Handy Handouts 8

Lets Take Notes ... ON THE FIRST DAY OF CLASS?
What is accounting?
What is an accountant?
What is accounting used for?
DESIGNATED DOODLE ZONE
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How management accounting is different than financial accounting, tax, or audit:
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Dont be afraid to take a big step if one is indicated. You cant

cross a chasm in two small jumps.
-- David Lloyd George (1863-1945), Statesman
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Choose always the way that seems best, however rough it may
be; custom will soon render it easy and agreeable.
-- Pythagoras (c. 580-c. 500 B.C.), Philosopher and
mathematician
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Nothing is particularly hard if you divide it into small jobs.

-- Henry Ford (1863-1947), Founder of the Ford Motor
Company
REVIEW / SELF-QUIZ
Do you know the answers to these questions??
What are the four Financial Statements?
How do you increase an Asset account?

a Liability account?
a Revenue account?
an Expense account?
What is the Accounting Equation?
How is profit calculated (most simply)?
How does Managerial Accounting differ from Financial Accounting, Tax,

and Auditing?
Note:
We may or may not cover all of this material on this day of class, but we
should cover the material before the next exam. So, if we have not covered
this material, be sure to ask about it during the exam review.
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Lets Take Notes ... TERMS AND FLOWS

Terms:
See next page for more noteworthy space for terms
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[More] Terms: (if you need additional space)
See next page for Income Statement formats
A certain amount of opposition is a great help to a person.

Kites rise against, not with the wind.
-- John Neal (1793-1870), Writer
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Variable Costing Income Statement
Absorption Costing Income Statement
Balance Sheet
More noteworthy space on the next page
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More Space
Youth is the best time to be rich and the best time to be poor.
-- Euripides (c. 485-406 B.C.), Playwright
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And even more space
You will soon break the

bow if you
Keep it always
stretched.
-- Phaedrus (c. 15
B.C. 50 A.D.),
Fabulist
** NOTE TO SELF! **
See problem: ____________________________
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On page _________ of the Handy Handouts

For an example of t-accounts and cost flows.
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What would you describe as the theme of these quotes?
The harder you work, the harder it is to surrender.

-- Vince Lombardi
I pray hard, work hard, and leave the rest to God.
-- Florence Griffith Joyner
Work is a good word. When we work hard at something we
enjoy and feel good about it, we feel good about ourselves
again and again and again.
-- Mike Krzyzewski
Work Hard. There is no short cut.
-- Alfred P. Sloan, Jr. (1875-1966), Business leader and
philanthropist
Nothing will work unless you do.
-- John Wooden
The road to happiness lies in two simple principles: find what it
is that interests you and that you can do well, and when you
find it, put your whole soul into it, every bit of energy and
ambition and natural ability you have.
-- John D. Rockefeller, III
If the power to do hard work is not talent, it is the best possible
substitute for it.
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-- James A. Garfield
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REVIEW / SELF-QUIZ
What are Fixed Costs?

Variable Costs?
What are Product Costs?

Period Costs?
What are Prime Costs?

Conversion Costs?
What is Revenue? Expense? Profit?
What is Cost of Goods Manufactured?

What is Cost of Goods Sold?
What are the t-accounts down the left side?

What is true of all of them?
What are the t-accounts across the top?

What are the t-accounts down the right side?

What kind of account is COGS? COGM? I/S? DM? WIP? DL? MOH?
What phrase appears at the top of every Income Statement? Why?

every Balance Sheet? Why?
Note:
We may or may not cover all of this material on this day of class, but we
should cover the material before the next exam. So, if we have not covered
this material, be sure to ask about it during the exam review.
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Eighth Edition
MANGO MOTORS
(Variable and Fixed Costs)
Mango Motors has incurred the following expenses during the 1996 calendar year.
Sales revenue
Fixed manufacturing costs
Fixed selling and administrative costs
Variable manufacturing costs
Variable selling and administrative costs
$810,000
60,000
50,000
540,000
67,500
Required:
Calculate net income using both the absorption costing and the variable costing income statement formats.
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SOMUCH STEREOS
As the chief financial officer of SoMuch Stereos, headquartered in Timbuktoo, Tennessee, you have
summarized the financial information for the fiscal year ending February 2000.
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling expense
Fixed selling expense
Fixed administrative expense
Sales revenue
$22,000
14,000
9,000
10,000
5,000
16,000
14,000
89,000
Required:
The CEO has asked you to provide her with income statements using both the absorption costing format and the
variable costing format.
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BOJANGLE DANCE SHOES

A partial list of sales and cost data is presented below for the Bojangle Dance Shoes Co. for the calendar year
2002.
Sales (18,000 units)
Manufacturing costs:
Prime costs
Variable MOH
Budgeted and actual fixed MOH
Operating expenses:
Variable selling expense
Fixed selling expense
Fixed administrative
$630,000
$252,000
84,000
100,000
54,000
45,000
90,000
Required:
Calculate Bojangles cost of goods sold, contribution margin, and net income using both the absorption costing
format and the variable costing format.
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CATTLE COMPANY
(Cost Flows)
Below are summarized financial data of the Cattle Company for two consecutive years.
Administrative expenses
Beginning finished goods
Beginning work in process
Beginning direct materials
Sales
Ending finished goods
Ending work in process
Ending direct materials
Cost of goods manufactured
Direct materials requisitioned
Direct labor
Indirect materials
All other manufacturing overhead costs
1997
$135,000
45,000
71,000
96,000
566,000
445,000
190,000
130,000
15,000
104,000
1998
$161,000
82,000
65,000
108,000
812,000
69,000
84,000
102,000
562,000
235,000
170,000
18,000
158,000
Required:
a.
b.
Use T-accounts to show the flow of costs and revenues.

Prepare income statements for both years.
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CATTLE COMPANY
Calculations ...
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JUDGE ELY JEANS

(Cost Flows)
The December 31, 1999 ledger account balances are presented below for Judge Ely Jeans. Beginning
inventories on January 1, 1999 were $37,600 for finished goods inventory, $49,600 for work in process
inventory, and $29,500 for direct materials inventory.
Sales
Insurance on production inventories
Factory supervision
Indirect materials
Office equipment depreciation
Utilities (60 percent factory)
Delivery expense for finished products
Direct labor
Direct materials purchased
Office fire insurance
Finished goods inventory
Indirect labor
Administrative and marketing salaries
Factory property tax
Advertising
Production equipment lease cost
Work in process inventory
Direct materials inventory
$715,200
7,200
44,800
4,800
7,200
36,000
4,000
118,400
98,400
2,640
52,000
10,400
123,200
15,200
15,300
35,200
62,400
32,300
Required:
Calculate cost of goods manufactured, cost of good sold, and net income.
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JUDGE ELY JEANS

Calculations ...
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BOBS BEEF BOY

(Cost Flows)
Bob, the owner and sole proprietor of Bobs Beef Boy, sells hamburgers for carry out or drive through only.
The restaurant is known for the high quality of the meat used in the burgers, and for the kaiser roll used in place
of the normal hamburger bun.
Each Hamburger sells for $3.99. Bob employs several part-time employees and a full-time manager. He leases
the building and hires a cleaning company to provide services on a weekly basis. The manager, who is paid a
monthly salary, carries out all administrative functions such as hiring, scheduling, and counting cash. Bob
purchases the ingredients needed to make hamburgers on a weekly basis to ensure its freshness; thus, there were
no inventory balances at the beginning or the end of the year.
During the year 1997 the following expenses were incurred:
Ground meat
Lettuce
Tomatoes
Kaiser rolls
Condiments
Part-time labor, cooks
Part-time labor, servers
Wrapping paper and bags
$54,000 (No accusations here about Wheres the beef!?)

6,750
Managers salary
$41,000
7,500
Utilities
22,500
9,250
Depreciation, grill
7,000
2,650
Depreciation, signs
3,250
66,400
Advertising
3,500
53,000
Rent
25,000
2,400
Cleaning services
6,800
Bobs restaurant sold 120,000 hamburgers during 1997.

Required:
1. Classify each cost as being a product cost (specify either direct materials, direct labor, or manufacturing
overhead) or as being a period cost.
2. Use T-accounts to show the flow of costs and revenues for Bobs Beef Boy.
3. Prepare an income statement for the year.
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BOBS BEEF BOY

Calculations ...
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SLEEPWELL INCORPORATED
(Cost Flows)
The following data is available for Sleepwell, Inc. for the month of August:
Beginning of August:
Direct Materials inventory
Work in Process inventory
Finished Goods inventory
$18,500
$12,000
$10,200
During August:
Direct Labor cost
Direct Materials purchases
Total Overhead cost
Sales Revenue
Selling & Admin. Exp.
$40,500
$80,000
$105,750
$400,000
$100,000
End of August:
Direct Materials inventory
Work in Process inventory
Finished Goods inventory
$16,800
$23,500
$9,100
Required:
Calculate the cost of goods manufactured, the cost of goods sold, and net income for Sleepwell, Inc. in August.
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Calculations ...
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HANNIBAL COMPANY
(Cost Flows)
The following information is available for Hannibal Company:
Raw materials purchased
Raw materials inventory, 1-1-1993
Raw materials inventory, 12-31-1993
Direct labor
Indirect labor
Factory rent
Depreciation, factory equipment
Factory utilities
Sales salaries
Sales commissions
Administrative costs
Sales revenue
Work in process inventory, 1-1-1993
Work in process inventory, 12-31-1993
Finished goods inventory, 1-1-1993
$160,000
$23,400
$33,400
$100,000
$20,000
$21,000
$30,000
$5,978
$55,000
$38,000
$61,000
$600,000
$6,520
$7,498
$40,000
$57,050
Required:
Calculate the cost of goods manufactured, cost of goods sold, and net income for Hannibal Co.
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HANNIBAL COMPANY
Calculations ...
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Lets Take Notes ... BREAKEVEN (C-V-P)

What is the GOAL of any business?
C-V-P analysis seeks the most profitable combination of
Love itself is love chief nourishment.

-- Sextus Propertius (c. 50-16 B.C.), Poet
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How do costs behave In Total
How do costs behave Per Unit
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More How do costs behave
There will always be a conflict between good and good

enough.
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-- Henry Martyn Leland (1843-1932), Engineer
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Even more how do costs behave
Chance favours only those who know how to court her.

-- Charles Nicholle (1866-1936), Physician and Scientist
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Variable Costing information is necessary for breakeven calculations!
Do the common thing in an uncommon way.

-- Booker T. Washington (1856-1943), Educator
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C-V-P Intuition:
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Lets think a little more about what we just learned
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Just a few more notes
You have your way. I have my way. As for the right way, the
correct way, and the only way, it does not exist.
-- Friedrich Nietzche (1844-1900), Philosopher
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NOTE TO SELF!
[Cost Acccounting Students Only]
See problem: ____________________________
For an example of multi-product breakeven.
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REVIEW / SELF-QUIZ
Can you draw a graph of Fixed Costs in total?

Fixed Costs per unit?
Variable Costs in total?
Variable Costs per unit?
Mixed Costs in total?
What formula can we use to draw a line in XY space?
What is the Variable Costing income statement format?
How does one calculate the VC Ratio in total?

per unit?
How does one calculate the CM Ratio in total?
per unit?
Does is CM calculated in total?
per unit?
The following formulas are important:

(why dont you fill them in here)
BE(units) =
BE($) =
SP(x) =
TR =
MS($) =
MS Ratio =
NIBT =
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EAST MEETS WEST COMPANY (A)

(Breakeven)
East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine
that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set
selling price at $10 per unit.
Required:
1.
Determine the breakeven point in units and dollars.
2.
If East Meets West Company wants to earn a $15,000 profit on the sale of its compasses, find the
number of units and sales revenue required to achieve this goal.
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EAST MEETS WEST COMPANY (B)

(Breakeven)
Management has decided that the number calculated in (A) is not realistic. That is, demand for the compasses is
not strong enough and competition is too strong to allow East Meets West company to sell 8,750 units. Instead,
management wants to determine how many units would be required to achieve a profit of 15 percent of sales
revenue. Notice above that variable cost is 60 percent of selling price and that management wants profit to be
15 percent of sales revenue.
Required:
1. Calculate the number of units and the sales revenue necessary to reach managements goal.
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EAST MEETS WEST COMPANY (C)

(Breakeven)
East Meets West Company is faced with $.80 per unit increase in labor cost and wants to compensate for this by
decreasing its fixed cost. It decides to give up some rented space and move all of its operations into its own
plant, reducing fixed cost by $2,000. At the same time management believes that increasing the selling price of
each unit by $.40 will not adversely affect demand for its product, and that a target profit of $9,000 can be
maintained.
Required:
1. If all these changes are incorporated in the analysis, what is the number of units that must be produced
and sold?
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EAST MEETS WEST COMPANY (D)

(Breakeven)
Income taxes are a percentage of net income. East Meets West is subject to a 30 percent tax rate and
management seeks an after-tax profit of $8,400.
Required:
1. Determine the breakeven point in units and dollars.
2. Determine the unit sales and revenue necessary to earn an after-tax income of $8,400.
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EAST MEETS WEST COMPANY (E)

