CHAPTER14

PROCESSCOSTINGANDTHECOSTACCOUNTINGCYCLE

141DellComputer'sCostingMethods
Dellalmostcertainlydoesnotusejobordercosting,norcanituse
processcosting,becauseunitsdiffer.Thecompanycouldusestandard
costing,butwithsuchasmallamountofworkinProcessandfinishedgoods
inventory,itcouldalsousebackflushing.
Dell'sbusinessmodelrequireslowinventoriesandquickresponsetimes.
Pricesofcomputercomponentsfall,sometimesrapidly,sobuyinginventory
wellinadvanceofsellingitreducesprofits.Wehavereferredtothis
situationinseveralInsights.
142StrategicUsesofOverheadAllocation
Thebenefitisthatmanagerswillconcentrateonreducingcycletime,
whichisahighlydesirableresult.Thelowerthecycletime,thefasterthe
response,themoresatisfiedthecustomerandthehighertheprofit.
Allocationsbasedonlaborormachinetimecanencouragemanagersand
engineerstoreducethosetimes,butmightnotloweroverallcosts,asthe
TektronixexampleinChapter10described.WerefertotheTektronixexample
toremindstudentsthatreportedcostsofproductsplayanimportantrolein
howmanagers(anddesignengineers)approachthoseproducts.
The8theditionofthisbookcontainedthefollowingmaterialthatyou
mightwanttouseinclass.
TeijinSeikiCo.,Ltd.manufacturesmachinesandcomponentsfor
industriesasdiverseastextiles,aerospace,andprinting.Managersata
divisionthatmadereductiongearsforearthmovingequipmentwere
dissatisfiedwiththestandardcostingsystembecauseitapplieddirectlabor
andoverheadtoproductsbasedonstandardmachinetimes.Themanagers
thereforeexpectedthatwhentheyreducedstandardmachinetimes,costs
shouldalsodrop,butresultsweredisappointing.Theproblemwasthatthe
standardmachinetime,whichisvalueaddingtime,wasmuchlessthanthe
leadtime,ortotaltimeacomponentwasinprocess.Leadtimeincludes
waitingtime,whichis,ofcourse,notvalueadding,butwhichgenerates
significantamountsofoverhead.
Thedivisionchangeditsallocationbasefromstandardmanufacturing
timetoleadtime,sothatmanagersweremotivatedtoreduceleadtime,which
inturnreducedinventoriesandcosts.Theoverheadratewascalculatedas
Overheadrate
=
Totalbudgetedoverhead
Totalleadtimes
Thedenominator,totalleadtimes,wasthesumoftheleadtimesforallof
thepartsthedivisionmade.Reducingmachinetimestillsavescostsunder
thenewmethod,butthenewmethoddirectsmanagerialattentiontotheentire
flowofpartsthroughthefactory.
Source:MakotoKawadaandDanielF.Johnson,"StrategicManagement
AccountingWhyandHow,"ManagementAccounting,August1993,3238.

14 1

143CostofAccountingSystems
Jobordercostingisalmostcertainlythecostliest,requiringthatthe
companytrackmaterialsandlabor,aswellasanyoverheaddriverssuchas
setuptime,tospecificjobs.Eventhoughbarcodingandothertechnologies
canreducecosts,jobordercostingprobablystillleadsthefield.
Backflushingisprobablythecheapestsystembecauseitrequiresentries
onlyatafewpointsintheproduction/saleprocess.Asingleproduct
factorycouldprobablyoperateastandardcostingorprocesscostingsystem
cheaplyaswell.
Thecostoftheaccountingsystemdependspartlyonthecomplexityof
theoperation,howmanyparts/components,howmanydepartments,operations,
etc.Ajobordersystemiscostlypartlybecausejoborderoperationsare
probablymorecomplicatedthanothers.
144Cost/BenefitofAccountingSystem
Caterpillaralmostcertainlyneedsthemoreaccuratesystembecauseits
manufacturingcostsandinventoriesarerelativelymuchhigherthanIntel's.
Caterpillar'scostofsalesisabout77%ofsales,whileIntel'sisabout
38%.Certainly,Intelcaresaboutcosts,butapointortwoincreasefor
Intelwillnothavethesamenegativeeffectaswillasimilarincreasefor
Caterpillar.Thetwocompaniesinventoriesareaboutthesamepercentagesof
costofsalesabout19%forboth),butIntelsismuchsmallerasa
percentageofsales.\
Intelmightstillbenefitfromasophisticated,costlysystem,
particularlyanABCsystem,forevaluatingprofitabilityofindividual
products,butCaterpillarwouldprobablybenefitmore.
145BasicProcessCosting(15minutes)
1.33,000
Unitscompleted30,000
Equivalentunitsinendinginventory(5,000x60%)3,000
Equivalentunitproduction33,000
2.$1.40($6,400+$39,800)/33,000=$46,200/33,000
3.$4,2003,000x$1.40
4.$42,00030,000x$1.40
Theassignmentdoesnotaskforareconciliationofcosts,butitis
alwayswisetodoone.The$46,200totalcostisaccountedforbelow.
Endinginventory$4,200
Transferredtofinishedgoods42,000
Totalcosts$46,200
5.
ConversionCosts$39,800
VariousCredits$39,800

WorkinProcessInventory$39,800
ConversionCosts$39,800

FinishedGoodsInventory$42,000
WorkinProcessInventory$42,000

14 2

146JobOrderCostingJournalEntries(20minutes)
a.WorkinProcessInventory$5,120
MaterialsInventory$5,120
b1.DirectLabor8,760
CashorWagesPayable8,760
b2.WorkinProcess8,760
DirectLabor8,760
c1.FactoryOverhead9,610
Variouscredits9,610
c2.WorkinProcess9,610
FactoryOverhead9,610
d.FinishedGoods18,660
WorkinProcess18,660
e.CostofGoodsSold15,200
FinishedGoods15,200

WorkinProcessInventory
|
(a)$5,120|
(b2)8,760|
(c2)9,610|$18,660(d)

23,49018,660
Bal$4,830
147BasicProcessCostingWeightedAverage(1015minutes)
1.74,000
Unitscompleted65,000
Equivalentunitsinendinginventory(15,000x60%)9,000
Equivalentunitproduction74,000
2.$3.50,($8,880+$250,120)/74,000=$259,000/74,000
3.$31,500,$3.50x9,000equivalentunits
4.$227,500,$3.50x65,000
The$259,000totalcostisaccountedforbelow.
Endinginventory$31,500
Transferredtofinishedgoods227,500
Totalcosts$259,000
148BasicProcessCostingFIFO(Continuationof147,Appendix)(1015
minutes)
1.67,600

14 3

Unitscompleted65,000
Equivalentunitsinendinginventory(15,000x60%)9,000
Total74,000
Lessbeginninginventory(8,000x80%)6,400
Equivalentunitproduction67,600
2.$3.70,$250,120/67,700
3.$33,300,$3.70x9,000
4.$225,700
Costofbeginninginventory$8,880
CosttocompleteBI*(1,600x$3.70)5,920
Costtostartandcomplete57,000units**at$3.70210,900
Totalcoststransferred$225,700
*The1,600unitsis20%x8,000units
**65,0008,000
The$259,000totalcosttoaccountforisthesameregardlessofthe
costflowassumption,becausethereisnobeginninginventory.

Endinginventory$33,300
Transferredtofinishedgoods225,700
Totalcosts$259,000
Thedifferencebetweentheresultshereandintheweightedaveragecase
arenotsignificantbecausetheunitcostsareonly$0.20apartandthe
endinginventoryisnotlargeinrelationtounitscompleted.

149JournalEntries(Continuationof147)(1420minutes)
MaterialsInventory$81,000
CashandAccountsPayable$81,000
Torecordpurchasesofmaterials.
WorkinProcessInventory68,000
RawMaterialsInventory68,000
Torecordcostofmaterialsputintoprocess.
DirectLabor52,040
CashorAccruedPayroll52,040
WorkinProcessInventory52,040
DirectLabor52,040
Tochargedirectlaborcosttoworkinprocess
ManufacturingOverhead130,080
VariousCredits130,080
Torecordoverheadcosts.
WorkinProcessInventory130,080
ManufacturingOverhead130,080
Toapplymanufacturingoverheadtoworkinprocess
FinishedGoodsInventory227,500
WorkinProcessInventory227,500
Totransfercostsofgoodscompletedtofinishedgoods.

WorkinProcessInventory

14 4

Beginningbalance$8,880|
Materials68,000|
DirectLabor52,040|
Overhead120,080|$227,500toFinishedGoods

259,000|$227,500
EndingBalance$31,500
1410JournalEntries(Continuationof148and149)(1420minutes)
NotetotheInstructor:Ifyouassigned149,youcancomparethe
entries.TheonlydifferenceisthetransfertoFinishedGoodsInventory.
Studentssometimesneedtoberemindedthatdifferentcostingmethodsdonot
affectphysical,economiceventssuchasbuyingandusingmaterials.
MaterialsInventory$81,000
CashandAccountsPayable$81,000
Torecordpurchasesofmaterials.
WorkinProcessInventory68,000
RawMaterialsInventory68,000
Torecordcostofmaterialsputintoprocess.
DirectLabor52,040
CashorAccruedPayroll52,040
WorkinProcessInventory52,040
DirectLabor52,040
Tochargedirectlaborcosttoworkinprocess
ManufacturingOverhead130,080
VariousCredits130,080
Torecordoverheadcosts.
WorkinProcessInventory130,080
ManufacturingOverhead130,080
Toapplymanufacturingoverheadtoworkinprocess
FinishedGoodsInventory225,700
WorkinProcessInventory225,700
Totransfercostsofgoodscompletedtofinishedgoods.

