Solutions to Questions 3-1 By defnition, manufacturing overhead consists of costs that cannot be practically traced to jobs. Therefore, if these costs are to be assigned to jobs, they must be allocated rather than traced. 3-2 Job-order costing is used in situations where many diferent products or services are produced each period. rocess costing is used in situations where a single, homogeneous product, such as cement, bric!s, or gasoline, is produced for long periods. 3-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. "hen a job is completed, the job cost sheet is used to compute the unit product cost. 3-4 # predetermined overhead rate is used to apply overhead cost to jobs. $t is computed before a period begins by dividing the period%s estimated total manufacturing overhead by the period%s estimated total amount of the allocation base. Thereafter, overhead cost is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base that is recorded for each job. 3-5 # sales order is issued after an agreement has been reached with a customer on &uantities, prices, and shipment dates for goods. The sales order forms the basis for the production order. The production order specifes what is to be produced and forms the basis for the job cost sheet. The job cost sheet, in turn, is used to summari'e the various production costs incurred to complete the job. These costs are entered on the job cost sheet from materials re&uisition forms, direct labor time tic!ets, and by applying overhead. 3- (ome production costs such as a factory manager%s salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. $n addition, some production costs such as indirect materials cannot be easily traced to jobs. $f these costs are to be assigned to products, they must be allocated to the products. 3-! $f actual manufacturing overhead cost is applied to jobs, the company must wait until the end of the accounting period to apply overhead and to cost jobs. $f the company computes actual overhead rates more fre&uently to get around this problem, the rates may )uctuate widely due to seasonal factors or variations in output. *or this reason, most companies use predetermined overhead rates to apply manufacturing overhead costs to jobs. 3-" The measure of activity used as the allocation base should drive the overhead cost+ that is, the allocation base should cause the overhead cost. $f the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted. 3-# #ssigning manufacturing overhead costs to jobs does not ensure a proft. The units produced may not be sold and if they , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 55 are sold, they may not be sold at prices su6cient to cover all costs. $t is a myth that assigning costs to products or jobs ensures that those costs will be recovered. 0osts are recovered only by selling to customers7not by allocating costs. 3-1$ The -anufacturing 8verhead account is credited when overhead cost is applied to "or! in rocess. .enerally, the amount of overhead applied will not be the same as the amount of actual cost incurred because the predetermined overhead rate is based on estimates. 3-11 9nderapplied overhead occurs when the actual overhead cost e:ceeds the amount of overhead cost applied to "or! in rocess inventory during the period. 8verapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to "or! in rocess inventory during the period. 9nderapplied or overapplied overhead is disposed of by either closing out the amount to 0ost of .oods (old or by allocating the amount among 0ost of .oods (old and ending inventories in proportion to the applied overhead in each account. The adjustment for underapplied overhead increases 0ost of .oods (old ;and inventories< whereas the adjustment for overapplied overhead decreases 0ost of .oods (old ;and inventories<. 3-12 -anufacturing overhead may be underapplied for several reasons. 0ontrol over overhead spending may be poor. 8r, some of the overhead may be f:ed and the actual amount of the allocation base may be less than estimated at the beginning of the period. $n this situation, the amount of overhead applied to inventory will be less than the actual overhead cost incurred. 3-13 9nderapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold was understated. Therefore, underapplied overhead is added to cost of goods sold. 8n the other hand, overapplied overhead is deducted from cost of goods sold. 3-14 # plantwide overhead rate is a single overhead rate used throughout a plant. $n a multiple overhead rate system, each production department may have its own predetermine overhead rate and its own allocation base. (ome companies use multiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. -ultiple overhead rates should be used, for e:ample, in situations where one department is machine intensive and another department is labor intensive. 3-15 "hen automated e&uipment replaces direct labor, overhead increases and direct labor decreases. This results in an increase in the predetermined overhead rate7particularly if it is based on direct labor. , The -c.raw-/ill 0ompanies, $nc., 1232 5= -anagerial #ccounting, 34th >dition %&er'ise 3-1 ;32 minutes< a. rocess costing g. Job-order costing b. Job-order costing h. rocess costing? c. rocess costing i. Job-order costing d. rocess costing j. rocess costing? e. rocess costing !. Job-order costing f. Job-order costing l. Job-order costing ? (ome of the listed companies might use either a process costing or a job-order costing system, depending on the nature of their operations and how homogeneous the fnal product is. *or e:ample, a chemical manufacturer would typically operate with a process costing system, but a job-order costing system might be used if products are manufactured in relatively small batches. The same thing might be true of the tire manufacturing plant in item j. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 5@ %&er'ise 3-2 ;3A minutes< 3. The direct materials and direct labor costs listed in the e:ercise would have been recorded on four diferent documentsB the materials re&uisition form for Job "CAD, the time tic!et for Jamie 9nser, the time tic!et for -elissa 0han, and the job cost sheet for Job "CAD. 1. The costs for Job "CAD would have been recorded as followsB -aterials re&uisition formB Quanti ty Unit Cost Total Cost Blan! s 12 E3A.22 E422 Fibs C=2 E3.1A D22 E@22 Time tic!et for Jamie 9nser Starte d Ended Time Complete d Rate Amoun t Job Number 33B22 #- 1BCA - 4.5A E@.D2 E4D.22 "CAD Time tic!et for -elissa 0han Starte d Ended Time Complete d Rate Amoun t Job Number =B3A #- 33B42 #- 4.1A E31.12 E4@.DA "CAD Job 0ost (heet for Job "CAD Girect materials....... E@22.22 Girect laborB Jamie 9nser........... 4D.22 -elissa 0han......... 4@.DA E@5A.DA , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. =2 -anagerial #ccounting, 34th >dition %&er'ise 3-3 ;32 minutes< The predetermined overhead rate is computed as followsB >stimated total manufacturing overhead. . E34C,222 H >stimated total direct labor hours ;GI/s<..................................................... 12,222 GI/s J redetermined overhead rate................ ED.52 per GI/ , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 =3 %&er'ise 3-4 ;3A minutes< a. Kaw -aterials................ =2,222 #ccounts ayable...... =2,222 b. "or! in rocess.............. D1,222 -anufacturing 8verhead....................... @,222 Kaw -aterials............ 53,222 c. "or! in rocess.............. 323,222 -anufacturing 8verhead....................... 33,222 "ages ayable.......... 331,222 d. -anufacturing 8verhead....................... 35A,222 Larious #ccounts....... 35A,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. =1 -anagerial #ccounting, 34th >dition %&er'ise 3-5 ;32 minutes< #ctual direct labor-hours....................... 32,=22 M redetermined overhead rate............ E14.C2 J -anufacturing overhead applied....... E1A1,512 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 =4 %&er'ise 3- ;12 minutes< 3 . 0ost of .oods -anufactured Girect materialsB Kaw materials inventory, beginning....... E31,22 2 #ddB urchases of raw materials............ 42,222 Total raw materials available.................. C1,222 GeductB Kaw materials inventory, ending.................................................. 3=,222 Kaw materials used in production.......... 1C,222 Iess indirect materials included in manufacturing overhead...................... A,222 E 3@,22 2 Girect labor................................................ A=,222 -anufacturing overhead applied to wor! in process inventory..................................... =5,22 2 Total manufacturing costs.......................... 3DC,22 2 #ddB Beginning wor! in process inventory.. AD,22 2 112,22 2 GeductB >nding wor! in process inventory.. DA,22 2 0ost of goods manufactured...................... E3AA,2 22 1 . 0ost of .oods (old *inished goods inventory, beginning.......... E 4A,22 2 #ddB 0ost of goods manufactured.............. 3AA,22 2 .oods available for sale............................. 3@2,22 2 GeductB *inished goods inventory, ending.. C1,22 2 9nadjusted cost of goods sold.................... 3C=,22 2 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. =C -anagerial #ccounting, 34th >dition #ddB 9nderapplied overhead...................... C,22 2 #djusted cost of goods sold........................ E3A1,2 22 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 =A %&er'ise 3-! ;12 minutes< arts 3 and 1. 0ash Kaw -aterials ;a< @C,222 ;a< @C,222 ;b< =@,222 ;c< 341,22 2 Bal. A,222 ;d< 3C4,22 2 "or! in rocess *inished .oods ;b< 5=,222 ;f< 4C1,22 2 ;f< 4C1,22 2 ;c< 331,222 Bal. 2 ;e< 3A1,222 ;f< 4C1,22 2 Bal . 2 -anufacturing 8verhead 0ost of .oods (old ;b< 33,222 ;e< 3A1,22 2 ;f< 4C1,22 2 ;c< 12,222 ;g< 11,222 ;d< 3C4,222 ;g< 11,222 Bal. 4DC,22 2 Bal . 2 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. =D -anagerial #ccounting, 34th >dition %&er'ise 3-" ;32 minutes< 3. #ctual direct labor-hours..................... 33,A22 M redetermined overhead rate.......... E3=.12 J -anufacturing overhead applied..... E12@,422 IessB -anufacturing overhead incurred............................................ 13A,222 E ;A,522 < -anufacturing overhead underapplied.................................... EA,522 1. Because manufacturing overhead is underapplied, the cost of goods sold would increase by EA,522 and the gross margin would decrease by EA,522. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 =5 %&er'ise 3-# ;32 minutes< Nes, overhead should be applied to value the "or! in rocess inventory at year-end. Because ED,222 of overhead was applied to Job L on the basis of E=,222 of direct labor cost, the company%s predetermined overhead rate must be 5AO of direct labor cost. Job " direct labor cost.............................................. EC,222 M redetermined overhead rate................................ M 2.5A J -anufacturing overhead applied to Job " at year- end......................................................................... E4,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. == -anagerial #ccounting, 34th >dition %&er'ise 3-1$ ;3A minutes< 3. redetermined overhead ratesB 0ompany PB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base EA4D,222 J J ED.52 per GI/ =2,222 GI/s 0ompany NB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E43A,222 J J EC.A2 per -/ 52,222 -/s 0ompany QB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base EC=2,222 3D2O of direct J J materials cost E422,222 direct materials cost 1. #ctual overhead costs incurred....................... EA42,22 2 8verhead cost applied to "or! in rocessB ED.52 per hour M 5=,222? actual hours........ A11,D2 2 9nderapplied overhead cost........................... E 5,C22 ?31,222 hours S 4D,222 hours S 42,222 hours J 5=,222 hours , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 =@ %&er'ise 3-11 ;3A minutes< 3. $tem ;a<B #ctual manufacturing overhead costs for the year. $tem ;b<B 8verhead cost applied to wor! in process for the year. $tem ;c<B 0ost of goods manufactured for the year. $tem ;d<B 0ost of goods sold for the year. 1. 0ost of .oods (old.................................... 52,22 2 -anufacturing 8verhead...................... 52,22 2 4. The underapplied overhead will be allocated to the other accounts on the basis of the amount of overhead applied during the year in the ending balance of each accountB "or! in rocess......... E 3@,A22 A O *inished .oods......... A=,A22 3A 0ost of .oods (old.... 431,222 =2 Total cost.................. E4@2,222 322 O 9sing these percentages, the journal entry would be as followsB "or! in rocess ;AO M E52,222<........... 4,A22 *inished .oods ;3AO M E52,222<.......... 32,A2 2 0ost of .oods (old ;=2O M E52,222<.... AD,22 2 -anufacturing 8verhead.................. 52,22 2 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. @2 -anagerial #ccounting, 34th >dition %&er'ise 3-12 ;42 minutes< 3. The predetermined overhead rate is computed as followsB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E3@1,222 J J E1.C2 per -/ =2,222 -/s 1. The amount of overhead cost applied to "or! in rocess for the year would beB 5A,222 machine-hours M E1.C2 per machine- hour J E3=2,222. This amount is shown in entry ;a< belowB -anufacturing 8verhead ;-aintenance< 13,222 ;a< 3=2,22 2 ;$ndirect materials< =,222 ;$ndirect labor< D2,222 ;9tilities< 41,222 ;$nsurance< 5,222 ;Gepreciation< AD,222 Balance C,222 "or! in rocess ;Girect materials< 532,22 2 ;Girect labor< @2,222 ;8verhead< ;a< 3=2,22 2 4. 8verhead is underapplied by EC,222 for the year, as shown in the -anufacturing 8verhead account above. The entry to close out this balance to 0ost of .oods (old would beB 0ost of .oods (old................................ C,222 -anufacturing 8verhead.................. C,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 @3 %&er'ise 3-12 ;continued< C. "hen overhead is applied using a predetermined rate based on machine-hours, it is assumed that overhead cost is proportional to machine-hours. "hen the actual machine-hours turn out to be 5A,222, the costing system assumes that the overhead will be 5A,222 machine-hours M E1.C2 per machine-hour, or E3=2,222. This is a drop of E31,222 from the initial estimated manufacturing overhead cost of E3@1,222. /owever, the actual manufacturing overhead did not drop by this much. The actual manufacturing overhead was E3=C,2227a drop of E=,222 from the estimate. The manufacturing overhead did not decline by the full E31,222 because of the e:istence of f:ed costs andTor because overhead spending was not under control. These issues will be covered in more detail in later chapters. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. @1 -anagerial #ccounting, 34th >dition %&er'ise 3-13 ;32 minutes< Girect material.................... E32,222 Girect labor......................... 31,222 -anufacturing overheadB E31,222 M 31AO............... 3A,222 Total manufacturing cost..... E45,222 9nit product costB E45,222 H 3,222 units...... E45 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 @4 %&er'ise 3-14 ;42 minutes< 3. a. Kaw -aterials $nventory.................... 132,22 2 #ccounts ayable............................ 132,222 b. "or! in rocess.................................. 35=,22 2 -anufacturing 8verhead................... 31,222 Kaw -aterials $nventory.................. 3@2,222 c. "or! in rocess.................................. @2,222 -anufacturing 8verhead................... 332,22 2 (alaries and "ages ayable............ 122,222 d. -anufacturing 8verhead................... C2,222 #ccumulated Gepreciation.............. C2,222 e. -anufacturing 8verhead................... 52,222 #ccounts ayable............................ 52,222 f. "or! in rocess.................................. 1C2,22 2 -anufacturing 8verhead................. 1C2,222 42,222 -/ M E= per -/ J E1C2,222. g. *inished .oods................................... A12,22 2 "or! in rocess............................... A12,222 h. 0ost of .oods (old............................. C=2,22 2 *inished .oods................................ C=2,222 #ccounts Keceivable.......................... D22,22 2 (ales............................................... D22,222 EC=2,222 M 3.1A J ED22,222. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. @C -anagerial #ccounting, 34th >dition %&er'ise 3-14 ;continued< 1. -anufacturing 8verhead "or! in rocess ;b< 31,222 ;f< 1C2,22 2 Bal . C1,222 ;g< A12,22 2 ;c< 332,222 ;b< 35=,222 ;d< C2,222 ;c< @2,222 ;e< 52,222 ;f< 1C2,222 =,222 Bal . 42,222 ;8verapplied overhead< , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 @A %&er'ise 3-15 ;42 minutes< 3. Because E312,222 of studio overhead was applied to "or! in rocess on the basis of E5A,222 of direct staf costs, the predetermined overhead rate was 3D2OB (tudio overhead applied E312,222 J J 3D2O rate Girect staf costs incurred E5A,222 1. The Ie:ington .ardens roject is the only job remaining in "or! in rocess at the end of the month+ therefore, the entire E4A,222 balance in the "or! in rocess account at that point must apply to it. Kecogni'ing that the predetermined overhead rate is 3D2O of direct staf costs, the following computation can be madeB Total cost in the Ie:ington .ardens roject.................................................... E4A,222 Iess B Girect staf costs............................. E D,A22 (tudio overhead cost ;ED,A22 M 3D2O<........................................... 32,C22 3D,@22 0osts of subcontracted wor!..................... E3=,322 "ith this information, we can now complete the job cost sheet for the Ie:ington .ardens rojectB 0osts of subcontracted wor!. E3=,322 Girect staf costs................... D,A22 (tudio overhead.................... 32,C22 Total cost to January 43......... E4A,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. @D -anagerial #ccounting, 34th >dition %&er'ise 3-1 ;42 minutes< 3. a. Kaw -aterials................................... 41A,222 #ccounts ayable......................... 41A,222 b. "or! in rocess................................. 141,222 -anufacturing 8verhead.................. A=,222 Kaw -aterials.............................. 1@2,222 c. "or! in rocess................................. D2,222 -anufacturing 8verhead.................. 312,222 "ages and (alaries ayable......... 3=2,222 d. -anufacturing 8verhead.................. 5A,222 #ccumulated Gepreciation........... 5A,222 e. -anufacturing 8verhead.................. D1,222 #ccounts ayable......................... D1,222 f. "or! in rocess................................. 422,222 -anufacturing 8verhead.............. 422,222 >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base EC,=22,222 J J E12 per -/ 1C2,222 -/s 3A,222 -/ M E12 per -/ J E422,222 1 . -anufacturing 8verhead "or! in rocess ;b< A=,222 ;f< 422,222 ;b< 141,222 ;c< 312,222 ;c< D2,222 ;d< 5A,222 ;f< 422,222 ;e< D1,222 4. The cost of the completed job is EA@1,222 as shown in the "or! in rocess T-account above. The journal entry isB *inished .oods............................ A@1,222 "or! in rocess...................... A@1,222 C. The unit product cost on the job cost sheet would beB , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 @5 EA@1,222 H 3D,222 units J E45 per unit , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. @= -anagerial #ccounting, 34th >dition %&er'ise 3-1! ;3A minutes< 3. #ctual manufacturing overhead costs. EC54,22 2 -anufacturing overhead cost appliedB 3@,C22 -/ M E1A per -/................. C=A,22 2 8verapplied overhead cost................. E 31,222 1. 0hang 0ompany (chedule of 0ost of .oods -anufactured Girect materialsB Kaw materials inventory, beginning. E12,222 #dd purchases of raw materials........ C22,222 Kaw materials available for use........ C12,222 Geduct raw materials inventory, ending............................................ 42,222 Kaw materials used in production..... 4@2,222 Iess indirect materials...................... 3A,222 E45A,22 2 Girect labor......................................... D2,222 -anufacturing overhead cost applied to wor! in process............................ C=A,222 Total manufacturing costs................... @12,222 #ddB "or! in process, beginning......... C2,222 @D2,222 GeductB "or! in process, ending......... 52,222 0ost of goods manufactured............... E=@2,22 2 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 @@ %&er'ise 3-1" ;42 minutes< 3. #s suggested, the costing problem does indeed lie with manufacturing overhead cost. Because manufacturing overhead is mostly f:ed, the cost per unit increases as the level of production decreases. This apparent problem can be UsolvedV by using a predetermined overhead rate, which should be based on e:pected activity for the entire year. (ome students will use units of product in computing the predetermined overhead rate, as followsB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E@D2,222 J J EC.=2 per unit 122,222 units The predetermined overhead rate could also be set on the basis of either direct labor cost or direct materials cost. The computations areB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E@D2,222 422O of direct J J labor cost E412,222 direct labor cost >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E@D2,222 3D2O of direct J J materials cost ED22,222 direct materials cost , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 322 -anagerial #ccounting, 34th >dition %&er'ise 3-1" ;continued< 1. 9sing a predetermined overhead rate, the unit product costs would beB Quarter First Second Third Fourth Girect materials............ E1C2,22 2 E312,22 2 E D2,222 E3=2,22 2 Girect labor................... 31=,222 DC,222 41,222 @D,222 -anufacturing overheadB #pplied at EC.=2 per unit, 422O of direct labor cost, or 3D2O of direct materials cost... 4=C,222 3@1,222 @D,222 1==,222 Total cost....................... E5A1,22 2 E45D,22 2 E3==,22 2 EADC,22 2 Fumber of units produced.................... =2,222 C2,222 12,222 D2,222 9nit product cost........... E@.C2 E@.C2 E@.C2 E@.C2 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 323 %&er'ise 3-1# ;42 minutes< 3. Harris Chan James Gesigner-hours...................... 312 322 @2 redetermined overhead rate..................................... M E@2 M E@2 M E@2 -anufacturing overhead applied............................... E32,=22 E@,222 E=,322 1. Harris Chan Girect materials.................... EC,A22 E 4,522 Girect labor........................... @,D22 =,222 8verhead applied.................. 