(Breakeven)
The companys managers want to determine the level of operations required to earn a profit of $12,000 before
taxes. They also want to know if it would be more profitable to change the method of operations by automating
part of the compass assembly and eliminating some of the direct labor currently required.
The company faces two alternatives: maintain its current production operations or use the more automated
production process. Selling price of the compass is $10 and East Meets West Companys management has no
plans to change the price. By changing the production process, the company would incur fixed costs of $27,500
per year and variable costs of $5 per compass.
Required:
1. Determine which of the two production alternatives is preferable by examining the margin of safety
ratio for both alternatives.
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S & P CORPORATION
(Breakeven)
The following data are expected for S & P Corporations in 2003:
Sales price (SP) per unit
Fixed costs (FC)
Contribution margin (CM)
$10
$300,000
50% of sales
Required:
1. Determine the breakeven point in units.
2. Determine the breakeven point in dollars.
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JOLLY CANDIES
(Breakeven)
The following information is available for Jolly Candies and the Valentine Candy production process.
Price of item
Variable costs
Contribution margin
Total fixed costs
Per Unit
$4
3
$1
$400
Required:
1. How many units must be sold in order to make a profit before taxes of $300?
2. What would the profit before taxes be if the sale volume increased 20% above the breakeven point?
3. If the variable costs (VC) increase to $3.50 per unit, how many units must be sold to make a profit
after taxes of $300 (assume a 40% tax rate).
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HOUGHTON'S LIMITED
(Breakeven)
The management of Houghton's Ltd. is involved in the preliminary analysis of a potential new product. The
product will sell for $35 per unit and requires variable costs of $20 per unit. Fixed costs are anticipated to be
$30,000 per month.
Required:
Answer each of the following independent questions:
1. What is the breakeven point in units? In dollars?
2. What annual dollar sales volume would be needed to earn $510,000 before taxes?
3. What is the margin of safety ratio for question 2?
4. How many units must be sold each month to earn an annual after tax profit of $864,000? The tax rate is
40%.
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CLAIR'S TOYS
(Breakeven)
Clair's Toys is preparing next year's budget for one of their stores. The store has a contribution margin ratio of
60% and its fixed costs are $18,000.
Required:
(Treat each part separately)
1. If sales increase by $12,000 above the breakeven point, how much will income increase?
2. If the advertising budget is increased by $6,000, it is estimated that sales will increase by $9,000. Should the
additional advertising be purchased?
3. If salaries are increased by $3,000, how much must sales be increased to cover the increased cost?
4. It is estimated that sales will increase from 12,000 to 18,000 units if the unit sales price is reduced from $10
to $8 and advertising is increased by $2,000. Is it profitable to do so?
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CASS COMPANY
(Breakeven)
Cass Company makes a deluxe product CC1 for special orders. The following are the actual results of
operations in 1996.
Sales revenue
Direct materials used
Direct labor costs
Variable overhead cost
Contribution margin
Gross margin
Total fixed costs
Fixed overhead
Variable selling and administrative costs
$ 500,000
210,000
140,000
30,000
100,000
70,000
110,000
?
?
Required:
1. Determine the total variable costs of production.
2. Determine the full manufacturing costs for 1996.
3. What is the total variable selling and administrative costs?
4. What is the fixed overhead costs for 1996?
5. Determine the breakeven sales dollars for 1996.
6.
What is the operating leverage for 1996?
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CASS COMPANY
Calculations ...
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DEERING BANJO COMPANY

(Multiple-Product Breakeven)
Deering Banjo Company manufactures two basic models of banjos: the Boston and the Deluxe. The Deluxe is
Deering's professional model of banjo and uses higher quality materials and is more carefully crafted. More
information on these products is provided below.
Boston
Deluxe
Selling
Price
$1,200
$5,000
Variable
Costs
$700
$2000
Fixed costs of $3,000,000 are incurred annually.

The expected mix of the banjos is 60% Boston and 40% Deluxe.
Required:
1. Calculate breakeven in units for the Deering Banjo Company.
2. Calculate breakeven revenue for the Deering Banjo Company.
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ALCATRAZ ARTIFACTS
Alcatraz inmates produce three artifacts, the Al, the Cat, and the Raz. More information is provided
below.
Sales in units
Selling price per unit
Variable cost per unit
Total fixed cost
Al
2,000
$20
$16
Artifacts
Cat
3,000
$50
$36
Raz
5,000
$40
$28
Total
10,000
$77,000
Required:
1. Calculate the breakeven point in units and dollars.
2. What is the breakeven point if the sales mix of artifacts Al and Cat is 40% each, leaving Raz
with 20% of total sales?
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[Based on a homework problem that Dr. Fessler completed as a cost accounting student (CMA, adapted)]
ABTEX ELECTRONICS
Abtex Electronics manufactures two products -- tape recorders and electronic calculators -- and sells
them nationally to wholesalers and retailers. Abtex management is very pleased with the companys
performance for the current fiscal year. Projected sales through December 31, 1997, indicate that 70,000 tape
recorders and 140,000 electronic calculators will be sold this year. The projected earnings statement, which
appears below, shows that Abtex will exceed its earnings goal of 9% on sales after taxes.
ABTEX ELECTRONICS
Projected Earnings Statement for the Year Ended December 31, 1997
TAPE
ELECTRONIC
RECORDERS
CALCULATORS
Total
Total
Amount
Per
Amount
Per
(000s)
Unit
(000s)
Unit
Sales
$1,050
$15.00
$3,150
$22.50
Production Costs:
Materials
$ 280
$ 4.00
$ 630
$ 4.50
Direct labor
140
2.00
420
3.00
Variable overhead
140
2.00
280
2.00
Fixed overhead
70
1.00
210
1.50
Total prod. costs
$ 630
$ 9.00
$1,540
$11.00
Gross margin
$ 420
$ 6.00
$1,610
$11.50
Fixed selling and admin.
NI before income taxes
Income taxes (55%)
Net income
Total
(000s)
$4,200.0
$ 910.0
560.0
420.0
280.0
$2,170.0
$2,030.0
1,040.0
$ 990.0
544.5
$ 445.5
The tape recorder business has been fairly stable the last few years, and the company does not intend to
change the tape recorder price. However, the competition among manufacturers of electronic calculators has
been increasing. Abtexs calculators have been very popular with consumers. In order to sustain this interest in
its calculators and to meet the price reductions expected from competitors, management has decided to reduce
the wholesale price of its calculator from $22.50 to $20.00 per unit effective January 1, 1998. At the same time
the company plans to spend an additional $57,000 on advertising during fiscal year 1998. As a consequence of
these actions, management estimates that 80% of its total revenue will be derived from calculator sales as
compared with 75% in 1997. As in prior years, the sales mix is assumed the same at all volume levels. (That is,
the sales mix in units will not necessarily be the same as in 1997; however, the sales mix in 1998 will be
constant no matter what volume levels occur.)
The total fixed overhead costs will not change in 1998, nor will the variable overhead cost rates
(applied on a direct-labor-hour base). However, the cost of materials and direct labor is expected to change.
The cost of solid state electronic components will be cheaper in 1998. Abtex estimates that material costs will
drop 10% for the tape recorders and 20% for the calculators in 1998. However, direct labor costs for both
products will increase 10% in the coming year. Variable overhead rates will be unchanged at $2.00 per unit.
Required:
1. How many tape recorder and electronic calculator units did Abtex Electronics have to sell in 1997 to
break even?
2. How many tape recorder and electronic calculator units will Abtex have to sell in 1998 to break even?
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ABTEX ELECTRONICS
Calculations ...
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ABTEX ELECTRONICS
Calculations ...
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Lets Take Notes ... RELEVANT COSTS

Relevant Cost
Sunk Cost
Opportunity Cost
The main idea in golf as in life, I suppose, is to learn to accept

what cannot be altered, and to keep on doing ones reasoned
and resolute best whether the prospect be bleak or rosy.
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-- Bobby Jones (1902-1971), Professional golfer
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Examples of decisions:
IN A NUTSHELL
I believe that every right implies a responsibility; every

opportunity, an obligation; every possession, a duty.
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-- John D. Rockefeller, Jr. (1874-1960), Business executive

and philanthropist
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Vitality shows in not only

the ability to
persist but the ability to
start over.
-- F. Scott Fitzgerald (18961940), Writer
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REVIEW / SELF-QUIZ
What is a Relevant Cost?

What is a Sunk Cost?
Are sunk costs relevant?
What is an Opportunity Cost?
Are opportunity costs relevant?
What types of decisions can be/are made using relevant cost thought?
Unshared joy is an unlighted candle.

-- Spanish Proverb
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FUNK AND WAGNALL

(Classifying Relevant and Irrelevant Items)
Funk and Wagnall, attorneys at law, have been asked to represent a local client in proceedings to be held in San
Francisco, California. Classify each of the following items on the basis of their relationship to this engagement.
Items may have multiple classifications.
Relevant Costs
Opportunity
Outlay*
1.
The case will require three attorneys to

stay four nights in a San Francisco hotel.
The predicted hotel bill is $1,200.
2.
Funk and Wagnalls professional staff is

paid $800 per day for out-of-town
assignments.
3.
Last year, depreciation on Funk and

Wagnalls office was $12,000.
4.
Round-trip transportation to San

Francisco is expected to cost $600 per
person for the engagement.
5.
The firm has recently accepted an

engagement that will require partners to
spend two weeks in Dallas. The
predicted out-of-pocket costs of this
engagement are $8,500.
6.
The firm has a maintenance contract on

its word processing equipment that will
cost $2,200 next year.
7.
If the firm accepts the engagement in

San Francisco, it will have to decline a
conflicting engagement in Orlando that
would have provided a net cash inflow
of $7,200.
8.
The firms variable overhead is $40 per

client-hour.
9.
The firm pays $150 per year for Mr.

Funks subscription to a law journal.
Irrelevant Costs
Outlay*
Sunk
10. Last year the firm paid $7,500 to

increase the insulation in its building.
* An outlay cost is a cost that requires a cash disbursement sooner or later.
Handy Handouts
Page - 64 -
Eighth Edition
FRODO COMPANY
(Relevant Costs)
MACHINE REPLACEMENT
Frodo Company is trying to determine whether or not to replace an old machine with a brand new machine with
lower annual operating costs.
Book value/cost
Salvage value in 5 yrs.
Annual operating cost
Current resale value
Remaining life
Old Machine
New Machine
$30,000
$40,000
$0
$0
$15,000
$4,000
$2,000
N/A
5 yrs.
5 yrs.
Required:
Should Frodo Company keep the old machine or purchase the new one?
Handy Handouts
Page - 65 -
Eighth Edition
TOLEDO TORPEDO COMPANY

(Relevant Costs)
MACHINE REPLACEMENT
Toledo Torpedo Company is considering replacement of an existing machine used for finishing products.
Annual revenue of $100,000 will not change regardless of the decision. Summary data on the existing machine
and the new machine are as follows:
Existing Machine
1. Initial cost of $120,000 (purchase made eight years ago)
2. Current book value of $40,000 ($120,000 minus accumulated depreciation of $80,000 using the
straight-line method
3. Current disposal value of $4,000
4. Estimated remaining useful life of four years with zero terminal disposal value
5. Variable operating costs per year of $80,000
New Machine
1. Current purchase price of $60,000
2. Estimated useful life of four years with zero terminal disposal value
3. Variable operating costs per year of $56,000
Required:
Should Toledo Torpedo Company keep the old machine or purchase the new one?
Handy Handouts
Page - 66 -
Eighth Edition
HASSETT COMPANY
(Relevant Costs)
MAKE OR BUY
Hassett Company produces ceramic teapots with wooden handles, and its production facility in Patchogue, NY
has idle capacity (i.e., no opportunity cost). The 1998 budget specifies that 20,000 wooden handles will be
required so the company can produce the same number of teapots.
Costs to manufacture the handles are as follows:
Direct Material
$ .60
Direct Labor
$ .40
Variable Mfg. Overhead $ .10
Fixed Mfg. Overhead
$ .20
Total
$1.30
R&M Handle Co. specializes in the production of wooden handles for ceramic teapots. R&M has offered to
supply handles for $1.25 each.
Required:
Should Hassett Company MAKE the handles for use in teapot production, or BUY them from R&M Handle
Co.?
Handy Handouts
Page - 67 -
Eighth Edition
CALIFORNIA TEXTBOOKS (A)

(Relevant Costs)
MAKE OR BUY
California Textbooks produces high-quality textbooks, and incurs the following costs for making the book
covers.
Direct materials
Direct labor
Variable overhead applied
Fixed overhead applied
Total costs
COST OF MAKING COVERS

Total Costs for
Costs
10,000 units
per Unit
$ 10,000
$ 1
80,000
8
40,000
4
50,000
5
$180,000
$18
If the textbook covers are purchased, $20,000 of fixed costs will be saved.
Required:
Should California Textbooks make or buy the textbook covers?
Handy Handouts
Page - 68 -
Eighth Edition
CALIFORNIA TEXTBOOKS (B)

(Relevant Costs)
MAKE OR BUY
California Textbooks produces high-quality textbooks, and incurs the following costs for making the book
covers.
Direct materials
Direct labor
Variable overhead applied
Fixed overhead applied
Total costs
COST OF MAKING COVERS

Total Costs for
Costs
10,000 units
per Unit
$ 10,000
$ 1
80,000
8
40,000
4
50,000
5
$180,000
$18
If the textbook covers are purchased, $20,000 of fixed costs will be saved.
Additionally, if the textbook covers are purchased, the released production facilities can be used to manufacture
other products with a contribution margin of $19,000 or can be rented out for $5,000. California Textbooks
now has four options: (1) Make, (2) Buy and leave facilities idle, (3) Buy and use facilities for other products,
or (4) Buy and rent.
Required:
Which option is best for California Textbooks?
Handy Handouts
Page - 69 -
Eighth Edition
ADAMS COMPANY
(Relevant Costs)
SCARCE RESOURCES
Adams Company specializes in manufacturing titanium into bicycle frames and golf clubs, their only two
product lines. A recent strike in Russia has stopped all production of this rare metal, but Adams foresaw this
event occurring and has stockpiled 80,000 lbs. of titanium in inventory. No more titanium can be purchased for
the foreseeable future and the managers at Adams Company must decide whether to use their titanium inventory
to produce bicycle frames or to produce golf clubs.
Bicycle Frames ------ $40/unit contribution margin, each frame requires 8 lbs. of titanium to produce
Set of Golf Clubs ---- $32/unit contribution margin, each set of clubs requires 4 lbs. of titanium to produce
Fortunately for Adams Company, everything they make can be sold regardless of which product they produce.
Required:
How many of each product should Adams Co. make to maximize Income?
Handy Handouts
Page - 70 -
Eighth Edition
SAM ENTERPRISES
(Relevant Costs)
SCARCE RESOURCES
Sam Enterprises manufactures two products, Cans and Can-ettes. More information regarding these two
products can be found below.
Variable expenses per unit
Contribution margin per unit
Contribution-margin ratio
Cans
$10
7
$ 3
30%
Can-ettes
$15
9
$ 6
40%
Additionally, as the owner of Sam Enterprises, you know that you only have 1,000 hours of production capacity
available. You can produce three Cans per hour but only one Can-ette per hour.
Required:
Which product should you choose to produce, Cans or Can-ettes? Show all supporting calculations.
Handy Handouts
Page - 71 -
Eighth Edition
MOEHRLE MANUFACTURING
(Relevant Costs)
SPECIAL ORDER
Moehrle Manufacturing makes computer monitors which sell for $150 each. Steve, the CEO of Moehrle
Manufacturing, has received a special order to produce monitors with a special logo. The special logo would
increase the production cost of each monitor by $5.00 over and above the normal costs to manufacture these
computer monitors, as detailed below.
Costs to manufacture:
Direct materials
Direct labor
Variable mfg. overhead
Fixed mfg. overhead
Total
$45
$30
$30
$22
$127
Required:
What is the minimum selling price Steve should accept for this order?
Handy Handouts
Page - 72 -
Eighth Edition
TILLAMOOK CHEESE CO.

