CostAccounting 2016 Vanderbeck

FOR EDUCATIONAL PURPOSES ONLY! NOT INTENDED FOR SALE!
INSTRUCTORS SOLUTIONS MANUAL
to accompany
PRINCIPLES OF
COST ACCOUNTING
Sixteenth Edition
Edward J. VanDerbeck
Professor Emeritus; Xavier University
________________________________________________________________________________
Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States
Visit: www.fb.com/AccountingStuffCPA
2013, 2010 South-Western, Cengage Learning ISBN-13: 978-1-133-58720-0

ISBN-10: 1-133-58720-8
ALL RIGHTS RESERVED. No part of this work covered by the
copyright herein may be reproduced, transmitted, stored, or South-Western Cengage Learning
used in any form or by any means graphic, electronic, or 5191 Natorp Boulevard
mechanical, including but not limited to photocopying, Mason, OH 45040
recording, scanning, digitizing, taping, Web distribution, USA
information networks, or information storage and retrieval
systems, except as permitted under Section 107 or 108 of the Cengage Learning is a leading provider of customized
1976 United States Copyright Act, without the prior written learning solutions with office locations around the globe,
permission of the publisher except as may be permitted by the including Singapore, the United Kingdom, Australia,
license terms below. Mexico, Brazil, and Japan. Locate your local office at:
international.cengage.com/region.
Cengage Learning products are represented in

For product information and technology assistance, contact us at Canada by Nelson Education, Ltd.
Cengage Learning Academic Resource Center,
1-800-423-0563. For your course and learning solutions, visit
www.cengage.com.
For permission to use material from this text or product, submit all
requests online at www.cengage.com/permissions.
Purchase any of our products at your local college
Further permissions questions can be emailed to
store or at our preferred online store
permissionrequest@cengage.com.
www.cengagebrain.com.
NOTE: UNDER NO CIRCUMSTANCES MAY THIS MATERIAL OR ANY PORTION THEREOF BE SOLD, LICENSED, AUCTIONED,
OR OTHERWISE REDISTRIBUTED EXCEPT AS MAY BE PERMITTED BY THE LICENSE TERMS HEREIN.
READ IMPORTANT LICENSE INFORMATION
Dear Professor or Other Supplement Recipient: license, auction, or otherwise redistribute the Supplement in any
form. We ask that you take reasonable steps to protect the
Cengage Learning has provided you with this product (the Supplement from unauthorized use, reproduction, or distribution.
Supplement) for your review and, to the extent that you adopt the Your use of the Supplement indicates your acceptance of the
associated textbook for use in connection with your course (the conditions set forth in this Agreement. If you do not accept these
Course), you and your students who purchase the textbook may conditions, you must return the Supplement unused within 30 days
use the Supplement as described below. Cengage Learning has of receipt.
established these use limitations in response to concerns raised
by authors, professors, and other users regarding the pedagogical All rights (including without limitation, copyrights, patents, and
problems stemming from unlimited distribution of Supplements. trade secrets) in the Supplement are and will remain the sole and
exclusive property of Cengage Learning and/or its licensors. The
Cengage Learning hereby grants you a nontransferable license to Supplement is furnished by Cengage Learning on an as is basis
use the Supplement in connection with the Course, subject to the without any warranties, express or implied. This Agreement will be
following conditions. The Supplement is for your personal, governed by and construed pursuant to the laws of the State of
noncommercial use only and may not be reproduced, posted New York, without regard to such States conflict of law rules.
electronically or distributed, except that portions of the Supplement
may be provided to your students IN PRINT FORM ONLY in Thank you for your assistance in helping to safeguard the integrity
connection with your instruction of the Course, so long as such of the content contained in this Supplement. We trust you find the
students are advised that they may not copy or distribute any Supplement a useful teaching tool.
portion of the Supplement to any third party. You may not sell,
Printed in the United States of America

1234567 15 14 13 12
TABLE OF CONTENTS
CHAPTER 1 ...................................................................................................................................... 1
CHAPTER 2 .................................................................................................................................... 37
CHAPTER 3 ................................................................................................................................... 81
CHAPTER 4 ................................................................................................................................. 115
CHAPTER 5 ................................................................................................................................. 163
CHAPTER 6 ................................................................................................................................. 199
CHAPTER 7 ................................................................................................................................. 249
CHAPTER 8 ................................................................................................................................. 283
CHAPTER 9 ................................................................................................................................. 339
CHAPTER 10 ................................................................................................................................. 355
iii
CHAPTER 1
QUESTIONS
1. The function of cost accounting is to provide c. The manufacturer will incur some costs
the cost accounting information that is the peculiar to this type of industry, such as
basis for planning and controlling current machine maintenance, materials handling,
and future operations. It provides the cost and inspection of manufactured goods.
figures and analyses that management The two types of operations are similar in
needs in order to find the most efficient that they are both concerned with purchas-
methods of operating, achieving control of ing, storing, and selling goods; they must
costs, and determining selling prices. have efficient management and adequate
2. Originally issued for companies marketing sources of capital; and they may employ
products in Europe, a set of international many workers.
standards for quality management, known 7. Cost accounting information is used by
as the ISO 9000 family, was designed by the management in the following ways:
International Organization for Standardiza- a. Determining product costs which are
tion. Obtaining ISO 9000 is important be- necessary for: determining cost of
cause many companies will only contract goods sold and valuing inventories; de-
with ISO 9000 suppliers. termining product selling price; meeting
3. A company meeting the requirements of ISO competition; bidding on contracts; and
14000 has an environmental management analyzing profitability.
system that (1) identifies and controls the b. Planning by providing historical costs
environmental impact of its activities, prod- that serve as a basis for projecting data.
ucts, or services, (2) improves its environ-
c. Controlling operations by providing cost
mental performance continually, and (3) im-
data that enable management to period-
plements a systematic approach to setting
ically measure results, to take corrective
environmental objectives and targets.
action where necessary, and to search
4. Reasons given by U.S. companies for for ways to reduce costs.
reshoring their manufacturing operations 8. Unit cost information is important to man-
include (1) Chinese wages and shipping agement because the unit costs of one peri-
costs have risen sharply in the past few od can be compared with those of other pe-
years, (2) frustration with the sometimes riods, and significant trends can be identified
poor quality of goods made by foreign con- and analyzed. Unit costs are also used in
tractors, (3) the desire to bring production making important marketing decisions relat-
managers and assembly-line workers closer ed to selling prices, competition, bidding,
to engineers, suppliers, and customers, (4)
9. For a manufacturer, the planning process
an effort to protect a companys intellectual
involves the selection of clearly defined ob-
property, and (5) weariness from midnight
jectives of the manufacturing operation and
phone calls and multiple annual trips to the development of a detailed program to
Asian producers. guide the organization in reaching the objec-
5. Manufacturers convert purchased materials tives. Cost accounting provides historical
into finished goods by using labor, technolo- cost information that is used as the basis for
gy, and facilities. Merchandisers purchase planning future operations.
completed products for resale. Service busi- 10. In a manufacturing concern, effective control
nesses or agencies sell or provide services is achieved in the following ways:
rather than products.
a. Responsibility must be assigned for each
6. A manufacturer differs from a merchandiser detail of the master production plan.
in these ways:
b. There must be a periodic measurement
a. The merchandiser buys items to sell of the actual results as compared with
while the manufacturing business must predetermined objectives.
make the items it markets. c. Management must take corrective action
b. Usually the manufacturer has a greater as necessary to improve or eliminate inef-
investment in physical facilities. ficient and unprofitable operations.
1
2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2 Chapter 01, VanDerbeck
11. Responsibility accounting is the assigning of Board to provide oversight of the accounting
accountability for costs or production results profession; prohibiting a public accounting
to those individuals who have the authority firm from providing many nonauditing ser-
to influence costs or production. It involves an vices to a company that it audits; requiring
information system that traces these data to the that a companys annual report contain
managers who are responsible for them. managements opinion on the effectiveness
12. The criteria for a cost center are: of its internal controls; placing the responsi-
a. A reasonable basis on which manufac- bility for hiring, compensating, and terminat-
turing costs can be allocated. ing the audit firm in the hands of the board
b. A person who has control over and is of directors audit committee; criminal penal-
accountable for many of the costs ties for the destruction or alteration of busi-
ness documents and for retaliating against
13. The requirements for becoming a CMA in-
whistleblowers.
clude a four-year college degree, two years
of relevant work experience, and passing a 19. Financial accounting focuses upon financial
rigorous two-day examination. statements which meet the decision-making
14. The four major categories of ethical conduct needs of external parties, such as investors,
that must be adhered to by management creditors, and governmental agencies, and
accountants include competence, confiden- to some extent the needs of management.
tiality, integrity, and objectivity. Management accounting focuses on both
historical and estimated data that manage-
15. The steps that should be taken by the man- ment needs to conduct ongoing business op-
agement accountant include: erations and do long-range planning. Cost ac-
a. Discuss the problem with the immediate counting includes those parts of both finan-
supervisor except when it appears that cial and management accounting that
the supervisor is involved, in which case collects and analyzes cost information. It
it should be taken to the next higher provides the product cost data required for
management level. special reports to management (manage-
b. Clarify relevant ethical issues by confi- ment accounting) and for inventory costing in
dential discussion with an objective ad- the financial statements (financial accounting).
visor. 20. With regard to methods for computing the
c. Consult your own attorney as to legal cost of goods sold, the difference between
obligations and rights. a manufacturer and a merchandiser is in
d. If the ethical issue still exists after ex- the determination of the cost of goods
hausting all levels of internal review, available for sale. Since the manufacturing
there may be no other recourse on sig- business makes the products it has availa-
nificant matters than to resign from the ble for sale, the cost of goods manufac-
organization. tured must be determined and added to
16. Corporate governance is the means by which beginning finished goods inventory to de-
a company is directed and controlled. Good termine the cost of finished goods available
corporate governance is important to all for sale. Since the merchandiser purchases
rather than makes goods to sell, the cost of
stakeholders because, due to recent account-
purchases is added to beginning merchan-
ing scandals, the need for ethical conduct in
dise inventory to compute the cost of goods
managing corporate affairs has never.
available for sale.
17. The recent accounting scandals where
21. Finished Goodsthis is an inventory ac-
management, including controllers and chief
count reflecting the total cost incurred in
financial officers, has cooked the books to
manufacturing goods on hand that are ready
make reported financial results seem better
for sale to customers.
than actual created the need for the Sar-
banes-Oxley Act. To help curb future abus- Work in Processthis inventory account
es the act holds CEOs and CFOs account- includes all of the costs incurred to date in
able for the accuracy of their firms financial manufacturing goods that are not yet com-
statements. pleted.
18. Key elements of the Sarbanes-Oxley Act Materialsthis account represents the cost
include: certification by the CEO and CFO of materials on hand that will be used in the
that the financial statements fairly reflect the manufacturing process.
results of operations; the establishment of
the Public Company Accounting Oversight
VanDerbeck, Chapter 01 3
22. Manufacturers, such as aircraft producers cost but required an inordinate amount of
and home builders, make tangible products time to trace directly to the products being
by applying labor and technology to raw ma- manufactured.
terials. They may have as many as three in- 27. Prime cost is the cost of direct materials and
ventory accounts: Finished Goods, Work in direct labor; it represents cost specifically
Process, and Raw Materials. Merchandisers, identified with the product.
such as wholesalers and department stores, Conversion cost is the cost of direct labor and
purchase tangible products in finished form factory overhead; it is the expense incurred to
from suppliers. They have only one inventory
convert raw materials into finished goods.
account, Merchandise Inventory. Service
businesses, such as airlines and sports fran- No, one of the component costs, direct labor,
chises, provide intangible benefits such as would be added twice. The cost of manufactur-
transportation and entertainment. They have ing includes direct materials, direct labor, and
no inventory account. factory overhead. Both prime cost and conver-
23. A perpetual inventory system involves main- sion cost include the cost of direct labor.
taining a continuous record of purchases, is- 28. Costs for direct materials and direct labor are
sues, and new balances of all goods in charged directly to the work in process ac-
stock. Under a periodic inventory system no
count, while the factory overhead costs are
attempt is made to record the cost of mer-
chandise sold at the time of sale. At the end first accumulated in the factory overhead ac-
of the accounting period a physical inventory count and are then transferred to the work.
is taken for the purpose of determining the 29. Cost of goods sold represents the total
cost of goods sold and the ending inventory. manufacturing cost of the goods sold during
24. The basic elements of production cost are: a given accounting period, while the cost of
a. Direct materials. goods manufactured represents the total
b. Direct labor. manufacturing cost of all goods that were
c. Factory overhead. finished during the accounting period.
25. Direct materialsthe cost of those materi- 30. Non-factory costs are charged to selling or
als which become part of the item being general administrative expense accounts
manufactured and can be readily identified and do not affect the determination of manu-
with it. facturing costs. Costs which benefit both
Indirect materialsthe cost of those items factory and non-factory operations must be
which are necessary for the manufacturing allocated in some equitable manner.
process but cannot be identified specifically 31. A mark-on percentage is a percentage of the
with any particular item manufactured, and
total manufacturing cost that is added to the
the cost of those materials which do become
a part of the manufactured product but manufacturing cost to establish a selling
whose cost is too insignificant to track to in- price that covers the products share of sell-
dividual jobs. ing and administrative expenses and earns
Direct laborthe labor cost for employees a satisfactory profit.
who work directly on the product manufac- 32. Job order costing is appropriate when the
tured. output of an enterprise consists of custom-
Indirect laborthe cost of labor for those made or specially ordered goods. Manufac-
employees who are required for the manu- turers such as machine shops and ship-
facturing process but who do not work di- builders, merchandisers such as computer
rectly on the item being manufactured. retailers, and service firms, such as CPAs
Factory overheadincludes all costs relat- and architects, all use job order costing.
ed to the manufacturing process except di- 33. Process costing is appropriate when an en-
rect materials and direct labor, such as indi-
terprises operations involve the continuous
rect materials, indirect labor, and all other
factory expenses. or mass production of large quantities of ho-
mogeneous items. Manufacturers such as
26. As manufacturing processes have become
increasingly automated, direct labor cost as chemical producers and candy makers, mer-
a percentage of total product cost has de- chandisers such as newspapers and agricul-
creased for many companies. In the case of tural wholesalers, and services such as hos-
Harley-Davidson, it was only 10% of product pital X-ray departments and airlines all use
process costing.
34. An advantage of accumulating costs by de- 36. Standard costs are reasonably attainable
partments (process costing) or by jobs ( j ob costs which are estimated by management
order costing) is that the information provid- in advance of production. Standard costs
ed aids management in achieving control of are then compared with actual costs, and
costs. With a process cost system, man- differences called variances are calculated
agement can make departmental compari- and analyzed. A standard cost system is not
sons of current period costs with prior period a separate cost accounting system but is
costs and can take corrective action as applied in conjunction with either process
needed. If costs were accumulated for the costing or job order costing to increase cost
factory as a whole, management would have control effectiveness.
difficulty identifying specific sources of ex- 37. Square footage occupied by each of the ar-
cessive costs and inefficiencies. The infor- eas would be a good cost allocation base to
mation provided by a job order cost system use in allocating the depreciation expense
aids management in the determination of between the factory operations and the sell-
selling prices, the profit on each job, and ing and administrative function. This distinc-
costs applicable to similar jobs produced in tion is important because the depreciation
future periods. allocated to factory operations is a manufac-
35. A job cost sheet is a form on which all of the turing expense that becomes part of invento-
individual costs applicable to a job are rec- ry cost and eventually cost of goods sold,
orded. Since the job cost sheets show de- whereas the portion allocated to selling and
tailed costs and gross profit for each job, administrative expense is a period cost that
they are useful to management in bidding on is always expensed in the period incurred.
similar jobs in the future.
EXERCISES
E1-1
The variances for kitchen wages and utilities were favorable for September,
whereas the variances for food and supplies were unfavorable. On a year-to-
date basis, the only expense that did not have the same pattern as September
was utilities which had a $120 F variance for the month, but an $850 U year-to-
date variance.
E1-2
No, the performance report should not be prepared just once a year. It should be
furnished to managers at regular intervals, in this case monthly, on a timely ba-
sis. If it is not provided in a timely fashion, it will not be effective in controlling fu-
ture operations.
E1-3
Merchandise inventory, January 1 .......................................... $ 22,000

Plus purchases ....................................................................... 183,000
Merchandise available for sale ............................................... $ 205,000
Less merchandise inventory, January 31 ............................... 17,000
Cost of goods sold .................................................................. $ 188,000
E1-4
Finished goods, July 1 ............................................................ $ 85,000

Plus cost of goods manufactured ............................................ 343,000
Finished goods available for sale ............................................ $ 428,000
Less finished goods, July 31 ................................................... 93,000
Cost of goods sold .................................................................. $ 335,000
E1-5
Selling &
Direct Direct Factory Admin.
Items Materials Labor Overhead Expense
a. Steel used in an overhead door plant

b. Cloth used in a shirt factory .............
c. Fiberglass used by a sailboat
builder ..............................................
d. Cleaning solvent for the factory floor
..........................................
e. Wages of a binder employed in a
printing plant ....................................
f. Insurance on factory machines ........
g. Rent paid for factory buildings..........
h. Wages of the Machining
Department supervisor .....................
i. Leather used in a shoe factory .........
j. Wages of a factory janitor ................
k. Electric power consumed in
operating factory machines ..............
l. Depreciation on corporate offices ....
m. Fuel used in heating a factory ..........
n. Paint used in the manufacture of
jet skis ... ...................................
o. Wages of an ironworker in the
construction business ......................
p. Electricity used in lighting
sales offices .....................................
E1-6
When direct materials and supplies are purchased, the materials account is debited.
When direct materials and supplies are issued to the factory, the materials account is
credited, Work in Process is debited for the cost of the direct materials, and the factory
overhead account is debited for the cost of indirect materials.
When labor costs are distributed, the payroll account is credited, Work in Process is
debited for the cost of direct labor, and Factory Overhead is debited for the cost of indi-
rect labor.
As other costs related to manufacturing are recorded, the factory overhead account is
charged. The debit to Work in Process for factory overhead is made by allocating over-
head expenses to this account. At the same time, the factory overhead account is cred-
ited. The total cost of goods completed is recorded by debiting Finished Goods and
crediting Work in Process. When units are sold, Cost of Goods Sold is debited and Fin-
ished Goods is credited.
E1-7
Valley View Manufacturing Co.

Statement of Cost of Goods Manufactured
For the Month Ended January 31, 20
a. Materials:
Inventory, January 1 ..................................................... $ 25,000

Purchases .................................................................... 21,000
Total cost of available materials ................................... $ 46,000
Less inventory, January 31 ...................................... 22,000
Cost of materials used ................................................. $ 24,000
Less indirect materials used ..................................... 1,000
Cost of direct materials used in production .................. $ 23,000
Direct labor ....................................................................... 18,000
Factory overhead:
Indirect materials .......................................................... $ 1,000
Indirect labor ................................................................ 3,000
Other ............................................................................ 8,000
Total factory overhead ................................................. 12,000
Total manufacturing cost .................................................. $ 53,000
Add work in process inventory, January 1 .................... 24,000
$ 77,000
Less work in process inventory, January 31................. 20,000
Cost of goods manufactured ............................................ $ 57,000
b. Finished goods inventory, January 1 ................................ $ 32,000

Add cost of goods manufactured...................................... 57,000
Goods available for sale ................................................... $ 89,000
Less finished goods inventory, January 31 ...................... 30,000
Cost of goods sold ........................................................... $ 59,000
E1-8
Viejas Manufacturing Co.
a. Materials:
Inventory, January 1 .................................................... $ 22,000

Purchases .................................................................... 18,000
Total cost of available materials ................................... $ 40,000
Less inventory, January 31 ...................................... 25,000
Cost of materials used ................................................. $ 15,000
Less indirect materials used .................................... 1,000
Cost of direct materials used in production .................. $ 14,000
Direct labor ...................................................................... 21,000
Factory overhead:
Indirect materials.......................................................... $ 1,000

Indirect labor ................................................................ 4,000
Other ............................................................................ 11,000
Total factory overhead ................................................. 16,000
Total manufacturing cost .................................................. $ 51,000
Add work in process inventory, January 1 ................... 20,000
$ 71,000
Less work in process inventory, January 31 ................ 24,000
Cost of goods manufactured ............................................ $ 47,000
b. Finished goods inventory, January 1 ............................... $ 30,000

Add cost of goods manufactured ..................................... 47,000
Goods available for sale .................................................. $ 77,000
Less finished goods inventory, January 31 ...................... 32,000
Cost of goods sold ........................................................... $ 45,000
E1-9
a. Direct materials used during the period ............................. $ 205,000

Add inventory of direct materials at the end of the period . 95,000
Direct materials available during the period ...................... $ 300,000
Less inventory of direct materials at the beginning of the
period ................................................................................ 90,000
Direct materials purchased during the period .................... $ 210,000
b. Total manufacturing costs incurred during the period ....... $ 675,000
Less: Direct materials used ............................................... $ 205,000
Factory overhead incurred ....................................... 175,000 380,000
Direct labor costs incurred during the period ..................... $ 295,000
c. Cost of goods available for sale ........................................ $ 775,000
Less finished goods inventory at the end of the period ..... 75,000
Cost of goods sold during the period ................................. $ 700,000
d. Sales ................................................................................. $ 900,000
Costs of goods sold ........................................................... 700,000
Gross profit........................................................................ $ 200,000
E1-10
Work in Process (Direct Materials).......................................... 21,000

Factory Overhead (Indirect Materials)..................................... 5,000
Materials ............................................................................ 26,000
Work in Process (Direct Labor) ............................................... 15,000
Factory Overhead (Indirect Labor) .......................................... 3,000
Payroll ............................................................................. 18,000
Factory Overhead ................................................................... 7,200
Accounts Payable (or Prepaid Rent) ................................. 4,000
Accounts Payable (Utilities) ............................................... 1,200
Accounts Payable (or Prepaid Insurance) ......................... 500
Accumulated DepreciationMachinery and Equipment.... 1,500
Work in Process ...................................................................... 15,200
Factory Overhead .............................................................. 15,200
($5,000+$3,000+$7,200)
E1-11
a. Work in Process(Jobs1040, 1065, 1120) ..................... 7,780

Materials ..................................................................... 7,780
Work in Process(Jobs 1040, 1065, 1120) .................... 8,200
Payroll .................................................................. 8,200
Work in Process(Jobs 1040, 1065, 1120) .................... 3,280
Factory Overhead ....................................................... 3,280
b.
Direct Direct Total
Jobs Materials Labor Factory Production
Completed Cost Cost Overhead Cost
1040 $ 3,600 $ 4,000 $ 1,600 $ 9,200

1065 2,380 2,500 1,000 5,880
1120 1,800 1,700 680 4,180
Total $ 7,780 $ 8,200 $ 3,280 $ 19,260
c. Finished Goods ............................................................... 19,260

Work in Process(Jobs1040, 1065, 1120) ................ 19,260
d.
Unit Cost
Job 1040 ($9,200 400) .................................. $23.00
Job 1065 ($5,880 240) .................................. $24.50
Job 1120 ($4,180 200) .................................. $20.90
e.
Selling Price Per Unit
Job 1040 ($23.00 140%) ............................... $32.20
Job 1065 ($24.50 140%) ............................... $34.30
Job 1120 ($20.90 140%) ............................... $29.26
E1-12
a. Work in Process(Jobs 1100, 1200, 1300) ..................... 10,800

Materials ..................................................................... 10,800
Work in Process(Jobs 1100, 1200, 1300) ..................... 13,600
Payroll .................................................................. 13,600
Work in Process(Jobs 1100, 1200, 1300) ..................... 23,100
b.
Direct Direct Total
Jobs Materials Labor Factory Production
Completed Cost Cost Overhead Cost
1100 $4,200 $5,000 $9,000 $18,200

1200 3,700 4,500 7,800 16,000
1300 2,900 4,100 6,300 13,300
Total $10,800 $13,600 $23,100 $47,500
c. Finished Goods ............................................................... 47,500

Work in Process(Jobs1100, 1200, 1300)................. 47,500
d.
Unit Cost
Job 1100 ($18,200 500) ................................ $36.40
Job 1200 ($16,000 400) ................................ $40.00
Job 1300 ($13,300 300) ................................ $44.33
e.
Selling Price Per Unit
Job 1100 ($36.40 150%) ............................... $54.60
Job 1200 ($40.00 150%) ............................... $60.00
Job 1300 ($44.33 150%) ............................... $66.50
E1-13
a. Work in Process ................................................................ 14,500

Factory Overhead (Indirect Materials)............................... 1,200
Materials ....................................................................... 15,700
b. Work in Process ................................................................ 11,500
Factory Overhead (Indirect Labor) .................................... 900
Payroll ........................................................................... 12,400
c. Work in Process ................................................................ 9,500
Factory Overhead ......................................................... 9,500
d. Finished Goods ................................................................. 27,500
Work in Process* .......................................................... 27,500
*Jobs completed:
Racers ............................... $12,000
Cruisers ............................. 15,500
Total ................................... $27,500
e. Cost of Goods Sold ........................................................... 27,500
Finished Goods ............................................................. 27,500
Accounts Receivable ........................................................ 49,000
Sales ............................................................................. 49,000
PROBLEMS
P1-1
Saitos Sushi Bar
Performance ReportDining Room
February 28, 2013
Budgeted Actual Variance
Expense February Year-to- February Year-to- February Year-to-

Date Date Date
Dining room $4,150 $8,450 $4,400 $9,100 $250U $650U

wages
Laundry and 1,500 3,150 1,400 3,000 100F 150F

housekeeping
Utilities 2,050 4,250 2,100 4,450 50U 200U
Depreciation 1,500 3,000 1,500 3,000 ---------- ---------
Total $9,200 $18,850 $9,400 $19,550 $200U $700U
P1- 2
1. Merchandise inventory, April 1 .......................................... $ 38,000

Plus purchases .................................................................. 121,000
Merchandise available for sale .......................................... $159,000
Less merchandise inventory, April 30 ................................ 33,000
Cost of goods sold ............................................................. $126,000
2. Finished goods, April 1 ...................................................... $ 67,000

Plus cost of goods manufactured ...................................... 287,000
Finished goods available for sale ...................................... $354,000
Less finished goods, April 30 ............................................. 61,000
Cost of goods sold ............................................................. $293,000
P1-3
1. Merchandise inventory, Sept. 1 ......................................... $ 33,000

Plus purchases .................................................................. 111,000
Merchandise available for sale .......................................... $144,000
Less merchandise inventory, Sept. 30 .............................. 38,000
Cost of goods sold ............................................................ $106,000
2. Finished goods, Sept. 1..................................................... $ 61,000

Plus cost of goods manufactured ...................................... 267,000
Finished goods available for sale ...................................... $328,000
Less finished goods, Sept. 30 ........................................... 67,000
Cost of goods sold ............................................................ $261,000
P1-4
1.
Kokomo Furniture Company
For the Month Ended November 30, 2013
Direct materials:
Inventory, November 1 .................................................... $ 0

Purchases........................................................................ 33,000
Total cost of available materials .......................................... $33,000
Less inventory, November 30 .......................................... 7,400
Cost of materials used ......................................................... $25,600
Less indirect materials used ............................................ 1,400
Cost of direct materials used in production .......................... $ 24,200
Direct labor .......................................................................... 18,500
Factory overhead:
Indirect materials ............................................................. $ 1,400
Indirect labor .................................................................... 4,300
Depreciation of building ................................................... 3,000
Depreciation of machinery and equipment ...................... 2,200
Utilities .......................................................................... 2,750
Total factory overhead ..................................................... 13,650
Cost of goods manufactured during the month .................... $ 56,350
P1-4 Continued
2.

Income Statement
Sales ..................................................................................... $ 68,300
Cost of goods sold:
Finished goods inventory, November 1............................... $ 0
Add cost of goods manufactured ......................................... 56,350
Goods available for sale ..................................................... $56,350
Less finished goods inventory, November 30 ..................... 13,900 42,450
Gross profit on sales ............................................................... $ 25,850
Selling and administrative expenses ....................................... 15,200
Net income ............................................................................. $ 10,650
P1-4 Concluded
3.

Balance Sheet
November 30, 2013
Assets
Current assets:
Cash ...................................................................... $ 21,800

Accounts receivable ................................................... 16,200
Inventories:
Finished goods ....................................................... $ 13,900
Work in process ..................................................... 0
Materials................................................................. 7,400 21,300
Total current assets ................................................ $ 59,300
Plant and equipment:
Building .................................................. $300,000
Less accumulated depreciation .......... 3,000 $ 297,000
Machinery and equipment ...................... $ 88,000
Less accumulated depreciation .......... 2,200 85,800
Total plant and equipment ............................................... 382,800
Total assets ..................................................................... $ 442,100
Liabilities and Stockholders Equity

Current liabilities:
Accounts payable ......................................................... $ 8,900

Stockholders equity:
Capital stock ................................................................. $422,550
Retained earnings ........................................................ 10,650
Total stockholders equity .................................................. 433,200
Total liabilities and stockholders equity ............................. $442,100
P1-5
1. Terre Haute Plastics, Inc.

Direct materials:
Inventory, November 1..................................................... $ 0

Purchases ........................................................................ 23,000
Total cost of available materials ........................................... $23,000
Less inventory, November 30 .......................................... 4,700
Cost of materials used ......................................................... $18,300
Less indirect materials used ............................................ 1,400
Cost of direct materials used in production .......................... $ 16,900
Direct labor .......................................................................... 15,800
Factory overhead:
Indirect materials.............................................................. $ 1,400
Indirect labor .................................................................... 6,010
Depreciation of building ................................................... 4,000
Depreciation of machinery and equipment....................... 1,650
Utilities .......................................................................... 2,750
Total factory overhead ..................................................... 15,810
Cost of goods manufactured during the month .................... $48,510
2.
Terre Haute Plastics, Inc.

Income Statement
For the Month Ended June 30, 2013
Sales ..................................................................................... $63,800
Cost of goods sold:
Finished goods inventory, November 1............................... $ 0
Add cost of goods manufactured ........................................ 48,510
Goods available for sale ..................................................... $48,510
Less finished goods inventory, November 30 ..................... 19,300 29,210
Gross profit on sales ............................................................... $34,590
Selling and administrative expenses ....................................... 12,500
Net income ............................................................................. $22,090
P1-5 Concluded
Terre Haute Plastics, Inc.

Balance Sheet
November 30, 2013
Assets
Current assets:
Cash ...................................................................... $ 18,200
Accounts receivable ................................................... 12,600
Inventories:
Finished goods ....................................................... $ 19,300
Work in process ..................................................... 0
Materials................................................................. 4,700 24,000
Total current assets ................................................ $ 54,800
Building .................................................. $400,000
Less accumulated depreciation .......... 4,000 $ 396,000
Machinery and equipment ...................... $ 66,000
Less accumulated depreciation .......... 1,650 64,350
Total plant and equipment ............................................... 460,350
Total assets ..................................................................... $ 515,150

Accounts payable ......................................................... $ 9,800
Capital stock ................................................................. $483,260
Retained earnings.. 22,090
Total stockholders equity .................................................. 505,350
Total liabilities and stockholders equity ............................. $ 515,150
P1-6
1. a. Materials ..................................................................... 58,000

Accounts Payable ................................................... 58,000
b. Work in Process .......................................................... 47,000
Factory Overhead (Indirect Materials) ......................... 15,000
Materials ................................................................. 62,000
c. Payroll ......................................................................... 48,000
Wages Payable ....................................................... 48,000
Wages Payable .......................................................... 48,000
Cash........................................................................ 48,000
Work in Process .......................................................... 29,000

Factory Overhead (Indirect Labor) .............................. 12,000
Selling and Administrative Expenses
(Salaries)..................................................................... 7,000
Payroll ..................................................................... 48,000
d. Factory Overhead (Depreciation of Building) .............. 1,600
Factory Overhead (Depreciation of Factory
Equipment).................................................................. 1,833*
(Depreciation of Building) ............................................ 400
(Depreciation of Office Equipment) ............................. 1,000
Accumulated DepreciationBuilding ...................... 2,000
Accumulated DepreciationFactory Equipment .... 1,833*
Accumulated DepreciationOffice Equipment ....... 1,000
*Rounded
P1-6 Continued
e. Factory Overhead (Miscellaneous) ............................. 8,250

(Miscellaneous)........................................................... 2,750
f. Work in Process.......................................................... 38,683
Factory Overhead ................................................... 38,683
g. Finished Goods........................................................... 91,000
Work in Process ..................................................... 91,000
h. Accounts Receivable .................................................. 362,000
Sales ...................................................................... 362,000
Cost of Goods Sold..................................................... 188,000
Finished Goods ...................................................... 188,000
i. Cash ........................................................................... 345,000
Accounts Receivable .............................................. 345,000
j. Accounts Payable ....................................................... 158,000
Cash ....................................................................... 158,000
P1-6 Continued
2.
Cash Accounts Receivable

4/30 25,000 (c) 48,000 4/30 65,000 (i) 345,000
(i) 345,000 (j) 158,000 (h) 362,000
370,000 206,000 427,000
164,000 82,000
Finished Goods Work in Process

4/30 120,000 (h) 188,000 4/30 35,000 (g) 91,000
(g) 91,000 (b) 47,000
211,000 (c) 29,000
23,000 (f) 38,683
149,683
58,683
Materials Building
4/30 18,000 (b) 62,000 4/30 480,000
(a) 58,000
76,000
14,000
Accumulated
DepreciationBuilding Factory Equipment
4/30 72,000 4/30 220,000
(d) 2,000
74,000
Accumulated
DepreciationFactory
Equipment Office Equipment
4/30 66,000 4/30 60,000
(d) 1,833
67,833
Accumulated
DepreciationOffice Equipment Accounts Payable
4/30 36,000 (j) 158,000 4/30 95,000
(d) 1,000 (a) 58,000
37,000 (e) 11,000
164,000
6,000
Payroll Wages Payable

(c) (c) (c) (c)
48,000 48,000 48,000 48,000
Capital Stock Retained Earnings

4/30 250,000 4/30 504,000
Sales Cost of Goods Sold

(h) 362,000 (h) 188,000
Selling and Administrative

Factory Overhead Expenses
(b) 15,000 (f) 38,683 (c) 7,000
(c) 12,000 (d) 400
(d) 1,600 (d) 1,000
(d) 1,833 (e) 2,750
(e) 8,250 11,150
38,683
P1-6 Continued
3. Hokie Manufacturing Co.