WorkinProcessInventory
Beginningbalance$8,880|
Materials68,000|
DirectLabor52,040|
Overhead130,080|$225,700toFinishedGoods

259,000|$225,700
EndingBalance$33,300
1411RelationshipsIncome,Production,andVolumeVariance(20minutes)
1.$16($320,000/20,000units)
Sales(20,000x$30)$600,000
Standardgrossprofit280,000
Standardcostofsales(allfixed)$320,000
2.$16,000favorable
Anintuitiveapproachtothispartistoprepareanincomestatement,leaving
thevolumevarianceblank.

14 5

Sales
$600,000
Standardcostofsales,allfixed320,000
Standardgrossprofit280,000
Volumevariance?
Sellingandadministrativeexpenses90,000
Income$174,000
3.24,000units
Productionlevelusedtosetstandard
fixedcost($400,000/$16standardfixedcost)25,000
Favorablevolumevariance,units($16,000/$16)1,000
Production24,000
4.$110,000
Sales$600,000
Fixedcosts,$400,000+$90,000490,000
Income$110,000
Analternativeapproachistoworkwiththedifferencebetweenabsorption
costingandvariablecostingincomes.
Absorptioncostingincome$174,000
Increaseininventory(24,000produced20,000sold)4,000
Fixedcostperunit$16
Fixedcostcarriedtofollowingyear64,000
Equalsvariablecostingincome
$110,000

1412ProcessCosting

Taccount(15minutes)
1.$20.80($23,700+$766,700)/38,000=$790,400/38,000
Unitscompleted35,000
Equivalentunitsinendinginventory(5,000x60%)3,000
Equivalentunitproductionweightedaverage38,000
2.Endinginventory$62,400($20.80x3,000)
Transfers728,000($20.80x35,000)
Total$790,400
3.WorkinProcessInventory
Beginningbalance$23,700|
Currentcosts766,700|$728,000Tofinishedgoods

790,400|728,000
Endingbalance$62,400
1413ProcessCosting(Extensionof1412,Appendix)(15minutes)
1.$20.50$766,700/37,400
Unitscompleted35,000
Equivalentunitsinendinginventory(5,000x60%)3,000
Total38,000
Lessbeginninginventory(3,000x20%)600
EquivalentunitproductionFIFO37,400
2.Endinginventory($20.50x3,000)$61,500
Transfers:
Beginninginventory$23,700

14 6

Costtocomplete*($20.50x2,400)49,200
Startedandcompleted**($20.50x32,000)656,000
Totaltransfers728,900
Total$790,400

*80%x3,000=2,400
**35,0003,000=32,000
3.

WorkinProcessInventory
Beginningbalance$23,700|
Currentcosts766,700|$728,900Tofinishedgoods

969,600|728,900
Endingbalance$61,500
1414BackflushCosting(5minutes)
Endinginventory(10,000x$7.60)$76,000
Costofgoodssold(90,000x$7.60)684,000
Totalcosts$760,000
Unitcost=($410,000+$350,000)/100,000=$7.60
NotetotheInstructor:Thissimpleexerciseandtheonesthatfollow
showhowstraightforwardandsimplebackflushingis.Ofcourse,the
conditionsmustberighttousebackflushingnosignificantinventories.
1415BackflushCosting,JournalEntries(Continuationof1414)(510
minutes)
MaterialsandInProcessInventory$410,000
Cash,AccountsPayable$410,000
ConversionCosts350,000
Cash,AccountsPayable,AccumulatedDepreciation350,000
CostofSales684,000
FinishedGoodsInventory76,000
MaterialsandInProcessInventory410,000
ConversionCosts350,000

1416BackflushCostingwithStandards
(Continuationof1414)(10
minutes)
Theuseofstandardcostswithbackflushingdoesnotappearinthetext,
buttheprincipleshouldbeclear.Showinventoriesatstandardcostand
variancesasadjustmentstostandardcostofsales.
Endinginventory,10,000x$7.20$72,000
Standardcostofsales,90,000x$7.20$648,000
Variances*40,000U
Costofsales688,000
Totalcosts$760,000
MaterialsConversionCosts
Actualcost$410,000$350,000
Standardcost,$4.00x100,000,400,000
$3.20x100,000320,000
Variance$10,000U$30,000U
1417ProcessCostingTwoDepartments(20minutes)

14 7

1.$0.30forMixing($25,620/85,400);$0.75forDistilling($60,000/80,000)

MixingDistilling
Gallonscompleted80,00080,000
Endinginventory(9,000x60%)5,4000
Equivalentproduction85,40080,000
2.$1,620(5,400x$0.30)
3.Costofgoodssold,$68,250(65,000x$1.05,whichis$0.30+$0.75)
Endinginventory,$15,750(15,000x$1.05)
Thereconciliationoftotalcostsfollows.
EndinginventoryofworkinProcess(requirement2)$1,620
Transferredtofinishedgoods(80,000x$1.05)84,000
Totalproductioncosts($25,620+$60,000)$85,620

1418Relationships

Income,Sales,andVolumeVariance(15minutes)
1.$18,$1,836,000/102,000
Thesimplestapproachistoprepareanincomestatementsofarasweknowthe
numbers.

Sales
?
Standardcostofsales(102,000x[$6+$8])1,428,000
Standardgrossprofit?
Volumevariance16,000F
Actualgrossmargin($200,000+$224,000)424,000
Sellingandadministrativeexpenses200,000
Income$224,000
Wecanseethatactualgrossmarginis$424,000($200,000+$224,000)and
standardgrossmarginmustthenbe$408,000becauseofthe$16,000favorable
volumevariance.Salesarethen$1,836,000($408,000+$1,428,000).
2.100,000Thevolumevariancewas$16,000favorable,whichmeansthat
productionof102,000(inventorieswereunchangedpertheassignment)was
2,000units($16,000/$8)abovethevolumeusedtosetthe$8standardfixed
cost.
3.$800,000$8x100,000
1419ProcessCosting(2025minutes)
1.Equivalentproduction
MaterialsConversionCosts
Gallonscompleted180,000180,000
Endinginventory(30,000x100%,80%)30,00024,000
Equivalentproduction210,000204,000

2.Unitcosts
Beginninginventory$3,240$9,620
Julycosts42,960127,060
Totals$46,200$136,680
Dividedbyequivalentproduction210,000204,000
Equalsunitcost$0.22$0.67

14 8

Totalunitcost=$0.89($0.22+$0.67)
3.FinishedGoodsInventory(180,000x$0.89)$160,200
WorkinProcessInventory$160,200
4.

WorkinProcessInventory
Beginningbalance$12,860|
Currentcosts170,020|$160,200Tofinishedgoods

182,880|160,200
Endingbalance$22,680
Beginningbalance=$3,240+$9,620;Julycosts=$42,960+$127,060
5.Proofofinventory
MaterialsConversionCosts
Equivalentunitsininventory30,00024,000
Costperunit$0.22$0.67
Inventorycost$6,600$16,080
Totalinventorycost=$22,680
1420EquivalentProductionandUnitCosts(2025minutes)
1.Equivalentproduction
MaterialsConversionCosts
Unitscompleted150,000150,000
Endinginventory(20,000x100%,60%)20,00012,000
Equivalentproduction170,000162,000
2.Unitcosts
Beginninginventory$14,650$19,400
Julycosts366,150571,900
Totals$380,800$591,300
Dividedbyequivalentproduction170,000162,000
Equalsunitcost$2.24$3.65
Totalunitcost=$5.89($2.24+$3.65)
3.$88,600endinginventory,$883,500transferred
MaterialsConversionCosts
Equivalentunitsininventory20,00012,000
Costperunit$2.24$3.65
Inventorycost$44,800$43,800
Totalinventorycost=$88,600
Unitstransferred150,000
Totalunitcost$5.89
Totalcosttransferred$883,500
Thecomponentsofthetransferare:
Materials(150,000x$2.24)$336,000
Conversioncosts(150,000x$3.65)547,500
Totaltransfer$883,500
NotetotheInstructor:Youmightwishtodoareconciliationofcosts
toreinforcethepointthatitisagoodidea.
MaterialsConversionCosts
Totalcostsfromabove$380,800$591,300

14 9

Lessendinginventory44,80043,800
Transferred$336,000$547,500
1421EquivalentUnitsandStandardCosts(Appendix)(1420minutes)
1.2,300units

