o.'D.......
Co ntrl b utl o n m a rg | !l I o9t..'. -....... r.. r....... o o.. r.'....
Net advantagc to Lorax Company lf clock system
le producgd
by Sytstems Dlvlsion..r""..D,...r'....r
$ ' 75
2.75
, 40
1, 35
s2.25
$ . ao
, 15
' r - .
$ ,25
r 5
1, 25
$l .OO/uni t
:
f2)
lnteruention by cxccutivo msnagsment
generally ls not advisable' oxcept
In unugual clrcumstances, becausc h takes ayt ay the delegated decision
powor gl ven to dl vi si on management and i nfl uences the measunes used
to
ludgc
the pcrfornancc of dlvlsion managemenl h conflicts with
I m portant
objectivce of decentralizaUo n-division auton o my ovor o p erat-
Ing declalons and doclslons made by those closest to the operating
rccnc. Such lnterfercncc cgn rcsult in lower moralc and
poorer perfor-
mancc by dlvlslon mansgement because they will be evaluated uslng
moaauncs that arc not substantlally within their control. However, a divi'
clon should ns,t bo allowed to make a decislon that ls not in the best
Interest ol thc total compsny oyor tre long nrn.
Thc descrlbed policy would avoid the need lor lntervention by erecutive
msnsgsmont or an arbiffiion committee, Howeyer, the
polisy is undesir'
abfe becauac other unfavorable consequsnces outweigh this benelit.
With thc described policy, there would be no analysis to determine the
most
profitable
use of an ltem raquired to be transferred at variable cosL
In sddl ti on, e di vi si on manager woul d have l ess control over the di vi si onb
operaUons, and t here woul d be an
"uncont rol l abl e'
i nf l uenco on t he
managerb porf ormanco moasure; t hi s coul d resul t I n l ower moral t or
msnagora.
a
;
f3)
i