(Relevant Costs)
SELL NOW OR PROCESS FURTHER
Tillamook Cheese Co. (TCC) produces not only cheese but also ice cream and butter in its facility in Tillamook,
Oregon. Raw milk is the primary direct material used to produce all three products. Currently 40% of the
TCCs production is cheese, 50% is ice cream, and 10% is butter. You were recently hired as an accountant and
were asked to determine if it would be more profitable instead to sell any of the raw milk as milk rather than use
it to produce cheese, ice cream, or butter.
Which products should be processed further??
Product:
Sales value at split off (i.e., raw milk)
Sales value if processed further
Cost of further processing
Cheese
$400,000
$450,000
$ 17,000
Ice Cream
$500,000
$679,000
$103,000
Butter
$100,000
$110,000
$ 14,000
Joint costs (milk truck)

$150,000
Joint costs are allocated by the sales value at split off
Required:
What product or products should Tillamook Cheese Co. continue to produce?
Handy Handouts
Page - 73 -
Eighth Edition

Calculations ...
Note: Tillamook Cheese Co. is the name of a real company, but all of the data in this problem are purely fictional.
Handy Handouts
Page - 74 -
Eighth Edition
ANDRETTI COMPANY
(Relevant Costs)
Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks
each year at a selling price of $32 per unit. The company's unit costs at this level of activity are given below:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Variable selling expenses
Fixed selling expenses
Total cost per unit
$10.00
4.50
2.30
5.00
1.20
3.50
$26.50
($300,000)
($210,000)
Required:
A number of questions relating to the production and sale of Daks are given below. Each question is
independent.
1.
Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year. The company
could increase sales by 25 percent above the present 60,000 units each year if it were willing to increase the
fixed selling expenses by $80,000. Would the increased fixed expenses be justified?
2.
Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A
customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would b $1.70 per
unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated
with the order would be $3.20 per unit shipping cost. You have been asked by the president to compute the
per unit break-even price on this order.
3.
The company has 1,000 Daks on hand that have some irregularities and are therefore considered to be
"seconds". Due to the irregularities, it will be impossible to sell these units at the regular price. If the
company wishes to sell them through regular distribution channels, what unit cost figure is relevant for
setting a minimum selling price?
4.
Due to a strike in its supplier's plant, Andretti Company is unable to purchase more material for the
production of Daks. The strike is expected to last for two months. Andretti Company has enough material
on hand to continue to operate at 30 percent of normal levels for the two-month period. As an alternative,
Andretti could close it plant down entirely for the two months. If the plant were closed, fixed overhead
costs would continue at 60 percent of their normal level during the two-month period; the fixed selling
costs would be reduced by 20 percent while the plant was closed. What would be the dollar advantage or
disadvantage of closing the plant for the two month period?
5.
An outside manufacturer has offered to produce Daks for Andretti Company and to ship them directly to
Andretti's customers If Andretti Company accepts this offer, the facilities that is uses to produce Daks
would be idle; however, fixed overhead costs would be reduced by 75 percent from their present level.
Since the outside manufacturer would pay for all the costs of shipping, the variable selling costs would be
only two-thirds of their present amount. Compute the unit cost figure that is relevant for the comparison
against whatever quoted price is received from the outside manufacturer.
Handy Handouts
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Eighth Edition
ANDRETTI COMPANY
Calculations ...
Handy Handouts
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Eighth Edition
ANDRETTI COMPANY
Calculations ...
Handy Handouts
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Eighth Edition
Lets Take Notes ... JOB-ORDER COSTING

The Cost/Managerial Accounting Problem:
Handy Handouts
Page - 78 -
Eighth Edition

What is the Matching Principle?
Be willing to make decisions. Thats the most important quality

in a good leader. Dont fall victim to what I call the ready-aimaim-aim-aim syndrome. You must be willing to fire.
-- T. Boone Pickens, Financier
Handy Handouts
Page - 79 -
Eighth Edition
I owe all of my success in life to having been always a quarter

of an hour beforehand.
-- Horatio Nelson (1758-1805), Vice Admiral of the Royal
Navy
Handy Handouts
Page - 80 -
Eighth Edition

Two Income Statement Formats:
Absorption Costing Income Statement
Variable Costing Income Statement
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
How Can Unit Costs Be Calculated?
Handy Handouts
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Eighth Edition
EGG YOLK YUMMIES

Applying Overhead
Egg Yolk Yummies manufactures hard yellow candies. The companys production process is largely automated,
and the company incurs monthly expenses of $25,000 for depreciation and factory leases. In addition, on
January 1st, 1999, Egg Yolk paid $48,000 for fire insurance covering the entire production facility for the
months January 1st through December 31st, 1999. Also, Egg Yolk paid $36,000 on December 15th to maintain
and refurbish the production machines and facilities.
Required:
When calculating monthly net income, how much manufacturing overhead expense should Egg Yolk Yummies
use for each of the months of 1999, January through December?
Jan.
Feb. Mar.
Apr.
May
June
July
Aug.
Sept. Oct.
Nov.
Dec.
Total
$384,000
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
Lets Take Notes ... APPLYING OVERHEAD

PDOR =
Applied MOH =
As I think back and look forward, I see how nothing is

unambiguous; nothing is without risk. Salvation does not come
through simplicities.
Handy Handouts
Page - 86 -
Eighth Edition
-- A. Bartlett Giamatti (1938-1989), Educator and baseball

executive
Handy Handouts
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Eighth Edition
HALO PRODUCTS COMPANY

(Applying Overhead)
The Halo Products Company uses direct labor hours as the basis for applying overhead to products. Estimated
manufacturing overhead costs for 1997 are $200,000, and estimated direct labor hours for the year are 32,000
hours. During 1997, 36,400 actual direct labor hours were worked and the Manufacturing Overhead Control
account had a year end balance of $256,200.
Required:
a.
b.
c.
d.
Compute the manufacturing overhead rate for 1997.

Compute the amount of applied manufacturing overhead for 1997.
Compute the amount of underapplied or overapplied overhead for the year.
Compute the actual overhead cost per direct labor hour.
Handy Handouts
Page - 88 -
Eighth Edition
NARCISSUS NEEDLES
(Applying Overhead)
Narcissus Needles allocates overhead on the basis of direct labor hours (DLH). The management of Narcissus
has estimated the following costs for the 1997 fiscal year, all related to factory and production processes:
Factory Utilities
Depreciation on factory equipment
Supervisors' salaries
Janitorial supplies
Factory Insurance
$10,000
15,000
30,000
6,000
9,000
Management has also estimated that 3,500 direct labor hours will be worked during the year.
Required:
1. What is the predetermined overhead rate (PDOR) that Narcissus should use to apply overhead?
2. If 3,600 direct labor hours were actually worked during the fiscal year, what would be applied overhead?
3. If 3,600 direct labor hours were worked and actual costs incurred were as follows, how much overhead was
overapplied or underapplied?
Factory Utilities
$10,500
Depreciation on factory equipment
15,000
Supervisors' salaries
30,000
Janitorial supplies
5,200
Factory Insurance
8,500
Handy Handouts
Page - 89 -
Eighth Edition
McKAY MILLS
(Applying Overhead)
Suppose McKay Mills at the beginning of the year expected to incur $1,335,000 of overhead expenses in 1995.
McKay has a policy of allocating overhead on the basis of direct labor hours using a plant-wide rate. McKay
has three departments -- Yarn, Fabric and Clothing -- which expect to incur 500, 410 and 735 hours
(respectively) of direct labor hours in 1995.
Required:
What predetermined overhead rate (PDOR) should McKay Mills use?
McKay Mills departments actually incurred direct labor hours as follows: Yarn (455), Fabric (420) and
Clothing (750).
Required:
How much overhead should be applied to each department when $1,372,000 of overhead costs
were actually incurred?
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
BUFFALO BROILERS
(Applying Overhead)
Buffalo Broilers is the manufacturer of a countertop oven-broiler and estimates overhead costs of $500,000 for
1992. Three possible overhead application bases are being considered by management; they are direct labor
hours, direct labor cost, and machine hours. Estimated 1992 activity levels for each of the potential application
bases are given below:
Direct labor hours
Direct labor cost
Machine hours
100,000 hours
$800,000
80,000 hours
The broiler requires two direct labor hours, $18.00 of direct labor cost, and 1.2 hours of machine time. The
balance in the manufacturing overhead account was $576,000 on December 31, 1992. During 1992, 120,000
direct labor hours were worked at a cost of $930,000, and 90,000 machine hours were used. There were 60,000
oven-broilers manufactured in 1992.
Required:
1.
Compute the 1992 manufacturing overhead rate using each of the three potential application bases.
2.
Compute the underapplied or overapplied overhead that would have occurred in 1992 using each of the
application bases.
3.
Assume direct labor hours was used as the application base. Compute the unit cost of overhead using
actual overhead cost and actual activity for the year.
Handy Handouts
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Eighth Edition
BUFFALO BROILERS
Calculations ...
Handy Handouts
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Eighth Edition
HOWDY COMPANY
(Applying Overhead)
Morris Company manufactures products to customer specifications and employs a job-order costing system.
Predetermined overhead rates are used to apply manufacturing overhead cost to jobs. The predetermined
overhead rate in department A is based on machine hours, and the rate in department B is based on direct labor
cost. At the beginning of 1995, the company's management made the following estimates:
Department
A
12,000
70,000
$510,000
$130,000
$602,000
Direct labor-hours
Machine-hours
Direct materials cost
Direct labor cost
Manufacturing overhead cost
B
60,000
8,000
$650,000
$420,000
$735,000
Job 205 was initiated into production on August 1 and completed on August 10. The company's cost records
show the following information on the job:
Department
A
30
110
$470
$290
Direct labor-hours
Machine-hours
Direct labor cost
B
85
20
$332
$680
Required:
1. Compute the predetermined overhead rate that should be used during the year in department A. Compute
the rate that should be used in department B.
2.
Compute the total overhead cost applied to job 205.
3.
What would be the total cost of job 205? If the job contains 50 units, what would be the cost per unit?
4.
At the end of 1995, the records of Morris Company revealed the following actual cost and operating data
for all jobs worked on during the year. What was the amount of under- or overapplied overhead in each
department at the end of 1995?
Department
A
B
Direct labor-hours
10,000
62,000
Machine-hours
65,000
9,000
$430,000
$680,000
Direct labor cost
$108,000
$436,000
Manufacturing overhead cost
$570,000
$750,000
Handy Handouts
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Eighth Edition
HOWDY COMPANY
Calculations ...
Handy Handouts
Page - 95 -
Eighth Edition
Lets Take Notes ... [EVEN MORE] JOB-ORDER COSTING
** NOTE TO SELF! **
See this problem ____________________________
For an example of cost flows with applied MOH.
Handy Handouts
Page - 96 -
Eighth Edition
Knowledge is food for the soul.

-- Plato (c. 427-347 B.C.), Philosopher
Saddle your dreams afore you ride em.

-- Mary Webb (1881-1927), Novelist
Handy Handouts
Page - 97 -
Eighth Edition
PLENTIFUL PRINTING, INC.

(Job-Order Costing)
You are asked to bring the following incomplete accounts of one of Plentiful Printing's printing plants up to date
through January 31, 1992. Also consider the data that appears below.
Materials (12/31/91 Balance)
Factory Department Overhead (total January charges)
Finished Goods (12/31/91 Balance)
$15,000
$57,000
$20,000
Additional Information:
1.
2.
3.
4.
5.
6.
7.
8.
9.
The overhead is applied using a budgeted rate that is set every December by forecasting the following
year's overhead and relating it to forecast direct labor costs. The budget for 1992 called for $400,000 of
direct labor and $600,000 of factory overhead.
The only job unfinished on January 31, 1992, was No. 419, on which total production costs were $13,000
(direct labor cost of $2,000 --125 direct labor hours--, direct materials cost of $8,000, and manufacturing
overhead costs of $3,000).
Total materials placed into production during January were $90,000.
Cost of goods manufactured during January was $180,000.
Materials inventory as of January 31 was $20,000.
Finished goods inventory as of January 31 was $15,000.
All factory workers earn the same rate of pay. Direct labor hours for January totaled 2,500.
Sales during January of $285,000 were made.
Selling costs of $57,000 and administrative costs of $12,000 were incurred during January.
Required:
a. Materials purchased during January
b. Cost of Goods Sold during January
c. Direct labor costs incurred during January
d. Overhead applied during January
e. Balance, Work in Process, December 31, 1991
f. Balance, Work in Process, January 31, 1992
g. Overapplied or underapplied overhead for January
h. Net income for January
Handy Handouts
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Eighth Edition
PLENTIFUL PRINTING, INC.