1410

UnitsstartedandcompletedinJune
(2,000unitscompleted300units
startedinpriormonth)1,700
Workdoneonunitsstartedinpriormonth
(300unitsx1/2)150
WorkdoneonunitsstartedinJunebutnot
yetcompleted(600x3/4)450
Equivalentunits2,300
2.Costs
BudgetedActualVariance
Material[($10,000/2,000)x2,300]$11,500$11,400$100F
Labor[($20,000/2,000)x2,300]23,00021,5001,500F
Variableoverhead[($15,000/2,000)x2,30017,25015,4001,850F
Fixedoverhead18,00018,800800U
Totals$69,750$67,100$2,650F
1422CostingMethodsandPricing(15minutes)
1.Thesalesmanagerwillfindthatheisonacircularpath,sometimes
called"thedeathspiral."Ifhesetsthepriceat$32,volumewillbeless
thanthevolumeonwhichhebasedthepriceandfixedcostsperunitwillbe
higher.At$32,volumewillbe18,000units,givingunitfixedcostsof
$8.89($160,000/18,000).Totalcostperunitwillbe$16.89andthedesired
marginwillnotbeearned.Thepricerequiredatthatvolumeis$33.78.But
atthatpriceitislikelythatvolumewillbelessthan18,000units,andso
theviciouscirclewillcontinue.
Thesalesmanagerisstartingwithvolume,thenderivingaprice,instead
ofconsideringvolumeandpricesimultaneously.Healsofailstorecognize
thatafixedcostperunitfigureholdsatonlyonevolume.
2.$28

PriceOptions

123
Sellingprice$28$30$32
Variablecost888
Contributionmargin$20$22$24
Volumeexpectedatthatprice24,00020,00018,000
Totalcontributionmargin$480,000$440,000$432,000
Thereisnoneedtoconsiderfixedcostsbecausetheywillbethesameunder
allthreeprices.
1423OverheadRates,StandardCostIncomeStatement(1420minutes)
DicksonCompany
IncomeStatementfor20X5
Sales(80,000units)$1,600,000
Standardcostofsales(80,000x$12)(a)960,000
Standardgrossprofit640,000
Manufacturingvariances(b):
Materials$10,000F
Directlabor10,000U
Variableoverhead10,000U
Fixedoverheadbudget20,000U
Volumevariance(c)30,000U60,000U
Actualgrossprofit580,000
Administrativeexpenses400,000

1411

Income$180,000
(a)Computationofstandardcost
Budgeted/BudgetedProduction=Standard

Cost100,000UnitsCost
Materials$400,000100,000$4
Directlabor300,000100,0003
Variableoverhead200,000100,0002
Fixedoverhead300,000100,0003
Totals$1,200,000$12
(b)Computationofvariances
FlexibleBudgetActual
for90,000UnitsCostVariance
Materials$360,000$350,000$10,000F
Directlabor270,000280,00010,000U
Variableoverhead180,000190,00010,000U
Fixedoverheadbudget300,000320,00020,000U
(c)Fixedoverheadvolumevarianceisbudgetedcostof$300,000less
overhead
appliedof$270,000(90,000unitsx$3perunit).
1424StandardCostSystemJournalEntries(3540minutes)
1.Journalentries
(a)MaterialInventory(120,000x$4)$480,000
MaterialPriceVariance$25,000
CashorAccountsPayable455,000
Torecordpurchasesofmaterials,charginginventoryat
standardcost.
(b1)DirectLabor(151,000x$10)1,510,000
DirectLaborRateVariance20,000
Cash,AccruedPayroll1,490,000
Torecorddirectlaborcostincurredandisolate
directlaborratevariance.
(b2)WorkinProcess(48,000x$30)1,440,000
DirectLaborEfficiencyvariance70,000
DirectLabor1,510,000
Tochargeworkinprocesswithstandarddirectlabor
costandisolateefficiencyvariance.
(c1)VariableOverhead(151,000x$6)906,000
VariableOverheadSpendingVariance11,000
Cash,etc.895,000
Torecordvariableoverheadcostsandspendingvariance.
(c2)WorkinProcess(48,000x$18)864,000
VariableOverheadEfficiencyVariance42,000
VariableOverhead906,000
Tochargeworkinprocesswithstandardvariablecost
andrecordefficiencyvariance.
(d1)FixedOverhead(budgeted)500,000
FixedOverheadBudgetVariance10,000

1412

Cash,etc.490,000
Torecordfixedoverheadincurredandbudgetvariance.
(d2)WorkinProcess(48,000x$10)480,000
VolumeVariance[(50,00048,000)x$10]20,000
FixedOverhead500,000
Tochargeworkinprocesswithstandardfixedoverhead
andrecordvolumevariance.
(e)WorkinProcess(48,000x$8)384,000
MaterialUseVariance4,000
MaterialInventory380,000
Torecordcostofmaterialsputintoprocessand
materialusevariance.
(f)FinishedGoods(48,000x$66)3,168,000
WorkinProcess3,168,000
Totransferstandardcostof48,000unitsto
finishedgoods(48,000x$66).
(g1)Cash,AccountsReceivable4,500,000
Sales(45,000x$100)4,500,000
Torecordsalesof45,000units.
(g2)CostofGoodsSold(45,000x$66)2,970,000
FinishedGoods2,970,000
Torecordcostofgoodssoldatstandardcost.

1425ProcessCosting

JournalEntries(2535minutes)
1.RawMaterialInventory$286,000
CashandAccountsPayable$286,000
Torecordpurchasesofmaterials.
2.DirectLabor289,000
CashorAccruedPayroll289,000

WorkinProcessInventory289,000
DirectLabor289,000
Tochargedirectlaborcosttoworkinprocess
3.WorkinProcessInventory271,000
RawMaterialsInventory271,000
Torecordcostofmaterialsputintoprocess.
4.IndirectLabor46,000
SupervisionandOtherSalaries182,000
UtilitiesandInsurance23,500
Depreciationexpense72,000
OtherMiscellaneousCosts112,000
AccumulatedDepreciation72,000
CashandAccruedExpenses363,500
ManufacturingOverhead435,500
IndirectLabor46,000
SupervisionandOtherSalaries182,000
UtilitiesandInsurance23,500
Depreciationexpense72,000
OtherMiscellaneousCosts112,000

1413

Toaccumulateoverheadcostsinoneaccount.
WorkinProcessInventory420,000
ManufacturingOverhead(35,000x$12)420,000
Toapplymanufacturingoverheadtoworkinprocess.
5.FinishedGoodsInventory863,000
WorkinProcessInventory863,000
Totransfercostsofgoodscompletedtofinishedgoods.
6.CashandAccountsReceivable1,314,000
Sales1,314,000
Torecordsalesfortheyear.
7.CostofGoodsSold818,000
FinishedGoodsInventory818,000
Torecordcostofgoodssoldduringyear.
8.SellingandAdministrativeExpenses387,000
CashandAccruedExpenses387,000
Torecordotherexpensesincurredduringtheyear.
2.Inventorybalances

RawMaterialsWorkinProcess
||
Beginning|Beginning|
balance$34,000|balance$67,000|
(1)286,000|$271,000(3)(2)289,000|

320,000|271,000(3)271,000|
Endbal.$49,000(4)420,000|$863,000(5)

1,047,000|863,000
Endbal.$184,000

FinishedGoods
|
Begbal$125,000|
(5)863,000|$818,000(7)

988,000|818,000
Balance$170,000
3.Incomestatementfor20X6
Sales$1,314,000
Costofgoodssold818,000
Grossprofit496,000
Underappliedoverhead($435,500$420,000)15,500
Adjustedgrossprofit480,500
Sellingandadministrativeexpenses387,000
Income$93,500
1426ProductCostingandCVPAnalysis(2025minutes)
Theresultsarecausedbythechangesinfixedcostsintheinventories.
Thecostofgoodssoldfigurescanbecomputedasfollows.

AprilMayJune
Beginninginventory$0$76,800$87,500
Productioncosts:
Variable*200,000160,000128,000
Fixed120,000120,000120,000
Costofgoodsavailable320,000356,800335,500

1414

Endinginventory**76,80087,50019,375
Costofgoodssold$243,200$269,300$316,125
*50,000x$4;40,000x$4;32,000x$4
**AprilMayJune
Productioncostsformonth$320,000$280,000$248,000
Dividedbyunitsproduced50,00040,00032,000
Equalscostperunit$6.40$7.00$7.75
Inventoryinunits
50,00038,00012,000
12,000+40,00039,50012,500
12,500+32,00042,0002,500
Endinginventory$76,800$87,500$19,375
Onecanhardlyblamethepresidentforbeingpuzzled.Inonemonth
saleswerejustabovethebreakevenpointandprofitswere$30,800,whichis
muchmorethanhewouldhaveexpectedatsalesof42,000units,thehighest
monthexperienced.IncomeundervariablecostinginJunewouldhavebeen
$18,000[(42,000x$4)fixedcostsof$150,000].InMay,whensaleswere
suchastogivethetargetprofitof$8,000,actualprofitswereovertwice
theexpectedamount.AndinJune,whensaleswerewellabovethoseneededto
providethe$8,000targetprofit,alosswassustained.
Theexplanationthatchangesinthevolumeofproduction,differences
betweensalesandproductionvolumes,causedthedifferencesbetweenexpected
profitsandactualprofitsmightnotbeconvincingtothepresident.One
alternativeistoprovideincomestatementsbasedonvariablecosting.
IncomeStatementsVariableCosting

AprilMayJune
Sales$380,000$395,000$420,000
Variablecostofsalesat$4152,000158,000168,000
Grossprofit228,000237,000252,000
Variablesellingandadministrative
expensesat$276,00079,00084,000
Contributionmargin152,000158,000168,000
Fixedcosts($120,000+$30,000)150,000150,000150,000
Profitbeforetaxes$2,000$8,000$18,000
1427ProcessCosting(3035minutes)
1.MixingDepartment
Laborand
MaterialsOverhead
Unitscompleted75,00075,000
Equivalentunitsinendinginventory
Materials(9,000x100%)9,000
Laborandoverhead(9,000x60%)5,400
Equivalentproduction84,00080,400
BoilingDepartment
Prior
DepartmentLaborand

