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Chapter 3

Systems Design: Job-Order Costing


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

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