For the Month Ended May 31, 2013
Materials:
Inventory, May 1 ............................................................ $ 18,000
Purchases ..................................................................... 58,000
Total cost of available materials .................................... $ 76,000
Less inventory, May 31 .............................................. 14,000
Cost of materials used ................................................... $ 62,000
Less indirect materials used ...................................... 15,000
Cost of direct materials used in production .................... $ 47,000
Direct labor ......................................................................... 29,000
Factory overhead:
Indirect materials ........................................................... $ 15,000
Indirect labor .................................................................. 12,000
Depreciation of building ................................................ 1,600
Depreciation of factory equipment ................................. 1,833
Miscellaneous expenses ............................................... 8,250
Total factory overhead ................................................... 38,683
Total manufacturing cost ..................................................... $114,683
Add work in process inventory, May 1 ........................... 35,000
$149,683
Less work in process inventory, May 31 ........................ 58,683
Cost of goods manufactured ............................................... $ 91,000
Hokie Manufacturing Co.

Income Statement
Sales ............................................................................. $362,000
Cost of goods sold:
Finished goods inventory, May 1 ................................... $120,000
Add cost of goods manufactured ................................... 91,000
Goods available for sale ................................................ $211,000
Less finished goods inventory, May 31 .......................... 23,000 188,000
Gross profit on sales ........................................................... $174,000
Selling and administrative expenses ................................... 11,150
Net income ......................................................................... $162,850
P1-6 Concluded
Hokie Manufacturing Co.

Balance Sheet
May 31, 2013
Assets
Current assets:
Cash ............................................................... $164,000
Accounts receivable ....................................... 82,000
Inventories:
Finished goods ........................................... $ 23,000
Work in process .......................................... 58,683
Materials ..................................................... 14,000 95,683
Total current assets ........................................ $341,683
Building ......................................................... $ 480,000
Less accumulated depreciation .................. 74,000 $ 406,000
Factory equipment .......................................... $ 220,000
Less accumulated depreciation .................. 67,833 152,167
Office equipment ............................................ $ 60,000
Less accumulated depreciation .................. 37,000 23,000
Total plant and equipment .............................. 581,167
Total assets ........................................................ $922,850

Accounts payable ........................................... $ 6,000
Capital stock ................................................... $250,000
Retained earnings* ......................................... 666,850
Total stockholders equity ............................... 916,850
Total liabilities and stockholders equity .............. $922,850
*$504,000 (bal. on 4/30) + $162,850 (Net income for May) = $666,850
P1-7
1. Materials........................................................................... 55,000
Accounts Payable ....................................................... 55,000
2. Work in Process (Materials) ............................................. 45,500
(Beginning balance + Purchases Ending balance =
$6,000 + $45,000 $5,500)
Factory Overhead (Indirect Materials) .............................. 9,900
(Beginning balance + Purchases Ending balance =
$800 + $10,000 $900)
Materials ..................................................................... 55,400
3. Payroll ............................................................................. 65,000
Wages Payable ........................................................... 65,000
4. Work in Process (Labor)................................................... 50,000
Factory Overhead (Indirect Labor) ................................... 15,000
Payroll ......................................................................... 65,000
5. Wages Payable...................................................................... 65,000
Cash................................................................................ 65,000
6. Factory Overhead ............................................................ 42,000
7. Factory Overhead ............................................................ 10,000
Various Credits (Prepaid Insurance,
Accumulated Depreciation, etc.) ................................. 10,000
8. Work in Process (Factory Overhead) ............................... 76,900
(Indirect materials + Indirect labor + Factory
overhead paid + Factory overhead recorded =
$9,900 + $15,000 + $42,000 + $10,000)
9. Finished Goods ................................................................ 169,400
(Work in process, beginning balance +
Materials + Labor + Factory overhead
Work in process, ending balance =
$3,500 + $45,500 + $50,000 + $76,900 $6,500)
Work in Process .......................................................... 169,400
P1-7 Concluded
10. Cost of Goods Sold .......................................................... 168,200
(Finished goods, beginning balance + Goods
finished during the month Finished goods,
ending balance = $12,000 + $166,400 $13,200)
Finished Goods........................................................... 168,200
P1-8
1.
Dennis Manufacturing Company
For the Month Ended July 31, 20
Direct materials:
Inventory, July 1 ...................................................... $ 20,000

Purchases................................................................ 110,000
Total cost of available materials .............................. $ 130,000
Less inventory, July 31 ........................................ 26,000
Cost of direct materials used in production .............. $104,000e
Direct labor .................................................................. 160,000f
Factory overhead ......................................................... 80,000g
Total manufacturing cost ............................................. $344,000d
Add work in process inventory, July 1 ..................... 40,000
Total .................................................................. $384,000c
Less work in process inventory, July 31 .............. 36,000b
Cost of goods manufactured................................ $348,000a
a
Cost of goods manufactured = cost of goods sold + ending finished goods inventory beginning
finished goods inventory ($345,000 + $105,000 $102,000 = $348,000)
b
Ending work in process (90% $40,000 = $36,000)
c
Total manufacturing cost to be accounted for ($348,000 + $36,000 = $384,000)
d
Total manufacturing cost = total manufacturing cost to be accounted for beginning work in process
inventory ($384,000 $40,000 = $344,000)
e
Direct materials used = beginning inventory + purchases ending inventory =
($20,000 + $110,000 $26,000 = $104,000)
f
Direct labor = total manufacturing cost direct materials factory overhead
X = $344,000 $104,000 .5X
X = $160,000
g
Factory overhead = 50% $160,000 = $80,000
2.
Schedule to Compute Prime Cost
e
Direct materials used ........................................................................ $ 104,000
f
Direct labor incurred.......................................................................... 160,000
Prime cost incurred during July ......................................................... $ 264,000
3.
Schedule to Compute Conversion Cost
f
Direct labor incurred.......................................................................... $ 160,000
g
Factory overhead .............................................................................. 80,000
Conversion cost incurred during July ................................................ $ 240,000
P1-9
Manlius Manufacturing Co.

For the Year Ended December 31, 2013
Direct materials used .............................................................................. $ 370,000 c
Direct labor ............................................................................................. 360,000 b
Factory overhead .................................................................................... 270,000 a
Total manufacturing cost ........................................................................ $1,000,000
Add work in process inventory, January 1 ....................................... 20,000 d
$1,020,000
Less work in process inventory, December 31 ....................................... 50,000 d
Cost of goods manufactured................................................................... $ 970,000
Supporting Computations:
a
Factory overhead: 27% total manufacturing cost (27% $1,000,000) = $270,000
b
Direct labor: 75% of direct labor equals $270,000, so direct labor was $360,000
($270,000 75%)
c
Direct materials used equals total manufacturing cost less direct labor and factory
overhead [$1,000,000 ($360,000 + $270,000)]
d
Work in process inventories:
Let X = ending work in process inventory
$1,000,000 + 0.4X X = $970,000
X = $50,000
0.4 X = $20,000
P1-10
1.
Job 101 Job 102 Job 103 Job 104 Total
Direct materials ......... $2,200 $ 5,700 $ 7,100 $ 1,700 $ 16,700

Direct labor ............... 2,700 6,800 9,200 2,100 20,800
Factory overhead ...... 1,200 2,000 3,800 1,000 8,000
Total .......................... $6,100 $14,500 $20,100 $ 4,800 $45,500
2. a. Materials ..................................................................... 37,000

Accounts Payable .................................................. 37,000
b. Work in Process .......................................................... 16,700
Materials ................................................................ 18,050
c. Payroll ......................................................................... 23,050
Wages Payable ..................................................... 23,050
Work in Process .......................................................... 20,800
Payroll ................................................................... 23,050
P1-10 Concluded
d. Factory Overhead ....................................................... 2,400

Accounts Payable ................................................. 2,400
e. Factory Overhead ....................................................... 2,000
Accumulated DepreciationMachinery ................ 2,000
f. Work in Process ......................................................... 8,000
Factory Overhead ................................................. 8,000
g. Finished Goods* ......................................................... 40,700
Work in Process .................................................... 40,700
h. Accounts Receivable .................................................. 39,000
Sales ..................................................................... 39,000
Cost of Goods Sold** .................................................. 20,600
Finished Goods ..................................................... 20,600
*Completed **Billed
Job 101 ..................... $ 6,100 $ 6,100
Job 102 ..................... 14,500 14,500
Job 103 ..................... 20,100
$40,700 $20,600
3. Added to work in process:

Direct materials ....................................................................... $16,700
Direct labor ............................................................................. 20,800
Factory overhead .................................................................... 8,000
Total ..................................................................................... $ 45,500
Transferred to finished goods ..................................................... 40,700
Balance (represented by the cost of Job 104) ............................ $ 4,800
4. Added to finished goods ............................................................. $40,700

Less costs of goods sold ............................................................. 20,600
Balance (represented by the cost of Job 103) ............................ $20,100
P1-11
1. Work in Process (Jobs 312,411,510) ......................................... 69,000

Materials ......................................................................... 69,000
Work in Process (Jobs 312,411,510) ......................................... 185,000
Payroll ............................................................................ 185,000
Work in Process (Jobs 312,411,510) ......................................... 153,000
Factory Overhead .......................................................... 153,000
Finished Goods .......................................................................... 407,000
Work in Process (Jobs 312,411,510) ............................. 407,000
Accounts Receivable (or Cash) .................................................. 447,250
Sales .............................................................................. 447,250
Cost of Goods Sold .................................................................... 407,000
Finished goods ............................................................... 407,000
2. a. Sales ...................................................................................... $447,250

Manufacturing costs of goods sold:
Materials ........................................................................ $ 69,000
Direct labor ..................................................................... 185,000
Factory overhead ........................................................... 153,000 407,000
Gross profit on sales .............................................................. $40,250
b.
312 411 510
Sales $152,000 $120,000 $175,250

Manufacturing cost:
Materials $25,000 $15,000 $29,000
Direct labor 70,000 60,000 55,000
Factory overhead 50,000 40,000 63,000
Total mfg. cost $145,000 $115,000 $147,000
Gross profit $7,000 $5,000 $ 28,250
c.
312 411 510
Number of units completed 10,000 5,000 14,000
Selling price per unit $15.20 $24.00 $12.52

Manufacturing cost per unit 14.50 23.00 10.50
Gross profit $ .70 $ 1.00 $2.02
P1-12
1. Work in Process (Jobs 10AX,11BX,12CX) ................................. 138,000

Materials 138,000
Work in Process (Jobs 10AX,11BX,12CX) ........................................ 370,000

Payroll ........................................................................................ 370,000
Work in Process (Jobs 10AX,11BX,12CX) ................................. 306,000

Factory Overhead ........................................................... 306,000
Finished Goods ........................................................................... 814,000

Work in Process (Jobs 10AX,11BX,12CX) ............................. 814,000
Accounts Receivable (or Cash) .............................................. 900,000

Sales ............................................................................... 900,000
Cost of Goods Sold ..................................................................... 814,000

Finished goods ....................................................................... 814,000
2. a. Sales
$900,000
Manufacturing costs of goods sold:
Materials $ 138,000
Direct labor 370,000
Factory overhead 306,000 814,000
Gross profit on sales $86,000
P1-12 Concluded
b. ....................................................................................... 10AX 11BX 12CX
Sales ...................................................................................... $300,000 $250,000 $350,000

Manufacturing costs:
Materials ......................................................................... $ 50,000 $30,000 $58,000
Direct labor ..................................................................... 140,000 120,000 110,000
Factory overhead ........................................................... 100,000 80,000 126,000
Gross profit ............................................................................... $10,000 $20,000 $56,000
c. ....................................................................................... 10AX 11BX 12CX
Number of units completed ..................................................... 10,000 5,000 14,000
Selling price per unit $30 $50 $25

Manufacturing cost per unit .................................................... 29 46 21
Gross profit per unit.. $1 $4 $4
P1-13
1. Work in Process ................................................................ 98,500

Materials .............................................................. 98,500
Work in Process ................................................................ 155,000
Payroll .................................................................. 155,000
Work in Process ................................................................ 120,000
Factory Overhead ................................................ 120,000
2.
Direct Direct Total
Materials Labor Factory Production
Job Cost Cost Overhead Cost
007 $ 50,000 $ 80,000 $ 60,000 $190,000

008 22,000 40,000 32,000 94,000
009 18,500 23,000 17,500 59,000
010 8,000 12,000 10,500 30,500
Total $98,500 $155,000 $120,000 $373,500
Finished Goods Inventory (Job 009)................... $59,000

Work in Process Inventory
(Job 010) ....................................................... $30,500
3. Finished Goods ................................................................. 343,000

Work in Process (Jobs 007, 008, 009) ................. 343,000
Accounts Receivable ................................................... 426,000

Sales .................................................................... 426,000
Cost of Goods Sold ........................................................... 284,000
Finished Goods ............................................................ 284,000
P1-13 Concluded
4.
Adirondack Manufacturing Co.
Direct materials used ........................................................................ $ 98,500
Direct labor ....................................................................................... 155,000
Factory overhead .............................................................................. 120,000
Total manufacturing cost ................................................................... $ 373,500
Less work in process inventory, January 31 ................................. 30,500
Cost of goods manufactured ............................................................. $ 343,000
MINI-CASE
1. The ethical standards which apply to this case are competency, integrity, and objec-
tivity. Competency requires that Gates perform his professional duties in accordance
with relevant laws, regulations, and technical standards. Integrity requires that Gates
refrain from either actively or passively subverting the attainment of the organizations
legitimate and ethical objectives. Objectivity requires that Gates communicate infor-
mation fairly and objectively.
2. Gates should first explain to Allen that recording the revenue in 2013 would be a vio-
lation of generally accepted accounting principles (GAAP). If Allen persists, Gates
should report the matter to the corporate controller. If there is no support from top
management, Gates should resign.
INTERNET EXERCISE 1
Students answers will vary depending upon articles chosen.
INTERNET EXERCISE 2
Students answers will vary, but key points include:

Most significant legislation affecting the accounting profession since 1934.
Applies to over 15,000 publicly-held companies.
Creates a Public Company Accounting Oversight Board (PCAOB).
Establishes standards related to the preparation of audits reports and the con-
duct of audits relative to: the length of time that audit workpapers must be kept;
the prohibition of certain nonaudit services for audit clients; the requirement that
audit partners rotate off an audit every five years; the requirement that the audit
committee of a companys board of directors approve all accounting services to
be performed; and the requirement that a companys CEO and CFO attest to the
accuracy of the financial statements.
CHAPTER 2
QUESTIONS
1. The two major objectives of materials con- The anticipated usage requirement should
trol are (1) physical control or safeguarding be founded upon the number of units ex-
the materials and (2) control of the invest- pected to be completed daily and the quanti-
ment in materials. ty of material each completed unit will re-
2. The controls established for safeguarding quire.
materials include limiting access to the ma- The lead time interval involves the typi-
terials area, segregating the duties of em- cal period of time required between placing
ployees involved with materials, and assur- the order and receiving the shipment.
ing that materials records are being main- The safety stock is the minimum stock
tained accurately. on hand needed to prevent running out of
Limiting access involves placing inven- stock due to errors in calculations of usage,
tories in storage areas that can be entered delivery delays, poor quality of merchandise
only by authorized personnel and restricting received, and so on.
the release of any material or finished goods 6. The economic order quantity (EOQ) is the
to individuals who have properly authorized calculated size of an order which minimizes
documents. Control procedures that limit the total cost of ordering and carrying the in-
access to work in process areas should be ventory over a specified period of time. It is
established within each department or pro- a function of the cost of placing an order, the
duction station. number of units required annually, and the
The segregation of duties involves as- carrying cost per unit of inventory
signing different people to different func- 7. The cost of placing an order, the number of
tions. Employees assigned to purchasing units required annually, and the annual car-
should not also be assigned to receiving, rying cost per unit in inventory are the items
storage, or recording functions, etc. needed to calculate the economic order
The accurate recording of purchases quantity.
and issuances of materials facilitates com- 8. The cost of an order includes the salaries
paring the recorded materials on hand to the and wages of employees who purchase, re-
actual materials on hand. If a substantial dif- ceive, and inspect materials; the expenses
ference between the recorded and actual incurred for telephone, fax usage, postage,
quantities is discovered, it can be quickly and forms; and the accounting and record
determined and investigated. keeping associated with inventories.
3. Management should consider production 9. The carrying cost of materials inventory includes
and working capital requirements along with the cost of storage and handling; the amount of
alternative uses of available funds which interest lost on alternative investments; the
might yield a greater return. Consideration losses due to obsolescence, spoilage, and theft;
should also be given to the cost of materials the cost of insurance and property taxes; and
handling, storage, and insurance protection the cost of maintaining accounting records and
against fire, theft, and other casualty losses. controls over the inventory.
In addition, the possibility of loss from dam-
age, spoilage, and obsolescence should not 10. The supply chain is the system that links a
be overlooked. manufacturer with its suppliers. If the system is
especially lean, in an effort to be cost effi-
4. Order point is the time to place an order for
cient, it is quite possible that parts may not be
additional material because the level of
available when needed due to work stoppages,
stock has reached a predetermined mini-
strikes, or natural disasters.
mum established by management.
5. In order to determine an order point, the in- 11. a. Purchasing agent duties include:
formation available should include the: (1) Coordinating materials requirements
(1) anticipated daily usage of the material, with production to prevent delays in
(2) lead time interval, and production due to inadequate materi-
(3) safety stock required. als supply on hand.
37
(2) Compiling and maintaining a vendor 14. Many manufacturing firms use forms some-
file from which materials can be what similar to those shown in the text;
promptly obtained at the best avail- however, most firms design forms to meet
able prices. (Note to Instructor: You their specific requirements. These specially
may take this opportunity to explain designed forms usually perform the same
to the student that the lowest price functions as those depicted in the text but
may not always be the best price.) may vary in appearance. For example, a
The purchasing agent should also purchase order will provide for recording all
consider the quantity to be ordered essential information to obtain materials
at one time to get a lower unit price, from selected vendors, regardless of the de-
the quality of the material, the time sign or format. Also, many firms now use
lapse before delivery, the credit terms, electronic data interchange to communicate
and the reliability of the vendor. with suppliers and expedite the receipt of
(3) Placing purchase orders for materi- orders.
als needed. 15. The internal control procedures established
(4) Supervising the purchase order pro- for incoming shipments should provide the
cess until materials are received. following safeguards:
(5) Verifying purchase invoices and a. A receiving report prepared by the re-
approvals for payment. ceiving clerk authenticates the quantity of
specific items ordered and verifies that
b. The receiving clerk is responsible for
they were received in good condition.
supervising the receipt of incoming
shipments. These duties include check- b. A copy of the receiving report should
ing the quantity and quality. At times, the accompany the materials received when
they are moved from the receiving area
assignment may include checking the
to the storeroom. As materials are
process.
placed in location, the storeroom keeper
c. The storeroom keepers usual duties should review and substantiate the
include properly storing all materials re- quantities received per the receiving re-
ceived, issuing materials only when port.
proper authorization is presented, and c. The cost and quantity of each item on
keeping the purchasing agent informed the approved invoice are independently
of the quantities on hand. recorded in the materials ledger.
d. The production supervisor is responsi- d. The total of the invoice is independently
ble for maintaining production and for recorded in the purchases journal to be
preparing or approving requisitions for subsequently posted to the appropriate
the quantities and kinds of materials general ledger accounts.
needed for current production. e. The invoice for materials purchased
12. A purchase requisition is used by the store- should not be approved for payment un-
room keeper to provide the purchasing til the purchasing agent reviews and ap-
agent with information concerning the mate- proves the following details on the in-
rials to be ordered. A purchase order is a voice:
document completed by the purchasing (1) The unit prices and materials de-
agent and sent to a vendor to order the ma- scriptions on the invoice are com-
terials. pared with similar data on the pur-
13. The purchasing agent compares the ven- chase order.
dors invoice to the purchase order to ascer- (2) The extensions of unit prices and
tain that there is agreement between the totals are verified.
description of the materials, the prices, and (3) The terms of payment and any other
the terms of purchase. The method of ship- charges are verified with the pur-
ment and the date of delivery are checked to chase order.
see that they conform with the instructions (4) The method of shipment and date of
on the purchase order. delivery are verified.
16. The purpose of a debit-credit memorandum paid than if some other method were used.
is to inform the vendor that an adjustment Since LIFO leaves the earlier costs of pur-
has been made to the vendors account. chases in inventory, the overall value of the
The information on the memo includes the material on hand at the end of a period will
amount of the adjustment, the reason for the be more conservatively stated than if FIFO
adjustment, and the type and quantity of were used. This lower valuation of materials
materials involved. inventory, which affects both the income
17. The originators of the various forms are: statement and the balance sheet, may be an
Forms Source advantage or a disadvantage depending on
a. Purchase requisition Storeroom keeper the use made of the balance sheet. The
lower valuation is an advantage when prop-
b. Purchase order Purchasing agent
erty taxes are assessed on the dollar
c. Receiving report Receiving clerk amount of inventory on hand. However, it
d. Materials requisition Production may be a disadvantage if the financial
supervisor statements are to be used with a loan appli-
e. Debit-credit Purchasing agent cation and a larger dollar value of inventory
memorandum would add to the appearance of the compa-
18. A materials ledger is a subsidiary ledger in nys financial position.
which individual accounts are kept for each Many companies, when prices are ris-
item of material carried in stock. The materi- ing, adopt LIFO to minimize the income tax
als account in the general ledger is the con- effects and believe that in such economic
trol account for the materials ledger. trends the costs charged against sales more
accurately depict reality.
19. a. First-in, first-out: It is assumed that ma-
terials issued are from the oldest mate- 21. Entries Source of Data
rials in stock. They were the first pur- a. Debits in materials Receiving
chased and are costed at the prices ledger to record report
paid for these earliest purchases. The materials purchased
cost of the ending inventory will reflect b. Credits in materials Materials
the most recent prices paid for the most ledger to record requisition
recent purchases. materials requisitioned form
b. Last-in, first-out: It is assumed that c. Debits in job cost Materials
materials issued are from the most re- ledger to record requisition
cent stock. The last purchased will be materials placed in form
the first used at the prices paid for these process
latest purchases. The ending inventory 22. In a just-in-time manufacturing system, ma-
will be costed at the prices paid for the terials are not received from suppliers until
earliest purchases. they are ready to be put into process. The
c. Moving average: Under this method, no work is not done in one department until the
attempt is made to identify the materials subsequent department is ready to work on
issued as to the time of purchase. The it. This approach differs from a traditional
average unit price of all materials in manufacturing system where materials are
stock is maintained; therefore, materials ordered and stored well in advance of pro-
issued are costed on a basis of average duction, and departments stockpile partially
prices. Unit cost changes each time unit completed units until the next department is
purchase prices change; therefore, end- ready for them.
ing inventory will be priced at the latest 23. A traditional push manufacturing system
average cost. produces goods for inventory in the hope
20. In a period of rising prices, the LIFO method that the demand for these goods will then be
estimates the cost of goods sold using the created. In a JIT pull manufacturing sys-
material purchased at the highest prices. tem, the credo is Dont make anything for
Such costs, when matched to sales for the anybody until they ask for it.
period are believed to more accurately re-
flect the gross margin earned. The lower in-
come, resulting from the use of LIFO,
means that a smaller amount of taxes will be
24. Disadvantages of a push manufacturing 28. Six Sigma is a process improvement meth-
system include having too many: dollars in- od that uses data gathering, analytical tech-
vested in inventory; defects not being de- niques, and customer feedback, and whose
tected because partially completed goods aim is to have no more than 3.4 defects per
are inventoried rather than completed im- one million process occurrences. It is an im-
mediately; obsolete products due to the long portant goal because the manufacture and
lead time from start to finish. sale of defective items is costly and tends to
25. The throughput time is the time that it takes damage a companys reputation.
a unit to make it through the production sys- 29. If the value of the scrap is high, an inventory
tem, and it is computed by dividing the file should be prepared showing the quantity
number of units in work in process by the and market value. If both quantity and mar-
number of units completed each day to ob- ket value are known, an inventory account
tain a measure in days. Velocity also should be debited while an account such as
measures the speed with which units are Scrap Revenue is credited. If the market
produced in the system, but in percentage value of the scrap is unknown, a journal en-
terms relative to past production; for exam- try cannot be made until the scrap is sold, at
ple, velocity increased by 50%. which time Cash (or Accounts Receivable)
26. Advantages of producing all units in a single is debited and Scrap Revenue is credited.
cell include: fewer and shorter movements 30. Spoiled work represents products which are
of materials; production in smaller lot sizes not first quality by the companys standards
because other products do not have to be and have imperfections that will not be cor-
made in the same cell; more worker motiva- rected. They are sold as irregular units,
tion and satisfaction due to the teamwork called seconds. Defective work also in-
approach within the cell. cludes goods that are not first quality by the
27. Critics of backflush costing argue that it is established standard but have imperfections
not consistent with GAAP because it does that will be corrected, making them first-
not accurately account for inventories. Pro- quality products.
ponents of backflush costing argue that
Work in Process and Finished Goods are
immaterial in a lean production environment
and, therefore, their omission does not ma-
terially misstate the financial statements.
EXERCISES
E2-1
a. 500 lbs. 7 days = ......... 3,500 lbs.

Required safety stock .... 2,500
Order point ..................... 6,000 lbs.
b. 500 lbs. 4 days = ........ 2,000 lbs.
E2-2
2 CN
a. EOQ =
K
2 $72 360,000
=
$4
$51,840,000
=
$4
= 12,960,000
= 3,600 gallons
b. 360,000 gals. (annual usage) 3,600 gals. (per order) = 100 orders
Ordering cost: 100 orders @ $72 per order ............................................. $ 7,200
Carrying cost: (3,600 gals. 2) @ $4.00 per gals.................................... 7,200
Total order and carrying cost ................................................................... $14,400
E2-3
2 CN
a. EOQ =
K
2 $40 225,000
=
$2
$18,000,000
=
$2
= $9,000,000
= 3,000 gallons
b. 225,000 gals. (annual usage) 3,000 gals. (per order) = 75 orders

Ordering cost: 75 orders @ $40 per order ............................................... $3,000
Carrying cost: (3,000 gals. 2) @ $2.00 per gals. .................................. 3,000
Total order and carrying cost ................................................................... $6,000
E2-4
a. Storeroom keeper
b. Purchasing agent
c. Receiving clerk
d. Purchasing agent
e. Production department supervisor
E2-5
Work in Process ..................................................................... 68,000
Materials .......................................................................... 72,800
To record materials used during the month of June.
E2-6
a. Materials .......................................................................... 200,000
b. Work in Process .............................................................. 175,000
Materials ..................................................................... 175,000
c. Factory Overhead ............................................................ 12,000
Materials ..................................................................... 12,000
d. Materials .......................................................................... 2,500
Work in Process ......................................................... 2,500
e. Accounts Payable ............................................................ 1,800
Materials ..................................................................... 1,800
f. Accounts Payable ............................................................ 165,000
Cash .......................................................................... 165,000
E2-7
First-in, first-out method

RECEIVED ISSUED BALANCE
Date Quantity Unit Price Amount Quantity Unit Price Amount Quantity Unit Price Amount
7/1 1,000 4.00 4,000.00
7/3 250 4.00 1,000.00 750 4.00 3,000.00
7/5 500 4.50 2,250.00 750 4.00
500 4.50
} 5,250.00
7/6 150 4.00 600.00 600 4.00
500 4.50
} 4,650.00
7/10 110 4.00 440.00 490 4.00
500 4.50 } 4,210.00
7/11 (10) 4.00 (40.00) 500 4.00
500 4.50 } 4,250.00
7/15 500 5.00 2,500.00 500 4.00
500 4.50 }
500 5.00 6,750.00
7/20 (300) 5.00 (1,500.00) 500 4.00
500 4.50 }
200 5.00 5,250.00
7/26 500 4.00 2,000.00 400 4.50
100 4.50 450.00 200 5.00 } 2,800.00
Cost of materials used (issued): $4,450

Cost of 7/31 inventory: $2,800
E2-8
Last-in, first-out method

7/1 1,000 4.00 4,000.00
7/3 250 4.00 1,000.00 750 4.00 3,000.00
7/5 500 4.50 2,250.00 750 4.00

500 4.50
} 5,250.00
7/6 150 4.50 675.00 750 4.00
350 4.50 } 4,575.00
7/10 110 4.50 495.00 750 4.00
240 4.50 } 4,080.00
7/11 (10) 4.50 (45.00) 750 4.00
250 4.50 } 4,125.00
7/15 500 5.00 2,500.00 750 4.00
250 4.50 }
500 5.00 6,625.00
7/20 (300) 5.00 (1,500.00) 750 4.00
250 4.50 }
200 5.00 5,125.00
7/26 200 5.00 1,000.00
250 4.50 1,125.00
150 4.00 600.00 600 4.00 2,400.00
E2-9
Moving average method

7/1 1,000 4.00 4,000.00
7/3 250 4.00 1,000.00 750 4.00 3,000.00
7/5 500 4.50 2,250.00 1,250 4.20 5,250.00
7/6 150 4.20 630.00 1,100 4.20 } 4,620.00
7/10 110 4.20 462.00 990 4.20 4,158.00
7/11 (10) 4.20 (42.00) 1,000 4.20 } 4,200.00
7/15 500 5.00 2,500.00 1,500 4.4667 6,700.00
7/20 (300) 5.00 (1,500.00) 1,200 4.3333 5,200.00
7/26 600 4.3333 2,600.00 600 4.3333 2,600.00

E2-10
Inventory Cost Transferred Cost of Ending

Method to Work in Process Inventory
FIFO $4,450 $2,800
LIFO 4,850 2,400
Moving average 4,650 2,600
In a period of constantly rising prices as illustrated in the problem, the LIFO method of
inventory pricing will result in the highest cost being charged to revenue; the FIFO
method will result in the lowest cost being charged against revenue; and the moving
average method will result in a cost between the other two. Theoretically, LIFO provides
a better matching of costs with revenue because the inventory sold will have to be
replaced at current prices. In a period of falling prices, the reverse will be true, with the
moving average method again falling in between the other two.
E2-11
a. The FIFO method which results in the most recent purchases being costed in ending
inventory indicates that materials costs have continued to increase over the three-
year period.
b. FIFO would show the highest net income for 2013. The information given indicates
that prices rose during the year. Using FIFO, the cost of goods sold would be
charged with the oldest materials costs, which during a time of rising prices would be
the lowest materials costs.
c. LIFO would show the lowest net income for 2015, because it would continue to
charge the latest and highest costs to the products sold while the other two methods
would be less affected by the rising cost of the more recent purchases.
d. FIFO would show the highest net income for the three years combined, because it
consistently charges the earliest, lower costs to the product, thereby increasing the
yearly net income.
E2-12
a. 1. Materials .................................................................... 23,750

Accounts Payable ................................................ 23,750
2. Work in Process ........................................................ 19,250
Materials .............................................................. 19,250
3. Materials .................................................................... 1,200
Work in Process ................................................... 1,200
4. Factory Overhead ...................................................... 2,975
Materials .............................................................. 2,975
5. Materials .................................................................... 385
Factory Overhead ................................................ 385
b.
Materials Factory Overhead
Bal. 5,000 (2) 19,250 (4) 2,975 (5) 385
(1) 23,750 (4) 2,975
(3) 1,200 22,225 2,590
(5) 385
30,335
8,110
Work in Process Accounts Payable

(2) 19,250 (3) 1,200 (1) 23,750
18,050
c. $8,110
E2-13
a. 1. Materials .................................................................... 35,750

2. Work in Process ........................................................ 29,250
Materials .............................................................. 29,250
3. Materials .................................................................... 2,200
Work in Process ................................................... 2,200
4. Factory Overhead ...................................................... 3,975
Materials .............................................................. 3,975
5. Materials .................................................................... 585
Factory Overhead ................................................ 585
b.
Bal. 10,000 (2) 29,250 (4) 3,975 (5) 585
(1) 35,750 (4) 3,975
(3) 2,200 33,225 3,390
(5) 585
48,535
15,310
Work in Process Accounts Payable

(2) 29,250 (3) 2,200 (1) 35,750
27,050
c. $15,310
E2-14
1. 40,000/10,000 = 4 days
2. 40,000 (40,000 .75) = 10,000
10,000/10,000 = 1 day
E2-15
a. Raw and In-Process ........................................................ 80,000

b. No entry.
c. Conversion Costs ............................................................ 10,000

Payroll ........................................................................ 10,000
d. Conversion Costs ............................................................ 60,000

Various Credits ........................................................... 60,000
e. Finished Goods .............................................................. 150,000

Raw and In-Process .................................................. 80,000
Conversion Costs ...................................................... 70,000
f. Accounts Receivable ....................................................... 225,000

Sales.......................................................................... 225,000
Cost of Goods Sold ......................................................... 150,000

Finished Goods .......................................................... 150,000
E2-16
e. No entry
f. Cost of Goods Sold. ... 150,000

Raw and In-Process.. 80,000
Conversion Costs ................................................... 70,000
E2-17
a. Raw and In-Process......................................................... 70,000

b. No entry.
c. Conversion Costs ............................................................ 15,000

Payroll ......................................................................... 15,000
d. Conversion Costs ............................................................ 45,000

Various Credits ........................................................... 45,000
e. Finished Goods ............................................................... 130,000

Raw and In-Process................................................... 70,000
Conversion Costs....................................................... 60,000
f. Accounts Receivable ....................................................... 195,000

Sales .......................................................................... 195,000
Cost of Goods Sold .......................................................... 130,000

Finished Goods ........................................................... 130,000
E2-18
e. No entry
f. Cost of Goods Sold. ... 130,000

Raw and In-Process.. 70,000
Conversion Costs ................................................... 60,000
E2-19
a. Scrap Materials................................................................ 125