Calculations ...
Handy Handouts
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Eighth Edition
ROLEY POLEY COMPANY

(Job-Order Costing)
Below are data for Roley Poley Company as of year-end, December 31, 2002.
Sales salaries
Advertising
Direct materials inventory
Work in process
Indirect labor
Depreciation, factory
Property taxes (70 percent production plant)

Fire insurance (80 percent production plant)
Sales commissions
Administrative salaries
Finished goods
Direct labor
Indirect material
Utilities (80 percent factory)
Rent, office equipment
Depreciation, office
Depreciation, factory equipment
Sales
Miscellaneous office expense
Sales returns and allowances
$ 85,000
44,000
126,100
325,000
73,900
22,700
31,000
18,000
9,800
28,500
167,200
77,300
293,480
11,600
319,700
45,000
8,700
17,400
44,000
1,281,700
4,300
36,100
All accounts have normal balances. Beginning work in process was $49,000 and beginning finished goods was
$87,300. Roley Poley pays income taxes at a rate of 40% of pretax income.
Roley Poleys 2002 budget called for production of 800 unicycles. On average it takes 26 hours of direct labor
per unicycle at a wage rate of $11 per hour. The manufacturing overhead rate is $6.00 per direct labor hour.
During 2002, 920 unicycles were produced. Actual direct labor hours averaged 3 per unit more than expected.
Required:
a.
b.
c.
d.
e.
f.
Calculate the beginning balance of direct materials inventory

Calculate the total prime cost for 2002.
Calculate the underapplied or overapplied overhead for the year.
Calculate the cost of goods manufactured.
Calculate the average unit cost of unicycles completed during 2002.
Calculate the cost of goods sold, and net income before and after taxes.
Handy Handouts
Page - 100 -
Eighth Edition
ROLEY POLEY COMPANY

Calculations ...
Handy Handouts
Page - 101 -
Eighth Edition
THE SWIZZLE MANUFACTURING COMPANY

(Job-Order Costing)
The Swizzle Manufacturing Company is a manufacturer of custom-made equipment and relies heavily on direct
labor in the completion of its jobs. The company uses a job-order costing system and applies manufacturing
overhead cost to jobs on the basis of direct labor hours. At the beginning of 1994, the following estimates were
made as a basis for computing a predetermined overhead rate for the year:
Manufacturing overhead cost ..........
$360,000
Direct labor hours .......................... 20,000 hours
The following transactions took place during the year (all purchases and services were acquired on account):
1.
2.
3.
Raw materials were purchased for use in production, $200,000

Raw materials were requisitioned for use in production (all direct materials), $185,000
Utility bills were incurred, $70,000 (90% related to factory operations, and the remainder related to selling
and administrative activities)
4. Salary and wage costs were incurred:
Direct labor (21,400 hours) ......................
$230,000
Indirect labor ..........................................
90,000
Selling and administrative salaries ............
110,000
5. Maintenance costs were incurred in the factory, $54,000
6. Advertising costs were incurred, $136,000
7. Depreciation was recorded for the year, $95,000 (80% related to factory equipment, and the remainder
related to selling and administrative equipment)
8. Rental cost incurred on buildings, $120,000 (85% related to factory operations, and the remainder related to
selling and administrative facilities)
9. Manufacturing overhead cost was applied to jobs, $ __?___
10. Sales for the year (all on account) totaled $1,200,000. These goods cost $780,000 to manufacture.
The balances in the inventory accounts at the beginning of the year were:
Raw Material
$10,000
Work in Process
15,000
Finished Goods
30,000
Work in Process at December 31, 1994, totaled $22,000
Required:
Prepare a schedule of cost of goods manufactured, a schedule of cost of goods sold, and a statement of net
income (in good form) for the year ended December 31, 1994.
Helpful Hint:
First prepare the calculations using t-accounts, then prepare the required schedules using the information from
the t-accounts. Please turn in all your work (t-accounts and statements).
Handy Handouts
Page - 102 -
Eighth Edition

Calculations ...
Handy Handouts
Page - 103 -
Eighth Edition

Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 1994
Direct materials:
Direct materials inventory, 1-1-1994
Add: Purchases of direct materials
____________
Total materials available
Deduct: Direct materials inventory, 12-31-1994
(___________)
Direct materials used in production
Direct labor
Manufacturing overhead
____________
Actual overhead costs
Add / (Deduct): Over (Under) applied overhead

Manufacturing overhead applied to Work In Process
Total manufacturing costs incurred
____________
$___________
$
Add: Beginning work in process inventory
____________
Total manufacturing costs to account for
Deduct: Ending work in process inventory
(___________)
Cost of Goods Manufactured
Handy Handouts
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Eighth Edition

Schedule of Cost of Goods Sold
Add: Cost of goods manufactured
___________
Goods available for sale
Less: Finished goods inventory, 12-31-1994
(___________)
Cost of goods sold
Add / (Deduct): Under (Over) applied overhead
____________
Adjusted cost of goods sold

Income Statement
Sales
Less: Cost of goods sold
(___________)
Gross margin
Less: Selling and administrative expenses:
____________
Net Income
Handy Handouts
(___________)
$
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Eighth Edition
Handy Handouts
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Eighth Edition
Lets Take Notes ... ACTIVITY-BASED COSTING

How can unit costs be calculated? (Some review, some new.)
Handy Handouts
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Eighth Edition
How might PERRY MASON define ABC?
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
Two ways ABC differs from Job-Order Costing:
It is what you are inside that matters. You, yourself, are your
only real capital.
-- Vladimir Zworykin (1889-1982), Physicist
It often takes more courage to change ones opinion than to
stick to it.
Handy Handouts
Page - 110 -
Eighth Edition
-- Georg Christoph Lichtenberg (1742-1799), Physicist and

philosopher
Handy Handouts
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Eighth Edition
ABC Steps:
It is easy to learn something about everything,

but difficult to learn everything about something.
-- Nathaniel Emmons (1745-1840), Clergyman
** NOTE TO SELF! **
See problem:
____________________________
On page _________
of the Handy Handouts
For an example of ABC.
Handy Handouts
Page - 112 -
Eighth Edition
ARE YOU EVERYTHING YOU COULD BE?

People the world over came to the museum to walk across
Marble Floor and gaze adoringly at Marble Statue. Soon Marble
Floor began to resent being treated like a doormat and said as
much to Marble Statue.
Its not fair! Floor complained. We started at the same
place, but youre revered while Im ignored.
My friend, Statue replied. You have a short memory.
We originated in the same cave, but dont you remember what
happened after that?
No, Floor pouted.
Let me remind you. When the designer cut us from the
cave, you resisted his tools and efforts to shape you.
Of course I did! Floor shouted. It hurt! I didnt need to
be shaped.
When you fought being shaped, he worked on me,
Statue said. I was willing to endure the hardship because it
takes work to reach toward your potential.
I never thought of it that way, Floor said.
You gave up halfway, said Statue. So dont blame the
people who step on you now.
Handy Handouts
Page - 113 -
Eighth Edition
-- Adapted from The Motivational Manager, Lawrence Ragan

Communications
Handy Handouts
Page - 114 -
Eighth Edition
AUDIO BASICS CORPORATION

(Activity-Based Costing)
Audio Basics Corporation manufactures two types of video cassettes: standard and high-grade. The standard
cassettes are primarily for home use. The high-grade version is used for television commercials.
Management believes the accounting system may not be accurately allocating costs to products, particularly
since sales of the high-grade video tapes have been increasing. Management asked you to investigate the cost
allocation problem. You find that manufacturing overhead is currently assigned to products based on the direct
labor costs in the products. For your investigation, you have data from last year. Last year's manufacturing
overhead was $880,000 based on production of 320,000 standard cassettes and 100,000 high-grade cassettes.
Direct labor and direct materials costs were as follows:
Direct labor
Direct materials
Standard
$348,000
$250,000
High-Grade
$132,000
$228,000
Total
$480,000
$478,000
Management determined that overhead costs are caused by three cost drivers. The cost drivers and their costs
for last year were as follows:
Cost Pool
Production Run Setup
Quality Testing
Packing Activities
Total overhead
Costs Assigned
$400,000
$360,000
$120,000
$880,000
Cost Driver
Number of production runs
Quality tests performed
Shipping orders processed
Activity Level
Standard
High-Grade
40
10
180
120
100
50
Total
50
300
150
Required:
1. (a)
(b)
2. (a)
(b)
How much of the overhead will be assigned to each product if the above three cost drivers are used to
allocate overhead?
What is the total cost per unit produced for each product?
How much of the overhead will be assigned to each product if direct labor cost had been used to
allocate overhead?
What would the total cost per unit produced be for each product?
Handy Handouts
Page - 115 -
Eighth Edition

Calculations ...
Handy Handouts
Page - 116 -
Eighth Edition
J.B. GOODE COMPANY

J.B. Goode Company produces two models of guitars. One is a standard acoustic guitar model that sells for
$600 and is constructed from medium-grade materials. The other model is a custom-made acoustic-electric
guitar with pearl inlays and a body constructed from special woods. The custom guitar sells for $1,000. Both
guitars require 10 hours of direct labor to produce, but the custom guitar is manufactured by more experienced
workers who are paid at a higher rate.
Most of J.B. Goodes sales come from the standard guitar, but sales of the custom model have been growing.
Here is the companys sales, production, and cost information for last year.
Sales and production volume in units

Unit costs:
Direct materials
Direct labor
Total unit costs
Manufacturing
Overhead Cost
Building rent
Maintenance
Purchasing
Inspection
Indirect materials
Supervision
Supplies
Total Overhead
Amount
$40,000
15,000
22,000
12,000
15,000
28,000
3,000
$135,000
Standard
Guitar
900
Custom
Guitar
100
$ 150
180
135
$465
$ 375
240
135
$750
Cost Driver
Square footage
Direct labor hours
Number of purchase orders
Number of inspections
Number of units
Number of inspections
Number of units
Standard
Guitar
3,000
9,000
1,500
400
900
400
900
Custom
Guitar
1,000
1,000
500
600
100
600
100
The company allocates overhead costs using the traditional method with an activity base of direct labor hours.
Normal production in the facility utilizes 10,000 direct labor hours.
Chuck B., president of J.B. Goode, is concerned that the traditional cost-allocation system the company is using
may not be generating accurate information and that the selling prices of the guitar may not be covering its true
cost.
Required:
1. Using the traditional method, how much overhead is allocated to the standard guitars, and how much to
the custom guitars? Discuss why this might not be an accurate way to assign overhead costs to
products.
2. J.B. Goodes controller developed the cost driver and activity data presented above. Use activity-based
costing to assign the total cost of overhead to each model of guitar.
3. Calculate the cost of one custom guitar using activity-based costing. Why is the cost different from the
cost calculated using the traditional allocation method? At the current selling price, is the company
covering its true cost of production? Explain your answers.
Handy Handouts
Page - 117 -
Eighth Edition
J.B. GOODE COMPANY

Calculations ...
Handy Handouts
Page - 118 -
Eighth Edition
THE CUTTERS, INC. (A)

Chase Gardner is an expatriate product manager for The Cutters, Inc., a manufacturer of hunting blades
and knives. Its production facilities are located in Argentina. In recent years profits have begun to decline and
Chase is trying to improve the situation by focusing the companys sales efforts on the most profitable products.
Chases reports generally indicate that complex, low volume products (such as The Hunter) are much more
profitable than simple, high volume products (such as The Carver).
The Cutters currently uses a job-order costing and allocates manufacturing overhead to product lines
using direct labor hours. 780,000,000 Pesos (Argentine) of manufacturing overhead costs were incurred during
2003, and 10,000 direct labor hours occurred producing all of the companys many product lines.
Additional information about The Hunter and The Carver product lines is provided below.
Sales
Cost:
Direct material cost
Direct labor cost
The Hunter
19,500,000 Pesos
The Carver
53,000,000 Pesos
4,500,000 Pesos
1,200,000 Pesos
10,000,000 Pesos
6,000,000 Pesos
Units produced
Total direct labor hours worked
15,000
80
100,000
400
Required:
Using job-order costing, apply overhead to The Hunter and The Carver and calculate the gross profit of these
two product lines.
Handy Handouts
Page - 119 -
Eighth Edition

Calculations ...
Handy Handouts
Page - 120 -
Eighth Edition
THE CUTTERS, INC. (B)

Sales and direct costs remain as described in The Cutters, Inc. (A). However, rather than allocating
indirect manufacturing costs to product lines using a single rate, Chase is considering the use of more
sophisticated costing methods. With activity-based costing in mind, he has collected the following information.
COST DRIVER
Number of parts
Number of machine hours
Number of components tested
Direct labor hours
OVERHEAD COST POOL

POOL 1
Materials purchasing and handling
cost
POOL 2
Production engineering and design
Production machine setup
POOL 3
Production machine depreciation
Production machine maintenance
POOL 4
Quality testing
POOL 5
Plant security
Plant supervision
Building maintenance
Factory supplies
Factory insurance
Total Manufacturing Overhead
OVERHEAD
COST
75,000,000 Pesos
60,000,000 Pesos
40,000,000 Pesos
300,000,000 Pesos
50,000,000 Pesos
100,000,000 Pesos
25,000,000 Pesos
70,000,000 Pesos
10,000,000 Pesos
20,000,000 Pesos
30,000,000 Pesos
780,000,000 Pesos
The Cutters, Inc., experienced the following levels of activity:

Number of parts
750,000
25
2,000
25,000
Number of direct labor hours
10,000
Additional information regarding the The Hunter and The Carver can be found below.
The Hunter The Carver
Number of units produced
15,000
100,000
Number of parts per unit
3
1
1
1
16
48
1,000
100
Number of direct labor hours
80
400
Required:
Using activity-based costing, apply overhead to The Hunter and The Carver and calculate the gross profit of
these two product lines.
Handy Handouts
Page - 121 -
Eighth Edition

Calculations ...
Handy Handouts
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Eighth Edition

Calculations ...
Handy Handouts
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Eighth Edition
Lets Take Notes ... THE ABC PRESENTATION
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
REVIEW / SELF-QUIZ (Job-Order Costing and ABC)

Job-order costing is used for what type(s) of products?

How is cost-per-unit calculated in job-order costing?
Both ABC and job-order costing are trying to answer the same question:
what is it?
How does one calculate PDOR?

How does one calculate Applied MOH?
Where does Applied MOH go in the t-accounts?
Where does Over- or Under-Applied MOH go in the t-accounts?
Where do period costs go in the t-accounts?
How might Perry Mason define ABC?

How is ABC different than job-order costing?
What steps are performed when calculating activity-based costs?
Can you draw the ABC Cross?

Can you draw the Profitability Profile? (Gary describes this as the fishing
pole diagram.)
What else to you remember from the ABC Presentation? For instance,
would all companies benefit from ABC?
Note:
We have covered this material over several days of classes.
Handy Handouts
Page - 131 -
Eighth Edition
Lets Take Notes ... PROCESS COSTING

We are still answering what question?
Process costing is used for what types of products?
When a company uses process costing, costs are accumulated by _____________________
Handy Handouts
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Eighth Edition

How can unit costs be calculated? (Some review material, some new.)
Handy Handouts
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Eighth Edition
Parallel and Sequential Processing
When you get to the end of your rope, tie a knot and hang on.
-- Franklin D. Roosevelt (1882-1945). 32nd U.S. President
Handy Handouts
Page - 134 -
Eighth Edition

What is an EQUIVALENT UNIT? (EU, for short)
Handy Handouts
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Eighth Edition

Process Costing Steps:
** NOTE TO SELF! **
See problem:
____________________________
On page _________
of the Handy Handouts
For an example of process costing,
including EU calculations.
Handy Handouts
Page - 136 -
Eighth Edition
REVIEW / SELF-QUIZ
Job-order costing, ABC and process costing are trying to answer the same
question: what is it?
On what types of products would you generally use Process Costing?
What is an EU?
How do you calculate EU using the weighted-average method?
In what t-account do you calculate EU?
What is sequential processing?