32,=22 @,222 Total cost............................... E1C,@22 E12,522 0ompleted rojects......................... CA,D22? "or! in rocess.......................... CA,D22? ? E1C,@22 S E12,522 J ECA,D22 4. The balance in the "or! in rocess account consists entirely of the costs associated with the James projectB Girect materials................................ E 3,C22 Girect labor....................................... 5,122 8verhead applied.............................. =,32 2 Total cost in wor! in process.............. E3D,52 2 C. The balance in the 8verhead account can be determined as followsB 8verhead #ctual overhead costs 42,222 15,@22 #pplied overhead costs 9nderapplied overhead 1,322 #s indicated above, the debit balance in the 8verhead account is called underapplied overhead. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 321 -anagerial #ccounting, 34th >dition %&er'ise 3-2$ ;3A minutes< 3. 0utting GepartmentB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E4D2,222 J J E5.A2 per -/ C=,222 -/s *inishing GepartmentB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base EC=D,222 3=2O of direct J J labor cost E152,222 direct labor cost 1. Oerhead Applied 0utting GepartmentB =2 -/s M E5.A2 per -/............................................................ ED22 *inishing GepartmentB E3A2 M 3=2O.......... 152 Total overhead cost applied........................ E=52 4. Nes+ if some jobs re&uire a large amount of machine time and little labor cost, they would be charged substantially less overhead cost if a plantwide rate based on direct labor cost were used. $t appears, for e:ample, that this would be true of Job 124 which re&uired considerable machine time to complete, but re&uired only a small amount of labor cost. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 324 (roblem 3-21 ;D2 minutes< 3. and 1. 0ash #ccounts Keceivable Bal . D4,222 ;m< 5=A,222 Bal . 321,222 ;l< =A2,22 2 ;l< =A2,222 ;!< @1A,222 Bal . 31=,222 Bal . 355,222 Kaw -aterials repaid $nsurance Bal . 42,222 ;b< 122,222 Bal . @,222 ;g< 5,222 ;a< 3=A,22 2 Bal . 1,222 Bal . 3A,222 Lideos in rocess *inished .oods Bal . CA,222 ;j< AA2,222 Bal . =3,222 ;!< D22,22 2 ;b< 352,22 2 ;j< AA2,222 ;f< =1,222 Bal . 43,222 ;i< 1@2,22 2 Bal . 45,222 (tudio and >&uipment #ccumulated Gepreciation Bal . 542,22 2 Bal . 132,222 ;d< =C,222 Bal . 1@C,222 (tudio 8verhead Gepreciation >:pense ;b< 42,222 ? ;i< 1@2,222 ;d< 13,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 32C -anagerial #ccounting, 34th >dition ;c< 51,222 ;d< D4,222 ;f< 332,22 2 ;g< A,D22 $nsurance >:pense ;n< @,C22 Bal. @,C22 ;g< 3,C22 ? E1=2,222 H 5,222 hours J EC2 per hour+ 5,1A2 hours M EC2 per hour J E1@2,222 #dvertising >:pense -iscellaneous >:pense ;e< 342,22 2 ;h< =,D22 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 32A (roblem 3-21 ;continued< #dministrative (alaries >:pense (ales ;f< @A,222 ;!< @1A,22 2 0ost of .oods (old #ccounts ayable ;!< D22,22 2 ;n< @,C22 ;m< A22,222 Bal . 3D2,222 ;a< 3=A,222 Bal . A@2,D2 2 ;c< 51,222 ;e< 342,222 ;h< =,D22 Bal . AA,D22 (alaries W "ages ayable ;m< 1=A,22 2 ;f< 1=5,222 Bal. 1,222 0apital (toc! Ketained >arnings Bal. C12,222 Bal . 152,222 4. 8verhead is overapplied for the year by E@,C22. >ntry ;n< above records the closing of this overapplied overhead balance to 0ost of .oods (old. C. (upreme Lideos, $nc. $ncome (tatement *or the Near >nded Gecember 43 (ales of videos...................................... E@1A,222 0ost of goods sold ;ED22,222 X E@,C22< A@2,D22 .ross margin......................................... 44C,C22 (elling and administrative e:pensesB , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 32D -anagerial #ccounting, 34th >dition Gepreciation e:pense......................... E 13,222 #dvertising e:pense........................... 342,222 #dministrative salaries....................... @A,222 $nsurance e:pense.............................. 3,C22 -iscellaneous e:pense....................... =,D22 1AD,222 Fet operating income............................ E5=,C22 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 325 (roblem 3-22 ;D2 minutes< 3. a. Kaw -aterials................................... 15A,222 0ash............................................. 15A,222 b. "or! in rocess................................. 112,222 -anufacturing 8verhead.................. D2,222 Kaw -aterials.............................. 1=2,222 c. "or! in rocess................................. 3=2,222 -anufacturing 8verhead.................. 51,222 (ales 0ommissions >:pense............. D4,222 (alaries >:pense............................... @2,222 0ash............................................. C2A,222 d. -anufacturing 8verhead.................. 34,222 Kent >:pense.................................... A,222 0ash............................................. 3=,222 e. -anufacturing 8verhead.................. A5,222 0ash............................................. A5,222 f. #dvertising >:pense......................... 3C2,222 0ash............................................. 3C2,222 g. -anufacturing 8verhead.................. ==,222 Gepreciation >:pense....................... 31,222 #ccumulated Gepreciation........... 322,222 h. "or! in rocess................................. 1@5,222 -anufacturing 8verhead.............. 1@5,222 >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base Kmb442,222 3DAO of J J direct labor cost Kmb122,222 direct labor cost Kmb3=2,222 actual direct labor cost M 3DAO J Kmb1@5,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 32= -anagerial #ccounting, 34th >dition (roblem 3-22 ;continued< i. *inished .oods.................................. D5A,222 "or! in rocess............................ D5A,222 j. 0ash.................................................. 3,1A2,222 (ales............................................ 3,1A2,222 0ost of .oods (old............................ 522,222 *inished .oods............................. 522,222 1. Kaw -aterials "or! in rocess Bal . 1A,222 ;b< 1=2,22 2 Bal . 32,222 ;i< D5A,22 2 ;a< 15A,222 ;b< 112,222 Bal . 12,222 ;c< 3=2,222 ;h< 1@5,222 Bal . 41,222 *inished .oods -anufacturing 8verhead Bal . C2,222 ;j< 522,22 2 ;b< D2,222 ;h< 1@5,22 2 ;i< D5A,222 ;c< 51,222 Bal . 3A,222 ;d< 34,222 ;e< A5,222 ;g< ==,222 Bal . 5,222 0ost of .oods (old ;j< 522,222 4. -anufacturing overhead is overapplied by Kmb5,222 for the year. The entry to close this balance to 0ost of .oods (old would beB , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 32@ -anufacturing 8verhead.............................. 5,222 0ost of .oods (old.................................. 5,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 332 -anagerial #ccounting, 34th >dition (roblem 3-22 ;continued< C. .old Fest 0ompany $ncome (tatement (ales................................................. Kmb3,1A2,22 2 0ost of goods sold ;Kmb522,222 - Kmb5,222<............. D@4,222 .ross margin..................................... AA5,222 (elling and administrative e:pensesB (ales commissions.......................... KmbD4,222 #dministrative salaries................... @2,222 Kent e:pense.................................. A,222 #dvertising e:pense....................... 3C2,222 Gepreciation e:pense..................... 31,222 432,222 Fet operating income........................ Kmb 1C5,22 2 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 333 (roblem 3-23 ;D2 minutes< 3. a. Kaw -aterials.................................. 352,222 #ccounts ayable....................... 352,222 b. "or! in rocess............................... 3CC,222 -anufacturing 8verhead................. 4D,222 Kaw -aterials............................. 3=2,222 c. "or! in rocess............................... 122,222 -anufacturing 8verhead................. =1,222 (alaries >:pense............................. @2,222 (alaries and "ages ayable....... 451,222 d. -anufacturing 8verhead................. DA,222 #ccounts ayable....................... DA,222 e. #dvertising >:pense........................ 322,222 #ccounts ayable....................... 322,222 f. -anufacturing 8verhead................. 3=,222 $nsurance >:pense.......................... 1,222 repaid $nsurance....................... 12,222 g. -anufacturing 8verhead................. 3A4,222 Gepreciation >:pense..................... 15,222 #ccumulated Gepreciation......... 3=2,222 h. "or! in rocess............................... 4A2,222 -anufacturing 8verhead............ 4A2,222 E122,222 actual direct labor cost M 35AO J E4A2,222 overhead applied i. *inished .oods................................ 522,222 "or! in rocess.......................... 522,222 j. #ccounts Keceivable....................... 3,222,222 (ales.......................................... 3,222,222 0ost of .oods (old.......................... 512,222 *inished .oods........................... 512,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 331 -anagerial #ccounting, 34th >dition (roblem 3-23 ;continued< 1. Kaw -aterials *inished .oods Bal . 41,222 ;b< 3=2,22 2 Bal . C=,222 ;j< 512,22 2 ;a< 352,222 ;i< 522,222 Bal . 11,222 Bal . 1=,222 "or! in rocess -anufacturing 8verhead Bal . 12,222 ;i< 522,22 2 ;b< 4D,222 ;h< 4A2,22 2 ;b< 3CC,222 ;c< =1,222 ;c< 122,222 ;d< DA,222 ;h< 4A2,222 ;f< 3=,222 Bal . 3C,222 ;g< 3A4,222 Bal . C,222 0ost of .oods (old ;j< 512,222 4. 8verhead is underapplied by EC,222 for the year. The entry to close this balance to 0ost of .oods (old would beB 0ost of .oods (old............................... C,222 -anufacturing 8verhead................. C,222 C. #lmeda roducts, $nc. $ncome (tatement *or the Near >nded -arch 43 (ales....................................................... E3,222,22 2 0ost of goods sold ;E512,222 S EC,222<. 51C,222 .ross margin........................................... 15D,222 (elling and administrative e:pensesB (alary e:pense..................................... E @2,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 334 #dvertising e:pense............................. 322,222 $nsurance e:pense................................ 1,222 Gepreciation e:pense........................... 15,222 13@,222 Fet operating income.............................. E A5,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 33C -anagerial #ccounting, 34th >dition (roblem 3-24 ;D2 minutes< 3. and 1. 0ash #ccounts Keceivable Bal . 5,222 ;m< 14C,222 Bal . 3=,222 ;l< 1CA,22 2 ;l< 1CA,222 ;!< 1A2,222 Bal . 3=,222 Bal . 14,222 Kaw -aterials repaid $nsurance Bal . @,222 ;b< 4=,222 Bal . C,222 ;g< 4,222 ;a< C2,222 Bal . 3,222 Bal . 33,222 "or! in rocess *inished .oods Bal . 12,222 ;j< 3C2,22 2 Bal . 41,222 342,22 2 ;b< 41,422 ;j< 3C2,222 ;!< ;f< CA,222 Bal . C1,222 ;i< D2,222 Bal . 35,422 lant and >&uipment #ccumulated Gepreciation Bal . 132,222 Bal . A4,222 ;d< 4D,222 Bal . =@,222 -anufacturing 8verhead Gepreciation >:pense ;b< A,522 ? ;i< D2,222 ;d< @,222 ;c< 3@,322 ;d< 15,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 33A ;f< 32,222 ;g< 1,C22 $nsurance >:pense Bal . C,122 ;n< C,122 ;g< D22 ?5,A22 -/ M E= per -/ J ED2,222 #dvertising >:pense -iscellaneous >:pense ;e< C=,222 ;h< @,A22 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 33D -anagerial #ccounting, 34th >dition (roblem 3-24 ;continued< #dministrative (alaries >:pense (ales ;f< 42,222 ;!