Factory Overhead (Scrap) .......................................... 125
Cash 125
Scrap Materials........................................................... 125
b. No entry at the time scrap is identified

At the time of sale:
Cash 75
Factory Overhead (Scrap) .......................................... 75
c. No entry at the time scrap is identified

Accounts Receivable ........................................................ 85
Work in Process ......................................................... 85
d. No entry at the time scrap is identified

Cash 40
Scrap Revenue ........................................................... 40
E2-20
a. Work in Process .............................................................. 108,000

Materials ..................................................................... 36,000
Payroll ........................................................................ 48,000
Spoiled Goods ................................................................. 995
Factory Overhead (Loss Due to Spoiled Work) ............... 355*
Work in Process ......................................................... 1,350
*Unit cost of completed work:
$108,000 8,000 skirts ............................ $13.50
Sale of spoiled work as seconds .............. 9.95
Loss due to spoiled work .......................... $ 3.55
100 units x $3.55 = $355
b. Work in Process ............................................................... 108,000

Materials ..................................................................... 36,000
Payroll ......................................................................... 48,000
Spoiled Goods ................................................................. 995
Work in Process .......................................................... 995
E2-21
a. Factory Overhead (Loss Due to Defective Work) ............ 300

Materials ..................................................................... 150
Payroll ......................................................................... 100
Factory Overhead ....................................................... 50
b. Work in Process ............................................................... 300
Materials ..................................................................... 150
Payroll ......................................................................... 100
PROBLEMS
P2-1
1. Order Point = Expected Usage During Lead Time + Safety Stock

= (200 units per day 5 days) + 500 units
= 1,500 units
2 CN
2. EOQ =
K
2 $50 25,000
=
$.10
= 25,000,000
= 5,000 units
3. 25,000 units (annual usage) 5,000 units (per order) = 5 orders

Ordering cost: 5 orders @ $50 per order = $250
Average number of units in inventory = (1/2 EOQ) + Safety Stock

= (1/2 5,000) + 500
= 3,000
Carrying Cost = Average Inventory Carrying Cost per Unit

= 3,000 $.10 = $300
Total Cost = Order Costs + Carrying Costs
= $250 + $300 = $550
(Note that when there is safety stock, the carrying cost does not equal the order
cost at the EOQ.)
P2-2
1. Order Point = Expected Usage During Lead Time + Safety Stock

= (500 units per day 5 days) + 1,500 units
= 4,000 units
2 CN
2. EOQ =
K
2 $194.4 6 ,000
$ 50
=
49 ,00 ,40
=
= 7,000 units (rounded)
3. 63,000 units (annual usage) 7,000 units (per order) = 9 orders (rounded)
Ordering cost: 9 orders @ $200 per order = $1,800
Average number of units in inventory = (1/2 EOQ) + Safety Stock

= (1/2 7,000) + 1,500
= 5,000
Carrying Cost = Average Inventory Carrying Cost per Unit

= 5,000 $.50 = $2,500
Total Cost = Order Costs + Carrying Costs
= $1,800 + $2,500 = $4,300
(Note that when there is safety stock, the carrying cost does not equal the order
cost at the EOQ.)
P2-3
Order Number of Order Ave Carrying Order &

Size Orders Cost Inv Cost C. C.
300 67 $1,340 150 $ 750 $2,090
400 50 1,000 200 1,000 2,000
500 40 800 250 1,250 2,050
600 34 680 300 1,500 2,180
700 29 580 350 1,750 2,330
800 25 500 400 2,000 2,500
P2-4
1. Average number of gals. In inventory = (1/2 x EOQ) + Safety Stock
= (1/2 x 400) + 500 = 700 gals.
2. Carrying costs = Average inventory x Carrying Cost per Unit
= 700 gals. X $5 = $3,500
3. The total order cost is still $1,000. It does not differ from the answer in
P2-3, because the number of orders will be the same.
P 2-5
1. a. FIFO costing
MATERIALS
LEDGER
Materials Ledger
Description Rubber gaskets Account No. 11216
Rec. Mat.
Rep. Req. Unit
Date No. Quantity Unit Price Amount No. Quantity Unit Price Amount Quantity Price Amount
11/1 30,000 3.00 90,000.00
11/4 112 10,000 3.10 31,000.00 30,000 3.00
10,000 3.10 } 121,000.00
11/5 49 30,000 3.00 90,000.00 10,000 3.10 31,000.00
11/8 113 50,000 3.30 165,000.00 10,000 3.10
50,000 3.30 } 196,000.00
11/15 50 10,000 3.10
10,000 3.30 } 64,000.00 40,000 3.30 132,000.00
11/22 114 25,000 3.50 87,500.00 40,000 3.30
25,000 3.50
} 219,500.00
11/28 51 30,000 3.30 99,000.00 10,000 3.30
25,000 3.50
} 120,500.00
P2-5 Continued
b. LIFO costing
MATERIALS
LEDGER
Materials Ledger

Rec. Mat.
Rep. Unit Req.
Date No. Quantity Price Amount No. Quantity Unit Price Amount Quantity Unit Price Amount
11/1 30,000 3.00 90,000.00
11/4 112 10,000 3.10 31,000.00 30,000 3.00
10,000 3.10
} 121,000.00
11/5 49 10,000 3.10
20,000 3.00
} 91,000.00 10,000 3.00 30,000.00
11/8 113 50,000 3.30 165,000.00 10,000 3.00
50,000 3.30
} 195,000.00
11/15 50 20,000 3.30 66,000.00 10,000 3.00
30,000 3.30
} 129,000.00
11/22 114 25,000 3.50 87,500.00 10,000 3.00
30,000 3.30 }
25,000 3.50 216,500.00
11/28 51 25,000 3.50
5,000 3.30
} 104,000.00 10,000 3.00
25,000 3.30
} 112,500.00
P2-5 Continued
c. Moving average costing
MATERIALS
LEDGER
Materials Ledger

Rec. Mat.
Rep. Unit Req.
Date No. Quantity Price Amount No. Quantity Unit Price Amount Quantity Unit Price Amount
11/1 30,000 3.00 90,000.00
11/4 112 10,000 3.10 31,000.00 40,000 3.025 121,000.00
11/5 49 30,000 3.025 90,750.00 10,000 3.025 30,250.00
11/8 113 50,000 3.30 165,000.00 60,000 3.25417 195,250.00
11/15 50 20,000 3.25417 65,083.40 40,000 3.25417 130,166.80
11/22 114 25,000 3.50 87,500.00 65,000 3.34872 217,666.80
11/28 51 30,000 3.34872 100,461.60 35,000 3.34872 117,205.20
P2-5 Concluded
2.
Cost Transferred Cost of Ending
Inventory Method to Work in Process Inventory
FIFO ........................................ $253,000 $120,500
LIFO ........................................ 261,000 112,500
Moving average ....................... 256,295 117,205
3. Probably LIFO because it will come closer to matching current costs with current
revenues. When costs are rising, revenues are usually increasing; therefore, the
resulting gross profit under LIFO will reflect the companys product profitability more
accurately. Other inventory factors that should be given consideration in selecting
any method are: the dollar amount of the inventories; the magnitude of the price
changes; the direction of the price changes, whether rising or falling; and the length
of the inventory cycle. Also, adopting LIFO in periods of rising prices will result in
the minimization of income taxes.
4. In a period of rising prices, the balance sheet inventory under either method will
most likely be less than the current market prices. However, as shown by the
problem, the lowest figure for ending inventory will be reported when LIFO is used.
LIFO charges the higher materials cost to Cost of Goods Sold whereas FIFO defers
more of the higher cost to the inventory on hand.
P2-6
1. FIFO method
MATERIALS
LEDGER
Materials Ledger
Description Plastic tubing (ft. ) Account No. 906

Rec. Mat.
Rep. Req.
Date No. Quantity Unit Price Amount No. Quantity Unit Price Amount Quantity Unit Price Amount
2/1 1,200 2.76 3,312.00
2/5 108 60 2.76 165.60 1,140 2.76 3,146.40
2/11 210 200 2.76 552.00 940 2.76 2,594.40
2/14 634 800 2.80 2,240.00 940 2.76
800 2.80
} 4,834.40
2/15 274 400 2.76 1,104.00 540 2.76
800 2.80
} 3,730.40
2/16 Ret. (90) 2.80 (252.00) 540 2.76
710 2.80
} 3,478.40
2/18 712 1,000 2.83 2,830.00 540 2.76
710 2.80 }
1,000 2.83 6,308.40
2/21 318 540 2.76 1,490.40
100 2.80
} 280.00 610 2.80
1,000 2.83
} 4,538.00
P2-6 Continued
2. LIFO method
MATERIALS
LEDGER
Materials Ledger
Description Plastic tubing ( ft. ) Account No. 906

Rec. Mat.
Rep. Req.
Date No. Quantity Unit Amount No. Quantity Unit Amount Quantity Unit Price Amount
Price Price
2/1 1,200 2.76 3,312.00
2/5 108 60 2.76 165.60 1,140 2.76 3,146.40
2/11 210 200 2.76 552.00 940 2.76 2,594.40
2/14 634 800 2.80 2,240.00 940 2.76
800 2.80
} 4,834.40
2/15 274 400 2.80 1,120.00 940 2.76
400 2.80
} 3,714.40
2/16 Ret. (90) 2.80 (252.00) 940 2.76
310 2.80
} 3,462.40
2/18 712 1,000 2.83 2,830.00 940 2.76
310 2.80 }
1,000 2.83 6,292.40
2/21 318 640 2.83 1,811.20 940 2.76
310 2.80 }
360 2.83 4,481.20
P2-6 Concluded
3. Moving average method
MATERIALS
LEDGER
Materials Ledger
Description Plastic tubing ( ft. ) Account No. 906

Rec. Mat.
Rep. Req.
Date No. Quantity Unit Amount No. Quantity Unit Price Amount Quantity Unit Price Amount
Price
2/1 1,200 2.76 3,312.00
2/5 108 60 2.76 165.60 1,140 2.76 3,146.40
2/11 210 200 2.76 552.00 940 2.76 2,594.40
2/14 634 800 2.80 2,240.00 1,740 2.7784 4,834.40
2/15 274 400 2.7784 1,111.36 1,340 2.7784 3,723.04
2/16 Ret. (90) 2.80 (252.00) 1,250 2.7768 3,471.04
2/18 712 1,000 2.83 2,830.00 2,250 2.8005 6,301.04
2/21 318 640 2.8005 1,792.32 1,610 2.8005 4,508.72
P2-7
1.
a. Materials ...................................................................... 74,000
b. Work in Process ........................................................... 57,000
Factory Overhead ........................................................ 11,000
Materials ................................................................. 68,000
c. Materials ...................................................................... 1,100
Work in Process ..................................................... 1,100
d. Accounts Payable ........................................................ 2,500
Materials ................................................................. 2,500
e. Accounts Payable ........................................................ 68,500
Cash ....................................................................... 68,500
2.
Cash Accounts Payable
Bal. 82,250 (e) 68,500 (d) 2,500 Bal. 21,000
13,750 (e) 68,500 (a) 74,000
71,000 95,000
24,000
Bal. 29,500 (b) 68,000 (b) 11,000
(a) 74,000 (d) 2,500
(c) 1,100 70,500
104,600
34,100
Work in Process
Bal. 27,000 (c) 1,100
(b) 57,000
84,000
82,900
3. a. Cash balance ................................................................................... $ 13,750

b. Inventory of materials on hand ......................................................... 34,100
c. Accounts payable............................................................................. 24,000
P2-8
1.
a. Materials....................................................................... 58,000
b. Work in Process ........................................................... 45,000
Materials ................................................................. 53,000
c. Materials....................................................................... 900
Work in Process ...................................................... 900
d. Accounts Payable ........................................................ 1,500
Materials ................................................................. 1,500
e. Accounts Payable ........................................................ 51,500
Cash ....................................................................... 51,500
2.
Cash Accounts Payable
Bal. 64,250 (e) 51,500 (d) 1,500 Bal. 29,000
12,750 (e) 51,500 (a) 58,000
53,000 87,000
34,000
Bal. 23,500 (b) 53,000 (b) 8,000
(a) 58,000 (d) 1,500
(c) 900 54,500
82,400
27,900
Work in Process
Bal. 31,000 (c) 900
(b) 45,000
76,000
75,100
3. a. Cash balance ................................................................................... $ 12,750

b. Inventory of materials on hand ......................................................... 27,900
c. Accounts payable ............................................................................. 34,000
P2-9
1. and 2.
a. The company purchased materials costing $22,000. (Forms used: receiving
report and vendors invoice.)
b. The storeroom issued direct materials to the factory in the amount of $19,000.
(Form used: materials requisitions.)
c. The direct labor cost was $17,000.
d. Factory overhead in the amount of $12,000 was charged to jobs in process.
e. Jobs having a total cost of $47,500 were completed in the factory and transferred
to the finished goods storeroom.
f. Total cost of goods sold during the month was $55,000.
3. Ending Inventories:
Materials ............................................................................................. $10,000
Work in Process.................................................................................. 4,100
Finished Goods................................................................................... 4,150
P2-10
1.
a. b. c. d.
Date Form Journal Entry Book of Original Subsidiary Ledger
Entry
Mar. 31 Purchase Requisition None None None
(for 1,800 aluminum
sheets)
Apr. 1 Purchase Order None None Materials Ledger

(if On Order
column
is used)
Apr. 6 Receiving Report Materials... 42,500 Purchases Journal` Materials Ledger
Vendors Invoice Accounts Payable.....42,500
(1,700 sheets @ $25)
Apr. 11 Receiving Report Materials... 2,500 Purchases Journal Materials Ledger

Vendors Invoice Accounts Payable ......2,500
(100 sheets @ $25)
Apr. 16 Approved Invoice Accounts Payable..42,500 Cash Payments None

Cash .........41,650 Journal
Purchases Discount..... 850
P2-10 Concluded
a. b. c. d.
Date Form Used Journal Entry Book of Original Subsidiary
Entry Used Records Affected
Apr. 30 Materials Work in Process. 46,500 General Journal Materials Ledger
Requisition Materials 46,500 Job Cost Ledger
500 x $23 = $11,500

1,400 x $25 = 35,000
$46,500
Apr. 30 Returned Materials Materials. 500 General Journal Materials Ledger

Report Work in Process. 500 Job Cost Ledger
(20 sheets @ $25)
Apr. 30 Inventory Report Factory Overhead General Journal Stores Ledger
(Inventory Short and Over). 550 Factory Overhead
Materials.. 550 Ledger
(22 sheets* @ $25)
*420 unused sheets - 398 sheets on hand
2.
500 x $23 = $11,500

1,380 x $25 = 34,500
$46,000
a. $9,950 (398 $25) b. $46,000 ($46,500 - $500)
P2-11
1. 200,000/50,000 = 4 days
2. 25% $1,000,000 = $250,000
3. [(200,000 (1 .50)]/50,000 = 2 days
4. By reducing the average work in process by 50% while keeping the daily production
constant, the velocity of production doubled.
5. 25% (1/2 $1,000,000) = $125,000
P2-12
1.
a. Raw and In-Process.................................................... 150,000
Accounts Payable ..................................................... 150,000
b. No entry
c. Conversion Costs ........................................................ 25,000
Payroll ....................................................................... 25,000
d. Conversion Costs ........................................................ 100,000
Various Credits ......................................................... 100,000
e. Finished Goods ........................................................... 275,000
Raw and In-Process.................................................. 150,000
Conversion Costs...................................................... 125,000
f. Accounts Receivable .................................................. 400,000
Sales ......................................................................... 400,000
Cost of Goods Sold ..................................................... 275,000

Finished Goods ......................................................... 275,000
2.
e. No entry
f. Cost of Goods Sold ..................................................... 275,000
Raw and In-Process.................................................. 150,000
Conversion Costs...................................................... 125,000
P2-13
1.
a. Raw and In-Process ................................................... 135,000
Accounts Payable ..................................................... 135,000
b. No entry
c. Conversion Costs ....................................................... 20,000
Payroll ....................................................................... 20,000
d. Conversion Costs ....................................................... 80,000
Various Credits ......................................................... 80,000
e. Finished Goods........................................................... 235,000
Raw and In-Process ................................................. 135,000
Conversion Costs ..................................................... 100,000
f. Accounts Receivable .................................................. 355,000
Sales ......................................................................... 355,000
Cost of Goods Sold .................................................... 235,000

Finished Goods ........................................................ 235,000
2.
e. No entry
f. Cost of Goods Sold .................................................... 235,000
Raw and In-Process 135,000
Conversion Costs 100,000
P2-14
a. Factory Overhead (Inventory Over and Short) ................ 26

Materials ..................................................................... 26
To adjust materials account to physical inventory
count: (10,000 9,950) $.52 = $546
b. Materials .......................................................................... 775
Work in Process.......................................................... 775
c. Work in Process .............................................................. 770
Factory Overhead (Repairs and Maintenance) ........... 770
d. Accounts Payable ............................................................ 234
Factory Overhead (Shipping Charges on Returned
Materials) ......................................................................... 35
Materials ..................................................................... 234
Cash ........................................................................... 35
e. Sales Returns and Allowances ........................................ 5,000

Accounts Receivable................................................... 5,000
Finished Goods ................................................................ 2,500
Cost of Goods Sold ..................................................... 2,500
f. Work in Process ............................................................... 20,200
Factory Overhead (Supplies) ........................................... 2,100
Materials ..................................................................... 22,300
g. Materials .......................................................................... 25,685
h. Materials .......................................................................... 950
Work in Process .......................................................... 950
i. Scrap Materials ................................................................ 685
j. Spoiled Goods ................................................................. 60
Work in Process .......................................................... 60
k. Cash ................................................................................ 685
Scrap Materials ........................................................... 685
P2-15
1.
a. Work in Process ........................................................... 7,500
Materials ................................................................. 3,500
Payroll ..................................................................... 1,500
b. Spoiled Goods .............................................................. 300
Factory Overhead (Loss Due to Spoiled Goods).......... 150
Work in Process ...................................................... 450
c. Cash ............................................................................. 300
Spoiled Goods ........................................................ 300
2.
a. Same as 1a above.
b. Spoiled Goods .............................................................. 300
Work in Process ...................................................... 300
c. Same as 1c above.
P2-16
1. Spoiled Goods Inventory ................................................. 1,350

Work in Process.......................................................... 1,350
2. Work in Process .............................................................. 4,350

Materials ..................................................................... 1,650
Payroll ......................................................................... 1,500
3. Work in Process .............................................................. 5,400
Materials (18 $117) .................................................. 2,106
Payroll (18 $100)...................................................... 1,800
Factory Overhead (18 $83) ...................................... 1,494
4. Cash ............................................................................... 1,350
Spoiled Goods Inventory ............................................ 1,350
REVIEW PROBLEM FOR CHAPTERS 1 & 2

P2-17R
1. and 3.
Cash Prepaid Insurance
Bal. 12,000 (b) 1,000 Bal. 3,000 (m) 400
(e) 72,500 (g) 31,000 2,600
84,500 (j) 6,000
6,950 (k) 2,000
(l) 1,800
(n) 2,000 Machinery
(s) 33,750 Bal. 125,000
77,550
Accounts Receivable Accum. Depr./Machinery

(d) 126,375 (e) 72,500 Bal. 10,500
53,875 (o) 1,200
11,700
Finished Goods
(q) 98,290 (r) 84,250
14,040 Office Equipment
Bal. 30,000
Work in Process
Bal. 35,000 (q) 98,290
(a) 28,000 Accum. Depr./Office Equipment
(f) 54,340 Bal. 4,800
(p) 11,950 (o) 400
129,290
31,000 5,200
Materials Office Furniture

Bal. 51,000 (f) 54,340 Bal. 20,000
(c) 22,000
73,000
18,660 Accum. Depr./Office Furniture
Bal. 2,500
(o) 180
Factory Supplies
(b) 1,000 (h) 650 2,680
350
P2-17R Continued
Accounts Payable Payroll
(s) 33,750 Bal. 30,000 (g) 31,000 (a) 31,000
(c) 22,000
(i) 3,000 Factory Overhead
55,000
(a) 3,000 (p) 11,950
21,250
(h) 650
(i) 3,000
Capital Stock (l) 1,800
(m) 300
Bal. 182,200
(n) 2,000
(o) 1,200
Retained Earnings 11,950
Bal. 46,000
Selling and Admin. Expense
Sales (j) 6,000
(d) 126,375 `(k) 2,000
(m) 100
(o) 580
Cost of Goods Sold (o)
(r) 84,250 8,680
2.
a. Work in Process ........................................................... 28,000
Payroll ..................................................................... 31,000
b. Factory Supplies .......................................................... 1,000
Cash ....................................................................... 1,000
c. Materials....................................................................... 22,000
d. Accounts Receivable .................................................... 126,375
Sales ....................................................................... 126,375
e. Cash ............................................................................. 72,500
Accounts Receivable ................................................ 72,500
P2-17R Continued
f. Work in Process .............................................................. 54,340

Materials ..................................................................... 54,340
Chain:
12,000 lbs. @ $2.00 $24,000
2,000 lbs. @ $2.20 4,400 $ 28,400
Pulleys:
4,000 sets @ $5.00 $20,000
400 sets @ $5.10 2,040 22,040
Bolts and taps:
4,000 pounds @ $ .50 2,000
Steel plates:
3,800 units @ $ .50 1,900
$ 54,340
g. Payroll ............................................................................. 31,000

Cash ........................................................................... 31,000
h. Factory Overhead ............................................................ 650
Factory Supplies ......................................................... 650
($1,000 - $350)
i. Factory Overhead ............................................................ 3,000
j. Selling and Administrative Expense (Salaries) ................ 6,000
Cash ........................................................................... 6,000
k. Selling and Administrative Expense (Advertising) ........... 2,000
Cash ........................................................................... 2,000
l. Factory Overhead ............................................................ 1,800
Cash ........................................................................... 1,800
m. Selling and Administrative Expense (Insurance) ............. 100
Factory Overhead ............................................................ 300
Prepaid Insurance....................................................... 400
P2-17R Continued
n. Factory Overhead ............................................................ 2,000

Cash ........................................................................... 2,000
o. Selling and Administrative Expense
(Depreciation of Office Equipment and Office Furniture) . 580
Factory Overhead ............................................................ 1,200
Accumulated Depreciation/Office Equipment .............. 400
Accumulated Depreciation/Office Furniture................. 180
Accumulated Depreciation/Machinery ......................... 1,200
p. Work in Process ............................................................... 11,950
q. Finished Goods ................................................................ 98,290
Work in Process .......................................................... 98,290
($35,000 + $28,000 + $54,340 +
$11,950 $31,000)
r. Cost of Goods Sold .......................................................... 84,250
Finished Goods ........................................................... 84,250
s. Accounts Payable ............................................................ 33,750
Cash ........................................................................... 33,750
P2-17R Continued
4.
Pullman, Inc.
For the Month Ended October 31, 20
Materials:
Inventory, October 1 ............................................................ $51,000
Purchases ......................................................................... 22,000
Total cost of available materials ........................................ $73,000
Less inventory, October 31 .......................................... 18,660
Cost of materials used....................................................... $ 54,340
Direct labor ............................................................................. 28,000
Total manufacturing costs....................................................... $ 94,290
Add work in process inventory, October 1 ......................... 35,000
$ 129,290
Less work in process inventory, October 31...................... 31,000
Cost of goods manufactured................................................... $ 98,290
5. Pullman, Inc.
Income Statement
Net sales................................................................................. $ 126,375
Cost of goods sold:
Finished goods inventory, October 1 ................................. 0
Add cost of goods manufactured (see statement) ............. $98,290
Goods available for sale .................................................... $98,290
Less finished goods inventory, October 31 ....................... 14,040
Cost of goods sold .................................................................. 84,250
Gross profit on sales ............................................................... $ 42,125
Selling and administrative expenses....................................... 8,680
Net income ............................................................................. $ 33,445
P2-17R Concluded
6.
Pullman, Inc.
Balance Sheet
October 31, 20
Assets
Current assets:
Cash ............................................................ $ 6,950
Accounts receivable .................................... 53,875
Inventories:
Finished goods ....................................... $ 14,040
Work in process ..................................... 31,000
Materials................................................. 18,660 63,700
Factory supplies .......................................... 350
Prepaid insurance ........................................ 2,600
Total current assets ................................ $127,475
Machinery .................................................... $ 125,000
Less accumulated depreciation .............. 11,700 $113,300
Office equipment ......................................... $ 30,000
Less accumulated depreciation .............. 5,200 24,800
Office furniture ............................................. $ 20,000
Less accumulated depreciation .............. 2,680 17,320
Total plant and equipment ...................... 155,420
Total assets ...................................................... $282,895
Liabilities
Accounts payable ........................................ $ 21,250
Stockholders Equity
Capital stock ..................................................... $182,200
Retained earnings, October 1 ........................... $ 46,000
Net income for October ..................................... 33,445
Retained earnings, October 31 ......................... 79,445
Total stockholders equity ............................ 261,645
Total liabilities and stockholders equity ............ $282,895
MINI-CASE 1
1. Savings from implementing JIT:

Reduction in rework costs ($300,000 x 25%)$75,000
Reduction in storage and handling ($250,000 x 40%).100,000
Savings in carrying costs (300,000 x $.35) ..105,000
Total savings.. $280,000
Less: Increase in changeover costs.. 200,000
Net advantage of JIT. $80,000
2. Non-financial advantages:
* Anticipated improvement in product quality
* Frees up factory space for other uses.
Non-financial disadvantages:
Interruptions in materials supply or strike by their own workers resulting in lost
sales.
Difficulty of workers to master JIT processes.
MINI-CASE 2
1. Inventory carrying costs such as storage space for raw materials, security,
insurance, and spoilage and obsolesence should be reduced by a JIT system. Also,
a JIT system can reduce nonvalue-added production activities such as moving
materials and work in process, storage of work in process and finished goods, and
inspection of work in process.
2. Yes, benefits to Torres customers would include increased customer satisfaction

due to quicker delivery, decreased cost of products due to some of the savings in
carrying costs and production costs being passed on to the consumer, and higher
quality products due to quality control techniques being practiced at the time an
individual unit is produced.
3. Yes, inventory should not be accounted for using traditional job costing techniques.
Products move through the system so rapidly in a JIT environment that it would not
be cost effective to track production costs to them while in process. For example, a
Raw and In-Process account may replace the Materials account, and the Work in
Process and Finished Goods accounts may disappear in a backflush costing
system.
INTERNET EXERCISE
1. The authors state that Whitneys biggest contribution to modern manufacturing

was the development of interchangeable parts on a contract with the U.S. Army
for the manufacture of 10,000 muskets.
2. Ford took all of the elements of a manufacturing system---people, machines,
tooling, and products---and arranged them in a continuous system for
manufacturing the Model T automobile.
3. The authors state that the breakdown of the Ford system resulted from: (a) the
prosperity of the 1920s and the advent of labor unions which conflicted with the
Ford system of marginalizing worker dignity and self esteem, and (b) product
proliferation such as model changes, multiple colors, and options which did not fit
well with Fords standardization of manufacturing.
4. The authors contend that after World War II Toyota was more successful than
Ford in implementing lean manufacturing because: (a) it discovered that factory
workers had more to contribute than sheer muscle power, and (b) it reduced
setups to minutes and seconds, thus allowing small batches to be produced at
one time, and an almost continuous flow of production.
1. General principles for using lean metrics include:

a. Keep it simple--- use metrics that are easy to compile and update.
b. Use tripwires---the daily or weekly metrics only need to alert you that a
problem exists
c. Limit the metrics---each person or team should have no more than three to
six metrics
d. Drill down when problems arise---when a tripwire metric indicates a
deviation, you can investigate further to determine the source of the
problem
2. Materials handling benefits that result from using lean manufacturing principles
include fewer moves, shorter travel distances, and simpler route structures.
Also, the cellular layout reduces the queuing, delays, tracking effort, and
confusion that accompany materials movement.
3. Lot sizes tend to be larger in a functional environment due to the complexity

of scheduling. It seems easier to schedule a small number of large lots rather
than a large number of small lots.
4. Employees benefit from a lean manufacturing environment because workcells

are more self-contained and much information flow is within the cell.
Workcells require teamwork to function effectively and instill motivations such
as pride in the team and feelings of accomplishment.
5. Functional layouts require the product to move many times between departments
with a separate operation at each. When the product is defective, it is often
difficult to pinpoint where the defect occurred.
6. Customers benefit when a supplier adopts lean manufacturing by seeing

improvement in quality. They also see faster response to requests for
customized products or expedited delivery. In cellular layouts, it is easier and
less costly to manufacture in smaller lots, thus more closely matching customer
needs.
CHAPTER 3
QUESTIONS
1. Direct labor is that part of factory wages The payroll department should also provide
earned by employees who perform work on the accounting department with the infor-
the item manufactured; it is charged directly mation necessary to allocate the labor costs
to the job or product. Indirect labor is that among direct labor, indirect labor, and sell-
part of factory wages earned by employees ing and administrative expense..
engaged in the manufacturing process who 7. The labor-time record shows the employees
do not work directly on the units being man- time spent on each job, as well as the time
ufactured; it cannot be charged to any par- spent on indirect labor activities. It is the
ticular job or product but must be treated as source document for allocating the cost of
overhead. labor to jobs or departments in the job cost
2. a. An advantage of the hourly rate plan is ledger and the factory overhead ledger.
that there is no temptation on the part of 8. Many companies issue magnetic cards to
the workers to speed up their work at direct laborers who use them to log on and
the sacrifice of quality or perfection. On log off to specific job assignments. They
the other hand, it provides no incentive slide the card through a magnetic card
for increased production. reader that is connected to a computer ter-
b. The principal advantage of the piece- minal. The computer sends this information
rate plan is that it provides an incentive to the accounting department for the prepa-
for increased production. The more ration of the payroll and the distribution of
units produced under such a plan, the the labor costs to the appropriate jobs.
higher the employee's earnings. How- 9. Almost all payroll records would contain the
ever, there may be a temptation to strive
following employee information:
for a high level of output at a sacrifice of
quality. A greater degree of supervision a. Marital status
is required and more detailed records b. Number of withholding allowances for
must be maintained when a piece-rate income tax purposes
plan is used. c. Rate of pay
3. A modified wage plan combines certain fea- d. Hours worked per day
tures of both the hourly rate and piece-rate
plans. Employees are paid a regular hourly e. Regular earningshours and amount
wage plus an additional incentive rate if es- f. Overtime earningshours and amount
tablished quotas are exceeded. g. Total earnings
4. In production work teams, output is depend- h. FICA taxable earnings
ent upon contributions made by all members i. Withholdings and deductionsFICA
of the work crew. If the number of pieces fin- tax, federal, state, and local income tax-
ished depends on a group effort, then a sin- es, health insurance, union dues, etc.
gle incentive plan for the group may be ap-
propriate. j. Net earnings paidcheck number and
amount.
5. Productivity is measured as the amount of 10. a. The source for posting direct labor cost
output per hour worked. Over the four cal-
to the individual accounts in the job cost
endar quarters ended March 31, 2011,
ledger is the labor-time records.
worker productivity in manufacturing in-
creased 4.7% over the previous 12-month b. The labor cost summary is the source
period. for posting direct labor cost to the work
in process account in the general ledg-
6. The payroll department is responsible for er.
determining the amount of each employees:
11. Labor-time records and a salaried-employee
a. gross earnings.
list provide the sources for posting to the in-
b. withholdings and deductions. direct labor account in the factory overhead
c. net pay. ledger.
81
12. Regular pay represents the regular hourly c. Charging the daily cost of factory labor
rate to be paid for an established hourly to the proper jobs or the proper factory
payroll period. The accounting treatment for overhead accounts.
regular payroll payments is to charge them Forms used: labor-time records and
to the job or product when they constitute di- labor cost summary.
rect labor.
d. Preparing the payroll, computing the
Overtime premium pay is an extra amount payroll taxes and other deductions, and
paid for each hour worked beyond the pre- determining the net wages payable to
scribed hourly payroll. The accounting factory employees.
treatment for overtime premium pay is gen-
Forms used: payroll record and em-
erally to charge it to factory overhead in or-
ployees earnings records.
der to avoid overcharging a single job with
an abnormally high amount of direct labor 17. a. and b. The schedule of earnings and
cost. (If the overtime was caused by a rush payroll taxes is used to distribute the total
order, that job should be charged with the payroll and to record the employers payroll
overtime premium.) taxes.
13. Effective internal control would require that 18. When the financial statement date does not
the charge to the work in process account coincide with the ending date for a payroll
be determined from the labor cost summary period, an accrual for payroll earnings and
that was prepared from the labor-time rec- payroll tax expense should be made.
ords. The charge to the work in process 19. A shift premium is the additional pay that
control account should be supported by the a worker receives for working the second
separate charges made to individual jobs or third shift of a workday. If a day worker
from labor-time records. The offsetting credit receives $8 per hour, a worker on a night
to the payroll account should be supported shift may receive an additional $1 per
by the separate calculation of the gross hour because of the later shift. The addi-
wages earned by each employee. tional $1 per hour would be a shift premi-
14. Accounts used to record employees taxes um. Shift premiums are charged to Fac-
are: FICA Tax Payable and Employees In- tory Overhead and charged to all jobs
come Tax Payable. worked on during the period.
The employer's accounts for payroll taxes are: 20. A basic requirement of all pension plans
FICA Tax Payable, Federal Unemployment should be to accrue systematically, over
Tax Payable, State Unemployment Tax Paya- the period of active service, the total esti-
ble, Factory Overhead (for payroll taxes on mated cost of the employees pension
factory labor), and Payroll Tax Expense (for from the date of the pension plan to the
payroll taxes on administrative and sales sala- date the worker retires.
ries). 21. a. Under a defined benefit plan an employee
15. The employee portion of the FICA tax rate was receives a specific amount of retirement in-
reduced for 2011 to increase employee dis- come based on a predetermined formula relat-
posable income and, hopefully, spending. ed to income level and years of service. Un-
der a defined contribution plan an employee
16. The procedures involved in accounting for
may contribute a certain amount of pre-tax
labor and the supporting forms are:
earnings, often matched by the employer, to
a. Recording the length of time each em- numerous investment vehicle choices. The
ployee works in the factory, both in total amount of the pension is tied to the perfor-
and in detail. mance of the investments.
Forms used: labor-time records. b. Non-contributory pension plans are com-
b. Analyzing the time worked to determine pletely funded by the employer. Contributory
how each employees time was spent. pension plans require a partial contribution
Forms used: labor-time records. from the employee. Currently, contributory
plans are much more common than non-
contributory plans.
22. In 2011, employees could contribute a pre- 24. An hourly rate may be developed for each
scribed percentage of their income to a direct laborer that includes an amount for
401(K) plan up to maximums of $16,500 and fringe benefits and then used to trace gross
$22,000 for employees under 50 years old earnings plus fringe benefits to the specific
and 50 years of age and greater, respective- jobs being worked on, or the fringe benefits
ly. may be collected in an overhead cost pool
23. Factory bonuses, vacation pay, and holiday and allocated to all jobs worked on during
pay are all chargeable to factory overhead the period using an allocation base such as
and are accrued with other factory payroll direct labor hours.
costs over the period that the employee 25. Many companies have given the recession
works during the year. that began in 2008 as the reason for their
suspension of contributions to employee
401 (k) plans, although many have not re-
sumed contributions in spite of their return
to profitable operations.
EXERCISES
E3-1
a. $1,350
Regular: Work in Process $930.00
57 hours $20.00 (regular rate) = $ 1,140.00 Factory Overhead
(Maintenance and Repair) $210.00
{
Overtime premium:
13 hours $10 (half of regular rate) = $130.00
4 hours $20 (equal to regular rate) = $ 80.00 210.00 (Overtime Premium)
$ 1,350.00
b. Work in Process ............................................................ 930.00
Factory Overhead (Overtime Premium) ......................... 210.00
Factory Overhead (Maintenance and Repair)................ 210.00
Payroll ...................................................................... 1,350.00
Note: The single journal entry for one employee is required here only for the purpose of illustrating the principle in-
volved. Normally the entry would be for the total factory payroll for the period.
Calculation for distribution of labor costs (not required in students solution):
Hours Rate = Total Account Debited
Factory Overhead
Expense
Time-and- Double- Time-and- Double- Gross Work in Overtime
Regular a-Half Time Regular a-Half Time Earnings Process Premium M&R
Sunday (indirect) 4 $40.00 $ 160.00 $ 80.00 $ 80.00
Monday (direct) 8 $20.00 160.00 $160.00
Tuesday (direct) 8 20.00 160.00 160.00
Wednesday (direct) 8 20.00 160.00 160.00
Thursday (direct) 8 3 20.00 $30.00 265.00 230.00 35.00
Friday (direct) 8 3 20.00 30.00 250.00 220.00 30.00
Saturday (indirect) 6 30.00 195.00 65.00 130.00
40 13 4 $1,350.00 $ 930.00 $210.00 $ 210.00
E3-2
a. Payroll ............................................................................. 1,350