What is parallel processing?
What steps are performed when calculating process costs?
Handy Handouts
Page - 137 -
Eighth Edition
Good has two meanings: It means that which is good absolutely

and that which is good for somebody.
-- Aristotle (384-322 B.C), Philosopher
Handy Handouts
Page - 138 -
Eighth Edition
B. G. WIP COMPANY
(Process Costing)
B. G. Wip Company manufactures and sells buggy whips as novelty items. A continuous flow production
operation is necessary to satisfy demand. The company is relatively new and the accountant hired last month
worked only for a job order manufacturing company before this position. The accountant is familiar with what
costs to accumulate as product costs, but is having difficulty determining the amount of output for the month so
that unit costs can be computed. Below are some notes the accountant has gathered to help determine the output
for the last process center in the manufacturing process.
2,000 units were in beginning inventory.
9,000 units were transferred in from the preceding process center during the month.
7,700 units were completed and transferred to finished goods inventory during the month.
Both the beginning and ending work in process inventory had all material added. Conversion was 60 percent
complete on the beginning work in process inventory but only 1/3 complete on the ending inventory.
Required:
Prepare a schedule for the new accountant showing the amount of production for the period in the department.
Use both the weighted average and FIFO methods.
Handy Handouts
Page - 139 -
Eighth Edition
CUTTING EDGE SKIS

(Process Costing)
The following is data for the November, 1997, operations of the shaping and milling department of Cutting
Edge Skis.
Work in process inventory, beginning:
Units in process
Percent complete with respect to materials
Percent complete with respect to conversion
Costs in the beginning inventory:
Materials
Conversion
Total
200
50%
30%
$3,000
1,000
$4,000
Units started into production during November

Units completed and transferred out
5,000
4,800
Costs added to production during November

Materials
Conversion
Total
$74,000
70,000
$144,000
Work in process inventory, ending:

Units in process
400
40%
25%
Required:
Calculate the value of goods transferred-out and ending inventory using both the weighted average and FIFO
methods.
Handy Handouts
Page - 140 -
Eighth Edition
CUTTING EDGE SKIS

Calculations ...
Handy Handouts
Page - 141 -
Eighth Edition
STEINMUELLER STEINS, INC.

(Process Costing)
The following information is available for the Molding Department of Steinmueller Steins for the month of
July:
Units
Work in process, July 1
(70% complete for conversion costs)
Direct materials
Direct labor
Total work in process, July 1
Costs
5,000
$ 6,000
3,000
4,000
$13,000
Started in production during July
20,000
Costs added:
Direct materials
Direct labor
Total costs added during July
$18,000
8,000
10,000
$36,000
Work in process, July 31

(80% complete for conversion costs)
2,000
Materials are added at the beginning of the process. Round unit costs to 2 decimal places.
Required:
1. What would be the equivalent units of production for materials using the weighted average method?
2. What would be the equivalent units of production for conversion costs using the weighted average method?
3. What would be the cost per equivalent unit of production for materials using the weighted average
method?
4. What would be the cost per equivalent unit of production for conversion costs using the weighted average
method?
5. What would be the cost of goods transferred out using the weighted average method?
6. What would be the cost of ending work in process using the weighted average method?
7. What would be the equivalent units of production for materials using the FIFO method?
8. What would be the equivalent units of production for conversion costs using the FIFO method?
Handy Handouts
Page - 142 -
Eighth Edition
STEINMUELLER STEINS, INC.

Calculations ...
Handy Handouts
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Eighth Edition
ABIQUA ACRES
(Process Costing)
The following information is available for the Pasteurization Department of the Abiqua Acres dairy farm for the
year 1996:
Units
Costs
Work in process, January 1
(100% complete as to direct materials,
40% complete for conversion costs)
5,000
Direct materials
$20,000
Conversion costs
16,000
Total work in process, January 1
$36,000
Started in production during the year
60,000
Costs added:
Direct materials
Conversion costs
Total costs added during 1996
$250,000
450,000
$700,000
Work in process, December 31

(100% complete as to direct materials,
50% complete as to conversion costs)
Units transferred out during the year
57,000
Materials are added at the beginning of the process. Round unit costs to 4 decimal places.
Required:
1. What would be the equivalent units of production for materials using the weighted average method?
2. What would be the equivalent units of production for conversion costs using the weighted average method?
3. What would be the cost per equivalent unit of production for materials using the weighted average
method?
4. What would be the cost per equivalent unit of production for conversion costs using the weighted average
method?
5. What would be the cost of goods transferred out using the weighted average method?
6. What would be the cost of ending work in process using the weighted average method?
7. What would be the equivalent units of production for materials using the FIFO method?
8.
What would be the equivalent units of production for conversion costs using the FIFO method?
Handy Handouts
Page - 144 -
Eighth Edition
ABIQUA ACRES
Calculations ...
Handy Handouts
Page - 145 -
Eighth Edition
CANDLELIGHT CANDLES CO.

(Process Costing)
The following is data for the August 2001 operations of the production department of Candlelight Candles.
Beginning inventory:
Units in process
25,000
100%
40%
Costs in the beginning inventory:

Materials
Conversion
Total
$42,650
17,152
$59,802
Units started into production during August

Units completed and transferred out
510,000
523,000
Costs added to production during November

Materials
Conversion
Total
$433,500
339,690
$773,190
Work in process inventory, ending:

Units in process
12,000
100%
80%
Required:
Calculate the value of goods transferred-out and ending inventory using both the weighted average and FIFO
methods.
Handy Handouts
Page - 146 -
Eighth Edition

Calculations ...
Handy Handouts
Page - 147 -
Eighth Edition
What we hope ever to do with ease, we must first learn to do

with diligence.
-- Samuel Johnson (1709-1784), Lexicographer and writer
Failure is the condiment that gives success its flavor.

Handy Handouts
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Eighth Edition
-- Truman Capote (1924-1984), Writer
Handy Handouts
Page - 149 -
Eighth Edition
Lets Take Notes ... BUDGETING
THE FIRM
Handy Handouts
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Eighth Edition

What is a BUDGET?
Budgets are used for TWO major purposes:
Handy Handouts
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Eighth Edition
Budgets are generally prepared in this order:
The Master Budget =
Handy Handouts
Page - 152 -
Eighth Edition
Punctuality is the politeness of kings.

-- Louis XVIII (1755-1824) King of France
Handy Handouts
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Eighth Edition
REVIEW / SELF-QUIZ
What is a budget?
Budgets are used for what two major purposes in organizations?
In what order are the budgets prepared?
What do the words pro-forma mean?
What is the master budget?
[N]o legacy is so rich as honesty.

-- William Shakespeare, Alls Well That Ends Well
Character is long-standing habit.
-- Plutarch (c. 46-120 A.D.), Biographer
Handy Handouts
Page - 154 -
Eighth Edition
Grant me the courage not to give up even though I think it is

hopeless.
-- Chester W. Nimitz (1885-1966), U.S. Navy Admiral
Handy Handouts
Page - 155 -
Eighth Edition
WOMACK COMPANY
(Budgeting)
Womack Company plans to sell 4,600 units in October and 5,000 units in November of 1997. The beginning
inventory of finished goods on October 1 is expected to be 650 units. Womack has a policy of wanting to have
10% of next month's sales as ending inventory.
Required: How much production should Womack schedule for the month of October?
Handy Handouts
Page - 156 -
Eighth Edition
PARADISE COMPANY
(Budgeting)
Paradise Company forcasted the following information about its inventories for the fiscal year ending June 30,
1995.
7/1/94
6/30/95
Raw Material
Work In Process
Finished Goods
40,000 lbs.
10,000 lbs.
80,000 lbs.
50,000 lbs.
10,000 lbs.
50,000 lbs.
During the manufacturing process, 2 lbs. of raw material is used to produce one finished unit of product.
Required:
If 500,000 units are expected to be manufactured during the fiscal year, how much raw material should Paradise
Company plan on purchasing?
Handy Handouts
Page - 157 -
Eighth Edition
WHISKERS PRODUCTS, INC.

(Budgeting)
Whiskers Products expects the following sales to occur during 1996:
February
March
April
May
June
Sales Volume
110,000
120,000
100,000
120,000
110,000
Sales Revenue
$55,000
$60,000
$50,000
$60,000
$55,000
Whiskers Products makes all sales on account. Fifty percent of the sales is collected in the month of the sale,
thirty percent is collected in the following month, and the remaining twenty percent is collected two months
after the sale.
Required: Calculate the second quarter cash budget for Whisker Products, Inc.
Handy Handouts
Page - 158 -
Eighth Edition
KAITLYN KORPORATION
(Budgeting)
The cash balance of Kaitlyn Korp. at the beginning of the month is $15,000, the balance required in the cash
account at the end of the month is $12,000, cash disbursements are $125,000, and cash collections from
customers for the month are $90,000.
Required: How much money should Kaitlyn Korp. borrow?
Handy Handouts
Page - 159 -
Eighth Edition
ARCHER COMPANY
(Budgeting)
Archer Company has budgeted sales of 30,000 units in April, 40,000 units in May, and 60,000 units in June.
The company has 6,000 units on hand on April 1.
Required:
If the company requires an ending inventory equal to 20 percent of the following month's sales, what should be
Archer Company's production in May?
Refer to the data for Archer Company above. Each unit requires 3 pounds of material X. Some 24,000 pounds
of material X were on hand April 1, and the company requires materials on hand at the end of each month equal
to 25 percent of the following month's production needs.
Required: For April, the company should purchase how many pounds of material X?
Handy Handouts
Page - 160 -
Eighth Edition
WARD COMPANY
(Budgeting)
Actual sales in Ward Company were: June, $30,000; July, $50,000; and August, $70,000.
Sales in September are expected to be $60,000.
Required Part 1:
If all sales are made on account and 30 percent of a month's sales are collected in the month of sale, 50 percent
in the first month after sale, and 15 percent in the second month after sale, then what are cash receipts for
September budgeted to be?
Required Part 2:
If twenty percent of sales are cash sales, then the remaining 80 percent of sales are on account. If 30 percent of
a month's account sales are collected in the month of sale, 50 percent in the first month after sale, and 15
percent in the second month after sale, then what are cash receipts for September budgeted to be?
Handy Handouts
Page - 161 -
Eighth Edition
YOUNG PRODUCTS
(Budgeting)
Young Products produces coat racks. The projected sales for the first quarter of the coming year and the
beginning and ending inventory data are as follows:
Sales (units)
Unit price
Beginning inventory (units)
Targeted ending inventory (units)
100,000
$15
8,000
12,000
The coat racks are molded and then painted. Each rack requires four pounds of metal, which costs $2.50 per
pound. The beginning inventory of raw materials is 4,000 pounds. Young Products wants to have 6,000 pounds
of metal in inventory at the end of the quarter. Each rack produced required thirty minutes of direct labor time,
which is billed at $9.00 per hour.
Required: For the first quarter prepare a:
1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
Handy Handouts
Page - 162 -
Eighth Edition
YOUNG PRODUCTS
Calculations ...
Handy Handouts
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Eighth Edition
Sincerity and truth are the basis of every virtue.

-- Confucius (551-479 B.C.), Philosophoer
Logic is a machine of the mind,

and if it is used honestly it ought to bring out an honest
conclusion.
-- G. K. Chesterton (1874-1936), Journalist and essayist
Handy Handouts
Page - 164 -
Eighth Edition
Lets Take Notes ... STANDARD COSTS and FLEXIBLE BUDGETING

DAY #1
What I hope you always remember (BOOK BUYING EXAMPLE):
What two reasons can be used to explain literally any variance?

#1.
#2.
It is not the mountain we conquer but ourselves.

Handy Handouts
Page - 165 -
Eighth Edition
-- Edmund Hillary, Explorer
Handy Handouts
Page - 166 -
Eighth Edition

Static Budget =
Flexible Budget =
Budget =
Standard =
We will learn how to calculate four variances:
Handy Handouts
Page - 167 -
Eighth Edition

DAY #2
Normal Cost System:
Extended Normal Cost System:
Small opportunities are often the beginning of great

enterprises.
Handy Handouts
Page - 168 -
Eighth Edition
-- Demosthenes (384-322), Orator and statesman
Handy Handouts
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Eighth Edition
IF you wouldnt write it and sign it, dont say it.

-- Earl Wilson (1907-1987), Columnist
Living well and beautifully and justly are all one thing.
-- Socrates (c. 470-399 B.C.), Philosopher
REVIEW / SELF-QUIZ
What is the difference between a budget and a standard?

What is a static budget?
What is a flexible budget?
What four variances should you be able to calculate?
When utilizing standard costs, what is another name for the PDOR?
When utilizing standard costs, how is the activity calculated?
Know Thy Calculations!
Handy Handouts
Page - 170 -
Eighth Edition
LANDS END MENS SUITS

(Standard Costs and Flexible Budgeting)
The following information is available:
Std. DM cost per yard =
$6.00
DM qty. std. =
(Std. Qty.)
Actual price per yard

Actual quantity used per suit
Yards purchased
Units produced
2.8 yards of material

.6 yards of waste
how the standard was established
.1 yards of rejects
3.5 yards per suit
$5.00
4 yards
10,000
2,700
Required:
Calculate all variances.
Handy Handouts
Page - 171 -
Eighth Edition
PIRATES, INC.
Pirates, Inc. uses a standard cost system. Pirates has established the following standards for the cost of one unit
of product.
Direct labor
Std. Qty.
1.25 hours
Std. Price or Rate

$12.00 per hour
During June, Pirates incurred total factory direct labor wages for June of $327,600. Pirates manufactured
22,000 units of product during June, using 28,000 direct labor hours.
Required:
1. What is the direct labor rate variance for June?
2. What is the direct labor efficiency variance for June?
3. What was the actual direct labor rate for June?
Handy Handouts
Page - 172 -
Eighth Edition
Handy Handouts
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Eighth Edition
SMITH COMPANY
Lets do this example:
DM
DL
Standards:
10 lbs. at @
3.5 hrs at @
$8.25 / lb.
$9.65 / hour
Actuals:
Units produced 3,200
DM purchased 36,000 @ $8.35 / lb.
DM used
31,800 lbs.
DL
11,520 hours
DL cost
$112,896
Required:
1. Compute material price and usage variances
2. Compute labor rate and efficiency variances
Handy Handouts
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Eighth Edition
SMITH COMPANY
Calculations ...
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
TRUE-BLUE CORPORATION
True-Blue Corporation has the following information available for December, 2003:
VOH Std. Rate
Actual VOH
Actual DLH
Std. Hours Allowed
$3.85 per DLH

$1,600
400 hours
420 hours
Required:
Handy Handouts
Page - 177 -
Eighth Edition
STRANGE FIRE, P.C.