CostsOverhead
Unitscompleted68,00068,000
Equivalentunitsinendinginventory
Priordepartmentcosts(15,000x100%)15,000

1415

Laborandoverhead(15,000x40%)6,000
Equivalentproduction83,00074,000
2.CostperUnitMixingDepartment

Laborand
MaterialsOverhead
Costsinbeginninginventory$1,680$4,020
CostsincurredduringFebruary18,48032,160
Totals$20,160$36,180
Dividedbyequivalentproduction84,00080,400
Equalscostperunit$0.24$0.45
3.JournalEntry
WorkinProcessInventoryBoilingDepartment
($0.24+$0.45)x75,000$51,750
WorkinProcessInventoryMixingDepartment$51,750
Totransfercostof75,000gallonsfrommixing
departmenttoboilingdepartment.
4.CostperUnitBoilingDepartment
Prior
DepartmentLaborand

CostsOverhead
Costsinbeginninginventory$6,350$2,220
Coststransferredfrommixingdepartment51,750
CostsincurredduringFebruary25,900
Totals$58,100$28,120
Dividedbyequivalentproduction83,00074,000
Equalscostperunit$0.70$0.38
Totalunitcost($0.70+$0.38)$1.08
5.FinishedGoodsInventory(68,000x$1.08)$73,440
WorkinProcessInventoryBoilingDepartment$73,440
Totransfercostof68,000completedgallonsfromboilingdepartmentto
finishedgoods.
6.WorkinProcessInventory

MixingDepartment
Beginningbalance$5,700|
Costsincurred50,640|$51,750transferredout

56,340|51,750
Endingbalance$4,590
WorkinProcessInventory
BoilingDepartment
Beginningbalance$8,570|
Coststransferredin51,750|
Costsincurred25,900|$73,440transferredout

86,220|73,440
Endingbalance$12,780
Verifications:
MixingDepartment
EquivalentCostTotal

1416


UnitsperUnitCost
Materials9,000$0.24$2,160
Laborandoverhead5,400$0.452,430
Endinginventory$4,590
BoilingDepartment
Priordepartmentcosts15,000$0.70$10,500
Laborandoverhead6,000$0.382,280
Endinginventory$12,780
1428ProcessCosting,Extensionof1427(2030minutes)
1.Conversion
MaterialsCosts
Equivalentproduction,weightedaverage,
from142784,00080,400
Less,equivalentunitsinbeginninginventory:
8,000x60%4,800
8,000x70%5,600
Equivalentproduction,FIFO79,20074,800
Dividedintocostsincurredthismonthof$18,480$32,160
Equals,FIFOunitcost$0.2333$0.43
2.$51,920($7,479+$44,441)
Coststransferredfrombeginninginventory:
Materials:
Costsincurredlastmonth$1,680
8,000x40%x$0.2333747
Conversioncosts:
Costsincurredlastmonth4,020
8,000x30%x$0.431,032
Totalcosttransferred$7,479
Coststransferredforunitsstartedandcompletedthismonth
(75,0008,000=67,000)
Materials(67,000x$0.2333)$15,631
Conversioncosts(67,000x$0.43)28,810
Totalcosttransferred$44,441
3.

WorkinProcessMixing
Beg.bal.$5,700|
Materials18,480|
Conversion32,160|$51,920transferredtoBoiling

56,340|51,920
Endingbalance$4,420
Materials(9,000x100%x$0.2333)$2,100
Conversioncosts(9,000x60%x$0.43)2,322
Total$4,422
(The$2differenceisfromroundingconversioncostsfrom$0.4299to$0.43.)
NotetotheInstructor:Studentsshouldbeabletohandlethis
assignmentwithonlytheinformationinthetext,thoughnotextexample
incorporatesalloftheitemsintheassignment.Inassignment1440we
extendtheproblemtoincludesimilarcalculationsfortheBoiling

1417

Department.Someinstructorsmightwishtochallengetheirstudentswiththe
specialproblemsoftheFIFOassumptionwherepriordepartmentcostsare
involved.

1418

1429StandardCostsPerformanceEvaluation(2025minutes)
1.ArnoldCompany
BudgetedIncomeStatementfor20XX
Sales(80,000x$20)$1,600,000
Costofgoodssold:
Variablemanufacturingcosts(100,000x$8)$800,000
Fixedcostsapplied(100,000x$3)*300,000
1,100,000
Lessendinginventory[20,000x($8+$3)]220,000880,000
Standardgrossprofit720,000
Volumevariance(20,000x$3)60,000
Grossprofit660,000
Sellingandadministrativeexpenses300,000
Income$360,000
*Budgetedfixedcostsof$360,000/120,000normalcapacity=$3perunit
2.ArnoldCompany
IncomeStatementfor20XX
Sales(77,000x$20)$1,540,000
Costofgoodssold:
Variablemanufacturingcosts(118,000x$8)$944,000
Fixedmanufacturingcostsapplied(118,000x$3)354,000
1,298,000
Lessendinginventory(41,000x$11)451,000
Standardcostofgoodssold847,000
Standardgrossprofit693,000
Variances:
Variablecosts($954,000$944,000)10,000U
Fixedoverheadbudget($370,000$360,000)10,000U
Volume(2,000x$3)6,000U26,000U
Grossprofit667,000
Sellingandadministrativeexpenses300,000
Income$367,000
3.Performanceappearstobebetterthanbudgetedifincomeistheonly
criterionexamined.However,saleswere2,000fewerunitsthanbudgeted,
resultinginalossincontributionmarginof$24,000($12perunit).
Variableandfixedproductioncostswerehigherthanexpectedforthe
productionlevel.Theonlyfavorablefactor,ifitcanbecalledthat,is
thereductioninthevolumevariancefrom$60,000to$6,000.Thisreduction
wascausedbyproducing18,000unitsmorethanbudgeted.Thecritical
questioniswhetherthehigherproductionisgoodorbad.Sincesaleswere
belowexpectations,itmightbeassumedthatthehigherproductionwas
unwise.Thatconclusionwouldnotholdtrueifsalesinthesecondyearwere
expectedtobehigherthanthe100,000originallybudgeted.
NotetotheInstructor:Theincomestatementspreparedbystudentsfor
requirements1and2mayshowonlythestandardcostofgoodssold.The
computationsarepresentedinthestatementsheretoreducetheexplanatory
notes.
1430StandardCostIncomeStatementRelationshipsandVariances(35
minutes)
1.$6.50

1419

Materials(3lbs.x$0.50)(a)$1.50
Directlabor(1/2hr.x$4)(b)2.00
Variableoverhead($2perdirectlaborhour)(c)1.00
Standardvariablecost4.50
Fixedoverhead(d)2.00
Totalstandardcost$6.50
(a)$300,000materials/200,000unitsis$1.50standardcostperunit.From
theproblemitisknownthatthestandardcostperpoundis$0.50,soaunit
ofproductmustrequire3poundsofmaterial.
(b)$400,000labor/200,000unitsis$2.00standardcostperunit.Fromthe
problemitisknownthatthestandardrateperhouris$4,soaunitof
productrequiresonehalfhouroflabor.
(c)Theproblemindicatesthatthevariableoverheadrateperlaborhouris
$2andfrom(b)thelaborperunitisonehalfhour,sothevariableoverhead
rateperunitis$1.
(d)Budgetedfixedcostsof$500,000/250,000budgetedproductionunits=
$2perunit.
Notethatthecomputationsin(a),(b),and(c)arerelatively
straightforwardbecausetheproblemshowsthecomponentsofcostofsalesat
standard.
2.$4.50(seerequirement1)
3.240,000units[250,000($20,000unabsorbedoverhead/$2perunit)
4.$260,000[(240,000unitsproduced200,000sold)x$6.50]
5.$493,000($500,000$7,000favorablebudgetvariance)
6.$403,000(800,000lbs.x$0.50)+$3,000unfavorablepricevariance(#7)
7.$9,000unfavorable[$12,000$3,000(totalunfavorablevarianceminus
unfavorablepricevariance)]
8.738,000lbs.(240,000x3lbs.=720,000lbs.)+18,000unfavorable
varianceinlbs.($9,000/$.50)
9.$16,000favorable[(120,000standardhoursfor240,000units116,000
hoursworked=4,000)x$4]
10.$2,000favorable($18,000totalfavorablevariance$16,000favorable
efficiencyvariance)
11.$462,000($4x116,000hours)$2,000favorableratevariance
12.$236,000(116,000x$2)+$4,000unfavorablebudgetvariance
13.$3.50($10sellingprice$6.50standardcost)
14.$5.50($3.50+the$2reductioninunderabsorbedoverhead)
1431InterpretationofStandardCostStatement(20minutes)
1.$3forbothfixedandvariablestandardcostsperunit,sinceeachis50%