FICA Tax Payable (8% of $1,350).. 108
Employees Income Tax Payable (10% of $1,350) ...... 135
Wages Payable ........................................................... 1,107
b. Wages Payable ................................................................ 1,107
Cash ........................................................................... 1,107
E3-3
a.
Hours Pieces Earnings @ Earnings @ Make-Up
Payroll
Day Worked Finished $25/hr. $.50/piece Guarantee Earnings
Monday 8 400 $200 $200 $200
Tuesday 8 380 200 190 $10 200
Wednesday 8 440 200 220 220
Thursday 8 450 200 225 225
Friday 8 360 200 180 20 200
Total 40 $1,000 $1,015 $30 $1,045
b.
Work in Process .............................. 1,015
Factory Overhead ........................... 30
Payroll ............................................. 1,045
E3-4
Day Worked Finished $20/hr. $.5333/piece Guarantee Earnings
Monday 8 300 $160 $160 $160

Tuesday 8 260 160 139 $21 160
Wednesday 8 420 160 224 224
Thursday 8 440 160 235 235
Friday 8 280 160 149 11 160
Total 40 1,700 $800 $907 $32 $939
b.
Work in Process .............................. 907
Factory Overhead ........................... 32
Payroll ....................................... 939
E3-5
a. The overtime premium could be charged to Job 402 or charged to Factory Overhead
and allocated between Jobs 401 and 402. If the contract provisions for Job 402 indi-
cate the necessity for overtime in order to complete the job in accordance with the
customers specifications, or if the overtime is due to an emergency demand by the
customer, the overtime premium should be charged directly to Job 402. If the over-
time is not directly attributable to contract provisions or other factors identified with
Job 402, the overtime premium should be charged to Factory Overhead.
b. Costs of Jobs 401 and 402:
Overtime Premium Overtime Premium
Charged to Charged to
Job 402 Factory Overhead
Job 401 Job 402 Job 401 Job 402
Direct materials .................................. $ 28,000 $ 37,000 $28,000 $37,000

Direct labor ........................................ 18,000 29,000* 18,000 23,000
Factory overhead ............................... 5,600 11,200 7,600 15,200
Total cost .................................... $ 51,600 $ 77,200 $ 53,600 $ 75,200
*Includes overtime premium of $6,000.
E3-6
a.
June 7 June 14 June 21 June 28
FICA tax................................ $ 2,920 $ 2,736 $ 2,984 $ 3,072
Total deductions ................... 9,560 9,236 9,759 9,952
Net earnings ......................... 26,940 24,964 27,541 28,448
b. 1. June 7 Payroll ........................................................... 36,500

FICA Tax Payable .................................. 2,920
Employees Income Tax Payable ............ 4,215
Health Insurance Payable ...................... 600
Employees Annuity Payable ................... 1,825
Wages Payable ...................................... 26,940
14 Payroll ........................................................ 34,200
FICA Tax Payable .................................. 2,736
Health insurance Payable ....................... 600
Employees Annuity Payable .................. 1,780
Wages Payable ...................................... 24,964
E3-6 Concluded
21 Payroll ......................................................... 37,300

FICA Tax Payable ................................... 2,984
Health Insurance Payable ....................... 600
Employees Annuity Payable ................... 1,855
Wages Payable....................................... 27,541
28 Payroll ......................................................... 38,400
FICA Tax Payable ................................... 3,072
Health Insurance Payable ....................... 600
Employees Annuity Payable .................. 1,870
Wages Payable....................................... 28,448
2. June 7 Wages Payable ........................................... 26,940

Cash ....................................................... 26,940
14 Wages Payable ........................................... 24,964
Cash ....................................................... 24,964
21 Wages Payable ........................................... 27,541
Cash ....................................................... 27,541
28 Wages Payable ........................................... 28,448
Cash ....................................................... 28,448
E3-7
a. Sylvester ($102,000 $100,000) ..................................... $2,000
b. The total yearly payroll amounted to $306,400. The employer is taxed on the first
$8,000 of each employees earnings for federal and state unemployment taxes. All
eight employees earned more than $8,000; therefore, $64,000 (8 x $8,000) is taxa-
ble and $242,400 is exempt.
c. None. The federal income tax is a progressive tax that is based on the amount that
someone earns. There is no maximum cap on the amount subject to income taxes.
E3-8
a. Payroll ............................................................................. 1,350

FICA Tax Payable....................................................... 108
Employees Income Tax Payable ................................ 135
Wages Payable........................................................... 1,107
b. Wages Payable ................................................................ 1,107
Cash ........................................................................... 1,107
c. Factory Overhead ............................................................ 113
FICA Tax Payable....................................................... 108
Federal Unemployment Tax Payable (1.0% of $100) . 1
State Unemployment Tax Payable (4.0% of $100) ..... 4
E3-9
a. Payroll ............................................................................. 1,350

FICA Tax Payable (8.0% of $200) .............................. 16
Employees Income Tax Payable ............................... 135
Wages Payable .......................................................... 1,199
b. Wages Payable ............................................................... 1,199
Cash ........................................................................... 1,199
c. Factory Overhead ............................................................ 16
FICA Tax Payable ...................................................... 16
E3-10
a. Work in Process ............................................................... 625,125

Administrative Salaries .................................................... 140,200
Sales Salaries .................................................................. 172,500
Payroll ......................................................................... 1,099,945
b. Employers payroll taxes = 8.0% (FICA) + 1.0% (Federal Unemployment) +
4.0% (State Unemployment) = 13% of total wages for the period, reduced by
5% of portion of wages directed to employees whose calendar-year earnings prior
to period have exceeded $8,000
(.13 1,099,945) (.05 $3,000) = $142,842.85
E3-11
a. Work in Process ............................................................... 526,125

Administrative Salaries ..................................................... 104,200
Sales Salaries .................................................................. 127,500
Payroll ......................................................................... 884,035
b. Employers payroll taxes = 8.0% (FICA) + 1.0% (Federal Unemployment) +
4.0% (State Unemployment) = 13% of total wages for the period, reduced by
5% of portion of wages directed to employees whose calendar-year earnings prior
to period have exceeded $8,000
(.13 884,035) (.05 $4,500) = $114,699.55
E3-12
a.
Regular Earnings Overtime Premium Total FICA Income Net
Employee Hours Rate Amount Hours Rate Amount Earnings 8% Tax Earnings
Holloway, T. 42 $12 $ 504.00 2 $6.00 $12.00 $ 516.00 $ 41.28 $ 77.40 $ 397.32
Jackson, D. 43 12 516.00 3 6.00 18.00 534.00 42.72 80.10 411.18
McLean, J. 44 15 660.00 4 7.50 30.00 690.00 55.20 103.50 531.30
Lyons, M. 40 9 360.00 360.00 28.80 54.00 277.20
Taylor, A. 40 18 720.00 720.00 57.60 108.00 554.40

$2,760.00 $60.00 $2,820.00 $225.60 $423.00 $2,171.40
b. 1. Payroll ........................................................................ 2,820.00

FICA Tax Payable ................................................. 225.60
Employees Income Tax Payable........................... 423.00
Wages Payable ..................................................... 2,171.40
2. Wages Payable .......................................................... 2,171.40
Cash ..................................................................... 2,171.40
3. Work in Process ($504 + $516 + $660) ...................... 1,680.00
Factory Overhead ($360 +$720 + $60) ...................... 1,140.00
Payroll ................................................................... 2,820.00
4. Factory overhead ....................................................... 366.60
FICA Tax Payable ................................................. 225.60
Federal Unemployment Tax Payable* .................. 28.20
State Unemployment Tax Payable** ..................... 112.80
*Federal unemployment tax = $2,820 1.0% = $28.20

**State unemployment tax = $2,820 4.0% = $112.80
E3-13
a.
Income
Classifi- Regular Overtime Total FICA Tax Net
Employee cation Hours Pieces Rate Earnings Premium Earnings 8% Withheld Earnings
Manressa, C. Direct 42 $18.00/hr $756.00 $ 18.00 $ 774.00 $ 61.92 $ 80.00 $ 632.08

Dorr, M. Direct 48 17.60/hr 844.80 70.40 915.20 73.22 84.00 757.98
Ginty, D. Direct 39 2,000 . 44/pc 880.00 880.00 70.40 110.00 699.60
Norris, D.. Direct 40 1,800 . 44/pc 792.00 792.00 63.36 100.00 628.64
Rancifer, K. Indirect 40 $800/wk 800.00 800.00 64.00 100.00 636.00
Greer, B. Indirect 50 $1,600/wk 1,600.00 1,600.00 128.00 240.00 1,232.00
Holbert, R. Indirect 40 $1,400/wk 1,400.00 1,400.00 112.00 120.00 1,168.00
$7,072.80 $88.40 $7,161.20 $572.90 $834.00 $5,754.30
b. 1. Payroll ........................................................................ 7,161.20

FICA Tax Payable ................................................. 572.90
Employees Income Tax Payable........................... 834.00
Wages Payable ..................................................... 5,754.30
2. Wages Payable .......................................................... 5,754.30
Cash ..................................................................... 5,754.30
3. Work in Process
($756.00 + $844.80 + $880.00 + $792.00) ................. 3,272.80
Factory Overhead
($18.00 + $70.40 + $800.00 + $1,600.00 + $1,400.00) 3,888.40
Payroll ................................................................... 7,161.20
E3-13 Concluded
4. Factory Overhead ....................................................... 930.96

FICA Tax Payable ................................................. 572.90
Federal Unemployment Tax Payable* ................... 71.61
State Unemployment Tax Payable** ..................... 286.45
*Federal unemployment tax = $7,161.20 1% = $71.61
**State unemployment tax = $7,161.20 4% = $286.45
E3-14
Work in Process ..................................................................... 1,000.00
Factory Overhead (Bonus)* .................................................... 83.33
Factory Overhead (Vacation)** ............................................... 83.33
Payroll ............................................................................. 1,000.00
Bonus Liability .................................................................. 83.33
Vacation Pay Liability ....................................................... 83.33
*$4,000 48 weeks = $83.33
**($1,000 4 weeks) 48 weeks = $83.33
E3-15
a. The holiday pay and vacation pay should be expensed over the forty-eight weeks
that the employee actually works.
b. Holiday pay: ($800/wk. / 5 days) x 12 paid holidays = $1,920

$1,920 / 48 wks. = $40/wk.
c. Vacation pay: $800 x 4 wks. = $3,200

$3,200 / 48 wks. = $66.67 / wk.
E3-16
a. The holiday pay and vacation pay should be expensed over the forty-eight weeks
that the employee actually works.
b. Holiday pay: ($1,000/wk. / 5 days) x 10 paid holidays = $2,000

$2,000 / 48 wks. = $41.67/wk.
c. Vacation pay: $1,000 x 4 wks. = $4,000

$4,000 / 48 wks. = $83.33 / wk.
PROBLEMS
P3-1
1. Actual production for week ............................................... 330,528 units

Standard units (616 500) ............................................... 308,000 units
Excess units over standard .......................................... 22,528

Calculation of bonus percentage:
22,528 units
= .07314 or 7.314%
308,000 units
7.314% 50% = 3.657% (bonus percentage)
$15.00 (average hourly rate) 3.657% = $.55 hourly bonus rate; 616 hours
$.55 (bonus rate per hour) = $338.80 (total bonus for week)
2. L. Brocks total wages:
$15.00 (hourly wage) 3.657% (bonus) = $.55 per hour

$15.00 + $.55 = $15.55 hourly wage for week
40 hours $15.55= $622.00(total wages for week)
3. R. Gibsons total wages:
$20.00 (hourly rate) 3.657% (bonus) = $.73 per hour

$20.00 + $.73 = $20.73 hourly wage for week
35 hours $20.73 = 725.55 (total wages for week)
P 3-2
1. LABOR-TIME RECORD
Record No: LTR 999

Employee Name: Ruby Barr
Employee No: 036-47-2189
Employee Classification: Grade 1 Machinist
Hourly Rate: $20
Job. No. Su M Tu. W Th. F Sa. Total
007 0 4 4 4 0 0 0 12
2525 0 4 4 4 6 6 0 24
Maintenance 0 0 0 0 2 2 0 4
Total 0 8 8 8 8 8 0 40
Supervisor: Aaron Wolfe
Date: June 29, 2013
2. Direct labor cost:
Job 007: 12 hrs. x $20 = $240
Job 2525: 24 hrs. x $20 = $480
Indirect labor cost:
Maintenance: 4 hrs. x $20 = $80
P 3-3
1. LABOR-TIME RECORD
Record No: LTR 777

Employee Name: Andy Hardy
Employee No: 063-74--8921
Employee Classification: Grade 2 Machinist
Hourly Rate: $18
Job. No. Su M Tu. W Th. F Sa. Total
AX20 0 4 4 4 0 0 0 12
AX25 0 4 4 4 6 4 0 22
Maintenance 0 0 0 0 2 4 0 6
Total 0 8 8 8 8 8 0 40
Supervisor: Ann Smithers
Date: June 15, 2013
2. Direct labor cost:
Job AX20: 12 hrs. x $18 = $216
Job AX25: 22 hrs. x $18 = $396
Indirect labor cost:
Maintenance: 6 hrs. x $18 = $108
P3-4
1.
Idle Time
(Included Income
Regular Overtime in Reg. Total FICA Tax Net
Employees Hours Earnings Premium Earnings) Earnings 8% 18% Earnings
Black 42 $ 1,050.00 $ 25.00 $1,075.00 $ 86.00 $193.50 $ 795.50
Bell 45 900.00 50.00 950.00 76.00 171.00 703.00

Ludwick 48 960.00 80.00 1,040.00 83.20 187.20 769.60
Bartlett 48 960.00 80.00 1,040.00 83.20 187.20 769.60
Headley 45 900.00 50.00 950.00 76.00 171.00 703.00
Adams 42 840.00 20.00 $200.00 860.00 68.80 154.80 636.40
Hawpe 40 800.00 0 200.00 800.00 64.00 144.00 592.00
$6,410.00 $305.00 $400.00 $6,715.00 $537.20 $1,208.70 $4,969.10
2. Payroll ............................................................................ 6,715.00

FICA Tax Payable ...................................................... 537.20
Employees Income Tax Payable ................................ 1,208.70
Wages Payable .......................................................... 4,969.10
Wages Payable ............................................................... 4,969.10
Cash ........................................................................... 4,96910
3. Work in Process .............................................................. 5,240.00*
Factory Overhead ............................................................ 1,475.00
Payroll ........................................................................ 6,715.00
*Total payroll ...................................... $6,715.00
Less:
Idle time (20 hrs. x $20) ............ $400.00
Supervisor................................. 1,075.00 1,475.00
To Work in Process ............. $5,240.00
P3-4 Concluded
4. Since overtime is proportionate to regular hours chargeable to vans, an average

labor rate, including overtime premium, can be calculated and used for distribution
as follows:
Total Hours Total Earnings Average Labor
Charged to Chargeable to Rate, Including
Vans Vans Overtime for Week
Bell ............................. 45 $950.00 $21.11

Ludwick .......................... 48 1,040.00 21.67
Bartlett ............................. 48 1,040.00 21.67
Headley ............................ 45 950.00 21.11
Adams . 32 660.00 20.63
Hawpe ............................. 30 600.00 20.00
Distribution of labor cost to vans using calculated average labor rate:
Van Van Van Van Van

No. 1 No. 2 No. 3 No. 4 No. 5 Total
Bell $211.10 $211.10 $211.10 $211.10 $105.55 $ 949.95 *
Ludwick 520.00 520.00 1,040.00
Bartlett 520.00 520.00 1,040.00
Headley 316.65 316.65 316.65 949.95 *
Adams 495.12 165.04 660.16*
Hawpe 400.00 200.00 600.00
Total $1,942.87 $1,412.79 1,047.75 $731.10 $105.55 $5,240.06*
*Rounding difference
P3-5
1.
Total
Total Unemployment Taxes Payroll
Classification Earnings FICA Federal State Taxes
of for Tax Tax Tax Imposed on
Wages and Salaries Month 8% 1% 4% Employer
Direct labor ............. $88,180.00 $ 7,054.40 $ 881.80 $3,527.20 $11,463.40

Indirect labor ........... 16,220.00 1,297.60 162.20 648.80 2,108.60
Total taxes on factory
wages .............. $ 8,352.00 $ 1,044.00 $4,176.00 $13,572.00
Administrative
salaries ............ 12,000.00 960.00 120.00 480.00 1,560.00
Sales salaries ......... 11,500.00 920.00 115.00 460.00 1,495.00
Total payroll taxes .. $ 10,232.00 $1,279.00 $5,116.00 $16,627.00
2. Factory Overhead ............................................................ 13,572.00

Payroll Taxes ExpenseAdministrative Salaries ............ 1,560.00
Payroll Taxes ExpenseSales Salaries .......................... 1,495.00
FICA Tax Payable....................................................... 10,232.00
Federal Unemployment Tax Payable .......................... 1,279.00
State Unemployment Tax Payable ............................. 5,116.00
P3-6
M T W T F Total
Gonzalez ............. $ 81.60 $ 85.20 $ 78.00 $ 96.00 $ 70.00 $410.80
Pujols ................... 70.00 70.40 70.00 70.00 77.00 357.40
Howard ................ 80.60 79.30 92.30 78.00 70.00 400.20
Total .............. $232.20 $234.90 $240.30 $244.00 $217.00 $1,168.40
2. a. Payroll ......................................................................... 1,168.40

Employees Income Tax Payable ............................ 116.84
FICA Tax Payable .................................................. 93.47
Wages Payable ...................................................... 958.09
b. Wages Payable........................................................... 958.09
Cash ....................................................................... 958.09
c. Factory Overhead ....................................................... 151.89
FICA Tax Payable .................................................. 93.47
Federal Unemployment Tax Payable ..................... 11.68
State Unemployment Tax Payable ......................... 46.74
P3-7
1. a. Payroll ......................................................................... 20,000.00

FICA Tax Payable ................................................... 1,600.00
Employees Income Tax Payable ............................ 2,000.00
Wages Payable ....................................................... 16,400.00
b. Wages Payable ........................................................... 16,400.00
Cash ....................................................................... 16,400.00
c. Factory Overhead ....................................................... 2,106.00*
Payroll Tax Expense (Sales and Administrative
Salaries) ...................................................................... 494.00**
FICA Tax Payable ................................................... 1,600.00
Federal Unemployment Tax Payable ...................... 200.00
State Unemployment Tax Payable.......................... 800.00
* ($10,500 + $5,700) x .13

** $3,800 x .13
d. Work in Process .......................................................... 10,500.00
Factory Overhead ....................................................... 5,700.00
Sales and Administrative Salaries ............................... 3,800.00
Payroll ..................................................................... 20,000.00
2. FICA Tax Payable ............................................................ 6,300.00

Employees Income Tax Payable ...................................... 3,937.50
Cash ........................................................................... 10,237.50
3. $193.75 (Federal Unemployment Tax Payable) represents 1% of the total earnings;

therefore, $193.75 .01 = $19,375 (total earnings January 1 to 15).
or
$775.00 (State Unemployment Tax Payable) represents 4.0% of total earnings;
therefore, $775.00 .04 = $19,375.
or
1/2 $3,100 = $1,550 equals employee portion of FICA Tax Payable (8% of total
earnings); therefore, $1,550 .08 = $19,375.
P3-8
1.
Total
Earnings
Earnings Per Week Through FICA Income
Overtime Fortieth Taxable Tax Net
Employee Regular Premium Total Week Earnings FICA Withheld Earnings
Allen $2,489.00 $ 0 $2,489.00 $112,049.00 $ 0 $ 0 $ 488.00 $2,001.00
Devine 2,238.00 0 2,238.00 101,738.00 500.00 40.00 402.00 1,796.00

Fiorelli 700.00 0 700.00 28,000.00 700.00 56.00 180.00 464.00
OClock 600.00 50.00 650.00 20,470.00 650.00 52.00 150.00 448.00
OReilly 460.00 30.00 490.00 17,690.00 490.00 39.20 160.00 290.80
Posner 440.00 20.00 460.00 17,060.00 460.00 36.80 110.00 313.20
Surdick 399.00 9.50 408.50 15,608.50 408.50 32.68 120.00 255.82
Trebbi 315.00 7.50 322.50 8,122.50 322.50 25.80 80.00 216.70
Webb 315.00 7.50 322.50 6,922.50 322.50 25.80 60.00 236.70
$7,956.00 $124.50 $8,080.50 $ 327,660.50 $3,853.50 $308.28 $1,750.00 $6,022.22
2. a. Payroll ....................................................................... 8,080.50

FICA Tax Payable ............................................... 308.28
Employees Income Tax Payable ......................... 1,750.00
Wages Payable ................................................... 6,022.22
b. Wages Payable ......................................................... 6,022.22
Cash .................................................................... 6,022.22
c. Work in Process ........................................................ 1,899.00
Factory Overhead ..................................................... 1,454.50
Administrative Salaries ............................................. 4,727.00
Payroll ................................................................. 8,080.50
P3-8 Concluded
d. Factory Overhead ................................................ 294.41

Payroll Taxes Expense
Administrative Salaries ........................................ 40.00
FICA Tax Payable .......................................... 308.28
SUTA Tax Payable ......................................... 20.90*
FUTA Tax Payable ......................................... 5.23**
3. Factory Overhead ...................................................... 105.00
Disability Insurance Expense
Administrative Salaries ............................................... 30.00
Disability Insurance Payable................................ 135.00
*[Trebbi ($200) + Webb ($322.50)] .04 = $20.90

**[Trebbi ($200) + Webb ($322.50) .01 = $5.23
P3-9
1.
EMPLOYEE EARNINGS RECORDS
Weekly Earnings
Weekly Accumulated Subject Withholdings Net
Week Gross Gross to FICA Income Amount
Ending Earnings Earnings FICA Tax Tax Paid
Hathaway 11/8 $300 $12,300 $300 $24.00 $30.00 $ 246.00

11/15 280 12,580 280 22.40 28.00 229.60
11/22 290 12,870 290 23.20 29.00 237.80
11/29 320 13,190 320 25.60 32.00 262.40
Kunis 11/8 280 8,080 280 22.40 28.00 229.60

11/15 270 8,350 270 21.60 27.00 221.40
11/22 260 8,610 260 20.80 26.00 213.20
11/29 280 8,890 280 22.40 28.00 229.60
Portman 11/8 320 11,820 320 25.60 32.00 262.40
11/15 300 12,120 300 24.00 30.00 246.00
11/22 340 12,460 340 27.20 34.00 278.80
11/29 280 12,740 280 22.40 28.00 229.60
Streep 11/8 2,032 91,432 600 48.00 203.20 1,780.80

11/15 2,032 93,464 0 0 203.20 1,828.80
11/22 2,032 95,496 0 0 203.20 1,828.80
11/29 2,032 97,528 0 0 203.20 1,828.80
Williams 11/8 800 33,600 800 64.00 80.00 656.00

11/15 760 34,360 760 60.80 76.00 623.20
11/22 850 35,210 850 68.00 85.00 697.00
11/29 870 36,080 870 69.60 87.00 713.40
P3-9 Continued
2.
PAYROLL RECORD
Withholdings Net
Employees Name Gross FICA Income Amount
Week Ending 11/8:
Hathaway ..................................... $ 300.00 $ 24.00 $ 30.00 $ 246.00
Kunis. 280.00 22.40 28.00 229.60
Portman ....................................... 320.00 25.60 32.00 262.40
Streep .......................................... 2,032.00 48.00 203.20 1,780.80
Williams ....................................... 800.00 64.00 80.00 656.00
$ 3,732.00 $ 184.00 $ 373.20 $ 3,174.80
Week Ending 11/15:
Hathaway .................................. $ 280.00 $ 22.40 $ 28.00 $ 229.60
Kunis .................................. 270.00 21.60 27.00 221.40
Portman .................................. 300.00 24.00 30.00 246.00
Streep .................................. 2,032.00 0 203.20 1,828.80
Wiliams .................................. 760.00 60.80 76.00 623.20
$ 3,642.00 $ 128.80 $ 364.20 $ 3,149.00
Week Ending 11/22:
Hathaway .................................. $ 290.00 $ 23.20 $ 29.00 $ 237.80
Kunis .................................. 260.00 20.80 26.00 213.20
Portman .................................. 340.00 27.20 34.00 278.80
Streep .................................. 2,032.00 0 203.20 1,828.80
Williams .................................. 850.00 68.00 85.00 697.00
$ 3,772.00 $ 139.20 $ 377.20 $ 3,255.60
Week Ending 11/29:
Hathaway .................................. $ 320.00 $ 25.60 $ 32.00 $ 262.40
Kunis .................................. 280.00 22.40 28.00 229.60
Portman .................................. 280.00 22.40 28.00 229.60
Streep .................................. 2,032.00 0 203.20 1,828.80
Williams .................................. 870.00 69.60 87.00 713.40
$ 3,782.00 $ 140.00 $ 378.20 $ 3,263.80
P3-9 Continued
3.
Labor Cost Summary
Dr. Dr. Dr. Cr.
Work in Process Factory Overhead Admin. Salaries Payroll
Week Ending (Direct Labor) (Indirect Labor) (Office) (Total)
11/8 $ 900.00 $2,032.00 $ 800.00 $ 3,732.00

11/15 850.00 2,032.00 760.00 3,642.00
11/22 890.00 2,032.00 850.00 3,772.00
11/29 880.00 2,032.00 870.00 3,782.00
Total $3,520.00 $8,128.00 $3,280.00 $14,928.00
P3-9 Concluded
4. a. Nov. 8 Payroll ...................................................... 3,732.00

FICA Tax Payable ................................ 184.00
Employees Income Tax Payable .......... 373.20
Wages Payable .................................... 3,174.80
b. Wages Payable ........................................ 3,174.80
Cash..................................................... 3,174.80
a. Nov. 15 Payroll ...................................................... 3,642.00
FICA Tax Payable ................................ 128.80
Wages Payable .................................... 3,149.00
b. Wages Payable ........................................ 3,149.00
Cash..................................................... 3,149.00
a. Nov. 22 Payroll ...................................................... 3,772.00
FICA Tax Payable ................................ 139.20
Wages Payable .................................... 3,255.60
b. Wages Payable ........................................ 3,255.60
Cash..................................................... 3,255.60
a. Nov. 29 Payroll ...................................................... 3,782.00
FICA Tax Payable ................................ 140.00
Wages Payable .................................... 3,263.80
b. Wages Payable ........................................ 3,263.80
Cash..................................................... 3,263.80
c. Nov. 30 Work in Process ....................................... 3,520.00
Factory Overhead .................................... 8,128.00
Administrative Salaries ............................. 3,280.00
Payroll .................................................. 14,928.00
d. Nov. 30 Factory Overhead .................................... 339.60
Payroll Taxes Expense
Administrative Salaries ............................. 262.40 *
FICA Tax Payable ................................ 592.00
FUTA Tax Payable ............................... 2.00 **
SUTA Tax Payable............................... 8.00 ***
* Employer shares of Williams FICA tax
** Kunis $200 1% = $2
*** Kunis $200 4% = $8
P3-10
1.
Federal State
FICA Unemploy- Unemploy- Total
Taxable Tax ment Tax ment Tax Payroll
Items Earnings 8% 1% 4% Taxes
Factory wages $325,000.00 $26,000.00 $3,250.00 $ 13,000.00 $42,250.00

Administrative
salaries 20,000.00 1,600.00 200.00 800.00 2,600.00
Sales salaries 36,000.00 2,880.00 360.00 1,440.00 4,680.00
$381,000.00 $30,480.00 $3,810.00 $15,240.00 $49,530.00
2. Jan. 7 Payroll ......................................................... 68,200.00

Employees Income Tax Payable (10%) ... 6,820.00
FICA Tax Payable (8%) ........................... 5,456.00
Wages Payable ....................................... 55,924.00
7 Wages Payable ........................................... 55,924.00
Cash ........................................................ 55,924.00
14 Payroll ......................................................... 66,300.00
Employees Income Tax Payable ............. 6,630.00
FICA Tax Payable ................................... 5,304.00
Wages Payable ....................................... 54,366.00
14 Wages Payable ........................................... 54,366.00
Cash ........................................................ 54,366.00
15 Payroll ......................................................... 28,000.00
FICA Tax Payable ................................... 2,240.00
Wages Payable ....................................... 22,960.00
15 Wages Payable ........................................... 22,960.00
Cash ........................................................ 22,960.00
21 Payroll ......................................................... 72,500.00
FICA Tax Payable ................................... 5,800.00
Wages Payable ....................................... 59,450.00
21 Wages Payable ........................................... 59,450.00
Cash ........................................................ 59,450.00
P3-10 Concluded
Jan. 28 Payroll .......................................................... 74,200.00

FICA Tax Payable .................................... 5,936.00
Wages Payable ........................................ 60,844.00
28 Wages Payable ............................................ 60,844.00
Cash ........................................................ 60,844.00
31 Payroll .......................................................... 28,000.00
FICA Tax Payable .................................... 2,240.00
Wages Payable ........................................ 22,960.00
31 Wages Payable ............................................ 22,960.00
Cash ........................................................ 22,960.00
31 Work in Process ........................................... 302,500.00
Factory Overhead ........................................ 22,500.00
Administrative Salaries ................................ 20,000.00
Sales Salaries .............................................. 36,000.00
Payroll ...................................................... 381,000.00
31 Factory Overhead ........................................ 42,250.00
Miscellaneous Administrative Expense ........ 2,600.00
Miscellaneous Selling Expense ................... 4,680.00
FICA Tax Payable .................................... 30,480.00
Federal Unemployment Tax Payable ....... 3,810.00
State Unemployment Tax Payable .......... 15,240.00
3. Wages earned and accrued as of January 31:

Direct labor ....................................................................... $ 302,500
Indirect labor .................................................................... 22,500
Total .................................................................................. $ 325,000
Less wages paid during month ....................................... 281,200
Accrued wages, January 31 ............................................. $ 43,800
P3-11
Factory Overhead (Bonus)* 8,000
Factory Overhead (Vacation Pay)** ........................................ 8,000
Factory Overhead (Holiday Pay)*** ........................................ 4,000
Bonus Liability ................................................................. 8,000
Vacation Pay Liability ....................................................... 8,000
Holiday Pay Liability ......................................................... 4,000
*$400,000 50 weeks = $8,000

**($200,000 2 weeks) 50 weeks = $8,000
***($200,000 5 days) 5 days = $200,000
$200,000 50 weeks = $4,000/week
Work in Process140,000
Factory Overhead (Indirect Labor) 60,000
Payroll 200,000
P3-12
The entry to distribute the payroll is the same as in P3-11 above. The entry to record
the liability for the bonus, vacation pay, and holiday pay is as follows:
Work in Process (Bonus). 5,600*

Work in Process (Vacation Pay).5,600**
Work in Process (Holiday Pay) 2,800***
Factory Overhead (Bonus) 2,400*
Factory Overhead (Vacation Pay)..2,400**
Factory Overhead (Holiday Pay)1,200***
Bonus Liability...8,000
Vacation Pay Liability.. 8,000
Holiday Pay Liability.4,000
*($140,000/$,200,000) x $8,000; ($60,000/$200,000) x $8,000
** x $8,000; x $8,000
*** x $4,000; x $4,000
P3-13
Work in Process 300,000