Strange Fire, P.C., has the following information available for the first quarter of 2004:
Actual VOH
Standard OH Applied
Actual hours incurred
Variable OH Rate
$54,000
$56,000
2,900 hours
$20 per hour
Required:
What is the Standard Quantity?
Handy Handouts
Page - 178 -
Eighth Edition
THE COSTUME COMPANY

The Costume Company incurred the following during the fiscal year ending January 31, 2002:
Budgeted FOH
Expected Production
Std. FOH Rate
Actual Production
Actual FOH
Actual Hours
$800,000
25,000 units
$8 per DLH
25,250 units
$802,000
102,000
Required:
Handy Handouts
Page - 179 -
Eighth Edition
BENTON COMPANY
Benton Co. provides the following information from their cost system. Benton records standard overhead based
on direct labor hours.
Actual units completed
Actual labor cost (@ $6.90)
Budgeted total overhead
Actual variable overhead
Actual fixed overhead
310
$20,769
$45,900
$25,150
$23,800
Standard specification per unit of finished product:

Direct labor (9 hrs./unit)
Variable overhead
Fixed overhead
$63.00
$72.00
$81.00
Required:
Calculate the standard hours, manufacturing overhead rate, and the variances.
Handy Handouts
Page - 180 -
Eighth Edition
BENTON COMPANY
Calculations ...
Handy Handouts
Page - 181 -
Eighth Edition
BEALE STREET BLUES, INC.

At the beginning of 1987, Beale Street Blues, Inc., adopted the following standards:
Total
Direct materials
Direct labor
Factory overhead:
Variable
Fixed
Standard cost
per unit
Input
3 lbs. @ $2.50 per lb.
5 hrs. @ $7.50 per hr.
$ 7.50
$37.50
$3.00 per direct labor hour

$4.00 per direct labor hour
$15.00
$20.00
$80.00
Normal volume per month is 40,000 standard labor hours. Beales January 1987 budget was based on normal
volume. During January Beale produced 7,800 units, with records indicating the following:
Direct labor
Factory overhead
Variable overhead
25,000 lbs. @ $2.60

23,100 lbs.
40,100 hrs. @ $7.30
$300,000
$130,000
Required:
For the month of January 1987, compute the following variances, indicating whether each is favorable or
unfavorable:
1. Direct materials price variance, based on purchases.
2. Direct materials usage variance.
3. Direct labor rate variance.
4. Direct labor efficiency variance.
5. Variable factory overhead efficiency variance.
6. Fixed factory overhead spending variance.
7. Factory overhead volume variance.
Handy Handouts
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Eighth Edition

Calculations ...
Handy Handouts
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Eighth Edition
BALLYCANALLY CORPORATION
The following information is available for Ballycanally's operations for the latest calendar year. Treat each
variance calculation independently.
Materials Variances
AX-89:
Material Price
Sheets Requisitioned
Sheets Purchased
Units Produced
Standard
$1.75
13,000
6,500
Actual
$1.80
13,250
14,000
6,300
Labor Variances
Deluxe Model:
Labor Hours
Labor Costs
Units Produced
Standard Hours Per Unit
Standard
$36,000
Actual
4,100
$37,105
2,000
Variable Overhead Variances

Supplies Expense:
Cost Per Labor Hour
Labor Hours
Standard Allowable Hours
Standard
$1.20
Actual
$1.22
27,750
28,000
Fixed Overhead Variances

Standard Units Allowed
Volume Variance
Standard Fixed Cost Rate
Total Fixed Cost Variance
60,000
$6,000 F
$2.50 per unit
$5,500 U
Required:
1.
Materials variances: Calculate the standard allowable sheets per unit and all variances.
2.
Labor variances: Calculate the actual labor rate per hour and all variances.
3.
Variable overhead variances: Calculate the actual supplies expense and all variances.
4.
Fixed overhead variances: Calculate actual and budgeted fixed overhead and all variances.
Handy Handouts
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Eighth Edition
Calculations ...
Handy Handouts
Page - 185 -
Eighth Edition
COX COMPANY
Information on Cox Company's direct materials costs for the month of January 1983 was as follows:
Actual quantity purchased
Actual unit purchase price
Materials purchase price variance unfavorable (based on purchases)
Standard quantity allowed for actual production
Actual quantity used
18,000
$ 3.60
$ 3,600
16,000
15,000
Required: What was the direct material usage variance for January 1983?
Handy Handouts
Page - 186 -
Eighth Edition
KENNEDY COMPANY
Information on Kennedy Company's direct material costs is as follows:
Standard unit price
Actual quantity purchased
Standard quantity allowed for actual production
Materials purchase price variance favorable
$3.60
1,600
1,450
$ 240
Required: What was the actual purchase price per unit, rounded to the nearest penny?
Handy Handouts
Page - 187 -
Eighth Edition
REX COMPANY
Information on Rex Co.'s direct material costs for May 1985 is as follows:
Actual quantity of direct materials purchased and used
Actual cost of direct materials
Unfavorable direct materials usage variances
Standard quantity of direct materials allowed for May production
30,000 lbs.
$ 84,000
$ 3,000
29,000 lbs.
Required: For the month of May, what was Rex's direct materials price variance?
Handy Handouts
Page - 188 -
Eighth Edition
BARBER COMPANY
Information on Barber Company's direct labor costs for the month of January 1981 is as follows:
Actual direct-labor hours
Standard direct-labor hours
Total direct-labor payroll
Direct-labor efficiency variance favorable
34,500
35,000
$ 241,500
$ 3,200
Required: What is Barber's direct labor rate variance?
Handy Handouts
Page - 189 -
Eighth Edition
TUB COMPANY
Tub Co. uses a standard cost system. The following information pertains to direct labor for Product B for the
month of October:
Actual rate paid
Standard rate
Standard hours allowed for actual production
Labor efficiency variance
$ 8.40 per hour

$ 8.00 per hour
2,000 hours
$ 1,600 unfavorable
Required: What were the actual hours worked?
Handy Handouts
Page - 190 -
Eighth Edition
THORP COMPANY
For the month of April, Thorp Co.'s records disclosed the following data relating to direct labor:
Actual costs
Rate variance
Efficiency variance
Standard cost
$10,000
1,000 favorable
1,500 unfavorable
$ 9,500
For the month of April, actual direct labor hours amounted to 2,000.
Required: In April, what was Thorp's standard direct labor rate per hour?
Handy Handouts
Page - 191 -
Eighth Edition
DUO COMPANY
The following processing standards have been set for Duo Co.'s clerical workers:
Number of hours per 1,000 paper processed
Number of papers processed per year
Wage rate per 1,000 papers
Standard variable cost of processing 1,500,000 papers
Fixed costs per year
150
1,500,000
$600
$900,000
$150,000
The following information pertains to the 1,200,000 papers that were processed during 1986:
Total cost
Labor cost
Labor hours
$915,000
$760,000
190,000
Required:
1. Assuming standard performance, what should be Duo's expected total cost to process the 1,200,000 papers
be for 1986?
2. What would be Duo's labor rate variance for 1986?
Handy Handouts
Page - 192 -
Eighth Edition
HERMAN COMPANY
The following information relates to a given department of Herman Company for the fourth quarter 1974:
Actual total overhead (fixed plus variable)
Budget formula
Total overhead application rate
Spending variance
Volume variance
$178,500
$110,000 plus $0.50/hr.
$1.50/hr.
$8,000 unfavorable
$5,000 favorable
The total overhead variance is divided into three variances spending, efficiency, and volume.
Required:
1. What were the actual hours worked in this department during the quarter?
2. What were the standard hours allowed for good output in this department during the quarter?
Handy Handouts
Page - 193 -
Eighth Edition
HERD COMPANY
Herd Company reported the following data for 1992:
Actual hours
Denominator hours
Standard hours allowed for output
40,000
50,000
42,000
The predetermined overhead rate was $9.00 per hour, of which $3.00 was variable and $6.00 was fixed.
Required: Given these data, what was the company's volume variance for the year?
Handy Handouts
Page - 194 -
Eighth Edition
BOSNA CORPORATION
The following information is available for the variable overhead expense of Bosna Corporation:
Estimated 1995 sales
Bad debt
Budgeted bad debt
$2,000,000
0.5% of sales
??
Actual 1995 sales

Actual bad debt
$2,450,000
$12,500
Required: Calculated budgeted bad debt expense and the bad debt variance.
Handy Handouts
Page - 195 -
Eighth Edition
STIEGL CORPORATION
The following information is available for the variable overhead expense of Stiegl Corporation:
Budgeted indirect labor per direct labor hour
Budgeted indirect labor for 1995
Total (actual) indirect labor hours for 1995
Total (actual) indirect labor cost for 1995
$2 / DLH
$24,000
15,000
$27,500
Required: Calculate the variable overhead spending variance for indirect labor.
Handy Handouts
Page - 196 -
Eighth Edition
Lets Take Notes ... ABSORPTION COSTING AND VARIABLE COSTING
Absorption Costing
Income Statement
Variable Costing
Income Statement
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
Dr. Fesslers Handy Notes:

Advantages of Variable Costing Income Statement Format:
1. Dovetails with C-V-P
2. More useful information for pricing decisions
3. Changes in inventory dont affect NI
4. Managers find it easier to understand
5. Impact of fixed costs on NI emphasized
6. More difficult to game
Check out in your textbook some conceptual differences between income calculated using the
absorption costing and variable costing formats.
Handy Handouts
Page - 199 -
Eighth Edition
When will Net Income be the same for both approaches?

When will Net Income be different??
To be good is noble; but to show others how to be good is

nobler and no trouble
-- Mark Twain Following the Equator Dover
Handy Handouts
Page - 200 -
Eighth Edition
A conceptual discussion about gaming
To have ideas is to gather flowers; to think, is to weave them

into garlands.
Handy Handouts
Page - 201 -
Eighth Edition
-- Anne-Sophie Swetchine (1782-1857), Writer
Handy Handouts
Page - 202 -
Eighth Edition
You have brains in your head. You have feet in your shoes. You
can steer yourself any direction you choose.
-- Dr. Seuss Oh, the Places Youll Go! Random House
REVIEW / SELF-QUIZ
How do you calculate NI using absorption and variable costing?

What are the advantages of variable costing?
When will Absorption NI = Variable NI?
When will Absorption NI Variable NI? Which will be higher? When?
Why is Absorption NI easier to game?
Handy Handouts
Page - 203 -
Eighth Edition
HOLLAND COMPANY
(Absorption Costing and Variable Costing Income Statements)
Holland company produces a single product.
Number of units produced annually
Variable costs per unit:
Direct material, direct labor, and
variable manufacturing overhead
Selling and administrative expense
Fixed costs per year:
Selling and administrative expense
5,000
$5
$1
$15,000
$21,000

Units Produced
Units Sold
$15.00
Year 1
5,000
5,000
Year 2
5,000
4,000
Year 3
5,000
6,000
Required:
1. Calculate the production cost of a single unit of product under the absorption and variable costing methods.
2. Calculate net income for years 1, 2 and 3 with under the absorption and variable costing methods.
3. Reconcile any differences between net income calculated using both methods.
Handy Handouts
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Eighth Edition
HOLLAND COMPANY
Calculations ...
Handy Handouts
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Eighth Edition
FAST COMPANY
Presented below is the operating data of Fast Company in the years 2002, 2003 and 2004.
Variable costs per unit:
Direct materials
Direct labor
Variable overhead (estimated and actual)
Variable selling and administrative
$4.00
1.50
0.50
0.25
Estimated fixed overhead was $150,000 each year. Actual fixed overhead was also $150,000. Normal
production volume was 150,000 units per year. The sales price each year was $10 per unit. Fixed selling and
administrative expenses were $50,000 per year. Other operating data were as follows:
Beginning inventory
Production
Sales
Ending inventory
2002
----150,000
150,000
-----
2003
----150,000
100,000
50,000
2004
50,000
150,000
200,000
-----
Required:
Prepare variable-costing and absorption-costing income statements for 2002, 2003 and 2004.
Handy Handouts
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Eighth Edition
FAST COMPANY
Calculations ...
Handy Handouts
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Eighth Edition
BELLY RUB PRODUCTIONS

Below are the Production, sales and cost data for Belly Rub Productions only product.
Belly Rub Productions
Calendar Years 2001 through 2004
Sales in units
Production in units
Direct materials per unit
Direct labor per unit
Variable MOH per unit
Fixed MOH
Variable S&A per unit
Fixed S&A
Sales price per unit
Beg. Inventory in units
2001
8,000
10,000
$6
$3
$2
$50,000
$3
$30,000
$25
0
2002
9,000
12,000
$6
$4
$2
$60,000
$3
$35,000
$27
2,000
2003
13,000
10,000
$7
$4
$3
$70,000
$4
$40,000
$30
5,000
2004
10,000
8,000
$8
$5
$4
$80,000
$5
$50,000
$35
2,000
Required:
1. Calculate the production cost of a single unit of product under the absorption and variable costing methods.
2. Calculate net income for 2001, 2002 and 2003 using both the absorption and variable costing methods.
3.
Reconcile any differences between net income calculated using both methods.
Handy Handouts
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Eighth Edition

Calculations ...
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
Lets Take Notes ... COST BEHAVIOR
Why do we study the past???
Never grow a wishbonewhere your backbone ought to be.

-- Clementine Paddleford (1900-1967), Food editor
Handy Handouts
Page - 211 -
Eighth Edition

Four GRAPHS
If you want to feel proud of yourself, youve got to DO things

you can be proud of. Feelings follow actions.
-- Oseolo McCarty (1908-1999), Domestic worker and
philanthropist
Handy Handouts
Page - 212 -
Eighth Edition
Obstacles cannot crush me, every obstacle yields to stern

resolve. He who is fixed to a star does not change his mind.
-- Leonardo Da Vinci (1452-1519), Artist, architect, and
engineer
Handy Handouts
Page - 213 -
Eighth Edition

Four More GRAPHS

1. Committed Fixed Costs = relate to investments in plant and equipment
and are difficult to adjust
2. Discretionary Fixed Costs = arise from annual decisions by management
There are two ways to live your life. One is as though nothing
is a miracle. The other is as though everything is a miracle.
-- Albert Einstein (1879-1955), Physicist
Handy Handouts
Page - 214 -
Eighth Edition
Is the trend in manufacturing toward greater fixed costs or greater variable costs?
What Is The Relevant Range?
I wish I could stand on a busy street corner, hat in hand, and

beg people to throw me all their wasted hours.
-- Bernard Berenson (1865-1959), Art critic
Handy Handouts
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Eighth Edition
We shall draw yet another graph, and then contemplate what it describes
Handy Handouts
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Eighth Edition
Three Methods of Predicting the Future:

1.
2.
3.