1420

oftotalstandardcostandtotalstandardcostis$6perunit($120,000cost
ofsales/20,000units)
2.$90,000($3perunitx30,000unitsatnormalcapacity)
3.22,000Sincethevolumevarianceis$24,000unfavorable,productionwas
8,000units($24,000/$3)belownormalactivityof30,000units.
4.$72,000
Beginninginventory(10,000units)$60,000
Fixedproductioncosts(22,000x$3)66,000
Variableproductioncosts(22,000x$3)66,000
Totalavailable$192,000
Lesscostofgoodssold120,000
Endinginventory$72,000
Analternativeistoaddthestandardcostof2,000units(theincreasein
inventory)of$12,000tothebeginninginventoryof$60,000.
1432IncomeStatementforStandardCosting,PracticalCapacity
(Continuationof1431(15minutes)
CTrinCompany
IncomeStatementforJune,20X4
Sales$200,000
Standardcostofsales*105,000
Standardgrossprofit95,000
Manufacturingvariances:
Materials$2,000U
Directlabor1,000F
Overheadbudget1,000U2,000U
93,000
Volumevariance(18,000x$2.25)40,500U
Grossprofitactual52,500
Selling,general,administrativeexpenses48,000
Income$4,500
*Standardfixedcostis$2.25perunit($90,000/40,000)andtotalstandard
costis$5.25perunit($3variable+$2.25fixed).Totalfixedcostsgo:
Toproduction(22,000x$2.25)$49,500
Volumevariance(18,000x$2.25)40,500
Totalfixedcosts$90,000
1433StandardCosts,Budgets,Variances,JournalEntries(5060minutes)
1.WarnerCompany
BudgetedIncomeStatementfor20X6
Sales(100,000x$10)$1,000,000
Costofgoodssold:*
Material(140,000x$1.50)$210,000
Labor(140,000x$3)420,000
Variableoverhead(140,000x1hr.x$1)140,000
Fixedoverheadapplied(140,000x$2)280,000
1,050,000
Lesschangeininventory,atstandard
(140,000100,000)x($1.50+$3+$1+$2)300,000
Costofgoodssold,atstandard750,000
Grossprofit,atstandard250,000

1421

Volumevariance(10,000x$2)20,000
Grossprofit230,000
Sellingandadministrativecosts180,000
Income$50,000
*Standardcostsperunitforcomponentsofmanufacturingwerecomputedby
dividingbudgetedcostbybudgetedproduction.
2.
(a)MaterialInventory(250,000x$0.75)$187,500
MaterialPriceVariance5,000
CashorAccountsPayable$192,500
Torecordtheacquisitionofmaterials,chargingtheinventoryaccount
forthestandardcost[($210,000/140,000)/2lbs.perunit].
WorkinProcess(130,000x$1.50)195,000
MaterialUseVariance18,000
MaterialInventory(236,000x$0.75)177,000
Torecordstandardcostofmaterialsusedandmaterialusevariance.
(b)DirectLabor(133,000x$3)399,000
DirectLaborRateVariance3,000
Cash,AccruedPayroll402,000
Torecordlaborcostandlaborratevariance.
WorkinProcess(130,000x$3)390,000
DirectLaborEfficiencyVariance(3,000x$3)9,000
DirectLabor399,000
(c)VariableOverhead(133,000x$1)133,000
FixedOverhead(budgeted)300,000
VariableOverheadSpendingVariance5,000
FixedOverheadBudgetVariance15,000
Cash,Accruals,AccumulatedDepreciation413,000
Torecordoverheadatbudgetedamountsandbudgetvariances.
WorkinProcess390,000
VariableOverheadEfficiencyVariance
(3,000x$1)3,000
VolumeVariance(150,000130,000)x$240,000
VariableOverhead133,000
FixedOverhead300,000
Tochargeworkinprocesswithstandardoverheadcostsandrecord
variableoverheadefficiencyvarianceandvolumevariance.
(d)SellingandAdministrativeExpenses175,000
Cash,etc.175,000
Torecordsellingandadministrativeexpenses.
(e)FinishedGoods(130,000x$7.50)975,000
WorkinProcess975,000
Totransferstandardcostofproductiontofinishedgoods.
(f)AccountsReceivable950,000
CostofGoodsSold(95,000x$7.50)712,500
Sales950,000
FinishedGoods712,500
Torecordsalesandcostofgoodssoldatstandard.

1422

3.WarnerCompany
IncomeStatementfor20X6
Sales(95,000unitsx$10)$950,000
Costofgoodssold:
Beginninginventory(13,000x$7.50)$97,500
Productioncosts:
Materials(130,000x$1.50)195,000
Labor(130,000x$3)390,000
Variableoverhead(130,000x$1)130,000
Fixedoverheadapplied(130,000x$2)260,000
Costofgoodsavailableforsale1,072,500
Lessendinginventory
(13,000+130,00095,000)x$7.50360,000
Standardcostofgoodssold712,500
Standardgrossprofit237,500
Variances:
Materialprice5,000U
Laborrate3,000U
Materialuse18,000F
Laborefficiency9,000U
Variableoverheadspending5,000F
Variableoverheadefficiency3,000U
Fixedoverheadbudget15,000F
Volume40,000U22,000
Grossprofit215,500
Sellingandadministrativecosts175,000
Income$40,500
1434ActualProcessCosting,JournalEntries,andIncomeStatement(3040
minutes)
1.Journalentriesunderactualprocesscosting
1.MaterialsInventory$39,600
CashandAccountsPayable$39,600
2.DirectLabor28,850
CashorAccruedPayroll28,850
WorkinProcessInventory28,850
DirectLabor28,850
3.VariableOverhead15,690
CashandAccruedExpenses15,690
WorkinProcessInventory15,690
VariableOverhead15,690
4.FixedOverhead23,500
Cash,AccruedExpenses,Accumulated
Depreciation23,500
WorkinProcessInventory23,500
FixedOverhead23,500
5.WorkinProcessInventory(11,000x$3.30)36,300
MaterialsInventory36,300
6.FinishedGoodsInventory(7,200x$14.10)101,520
WorkinProcessInventory101,520
Totalcostschargedtoworkinprocesswere$104,340($28,850+$15,690+
$23,500+$36,300).Equivalentproductionwas7,400units[7,200+(500x
40%)],and$104,340/7,400=$14.10.
7.CashandAccountsReceivable(6,500x$50)325,000

1423

Sales325,000
CostofGoodsSold(6,500x$14.10)91,650
FinishedGoodsInventory91,650
8.SellingandAdministrativeExpenses106,000
CashandAccruedExpenses106,000
2.Incomestatementunderactualprocesscosting
Sales$325,000
Costofsales*91,650
Grossprofit233,350
Sellingandadministrativeexpenses106,000
Income$127,350
*Detailofcostofgoodssold:
Materialsputintoprocess$36,300
Directlabor28,850
Variableoverhead15,690
Fixedoverhead23,500
Total104,340
Lessendingworkinprocess,(500unitsx40%)x$14.102,820
Coststransferredtofinishedgoods101,520
Lessendingfinishedgoods,(7,2006,500)x$14.109,870
Equalscostofgoodssold$91,650
1435StandardProcessCosting,JournalEntries,andIncomeStatement
(Continuationof1434)(4050minutes)
1.Journalentriesunderstandardprocesscosting
1.MaterialsInventory(12,000x$3.20)$38,400
MaterialPriceVariance(12,000x$0.10)1,200
CashandAccountsPayable$39,600
2.DirectLabor(1,700x$16)27,200
DirectLaborRateVariance1,650
CashorAccruedPayroll28,850
WorkinProcessInventory(7,400unitsx$4)29,600
DirectLaborEfficiencyVariance2,400
DirectLabor27,200
3.VariableOverhead(1,700hoursx$8)13,600
VariableOverheadSpendingVariance2,090
CashandAccruedExpenses15,690
WorkinProcessInventory(7,400x$2)14,800
VariableOverheadEfficiencyVariance1,200
VariableOverhead13,600
4.FixedOverhead[Budgetedamount(2,000x$12)]24,000
FixedOverheadBudgetVariance500
Cash,AccruedExpenses,Accumulated
Depreciation23,500

WorkinProcessInventory(7,400unitsx$3)22,200
VolumeVariance[(1,850stdhours2,000
hoursusedtosetstandard)x$12perhour]1,800
FixedOverhead24,000
5.WorkinProcess(7,400x$4.80)35,520

1424

MaterialUseVariance320
MaterialInventory(11,000x$3.20)35,200
6.FinishedGoodsInventory(7,200x$13.80)99,360
WorkinProcessInventory99,360
7.CashandAccountsReceivable325,000
Sales325,000
CostofSales(6,500x$13.80)89,700
FinishedGoodsInventory89,700
8.SellingandAdministrativeExpenses106,000
CashandAccruedExpenses106,000
2.Incomestatementunderstandardcosting
Sales$325,000
Costofsalesatstandard89,700
Standardgrossprofit235,300
Plusvariances:
Materialprice$1,200U
Materialuse320F
Directlaborrate1,650U
Directlaborefficiency2,400F
Variableoverheadspending2,090U
Variableoverheadefficiency1,200F
Fixedoverheadbudget500F
Fixedoverheadvolume1,800U2,320U
Actualgrossprofit232,980
Sellingandadministrativeexpenses106,000
Income$126,980
SummaryofVariances:
Materials
Budgetfor

ActualPurchases12,000pounds
$39,600$38,400
$1,200U

ActualUseatStandardCostfor

StandardPrice7,400EquivalentUnits
$3.20x11,000lbs.$3.20x1.5x7,400or
$4.80x7,400
$35,200$35,520
$320F
DirectLabor
BudgetforStandardCostfor
ActualCost1,700Hours7,400Units
$16x1,700$4x7,400
$28,850$27,200$29,600
$1,650U$2,400F
Variableoverhead