Factory Overhead (Indirect Labor) 200,000
Payroll 500,000
Factory Overhead (Bonus)* 15,000

Factory Overhead (Vacation Pay)** ........................................ 20,000
Factory Overhead (Holiday Pay)***......................................... 20,000
Bonus Liability .................................................................. 15,000
Vacation Pay Liability ....................................................... 20,000
Holiday Pay Liability ......................................................... 20,000
*$750,000 50 weeks = $15,000

**($500,000 2 weeks) 50 weeks = $20,000
***($500,000 5 days) 10 days = $1,000,000
$1,000,000 50 weeks = $20,000/week
P3-14
The entry to distribute the payroll is the same as in P3-13 above. The entry to record
the liability for the bonus, vacation pay, and holiday pay is as follows:
Work in Process (Bonus).. 9,000*

Work in Process (Vacation Pay) 12,000**
Work in Process (Holiday Pay).. 12,000***
Factory Overhead (Bonus)... 6,000*
Factory Overhead (Vacation Pay).. 8,000**
Factory Overhead (Holiday Pay). 8,000***
Bonus Liability.... 15,000
Vacation Pay Liability 20,000
Holiday Pay Liability.. 20,000
*($300,000/$500,000) x $15,000; ($200,000/$500,000) x $15,000.
** x $20,000; x $20,000
*** x $20,000 x $20,000
P3-15
1. Hours required:
First 100,000 units @ 5 hours per unit ...................... 500,000
Second 100,000 units @ 5 hours per unit 90% ....... 450,000
Remaining 1,000,000 units @ 5 hours per unit 80% 4,000,000
Total hours required .............................................. 4,950,000
Wages paid at regular rate:
4950,000 hours $20 per hour ................................. $ 99,000,000
2. Total hours required (from above)................................. 4,950,000
Less regular hours available:
2,250 employees 40 hours per
week 50 weeks ...................................................... 4,500,000
Less holidays8 holidays 2,250
employees 8 hours per day .................................... 144,000 4,356,000
Overtime hours required ............................................... 594,000
Overtime premium:
594,000 hours $10 premium per hour .................... $ 5,940,000
3. Second 100,000 units:
Per-unit cost of first 100,000 units5 hours $20 per hour = $100
Expected savings per unit10% $100 = $10
Total savings100,000 units $10 per unit = $1,000,000
Bonus payment on second 100,000 units1/2 of $1,000,000 = $500,000
Remaining 1,000,000 units:
Per-unit costs of first 100,000 units$100
Expected savings per unit20% $100 = $20
Total savings1,000,000 units $20 per unit = $20,000,000
Bonus payment on remaining 1,000,000 units1/2 of $20,000,000 =
$10,000,000
Total incentive bonus payment:
Second 100,000 units ....................................... $ 500,000
Remaining 1,000,000 units ............................... 10,000,000
Total .............................................................. $ 10,500,000
P3-15 Concluded
4. Hours:
Vacation pay2,250 employees 2 weeks 40
hours per week.............................................. 180,000
Holiday pay2,250 employees 8 days 8
hours per day ................................................ 144,000
Total hours ........................................................ 324,000
Cost of vacation and holiday pay:
324,000 hours $20 per hour ........................... $ 6,480,000
5. Wages at regular rate ............................................ $ 99,000,000
Overtime premium ................................................. 5,940,000
Incentive premium ................................................. 10,500,000
Vacation and holiday pay ...................................... 6,480,000
Total payroll....................................................... $ 121,920,000
Employers payroll taxes$121,920,000 13%..................... $ 15,849,600
MINI-CASE 1
1. A piece-rate plan provides an incentive for employees to produce a high level of

output, thereby maximizing their earnings and company production and revenues.
However, a serious shortcoming of such plans is that they may encourage employ-
ees to sacrifice quality for quantity. One solution is to adopt a piece-rate plan based
on the production of good units, only.
2. No, the compensation may be a combination of hourly-rate and piece-rate plans.
Because such a modified wage plan provides a base hourly wage regardless of the
level of production, it may cause employees to feel less pressure to maximize quan-
tity at the expense of quality.
3. Yes, incentive compensation plans are often used in service businesses. For ex-
ample, salespersons in retail stores, real estate agents, and insurance agents are
examples of workers whose compensation is often either on a salary plus commis-
sion or all-commission basis.
MINI-CASE 2
1. The controller is correct in assuming that the weekday overtime and the bonus are
factory overhead costs and should be spread over all production for the period. Un-
der the circumstances, however, it would be improper to charge Saturday and Sun-
day overtime to factory overhead. These costs should be charged to the weekend
jobs that were rush orders.
The plant manager is incorrect in allocating weekday overtime to particular jobs,

because the overtime was required due to scheduling more work than could be
done during a regular workday. It would be improper to charge jobs that happen to
be in production during the overtime period. All production during the period should
bear part of the additional cost. The plant manager is also incorrect in charging the
bonus to administrative expenses since factory workers bonuses are part of the
cost of production.
The sales managers belief that overtime premiums and bonuses are not part of fac-
tory costs indicates a lack of understanding of the concept that all costs except sell-
ing and administrative expenses should be included in the cost of the product.
Based on the facts given, the most appropriate procedure would be to charge the
weekday overtime and bonus to factory overhead. (The bonus could, however, be
added to each direct laborers hourly rate and traced to the specific job.) The Satur-
day and Sunday overtime should be charged to the rush-order jobs that were
worked on during the weekends.
2. Work in Process ............................................................... 433,000

Payroll ......................................................................... 456,300
Computation of Work in Process:
Weekdays: (40,200 hours + 1,700 hours) @ $10 ... $419,000
Weekends: (400 hours + 300 hours) @ $20 ........... 14,000
$433,000
Computation of Factory Overhead:
Indirect labor ........................................................... $14,800
Overtime premiumweekdays (1,700 $5)........... 8,500
$23,300
Bonus Liability ............................................................. 4,563
Computation of Accrued Bonus Liability:
$456,300 1% = $4,563
INTERNET EXERCISE
1. Asset mix is the apportionment of investment dollars among various asset clas-
ses such as short-term reserves, bonds, and stocks. It is also known as asset al-
location or investment mix.
2. Rebalancing is obtaining the desired fund mix in your plan account by shifting
the balance to match contribution allocation percentages that you previously
chose. (Say 60% stocks and 40% bonds.) This may involve selling out some
funds and buying others to achieve your desired percentages.
3. A Roth IRA, introduced by the Taxpayer Relief Act of 1997, is a nondeductible

IRA at the time contributions are made. However, distributions from a Roth IRA
are tax free if they meet certain requirements (income, time since the Roth IRA
was established, and the age of the Roth IRA owner).
CHAPTER 4
QUESTIONS
1. Factory overhead represents expenses that the total unit cost of the product increases.
are incurred in the process of production, For example, assume $100,000 of fixed costs
but that cannot be identified directly with the and production of 10,000 units. The fixed
finished product. This distinguishes them cost per unit would be $10. However, if pro-
from direct materials and direct labor which duction doubled to 20,000 units, the new
apply directly to the product being manufac- fixed cost per unit would only be $5 per unit.
tured. 6. Volume changes will affect cost patterns in
A variety of terms can be used to describe the following ways:
factory overhead, such as indirect factory ex- (1) Total variable costs will vary proportion-
pense, indirect manufacturing costs, and fac- ately with the volume change.
tory burden. For simplicity, factory overhead is (2) Fixed costs will remain constant. In total,
often referred to merely as overhead. they are not affected by volume change
2. Sherwin-Williams told its painting contractors (over a certain range of volume).
that cost estimation isnt just about materials (3) Total semivariable costs will move in a
and labor. Overhead costs, such as taxes, stair-step or continuous fashion when
lights, gas, office supplies, and rent, must be volume changes, but not in direct pro-
factored into job bids for the contractors busi- portion to volume changes.
ness to be profitable.
7. A step-variable cost, such as inspection and
3. The three categories of factory overhead materials handling labor, will remain con-
expenses and examples of each are: stant over a small range of production and
(1) Indirect materials. Examples: cleaning mate- then abruptly change. A step-fixed cost,
rials, lubricants, polishing compounds, glue such as factory supervision, will remain the
and nails. same in total over a much wider range of
(2) Indirect labor. Examples: wages of su- activity before it changes.
pervisors, janitors, inspectors, forklift 8. The high-low method assumes that a
operators. straight line can be drawn between the two
(3) Other indirect manufacturing expenses. extremes of the analyzed volume range and
Examples: factory rent, insurance, prop- that all costs for volumes between the two
erty taxes, depreciation, and power. points will fall along the straight line.
4. The distinguishing characteristic of a variable 9. The scattergraph method is an improvement
cost is that it tends to increase or decrease over the high-low method because it uses all
proportionately with production increases and of the available data points rather than just
decreases. Fixed costs will remain the same, two of them. Also, visual inspection of the
in total, over a period of time, regardless of graph allows nonrepresentative data points
the changes in production. Semivariable to be identified. The main disadvantage of
costs, although affected by production, con- the scattergraph method is that the cost line
tain both fixed and variable components. is drawn through the data points based on
5. When a product is composed of both fixed visual inspection rather than on utilization of
and variable costs, the total unit cost will de- mathematical techniques. Using visual in-
crease with volume increases and increase spection only, more than one line might be
when volume goes down. The change in unit drawn to fit the data points.
cost is caused by the spreading of the total 10. The independent variable is the one whose
fixed cost over the new level of volume. change causes the variation in the depend-
When volume goes up, the fixed cost as- ent variable. For example, the variation in
signed to each unit of product decreases, electricity cost (dependent variable) from
lowering the total unit cost. As volume de- month-to-month can be explained by the
creases, more of the total fixed cost must be variation in the number of units produced
assigned to each unit produced; therefore, (independent variable)
115
11. R2 is a measure of the percentage of department costs directly to production de-

change in the dependent variable that can partments, and (2) the sequential distribution
be explained by change in the independent method of distributing service department
variable. For example, an R2 of .95 means costs sequentially to other service depart-
that 95% of the change in electricity cost is ments, and then to production departments.
explained by the change in the number of When service department costs are dis-
units produced. tributed directly to the production depart-
12. In a small company having only one produc- ments, bypassing other service depart-
tion department, all factory overhead accounts ments, only the service rendered to each
may be kept in the general ledger. In a large production department needs to be deter-
company, there are usually many depart- mined before the costs are distributed.
ments, thus requiring that factory overhead If the distribution method recognizes the
expenses be departmentalized and the de- service one service department renders to
partmental accounts be kept in a factory another service department, the sequence
overhead ledger because of the large num- of distributing the service departments ac-
ber of accounts and the detail required. cumulated costs must be determined before
13. The two types of factory overhead analysis the distribution process can be undertaken.
spreadsheets are the expense type and the 16. No. A limitation of the sequential distribution
department type. The functions of each are method is that once a service department has
as follows: been allocated out no reciprocal services are
Expense-type: A separate analysis sheet allocated back to it. (The algebraic distribution
is used for each factory overhead expense method is needed to do those kinds of cross-
item. The form provides columns for distrib- allocations.)
uting the expense to each factory depart- 17. In using the sequential distribution method
ment. of allocating service department costs, if
Department-type: A separate analysis each of the service departments services
sheet is used for each department. Provi- the same number of other departments, the
sion is made on the form for recording the service department with the largest total
departments share of each expense item. overhead costs should be allocated first.
Use of the department-type sheet is advan-
18. Yes, after a distribution worksheet is pre-
tageous because fewer analysis sheets are
required and each sheet provides a compared, a single journal entry can be made to
plete record of all overhead expenses appli- close the balance in the factory overhead
cable to a particular department. account to the individual producing depart-
ments. The charges are made directly to the
14. The two types of departments found in a producing departments without first setting
departmentally organized factory are service
up factory overhead accounts for the service
and production departments.
departments.
The function of a service department is
to render service to one or more internal de- 19. If the actual factory overhead costs cannot
partments of the factory. For example, a be determined until the end of an accounting
maintenance department may be responsi- period, the jobs completed during the period
ble for maintaining the buildings, equipment, could not have factory overhead costs
and grounds. This department does not ac- charged to them until the total factory over-
tually produce goods but renders a service head costs are known. This delay in deter-
to other service and production depart- mining a jobs cost could affect the process
ments. of ascertaining a selling price and billing a
A production department produces the customer. Also, because it is frequently
product that is sold to customers. It may necessary to predetermine costs of produc-
requisition raw materials and, by the addition in order to bid for future work, having a
tion of labor, physically convert the materials predetermined factory overhead rate is a vi-
to finished products. A production depart- tal part of any bidding process. Under the
ment could also merely assemble a product job cost system, it is customary to charge
from a stock of raw materials. each job completed during the period or in
15. Two methods of distributing service depart- process at the end of the period with a por-
ment costs to production departments are tion of the total factory overhead on the ba-
(1) the direct method of distributing service sis of predetermined rates.
20. The two types of budget data required in record keeping than the other two methods;
computing predetermined overhead rates however, it has some shortcomings.
are budgeted production and budgeted fac- This method will tend to charge a dispropor-
tory overhead costs. tionate amount of overhead to the jobs that
Budgeted production may be expressed have the highest labor costs. These high
in terms of direct labor hours, direct labor overhead charges may not be justified in all
costs, machine hours, or units of product. circumstances because, for example, the
Budgeted costs are expressed in terms of amount of expense charged for heat, light,
the total estimated factory overhead costs to power, insurance, or taxes should not be af-
be incurred at various production levels. fected by a differential in labor costs.
21. The three traditionally used methods for ap- The direct labor hour method requires
plying factory overhead are the direct labor that detailed computations be made, and
cost method, the direct labor hour method, that a record of direct labor hours be main-
and the machine hour method. tained on all jobs. This method has some
advantages over the direct labor cost meth-
The direct labor cost method requires od because the amount of indirect materials,
that the estimated factory overhead expense indirect labor, power, and other overhead
for the upcoming period be divided by the items used by departments will usually vary
estimated direct labor cost that is expected in proportion to units produced and, thus,
to be incurred. The relationship between the number of hours worked.
factory expense and labor cost is expressed The machine hour method requires a
as a percentage. In order to determine the considerable amount of preliminary study
amount of factory overhead to be applied to and detailed recordkeeping to determine the
the job, the resulting percentage is multi- number of hours that machines are being
plied by the direct labor cost incurred on a operated. This method provides a more ac-
job. curate application of factory overhead to
The direct labor hour method requires jobs that require a substantial amount of au-
the division of the estimated factory over- tomated labor. When machines play a
head expenses by the estimated direct labor greater part in production than do employ-
hours expected to be worked during the ees, machine-related costs are a substantial
period. The relationship between the factory element in factory overhead charges.
overhead expense and labor hours is then 23. Manufacturing conditions that require some
expressed in terms of a dollar amount of departments to perform manual operations
overhead per direct labor hour. When the and other departments to be highly auto-
number of actual direct labor hours are mated should use more than one method of
known on jobs in production, the actual di- applying factory overhead expense. In de-
rect labor hours are multiplied by the dollar partments that use mostly manual labor, the
amount (rate) per direct labor hour to deter- direct labor cost or direct labor hour method
mine the applied factory overhead cost may be appropriate. (If all employees in a
chargeable to the jobs. department receive approximately the same
The machine hour method requires the rate of pay, the direct labor cost method
division of the estimated factory overhead would probably be used because of its sim-
expense by the estimated machine hours to plicity and lower clerical cost.) In the auto-
be used in the forecast period. The dollar mated departments, the machine hour
amount (rate) per machine hour is multiplied method would be more appropriate because
by the number of machine hours incurred on it would most accurately charge a fair
22. The direct labor cost method requires only amount of factory overhead to the automat-
that the direct labor cost charged to the job ed departments products.
or process be known. The percentage de- 24. Activity-based costing considers non-volume-
veloped, expressing the relationship be- related activities, such as machine setups or
tween the direct labor cost and factory over- product design changes, as well as volume-
head, is multiplied by the direct labor cost related activities in charging overhead to jobs.
incurred on the jobs to apply the estimated It considers the complexity of the production
factory overhead cost. This is the simplest of process as well as the number of units pro-
the three methods to apply and requires less duced in deciding how much overhead to
25. To successfully employ an ABC system, a Both of the causes mentioned may be relat-
company must do the following: ed to a seasonal difference in costs incurred
(1) Identify activities in the factory that cre- and/or the level of production for the given
ate costs, such as design changes, in- accounting period.
spections, and machine setups. 29. The factory overhead has been overrapplied
(2) The cost of performing the activities in by $2,000. The probable causes for the
the coming period must be estimated. overapplication could include:
(1) A higher level of capacity was achieved
(3) The cost driver used to allocate each of
than was forecast when the predeter-
the activity cost pools must be decided
mined rate was established.
upon.
(2) The actual factory overhead expenses
(4) The estimated cost of each activity pool charged to the factory overhead control
must be divided by the number of esti- account were less than were estimated.
mated cost driver units for that pool to
obtain an overhead rate that is used to Both of the causes mentioned may be relat-
charge each job ed to a seasonal difference in costs incurred
and/or the level of production for the given
26. Activity-based costing provides the infor- accounting period.
mation that is needed to practice activity-
based management. Once provided, the
information may be used to make the busi- 30. The two ways an under- or overapplied
ness more profitable by reducing costs and facory overhead balance can be disposed of
improving processes. are: (1) charge the entire amount to Cost of
Goods Sold, or (2) allocate the amount be-
27. Volume-related overhead changes as the tween Work in Process, Finished Goods,
number of units produced changes. For ex- and Cost of Goods Sold.
ample, electricity expense incurred to power If the amount of under- or overapplica-
the machines increases as more units are pro-
tion is insignificant, the recommended pro-
duced. The change in non-volume-related
cedure is to charge the balance to the costs
overhead costs is not a function of how many
of the current period by closing it to Cost of
units are produced. For example, you have
Goods Sold.
to incur the same setup costs prior to a pro-
When the amount is substantial, the
duction run whether one unit or one thou-
recommended procedure would be to allo-
sand units are produced.
cate the balance to Work in Process, Fin-
28. The factory overhead has been underap- ished Goods, and Cost of Goods Sold. The
plied by $1,000. The probable causes for allocation would be based on the balances
the underapplication could include: remaining in these accounts at the end of
(1) A lower level of capacity was achieved the fiscal period. This is actually a correcting
than was forecast when the predeter- procedure that recognizes that the balances
mined rate was established. in Work in Process, Finished Goods, and
(2) The actual factory overhead expenses Cost of Goods Sold have been incorrectly
charged to the factory overhead control charged by an inaccurate predetermined
account were more than were estimated. rate.
EXERCISES
E4-1
Variable Costs Fixed Costs

a. Indirect labor* c. Insurance on building
b. Indirect materials e. Depreciation on building
d. Overtime premium pay i. Property taxes
f. Polishing compounds o. Rent
g. Depreciation on machinery q. Plant managers salary
h. Employers payroll taxes
j. Machine lubricants
k. Employees hospital insurance
l. Labor for machine repairs
m. Vacation pay
n. Janitors wages
p. Small tools
r. Factory electricity
s. Product inspectors wages
* Note that all of the payroll costs,

except the plant managers salary,
would increase, at least somewhat,
as the volume of production
increases.
Note: This is a good time to bring to students attention the fact that some factory over-
head expenses are of a semivariable nature in that they may contain both fixed and var-
iable elements. For example, arguments could be made for (a), (b), (j), (l), (n), (p), (r),
and (s) to be classified as semivariable or semifixed.
E4-2
Hours Cost
High volume............................................................................ 900 $ 11,000
Low volume ............................................................................ 400 6,000
Change ............................................................................. 500 $ 5,000
Variable cost per indirect labor hour: $5,000/500 = $10.00
400 Hours 900 Hours

Total cost ................................................................................ $ 6,000 $ 11,000
Variable cost @ $10.00 per hour ............................................ 4,000 9,000
Fixed cost ............................................................................... $ 2,000 $ 2,000
E4-3
1.
2.
Reading from the Graph:

Total fixed costs (the point where the trend line intersects the Y-axis).$2,000
Solving for variable costs using any data point:
At 500 hours:
Total costs ................................................. $ 7,000
Fixed costs ................................................ 2,000
Variable costs............................................ $ 5,000
$5,000
Variable cost per unit: = $10 hour
500 hours
E4-4
1. and 2.
3. There is no difference in the solution obtained under the three methods. There were
no outlier data points that would result in inaccuracies in the high-low points and
scattergraph solutions.
E4-5
Hours Cost
High volume............................................................................ 1,700 $ 22,000
Low volume ............................................................................ 700 10,000
Change ............................................................................. 1,000 $ 12,000
Variable cost per machine hour: $12,000/1,000 = $12.00
700 Hrs. 1,700 Hrs

Total cost ................................................................................ $10,000 $ 22,000
Variable cost @ $12.00 per hour ............................................ 8,400 20,400
Fixed cost ............................................................................... $ 1,600 $ 1,600
E4-6
a. and b.
Unit cost at production levels of 10,000 and 20,000 units:
10,000 units 20,000 units
Direct materials ............................................................ $7.00 $7.00
Direct labor .................................................................. 8.00 8.00
Fixed factory overhead
($24,000* 10,000) .............................................. 2.40
($24,000* 20,000) .............................................. 1.20
Variable factory overhead expenses ............................ 3.00 3.00
Unit cost ....................................................................... $20.40 $19.20
* The 12,000 units budgeted for May multiplied by the fixed overhead unit cost of $2
indicates that fixed costs are $24,000 per month.
c. The variable elements of total cost will increase or decrease in proportion to the
increase or decrease in production. However, costs for the variable elements on a
unit basis will remain the same. Total fixed costs will remain constant, but unit costs
for fixed elements will increase as production decreases and decrease as produc-
tion increases because the same total cost is being divided by fewer or more units.
The difference in unit costs is due to the change in fixed costs per unit.
E4-7
a. Floor space occupied by other

departments.
b. Production volume by department.
c. Cost of machinery and equipment by department.
d. Number of workers in departments served.
e. Number of purchase orders requested.
f. Quantity and weight of items shipped.
g. Units of materials requisitioned.
E4-8
1.
Building Factory
Maintenance Office Assembly Machining Total
Direct charges ................ $90,000 $171,000 $ 378,000 $ 328,000 $967,000
Building maintenance
floor space:
Assembly
$90,000 4/9 ......... 40,000
Machining
$90,000 5/9 ......... 50,000
Factory office
direct labor hours:
Assembly
*$171,000 x 8/12 .... 114,000
Machining
*$171,000 x 4/12 .... 57,000
$532,000 $ 435,000 $967,000
*or $171,000 (Factory Office) 120,000 (Direct Labor Hours) = $1.425 per direct labor hour
80,000 $1.425 = $114,000; 40,000 x $1.425 = $57,000
2.
Building Factory
Maintenance Office Assembly Machining Total
Direct charges ............ $90,000 $ 171,000 $ 378,000 $ 328,000 $967,000
floor space:
Factory office
$90,000 10% ....... 9,000
Assembly
$90,000 40% ....... 36,000
Machining
$90,000 50% ........ 45,000
$ 180,000
Factory office
direct labor hours:
Assembly
*$180,000 x8/12 ..... 120,000
Machining
*$180,000 4/12.... 60,000
$ 534,000 $ 433,000 $967,000
*or $180,000 (Factory Office) 120,000 = $1.50 per direct labor hour
80,000 $1.50 = $120,000; 40,000 x $1.50 = $60,000
E4-9
1.
Building Factory
Maintenance Office Grinding Polishing Total
Direct charges $100,000 $ 150,000 $ 450,000 $350,000 $1,050,000
floor space:
Grinding
$100,000 x 6/9 66,667
Polishing
$100,000 3/9* ...... 33,333
Factory office
direct labor hours:
Grinding
$150,000 x 75/100 . 112,500
Polishing
$150,000 x 25/100 . 37,500
$629,167 $420,833 $1,050,00
2.
Building Factory
Maintenance Office Grinding Polishing Total
Direct charges ................... $100,000 $ 150,000 $ 450,000 $350,000 $1,050,000
floor space:
Factory office
$100,000 10% ..... 10,000
Grinding
$100,000 60% ..... 60,000
Polishing
$100,000 30% ...... 30,000
Total.. $160,000
Factory office
direct labor hours:
Grinding
*$160,000 x75/100 . 120,000
Polishing
*$160,000 25/100 40,000
$ 630,000 $ 420,000 $1,050,00
E4-10
a. Direct labor cost method$3,200 x 100% ....................................... $3,200

b. Direct labor hour method250 direct labor hours $10 ................. $2,500
c. Machine hour method295 machine hours $12.50 $3,687.50
E4-11
Direct materials ....................................................................................... $ 5,000

Direct labor ............................................................................................. 2,000
Factory overhead:
Assembly support (200 $5) ........................................................... 1,000
Machining support (100 $10) ........................................................ 1,000
Machine setups (2 $250) .............................................................. 500
Design changes (3 $500) .............................................................. 1,500
Total cost of complete job ....................................................................... $ 11,000
E4-12
Direct materials ....................................................................................... $ 10,000

Direct labor ............................................................................................. 4,000
Factory overhead:
Direct labor support (300 $10) ...................................................... 3,000
Machining support (150 $15) ........................................................ 2,250
Machine setups (3 $350) .............................................................. 1,050
Design changes (5 $700) .............................................................. 3,500
Total cost of complete job ....................................................................... $ 23,800
E4-13
Assembly support (direct labor cost): $50,000/$75,000 = $.67 per direct labor $
Machining support (machine hours): $80,000/2,000 = $40 per machine hour
Machine setups (number of setups): $25,000/200 = $125 per setup
Design changes (design hours): $15,000/500 = $30 per design hour
E4-14
Direct materials cost ............ $40,000

Direct labor cost (one and
one-half times direct
materials cost)............... $60,000 $10 per hour = 6,000 direct labor hours
Factory overhead application rate ................................... $4.00

Factory overhead applied to jobs .................................... $24,000
Less overapplied factory overhead ................................. 2,000
Total actual factory overhead for the period .................... $22,000
E4-15
Balance of work in process ($47,000 $40,000) .................... $ 7,000

Less materials cost ................................................................. 3,400
Labor and factory overhead costs ........................................... $ 3,600
Let X = direct labor cost, then:

X + 1.0X = $3,600
2.0 X = $3,600
X = $1,800 labor
X = $1,800 overhead
E4-16
a. Factory Overhead.
b. No. If this were a departmentalized factory, the credit to Factory Overhead would be
offset by debits to the various departments in the factory, thereby distributing total
factory overhead to the departments. The account illustrated shows a charge direct-
ly to Work in Process instead of Factory OverheadDepartment A or B.
c. The debit balance in the account represents the amount of underapplied overhead.
d. The application rate of 50% was determined by dividing the estimated direct labor
cost into the estimated factory overhead for the period.
e. The $1,100 balance may be added to the cost of goods sold account, or if signifi-
cant, prorated to the cost of goods sold, work in process, and finished goods ac-
counts.
E4-17
a. Work in Process ............................................................... $ 25,000 16.67%

Finished Goods ................................................................ 25,000 16.67
Cost of Goods Sold .......................................................... 100,000 66.67
Total ................................................................................. $ 150,000 100.00%
Work in Process ($20,000 16.67%) ............................... $ 3,333
Finished Goods ($20,000 16.67%) ................................ 3,333
Cost of Goods Sold ($20,000 66.67%) .......................... 13,334
$ 20,000
b. Under-and Overapplied Factory Overhead ...................... 20,000

Work in Process 3,333
Finished Goods ............................................................ 3,333
Cost of Goods Sold ...................................................... 13,334
E4-18
a. Work in Process ............................................................... $ 60,000 24%

Finished Goods ................................................................ 40,000 16
Cost of Goods Sold .......................................................... 150,000 60
Total ................................................................................. $ 250,000 100%
Work in Process ($25,000 x 24%) $ 6,000

Finished Goods ($25,000 16%) .................................... 4,000
Cost of Goods Sold ($25,000 60%) .............................. 15,000
$ 25,000
b.
Work in Process .. 6,000
Finished Goods ................................................................ 4,000
Under-and Overapplied Factory Overhead............................. 25,000
PROBLEMS
P4-1
a. G. The depreciation charged varies directly with machine hours used.

b. B. The flat fixed charge remains constant until a certain number of hours are used,
then the rate varies directly with the usage.
c. D. There is a minimum charge up to 1,000,000 gallons, then the rate changes by
10,000 gallon increments.
d. F. Depreciation is a fixed cost that remains the same even though the volume or
use varies.
e. H. The rent is a fixed cost up to 200,000 work hours. Upon reaching the 200,000-
work-hour level, the cost drops to zero.
f. C. The salaries are a semivariable, stair-step cost. The cost remains constant for up
to 1,000 hours, then jumps to a new constant level when 1,001 hours are reached,
remains at that level up to 2,000 hours, then jumps again at 2,001, etc.
P4-2
1. High-low method Units Cost

High volume................................................................. 2,400 $ 4,400
Low volume ................................................................. 1,400 3,400
Change ....................................................................... 1,000 $ 1,000
Variable cost per unit: $1,000 1,000 = $1.00 per unit
Fixed cost 1,400 Units 2,400 Units

Total cost................................................................ $ 3,400 $ 4,400
Variable cost, $1.00 per unit................................... 1,400 2,400
Fixed cost ............................................................... $ 2,000 $ 2,000
2. Variable cost charged to product: 24,000 units $1.00 per unit = $24,000.
3. Fixed cost charged to factory overhead: $2,000 per month 12 months = $24,000.
P4-3
1.
Number of Units (hundreds)
2. Fixed costs are $2,100 as read from the graph.