< 1A2,22 2 0ost of .oods (old #ccounts ayable ;!< 342,222 ;m< 3A2,222 Bal . 4=,222 ;n< C,122 ;a< C2,222 Bal . 34C,122 ;c< 3@,322 ;e< C=,222 ;h< @,A22 Bal . C,D22 (alaries W "ages ayable ;m< =C,222 ;f< =A,222 Bal. 3,222 0apital (toc! Ketained >arnings Bal. 3D2,22 2 Bal . C@,222 4. 8verhead is underapplied by EC,122. >ntry ;n< above records the closing of this underapplied overhead balance to 0ost of .oods (old. C. /udson 0ompany $ncome (tatement *or the Near >nded Gecember 43 (ales....................................................... E1A2,222 0ost of goods sold ;E342,222 S EC,122<. 34C,122 .ross margin........................................... 33A,=22 (elling and administrative e:pensesB Gepreciation e:pense........................... E@,222 #dvertising e:pense............................. C=,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 335 #dministrative salaries e:pense........... 42,222 $nsurance e:pense................................ D22 -iscellaneous e:pense......................... @,A22 @5,322 Fet operating income.............................. E 3=,522 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 33= -anagerial #ccounting, 34th >dition (roblem 3-25 ;CA minutes< 3. Kesearch W Gocuments predetermined overhead rateB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E=C2,222 J J E4A per hour 1C,222 hours Iitigation predetermined overhead rateB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E4D2,222 C2O of direct J J attorney cost E@22,222 direct attorney cost 1. Kesearch W Gocuments overhead appliedB 1D hours M E4A per hour............................ E @32 Iitigation overhead appliedB EA,522 M C2O. . 1,1=2 Total overhead cost....................................... E4,3@2 4. Total cost of 0ase C3=-4B !epartments Research " !ocument s #iti$atio n Total Iegal forms and supplies...................... E =2 E C2 E 312 Girect attorney cost...... 4A2 A,522 D,2A2 8verhead cost applied. . @32 1,1=2 4,3@2 Total cost....................... E3,4C2 E=,212 E@,4D2 C. Research " !ocuments #iti$atio n Gepartmental overhead cost incurred.......................................... E=52,222 E43A,222 Gepartmental overhead cost appliedB , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 33@ 1D,222 hours M E4A per hour......... @32,222 E5A2,222 M C2O............................. 422,222 9nderapplied ;or overapplied< overhead........................................ E ;C2,222< E3A,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 312 -anagerial #ccounting, 34th >dition (roblem 3-2 ;D2 minutes< 3. Kaw -aterials "or! in rocess Bal. 42,222 ;a< 3D,=22 Bal . C3,222 ? ;e< 4=,422 ;a< 34,122 ;b< 12,222 ;d< 1=,222 Bal . D4,@22 *inished .oods -anufacturing 8verhead Bal. A2,222 ;a< 4,D22 ;d< 1=,222 ;e< 4=,422 ;b< 5,222 ;c< 3@,C22 (alaries W "ages ayable #ccounts ayable ;b< 15,222 ;c< 3@,C22 ? Job 12= materials, labor, and overhead at -ay 43........................................................ K9K1=,522 Job 12@ materials, labor, and overhead at -ay 43........................................................ 31,422 Total "or! in rocess inventory at -ay 43..... K9KC3,222 1. a. "or! in rocess............................... 34,12 2 ? -anufacturing 8verhead................. 4,D22 Kaw -aterials............................. 3D,=22 ?K9KD,222 S K9K5,122 J K9K34,122. This entry is posted to the T-accounts as entry ;a< above. b. "or! in rocess............................... 12,222 ? -anufacturing 8verhead................. 5,222 (alaries and "ages ayable....... 15,222 ?K9KC,222 S K9K5,A22 S K9K=,A22 J K9K12,222. This entry is posted to the T-accounts as entry ;b< above. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 313 (roblem 3-2 ;continued< c. -anufacturing 8verhead................. 3@,C2 2 #ccounts ayable....................... 3@,C22 This entry is posted to the T-accounts as entry ;c< above. 4. The company uses a predetermined overhead rate of 3C2O of direct labor cost. This fgure can be determined by relating the -ay applied overhead cost on the job cost sheets to the -ay direct labor cost shown on these sheets. *or e:ample, in the case of Job 12=B -ay overhead cost K9K33,122 3C2O of direct J J labor cost -ay direct labor cost K9K=,222 The overhead cost applied to each job during June wasB Job 12=B K9KC,222 M 3C2O..... K9K A,D2 2 Job 12@B K9K5,A22 M 3C2O..... 32,A22 Job 132B K9K=,A22 M 3C2O..... 33,@22 Total applied overhead............ K9K1=,22 2 The entry to record the application of overhead cost to jobs would be Yrecorded as entry ;d< in the T-accounts aboveZB "or! in rocess........................... 1=,222 -anufacturing 8verhead........ 1=,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 311 -anagerial #ccounting, 34th >dition (roblem 3-2 ;continued< C. The total cost of job 12= wasB Girect materials..................................................... K9K @,A2 2 Girect labor ;K9K=,222 S K9KC,222<..................... 31,222 -anufacturing overhead applied ;K9K31,222 M 3C2O<.................................................................. 3D,=22 Total cost............................................................... K9K4=,42 2 The entry to record the transfer of the completed job is Yrecorded as entry ;e< in the T-accounts aboveZB *inished .oods............................ 4=,422 "or! in rocess...................... 4=,422 A. #s shown in the above T-accounts, the balance at June 42 was K9KD4,@22. The brea!down of this amount between Jobs 12@ and 132 isB Job %&' Job %(& Total Girect materials........... K9K33,322 K9K5,122 K9K3=,422 Girect labor................. 32,A22 =,A22 3@,222 -anufacturing overhead applied...... 3C,52 2 33,@2 2 1D,D22 Total cost..................... K9K4D,422 K9K15,D22 K9KD4,@22 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 314 (roblem 3-2! ;D2 minutes< 3. a. >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E=22,222 J J3D2O EA22,222 direct materials cost b. Before the underapplied or overapplied overhead can be computed, we must determine the amount of direct materials used in production for the year. Kaw materials inventory, beginning............. E12,222 #dd, urchases of raw materials................... A32,222 Kaw materials available................................ A42,222 GeductB Kaw materials inventory, ending..... =2,222 Kaw materials used in production................. ECA2,222 #ctual manufacturing overhead costsB $ndirect labor.............................................. E352,222 roperty ta:es............................................ C=,222 Gepreciation of e&uipment......................... 1D2,222 -aintenance.............................................. @A,222 $nsurance................................................... 5,222 Kent, building............................................. 3=2,222 Total actual costs.......................................... 5D2,222 #pplied manufacturing overhead costsB ECA2,222 M 3D2O...................................... 512,222 9nderapplied overhead................................ E C2,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 31C -anagerial #ccounting, 34th >dition (roblem 3-2! ;continued< 1. .itano roducts (chedule of 0ost of .oods -anufactured Girect materialsB Kaw materials inventory, beginning....... E 12,222 #dd purchases of raw materials............. A32,222 Total raw materials available.................. A42,222 Geduct raw materials inventory, ending. =2,222 Kaw materials used in production............. E CA2,22 2 Girect labor............................................... @2,222 -anufacturing overhead applied to wor! in process............................................... 512,222 Total manufacturing costs......................... 3,1D2,222 #ddB "or! in process, beginning............... 3A2,222 3,C32,222 GeductB "or! in process, ending............... 52,222 0ost of goods manufactured..................... E3,4C2,22 2 4. 0ost of goods soldB *inished goods inventory, beginning.......... E 1D2,222 #ddB 0ost of goods manufactured............... 3,4C2,222 .oods available for sale............................. 3,D22,222 GeductB *inished goods inventory, ending. . C22,222 0ost of goods sold...................................... E3,122,22 2 The underapplied overhead can either be closed out to 0ost of .oods (old or allocated between "or! in rocess, *inished .oods, and 0ost of .oods (old based on the overhead applied during the year in the ending balance in each of these accounts. C. Girect materials............................................ E=,A22 Girect labor................................................... 1,522 8verhead applied ;E=,A22 M 3D2O<.............. 34,D22 Total manufacturing cost............................... E1C,=22 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 31A E1C,=22 M 31AO J E43,222 price to the customer , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 31D -anagerial #ccounting, 34th >dition (roblem 3-2! ;continued< A. The amount of overhead cost in "or! in rocess wasB E1C,222 direct materials cost M 3D2O J E4=,C22 The amount of direct labor cost in "or! in rocess isB Total ending wor! in process......... E52,222 GeductB Girect materials............... E1C,222 -anufacturing overhead... 4=,C22 D1,C22 Girect labor cost............................ E 5,D22 The completed schedule of costs in "or! in rocess wasB Girect materials............................. E1C,222 Girect labor................................... 5,D22 -anufacturing overhead................ 4=,C22 "or! in process inventory............. E52,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 315 (roblem 3-2" ;CA minutes< 3. -olding Gepartment predetermined overhead rateB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base ED21,222 J J E=.D2 per machine-hour 52,222 -/s ainting Gepartment predetermined overhead rateB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E54A,222 35AO of direct J J labor cost EC12,222 direct labor cost 1. -olding Gepartment overhead appliedB 332 machine-hours M E=.D2 per machine-hour........................................... E @CD ainting Gepartment overhead appliedB ED=2 direct labor cost M 35AO................. 3,3@2 Total overhead cost....................................... E1,34D 4. Total cost of Job 12AB )oldin$ !ept* +aintin $ !ept* Total Girect materials..................... E C52 E 441 E =21 Girect labor............................ 1@2 D=2 @52 -anufacturing overhead applied................................ @CD 3,3@2 1,34D Total cost............................... E3,52D E1,121 E4,@2= 9nit product cost for Job 12AB Total cost, E4,@2= J E5=.3D per unit A2 units , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 31= -anagerial #ccounting, 34th >dition (roblem 3-2" ;continued< C. )oldin$ !ept* +aintin$ !ept* -anufacturing overhead incurred..... EA52,222 E5A2,222 -anufacturing overhead appliedB DA,222 -/s M E=.D2 per -/........... AA@,222 EC4D,222 direct labor cost M 35AO 5D4,222 9nderapplied ;or overapplied< overhead........................................ E33,222 ;E 34,222< , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 31@ (roblem 3-2# ;D2 minutes< 3. a. >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E=C2,222 3C2O of direct J J labor cost ED22,222 direct labor cost b. E@,A22 M 3C2O J E34,422 1. a. Fabricatin $ !epartme nt )achinin$ !epartme nt Assembly !epartme nt >stimated manufacturing overhead cost ;a<...... E4A2,222 EC22,222 E @2,222 >stimated direct labor cost ;b<............ E122,222 E322,222 E422,222 redetermined overhead rate ;a< H ;b<............................. 35AO C22O 42O b. *abricating GepartmentB E1,=22 M 35AO......................... EC,@22 -achining GepartmentB EA22 M C22O............................ 1,222 #ssembly GepartmentB ED,122 M 42O........................... 3,=D2 Total applied overhead................ E=,5D2 4. The bul! of the labor cost on the [oopers job is in the #ssembly Gepartment, which incurs very little overhead cost. The department has an overhead rate of only 42O of direct labor cost as compared to much higher rates in the other two departments. Therefore, as shown above, use of departmental overhead rates results in a relatively small amount of overhead cost being charged to the job. 9se of a plantwide overhead rate in efect redistributes , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 342 -anagerial #ccounting, 34th >dition overhead costs proportionately between the three departments ;at 3C2O of direct labor cost< and results in a large amount of overhead cost being charged to the [oopers job, as shown in art 3. This may e:plain why the company , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 343 (roblem 3-2# ;continued< bid too high and lost the job. Too much overhead cost was assigned to the job for the !ind of wor! being done on the job in the plant. 8n jobs that re&uire a large amount of labor in the *abricating or -achining Gepartments the opposite will be true, and the company will tend to charge too little overhead cost to the jobs if a plantwide overhead rate is being used. The reason is that the plantwide overhead rate ;3C2O< is much lower than the rates would be if these departments were considered separately. C. The company%s bid wasB Girect materials..................................... EC,D22 Girect labor........................................... @,A22 -anufacturing overhead applied ;above<............................................... 34,422 Total manufacturing cost....................... E15,C22 Bidding rate........................................... M 3.A Total bid price........................................ EC3,322 $f departmental overhead rates had been used, the bid would have beenB Girect materials..................................... EC,D22 Girect labor........................................... @,A22 -anufacturing overhead applied ;above<............................................... =,5D2 Total manufacturing cost....................... E11,=D2 Bidding rate........................................... M 3.A Total bid price........................................ E4C,1@2 Fote that if departmental overhead rates had been used, Telede: 0ompany would have been the low bidder on the [oopers job because the competitor underbid Telede: by only E1,222. A. a. #ctual overhead cost................................. E=DC,222 #pplied overhead cost ;EA=2,222 M 3C2O<..................................................... =31,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 341 -anagerial #ccounting, 34th >dition 9nderapplied overhead cost..................... EA1,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 344 (roblem 3-2# ;continued< b. !epartment Fabricatin $ )achinin $ Assemb ly Total +lant #ctual overhead cost.................... E4D2,222 EC12,222 E=C,222 E=DC,222 #pplied overhead costB................... E132,222 M 35AO................ 4D5,A22 E32=,222 M C22O................ C41,222 E1D1,222 M 42O.................. 5=,D22 =5=,322 9nderapplied ;overapplied< overhead cost..... ;E 5,A22< ;E 31,222 < EA,C22 ;E 3C,322< , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 34C -anagerial #ccounting, 34th >dition (roblem 3-3$ ;CA minutes< 3. The cost of raw materials put into production wasB Kaw materials inventory, 3T3.......... E3A,222 Gebits ;purchases of materials<....... 312,222 -aterials available for use.............. 34A,222 Kaw materials inventory, 31T43....... 1A,222 -aterials re&uisitioned for production.................................... E332,222 1. 8f the E332,222 in materials re&uisitioned for production, E@2,222 was debited to "or! in rocess as direct materials. Therefore, the diference of E12,222 was debited to -anufacturing 8verhead as indirect materials. 4. Total factory wages accrued during the year ;credits to the *actory "ages ayable account<.... E3=2,222 Iess direct labor cost ;from "or! in rocess<.......... 3A2,222 $ndirect labor cost................................................... E42,222 C. The cost of goods manufactured was EC52,2227the credits to the "or! in rocess account. A. The 0ost of .oods (old for the year wasB *inished goods inventory, 3T3.................................... EC2,222 #ddB 0ost of goods manufactured ;from "or! in rocess<.................................................................. C52,222 .oods available for sale............................................ A32,222 *inished goods inventory, 31T43................................ D2,222 0ost of goods sold..................................................... ECA2,22 2 D. The predetermined overhead rate wasB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base E1C2,222 3D2O of direct J J labor cost E3A2,222 direct labor cost , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 34A (roblem 3-3$ ;continued< 5. -anufacturing overhead was overapplied by E32,222, computed as followsB #ctual manufacturing overhead cost for the year ;debits<................................................................. E142,222 #pplied manufacturing overhead cost ;from "or! in rocess7this would have been the credits to the -anufacturing 8verhead account<........................ 1C2,222 8verapplied overhead............................................. E;32,222 < =. The ending balance in "or! in rocess is E42,222. Girect materials ma!e up E@,122 of this balance, and manufacturing overhead ma!es up E31,=22. The computations areB Balance, "or! in rocess, 31T43............................. E42,222 IessB Girect labor cost ;given<................................ ;=,222< -anufacturing overhead cost ;E=,222 M 3D2O<.......................................................... ;31,=22< Girect materials cost ;remainder<........................... E @,122 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 34D -anagerial #ccounting, 34th >dition (roblem 3-31 ;312 minutes< 3. a. Kaw -aterials............................... 122,222 #ccounts ayable..................... 122,222 b. "or! in rocess............................ 3=A,222 Kaw -aterials.......................... 3=A,222 c. -anufacturing 8verhead.............. D4,222 9tilities >:pense........................... 5,222 #ccounts ayable..................... 52,222 d. "or! in rocess............................ 142,222 -anufacturing 8verhead.............. @2,222 (alaries >:pense.......................... 332,222 (alaries and "ages ayable..... C42,222 e. -anufacturing 8verhead.............. AC,222 #ccounts ayable..................... AC,222 f. #dvertising >:pense..................... 34D,222 #ccounts ayable..................... 34D,222 g. -anufacturing 8verhead.............. 5D,222 Gepreciation >:pense................... 3@,222 #ccumulated Gepreciation....... @A,222 h. -anufacturing 8verhead.............. 321,222 Kent >:pense................................ 3=,222 #ccounts ayable..................... 312,222 i. "or! in rocess............................ 4@2,222 -anufacturing 8verhead......... 4@2,222 >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base F!r4D2,222 J J F!rC22 per GI/ @22 GI/s @5A actual GI/ M F!rC22 per GI/ J F!r4@2,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 345 (roblem 3-31 ;continued< j. *inished .oods.............................. 552,222 "or! in rocess........................ 552,222 !. #ccounts Keceivable..................... 3,122,222 (ales........................................ 3,122,22 2 0ost of .oods (old........................ =22,222 *inished .oods......................... =22,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 34= -anagerial #ccounting, 34th >dition (roblem 3-31 ;continued< 1. #ccounts Keceivable (ales ;!< 3,122,22 2 ;!< 3,122,222 Kaw -aterials 0ost of .oods (old Bal. 42,222 3=A,222 ;!< =22,222 ;a< 122,222 ;b< Bal. CA,222 "or! in rocess -anufacturing 8verhead Bal. 13,222 ;j< 552,222 ;c< D4,222 ;i< 4@2,222 ;b< 3=A,222 ;d< @2,222 ;d< 142,222 ;e< AC,222 ;i< 4@2,222 ;g< 5D,222 Bal. AD,222 ;h< 321,222 Bal. A,222 *inished .oods #dvertising >:pense Bal. D2,222 ;!< =22,222 ;f< 34D,222 ;j< 552,222 Bal. 42,222 #ccumulated Gepreciation 9tilities >:pense ;g< @A,222 ;c< 5,222 #ccounts ayable (alaries >:pense ;a< 122,222 ;d< 332,222 ;c< 52,222 ;e< AC,222 Gepreciation >:pense ;f< 34D,222 ;g< 3@,222 ;h< 312,222 (alaries W "ages ayable Kent >:pense ;d< C42,222 ;h< 3=,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 34@ (roblem 3-31 ;continued< 4. *roya *abri!!er #T( (chedule of 0ost of .oods -anufactured Girect materialsB Kaw materials inventory, beginning.. F!r 42,222 urchases of raw materials............... 122,222 -aterials available for use................ 142,222 Kaw materials inventory, ending...... CA,222 -aterials used in production............. F!r3=A,22 2 Girect labor......................................... 142,222 -anufacturing overhead applied to wor! in process................................. 4@2,222 Total manufacturing costs................... =2A,222 #ddB "or! in process, beginning......... 13,222 =1D,222 GeductB "or! in process, ending......... AD,222 0ost of goods manufactured............... F!r552,22 2 C. -anufacturing 8verhead..................... A,222 0ost of .oods (old......................... A,222 (chedule of cost of goods soldB *inished goods inventory, beginning. F!r D2,222 #ddB 0ost of goods manufactured..... 552,222 .oods available for sale.................... =42,222 Geduct fnished goods inventory, ending............................................ 42,222 9nadjusted cost of goods sold.......... =22,222 GeductB 8verapplied overhead......... A,222 #djusted cost of goods sold.............. F!r5@A,22 2 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3C2 -anagerial #ccounting, 34th >dition (roblem 3-31 ;continued< A. *roya *abri!!er #T( $ncome (tatement (ales................................................. F!r3,122,222 0ost of goods sold............................. 5@A,222 .ross margin..................................... C2A,222 (elling and administrative e:pensesB #dvertising e:pense....................... F!r34D,222 9tilities e:pense............................. 5,222 (alaries e:pense............................ 332,222 Gepreciation e:pense..................... 3@,222 Kent e:pense.................................. 