1425

$8x1,700$2x7,400
$15,690$13,600$14,800
$2,090U$1,200F
FixedOverhead

$23,500$24,000$22,200(7,400x$3)
$500F$1,800U
1436SpecialOrder(20minutes)
1.Theordershouldbeacceptedbecauseitwillreturncontributionmargin
of$0.80percase,or$20,000intotal.Thestandardcostperunitof$6
contains$2fixedcost,calculatedfromtheinformationaboutthevolume
varianceandbasefordeterminingunitfixedcost.[Thevolumevarianceof
$120,000isfor60,000units(400,000340,000),giving$2fixedcostper
unitatstandard.]Thevariablecostingincomestatementsshowthisclearly,
anditmaybehelpfultostartwithrequirement2.
2.Without

OrderWithOrder
Sales
300,000at$8$2,400,000
25,000at$4.80;300,000at$8$2,520,000
Variablecostsat$4perunit1,200,0001,300,000
Contributionmargin1,200,0001,220,000
Fixedproductioncosts800,000800,000
Grossprofit$400,000$420,000
The$800,000fixedproductioncostis$2x400,000units(thebaseused
tocomputestandardfixedcostperunit).
3.WithOrder
Sales$2,520,000
Standardcostofsales1,950,000
Standardgrossprofit570,000
Volumevariance[(400,000365,000)x$2](70,000)
Actualgrossprofit$500,000
NotetotheInstructor:Thisproblemillustratesseveralpoints.Oneis
thatincreasesinsaleswithoutincreasesinproductionresultinincreases
inincomeequaltosalespriceminusstandardcostperunittimesthe
increaseinsales.Inthiscase,theresultwasa$30,000decreasebecause
thesellingpriceof$4.80was$1.20lessthanstandardcostand$30,000is
$1.20x25,000units.However,ifsalesandproductionchangeinthesame
amount,incomewillchangebycontributionmarginperunittimesthechange
involume.Thisisbecausethevolumevariancewillbereducedbyfixedcost
perunittimesthechangeinvolumeofproduction,andstandardgrossprofit
bythesellingpriceminusstandardcosttimesthechangeinvolume.Hence,
whilestandardcostofsaleswillrise,thevolumevariancewillfallbythe
sameamount,leavinganetincreaseequaltocontributionmargin.
Whenabsorptioncostingisused,thecriteriondiscussedinChapter5
thatanactionshouldbetakenifitresultsinanincreaseinprofitmust
bemodified.Themodificationisthatinventorylevelsremainatwhatthey
wouldhavebeenifthespecialorderwerenotaccepted,whichisshownin
requirement3.
Finally,somestudentswillhaveagreatdealoftroublestartingthis
problembecausethefixedcostperunitisnotgiven.Inorderto
concentrateontheotheraspectsoftheproblem,youmaywishtotellthe
classaheadoftimethatthefixedcostincludedinthestandardcostis$2.

1426

1437JoborderCostingStandardsandVariances(2530minutes)
1.Standardcostsforjobs
Job82Job83
80Unitsof50Unitsof

Model803Model407Totals
Materials:
Wood(80x$24)$1,920(50x$58)$2,900$
4,820
Fabric(80x$46)3,680(50x$92)4,600
8,280
Other(80x$13)1,040(50x$21)1,050
2,090
Totalmaterials6,6408,550
15,190Directlabor(80x$65)5,200(50x$90)4,500
9,700Variableoverhead(80x$104)8,320(50x$144)7,200
15,520Totalstandardvariablecost$20,160$20,250
$40,410
2.Variances
ActualUseatStandard
StandardPriceCost
Variance
Materialuse:
Wood$4,855$4,820$35U
Fabric8,3608,28080U
Other2,0902,0900
Totals$15,305$15,190$115U
Directlaborefficiency10,2509,700550U
Variableoverheadefficiency(2,050x$8)16,40015,520880U
Variableoverheadbudget($16,850$16,400)450U
Totalvariances$1,995U
3.CarlsonCompany
IncomeStatementforJune
Sales$97,000
Costofsalesstandard40,410
Standardgrossprofit56,590
Variablecostvariances,unfavorable1,995
Actualgrossprofit54,595
Fixedcosts:
Production$24,600
Sellingandadministrative18,70043,300
Income$11,295
NotetotheInstructor:Tofocusonthequestionofusingstandard
costsinajobordersystem,wedidnotprovidedataonthecostschargeable
toeachjob(actualquantitiesatstandardprices).Thus,thevariances
attributabletoeachjobcannotbecalculated.Thisinformationwouldbe
valuable,especiallyifithighlightedchangesinconditionsthatmightmake
itdesirabletochangestandards.(Forexample,persistentvariancessuchas
materialuseorlaborefficiencyforaparticularmodelmightindicatethat
thestandardsshouldberevised.)
Youcouldpointoutinclassthatmostcompanieswould,ifpossible,
keeptrackofmaterialandlaboruseforeachjob,therebyallowingthe
isolationofefficiencyvariancesbyjoborder.

1427

1438ComprehensiveProblemonCostingMethods(3540minutes)

AbsorptionCosting
(a)(b)(c)
BudgetedPractical

ActualProductionCapacity

Sales(160,000units)$2,400,000$2,400,000$2,400,000

Costofsales:
Productioncosts:
Materialsactual375,000
standard(1)360,000360,000
Laboractual580,000
standard(2)540,000540,000
VOHactual395,000
standard(3)360,000360,000
FOHactual208,000
applied(4)180,000144,000
Total1,558,0001,440,0001,404,000
Lessendinginventory(5)173,112160,000156,000
Standardcostofgoodssold1,280,0001,248,000
Variances:
Materials($360,000$375,000)15,000U15,000U
Labor($540,000$580,000)40,000U40,000U
VOH($360,000$395,000)35,000U35,000U
Fixedoverheadbudget
($200,000$208,000)8,000U8,000U
Volume(6)20,000U56,000U
Totalvariances118,000U154,000U
Costofgoodssold1,384,8881,398,0001,402,000
Grossprofit1,015,1121,002,000998,000
S&Aexpenses700,000700,000700,000
Income$315,112$302,000$298,000
VariableCosting
(d)(e)

StandardActual
Sales(160,000units)$2,400,000$2,400,000
Costofsales:
Productioncosts:
Materialsactual375,000
standard(1)360,000
Laboractual580,000
standard(2)540,000
Variableoverheadactual395,000
standard(3)360,000
Total1,260,0001,350,000
Lessendinginventory(5)140,000150,000
Standardcostofgoodssold1,120,000
Variances:
Materials($360,000$375,000)15,000U
Labor($540,000$580,000)40,000U
Variableoverhead($360,000$395,000)35,000U
Totalvariances90,000U
Costofgoodssold1,210,0001,200,000
Grossprofit1,190,0001,200,000
Fixedoverhead(208,000)(208,000)
Sellingandadministrativeexpenses(700,000)(700,000)
Income$282,000$292,000

1428


(1)(Budgetedmaterialcostof$400,000/200,000budgetedproduction=$2
standardcostperunit)x180,000=$360,000
(2)(Budgetedlaborcostof$600,000/200,000budgetedproduction=$3
standardcostperunit)x180,000=$540,000
(3)(Budgetedvariableoverheadof$400,000/200,000budgetedproduction=$2
standardcostperunit)x180,000=$360,000
(4)Fixedcostsarecomputedasfollows:
(b)(Budgetedfixedcostsof$200,000/200,000budgetedproduction=$1
standardcostperunit)x180,000=$180,000
(c)(Budgetedfixedcostsof$200,000/250,000practicalcapacity=$.80
standardcostperunit)x180,000=$144,000
(5)Inventoriesareattherelevantunitcost,asfollows:
(a)20,000unitsx$8.6556($1,558,000/180,000)=$173,112
(b)20,000unitsx$8($2+$3+$2+$1)=$160,000
(c)20,000unitsx$7.80($2+$3+$2+$.80)=$156,000
(6)Volumevariancesareascomputedbelow:
(b)$1x(200,000180,000)=$20,000U
(c)$.80x(250,000180,000)=$56,000U
2.Thedifferencesinincomesrelatetothedifferencesininventories.The
two"actual"income,(a)and(e),werehigherthantherelatedstandard
incomesbecausepartoftheunfavorablevariancesweredeferredininventory.
Productionexceededsales,soallvariationsofabsorptioncosting
producedincomeshigherthanthoseundervariablecosting;andtheincome
basedonpracticalcapacitywaslowerthanthatbasedonbudgetedproduction
becausealowerfixedstandardcostperunitisdeferredinendinginventory.