How to calculate a regression using Excel:
1. Choose TOOLS
2. Choose DATA ANALYSIS REGRESSION
3. Input Y Range [(D.V.) Effect]
4. Input X Range [(I.V.) Cause]
The truth is that all of us attain the greatest success and

happiness possible in this life whenever we use our native
capacities to their greatest extent.
Handy Handouts
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Eighth Edition
-- Smiley Blanton (1882-1966), Speech pathologist
Handy Handouts
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Eighth Edition
The HIGH-LOW METHOD
High-Low Steps:
1.
m=
2.
Solve
3.
Create
4.
Predict
It is evident that many great and useful objects can be attained

in this world only by cooperation.
-- Thomas Babington MacAulay (1800-1859), Statesman and
historian
Handy Handouts
Page - 219 -
Eighth Edition
What hunger is in relation to food, zest is in relation to life.

-- Bertrand Russell (1872-1970), Philosopher and
mathematician
Handy Handouts
Page - 220 -
Eighth Edition
A genuine leader is not a searcher for consensus but a molder

of consensus.
-- Martin Luther King, Jr. (1929-1968), Civil rights activist
REVIEW / SELF-QUIZ
Do you know how to graph FC and VC? Per unit and in total?
What are the two types of fixed costs?
Is the trend toward greater FC or VC?
What is the relevant range?
Can you graph Mixed Costs?
What algebraic formula can we use to describe a line on an X-Y plane?
What three ways can be used to predict the future?
Handy Handouts
Page - 221 -
Eighth Edition
SOUTHERN CARPETS
(Cost Estimation)
Southern Carpets weaves carpets for houses and offices. Its manufacturing plant is highly automated with stateof-the-art weaving machines. The report below shows monthly (time-series) data for the most recent year.
Note that the data are paired. For example, December has indirect manufacturing costs of $275,343 and 2,469
machine hours.
Month
January
February
March
April
May
June
July
August
September
October
November
December
Indirect
Manufacturing
Costs
$341,062
346,471
287,328
262,828
220,843
390,700
337,924
180,000
376,246
295,041
215,121
275,343
Cost Driver:
Machine
Hours
3,467
4,426
3,103
3,625
3,081
4,980
3,948
2,180
4,121
4,762
3,402
2,469
Required:
1. Use the above information and the high-low method to estimate the cost function of Southern Carpets.
2. If for the following month it is estimated that 3,500 machine hours will be used, what are the total indirect
manufacturing costs associated with this estimate?
Handy Handouts
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Eighth Edition
CHAIN SAW COMPANY

(Cost Estimation)
The following information is from the quality-testing area of the Chain Saw Company (CSC). After assembly,
each chain saw passes through the quality testing area. Each chain saw receives a minimum of 10 minutes
testing to examine its ability to cut lumber and to operate under differing conditions. Deluxe brands receive a
minimum of 15 minutes testing. Several special customers have requested testing that requires over 30 minutes.
The schedule below presents monthly data for the quality-testing activity area. The costs in the
schedule are the direct costs of the activity area: the cost of lumber used in testing and the cost of labor working
in this area. Personal computers monitor each test and provide the data. Operating personnel believe that the
single most important driver of month-to-month cost levels in the quality-testing activity area is hours of test
time.
Month
January
February
March
April
May
June
July
August
September
October
November
December
Activity-Area
Costs
$54,235
59,520
45,380
64,000
59,235
73,060
81,625
80,630
75,105
63,970
67,350
55,285
Hours of Testing
Time in
Activity Area
640
722
486
886
634
812
927
986
958
819
856
546
Required:
1. Estimate the cost function for the quality-testing activity area using the data provided and the high-low
method.
2. If 800 hours of activity are estimated for the next month, how much expense should be forecast?
Handy Handouts
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Eighth Edition
Lets Take Notes ... COST OF QUALITY
Some terms:
QUALITY =
Grade =
Quality of design =
Quality of conformance =
Handy Handouts
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Eighth Edition

COST OF QUALITY
Prevention and Appraisal Costs keep poor quality from occurring
Prevention Costs
Appraisal Costs
Handy Handouts
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Eighth Edition

COST OF QUALITY
Internal and External Failure costs are incurred because poor quality occurred
Internal Failure Costs
External Failure Costs
Handy Handouts
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Eighth Edition
Who tells more friends about their experiences,

those who are happy or those who are unhappy?
I believe that all of us have the capacity for one adventure

inside us, but great adventure is facing responsibility day after
day.
Handy Handouts
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Eighth Edition
-- Charles William Gordon (1960-1937), Clergyman and

novelist
Handy Handouts
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Eighth Edition
Notes on Ford Motor Companys Cost of Quality Report:
Handy Handouts
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Eighth Edition
More/Other Notes:
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
REVIEW / SELF-QUIZ
What
What
What
What
What
What
is quality?
is a Grade?
is Quality of Design? Quality of Conformance?
are the four categories in a Cost of Quality report?
types of costs are placed in each category?
did you learn from Fords Cost of Quality report?
Handy Handouts
Page - 232 -
Eighth Edition
GILROY FOODS
(Cost of Quality)
Gilroy Foods (a real company) has implemented a quality cost reporting system. On the following page is listed
the cost categories identified and utilized by Gilroy Foods, along with associated fictional dollar amounts. Your
task is to properly classify these costs as prevention, appraisal, internal failure or external failure costs, and
construct a Quality Cost Report for Gilroy Foods. That is, under each of the four cost of quality report headings
list the appropriate cost categories and sum the associated quality costs.
Information about Gilroy Foods:
Gilroy Foods regards all quality costs as nonvalue added. Because these costs do not add value to the product
or process, the goal of Gilroy Foods is to eliminate them.
Some of the areas measured by Gilroy Foods that represent a nuance from traditional Quality Cost Reporting
are:
Workers Compensation. If you have no accidents, you have no cost.

Worker Safety. This is the cost of preventive programs to influence worker safety.
Overtime. While this cost is debatable because many will argue passionately that some overtime is
appropriate, Gilroy Foods believes the majority can be explained by poor productivity or poor planning,
scheduling, or forecasting.
Excess Waste Water Cost. This cost is a symptom of a suboptimum water conservation program.
Plant Throughputs. Gilroy Foods records shortfalls as a cost and positives as a credit.
Capital Project Overruns. For some reason many people in the corporation do not look at a capital dollar
the same as a cost of production dollar or an administrative expense. This tendency is influenced by the
accounting deferral of capital costs over the depreciable life of the asset. Gilroy Foods considers a capital
dollar to have equal value and highlight project overruns on the Quality Cost Report.
Required:
Given the cost of quality report items from the following page, construct a Quality Cost Report for Gilroy
Foods.
Handy Handouts
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Eighth Edition
GILROY FOODS, continued

Quality Cost Report Items for 1993
Capital Project Overruns

Customer Complaints
Excess Waste Water Cost
Excessive Product Movement
Freight on Returned Goods
Overtime
Purchase Price Premium
Quality Assurance Administration
Quality Assurance Analytical
Quality Assurance Fabens
Quality Assurance Geothermal
Quality Assurance Inspection
Quality Assurance Micro
Quality Assurance Sanitation
Quality Assurance Tech Services
Returns--Lost Sales/Other
Rework Costs:
Gilroy Plant
Gentry Plant
Fabens Plant
Umatilla Plant
Grind Down Costs
Total Rework Costs
Scrap
Some Quality Assurance Hold Area Costs
Supplier Inspections
Throughputs ()=Favorable:
Gilroy Plant
Gentry Plant
Fabens Plant
Geothermal Plant
Umatilla Plant
Total Throughputs
Total Quality Process
Total Quality Training
Union Grievances
Worker Safety
Workers Compensation:
Gilroy Plant & Field
Gentry Plant
Fabens Plant
Geothermal Plant
Umatilla Plant
Total Workers Compensation
$262,540
$50,500
$13,230
$19,740
$2,350
$16,840
$6,800
$3,220
$4,000
$2,980
$1,990
$12,680
$7,750
$5,230
$3,850
$172,990
$15,220
$10,110
$8,550
$6,780
$10,390
$51,050
$36,110
$3,580
$41,330
$11,800
($6,150)
($4,660)
$1,280
$3,550
$5,820
$26,800
$20,970
$2,600
$4,900
$0
$15,050
$7,000
$1,160
$2,880
$26,090
Total Quality Costs
Handy Handouts
$805,940
Page - 234 -
Eighth Edition
Names: ________________________________
________________________________
________________________________
________________________________
GILROY FOODS
Calculations...
These pages can be torn out and turned in.
Handy Handouts
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Eighth Edition
GILROY FOODS
Calculations...
Handy Handouts
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Eighth Edition
Names: ________________________________
________________________________
________________________________
________________________________
GILROY FOODS
Calculations...
These pages can be torn out and turned in.
Handy Handouts
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Eighth Edition
GILROY FOODS
Calculations...
Handy Handouts
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Eighth Edition
Lets Take Notes ... CASH FLOWS

What, again, are the four financial statements?
Statement
Phrase at Top
General Calculation
1.
2.
3.
4.
Handy Handouts
Page - 239 -
Eighth Edition

Types of Cash Inflows and Outflows
Operating Activities
Investing Activities
Financing Activities
Handy Handouts
Page - 240 -
Eighth Edition

We will only be learning the _________________________ method!
Check out your textbook what percent of companies use this method? ___________________
Its not what you are, its what you dont become that hurts.
-- Oscar Levant (1906-1972), Musician and actor
Take rest; a field that has rested gives a bountiful crop.
-- Ovid (c. 43 B.C-18 A.D.), Poet
Handy Handouts
Page - 241 -
Eighth Edition

What is the effect do these events have upon cash?
Decrease in accounts receivable?
Increase in accounts receivable?
Increase in prepaid expenses?
Decrease in prepaid expenses?
Increase in accounts payable?
Handy Handouts
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Eighth Edition

HOW/WHY can Cash Flow be different than Net Income? Are differences important?
You never find yourself until you face the truth.

Handy Handouts
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Eighth Edition
-- Pearl Bailey (1918-1990), Entertainer
Handy Handouts
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Eighth Edition
Handy Handouts
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Eighth Edition
REVIEW / SELF-QUIZ
What are the four financial statements?

What three categories of cash flows are used on the Statement of Cash
Flows?
Do most companies use the direct or indirect method for preparing the
statement of cash flows?
What effect does an decrease in A/R have on Cash?
an increase in A/R?
an increase in prepaid expenses?
a decrease in prepaid expenses?
an increase in A/P?
Know thy calculations! Can you prepare a Statement of Cash Flows?
Are differences between Net Income and Cash Flow important?
Handy Handouts
Page - 246 -
Eighth Edition
PORTLAND PILOTS ASSOCIATION

(Cash Flows)
Below is information related to the second year of operations for Portland Pilots Association.
Portland Pilots Association
Comparative Balance Sheets
December 31
Assets
Cash
Accounts receivable
Prepaid expenses
Land
Building
Accumulated depreciation building
Equipment
Accumulated depreciation -- equipment
Total
2004
$ 67,200
24,000
4,800
156,000
192,000
(13,200)
32,400
(3,600)
$ 459,600
2003
$40,800
36,000
-0-0-0-012,000
-0$88,800
Liabilities and Stockholders Equity

Accounts payable
Bonds payable
Common stock
Retained earnings
Total
$ 70,800
156,000
60,000
172,800
$459,600
$ 4,800
-060,000
24,000
$88,800
Change
Increase/Decrease
Portland Pilots Association

Income Statement
Revenues
Operating expenses (excluding depreciation)
Depreciation expense
Loss on sale of equipment
Income from operations
Income tax expense
Net income
$608,400
$313,200
18,000
3,600
334,800
$273,600
106,800
$166,800
Additional information:
1.
In 2004, the association declared and paid an $18,000 cash dividend.
2.
The association obtained land through the issuance of $156,000 of long-term bonds.
3.
A building costing $192,000 was purchased for cash. Equipment costing $30,000 was also
purchased for cash.
4.
During 2004, the association sold equipment with a book valued of $8,400 (cost $9,600, less
accumulated depreciation $1,200) for $4,800 cash.
Required:
Prepare a statement of cash flows, using the indirect method.
Handy Handouts
Page - 247 -
Eighth Edition
PORTLAND PILOTS ASSOCIATION

Calculations ...
Handy Handouts
Page - 248 -
Eighth Edition
RONDINI MAGIC COMPANY

(Cash Flows)
Below is information related to the operations of Rondini Magic Company.
Rondini Magic Company
December 31
Assets
Cash
Accounts receivable
Inventories
Prepaid expenses
Land
Building
Accumulated depreciation building
Equipment
Accumulated depreciation equipment
Total
2004
$ 64,800
81,600
64,800
4,800
54,000
240,000
(25,200)
231,600
(33,600)
$ 682,800
2003
$ 44,400
31,200
-07,200
84,000
240,000
(13,200)
81,600
(12,000)
$ 463,200

Accounts payable
Accrued liabilities
Bonds payable
Common stock ($1 par)
Retained earnings
Total
$ 27,600
12,000
132,000
264,000
247,200
$ 682,800
$ 48,000
-0180,000
72,000
163,200
$ 463,200
Change
Increase/Decrease
Rondini Magic Company

Income Statement
Revenues
Gross margin
Less: Operating expenses
Net operating income
Nonoperating items:
Interest expense
Income tax expense
Net income
$1,068,000
558,000
$ 510,000
265,200
$ 244,800
$ (14,400)
( 2,400)
(16,800)
$ 228,000
78,000
$ 150,000
1. Operating expenses include depreciation expense of $39,600 and charges from prepaid expenses of
$2,400.
2. Land was sold at it book value for cash.
3. Cash dividends of $66,000 were declared and paid in 2004.
4. Interest expense of $14,400 was paid in cash.
5. Equipment with a cost of $199,200 was purchased for cash. Equipment with a cost of $49,200 and a
book value of $43,200 was sold for $40,800 cash.
6. Bonds of $12,000 were redeemed at their book value for cash. Bonds of $36,000 were converted into
common stock.
7. Common stock ($1 par) of $156,000 was issued for cash.
8. Accounts payable pertain to merchandise suppliers.
Handy Handouts
Page - 249 -
Eighth Edition