Choosing a point on the cost line of 2,200 units and $4,200:
Total costs = Fixed Costs + Variable Costs
$4,200 = $2,100 + Variable Costs
Variable Costs = $4,200 $2,100 = $2,100
$2,100
Variable Cost Per Unit = = $0.9545/Unit
2,200 Units
3. 24,000 units produced $0.9545 = $22,908
4. $2,100 12 months = $25,200
5. No, the answers do not agree. In P 4-2, the fixed cost per month was $2,000 and
the variable cost per unit was $1. In P 4-3, the fixed cost per month is $2,100 and
the variable cost per unit is only $.9545. The reason the two answers differ is that
both of these methods are imprecise. The high-low method only uses two data
points and the scattergraph method fits the trend line by visual inspection.
P4-4
1.
2. 24,000 units x $1.01 = $24,240

3. $1,979.17 x 12 = $23,750
4.
5. In this instance the high-low points solution in P4-2 is closer to this solution than the
scattergraph solution in P4-3 because neither the high nor low point is an outlier.
P4-5
Units
Expenses 1,000 2,000 4,000
Variable:
Indirect materials.. $5,000 $10,000 $20,000
Indirect labor. 10,000 20,000 40,000
Power. 7,500 15,000 30,000
Total variable.. $22,500 $45,000 $90,000
Fixed:
Depreciation $30,000 $30,000 $30,000
Property tax.. 28,000 28,000 28,000
Insurance. 22,000 22,000 22,000
Total fixed. $80,000 $80,000 $80,000
Total expenses.. $102,500 $125,000 $170,000
P4-6
Schedule for Distribution of Service Department CostsDirect Method
Description Bldg. Factory Mixing Blending Finishing Total

Maint. Office
Total from factory overhead................... $6,400 $9,000 $21,000 $18,000 $25,000 $79,400
analysis sheets
Bldg. Maint. distribution(Basis sq. ft.
floor space$6,400 25,000 sq. ft =
$0.256 per sq. ft.)
Mixing 10,000 @ $.256 ........................ 2,560
Blending 4,500 @ $.256 ........................ 1,152
Finishing10,500@ $.256 .......................... 2,688
25,000
Fact. Office distribution(Basis number
of employees----$9,000/100
employees= $90 per employee )
Mixing 30 x $90 .................................... 2,700

Blending20 x $90 .................................... 1,800
Finishing50 x $90 ................................... 4,500
Totaldirect and apportioned expenses ......... $26,260 $20,952 $32,188 $79,400
P4-7
Schedule for Distribution of Service Department CostsSequential Method
(Note that Building Maintenance services four other departments, whereas Factory
Office only services three departments.)
Description Bldg. Fact. Mixing Blending Finishing Total

Maint. Office
Total from factory overhead................... $6,400 $9,000 $21,000 $18,000 $25,000 $79,400
analysis sheets
Bldg. Maint. distribution(Basis sq. ft.
floor space$6,400 32,000 sq. ft =
$0.20 per sq. ft.)
Factory Office7,000@ $.20 ..................... 1,400
Mixing 10,000 @ $.20 .......................... 2,000
Blending 4,500 @ $.20 .......................... 900
Finishing10,500@ $.20 ............................ 2,100
32,000
New total ........................................................... $10,400 $23,000 $18,900 $27,100 $79,400
Fact. Office distribution(Basis number of
employees $10,400/100 employees=$104
per employee)
Mixing----- 30 x $104 .................................. 3,120

Blending20 x $104 .................................. 2,080
Finishing50 x $104 ................................. 5,200
Totaldirect and apportioned expenses.......... $26,120 $20,980 $32,300 $79,400
P4-8
(1)
Factory Overhead-Building Maintenance..6,400
Factory Overhead-Factory Office9,000
Factory Overhead-Mixing.21,000
Factory Overhead-Blending18,000
Factory Overhead-Finishing25,000
Factory Overhead.. 79,400
(2)
Factory Overhead-Factory Office 1,400
Factory Overhead-Mixing 2,000
Factory Overhead-Blending 900
Factory Overhead-Finishing 2,100
Factory Overhead-Building Maintenance 6,400
(3)
Factory Overhead-Mixing3,120
Factory Overhead-Blending2,080
Factory Overhead-Finishing5,200
Factory Overhead-Factory Office 10,400
P4-9
1. 2. and 3.
Direct Direct Applied Total
Materials Labor Factory Production
Job Cost Cost Overhead Cost
18AX ......................... $ 300 $ 600 $ 1,200 $ 2,100
19BT ......................... 1,080 940 1,880 3,900
20CD ......................... 720 1,400 2,800 4,920
21FB ......................... 4,200 5,120 10,240 19,560
$ 6,300 $ 8,060 $16,120 $ 30,480
P4-10
1. Direct Labor Cost MethodApplication Rates

Forming Shaping Finishing
$64,000 $36,000 $10,080
= 400% = 240% = 120%
$16,000 $15,000 $8,400
Cost of ProductionJob SL500

Forming Shaping Finishing Total
Direct materials .................................. $ 120.00 $ 140.00 $ 120.00 $ 380.00
Direct labor ........................................ 220.00 270.00 240.00 730.00
Factory overhead:
(400% $220.00) ....................... 880.00
(240% $270.00) ....................... 648.00
(120% $240.00) ....................... 288.00
1,816.00
Total cost ........................................... $ 1,220.00 $ 1,058.00 $ 648.00 $ 2,926.00
2. Direct Labor Hours MethodApplication Rates

Forming Shaping Finishing
$64,000 $36,000 $10,080
= $80.00 per hr. = $72.00 per hr. = $28.80 per hr.
800 500 350
Cost of ProductionJob SL500

Forming Shaping Finishing Total
Direct materials .................................. $ 120.00 $ 140.00 $ 120.00 $ 380.00
Direct labor ........................................ 220.00 270.00 240.00 730.00
Factory overhead:
(12 hrs. $80.00)........................ 960.00
(10 hrs. $72.00)........................ 720.00
(8 hrs. $28.80).......................... 230.40
1,910.40
Total cost ........................................... $ 1,300.00 $ 1,130.00 $ 590.40 $ 3,020.40
P4-11
1.
Budgeted Allocation Budgeted Overhead
Cost Pool Amount Base Amount Rate
Direct labor Direct
support ..... $ 150,000 labor hours 20,000 $7.50/direct labor hour
Machine Machine
support ..... $ 200,000 hours 10,000 $20/machine hour
Machine Number of
setups ....... $ 100,000 setups 200 $500/setup
Design Number of
changes .... $ 50,000 design changes 50 $1,000/design change
2. Job 2525
Direct materials ............................................................................ $25,000
Direct labor .................................................................................. 10,000
Factory Overhead:
Direct labor usage (500 $7.50) ...................................... $ 3,750
Machine usage (1,000 $20)........................................... 20,000
Machine setups (5 x $500).. 2,500
Design changes (3 $1,000) ........................................... 3,000 29,250
Total Cost of Job ..................................................................... $64,250
P4-12
1.
Budgeted Allocation Budgeted Overhead
Cost Pool Amount Base Amount Rate
Direct labor Direct
support ..... $ 300,000 labor hours 25,000 $12/direct labor hour
Machine Machine
support ..... $ 250,000 hours 10,000 $25/machine hour
Machine Number of
setups ....... $ 125,000 setups 400 $312.50/setup
Design Number of
changes .... $ 75,000 design changes 75 $1,000/design change
2. Job 007
Direct materials ............................................................................ $15,000
Direct labor .................................................................................. 20,000
Factory Overhead:
Direct labor usage (800 $12)......................................... $ 9,600
Machine usage (1,200 $25) .......................................... 30,000
Machine setups (6 x $312.50).. 1,875
Design changes (4 $1,000) ........................................... 4,000 45,475
Total Cost of Job .................................................................... $80,475
P4-13
a. Factory Overhead (Indirect Materials).............................. 3,200

Materials ..................................................................... 3,200
b. Materials .......................................................................... 4,400
c. Factory Overhead (Machine Repair) ................................ 1,400
d. Factory Overhead (Supplies) ........................................... 900
Materials ..................................................................... 900
e. Accounts Payable ............................................................ 700
Materials ..................................................................... 700
f. Factory Overhead (Rent) ................................................. 2,400
Rent Payable .............................................................. 2,400
g. Materials .......................................................................... 350
Factory Overhead (Supplies) ...................................... 350
h. Factory Overhead (Depreciation Expense
Machinery and Equipment) .............................................. 2,800
Accumulated DepreciationMachinery and
Equipment ................................................................. 2,800
i. Factory Overhead (Payroll Taxes) ................................... 3,200
Payroll Taxes Payable ................................................ 3,200
j. Factory Overhead (Heat, Lights, and Power) ................... 6,400
Utilities Payable .......................................................... 6,400
k. Factory Overhead (Insurance Expense) ......................... 1,350
Prepaid Insurance....................................................... 1,350
l. Work in Process .............................................................. 34,600

Applied Factory Overhead .......................................... 34,600
m. Factory Overhead (Indirect Labor) ................................... 2,600
Payroll ......................................................................... 2,600
n. Finished Goods ................................................................ 85,200
Work in Process .......................................................... 85,200
P4-14
1. Predetermined rates:
a. Direct labor cost

rate = Estimated overhead Estimated labor cost
100% = $60,000 $60,000
b. Direct labor hour
rate = Estimated overhead Estimated labor hours

$6.00 = $60,000 10,000
c. Machine hour rate = Estimated overhead Estimated machine hours
$3.00 = $60,000 20,000
2. Total cost of jobs:
Job 101 Job 102 Job 103 Job 104 Job 105 Job 106 Total
Materials .............................................. $ 5,000 $ 7,000 $ 8,000 $ 9,000 $ 10,000 $ 11,000 `
$ 50,000
Direct labor .......................................... 6,000 12,000 13,500 15,600 29,000 2,400 78,500
Total prime cost ............................... $ 11,000 $ 19,000 $ 21,500 $ 24,600 $ 39,000 $13,400 $ 128,500
Applied overhead: Direct labor cost .... $ 6,000 $ 12,000 $ 13,500 $ 15,600 $ 29,000 $ 2,400 $ 78,500
Direct labor hour.... $ 6,000 $ 12,000 $ 15,000 $ 15,600 $ 27,000 $ 2,400 $ 78,000
Machine hour ........ $ 9,000 $ 9,600 $ 12,000 $ 10,200 $ 19,500 $ 4,500 $ 64,800
Total cost using direct labor cost.......... $ 17,000 $ 31,000 $ 35,000 $ 40,200 $68,000 $ 15,800 $207,000
Total cost using direct labor hour ......... $ 17,000 $ 31,000 $ 36,500 $ 40,200 $ 66,000 $15,800 $ 206,500
Total cost using machine hour ............. $20,000 $ 28,600 $ 33,500 $ 34,800 $ 58,500 $17,900 $ 193,300
3. Under- and overapplied overhead:

Direct Direct
Labor Labor Machine
Cost Hour Hour
Actual factory overhead ............................. $80,000 $80,000 $80,000
Applied overhead:
Direct labor cost($78,500 100%)..... 78,500
Direct labor hour(13,000 $6.00) ...... 78,000
Machine hour(21,600 $3.00) ........... 64,800
Underapplied (overapplied)
Overhead ........................................... $1,500 $2,000 $15,200
4. Either the direct labor cost or direct labor hour method. The machine-hour method
results in applied overhead that is far different than actual overhead.
P4-15
1.
Application Rates
Basis Bronzing Casting Finishing
a. Direct labor cost ............................................ 250% 200% 180%
b. Direct labor hours .......................................... $ 20 $ 20 $ 10
c. Machine hours............................................... $ 5 $ 2 $ 8
2. Cost of Production
Job M45Direct Labor Cost Method Bronzing Casting Finishing Total
Materials..................................... $ 20.00 $ 40.00 $ 20.00 $ 80.00
Direct labor cost ......................... 64.00 60.00 54.00 178.00
Factory overhead ....................... 160.00 120.00 97.20 377.20
Total production cost .................. $ 244.00 $ 220.00 $ 171.20 $ 635.20
Job M45Direct Labor Hour Method Bronzing Casting Finishing Total
Materials..................................... $ 20.00 $ 40.00 $ 20.00 $ 80.00
Job M45Machine Hour Method ..... Bronzing Casting Finishing Total
Materials..................................... $ 20.00 $ 40.00 $ 20.00 $ 80.00
P4-15 Concluded
3. a. Factory Overhead ....................................................... 895,000

b. Factory OverheadBronzing ..................................... 350,000
Factory OverheadCasting ....................................... 220,000
Factory OverheadFinishing ..................................... 325,000
c. Work in Process.......................................................... 696,000
Applied Factory OverheadBronzing .................... 300,000
Applied Factory OverheadCasting ...................... 196,000
Applied Factory OverheadFinishing .................... 200,000
d. Applied Factory OverheadBronzing ........................ 300,000
Applied Factory OverheadCasting .......................... 196,000
Applied Factory OverheadFinishing ........................ 200,000
Factory OverheadBronzing ................................. 300,000
Factory OverheadCasting ................................... 196,000
Factory OverheadFinishing ................................. 200,000
e. Under- and Overapplied Overhead ............................. 199,000
Factory OverheadBronzing ................................. 50,000
Factory OverheadCasting ................................... 24,000
Factory OverheadFinishing ................................. 125,000
P4-16
Building General
Mainte- Factory
nance Overhead Machining Assembly Total
Actual costs incurred ..................... $ 30,000 $ 75,400 $ 45,800 $ 68,800 $ 220,000
DistributionBuilding
Maintenance:
General factory
overhead10% ..................... 3,000
Machining50%......................... 15,000
Assembly40% ......................... 12,000
$ 78,400
DistributionGeneral Factory
Overhead:
1/2 x $78,400 .................................. 39,200 39,200
$ 100,000 $ 120,000 $ 220,000
Applied factory overhead:
Machining28,000 $4.00 ........ (112,000) (112,000)
Assembly28,000 $4.50 ........ (126,000) (126,000)
$(238,000)
Machiningoverapplied ............. $ (12,000)
Assemblyoverapplied .............. $ (6,000)
Net overapplied ...................... $ (12,000) $ (6,000) $ (18,000)
P4-17
Job 2526
1. Materials........................................................................... $ 5,000
Labor ................................................................................ 10,000
Applied factory overhead (1,600 hrs. $6) ...................... 9,600
Total cost.......................................................................... $ 24,600
Job 2527
Materials........................................................................... $ 10,000
Labor ................................................................................ 15,000
Total cost.......................................................................... $ 36,400
Job 2528
Materials........................................................................... $ 4,000
Labor ................................................................................ 7,000
Total cost.......................................................................... $ 18,800
2. a. Work in Process .......................................................... 28,800
Applied Factory Overhead ...................................... 28,800
b. Applied Factory Overhead .......................................... 28,800
c. Factory Overhead ....................................................... 1,800
Under- and Overapplied Factory Overhead ............ 1,800*
d. Finished Goods ........................................................... 61,000**
Work in Process ...................................................... 61,000
e. Accounts Receivable .................................................. 36,900***

Sales ...................................................................... 36,900
Finished Goods ...................................................... 24,600
* $28,800 (applied) $27,000 (actual) = $1,800

** $24,600 + $36,400 = $61,000
*** $24,600 150% = $36,900
P4-18
1. Under- and Overapplied Overhead .................................. 10,000

2. Work in Process ............................................................... $ 25,000 20%
Finished Goods ................................................................ 15,000 12
$ 125,000 100%
Work in Process ($10,000 20%) ................................... $ 2,000
Finished Goods ($10,000 12%) .................................... 1,200
Cost of Goods Sold ($10,000 68%) .............................. 6,800
$ 10,000
Under- and Overapplied Overhead 10,000

Work in Process ............................................................... 2,000
Finished Goods ................................................................ 1,200
P4-19
1. Cost of Goods Sold .......................................................... 20,000

Under-and Overapplied Overhead .............................. 20,000
2. Work in Process ............................................................... $ 20,000 20%
Finished Goods ................................................................ 30,000 30
$ 100,000 100%
Work in Process ($20,000 20%) .................................... $ 4,000
Finished Goods ($20,000 30%) ..................................... 6,000
Cost of Goods Sold ($20,000 50%) ............................... 10,000
Total $20,000
Work in Process ...................... 4,000

Finished Goods ................................................. 6,000
Cost of Goods Sold 10,000
Under-and Overapplied Overhead ................................... 20,000
REVIEW PROBLEM FOR CHAPTERS 1-4
P4-20R
1.
Cash
Oct. 1 Balance 22,500 Oct. 31 (d) 14,050

31 Deposit (l) 55,500 (m) 43,706
57,756
78,000
20,244
Accounts Receivable
Oct 1 Balance 21,700 Oct. 31 Receipts (l) 55,500

31 Sales (k) 43,140
64,840
9,340
Finished Goods
Oct. 1 Inventory 8,750 Oct. 31 Cost of goods

31 Goods Sold (k) 28,760
completed (j) 78,700
87,450
58,690
Work in Process
Oct. 1 Inventory 3,600 Oct. 31 Finished goods (j) 78,700

31 Materials (b) 52,600
31 Labor (c) 25,500
31 Overhead (i) 22,000
103,700
25,000
Materials
Oct. 1 Inventory 15,000 Oct. 31 Requisitions (b) 55,050

31 Purchases (a) 69,500
84,500
29,450
Prepaid Insurance
Oct. 1 Balance 4,320 Oct. 31 Expired (f) 120

4,200
Factory Building
Oct. 1 Balance 64,000
Accumulated DepreciationFactory Building

31 Addition (e) 267
22,767
Machinery & Equipment
Accumulated DepreciationMachinery & Equipment

31 Addition (e) 633
16,633
Office Equipment
Accumulated DepreciationOffice Equipment

31Addition (e) 175
7,675
Accounts Payable

31 Materials (a) 69,500
72,000
FICA Tax Payable
Oct. 31 Paid (d) 3,120 Oct. 1 Balance 3,120

31 Employees (c) 4,264
31 Employer (c) 4,264
11,648
8,528
Federal Unemployment Tax Payable
Oct. 1 Balance 364

31 Employer (c) 533
897
State Unemployment Tax Payable

31 Employer (c) 2,132
3,536
Employees Income Tax Payable
Oct. 31 Paid (d) 5,200 Oct. 1 Balance 5,200

31 Withheld (c) 5,330
10,530
5,330
Wages Payable
Oct. 31 Paid (c) 43,706 Oct. 31 Accrued (c) 43,706
Capital Stock
Retained Earnings
Factory Overhead
Oct. 31 (b) 2,450 Oct. 31 Distributed (g) 21,750

(c) 9,500
(c) 4,550
(d) 4,230
(e) 900
(f) 120
21,750 21,750
Factory OverheadStamping
Oct. 31 Distributed (g) 9,768.40 Oct. 31 Applied (i) 10,500.00

31 Mainte- 31 Trans. to over-
nance (h) 1,728.14 and under-
31 Power (h) 1,497.88 Applied
(i) 2,494.42
12,994.42 12,994.42
Factory OverheadPlating
Oct. 31 Distributed (g) 6,559.80 Oct. 31 Applied (i) 11,500.00

31 Mainte-
nance (h) 697.91
31 Power (h) 1,497.87
31 Trans. to over-
and under-applied
(i) 2,744.42
11,500.00 11,500.00
Applied Factory OverheadStamping
Oct. 31 Transferred to factory Oct. 31 Applied (i) 10,500.00

Overhead (i) 10,500.00
Applied Factory OverheadPlating
Oct. 31 Transferred to factory Oct. 31 Applied (i) 11,500.00

Overhead (i) 11,500.00
Factory OverheadPower
Oct. 31 Distributed (g) 2,214.10 Oct. 31 Distributed (h) 2,995.75

31 Mainte-
nance (h) 781.65
2,995.75 2,995.75
Factory OverheadMaintenance
Oct. 31 Distributed (g) 3,207.70 Oct. 31 Distributed (h) 3,207.70
Under- and Overapplied Overhead
Oct. 31 (i) 250.00
Sales
Oct. 31 On account (k) 43,140
Cost of Goods Sold
Oct. 31 Finished
Goods (k) 28,760
Payroll
Oct. 31 Recorded (c) 53,300 Oct. 31 Distributed (c) 53,300
Salaries
Oct. 31 (c) 18,300
Payroll Tax ExpenseSalaries
Oct. 31 (c) 2,379
Miscellaneous Selling & Administrative Expense
Oct. 31 (d) 1,500
Depreciation ExpenseOffice Equipment
Oct. 31 (e) 175
P4-20R Continued
2. Material Inventory Ledger Cards
Material A
Unit
Units Cost Total
Beg. balance 120 $25 $ 3,000

Purchases 1,100 26 28,600
IssuedJob 1001 (120) 25 (3,000)
IssuedJob 1001 (480) 26 (12,480)
IssuedJob 1002 (400) 26 (10,400)
Ending balance 220 $26 $ 5,720
Material B
Unit
Units Cost Total
Beg. balance 320 $15 $ 4,800

Purchases 900 17 15,300
IssuedJob 1001 (320) 15 (4,800)
IssuedJob 1001 (80) 17 (1,360)
IssuedJob 1002 (200) 17 (3,400)
Ending balance 620 $17 $10,540
Material C
Unit
Units Cost Total
Beg. balance 180 $30 $ 5,400

Purchases 800 28 22,400
IssuedJob 905 (180) 30 (5,400)
IssuedJob 905 (20) 28 (560)
IssuedJob 1001 (400) 28 (11,200)
Ending balance 380 $28 $ 10,640
Factory Supplies
Total
Beg. balance $1,800

Purchases 3,200
Issued (2,450)
Ending balance $2,550
P4-20R Continued
3. Job Cost Sheets
Job Cost SheetJob 905

Date Materials Labor Overhead Total
10/1 Bal. 1,500 1,200 900 3,600

Oct. 5,960 4,200 6,250 16,410
7,460 5,400 7,150 20,010

Oct. 32,840 14,100 11,750 58,690

Oct. 13,800 7,200 4,000 25,000
4. Transactions
(a) Materials.................................................................... 69,500
Materials purchases.
(b) Work in Process ........................................................ 52,600
Factory Overhead ..................................................... 2,450
Materials .............................................................. 55,050
Materials requisitioned.
(c) Payroll ....................................................................... 53,300
FICA Tax Payable ................................................ 4,264
Employees Income Tax Payable.......................... 5,330
Wages Payable .................................................... 43,706
Recording wages payable.
Work in Process ........................................................ 25,500

Salaries ..................................................................... 18,300
Payroll .................................................................. 53,300
Payroll distribution to work in process and overhead.
P4-20R Continued
Factory Overhead ...................................................... 4,550

Payroll Tax ExpenseSalaries ................................. 2,379
FICA Tax Payable ................................................ 4,264
Federal Unemployment Tax Payable. .................. 533
State Unemployment Tax Payable ....................... 2,132
Record employer payroll taxes.
(d) Factory Overhead ...................................................... 4,230
Misc. Selling & Admin. Expense ................................ 1,500
FICA Tax Payable ..................................................... 3,120
Employees Income Tax Payable ............................... 5,200
Cash ..................................................................... 14,050
Paid expenses.
(e) Factory Overhead ...................................................... 900
Depreciation ExpenseOffice Equipment ................ 175
Accumulated DepreciationFactory Building ...... 267
Accumulated Depreciation
Machinery & Equipment ....................................... 633
Accumulated Depreciation
Office Equipment.................................................. 175
To record depreciation.
(f) Factory Overhead ...................................................... 120
Prepaid Insurance ................................................ 120
To record expired insurance.
(g) Factory OverheadStamping ................................... 9,768.40
Factory OverheadPlating ....................................... 6,559.80
Factory OverheadPower ........................................ 2,214.10
Factory OverheadMaintenance .............................. 3,207.70
Factory Overhead ................................................ 21,750.00
To distribute factory overhead to departments.
(h) Factory OverheadStamping ................................... 1,728.14
Factory OverheadPlating ....................................... 697.91
Factory OverheadPower ........................................ 781.65
Factory OverheadMaintenance ........................ 3,207.70
To distribute maintenance overhead to other
departments.
Factory OverheadStamping ................................... 1,497.88
Factory OverheadPower ................................... 2,995.75
To distribute power overhead to producing
departments.
P4-20R Continued
(i) Work in Process ........................................................ 22,000.00

Applied Factory OverheadStamping................. 10,500.00
Applied Factory OverheadPlating ..................... 11,500.00
To apply overhead to work in process.
Stamping 2,100 DLH $ 5.00 = $10,500
Plating 600 DLH $19.1667= $11,500
Applied Factory Overhead---Stamping ...................... 10,500.00
Applied Factory Overhead---Plating ........................ 11,500.00
Factory OverheadStamping ............................. 10,500.00
Factory Overhead----Plating ................................ 11,500.00
To transfer applied overhead to actual overhead
Factory OverheadStamping ............................. 2,494.42
Under- and Overapplied Overhead ...................... 250.00
To transfer under- and overapplied overhead to
under- and overapplied account.
(j) Finished Goods ......................................................... 78,700.00
Work in Process ................................................... 78,700.00
To record goods finished during October.
(k) Accounts Receivable ................................................. 43,140.00
Sales .................................................................... 43,140.00
Cost of Goods Sold ................................................... 28,760.00
Finished Goods .................................................... 28,760.00
To record October sales and cost of goods
sold.
(l) Cash .......................................................................... 55,500.00
Accounts Receivable ........................................... 55,500.00
To record October cash receipts.
(m) Wages Payable ......................................................... 43,706.00
Cash .................................................................... 43,706.00
Paid payroll.
P4-20R Continued
5. Service Department Expense Distribution
Service Department Expense Distribution Work Sheet

Description Maintenance Power Stamping Plating Total
Direct costs ............ $3,207.70 $2,214.10 $ 9,768.40 $6,559.80 $21,750.00
Maintenance
Distribution
$.0886227 per
adj. sq. ft.
Power8,820 sq. ft. ................ 781.65
Stamping19,500 sq. ft. ......... 1,728.14
Plating7,875 sq. ft................. 697.91
$2,995.75
PowerDistribution
basis arbitrary
Stamping50% ..................... 1,497.88
Plating50% ..................... 1,497.87
Total $12,994.42 $8,755.58 $21,750.00
6.
a. Material SummaryOctober 31
Unit
Unit Cost Total
Material ............................... 220 $26 $ 5,720

Material B ............................. 620 17 10,540
Material C ............................. 380 26 10,640
Factory Supplies ................. 2,550
Total $29,450
Finished Goods SummaryOctober 31
Total
Job 1001 ............................... $58,690
Work in Process SummaryOctober 31
Total
Job 1002 ............................... $25,000
P4-20R Continued
6.
b. Custom Chrome, Inc.
Direct materials:
Inventory, October 1. ............................... $15,000
Purchases......................................................................... 69,500
Total cost of materials available ....................................... $84,500
Inventory, October 31 ....................................................... 29,450
Cost of materials used ...................................................... $55,050
Less: indirect materials used ............................................ 2,450
Direct materials used ................................................................................... $ 52,600
Direct labor .................................................................................................. 25,500
Applied factory overhead ............................................................................. 22,000
Total manufacturing cost ............................................................................. $ 100,100
Add work in process inventory, October 1 ............................................ 3,600
Total .................................................................................................. $103,700
Less work in process inventory, October 31.. 25,000
Cost of goods manufactured $78,700
Less work in process inventory, October 31 .......................................... $78,700
Custom Chrome, Inc.

Income Statement
Net sales...................................................................... $43,140
Less cost of goods sold:
Finished goods inventory, October 1 ................ $ 8,750
Add cost of goods manufactured ...................... 78,700
Goods available for sale ................................... $ 87,450
Less finished goods inventory, October 31 ....... 58,690
Cost of goods sold ................................................ 28,760
Gross margin on sales ................................................ $ 14,380
Operating expenses:
Salaries ................................................................. $ 18,300
Payroll tax expensesalaries .............................. 2,379
Miscellaneous selling and admin. expense ........... 1,500
Depreciation expenseoffice equipment ............. 175
Total operating expenses ............................................ 22,354
Net loss........................................................................ $ (7,974)
P4-20R Concluded
Custom Chrome, Inc.
Balance Sheet
October 31,2013
Assets
Current assets:
Cash ................................................................. $20,244
Accounts receivable ......................................... 9,340
Finished goods ................................................. 58,690
Work in process ............................................... 25,000
Materials........................................................... 29,450
Prepaid insurance ............................................ 4,200
Total current assets ...................................... $146,924
Property, plant, and equipment:
Factory building ................................. $64,000
Less accumulated
depreciation ............................. 22,767 $41,233
Machinery and equipment ................. $38,000
Less accumulated
depreciation ............................. 16,633 21,367
Office equipment ............................... $10,500
Less accumulated
depreciation ............................. 7,675 2,825
Total property, plant, and equipment ........................... 65,425
Total assets ................................................................ $212,349
Liabilities
Accounts payable .................................................. $72,000
FICA tax payable ................................................... 8,528
Federal unemployment tax payable ...................... 897
State unemployment tax payable .......................... 3,536
Employees income tax payable ............................. 5,330
Deferred credit-overapplied factory overhead* ...... 250
Total liabilities .............................................................. $90,541
Stockholders Equity
Capital stock ................................................................ $75,000
Retained earnings, October 31 .................................... 46,808**
Total stockholders equity ...................................... 121,808
Total liabilities and stockholders equity ....................... $212,349
* Any balance in an under-or- overapplied overhead account will be disposed of at the
end of the period.
** $54,782-$(7,974)
MINI-CASE
1. Direct labor support---direct labor hours

Machine support----machine hours
Setup costs-----machine setups
Design costs---design changes
2. Direct labor support = $300,000/100,000 dl hrs. = $3/dlhrs.

Machine support = $400,000/50,000 mh. hrs. = $8/mh. hr.
Setup costs = $200,000/1,000 setups = $200 per setup
Design costs = $100,000/250 design changes = $400/design change
3.
Item Standard Deluxe

Direct materials .......................................................... $30.00 $50.00
Direct labor ................................................................ 17.50 37.50
Direct labor support:
($3 x 60,000) / 10,000 ................................................ 18.00
($3 x 40,000) / 2,000 .................................................. 60.00
Machine support:
($8 x 30,000) / 10,000 ................................................ 24.00
($8 x 20,000) / 2,000 .................................................. 80.00
Setup costs:
($200 x 200) / 10,000 ................................................. 4.00
($200 x 800) / 2,000 ................................................... $80.00
Design changes:
($400 x 50) / 10,000 ................................................... 2.00
($400 x 200) / 2,000 ................................................... 40.00
Total per unit cost....................................................... $95.50 $347.50
4. Product costs are so dramatically different because the plant-wide overhead rate on-
ly uses direct labor cost as the allocation base. Since five times as many standard
units are produced as compared to deluxe units, significantly more labor dollars and,
thus, overhead costs would be assigned to the standard model. However, this ap-
proach ignores the fact that deluxe units are more complex and require more ma-
chine time, more design changes, and a greater number of setups because they are
made in small production runs.
5. Yes. The new selling prices would be:
Standard Deluxe
Cost per unit .......................................... $95.50 $ 347.50
Markup (50%) ........................................ 47.75 173.75
Selling price ........................................... 143.25 $521.25
INTERNET EXERCISE
1. If machine hours were used to allocate most of the overhead, Product 366, the high-
volume product, would be allocated most of the overhead even though it did not
require any testing, engineering, and setup activities. Using activity-based costing,
Product 124 that consumes many of the special activities would be charged with a
greater share of the overhead cost.
2. Activity-based costing has grown in importance in recent decades because (1) man-
ufacturing overhead costs have increased significantly, the manufacturing overhead
costs no longer correlate with the productive machine hours or direct labor hours,
(3) the diversity of products and the diversity in customers demands have grown,
and (4) some products are produced in large batches, while others are produced in
small batches.
3. When a batch-level cost, such as setup costs, is allocated to a batch of products it

is known as a Stage 1 allocation. A Stage 2 allocation occurs when the batch-
level costs are allocated to the individual units within the batch.
4. When all of the overhead is allocated using a volume-related allocation base such as
machine hours, a job that is for a great number of units, such as the 50,000 units in
this example, will be charged with a very large amount of overhead whether or not it
consumes many special overhead activities.
5. If a company knows the overhead cost associated with setting up a machine, it can
then ask activity-based management questions such as: Why is the cost of setting
up this machine so expensive?, What can be done to reduce the setup costs?, and If
the setup costs cannot be reduced, are the selling prices adequate to cover all of the
companys costs and earn a satisfactory profit?
CHAPTER 5
QUESTIONS
1. The two basic systems of cost accounting c. The factory overhead charged to jobs is
are the job order cost system and the proc- usually based on a predetermined rate
ess cost system. The job order cost system under a job order cost system. Under a
may be used advantageously when goods process cost system, these costs are
are produced in lots of predetermined gathered and distributed to departments,
quantity usually based on customers and a predetermined rate for each
specifications. The process cost system may department is used to apply overhead to
be used advantageously when goods are Work in Process.
produced continuously as in the case of 7. The primary objective in accumulating costs
mass production industries. by departments is to determine the amount
2. Job Order Cost System of manufacturing expenses to be borne by
items b, c, f the product as it passes through each de-
Process Cost System partment or process. This facilitates better
items a, d, e, g, h control by making available unit costs of
production for each department, which can
3. Answers will vary, but may include: clothing
then be compared to unit costs in prior
(Levi Strauss), beverages (Coca Cola), food
periods and to budgeted costs for the
(General Mills), petroleum (ExxonMobil),
current period.
and pharmaceuticals (Merck & Co.).
4. In a job order cost system, (a) costs are ac- 8. Equivalent production represents the
cumulated by specific jobs or orders, and (b) number of whole units that could have been
unit costs are calculated at the time the job completed during the period, given the
or order is finished. In a process cost sys- amount of work that was performed. For
tem, (a) costs are accumulated by proc- example, if 1,000 units are completed during
esses or departments, and (b) unit costs are the period and there are 500 units in
calculated at the end of a given period, process estimated to be one-half completed
usually a month, for each process or at the end of the period, equivalent
department. production in whole units is 1,250 units [
1,000 + (500 x .50) ].
5. The term unit cost refers to the average
cost of producing each unit manufactured 9. It is necessary to estimate the stage of com-
during a given period; the term job cost pletion of work in process at the end of the
refers to the cost of producing each job accounting period so that the costs incurred
completed or fully manufactured during a during the period may be properly allocated
given period. A job may consist of any num- between the goods finished during the pe-
ber of units. riod and those in process at the end of the
6. a. In accounting for materials under a job period.
order cost system, the costs, as deter- 10. If the estimate of the stage of completion of
mined from materials requisitions, are work in process is too high, the figure repre-
charged to specific jobs (direct materials) senting equivalent production would be
or to factory overhead (indirect overstated and, therefore, the unit cost for
materials). Under a process cost system, the month would be too low. As a result, the
these costs are charged to the de- uncompleted units would absorb more than
partments to which the materials were their appropriate share of total costs and the
issued. goods finished would be charged for less
b. The cost of labor under a job order cost than the correct amount of costs. The unit
system is charged to specific jobs worked cost of finished goods would be understated.
on (direct labor) or to factory overhead
(indirect labor). The cost of labor under a
process cost system is charged to the
departments in which the work was done.
163
Conversely, if the estimate of the stage of 14. No. The calculation of unit cost in a depart-
completion of work in process was too low, ment subsequent to the first considers only
the figure representing equivalent production those costs incurred for materials, labor, and
would be understated and, therefore, the factory overhead added during the month in
unit cost for the month would be too high. As that department and the equivalent units
a result, the uncompleted units would produced in that department. However, a
absorb less than their appropriate share of separate computation is made for the
total costs and the good finished would be transferred-in costs and it is added to the
charged more than the correct amount of cost of the goods transferred out.
costs.
15. Yes. In determining the costs transferred
11. The production report shows the number of
from a second department to a third, all prior
units (1) in process at the beginning of the
departments costs must be considered. The
period, as well as the stage of completion,
costs from the first department would also
(2) placed in process or received from a
be included in the computation of the ending
prior department during the period,
work in process in the second department.
(3) completed or transferred to a subsequent
department during the period, and (4) in 16. Goods that are finished but still on hand in a
process at the end of the period, as well as department at the end of the month are ac-
the stage of completion. counted for as goods completed and on
hand on the cost of production report, and
12. The four main sections of a cost of
as finished goods for financial statement
production summary are (1) the costs to be
purposes.
accounted for, (2) the equivalent production
(unit output) for the period, (3) the 17. If the prior departments transfers from two
computation of unit costs for the period, and different periods have different unit costs
(4) the summary of production costs each month, these previous department
accounted for (inventory costs). costs must be averaged as a separate
grouping so that these transferred-in costs
13. In a single-department factory, units trans-
can be properly allocated to the products
ferred out are moved to the stockroom as
being produced in the department to which
finished goods. In a multiple-department fac-
they were transferred.
tory, the units transferred out of the first de-
partment are considered to be raw materials
that will be added at the beginning of a
second departments processing opera-tions.
EXERCISES
E5-1
Equivalent
Units
a. Completed during month .................................... 10,000
Equivalent units of work in process, end of period:
(5,000 units, one-half completed) ................ 2,500 12,500
b. Completed during month .................................... 22,000

(4,000 units, three-fourths completed) ......... 3,000 25,000
c. Completed during month .................................... 8,000

1,000 units, one-fourth completed ............... 250
500 units, two-fifths completed .................... 200 450 8,450
d. Completed during month .................................... 25,000

5,000 units, one-half completed................... 2,500
5,000 units, three-fourths completed ........... 3,750 6,250 31,250
e. Completed during month .................................... 48,000

1,500 units, four-fifths completed................. 1,200
4,000 units, one-fourth completed ............... 1,000 2,200 50,200
E5-2
a. Beginning units in process ................................. 600

Units started in production.................................. 8,000 8,600
Less units transferred to finished goods ...... 8,600
Ending units in process ......................... 0
Units finished during month ......................... 8,600
Ending equivalent units in process .............. 0
Equivalent units .................................... 8,600
E5-2 Continued
b. Beginning units in process .................................. 900

Units started in production .................................. 6,500 7,400
Less ending units in process ........................ 400
Units transferred to finished goods ........ 7,000
Units transferred to finished goods ..................... 7,000
Ending equivalent units in process
(400 units, one-half completed) .................... 200
Equivalent units ..................................... 7,200
c. Units transferred to finished goods ..................... 12,900

Ending units in process ....................................... 1,200 14,100
Less beginning units in process ................... 1,500
Units started in production .................................. 12,600
(1,200 units, one-fourth completed) ............. 300
d. Units transferred to finished goods ..................... 7,200

Ending units in process ....................................... 150 7,350
Less units started in production .......................... 7,250
Beginning units in process ........................... 100
e. Units transferred to finished goods ..................... 8,200

Ending units in process ....................................... 200 8,400
Units started in production............................ 8,400
Beginning units in process ..................... 0
E5-2 Concluded
f. Beginning units in process ................................. 400

Units started in production.................................. 6,200 6,600
Units transferred to finished goods .............. 6,200
Ending units in process ......................... 400
Equivalent units .................................................. 6,300
Equivalent ending units in process completed* 100
*Equivalent ending units in process = 100

Ending units in process 400
E5-3
Cost Element Production Cost Unit Output Unit Cost

Materials $ 45,000 20,000 $ 2.250
Labor 36,000 20,000 1.800
Factory overhead 22,500 20,000 1.125
Total $ 103,500 $ 5.175
E5-4
Materials $ 18,900 10,000* $ 1.890
Labor 44,100 10,000 4.410
Factory overhead 26,250 10,000 2.625
Total $ 89,250 $ 8.925
*Units completed and transferred ......................................... 8,000

3,000 units in process, two-thirds completed ...................... 2,000
Unit output for the month ..................................................... 10,000
E5-5
Production Cost
Beginning Work Cost for Unit Unit
Cost Element In Process Month Total Output Cost
Materials $ 1,250 $ 99,150 $ 100,400 40,000* $ 2.51
Labor 675 54,925 55,600 40,000 1.39
Factory overhead 950 75,050 76,000 40,000 1.90
Total $ 2,875 $ 229,125 $ 232,000 $ 5.80
*Units completed and transferred......................................... 38,500

3,000 units in process, one-half completed ........................ 1,500
Unit output for the month ................................................... 40,000
E5-6
Production Cost
Cost Element In Process Month Total Output Cost
Materials $ 2,500 $130,000 $ 132,500 47,500* $ 2.789
Labor 1,400 70,000 71,400 47,500 1.503
Factory overhead 1,800 82,000 83,800 47,500 1.764
Total $ 5,700 $ 282,000 $ 287,700 $ 6.056
*Units completed and transferred......................................... 45,000

5,000 units in process, one-half completed ........................ 2,500
Unit output for the month ................................................... 47,500
E5-7
Units in process at beginning of month ................................... 500
Units started in process and finished ...................................... 2,000
Units completed during month ................................................ 2,500
2,500 $1.20 = $ 3,000 credited to Work in Process at end of month

Current costs = 2,655 debited to Work in Process during month
$ 345 balance in Work in Process at beginning of month
(There are no units in process at the end of the month, so there would be no balance
remaining in Work in Process at the end of the month.)
500 units, three-fifths completed at the beginning of the month equals the equivalent
of 300 fully completed units.
$345 300 = $1.15 unit cost for the prior month.
E5-8
Materials $ 8,800 10,000 $ .88
Labor 7,200 10,000 .72 (a)
Factory overhead 8,800 10,000 .88
Total $ 24,800 $ 2.48
Transferred from
Assembly 30,000 10,000 3.00
Total $ 54,800 5.48 (b)
E5-9
Atlanta Appliance, Inc.
Materials.$8,800
Labor.7,200
Factory overhead8,800
Total manufacturing costs $24,800
Add work in process inventory, January 1.. 30,000
Total in process $54,800
Less work in process inventory, January 31 -0-
Cost of goods manufactured during the month $54,800
E5-10
Materials $ 6,000 15,000 $ .40
Labor 9,000 15,000 .60 (a)
Factory overhead 12,000 15,000 .80
Total $ 27,000 $ 1.80
Transferred from
Immersion 25,000 15,000 1.67
Total $ 52,000 3.47 (b)
E5-11
Amarillo Adhesives, Inc.
Materials.$6,000
Labor.9,000
Factory overhead 12,000
Total manufacturing costs $27,000
Add work in process inventory, January 1.. 25,000
Total in process $52,000
Less work in process inventory, January 31 -0-
Cost of goods manufactured during the month $52,000
E5-12
Account
Transaction Debit Credit
Purchase of materials and Materials Accounts Payable
supplies
Materials and supplies Work in Process Materials
issued to the factory (for each department)
Factory Overhead
(for indirect materials)
Labor cost incurred Work in Process Wages Payable
(for each department)
Factory Overhead
(for indirect labor)
Other costs incurred Factory Overhead various accounts
Distribution of factory Factory Overhead Factory Overhead
overhead to departments (for each department)
Factory overhead applied Work in Process Factory Overhead
(for each department) (for each department)
Units transferred from one Work in Process Work in Process
department to another (receiving department) (transferring department)
Units completed Finished Goods Work in Process
(last department)
Units sold A/R and Cost of Goods Sold Sales and Finished Goods
E5-13
a.