1439ComprehensiveProblemonCostingMethods(Continuationof1438)(35
40minutes)
AbsorptionCosting
(a)(b)(c)
BudgetedPractical

ActualProductionCapacity
Sales(160,000units)$3,000,000$3,000,000$3,000,000
Costofsales:
Beginninginventory173,112160,000156,000
Productioncosts:
Materialsactual400,000
standard(1)380,000380,000
Laboractual590,000
standard(2)570,000570,000
VOHactual410,000
standard(3)380,000380,000
FOHactual215,000
applied(4)253,327152,000
Total1,788,1121,743,3271,638,000
Lessendinginventory(5)85,00083,33378,000
Standardcostofgoodssold1,659,9941,560,000
Variances:
Materials($400,000$380,000)20,000U20,000U
Labor($590,000$570,000)20,000U20,000U
VOH($410,000$380,000)30,000U30,000U
Fixedoverheadbudget
($200,000$208,000)15,000U15,000U
Volume(6)53,327F48,000U
Totalvariances31,673U133,000U
Costofgoodssold1,703,1121,691,6671,693,000
Grossprofit1,296,8881,308,3331,307,000

1429

S&Aexpenses720,000720,000720,000
Income$576,888$588,333$587,000
VariableCosting
(d)(e)

StandardActual
Sales(160,000units)$3,000,000$3,000,000
Costofsales:
Beginninginventory140,000150,000
Productioncosts:
Materialsactual400,000
standard(1)380,000
Laboractual590,000
standard(2)570,000
Variableoverheadactual410,000
standard(3)380,000
Total1,470,0001,550,000
Lessendinginventory(5)70,00073,684
Standardcostofgoodssold1,400,000
Variances:
Materials($400,000$380,000)20,000U
Labor($590,000$570,000)20,000U
Variableoverhead($410,000$380,00030,000U
Totalvariances70,000U
Costofgoodssold1,470,0001,476,316
Grossprofit1,530,0001,523,684
Fixedoverhead(215,000)(215,000)
Sellingandadministrativeexpenses(720,000)(720,000)
Income$595,000$588,684
(4)Fixedoverheadappliedtoproduction:
(b)190,000x$1.3333($200,000/150,000)=$253,327
(c)190,000x$.80=$152,000
(5)Inventoryof10,000units(20,000+190,000200,000)attherelevant
cost,asfollows
(a)10,000x$8.50($1,615,000/190,000)=$85,000
(b)10,000x$8.3333($7+1.3333)=$83,333
(c)10,000x$7.80=$78,000
(d)10,000x$7=$70,000
(e)10,000x$7.3684=[($400,000+$590,000+$410,000)/190,000]=
$73,684
(3)Volumevariancesarecomputedasfollows:
(b) $1.3333x(150,000190,000)=$53,333(adjustedto$53,327for
theincomestatementtoagreewiththeamountappliedinexcessof
budgeted)
(c) $0.80x(250,000190,000)=$48,000
1440StandardCostsandProductProfitability(30minutes)
Thisproblemcontainsmuchirrelevantinformation.Thesolution
requiresonlythecontributionmarginsofeachproduct,theirrequired
machinehours,andtotalavailablemachinehours.Afirststepisto
determinethecontributionmarginspermachinehourthecapacitylimitation.
TwoinchThreeinchFourinchSixinch
Sellingprice$17.00$24.00$31.00$40.00
Standardvariablecosts8.0011.0016.0019.00
Contributionmargins9.0013.0015.0021.00
Machinehoursrequiredpercarton.30.40.60.80
Contributionmarginpermachinehour
(contributionmargins/hours)$30.00$32.50$25.00$26.25

1430

Thesixinchfolderismoreprofitablethanthefourinchfolder,less
profitablethantheothers.Thefirmisnowexpectingtouse41,200machine
hoursdistributedasfollows.
SizeFolderVolumeTimeRequiredTotalHours
Twoinch44,000.3013,200
Threeinch25,000.4010,000
Fourinch30,000.6018,000
Total41,200
Addhoursrequiredforspecialorder(24,000x.80)19,200
Totalhoursrequired60,400
Practicalcapacity50,000
Requiredreduction10,400
Reductioninnumberofcartonsoffourinchfolders
(10,400/.6)17,333
Contributionmarginlost(17,333x$15)$259,995
Contributionmargingained($21x24,000)504,000
Netgain$244,005
Thevolumevariancewilldisappearifthesixinchfoldersweresold,
butthatisnotthecriticalpoint.Thechangeincontributionismore
important.

NotetotheInstructor:Somestudentswilltrytocalculatethefixed
overheadpermachinehour,whichis$16(anyofthestandardfixedcosts
dividedbythenumberofhoursrequiredpercarton),andthetotalfixed
manufacturingcosts,$800,000($16x50,000hours).Thesefiguresare
unnecessary,butyoumaywishtoaskfortheminordertoseeifthestudents
understandtheirderivations.Anextensionofthisproblemistoaskthe
valueofadditionalhoursofcapacity,whichis$25perhourbecausetheonly
productthatcanbemadeandsoldisthefourinchfolder,whichhasa
contributionmarginof$25permachinehour.The$16fixedcostperhouris
irrelevant.
1441ReviewProblem(4045minutes)
1.5,000units,thetopoftherelevantrange.Thoughrelevantrangewas
notdiscussedspecificallyinrelationtocapacitycomputations,students
shouldbeabletoseetherelationship.
2.3,000units(2,500unitssold+500unitsofendinginventory)
3.9,500yards[(3,000unitsproducedx3yds.perunit)+500yds.of
endinginventory]
4.2hours(given)
5.$9.00
Material(3yds.x$2)$6.00
Labor(2hrs.x$0.50)1.00
Variableoverhead(2hrs.x$1)2.00
Total$9.00
6.$10
Variablemanufacturingcost(from5)$9.00
Fixedmanufacturingcost($3,000/3,000)1.00
Total$10.00

1431

7.$18[$30$910%($30)]
8.$9,variablemanufacturingcost
9. $10 This answer is, for this particular month, the same as the total
manufacturingcostusingapredeterminedoverheadratebecausethebudgeted
productionforMayisequaltonormalcapacity,uponwhichthepredetermined
overheadrateisbased.Studentsshouldberemindedthatthetwoamountswill
notalwayscoincide.
10.$9,thevariablemanufacturingcost
11.$12,thevariablemanufacturingcostplusthevariablesellingcostof
$3(10%x$30)
12.$.50perhour($3,000/6,000hours)or$1.00perdress
Normalcapacity3,000units
Laborhoursperunit2
Normalcapacity,inlaborhours6,000
13.$30,000[(3,000x$9)+$3,000]
14.$3,000+$9X,whereX=production
15.$0.30perhour($3,000/10,000hours)or$0.60perdress
Practicalcapacity5,000units
Laborhoursperunit2
Practicalcapacity,inlaborhours10,000
16.Theanswerheredependsonthecostingmethodused.Undervariable
costing,incomeis$36,000,computedasfollows:
Contributionmargin(2,500unitsx$18)$45,000
Fixedcosts($3,000+$6,000)9,000
Income$36,000
Underabsorptioncosting,incomeis$36,500,computedasfollows:
Sales(2,500x$30)$75,000
Costofsales:
Variableproductioncosts(3,000x$9)$27,000
Fixedproductioncostsapplied
(3,000x$1)3,000
30,000
Lessendinginventory(500x$10)5,00025,000
Grossprofit50,000
Sellingandadministrativeexpenses:
Variable($75,000x10%)7,500
Fixed6,00013,500
Income$36,500
Thedifferenceintheincomesisequaltotheamountoffixedcostinthe
endinginventoryunderabsorptioncosting(500units@$1).
17.500units(fixedcostsof$9,000/$18contributionmarginperunit)
18.2,000units(budgetedunitsof2,500thebreakevenpointof500

1432

units)
19.$18,thecontributionmargin

1433

1442ProcessCostingSecondDepartment(Continuationof1427and1428)
(3040minutes)
NotetotheInstructor:Thisisaverydifficultassignment,andwe
includeitonlyforthoseofyouwhowisheithertopursuethecomplications
ofaccumulatingcostsunderFIFOortochallengestudentstoapplytext
principlesinsituationsnotcoveredbythetext.Ineithercase,youmight
wishtoassignthisproblemtobedoneinclass,sothatstudentswon'tget
toofrustratedwiththeirindependentefforts.And,becausetheanswer
dependsontheamountofcosttransferredfromthepriordepartment,itwould
behelpfultogivestudentstheamountofthecosttransferred(computedin
1427as$51,922)beforetheyattempttodothisassignment.
1.

$0.37

Equivalentproduction,weightedaverage,from142774,000
Lessequivalentproductioninbeginninginventory,
8,000x50%4,000
Equalsequivalentproduction,FIFO70,000
Dividedintocurrentmonth'scostsof$25,900
Equalscostperequivalentunit$0.37
2.$73,788
Coststransferredforunitsinbeginninginventory:
Priordepartmentcosts$6,350
Conversioncosts2,220
Coststofinishbeginninginventorythismonth,
$0.37x8,000x50%1,480
Totalcosttransferredforunitsinbeginninginventory10,050
Coststransferredforunitsstartedandcompleted
Priordepartment'scosts:
Coststransferredthismonth(1427)$51,922
Dividedbyno.ofunitstransferredin75,000
Equalspriordepartment'scostperunit$0.6923
Timesunitsstartedandcompletedthismonth,
68,0008,000inbeginninginventory60,000
Equalspriordepartment'scost$41,538
Conversioncosts(60,000x$0.37)22,20063,738
Totalcoststransferredtofinishedgoods$73,788
3.