3=,222 1@2,222 Fet operating income....................... F!r 33A,222 D. Girect materials.................................................. F!r =,222 Girect labor......................................................... @,122 -anufacturing overhead applied ;4@ hours M F!rC22 per hour<........................... 3A,D22 Total manufacturing cost..................................... 41,=22 #dd mar!up ;D2O M F!r41,=22<......................... 3@,D=2 Total billed price of Job C31................................. F!rA1,C=2 F!rA1,C=2 H C units J F!r34,312 per unit , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 3C3 (roblem 3-32 ;42 minutes< 3. The predetermined overhead rate isB >stimated total manufacturing overhead cost redetermined J overhead rate >stimated total amount of the allocation base (fr@22,222 J J 31(fr per -/ 5A,222 -/s 1. #ctual manufacturing overhead cost.............. (fr=A2,22 2 -anufacturing overhead cost applied to "or! in rocess during the yearB D2,222 actual -/s M (fr31 per -/.......................... 512,22 2 9nderapplied overhead cost........................... (fr342,22 2 4. 0ost of .oods (old.............................. 342,222 -anufacturing 8verhead................ 342,222 C. The underapplied balance would be allocated using the following percentagesB 8verhead applied during the year inB "or! in process............................. (fr 4D,22 2 A O *inished goods.............................. 3=2,222 1A O 0ost of goods sold......................... A2C,22 2 52 O Total................................................ (fr512,22 2 322 O The entry to record the allocation of the underapplied overhead would beB "or! in rocess ;AO M (fr342,222<... D,A22 *inished .oods ;1AO M (fr342,222<. . 41,A22 0ost of .oods (old ;52O M (fr342,222<..................................... @3,222 -anufacturing 8verhead........... 342,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3C1 -anagerial #ccounting, 34th >dition (roblem 3-32 ;continued< A. 0ost of goods sold if the underapplied overhead is closed directly to cost of goods sold ;(fr3,C22,222 S (fr342,222<........................ (fr3,A42,222 0ost of goods sold if the underapplied overhead is allocated among the accounts ;(fr3,C22,222 S (fr@3,222<.......................... 3,C@3,222 Giference in cost of goods sold...................... (fr 4@,222 Thus, net operating income will be (fr4@,222 greater if the underapplied overhead is allocated rather than closed directly to cost of goods sold. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 3C4 Case 3-33 ;CA minutes< 3. (having AO of the estimated direct labor-hours in the predetermined overhead rate will result in an artifcially high overhead rate. The artifcially high predetermined overhead rate is li!ely to result in overapplied overhead for the year. The cumulative efect of overapplying the overhead throughout the year is all recogni'ed in Gecember when the balance in the -anufacturing 8verhead account is closed out to 0ost of .oods (old. $f the balance were closed out every month or every &uarter, this efect would be dissipated over the course of the year. 1. This &uestion may generate lively debate. "here should Terri Konsin%s loyalties lie\ $s she wor!ing for the general manager of the division or for the corporate controller\ $s there anything wrong with the U0hristmas bonusV\ /ow far should Terri go in buc!ing her boss on a new job\ "hile individuals can certainly disagree about what Terri should do, some of the facts are indisputable. *irst, understating direct labor-hours artifcially in)ates the overhead rate. This has the efect of in)ating the 0ost of .oods (old in all months prior to Gecember and overstating the costs of inventories. $n Gecember, the huge adjustment for overapplied overhead provides a big boost to net operating income. Therefore, the practice results in distortions in the pattern of net operating income over the year. $n addition, because all of the adjustment is ta!en to 0ost of .oods (old, inventories are still overstated at year-end. This means, of course, that the net operating income for the entire year is also overstated. "hile Terri is in an e:tremely di6cult position, her responsibilities under the $-#%s (tatement of >thical rofessional ractice seem to be clear. The 0redibility (tandard states that management accountants have a responsibility to Udisclose all relevant information that could reasonably be e:pected to in)uence an intended user%s understanding of the reports, analyses or recommendations.V $n our opinion, Terri should discuss this situation with her immediate supervisor in the controller%s o6ce at corporate head&uarters. This step may , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3CC -anagerial #ccounting, 34th >dition bring her into direct con)ict with the general manager of the division, so it would be a very di6cult decision for her to ma!e. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 3CA Case 3-33 ;continued< $n the actual situation that this case is based on, the corporate controller%s staf were aware of the general manager%s accounting tric!s, but top management of the company supported the general manager because Uhe comes through with the resultsV and could be relied on to hit the annual proft targets for his division. ersonally, we would be very uncomfortable supporting a manager who will resort to deliberate distortions to achieve Uresults.V $f the manager will pull tric!s in this area, what else might he be doing that is &uestionable or even perhaps illegal\ , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3CD -anagerial #ccounting, 34th >dition Case 3-34 ;5A minutes< 3. The revised predetermined overhead rate is determined as followsB 8riginal estimated total manufacturing overhead................................................... E4,C21,22 2 lusB Iease cost of the new machine............ 4C=,222 lusB 0ost of new technicianTprogrammer.... A2,222 >stimated total manufacturing overhead..... E4,=22,22 2 8riginal estimated total direct labor-hours... D4,222 IessB >stimated reduction in direct labor- hours......................................................... D,222 >stimated total direct labor-hours................ A5,222 >stimated total manufacturing overhead redetetermined J overhead rate >stimated total amount of the allocation base E4,=22,222 J A5,222 GI/s J EDD.D5 per GI/ The revised predetermined overhead rate is higher than the original rate because the automated milling machine will increase the overhead for the year ;the numerator in the rate< and will decrease the direct labor-hours ;the denominator in the rate<. This double-whammy efect increases the predetermined overhead rate. 1. #c&uisition of the automated milling machine will increase the apparent costs of all jobs7not just those that use the new facility. This is because the company uses a plantwide overhead rate. $f there were a diferent overhead rate for each department, this would not happen. 4. The predetermined overhead rate is now considerably higher than it was. This will penali'e products that continue to use the same amount of direct labor-hours. (uch products will now appear to be less proftable and the managers of these products will appear to be doing a poorer job. There may be , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 3C5 pressure to increase the prices of these products even though there has in fact been no increase in their real costs. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3C= -anagerial #ccounting, 34th >dition Case 3-34 ;continued< C. "hile it may have been a good idea to ac&uire the new e&uipment because of its greater capabilities, the calculations of the cost savings were in error. The original calculations implicitly assumed that overhead would decrease because of the reduction in direct labor-hours. $n reality, the overhead increased because of the additional costs of the new e&uipment. # diferential cost analysis would reveal that the automated e&uipment would increase total cost by about E43D,222 a year if the labor reduction is only 1,222 hours. 0ost conse&uences of leasing the automated e&uipmentB $ncrease in manufacturing overhead costB Iease cost of the new machine......................... E4C=,22 2 0ost of new technicianTprogrammer.................. A2,222 4@=,222 IessB labor cost savings ;1,222 hours M EC3 per hour<................................................................. =1,222 Fet increase in annual costs................................ E43D,22 2 >ven if the entire D,222-hour reduction in direct labor-hours had happened, that would have added only E3DC,222 ;C,222 hours M EC3 per hour< in cost savings. The net increase in annual costs would have been E3A1,222 and the machine would still be an unattractive proposal. The entire D,222-hour reduction may ultimately be reali'ed as wor!ers retire or &uit. /owever, this is by no means automatic. There are two morals to this tale. *irst, predetermined overhead rates should not be misinterpreted as variable costs. They are not. (econd, a reduction in direct labor re,uirements does not necessarily lead to a reduction in direct labor hours paid. $t is often very di6cult to actually reduce the direct labor force and may be virtually impossible e:cept through natural attrition in some countries. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 3C@ )esear'h and *ppli'ation 3-35 3. Toll Brothers succeeds frst and foremost because of its product leadership customer value proposition. The annual report mentions in numerous places that Toll Brothers focuses on Iu:ury /omes and 0ommunities and high &uality construction. age = of the 32-[ says ]"e believe our mar!eting strategy, which emphasi'es our more e:pensive U>stateV and U>:ecutiveV lines of homes, has enhanced our reputation as a builder-developer of high-&uality upscale housing.V age 1 of the 32-[ says U"e are the only publicly traded national home builder to have won all three of the industry%s highest honorsB #merica%s Best Builder ;3@@D<, the Fational /ousing ^uality #ward ;3@@A<, and Builder of the Near ;3@==<.V Toll Brothers see!s to reali'e manufacturing e6ciencies for the beneft of its shareholders, but its customers choose Toll Brothers for its leadership position in the lu:ury home mar!et. 1. Toll Brothers faces numerous business ris!s as described in pages 32-33 of the 32-[. (tudents may mention other ris!s beyond those specifcally mentioned in the 32-[. /ere are four ris!s faced by Toll Brothers with suggested control activitiesB Kis!B Gownturns in the real estate mar!et could adversely impact Toll Brothers% sales. 0ontrol activitiesB Giversify geographic mar!ets served so that a downturn in one region of the country will not cripple the company. Kis!B Iarge sums of money may be spent buying land that, geologically spea!ing, cannot support home construction. *or e:ample, soil conditions may be too unstable to support the weight of a home. 0ontrol activitiesB ay engineers to certify that targeted properties can support home construction. Kis!B Kaw material costs may increase thereby depressing proft margins. 