Calculations ...
Required:
Handy Handouts
Page - 250 -
Eighth Edition
RIKKY-TIKKY-TAVI TAFFY
(Cash Flows)
Below is information related to the operations of Rikky-Tikky-Tavi Taffy.
Rikky-Tikky-Tavi Taffy
December 31
Assets
Current Assets:
Cash
Accounts receivable
Inventory
Prepaid expenses
Total current assets
Long-term investments
Plant and equipment
Less: Accumulated depreciation
Net plant and equipment
Total assets
2002

Current liabilities:
Accounts payable
Accrued liabilities
Total current liabilities
Bonds payable
Deferred income taxes
Stockholders equity:
Preferred stock
Common stock
Retained earnings
Total stockholders equity
Total liabilities and stockholders equity
2001
3,600
144,000
129,600
6,000
283,200
64,800
523,200
72,000
451,200
$ 799,200
$ 26,400
98,400
102,000
9,600
236,400
88,800
336,000
60,000
276,000
$ 601,200
$ 86,400
22,800
109,200
156,000
14,400
$ 72,000
21,600
93,600
-012,000
98,400
318,000
103,200
519,600
$ 799,200
114,000
285,600
96,000
495,600
$ 601,200
Rikky-Tikky-Tavi Taffy
Income Statement
Revenues
Gross margin
Less: Operating expenses
Net operating income
Nonoperating items:
Interest expense
Income tax expense
Net income
$ 602,400
372,000
$ 230,400
187,200
$ 43,200
$ 12,000
3,600
15,600
$ 58,800
21,600
$ 37,200
1.
Dividends totaling $30,000 were declared and paid in cash.
2.
Equipment was sold during the year for $12,000. The equipment had originally cost $30,000 and
had accumulated depreciation of $21,600.
3.
The decrease in the Preferred Stock account is the result of a conversion of preferred stock into an
equal dollar amount of common stock.
4.
Long-term investments that had cost $24,000 were sold during the year for $36,000.
Handy Handouts
Page - 251 -
Eighth Edition
Calculations ...
Required:
Handy Handouts
Page - 252 -
Eighth Edition
THE LOST ART OF HENRY JONES

A critic, an artist, and a scholar were assembled on a
panel for an art history presentation at a university. During the
question and answer portion of the lecture, a student asked the
panel to name the greatest artist who ever lived.
Michelangelo, responded the critic.
Monet, said the artist.
Henry Jones, replied the scholar.
Henry Jones? questioned the student. Who is Henry
Jones?
Many years ago, he was a janitor at this very institution.
How can you compare a janitor to great artists like Monet
and Michelangelo?
Henry Jones has more talent than either of those men,
said the scholar.
Then why have we never heard of him? asked the
student.
Because he never thought he was good enough, so he
never cultivated his talents nor shared them with the world,
the scholar sighed. Henry Jones is lost to us forever, because
he never lived up to his potential.
-- Adapted from American Scandal!, Pat Williams, Destiny

Image Publishers
Handy Handouts
Page - 253 -
Eighth Edition
I dont paint things. I only paint the difference between things.

-- Henri Matisse (1869-1954), Artist
Anyone can hold the helm when the sea is calm.

-- Publilius Syrus (c. 42 B.C.), Writer
Handy Handouts
Page - 254 -
Eighth Edition
Lets Take Notes ... THE COST OF UNETHICAL BEHAVIOR
One man practicing sportsmanship is far better than 50

preaching it.
Handy Handouts
Page - 255 -
Eighth Edition
-- Knute K. Rockne (1888-1931), College football coach
Handy Handouts
Page - 256 -
Eighth Edition
Really great people always see the best in others; it is the little
man who looks for the worst
and finds it.
Handy Handouts
Page - 257 -
Eighth Edition
-- Samuel Coleridge-Taylor (1875-1912), Composer and

conductor
Handy Handouts
Page - 258 -
Eighth Edition
Never bend your head. Always hold it high. Look the world
straight in the face.
Handy Handouts
Page - 259 -
Eighth Edition
-- Hellen Keller (1880-1968), Writer and lecturer
Handy Handouts
Page - 260 -
Eighth Edition
Fame is something which must be won; honor is something

which must not be lost.
Handy Handouts
Page - 261 -
Eighth Edition
-- Arthur Schopenhauer (1788-1860), Philosopher
Handy Handouts
Page - 262 -
Eighth Edition
If you get hung up on everybody elses hang-ups,
Handy Handouts
Page - 263 -
Eighth Edition
then the whole worlds going to be nothing more than one huge
gallows.
-- Richard Brautigan (1935-1984), Writer and poet
Handy Handouts
Page - 264 -
Eighth Edition
Your honesty influences others to be honest.

-- George Washington (1732-1799), 1st U.S. President
Handy Handouts
Page - 265 -
Eighth Edition
The less you do, the better you do it.

Handy Handouts
Page - 266 -
Eighth Edition
-- Marcello Mastroianni (1924-1996), Actor
Handy Handouts
Page - 267 -
Eighth Edition
REVIEW / SELF-QUIZ
Were you paying attention??
If I asked you to prepare some review questions, what would you ask?
Handy Handouts
Page - 268 -
Eighth Edition
Lets Take Notes ... MISCELLANEOUS
Handy Handouts
Page - 269 -
Eighth Edition
Handy Handouts
Page - 270 -
Eighth Edition
Handy Handouts
Page - 271 -
Eighth Edition
Handy Handouts
Page - 272 -
Eighth Edition
Always NEW and IMPROVED
Common sense is not so common.

-- Voltaire (1694-1778),
Philosopher and writer
We cannot all do GREAT THINGS,

but we can do SMALL THINGS
WITH GREAT LOVE.
-- Mother Teresa
... INDEX ...

Problem
Lets Take Notes ...
Topic
ON THE FIRST DAY OF CLASS?
Page
1
Lets Take Notes ...

MANGO MOTORS
SOMUCH STEROES
BOJANGLE DANCE SHOES
CATTLE COMPANY
JUDGE ELY JEANS
BOBS BEEF BOY
HANNIBAL COMPANY
TERMS AND FLOWS

(Cost Flows)
(Cost Flows)
(Cost Flows)
(Cost Flows)
(Cost Flows)
5
13
14
15
16
18
20
22
24
Lets Take Notes ...

EAST MEETS WEST COMPANY (A)
EAST MEETS WEST COMPANY (B)
EAST MEETS WEST COMPANY (C)
EAST MEETS WEST COMPANY (D)
EAST MEETS WEST COMPANY (E)
S & P CORPORATION
JOLLY CANDIES
HOUGHTONS LIMITED
CLAIRS TOYS
CASS COMPANY
DEERING BANJO COMPANY
ALCATRAZ ARTIFACTS
ABTEX ELECTRONICS
BREAKEVEN (C-V-P)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Multi-Product Breakeven)
27
37
38
39
40
41
42
43
44
45
46
48
49
50
Lets Take Notes ...

FUNK AND WAGNALL
FRODO COMPANY
TOLEDO TORPEDO COMPANY
HASSETT COMPANY
CALIFORNIA TEXTBOOKS (A)
CALIFORNIA TEXTBOOKS (B)
ADAMS COMPANY
SAM ENTERPRISES
MOEHRLE MANUFACTURING
ANDRETTI COMPANY
RELEVANT COSTS
(Classifying Relevant and Irrelevant Items)
(Relevant Costs)
(Relevant Costs)
(Relevant Costs)
(Relevant Costs)
(Relevant Costs)
(Relevant Costs)
(Relevant Costs)
(Relevant Costs)
(Relevant Costs)
(Relevant Costs)
53
57
58
59
60
61
62
63
64
65
66
68
Lets Take Notes ...

EGG YOLK YUMMIES
JOB-ORDER COSTING
(Applying Overhead)
71
75
Lets Take Notes ...

HALO PRODUCTS COMPANY
NARCISSUS NEEDLES
McKAY MILLS
BUFFALO BROILERS
HOWDY COMPANY
APPLYING OVERHEAD
(Applying Overhead)
(Applying Overhead)
(Applying Overhead)
(Applying Overhead)
(Applying Overhead)
77
78
79
80
82
84
Handy Handouts
-i-
Eighth Edition
... INDEX ...

Problem
Topic
Page
Lets Take Notes ...

PLENTIFUL PRINTING
ROLEY POLEY COMPANY
THE SWIZZLE MANUFACTURING CO.
[EVEN MORE] JOB-ORDER COSTING

(Job-Order Costing)
(Job-Order Costing)
(Job-Order Costing)
Lets Take Notes ...

J.B. GOODE COMPANY
ACTIVITY-BASED COSTING
97
102
104
106
108
THE ABC PRESENTATION
111
Lets Take Notes ...

B.G. WIP COMPANY
CUTTING EDGE SKIS
STEINMUELLER STEINS
ABIQUA ACRES
PROCESS COSTING
(Process Costing)
(Process Costing)
(Process Costing)
(Process Costing)
(Process Costing)
119
125
126
128
130
132
Lets Take Notes ...

WOMACK COMPANY
PARADISE COMPANY
WHISKERS PRODUCTS, INC.
KAITLYN KORPORATION
ARCHER COMPANY
WARD COMPANY
YOUNG PRODUCTS
BUDGETING
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
135
140
141
142
143
144
145
146
Lets Take Notes ...
Handy Handouts
- ii -
86
88
90
92
Eighth Edition
... INDEX ...

Problem
Topic
Page
Lets Take Notes ...

LANDS END MENS SUITS
PIRATES, INC.
SMITH COMPANY
TRUE-BLUE CORPORATION
STRANGE FIRE, P.C.
THE COSTUME COMPANY
BENTON COMPANY
COX COMPANY
KENNEDY COMPANY
REX COMPANY
BARBER COMPANY
TUB COMPANY
THORP COMPANY
DUO COMPANY
HERMAN COMPANY
HERD COMPANY
BOSNA CORPORATION
STIEGL CORPORATION
STANDARD COSTS and FLEXIBLE BUDGETING

149
153
154
156
159
160
161
162
164
166
168
169
170
171
172
173
174
175
176
177
178
Lets Take Notes ...

HOLLAND COMPANY
FAST COMPANY
ABSORPTION COSTING AND VARIABLE COSTING

(Absorption and Variable Costing Income Statements)
179
184
186
188
Lets Take Notes ...

SOUTHERN CARPETS
CHAIN SAW COMPANY
COST BEHAVIOR
(Cost Behavior)
(Cost Behavior)
191
199
200
Lets Take Notes ...

GILROY FOODS
COST OF QUALITY
(Cost of Quality)
201
209
Lets Take Notes ...

PORTLAND PILOTS COMPANY
CASH FLOWS
(Cash Flows)
(Cash Flows)
(Cash Flows)
215
222
224
226
Lets Take Notes ...
THE COST OF UNETHICAL BEHAVIOR
229
Lets Take Notes ...
MISCELLANEOUS
237
Handy Handouts
- iii -
Eighth Edition
OBSERVATIONS FROM THE ANCIENTS
Hope is a waking dream.

-- Aristotle (384-322 B.C.),
Philosopher
Fate leads the willing, drags the unwilling.

-- Cleanthes (c. 331-231 B.C.),
Philosopher
Human behavior flows from three main sources: desire,

emotion, and knowledge.
-- Plato (c. 428-348 B.C.),
Philosopher
I hold this as a rule of life:

Too much of anything is bad.
-- Terence (c. 186-159 B.C.),
Dramatist
Handy Handouts
- iv -
Eighth Edition

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Lets Take Notes ... ON THE FIRST DAY OF CLASS?

What is accounting used for?

DESIGNATED DOODLE ZONE

Lets Take Notes ... ON THE FIRST DAY OF CLASS?

Dont be afraid to take a big step if one is indicated. You cant

Lets Take Notes ... ON THE FIRST DAY OF CLASS?

Lets Take Notes ... ON THE FIRST DAY OF CLASS?

Nothing is particularly hard if you divide it into small jobs.

What are the four Financial Statements?

How do you increase an Asset account?

What is the Accounting Equation?

How is profit calculated (most simply)?

How does Managerial Accounting differ from Financial Accounting, Tax,

Lets Take Notes ... TERMS AND FLOWS

See next page for more noteworthy space for terms

Lets Take Notes ... TERMS AND FLOWS

See next page for Income Statement formats

A certain amount of opposition is a great help to a person.

Lets Take Notes ... TERMS AND FLOWS

Absorption Costing Income Statement

More noteworthy space on the next page

Lets Take Notes ... TERMS AND FLOWS

Lets Take Notes ... TERMS AND FLOWS

You will soon break the

On page _________ of the Handy Handouts

Lets Take Notes ... TERMS AND FLOWS

What would you describe as the theme of these quotes?

The harder you work, the harder it is to surrender.

Lets Take Notes ... TERMS AND FLOWS

DESIGNATED DOODLE ZONE

Lets Take Notes ... TERMS AND FLOWS

What are Fixed Costs?

What are Product Costs?

What are Prime Costs?

What is Revenue? Expense? Profit?

What is Cost of Goods Manufactured?

What are the t-accounts down the left side?

What are the t-accounts across the top?

What are the t-accounts down the right side?

What phrase appears at the top of every Income Statement? Why?

BOJANGLE DANCE SHOES

Use T-accounts to show the flow of costs and revenues.

JUDGE ELY JEANS

JUDGE ELY JEANS

BOBS BEEF BOY

$54,000 (No accusations here about Wheres the beef!?)

Bobs restaurant sold 120,000 hamburgers during 1997.

BOBS BEEF BOY

[This page left blank]

Lets Take Notes ... BREAKEVEN (C-V-P)

C-V-P analysis seeks the most profitable combination of

Love itself is love chief nourishment.

Lets Take Notes ... BREAKEVEN (C-V-P)

How do costs behave Per Unit

Lets Take Notes ... BREAKEVEN (C-V-P)

There will always be a conflict between good and good

-- Henry Martyn Leland (1843-1932), Engineer

Lets Take Notes ... BREAKEVEN (C-V-P)

Chance favours only those who know how to court her.

Lets Take Notes ... BREAKEVEN (C-V-P)

Do the common thing in an uncommon way.

Lets Take Notes ... BREAKEVEN (C-V-P)

Lets Take Notes ... BREAKEVEN (C-V-P)

DESIGNATED DOODLE ZONE