WorkinProcessInventoryBoiling
|
Beginningbalance$8,570|
Transferredin(1427)51,922|$73,788Transferredout
Conversioncosts25,900|

86,392|73,788
Endingbalance$12,604
Verificationofendingbalance:
Priordepartmentcosts(15,000x100%x$0.6923)$10,384
Conversioncosts(15,000x40%x$0.37)2,220
Totalendinginventory$12,604
1443ReviewofChapters11,12,13,and14(40minutes)
1.Variances,20X3

1434

Materials
ActualCostatActualQuantity
ActualQuantityatStandardPrice
$1,425,000$1,400,000(7,000,000lbs.x$.20)
$25,000U
pricevariance
ActualQuantityUsed

atStandardPriceStandardCost
6,450,000x$0.20260,000x25x$0.20
$1,290,000$1,300,000
$10,000F
usevariance
DirectLabor
ActualCostforActualQuantityUsed
ActualQuantityatStandardPriceStandardCost
53,000x$10260,000x.20x$10
$520,000$530,000$520,000
$10,000F$10,000U
ratevarianceefficiencyvariance
VariableOverhead
ActualCostforActualQuantityUsed
ActualQuantityatStandardPriceStandardCost
53,000x$5260,000x.20x$5
$270,000$265,000$260,000
$5,000U$5,000U
spendingvarianceefficiencyvariance
FixedOverheadStandardrate=$6=$1,500,000/250,000units
ActualOverheadBudgetedOverheadAppliedOverhead
260,000x$6
$1,480,000$1,500,000$1,560,000
$20,000F$60,000F
budgetvariancevolumevariance
(Notethattheabovevariancesrelateonlytotheincomestatementusing
absorptioncosting.)
SummaryofVariances
VariableAbsorption

CostingCosting
Materialpricevariance$25,000U$25,000U
Materialusevariance10,000F10,000F
Laborratevariance10,000F10,000F
Laborefficiencyvariance10,000U10,000U
Variableoverheadspendingvariance5,000U5,000U
Variableoverheadefficiencyvariance5,000U5,000U

1435

Fixedoverheadbudgetvariance20,000F20,000F
Fixedoverheadvolumevariance60,000F
Total$5,000U$55,000F
2.IncomeStatements
ARCIndustries
IncomeStatementsfor20X3
VariableAbsorption

CostingCosting
Sales(230,000x$20)$4,600,000
$4,600,000
Costofsalesatstandard:
Beginninginventory0
0
Variableproductioncosts(260,000x$8)2,080,000
2,080,000
Fixedproductioncosts(260,000x$6)
1,560,000
Availableforsale2,080,000
3,640,000
Endinginventory:30,000x$8240,000
30,000x$14($8+$6=$14)
420,000
Costofsalesatstandardsof$8and$141,840,000
3,220,000
Standardgrossprofit2,760,000
1,380,000
Variances(unfavorable)(5,000)
55,000
Actualgrossprofit2,755,000
1,435,000
Sellingandadministrativeexpenses800,000
800,000
Fixedproductioncostsbudgeted1,500,000
Totalothercosts2,300,000
800,000
Profit$455,000$
635,000
Itisalsopossibletoshortcuttheincomestatementsbecausestandard
costofsalesundereithermethodisstandardunitcosttimesthe230,000
rollssold.
Somestudentsmightaskabouttheformatofoursolution,wherethe
fixedproductioncostbudgetvarianceisshownaspartofthecalculationof
actualgrossprofit.Analternativeistoshowitasaseparateitemalong
withbudgetedfixedproductioncosts.Weshoweditthiswaybecausethe
problemstatesthatthereshouldbeasinglefigureforvariancesoneach
statement.Theimportantpointforstudentstogetisthattheformatofthe
incomestatementislargelyamatterofchoice.Asidefromsome
"unacceptable"practices,theselectionofformatdependsonthemanagers'
preferencesregardingwhattheywanthighlightedandwhatsequencetheywant.
1444ReviewofChapters11,12,13,and14(Extensionof1443)(40
minutes)
Materialprice$30,000F$1,240,000budgetfor6,200,000lbs.

1,210,000actualcost
$30,000F
Materialuse$20,000F$1,200,000standardfor240,000rollsat$5

1,180,000budgetfor5,900,000lbs.at

1436

$0.20
$20,000F
Laborrate$5,000U$475,000actualcost

470,000budgetfor47,000hoursat$10
$5,000U
Laborefficiency$10,000F$480,000standardfor240,000rollsat$2

470,000budgetfor47,000hours
$10,000F
Variableoverhead$240,000actualcost
spending$5,000U235,000budgetfor47,000hoursat$5
$5,000U
Variableoverheadefficiency$240,000standardfor240,000rollsat$1
$5,000F235,000budgetfor47,000hours
$5,000F
Fixedoverheadbudget$10,000U$1,510,000actualcost

1,500,000budgetedcost
$10,000U
Fixedoverheadvolume$60,000U$1,500,000budgetedcost

1,440,000appliedat$6x240,000rolls
$60,000U
SummaryofVariances:
VariableAbsorption

CostingCosting
Materialpricevariance$30,000F$30,000F
Materialusevariance20,000F20,000F
Laborratevariance5,000U5,000U
Laborefficiencyvariance10,000F10,000F
Variableoverheadspendingvariance5,000U5,000U
Variableoverheadefficiencyvariance5,000F5,000F
Fixedoverheadbudgetvariance10,000U10,000U
Fixedoverheadvolumevariance60,000U
Total$45,000F$15,000U
ARCIndustries
IncomeStatementsfor20X4
VariableAbsorption

CostingCosting
Sales(250,000x$20)$5,000,000$5,000,000
Costofsalesatstandard:
Beginninginventory(1442)240,000$420,000
Variableproductioncosts(240,000x$8)1,920,0001,920,000
Fixedproductioncosts(240,000x$6)1,440,000
Availableforsale2,160,0003,780,000
Endinginventory:20,000x$8160,000
20,000x$14280,000
Costofsalesatstandardof$8and$142,000,0003,500,000
Standardgrossprofit3,000,0001,500,000
Variances(unfavorable)45,000(15,000)
Actualgrossprofit3,045,0001,485,000
Sellingandadministrativeexpenses810,000810,000
Budgetedfixedproductioncosts1,500,000
Totalothercosts2,310,000810,000
Profit$735,000$675,000

1437

Again,wecouldpreparemuchshorterincomestatementsbytaking
advantageoftherelationshipthatstandardcostofsalesistheunit
standardcosttimesthenumberofunitssold.Thereconciliationofincomes
in20X4is:
Incomeundervariablecosting$735,000
Lessfixedcostsinbeginninginventory(30,000x$6)180,000
Subtotal555,000
Plusfixedcostsinendinginventory(20,000x$6)120,000
Incomeunderabsorptioncosting$675,000
1445UnitCosts(30minutes)
Themajordifficultywiththisproblemmightbeidentifyingthe
componentsforwhichunitcostsmustbecalculated.Thetextdoesnotcover
thepossibilityofdifferentpercentagesofcompletionfordifferent
materials.
1.Equivalentunits
QuiltedConversion

WrapBoxesCosts
CompletebeginningWIPinventory010,0006,000
Startedandcompleted30,00030,00030,000
EndingWIPinventory10,00010,0008,000
Equivalentunitsofproduction40,00050,00044,000
2.Costperequivalentunit
OctoberCostsEquivalentUnitsUnitCosts
QuiltedWrap$80,00040,000$2.00
Boxes$50,00050,0001.00
Conversioncosts$88,00044,0002.00
Equivalentunitcost$5.00
Priordepartmentcost3.00
Totalunitcost$8.00
3.If$5,000isconsideredimmaterial,theadditionaloverheadincurred
wouldbechargedtothecostofgoodssoldforthemonthofOctober.Ifthe
amountismaterial,theunderappliedoverheadshouldbeproratedamongthe
costofgoodssold,workinProcessinventory,andfinishedgoodsinventory.
1446CostofRejectedUnits

Studentswilleithergetrequirement2ornotgetit,sowehavenotime
estimate.Chapter16discussesqualitycostsinmuchgreaterdepth,butyou
mightstillwanttopursuesomeaspectsofqualitycost.Forinstance,does
the$58,000costofrejectscapturethecostofpoorquality.Ifsomepoor
unitsgotocustomersandfailinthefield,thecostsaremuchhigherthan
$58,000becauseoffuturelostsales.

1.19,000,whichisanyofthethreefiguresdividedbytherelatedper
unitamount.$418,000/$22=19,000,$684,000/$36=19,000,$1,102,000/$58=
19,000.

2.Thesolutionistocalculatethestandardcostoftotalproduction
(20,000unitshere)todetermineefficiencyorinefficiency,andcalculate
thestandardcostofthe1,000rejectedunitsasqualitycost.

StandardCostforStandardCostfor
ActualCostTotalOutputGoodOutput

1438

Materials$451,000$440,000$418,000
$11,000U$22,000U
usevariancerejectedunits
$33,000U
totalvariance
Conversion$712,000$720,000$684,000
$8,000F$36,000U
efficiencyvariancerejectedunits
$28,000U
totalvariance
Thepicturewegetnowisclearerbecausethe$58,000(1,000x$58)
standardcostofrejectedunitsisseparatedfromthe$3,000($11,000U
$8,000F)variancesrelatedtoefficiency.Itispossiblefortheplantto
beefficient,buttoproducepoorproduct,anditisimportanttodistinguish
betweentwocausesofhighcostsinefficiencyandmakingdefectiveunits.
Costaccountantsmightusetheterm"spoilage"torefertoourrejectedunits
variance.Wedonotwishtodiscussnormalandabnormalspoilage,norways
toaccountforeither,buttofocusonthecostofpoorquality.

1439