0ontrol activitiesB Lertically integrate by operating manufacturing facilities ;see page 31 of the 32-[ for a discussion of Toll Brothers% manufacturing facilities<. Buying raw materials at wholesale prices cuts out a middleman in the value chain. $n addition, Toll Brothers can , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3A2 -anagerial #ccounting, 34th >dition purchase raw materials in large volumes to reali'e purchase price discounts. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 3A3 )esear'h and *ppli'ation 3-35 ;continued< Kis!B (ubcontractors may perform substandard wor! resulting in warranty claims and dissatisfed customers. 0ontrol activitiesB >mploy a project manager within each community who serves in a &uality assurance capacity. 4. Toll Brothers would use job-order costing because its homes are uni&ue rather than homogeneous. >ach home being built would be a considered a job. Toll Brothers% standard )oor plans difer from one another particularly across its main product lines such as -ove-9p, >mpty Fester, #ctive #dult, 9rban $n-*ill, /igh- Gensity (uburban, and (econd /omes ;see pages A and @ of the annual report<. $n 122C, Toll Brothers introduced =5 new home models ;see page C of the 32-[<. Beyond the fact that Toll Brothers ofers a wide variety of )oor plans, homes are further distinguished from one another by customer upgrades that add an average of E324,222 to the price of a home ;see page 3 of the annual report<. 9pgrades include items such as additional garages, guest suites, e:tra freplaces, and fnished lofts ;see page C of 32-[<. C. >:amples of direct materials used in Toll Brothers% manufacturing facilities include lumber and plywood for wall panels, roofs, and )oor trusses, as well as other items such as windows and doors ;see page 31 of the 32-[<. >:amples of direct materials used at the home sites include shingles, e:terior fnishes such as stone, stucco, siding, or bric!, !itchen cabinets, cement for the foundation, bathroom f:tures, etc. The standard bill of materials ;e.g., prior to considering a specifc customer%s upgrade re&uests< for each home would difer. *or e:ample, diferences in the s&uare footage of homes would drive numerous diferences in their bills of materials. Bigger homes would re&uire more lumber, sheet roc!, electrical wiring, etc. Bills of materials are also li!ely to difer across geographic regions of the country. *or e:ample, homes in *lorida typically do not have basements whereas homes in Few >ngland are li!ely to have basements. *ront porches may be more prevalent in (outh 0arolina than in 8hio. Giferent grades , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3A1 -anagerial #ccounting, 34th >dition of windows and insulation may be used in homes in the Forth than in the (outh. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 3A4 )esear'h and *ppli'ation 3-35 ;continued< A. Toll Brothers incurs two types of direct labor costs. The company employs its own direct laborers in its manufacturing facilities in -orrisville, a. and >mporia, La. The costs of these wor!ers can be traced to specifc items such as roof trusses that can in turn be traced to particular houses. "or! at the home sites is performed by subcontractors. The labor cost embedded in a subcontractor%s f:ed price contract is directly traceable to the home being built. /owever, the direct laborers are not employed by Toll Brothers. Toll Brothers would not use employee time tic!ets at its home sites because the subcontractors are not employees of Toll Brothers, $nc. and they are paid a f:ed price that is unafected by the amount of hours wor!ed. D. There are numerous e:amples of overhead costs mentioned in the annual report and 32-[. (ome e:amples areB land ac&uisition costs, land development costs ;e.g., grading and clearing<, road construction costs, underground utility installation costs, swimming pools, golf courses, tennis courts, marinas, community entrances, model home costs ;including construction, furnishing and sta6ng<, and project manager salaries. These costs are incurred to create housing communities but they cannot be easily and conveniently traced to specifc homes. 5. $t appears that Toll Brothers does not use cost-plus pricing to establish selling prices for its base models. age = of the 32-[ says U$n determining the prices for our homes, we utili'e, in addition to management%s e:tensive e:perience, an internally developed value analysis program that compares our homes with homes ofered by other builders in each local mar!eting area.V $n other words, the value to the customer and competitive conditions determine prices7not the cost of building a particular home. age A of the annual report says U"hen there is strong demand, we beneft from e:ceptional pricing power because we have greater ability to raise prices than those builders who target buyers on tight budgetsB it%s easier to hit doubles, triples , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3AC -anagerial #ccounting, 34th >dition and home runs selling to lu:ury buyers.V This &uote implies that pricing is driven by the customers% willingness and ability to pay and not by the cost of building a particular house. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, 0hapter 4 3AA )esear'h and *ppli'ation 3-35 ;continued< =. Based on information contained in the 32-[, it appears that Toll Brothers assigns overhead to cost objects in two ways. *irst, page 3D of the 32-[ says UIand, land development and related costs ;both incurred and estimated to be incurred in the future< are amorti'ed to the cost of homes closed based upon the total number of homes to be constructed in each community.V $n other words, each home is assigned an e&ual share of overhead costs. age 3D also says, UThe estimated land, common area development and related costs of master planned communities ;including the cost of golf courses, net of their estimated residual value< are allocated to individual communities within a master planned community on a relative sales value basis.V $n other words, higher priced communities within a master planned community are assigned a greater portion of master planned community overhead costs. $n master planned communities, the allocation of overhead appears to ta!e place in two stages. *irst, the overhead costs common to all communities contained with the master planned community are assigned to communities based on relative sales value. Then, all overhead costs related to a particular community within the master planned community are assigned e&ually to each home site. The company needs to assign overhead costs to homes so that it can derive a cost of sales number for the income statement and an inventory number for the balance sheet. age 1@ of the annual report shows the components of the company%s ending inventory balance of E4.=5= billion. $nventoriable costs include land and land development costs ;E3.1C1 billion<, construction in progress ;E1.35= billion<, sample homes and sales o6ces ;E12= million<, land deposits and costs of future development ;E145 million<, and other ;E31 million<. 0onstruction in progress is similar to wor! in process for a manufacturing company. 8verhead costs ;as well as direct costs< )ow through the construction in progress account and hit cost of home sales when a customer has a closing and ta!es possession of the home. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3AD -anagerial #ccounting, 34th >dition *ppendi& 3* +he (redetermined O,erhead )ate and Capa'ity %&er'ise 3*-1 ;42 minutes< 3. The overhead applied to -rs. Brin!si%s account would be computed as followsB %&&- %&&' >stimated overhead cost ;a<...................... E432,A2 2 E432,A2 2 >stimated professional staf hours ;b<........ C,A22 C,D22 redetermined overhead rate ;a< H ;b<...... ED@.22 ED5.A2 rofessional staf hours charged to -s. Brin!si%s account..................................... M 1.A M 1.A 8verhead applied to -s. Brin!si%s account. E351.A2 E3D=.5A 1. $f the actual overhead cost and the actual professional hours charged turn out to be e:actly as estimated there would be no underapplied or overapplied overhead. %&&- %&&' redetermined overhead rate ;see above<. ED@.22 ED5.A2 #ctual professional staf hours charged to clients% accounts ;by assumption<........... M C,A22 M C,D22 8verhead applied....................................... E432,A2 2 E432,A2 2 #ctual overhead cost incurred ;by assumption<............................................. 432,A22 432,A22 9nderapplied or overapplied overhead...... E 2 E 2 4. $f the predetermined overhead rate is based on the professional staf hours available, the computations would beB >stimated overhead cost ;a<........................ E432,A2 2 E432,A2 2 rofessional staf hours available ;b<........... D,222 D,222 redetermined overhead rate ;a< H ;b<....... EA3.5A EA3.5A , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, #ppendi: 4# 3A5 rofessional staf hours charged to -s. Brin!si%s account....................................... M 1.A M 1.A 8verhead applied to -s. Brin!si%s account. . E31@.4= E31@.4= , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3A= -anagerial #ccounting, 34th >dition %&er'ise 3*-1 ;continued< C. $f the actual overhead cost and the actual professional staf hours charged to clients% accounts turn out to be e:actly as estimated, overhead would be underapplied as shown below. %&&- %&&' redetermined overhead rate ;see above< ;a<............................................................. EA3.5A EA3.5A #ctual professional staf hours charged to clients% accounts ;by assumption< ;b<....... M C,A22 M C,D22 8verhead applied ;a< M ;b<.......................... E141,=5 A E14=,2A 2 #ctual overhead cost incurred ;by assumption<.............................................. 432,A22 432,A22 9nderapplied overhead............................... E 55,D1A E 51,CA2 The underapplied overhead is best interpreted in this situation as the cost of idle capacity. roponents of this method of computing predetermined overhead rates suggest that the underapplied overhead be treated as a period e:pense that would be disclosed separately on the income statement as 0ost of 9nused 0apacity. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, #ppendi: 4# 3A@ (roblem 3*-2 ;D2 minutes< 3. The overhead applied to the Lerde Baja job is computed as followsB %&&- %&&' >stimated studio overhead cost ;a<.......... E3D2,22 2 E3D2,22 2 >stimated hours of studio service ;b<....... 3,222 =22 redetermined overhead rate ;a< H ;b<.... E3D2 E122 Lerde Baja job%s studio hours .................. M C2 M C2 8verhead applied to the Lerde Baja job . . ED,C22 E=,222 8verhead is underapplied for both years as computed belowB %&&- %&&' redetermined overhead rate ;see above< ;a<.............................................. E3D2 E122 #ctual hours of studio service provided ;b<.......................................................... 5A2 A22 8verhead applied ;a< M ;b<...................... E312,22 2 E322,22 2 #ctual studio cost incurred....................... 3D2,222 3D2,222 9nderapplied overhead............................ E C2,222 E D2,222 1. $f the predetermined overhead rate is based on the hours of studio service at capacity, the computations would beB %&&- %&&' >stimated studio overhead cost at capacity ;a<........................................... E3D2,222 E3D2,222 /ours of studio service at capacity ;b<..... 3,D22 3,D22 redetermined overhead rate ;a< H ;b<.... E322 E322 Lerde Baja job%s studio hours .................. M C2 M C2 8verhead applied to the Lerde Baja job . . EC,222 EC,222 8verhead is underapplied for both years under this method as wellB %&&- %&&' redetermined overhead rate ;see above< ;a<.............................................. E322 E322 #ctual hours of studio service provided 5A2 A22 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3D2 -anagerial #ccounting, 34th >dition ;b<.......................................................... 8verhead applied ;a< M ;b<...................... E 5A,222 E A2,222 #ctual studio cost incurred....................... 3D2,222 3D2,222 9nderapplied overhead............................ E =A,222 E332,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, #ppendi: 4# 3D3 (roblem 3*-2 ;continued< 4. "hen the predetermined overhead rate is based on capacity, the underapplied overhead is interpreted as the cost of idle capacity. $ndeed, proponents of this method suggest that the underapplied overhead should be treated as a period e:pense that would be disclosed separately on the income statement as 0ost of 9nused 0apacity. C. latinum Trac!%s fundamental problem is the competition that is drawing customers away. The competition is able to ofer the latest e&uipment, e:cellent service, and attractive prices. The company must do something to counter this threat or it will ultimately face failure. 9nder the conventional approach in which the predetermined overhead rate is based on the estimated studio hours, the apparent cost of the Lerde Baja job has increased between 122= and 122@. That happens because the company is losing business to competitors and therefore the company%s f:ed overhead costs are being spread over a smaller base. This results in costs that seem to increase as the volume declines. 9nder this method, latinum Trac!%s managers may be misled into thin!ing that the problem is rising costs and they may be tempted to raise prices to recover their apparently increasing costs. This would almost surely accelerate the company%s decline. 9nder the alternative approach, the overhead cost of the Lerde Baja job is stable at EC,222 and lower than the costs reported under the conventional method. 9nder the conventional method, managers may be misled into thin!ing that they are actually losing money on the Lerde Baja job and they might refuse such jobs in the future7another sure road to disaster. This is much less li!ely to happen if the lower cost of EC,222 is reported. $t is true that the underapplied overhead under the alternative approach is much larger than under the conventional approach and is growing. /owever, if it is properly labeled as the cost of idle capacity, management is much more li!ely to draw the appropriate conclusion that the real problem is the loss of business ;and therefore more idle capacity< rather , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3D1 -anagerial #ccounting, 34th >dition than an increase in costs. "hile basing the predetermined rate on capacity rather than on estimated activity will not solve the company%s basic problems, at least this method is less li!ely to send managers misleading signals. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, #ppendi: 4# 3D4 Case 3*-3 ;312 minutes< 3. +raditional approa'h: #ctual total manufacturing overhead cost incurred ;assumed to e&ual the original estimate<......... EC,222,222 -anufacturing overhead applied ;3D2,222 units M E1A per unit<........................ C,222,222 8verhead underapplied or overapplied.............. E 2 Lault /ard Grives, $nc. $ncome (tatementB Traditional #pproach (ales ;3A2,222 units M ED2 per unit<..... E@,222,22 2 0ost of goods soldB Lariable manufacturing ;3A2,222 units M E3A per unit<......... E1,1A2,22 2 -anufacturing overhead applied ;3A2,222 units M E1A per unit<......... 4,5A2,22 2 D,222,22 2 .ross margin......................................... 4,222,222 (elling and administrative e:penses..... 1,522,22 2 Fet operating income............................ E 422,22 2 -e. approa'h: Lault /ard Grives, $nc. $ncome (tatementB Few #pproach (ales ;3A2,222 units M ED2 per unit<........... E@,222,22 2 0ost of goods soldB Lariable manufacturing ;3A2,222 units M E3A per unit<................ E1,1A2,22 2 -anufacturing overhead applied ;3A2,222 units M E12 per unit<................ 4,222,22 2 A,1A2,22 2 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3DC -anagerial #ccounting, 34th >dition .ross margin................................................ 4,5A2,222 0ost of unused capacity Y;122,222 units X 3D2,222 units< M E12 per unitZ.................. =22,222 (elling and administrative e:penses............ 1,522,22 2 Fet operating income.................................. E 1A2,22 2 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, #ppendi: 4# 3DA Case 3*-3 ;continued< 1. +raditional approa'h: 9nder the traditional approach, the reported net operating income can be increased by increasing the production level which then results in overapplied overhead which is deducted from 0ost of .oods (old. #dditional net operating income re&uired to attain target net operating income ;EA22,222 X E422,222< ;a<...................................................... E122,222 8verhead applied per unit of output ;b<................ E1A per unit #dditional output re&uired to attain target net operating income ;a< H ;b<.................................. =,222 units #ctual total manufacturing overhead cost incurred.............................................................. EC,222,222 -anufacturing overhead applied Y;3D2,222 units S =,222 units< M E1A per unitZ.. . C,122,222 8verhead overapplied........................................... E 122,222 Lault /ard Grives, $nc. $ncome (tatementB Traditional #pproach (ales ;3A2,222 units M ED2 per unit<....... E@,222,22 2 0ost of goods soldB Lariable manufacturing ;3A2,222 units M E3A per unit<............ E1,1A2,22 2 -anufacturing overhead applied ;3A2,222 units M E1A per unit<............ 4,5A2,222 IessB -anufacturing overhead overapplied......................................... 122,222 A,=22,22 2 .ross margin............................................ 4,122,222 (elling and administrative e:penses........ 1,522,22 2 Fet operating income.............................. E A22,22 2 FoteB $f the overapplied manufacturing overhead were prorated , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3DD -anagerial #ccounting, 34th >dition between ending inventories and 0ost of .oods (old, more units would have to be produced to attain the target net proft of EA22,222. $n fact, it can be shown that the total production level would have to be 3D@,23C units rather than 3D=,222 units. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, #ppendi: 4# 3D5 Case 3*-3 ;continued< -e. approa'h: 9nder the new approach, the reported net operating income can be increased by increasing the production level. This results in less of a deduction on the income statement for the 0ost of 9nused 0apacity. #dditional net operating income re&uired to attain target net operating income ;EA22,222 X E1A2,222< ;a<....................................................... E1A2,222 8verhead applied per unit of output ;b<.................. E12 per unit #dditional output re&uired to attain target net operating income ;a< H ;b<................................... 31,A22 units >stimated number of units produced...................... 3D2,222 units #ctual number of units to be produced................... 351,A22 units Lault /ard Grives, $nc. $ncome (tatementB Few #pproach (ales ;3A2,222 units M ED2 per unit<........... E@,222,22 2 0ost of goods soldB Lariable manufacturing ;3A2,222 units M E3A per unit<............... E1,1A2,22 2 -anufacturing overhead applied ;3A2,222 units M E12 per unit<............... 4,222,22 2 A,1A2,222 .ross margin............................................... 4,5A2,222 0ost of unused capacity Y;122,222 units X 351,A22 units< M E12 per unitZ................. AA2,222 (elling and administrative e:penses........... 1,522,222 Fet operating income.................................. E A22,222 , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 3D= -anagerial #ccounting, 34th >dition Case 3*-3 ;continued< 4. Fet operating income is more volatile under the new method than under the old method. The reason for this is that the reported proft per unit sold is higher under the new method by EA, the diference in the predetermined overhead rates. #s a conse&uence, swings in sales in either direction will have a more dramatic impact on reported profts under the new method. C. #s the computations in part ;1< above show, the Uhat tric!V is a bit harder to perform under the new method. 9nder the old method, the target net operating income can be attained by producing an additional =,222 units. 9nder the new method, the production would have to be increased by 31,A22 units. #gain, this is a conse&uence of the diference in predetermined overhead rates. The drop in sales has had a more dramatic efect on net operating income under the new method as noted above in part ;4<. $n addition, because the predetermined overhead rate is lower under the new method, producing e:cess inventories has less of an efect per unit on net operating income than under the traditional method and hence more e:cess production is re&uired. A. 8ne can argue that whether the Uhat tric!V is unethical depends on the level of sophistication of the owners of the company and others who read the fnancial statements. $f they understand the efects of e:cess production on net operating income and are not misled, it can be argued that the hat tric! is not unethical. /owever, if that were the case, there does not seem to be any reason to use the hat tric!. "hy would the owners want to tie up wor!ing capital in inventories just to artifcially attain a target net operating income for the period\ #nd increasing the rate of production toward the end of the year is li!ely to increase overhead costs due to overtime and other costs. Building up inventories all at once is very li!ely to be much more e:pensive than increasing the rate of production uniformly throughout the year. $n this case, we assumed that there would not be an increase in overhead costs due to the additional production, but that is li!ely not to be true. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. (olutions -anual, #ppendi: 4# 3D@ $n our opinion, the hat tric! is unethical unless there is a good reason for increasing production other than to artifcially boost the current period%s net operating income. $t is certainly unethical if the purpose is to fool users of fnancial reports such as owners and creditors or if the purpose is to meet targets so that bonuses will be paid to top managers. , The -c.raw-/ill 0ompanies, $nc., 1232. #ll rights reserved. 352 -anagerial #ccounting, 34th >dition