Cost Element in Process Month Total Output Cost
Materials $ 200 $ 3,328 $ 3,528 8,400 * $ 0.42
Labor 500 10,000 10,500 8,400 1.25
Factory overhead 300 6,672 6,972 8,400 .83
Total $ 1,000 $ 20,000 $ 21,000 $ 2.50
* Units completed and transferred.............................................................. 8,200

600 units in process, 1/3 completed ........................................................ 200
Unit output for the month ......................................................................... 8,400
b. Cost in Mixing (8,200 $10.00*) ............................................................. $ 82,000

Cost in Blending (8,200 $2.50) ............................................................. 20,500
Cost of goods transferred to finished goods ............................................ $102,500
* $78,000 7,800 = $10/unit
c. Cost in Mixing (600 $10)....................................................................... $ 6,000

Cost in Blending:
Materials (600 1/3 $0.42) ............................................................. 84
Labor (600 1/3 $1.25)................................................................... 250
Factory Overhead (600 1/3 $0.83) ............................................... 166
Cost of ending work in process inventory ........................................... $ 6,500
E5-14
1.
Cost of Production Summary
Blending Department
January 31, 2013
Cost of work in process, beginning of month:
Cost in Mixing$10,000
Cost in Blending:
Materials.$ 200
Labor. 500
Factory Overhead. 300 1,000 $11,000
Cost of goods received from Mixing during the month 78,000

Cost of production for month-Blending:
Materials $3,328
Labor.. 10,000
Factory Overhead.. 6,672 20,000
Total costs to be accounted for. $109,000

Unit output for month:
Finished and transferred to finished goods 8,200
Equivalent units of work in process, end of month,
(600 units, 1/3 complete). 200
Total equivalent production. 8,400
Unit cost for month:
Materials [($200 + $3,328) / 8,400].$.42
Labor [($500 + $10,000) / 8,400].1.25
Factory overhead [($300 + $6,672) / 8,400] .83
Total$2.50
Inventory costs:
Cost of goods finished and transferred to finished goods:
Cost in Mixing (8,200 x $10)$82,000
Cost in Blending (8,200 x $2.50) 20,500
(8,200 x $12.50).. $102,500
Cost of work in process, end of month:
Cost in Mixing (600 x $10).$6,000
Cost in Blending:
Materials (600 x 1/3 x $.42). $84
Labor (600 x 1/3 x $1.25)250
Factory overhead (600 x 1/3 x $.83). 166 500 6,500
Total production costs accounted for $109,000
2. Finished Goods..102,500
Work in Process-Blending.. 102,500
E5-15
a.

Cost Element in Process Month Total Output Cost
Materials $ 600 4,800 $ 5,400 15,000 $ 0.36
Labor 1,500 15,000 16,500 15,000 1.10
Factory overhead 900 9,600 10,500 15,000 .70
Total $ 3,000 $ 29,400 $ 32,400 $ 2.16
* Units completed and transferred .............................................................. 13,000

3,000 units in process, 2/3 completed ...................................................... 2,000
Unit output for the month .......................................................................... 15,000
b. Cost in Assembly (13,000 $6.00*) ......................................................... $ 78,000

Cost in Finishing (13,000 $2.16) ........................................................... 28,080
Cost of goods transferred to finished goods ............................................. $106,080
* $84,000 14,000 = $6/unit
c. Cost in Assembly (3,000 $6) ................................................................ $ 18,000

Cost in Finishing:
Materials (3,000 2/3 $0.36) .......................................................... 720
Labor (3,000 2/3 $1.10)................................................................ 2,200
Factory Overhead (3,000 2/3 $0.70) ............................................ 1,400
Cost of ending work in process inventory ........................................... $ 22,320
E5-16
1.
Finishing Department

Cost in Assembly$12,000
Cost in Finishing:
Materials.$ 600
Labor 1,500
Factory Overhead. 900 3,000 $15,000
Cost of goods received from Assembly during the month 84,000

Cost of production for month-Finishing:
Materials$4,800
Labor..15,000
Factory Overhead.. 9,600 29,400
Total costs to be accounted for.$128,400
Finished and transferred to finished goods 13,000
Equivalent units of work in process, end of month,
(3,000 units, 2/3 complete)2,000
Total equivalent production 15,000
Materials [($600 + $4,800) / 15,000.$.36
Labor [($1,500 + $15,000) / 15,000 1.10
Factory overhead [($900 + $9,600/ 15,000] .70
Total$2.16
Inventory costs:
Cost of goods finished and transferred to finished goods:
Cost in Assembly (13,000 $6)$78,000
Cost in Finishing (13,000 $2.16) 28,080
(13,000 $8.16).. $106,080
Cost in Assembly (3,000 $6).$18,000
Cost in Finishing:
Materials (3,000 2/3 $.36). $720
Labor (3,000 2/3 $1.10) 2,200
Factory overhead (3,000 2/3 $.70). 1,400 4,320 22,320
2. Finished Goods..106,080
Work in Process-Finishing.. 106,080
E5-17
Units Cost
Beginning inventory.. 1,000 $ 21,200
Transferred in this month 5,000 100,000
Total6,000 $121,200
Adjusted unit cost from prior department = $121,200 / 6,000 = $20.20 (the units
transferred to Finishing and the number of units in ending work in process have no
effect on the solution.)
PROBLEMS
P5-1
Superior Products Co.
For the Month Ended February 28, 20--
Cost of production for month:

Materials .......................................................................... $ 30,000
Labor ............................................................................. 20,000
Factory overhead ............................................................ 40,000
Total costs to be accounted for ................................. $ 90,000

Finished and transferred to finished goods during month 60,000
Equivalent units of work in process, end of month
(10,000 units, one-fourth completed) .............................. 2,500
Total equivalent production ...................................... 62,500

Materials ($30,000 62,500) ........................................... $ .48
Labor ($20,000 62,500) ................................................ .32
Factory overhead ($40,000 62,500) .............................. .64
Total .......................................................................... $ 1.44
Inventory costs:
Costs of goods finished and transferred to finished goods
during month (60,000 $1.44)......................................... $86,400
Materials (10,000 1/4 $0.48)................................ $ 1,200
Labor (10,000 1/4 $0.32) ..................................... 800
Factory overhead (10,000 1/4 $0.64) .................. 1,600 3,600
Total production costs accounted for ...................................... $ 90,000
P5-2
Erin Company
For the Month Ended October 31, 20--

Materials .......................................................................... $ 2,600
Labor ............................................................................. 2,300
Factory overhead............................................................. 1,000 $ 5,900

Materials .......................................................................... $ 10,000
Labor ............................................................................. 7,500
Factory overhead............................................................. 6,000 23,500

(2,000 units, one-half completed) .................................... 1,000
Total equivalent production ....................................... 14,000

Materials ($2,600 + $10,000) 14,000 ............................ $ 0.90
Labor ($2,300 + $7,500) 14,000 ................................... .70
Factory overhead ($1,000 + $6,000) 14,000 ................ .50
Total .......................................................................... $ 2.10
Inventory costs:
during month (13,000 $2.10) ........................................ $ 27,300
Materials (2,000 1/2 $0.90) ................................. $ 900
Labor (2,000 1/2 $0.70)....................................... 700
Factory overhead (2,000 1/2 $0.50) .................... 500 2,100
P5-3
Maxsim Company
For the Month Ended March 31, 20--

Materials .......................................................................... $ 5,200
Labor ............................................................................. 4,600
Factory overhead ............................................................. 2,000 $ 11,800

Materials .......................................................................... $ 20,000
Labor ............................................................................. 15,000
Factory overhead ............................................................. 12,000 47,000

(3,000 units, two-thirds completed) .................................. 2,000

Materials ($5,200 + $20,000) 20,000 ............................ $ 1.26
Labor ($4,600 + $15,000) 20,000 ................................. .98
Factory overhead ($2,000 + $12,000) 20,000 ............... .70
Total .......................................................................... $ 2.94
Inventory costs:
during month (18,000 $2.94)......................................... $ 52,920
Material (3,000 2/3 x $1.26). $ 2,520
Labor (3,000 2/3 $0.98) ....................................... 1,960
Factory overhead (3,000 2/3 $0.70) .................... 1,400 5,880
P5-4
P5-5
Military, Inc.
Cost of Production Summary--Bravo
For the Month Ended May 31, 20__
Cost of goods received from Alpha during month(10,000 x $2.50). $25,000
Cost of production for monthBravo:

Materials$6,000
Labor.. 3,000
Factory overhead. 9,000 18,000
Total cost to be accounted for $43,000*
Finished and transferred to Charlie during month.. 8,000
Equivalent units of work in process, end of month (2,000 units, complete) . 500
Total equivalent production .8,500
Unit cost for monthBravo:
Materials ($6,000 / 8,500)$.706
Labor ($3,000 / 8,500)................................... .353
Factory overhead ($9,000 / 8,500)..1.059
Total. $2.118
Inventory costs:
Cost of goods finished and transferred to Charlie during month:
Cost in Alpha (8,000 $2.50).. $20,000
Cost in Bravo (8,000 $2.118) 16,944
(8,000 $4.618) $36,944

Cost in Alpha (2,000 $2.50)$5,000
Cost in Bravo:
Materials [(2,000 ) $.706].$353
Labor [ (2,000 ) $.353].. 177
Factory overhead [ (2,000 ) $1.059].530 1,060 6,060
Total production costs accounted for$43,004*

*rounding difference
P5-6
NYC, Inc.
Cost of Production Summary--Brooklyn
For the Month Ended May 31, 20--__
Cost of goods received from Bronx during month (15,000 $3.00). $45,000
Cost of production for monthBrooklyn:

Materials$9,000
Labor.. 6,000
Factory overhead.12,000 27,000
Total cost to be accounted for$72,000*
Finished and transferred to Queens during month. 12,000
Equivalent units of work in process, end of month (3,000 units, 2/3
complete) 2,000
Total equivalent production 14,000
Unit cost for monthBrooklyn:
Materials($9,000/14,000) $.643
Labor ($6,000 / 14,000).............. .429
Factory overhead ($12,000 /14,000).. .857
Total $1.929
Inventory costs:
Cost of goods finished and transferred to Queens during month:
Cost in Bronx (12,000 $3.00)..$36,000
Cost in Brooklyn (12,000 $1.929)23,148
(12,000 $4.929).. $59,148

Cost in Bronx (3,000 $3.00) $9,000
Cost in Brooklyn:
Materials [(3,000 2/3) $.643].$1,286
Labor [(3,000 2/3) $.429].. 858
Factory overhead [(3,000 2/3) $.857. 1,714 3,858 12,858
Total production costs accounted for. $72,006*
P5-7
Phillies Manufacturing Co.
Cost of Production SummaryCutting

Materials .......................................................................... $ 30,000
Labor ............................................................................. 16,000
Factory overhead............................................................. 14,000
Started in process and transferred to Shaping
during month.................................................................... 5,400
(1,200 units, one-half completed) .................................... 600
Materials ($30,000 6,000) ............................................. $ 5.000
Labor ($16,000 6,000) .................................................. 2.667
Factory overhead ($14,000 6,000) ............................... 2.333
Total .......................................................................... $ 10.000
Inventory costs:
Costs of goods finished and transferred to Shaping
during month (5,400 $10) ............................................. $ 54,000
Materials (1,200 1/2 $5.000) ............................... $ 3,000
Labor (1,200 1/2 $2.667)..................................... 1,600
P5-7 Continued

Cost of Production SummaryShaping
Cost of goods received from Cutting during month

(5,400 units $10) ........................................................... $ 54,000
Materials .......................................................................... $ 1,200
Labor ............................................................................. 6,000
Factory overhead ............................................................. 4,800
Total .......................................................................... 12,000
Total costs to be accounted for ............................................... $ 66,000

Finished and transferred to Finishing during month ......... 4,400
(1,000 units, two-fifths completed) ............................. 400
Materials ($1,200 4,800) ............................................... $ 0.25
Labor ($6,000 4,800) .................................................... 1.25
Factory overhead ($4,800 4,800) .................................. 1.00
Total .......................................................................... $ 2.50
Inventory costs:
Costs of goods finished and transferred to Finishing:
Cost in Cutting (4,400 $10.00) ........................... $ 44,000
Cost in Shaping (4,400 2.50)........................... 11,000
(4,400 $12.50) ........................... $ 55,000
Cost in Cutting (1,000 $10.00)................................ $ 10,000
Cost in Shaping (1,000 2/5 $2.50) ....................... 1,000 11,000
P5-7 Concluded

Cost of Production SummaryFinishing
Cost of goods received from Shaping during month

(4,400 units $12.50)...................................................... $ 55,000
Materials .......................................................................... $ 6,300
Labor .............................................................................. 4,200
Total .......................................................................... 16,800
Total costs to be accounted for............................................... $ 71,800

(400 units, one-half completed) ................................. 200
Materials ($6,300 4,200) ............................................... $ 1.50
Labor ($4,200 4,200) .................................................... 1.00
Factory overhead ($6,300 4,200) ................................. 1.50
Total .......................................................................... $ 4.00
Inventory costs:
Costs of goods finished and transferred to finished goods:
Cost in Cutting (4,000 $10.00) ......................... $ 40,000
Cost in Shaping (4,000 2.50) ......................... 10,000
Cost in Finishing (4,000 4.00) ......................... 16,000
(4,000 $16.50) ......................... $ 66,000

Cost in Cutting (400 $10.00) .................................. $ 4,000
Cost in Shaping (400 $2.50) .................................. 1,000
Cost in Finishing (400 1/2 $4.00) ........................ 800 5,800
P5-8
1. Work in ProcessCutting ............................................... 30,000
Work in ProcessShaping .............................................. 1,200
Work in ProcessFinishing ............................................ 6,300
Materials .................................................................... 37,500
Work in ProcessCutting ............................................... 16,000
Work in ProcessShaping ............................................. 6,000
Payroll ....................................................................... 26,200
Work in ProcessCutting ............................................... 14,000
Work in ProcessCutting ........................................ 54,000
Work in ProcessShaping ....................................... 55,000
Finished Goods ............................................................... 66,000
Work in ProcessFinishing ..................................... 66,000
2.

Materials ......................................................................................................... $37,500

Labor............................................................................................................... 26,200
Factory overhead ............................................................................................ 25,100
Total ................................................................................................................ $88,800
Less work in process inventories, July 31 ................................................ 22,800*
Cost of goods manufactured during the month ............................................... $66,000
* $6,000 (Cutting) + $11,000 (Shaping) + $5,800 (Finishing)
P5-9
Costs in Cooking Dept.

Unit Cost from Factory Total Cost
Units Cost Mixing Overhead
Materials Labor
Dept.
In process,
Beginning of
Month. 4,000 $2.15 $ 8,600 $ 500 $ 1,000 $ 2,500 $ 12,600
Recd from
Mixing Dept.
During month... 10,000 $2.50 25,000 $ 25,000
Cost incurred
This month. 4,250 8,500 21,250 34,000
Total units and
costs to be
accounted for... 14,000 $ 33,600 $ 4,750 $ 9,500 $ 23,750 $71,600**
Average cost
of units from
Mixing Dept.
($33,600
14,000).. $2.40 $ 2.40 (2)
Unit cost for
month in
Cooking
Dept. with
equivalent
production
of 13,000
units*.
$0.365 $.731 $1.827 2.923 (1)
Unit cost for
finished
goods $ 5.323 (3)
Assignment of
costs:
Units finished... 12,000 $2.40 $ 28,800 $ 4,380 $ 8,772 $ 21,924 $ 63,876
In process end (4)
of month (1/2
completed).. 2,000 $2.40 4,800 365 731 1,827 7,723
Total equiv.
units
and costs 14,000 $2.40 $ 33,600 $ 4,745** $ 9,503** $ 23,751** $71,599**
accounted for..
*Equivalent unitsCooking department
Finished during the month ............................................................... 12,000

Equivalent units in process, end of month (2,000 units,
one-half completed) .................................................................. 1,000
Equivalent units................................................................................ 13,000
** rounding difference
P5-10
Reynolds, Inc.
Cost of Production SummaryCutting
For the Month Ended May 31, 20--
Cost of work in process, May 1:

Materials........................................................................... $ 5,000
Labor ................................................................................ 6,450
Factory overhead ............................................................. 3,550 $ 15,000
Materials........................................................................... $ 37,000
Labor ................................................................................ 45,000
Finished and transferred to Grinding ................................ 15,000
Finished and on hand ....................................................... 5,000
Equivalent units of work in process, May 31
(5,000 units, one-fifth completed) .............................. 1,000
Total equivalent production ..................................... 21,000
Materials ($5,000 + $37,000) 21,000 ............................ $ 2.00
Labor ($6,450 + $45,000) 21,000 .................................. 2.45
Factory overhead ($3,550 + $50,000) 21,000 ............... 2.55
Total .......................................................................... $ 7.00
Inventory costs:
Costs of goods finished and transferred to Grinding
during month (15,000 $7.00) .................................. $ 105,000
Cost of goods finished and on hand
(5,000 $7.00) .......................................................... 35,000
Materials (5,000 1/5 $2.00).................................. $ 2,000
Labor (5,000 1/5 $2.45) ....................................... 2,450
Factory overhead (5,000 1/5 $2.55) .................... 2,550 7,000
P5-10 Continued
Reynolds, Inc.
Cost of Production SummaryGrinding

Cost in Cutting .............................................. $ 50,000
Cost in Grinding:
Materials................................................. $ 5,000
Labor ...................................................... 5,500
Factory overhead ................................... 3,500 14,000 $ 64,000
Cost of goods received from Cutting ................... 105,000

Cost of production in Grinding for month:
Materials ....................................................... $ 40,000
Labor............................................................. 44,000
Factory overhead .......................................... 37,000 121,000
Total costs to be accounted for .............. $ 290,000

Finished and transferred to finished goods ... 10,000
Equivalent units of work in process, May 31
(15,000 units, one-third completed) ............ 5,000
Total equivalent production .................... 15,000

Cost for Cutting:
Beginning inventory (10,000 units) ................. $ 50,000
Transferred in this month (15,000 units) ................. 105,000
Average cost per unit (25,000 units) ................. $ 155,000 $ 6.20
Cost in Grinding:
Materials ($5,000 + $40,000) 15,000 ............................ $ 3.00
Labor ($5,500 + $44,000) 15,000 ................................. 3.30
Factory overhead ($3,500 + $37,000) 15,000 ............... 2.70
Total ................................................................................. $ 9.00
P5-10 Concluded
Inventory costs:
Costs of goods finished and transferred:
Cost in Cutting (10,000 $ 6.20)........... $ 62,000
Cost in Grinding (10,000 9.00)........... 90,000
(10,000 $ 15.20)........... $ 152,000

Cost in Cutting (15,000 $6.20)................ $ 93,000
Materials (15,000 1/3 $3.00)................ $ 15,000
Labor (15,000 1/3 $3.30) ..................... 16,500
Factory overhead (15,000 1/3 $2.70) .. 13,500 45,000 138,000
P5-11
Mankato Manufacturing Co.
Cost of Production SummaryForming

Cost in Shaping ................................................................. $ 8,0001
Cost in Forming:
Materials........................................................ $ 5003
Labor ............................................................. 1,0003
Factory overhead .......................................... 7503 2,2502 $ 10,250
Cost of goods received from Shaping during month ................ 36,000
Materials............................................................................ $ 4,000
Labor ................................................................................. 8,000
Factory overhead .............................................................. 6,000 18,000
Total costs to be accounted for ................................................ $ 64,250
Finished and transferred to Finishing during month .......... 8,000
(3,000 units, one-third completed)4 ................................... 1,000
Total equivalent production ............................................... 9,000
P5-11 Continued
Materials ($500 + $4,000) 9,000 .................................... $ .50
Labor ($1,000 + $8,000) 9,000 ...................................... 1.00
Factory overhead ($750 + $6,000) 9,000 ....................... .75
Total ........................................................................... $ 2.25
Inventory costs:
Costs of goods finished and transferred to Finishing
during month:
Cost in Shaping (8,000 $4.00) ............................. $ 32,000
Cost in Forming (8,000 2.25) ............................. 18,000
(8,000 $6.25) ............................. $ 50,000

Cost in Shaping (3,000 $4.00)................................. $ 12,000
Cost in Forming:
Materials (3,000 1/3 $0.50) ................. $ 500
Labor (3,000 1/3 $1.00)....................... 1,000
Factory overhead (3,000 1/3 $0.75) .... 750 2,250 14,250
Total production costs accounted for ...................... $ 64,250

1
$36,000 9,000 = $4 unit cost for Shaping; $4 2,000 units = $8,000
2
$10,250 ($4 2,000) = $2,250 Forming cost in beginning work in process
3
Calculation of ratio:
$ 4,000 $ 18,000 = 22.22% $ 2,250 = $ 500 material cost in beginning
work in process
$ 8,000 $ 18,000 = 44.44 $ 2,250 = 1,000 labor cost in beginning
work in process
$ 6,000 $ 18,000 = 33.33 $ 2,250 = 750 factory overhead cost in be-
ginning work in process
$ 18,000 100.00%* $2,250
Beginning work in process ........................................... 2,000 units

Received from Shaping ................................................ 9,000 units
Total ............................................................................. 11,000 units
Units finished ............................................................... 8,000 units
Ending work in process ................................................ 3,000 units
Balance in work in process account $14,250 ($4 3,000) = $2,250 Forming cost in
ending work in process divided in same ratio as above calculation3
P5-11 Concluded
4
Beginning work in process = equivalent of 1,000 units
$2,250 1,000 units = $2.25 unit cost in Forming.

$2,250 3,000 units = $0.75 per unit charged to ending work in process.
$0.75 = 1/3 of $2.25 unit cost, so ending units in process must be one-third completed.
*Total is off .01% due to rounding.
P5-12
1. Work in Process---Forming..36,000
Work in Process---Shaping. 36,000
2. Work in Process---Forming..18,000
Materials.. 4,000
Payroll.. 8,000
Factory Overhead. 6,000
3. Work in Process---Finishing50,000
Work in Process---Forming. 50,000
P5-13R
1.
Ito Manufacturing Co.
Cost of Production SummaryMixing
For the Month Ended December 31, 20--

Materials .......................................................................... $ 1,470
Labor ............................................................................... 650
Factory overhead............................................................. 565 $ 2,685
Materials .......................................................................... $ 15,000
Labor ............................................................................... 4,750

Finished and transferred to Blending during month ......... 13,000
(2,000 units, one-fourth completed) .......................... 500

Materials ($1,470 + $15,000) 13,500 ............................ $ 1.22
Labor ($650 + $4,750) 13,500 ...................................... .40
Factory overhead ($565 + $5,240) 13,500 ................... .43
Total .......................................................................... $ 2.05
Inventory costs:
Costs of goods finished and transferred to Blending
during month (13,000 $2.05) .................................. $ 26,650
Materials (2,000 1/4 $1.22) ................................. $ 610
Labor (2,000 1/4 $0.40)....................................... 200
P5-13R Continued

Cost of Production SummaryBlending

Cost in Mixing .................................................................. $ 3,075
Cost in Blending:
Materials ......................................................... $ 240
Labor .............................................................. 905
Factory overhead............................................ 750 1,895 $ 4,970
Cost of goods received from Mixing during month .................. 26,650

Materials .......................................................................... $ 2,500
Labor ............................................................................. 8,000

Finished and transferred to Bottling during month ........... 10,000
Finished and on hand ...................................................... 500
(4,000 units, four-fifths completed) ............................ 3,200
Total equivalent production ..................................................... 13,700

Materials ($240 + $2,500) 13,700 ................................. $ 0.20
Labor ($905 + $8,000) 13,700 ...................................... .65
Factory overhead ($750 + $6,100) 13,700 .................... .50
Total .......................................................................... $ 1.35
P5-13R Continued
Inventory costs:
Costs of goods finished and transferred to Bottling
during month:
Cost in Mixing (10,000 $2.05) ...................... $ 20,500
Cost in Blending (10,000 1.35) ...................... 13,500
(10,000 $3.40) ...................... $ 34,000
Cost of goods finished and on hand:
Cost in Mixing (500 $2.05) ................................ $ 1,025
Cost in Blending (500 1.35) ................................ 675
(500 $3.40) ................................ 1,700
Cost in Mixing (4,000 $2.05) .................................. $ 8,200
Cost in Blending:
Materials (4,000 4/5 $0.20) ................. $ 640
Labor (4,000 4/5 $0.65) ...................... 2,080
Factory overhead (4,000 4/5 $0.50).... 1,600 4,320 12,520
Cost of Production SummaryBottling
Cost in Mixing .................................................................. $ 6,150
Cost in Blending .............................................................. 3,660
$ 9,810
Cost in Bottling:
Materials ............................................................... $ 900
Labor .................................................................. 3,100
Factory overhead.................................................. 3,080 7,080 $ 16,890
Cost of goods received from Blending .................................... 34,000
Materials .......................................................................... $ 1,500
Labor ............................................................................. 6,500
Finished and transferred to finished goods ...................... 11,000
(2,000 units, one-half completed) .............................. 1,000
P5-13R Continued

Cost from preceding department:*
Beginning inventory (3,000) ................... $ 9,810
Goods received during month (10,000) ................... 34,000
Average unit cost for goods (13,000) ................... $ 43,810 $ 3.37
Cost in Bottling:
Materials ($900 + $1,500) 12,000 ........................... $ 0.20
Labor ($3,100 + $6,500) 12,000 ............................. .80
Factory overhead ($3,080 + $7,000) 12,000 ........... .84
Total .......................................................................... $ 1.84
Inventory costs:
Costs of goods finished and transferred:
Cost in Mixing and Blending (11,000 $3.37) ......... $ 37,070
Cost in Bottling (11,000 1.84) ......... 20,240
(11,000 $5.21) ......... $ 57,310
Cost in work in process, end of month:
Cost in Mixing and Blending (2,000 $3.37) ............. $ 6,740
Cost in Bottling:
Materials (2,000 1/2 $0.20) ................. $ 200
Labor (2,000 1/2 $0.80) ...................... 800
Factory overhead (2,000 1/2 $0.84) .... 840 1,840 8,580
Total production costs accounted for ............................... $ 65,890
*Alternative calculation.
Detailed calculation of the average unit costs from other departments as follows:
Cost from
Units Mixing Blending
Units in process, beginning of month ........................... 3,000 $ 6,150 $ 3,660
Units received during month ........................................ 10,000 20,500 13,500
Total ............................................................................. 13,000 $ 26,650 $ 17,160
Unit cost ....................................................................... $ 2.05 $ 1.32
P5-13R Continued
2.

Departmental Cost Work Sheet
Cost Units Units Amount Amount
per Unit Received Transf. or Charged Credited
Analysis Transf. in Dept. on Hand to Dept. to Dept.
Mixing:
Opening inventory in
process.................. 2,500 $ 2,685
Started in process ....... 12,500
Costs for month:
Materials................ $1.22 15,000
Labor ..................... .40 4,750
Factory Overhead .43 5,240
Finished and trans-
ferred to Blending $2.05 13,000 $ 26,650
Closing work in
process.................. 2,000 1,025
Total ...................... 15,000 15,000 $ 27,675 $ 27,675
Blending:
process.................. 1,500 $ 4,970
Received during
Month from Mixing 13,000 26,650
Costs added during
Month:
Materials................ 0.20 2,500
Labor ..................... 0.65 8,000
Factory overhead 0.50 6,100
Finished and trans-
Ferred to Bottling... $3.40 10,000 $ 34,000
Completed and on
Hand...................... 500 1,700
Closing work in
process.................. 4,000 12,520
Total ...................... 14,500 14,500 $ 48,220 $ 48,220
P5-13R Continued

per Unit Received Transf. or Charged Credited
Analysis Transf. in Dept. on Hand to Dept. to Dept.
Bottling:
process .............. 3,000 $ 16,890
Received during
Month from 10,000 34,000
Blending
Costs added during
Month:
Materials ............ 0.20 1,500
Labor.................. 0.80 6,500
Factory overhead 0.84 7,000
Finished and
transferred to stock $ 5.24 11,000 $ 57,310
Closing work in
process .............. 2,000 8,580
Adjusting due to
averaging costs
from prior
department ......... (.03)
Total ................... $ 5.21 13,000 13,000 $ 65,890 $ 65,890
P5-13R Continued
Summary:
Materials:
Mixing ........................................................................ $ 15,000
Blending .................................................................... 2,500
Bottling ...................................................................... 1,500 $ 19,000
Labor:
Mixing ........................................................................ $ 4,750
Blending .................................................................... 8,000
Bottling ...................................................................... 6,500 19,250
Factory overhead:
Mixing ........................................................................ $ 5,240
Blending .................................................................... 6,100
Bottling ...................................................................... 7,000 18,340
Total production costs for December ..................................... $ 56,590

Add work in process, beginning of month:
Mixing .............................................................................. $ 2,685
Blending .......................................................................... 4,970
Bottling ............................................................................ 16,890 24,545
Total....................................................................................... $ 81,135
Deduct work in process, end of month:
Mixing ............................................................................. $ 1,025
Blending .......................................................................... 14,220
Bottling ............................................................................ 8,580 23,825
Cost of production, goods fully manufactured during
December .............................................................................. $ 57,310
3. Work in ProcessMixing ................................................ 15,000

Work in ProcessBlending ............................................. 2,500
Work in ProcessBottling ............................................... 1,500
Materials.................................................................... 19,000
Work in ProcessMixing ................................................ 4,750
Payroll ....................................................................... 19,250
Work in ProcessMixing ................................................ 5,240
Work in ProcessMixing .......................................... 26,650
P5-13R Concluded

Work in ProcessBlending ....................................... 34,000
Finished Goods ................................................................ 57,310
Work in ProcessBottling ......................................... 57,310
4.
Materials ................................................................................. $ 19,000
Labor....................................................................................... 19,250
Total ........................................................................................ $ 56,590
Add work in process inventories, December 1 ................. 24,545
Total .......................................................................... $ 81,135
Less work in process inventories, December 31 .............. 23,825
Cost of goods manufactured during the month ....................... $ 57,310
MINI-CASE
1. Presumably, the controllers are accusing the St. Bernard plant of treating all ending
work in process as finished goods, because they report no ending work in process.
If there is any ending work in process that should be converted to a lesser number
of equivalent units, this would cause the number of units in the denominator of the
unit cost formula to be smaller than reported, thus resulting in a higher than
reported unit cost figure.
2. There are a number of items that apply to this situation, for example:
Competence: Prepare complete and clear reports and recommendations after
analysis of relevant and reliable information.
Integrity: Communicate unfavorable as well as favorable information and
professional judgments or opinions.
Objectivity: Communicate information fairly and objectively.
3. Per the IMAs Resolution of Ethical Conflict guidelines, she should consider the
following courses of action:
Discuss such problems with the immediate superior except when it appears
that the superior is involved, in which case the problem should be presented
initially to the next higher level of management.
Clarify relevant ethical issues by confidential discussion with an objective

advisor to obtain a better understanding of possible courses of action.
Consult your own attorney as to legal obligations and rights concerning the
ethical conflict.
If the ethical conflict still exists after exhausting all levels of internal review,
there may be no other recourse on significant matters but to resign from the
organization and to submit an informative memorandum to an appropriate
member of the organization.
INTERNET EXERCISE
1. First consult with the finance director or vice president to determine what
treatment is in accord with the companys accounting practices. If it is not, or not
applicable in this situation, you must immediately advise the head of financial
operations for your division and copy the senior vice president of financial
operations and the chief compliance officer.
2. Confidential information is only given to those who are authorized to receive it.
Never provide this type of information unless you are certain that it is
appropriate. If in doubt, talk to HR to ensure the legitimacy of the request.
3. No, the employee may not make the trade. Trading in company stock while
aware of material, non-public information will be deemed to have been traded on
the basis of that information, even though it was not a significant factor in the
decision to make the trade.
4. Any gift should be in good taste, not used to gain influence, and nominal in value
(less than $100, never in cash). Ask yourself, Would the public disclosure of
the gift be embarrassing to the Company? If returning the gift to the donor
would be embarrassing, discuss it with your manager, donate it to charity, or
turn it over to the Company.
5. One may not pay U.S. customs officials under any circumstance. In some
countries small payments may be made to expedite products through customs.
First consult with the Law department to see if your situation qualifies, then
receive written permission from Law and from your managing director.
CHAPTER 6
QUESTIONS
1. The unit costs of materials, labor, and over- 7. The total number of units completed during
head may be computed by using one a month plus the number of units in process
equivalent production figure when materials, at the end of the month may be less than the
labor, and overhead are put into process total number in process at the beginning of
with uniform continuity or in an equal flow. the month plus the number placed in
2. Separate equivalent production figures must process during the month because of a loss
be used in computing the unit costs of mate- of units during the process through spoilage
rials, labor, and overhead when these three and evaporation.
elements are not put into process uniformly 8. The usual method of handling the cost of
during production. normal processing losses is to include the
3. The assumption is reasonable in a cost of lost units in the cost of all units
manufacturing process where direct labor is finished or still in process. With this
significant because the application of approach, the units lost are ignored in the
overhead is usually so closely related to the calculation of equivalent production.
incurrence of labor costs that overhead is 9. If some units are normally lost in the manu-
generally thought of as being applied in the facturing process and all good units are to
same ratio as labor expense. absorb the cost, the effect is to increase the
4. In determining the cost of the ending work in unit cost of the goods completed during the
process, the cost accountant must consider period as well as those still in process at the
the stage of completion and the point at end of the period.
which materials are added in order to make 10. The total manufacturing costs for the month
the proper allocation of cost. will include those costs applicable to the
5. Reasons for using standard costs per unit in units that were lost. The equivalent units will
a process costing system include: (1) clear be based only on units actually completed or
and accurate reports can be prepared without still in process, thereby excluding the units
having to wait until the end of the period for lost. When manufacturing costs for the
actual cost data; (2) getting reports on a period are divided by equivalent units for the
timely basis enables management to focus period, the resulting unit cost will include a
on business performance and strategy; (3) portion of the cost relating to the lost units.
developing accurate estimates of production 11. If goods lost at any time during the process
costs and equivalent units of production aids are considered to be abnormal losses, the
the efficient and effective management of cost of the lost units will be charged to an
business operations; (4) comparing standard expense account such as Abnormal Loss of
costs to actual costs enables management to Units. Under this procedure, the number of
determine if it is making the most of raw units lost is taken into consideration in deter-
materials, labor, and overhead deployed for mining equivalent production. The resulting
production. unit cost will be used to compute the amount
6. In the cost of production summary presented charged to lost units.
in Chapter 6, the equivalent units are com- 12. If materials added to the process increase
puted separately for materials and for labor the number of units being manufactured, the
and factory overhead, while in Chapter 5, unit cost from the prior department must be
only one equivalent unit figure had to be adjusted. The total cost of the units
determined. The reason for this difference is transferred would be divided by the new
that in Chapter 6 the discussion concerning total of units being processed to determine
the accounting for materials is based on the the new adjusted unit cost, which will be
assumption that materials are not added to less than the original unit cost in the
the manufacturing process at the same rate originating department(s).
as are labor and factory overhead. In Chapter
5, it was assumed that all three cost elements
were uniformly added to production.
199
13. With the average cost method, the cost c. Joint costs include the costs of
elements in the beginning work in process materials, labor, and overhead incurred
inventory are merged with the production during a common process that produces
costs of the current period, and the units in two or more products.
process at the start of the period are merged d. The split-off point is that stage of a
with the units received or started during the manufacturing process at which two or
period. The effect is to treat the units started more products are separated and
but not completed in the prior period as become individually identifiable
though they had been fully manufactured in 16. (1) Physical unit of measure.
the current period, and to treat the related (2) Relative sales value.
cost for these units as though these costs
(3) Chemical engineering, or some other
had been incurred in the current period.
type of component analysis.
One unit cost is determined for the
17. Treat the estimated sales value of the by-
current period and charged to all units pro-
products as a reduction in the cost of the
cessed during the period.
main products by debiting By-Products and
The FIFO method assumes that units
crediting Work in Process for this value. Any
are finished in the order started in process
difference between the estimated and the
and unit costs are assigned accordingly. The
actual sales value would be recorded in an
units in process at the beginning of the
account such as Gain or Loss on Sales of
period and their related costs are kept
By-Products.
separate from units received or started
during the current period and their related 18. Some companies further refine the relative
costs. These units in process at the start of sales value method by subtracting the
the period are valued at the cost carried estimated expenses incurred after split-off
over from the prior period plus a portion of on a joint product from its ultimate sales
the current periods cost necessary to value to determine the sales value at
complete them. split-off.
Units started and finished during the
current period are handled separately and
charged with the current periods unit cost.
With both methods, the procedures to
value the ending work in process are the
same; the costs charged may be different,
however, if the unit cost differs between the
average cost and the FIFO cost method.
14. Unlike average costing, under FIFO costing
the units and costs in the beginning
inventory maintain their separate identity
from the units and costs in the current
month, thus helping to identify trends and
control costs by making month-to-month
comparisons.
15. a. Although technically all products
resulting from a common process are
joint products, the term is commonly
used to mean those products that are
the primary objective of the
manufacturing process.
b. By-products are those products with
rela-tively little value that are obtained
from a common process that also
produces a product of greater value.
EXERCISES
E6-1
a. CASE 1
Unit output for period:
Materials
Added to work started in process and
finished during period ...................................... 3,000
Added to work in process, end of period .......... 2,000 5,000
Labor and factory overhead
Added to work in process, end of period
(2,000 units, three-fourths completed) ............. 1,500 4,500
CASE 2
Materials
Added to work in process, end of period 6,000 45,000
(6,000 units, one-fourth completed) ................. 1,500 40,500
CASE 3
Materials
Added to work in process, end of period .......... 10,000 39,000
Added to work in process, end of period:
5,000 units, one-fourth completed ............. 1,250
5,000 units, one-half completed ................ 2,500 3,750 32,750
E6-1 Continued
b. CASE 1
Materials
finished during period .................................... 3,000
Added to work in process, end of period ....... none 3,000
CASE 2
Materials
CASE 3
Materials
Note: The unit output for labor and
factory overhead in (b) is the
same as for (a).
c. CASE 1
Materials
Added to work in process, end of period ....... 2,000 5,000
CASE 2
Materials
(6,000 units one-fourth completed, 75%
of materials added at beginning of process) .. 4,500 43,500
E6-1 Concluded
CASE 3
Materials
finished during period ........................... 29,000
5,000 units, one-fourth completed,
75% of materials added ................. 3,750
5,000 units, one-half completed, all
materials added.............................. 5,000 8,750 37,750
Note: The unit output for labor and factory
overhead in (c) is the same as for (a).
E6-2
a. Equivalent Units
Material Labor and Overhead
Units completed 9,500 9,500
Units, ending process:
All material 1,500
25% labor and
overhead _____ 375
Equivalent units 11,000 9,875
b.
Material Labor Overhead Total
Work in process, beg. $ 5,000 $ 5,000 $ 8,000 $ 18,000
Current costs 61,000 20,000 48,000 129,000
Total costs $ 66,000 $ 25,000 $ 56,000 $ 147,000*
Equivalent units 11,000 9,875 9,875
Unit costs $ 6.00 $ 2.53 $ 5.67 $ 14.20
c. Completed and transferred: 9,500 units $14.20= $ 134,900

d. Ending work in process:
Materials ....................... (1,500 $6.00) = $ 9,000
Labor................................ (375 $2.53) = 949
Overhead ......................... (375 $5.67) = 2,126 12,075
e. Total costs accounted for ........................... $146,975*

* rounding difference
E6-3
CASE 1
Equivalent Production
Materials:
finished during period ................................... 10,500
Added to work in process, end of period ...... 1,500
12,000 units
Labor and factory overhead:
(1,500 units, two-fifths completed) ............... 600
11,100 units
a. Unit costs:
Materials.................... $ 36,000 12,000 units = $ 3.00
Labor ......................... 44,400 11,100 units = 4.00
Factory overhead ...... 22,200 11,100 units = 2.00
$ 102,600 $ 9.00
b. Cost of units finished (10,500 $9.00) ............... $ 94,500
c. Cost of units in process:
Materials (1,500 $3.00) ............................. $4,500
(1,500 2/5 $6.00) .................................... 3,600 8,100
Total cost accounted for ...................................... $ 102,600
CASE 2
Equivalent Production
Materials:
(1,500 units, one-half added at start of process) 750
11,250 units
(1,500 units, two-fifths completed) ............... 600
11,100 units
E6-3 Concluded
a. Unit costs:
Materials .................... $ 36,000 11,250 units = $ 3.20
Labor ......................... 44,400 11,100 units = 4.00
Factory overhead....... 22,200 11,100 units = 2.00
$ 102,600 $ 9.20
b. Cost of units finished (10,500 $9.20)....................... $ 96,600
c. Cost of units in process:

Materials (1,500 1/2 $3.20)............................ $2,400
(1,500 2/5 $6.00) ........................................... 3,600 6,000
Total cost accounted for ............................................. $ 102,600
E6-4
Units to
Account for
Beginning work in process 1,000

Started 5,000
Quantity to account for 6,000

Completed and transferred 4,000
Ending work in process 2,000
Units Materials Labor and Overhead

Transferred out 4,000 4,000 4,000
Ending work in process:
All material 2,000 2,000
75% labor and
overhead 2,000 _____ _____ 1,500
Accounted for and
equivalent units 6,000 6,000 5,500
(a) (b)
E6-5
CASE 1
Units transferred ................................................................ 1,300
Units in process, end of period .......................................... + 200 1,500
Units in process, beginning of period ................................. 300
Units started in process .............................................. 1,200
Units in process, end of period .......................................... + 200
Equivalent unitsmaterials ....................................... 1,500
Units in process, end of period, one-fourth completed
(200 1/4) ...................................................................... + 50
Equivalent unitslabor and factory overhead ............ 1,350
Materials $4,575 = $3.05

Materials unit cost for period = =
Equivalent unitsmaterials 1,500
Labor and factory

Labor and factory overhead $5,751
overhead unit cost = = = $4.26
Equivalent unitslabor and factory overhead 1,350
for period
CASE 2
Equivalent unitsmaterials Materials $13,120 = 8,200

= =
Materials unit cost $1.60
Equivalent unitslabor Labor and factory overhead $16,200

and factory overhead = = = 8,100
Labor and factory $2.00
overhead unit cost
Equivalent unitsmaterials .............................................. 8,200

Equivalent units in process, end of period, all materials ... 200
Equivalent unitslabor and factory overhead ................... 8,100
Equivalent units in process, end of period (50% complete) 100
Units transferred ............................................................................................. 8,000

Units in process, end of period ....................................................................... + 200
Units started in process ........................................................................... 8,200
CASE 3
Equivalent unitslabor and factory overhead ................................................ 18,440
Labor and factory overhead unit cost for period .............................................. $0.20
Total cost ........................................................................................................ $ 3,688
Less labor and factory overhead costs in process, beginning of period .......... 388
Labor and factory overhead current month .............................................. $ 3,300
Equivalent unitslabor and factory overhead ................................................ 18,440
Less equivalent units in process, end of period (1,400 1/5) ......................... 280
Units transferred ....................................................................................... 18,160
Units in process, end of period ............................................... 1,400
Less: Units started in process ............................................. 19,200
Less units transferred ................................................ 18,160 1,040
Units in process, beginning of period .............................................................. 360
Units transferred ............................................................................................. 18,160
Units in process, end of period ....................................................................... + 1,400
Equivalent unitsmaterials ..................................................................... 19,560
Materials unit cost for period ........................................................................... $0.30
Total cost for materials.................................................................................... $ 5,868
Less materials cost in process, beginning of period........................................ 568
Materials cost current month .................................................................... $ 5,300
E6-6
Materials Labor Overhead Total

Beginning work in process $ 11,360 $ 11,666 $ 9,250
Cost for November 73,000 68,134 77,200
Total $ 84,360 $ 79,800 $ 86,450
Average unit cost $ 5.70 $ 6.00 $ 6.50 $ 18.20
(a) (b) (c) (d)
E6-7
Materials $132,000
Labor 33,000
Factory overhead 20,625
Total cost to be accounted for $185,625*

Finished and transferred 8,000
Equivalent units of work in process (1,000 1/2) 500
Total 8,500
(Note: When units are lost at the beginning of operations, the units lost are not added into the
equivalent production of units.)

Materials ($132,000 8,500) $15.53
Labor ($33,000 8,500) 3.88
Factory overhead ($20,625 8,500) 2.43
Total $21.84
Inventory costs:
Cost of goods finished and transferred (8,000 $21.84) $174,720
Materials (1,000 1/2 $15.53) $ 7,765
Labor (1,000 1/2 $3.88) 1,940
Factory overhead (1,000 1/2 $2.43) 1,215 10,920
Total production costs accounted for $ 185,640*
E6-8

Materials............................................................................. $ 154,000
Labor .............................................................................. 48,000
Factory overhead ............................................................... 26,500
Total cost to be accounted for ............................................ $ 228,500
Finished and transferred .................................................... 9,000
Equivalent units of work in process (2,000 1/2) ............... 1,000
Total ............................................................................ 10,000
(Note: When units are lost at the beginning of operations, the units lost are not added
into the equivalent production of units.)
Materials ($154,000 10,000) ........................................... $ 15.40
Labor ($48,000 10,000) ................................................... 4.80
Factory overhead ($26,500 10,000) ................................ 2.65
Total ............................................................................ $ 22.85
Inventory costs:
Cost of goods finished and transferred (9,000 $22.85) ... $ 205,650
Materials (2,000 1/2 $15.40).................................. $ 15,400
Labor (2,000 1/2 $4.80) ......................................... 4,800
Factory overhead (2,000 1/2 $2.65) ...................... 2,650 22,850
Total production costs accounted for ........................................ $ 228,500
E6-9
Department 1

Finished and transferred ..................................... 14,000
Equivalent units of work in process ..................... 1,000
Total ............................................................. 15,000
a. Unit cost for month:
Materials ($90,000 15,000) ....................... $ 6.00
Labor ($30,000 15,000) ............................. 2.00
Factory overhead ($15,000 15,000) .......... 1.00
Total ...................................................... $ 9.00
b. Cost of units finished and transferred (14,000 $9) $ 126,000
c. Cost of work in process, end of month:
Materials (4,000 1/4 $6.00) .................... $ 6,000
Labor (4,000 1/4 $2.00).......................... 2,000
Factory overhead (4,000 1/4 $1.00) ....... 1,000
Total ............................................................. $ 9,000
Department 2
Finished and transferred .............................. 15,000
Equivalent units of work in process .............. 3,000
Total ...................................................... 18,000
a. Unit cost for month:
Materials ($36,000 18,000) ....................... $ 2.00
Labor ($13,500 18,000) ............................. 0.75
Factory overhead ($4,500 18,000) ............ 0.25
Total ...................................................... $ 3.00
b. Cost of units finished and transferred:
Cost in Dept. 1 (15,000 $6, adjusted
unit cost)* ..................................................... $ 90,000
Cost in Dept. 2 (15,000 $3) ....................... 45,000
Total ...................................................... $ 135,000
E6-9 Concluded
c. Cost of work in process, end of month:

Cost in Dept. 1 (6,000 $6) ........................ $ 36,000
Cost in Dept. 2:
Materials (6,000 1/2 $2.00) ............. $ 6,000
Labor (6,000 1/2 $0.75) .................. 2,250
Factory overhead (6,000 1/2 $0.25) 750 9,000
Total ...................................................... $ 45,000
*Calculation of the adjusted unit cost is as follows:
Units from Dept. 1 .............................................. 14,000 $9 = $126,000
Units added ........................................................ 7,000
New quantity ...................................................... 21,000
$126,000 cost 21,000 units = $6.00 adjusted unit cost
E6-10
a. CASE 1
Materials
Added to work in process, end
of period ................................................ 2,000 5,000
(2,000 units, three-fourths completed) .. 1,500 4,500
CASE 2
Materials
Added to work in process, beginning
of period ................................................ none
Added to work started in process, and
finished during period (39,000 5,000) 34,000
of period ................................................ 6,000 40,000
E6-10 Continued

Added to work in process, beginning of
period:
(5,000 units, two-fifths completed
during period) ........................................ 2,000
finished during period (39,000 5,000) . 34,000
(6,000 units, one-fourth completed) ....... 1,500 37,500
CASE 3
Materials
of period ................................................ none
of period ................................................ 10,000 30,000

Added to work in process, beginning of
period:
1,000 units, one-half completed
during period....................................... 500
8,000 units, three-fourths completed
during period....................................... 6,000 6,500
5,000 units, one-fourth completed ...... 1,250
5,000 units, one-half completed.......... 2,500 3,750 30,250
b. CASE 1
Materials
finished during period ............................ 3,000
Added to work in process, end of period none 3,000
E6-10 Continued
CASE 2
Materials
of period ................................................ 5,000
CASE 3
Materials
of period ................................................ 9,000
Note: The unit output for labor and factory overhead in (b) is the same as for (a).
c. CASE 1
Materials
Added to work started in process
and finished during period..................... 3,000
of period ................................................ 2,000 5,000
CASE 2
Materials
of period ................................................ none
Added to work started in process
and finished during period..................... 34,000
(6,000 units, one-fourth completed, 75%
of materials added) ............................... 4,500 38,500
E6-10 Concluded
CASE 3
Materials
of period:
1,000 units, one-half completed.......... none
25% of materials added ...................... 2,000 2,000

finished during period ............................ 20,000
of period:
75% of materials added ...................... 3,750
5,000 units, one-half completed,
all materials added ............................. 5,000 8,750 30,750
Note: The unit output for labor and factory overhead in (c) is the same as for (a).
E6-11
a. (1) Average Cost
Dept. 1 Units finished and transferred ................................ 19,000

Units in process, end of month .............................. 2,000
Equivalent unitsmaterials ............................ 21,000
Units finished and transferred ................................ 19,000
Units in process, end of month, three-fourths
completed .............................................................. 1,500
Dept. 2 Units finished and transferred ................................ 15,500

Units in process, end of month .............................. 2,000
Equivalent unitsmaterials ............................ 17,500
Units finished and transferred ................................ 15,500
Units in process, end of month, one-half
completed .............................................................. 1,000
E6-11 Continued
Dept. 3 Units finished and transferred ...................................... 21,000

Units in process, end of month .................................... 1,200
Equivalent unitsmaterials .................................. 22,200
Units finished and transferred ...................................... 21,000
Units in process, end of month, one-fourth
completed .................................................................... 300
Equivalent unitslabor and factory overhead ...... 21,300
a. (2)
Units in process, end of month .................................... none
Equivalent unitslabor and factory overhead
(Same as (1) Dept. 1) ........................................... 20,500
(Same as (1) Dept. 2) ........................................... 16,500
(Same as (1) Dept. 3) ........................................... 21,300
a. (3)
completed, all materials added .................................... 2,000
(Same as (1) Dept. 1) ........................................... 20,500
completed, 50% materials added ................................ 1,000
(Same as (1) Dept. 2) ........................................... 16,500
E6-11 Continued

completed, 1/2 materials added ................................... 600
Equivalent unitsmaterials ................................... 21,600
(Same as (1) Dept. 3) ............................................ 21,300
FIFO Cost
b. (1)
Dept. 1 Units in process, beginning of month ........................... none
Units started in process and transferred....................... 16,000
Units in process, end of month ..................................... 2,000
Units in process, beginning of month, one-half
to complete................................................................... 1,500
completed..................................................................... 1,500
Equivalent unitslabor and factory overhead ....... 19,000
Units in process, beginning of month, two-fifths
to complete................................................................... 600
completed..................................................................... 1,000
E6-11 Continued
Units in process, beginning of month, one-fifth
to complete .................................................................. 240
Units started in process and transferred ...................... 19,800
completed..................................................................... 300

b. (2)
Dept. 1 Units in process, beginning of month........................... 3,000
to complete .................................................................. 1,500
completed .................................................................... 1,500
to complete .................................................................. 600
completed .................................................................... 1,000
to complete .................................................................. 240
completed .................................................................... 300
E6-11 Concluded
b. (3)
Dept. 1 Units in process, beginning of month, one-half
to complete................................................................... 1,500
completed, 100% materials added ............................... 2,000
to complete................................................................... 1,500
completed..................................................................... 1,500
Dept. 2 Units in process, beginning of month, three-fifths
completed, 1/2 materials added .................................. 750
completed, 1/2 materials added ................................... 1,000
to complete................................................................... 600
completed..................................................................... 1,000
Dept. 3 Units in process, beginning of month, one-fifth
to complete, all materials added ................................... none
completed, 1/2 materials added ................................... 600
to complete................................................................... 240
completed..................................................................... 300
E6-12
Finished GoodsA ..................................................................... 82,759
Finished GoodsB ..................................................................... 62,069
Finished GoodsC..................................................................... 155,172
Work in Process ................................................................... 300,000
Market value of A200,000 bd. ft. $0.20 = $ 40,000

Market value of B300,000 bd. ft. $0.10 = 30,000
Market value of C500,000 bd. ft. $0.15 = 75,000
Total market value $145,000
Allocation of cost of A40/145 $300,000 $82,759
Allocation of cost to B30/145 $300,000 62,069
Allocation of cost to C75/145 $300,000 155,172
Total cost ....................................................... $300,000
E6-13
(a.) Relative Sales Basis
Products
A B C Inventory
1. Number of units............................ 1,000 500 500
2. Unit sale price .............................. $20 $200 $160
3. Sales value, (1) (2).................... $20,000 $100,000 $80,000
4. Percent of sales value .................. 10% 50% 40%
5. Allocation of joint cost of
$20,000 ........................................ $2,000 $10,000 $8,000
6. Allocated joint cost per unit,
(5) (1) ........................................ $2 $20 $16
7. Units in ending inventory .............. 100 200 300
8. Joint cost included in
Ending inventory valuation,
(6) (7) ........................................ $200 $4,000 $4,800 $9,000
(b.) Adjusted Sales Basis
Products
A B C Inventory
1. Number of 1,000 500 500
units
2. Unit sales $20 $200 $200
price
3. Sales value $20,000 $100,000 $100,000

(1) (2)
4. Less costs -0- -0- $12,500
after split-off
5. Sales value $20,000 $100,000 $87,500
at split-off
6. Percent 9.64% 48.19% 42.17%
sales value
7. Allocation of $1,928 $9,638 $8,434
joint cost
8. Allocated $1.93 $19.28 $16.87
joint cost
per unit
9. Units in 100 200 300
ending
inventory
10. Joint cost in $193 $3,856 $5,061 $9,110
ending
inventory
E6-14
(a.) Relative Sales Basis
Products
X Y Z Inventory
1. Number of units ........................... 2,000 1,000 1,000
2. Unit sale price .............................. $30 $100 $90
3. Sales value, (1) (2) ................... $60,000 $100,000 $90,000
4. Percent of sales value ................. 24% 40% 36%
5. Allocation of joint cost of
$50,000........................................ $12,000 $20,000 $18,000
Allocated joint cost per unit,
6. (5) (1) ........................................ $6 $20 $18

7. Units in ending inventory ............. 200 300 100
8. Joint cost included in
Ending inventory valuation,
(6) (7) ........................................ $1,200 $6,000 $1,800 $9,000
(b.) Adjusted Sales Basis
Products
X Y Z Inventory
1. Number of 2,000 1,000 1,000
units
2. Unit sales $30 $100 $120
price
3. Sales value $60,000 $100,000 $120,000
(1) (2)
4. Less costs -0- -0- $10,000
after split-off
5. Sales value $60,000 $100,000 $110,000
at split-off
6. Percent 22.22% 37.04% 40.74%
sales value
7. Allocation of $11,100 $18,520 $20,370
joint cost
8. Allocated $5.555 $18.52 $20.370
joint cost
per unit
9. Units in 200 300 100
ending
inventory
10. Joint cost in $1,111 $5,556 $2,037 $8,704
ending
inventory
E6-15
a. By-Product Inventory ............................................. 2,000
Work in Process ............................................. 2,000
b. Accounts Receivable ............................................. 850

Gain and Loss on Sale of By-Products ................. 150
By-Products Inventory .................................... 1,000
E6-16
a. By-Product Inventory ............................................. 1,200

Work in Process ............................................. 1,200
To record the market value of by-products.
Accounts Receivable .............................................. 1,200
By-Product Inventory ...................................... 1,200
To record the sale of by-products.
b. (no initial entry to set up by-product inventory account)

..............................................................................
Accounts Receivable ................................................... 1,200
By-Product Sales or Miscellaneous Income ... 1,200
To record the sale of by-products.
PROBLEMS
P6-1
1.
Kerwin Kleaning Products
Cost of Production SummaryMixing Dept.
For the Month Ended January 31, 20--

Materials .......................................................................... $ 20,000
Labor................................................................................ 15,200
Total costs to be accounted for ............................................... $46,600*
Materials:
Finished and transferred to Blending during month ... 3,600
(400 units, three-fourths completed, all materials) ..... 400
Total equivalent production .................................. 4,000
Finished and transferred to Blending during month ... 3,600
(400 units, three-fourths completed) .......................... 300
Materials ($20,000 4,000) ............................................. $ 5.000
Labor ($15,200 3,900) ................................................... 3.897
Factory overhead ($11,400 3,900) ................................ 2.923
Total .......................................................................... $ 11.820
Inventory costs:
Cost of goods finished and transferred to Blending
during month (3,600 $11.82)......................................... $ 42,552
Materials (400 $5.00).............................................. $ 2,000
Labor (400 3/4 $3.897) ........................................ 1,169
Factory overhead (400 3/4 $2.923) ..................... 877 4,046
Total production costs accounted for ...................................... $46,598*
P6-1 Continued
1.
Kerwin Kleaning Products
Cost of Production SummaryMixing Dept.
For the Month Ended February 28, 20--

Materials .......................................................................... $ 2,000
Labor ............................................................................... 1,169
Factory overhead............................................................. 877 $ 4,046
Materials .......................................................................... $ 28,400
Labor ............................................................................... 23,000
Materials:
Finished and transferred to Blending during month... 3,200
(600 units, one-fourth completed, all materials) ........ 600
Finished and transferred to Blending during month... 3,200
(600 units, one-fourth completed) ............................. 150
Materials ($2,000 + $28,400) 3,800 .............................. $ 8.000
Labor ($1,169 + $23,000) 3,350 ................................... 7.215
Factory overhead ($877+ $19,800) 3,350 .................... 6.172
Total .......................................................................... $ 21.387
Inventory costs:
Cost of goods finished and transferred to Blending
during month (3,200 $21.387) ..................................... $68,438
Materials (600 $8.00) ............................................. $ 4,800
Labor (600 1/4 $7.215)........................................ 1,082
P6-1 Concluded
2.
Jan. 31 Work in ProcessMixing .......................................... 20,000
Materials ............................................................ 20,000
Payroll ............................................................... 15,200
Factory Overhead .............................................. 11,400
Work in ProcessMixing .................................. 42,552
Feb. 28 Work in ProcessMixing .......................................... 28,400

Materials ............................................................ 28,400
Payroll ............................................................... 23,000
Factory Overhead .............................................. 19,800
Work in ProcessMixing .................................. 68,438
P6-2
1.
Laurence Liquids, Inc.
Cost of Production SummaryBlending Dept.
For the Month Ended June 30, 20--

Materials .......................................................................... $ 30,000
Labor................................................................................ 25,200
Materials:
Finished and transferred to Bottling during month ..... 2,800
(500 units, three-fourths completed, all materials) ..... 500

Finished and transferred to Bottling during month..... 2,800
(500 units, three-fourths completed) ......................... 375
Materials ($30,000 3,300) ............................................. $ 9.091
Labor ($25,200 3,175) ................................................... 7.937
Total .......................................................................... $22.508
Inventory costs:
Cost of goods finished and transferred to Bottling
during month (2,800 $22.508) ...................................... $63,022
Materials (500 $9.091) ........................................... $ 4,546
Labor (500 3/4 $7.937)........................................ 2,976
Factory overhead (500 3/4 $5.480) ..................... 2,055 9,577
Total production costs accounted for ...................................... $ 72,599*
P6-2 Continued
1.
Laurence Liquids, Inc.
Cost of Production SummaryBlending Dept.
For the Month Ended July 31, 20--

Materials .......................................................................... $ 4,546
Labor................................................................................ 2,976
Factory overhead ............................................................ 2,055 9,577
Materials .......................................................................... $ 43,400
Labor................................................................................ 31,500
Materials:
(400 units, one-fourth completed, all materials) ......... 400
(400 units, one-fourth completed) .............................. 100
Materials ($4,546+ $43,400) 4,000 ..................................... $11.987
Labor ($2,976 + $31,500) 3,700 ......................................... 9.318
Factory overhead ($2,055+ $29,600) 3,700 ........................ 8.555
Total .......................................................................... $29.860
Inventory costs:
Cost of goods finished and transferred to Bottling
during month (3,600 $29.860)....................................... $107,496
Materials (400 $11.987).......................................... $ 4,795
Labor (400 1/4 $9.318) ........................................ 932
P6-2 Concluded
2.
June 30 Work in ProcessBlending...................................... 30,000
Materials............................................................ 30,000
Work in ProcessBlending....................................... 25,200
Payroll ............................................................... 25,200
Factory Overhead ............................................. 17,400
Work in ProcessBottling......................................... 63,022
Work in ProcessBlending............................... 63,022
July 31 Work in ProcessBlending....................................... 43,400

Materials............................................................ 43,400
Payroll ............................................................... 31,500
Factory Overhead ............................................. 29,600
Work in ProcessBottling......................................... 107,496
Work in ProcessBlending............................... 107,496
P6-3
a. Materials .......................................................................... 50,000
Accounts Payable ...................................................... 50,000
b. Work in Process ................................................................ 49,000
Materials .................................................................... 49,000
c. Work in Process ................................................................ 50,500
Payroll ....................................................................... 50,500
d. Factory Overhead .............................................................. 61,000
Accumulated Depreciation ......................................... 20,000
Cash ($28,000 + $11,000) ......................................... 39,000
Supplies Inventory ..................................................... 2,000
e. Work in Process ................................................................ 63,125
Factory Overhead ...................................................... 63,125
f. Finished Goods Inventory* ................................................ 164,700
Work in Process ........................................................ 164,700
*Calculation of Costs Transferred to Finished Goods:
Materials Labor Overhead Total
Units completed 10,000 10,000 10,000

Equivalent units in ending inv.:
All materials 1,000
25% labor and overhead _____ 250 250
Total 11,000 10,250 10,250
Work in process, beginning $ 6,000 $ 2,000 $ 2,000 $ 10,000
Current costs 49,000 50,500 63,125 162,625
Total $ 55,000 $ 52,500 $ 65,125 $ 172,625
Unit costs $ 5.00 $ 5.12 $ 6.35 $ 16.47
Transferred out: 10,000 units $16.47 = $164,700
P6-4
1.
Youngstown Manufacturing Co.
Cost of Production SummaryDept. 1

Materials .......................................................................... $22,500
Labor ............................................................................. 7,200
Total costs to be accounted for............................................... $40,500
Materials:
Finished and transferred to Dept. 2 during month ..... 40,000
(10,000 units, one-half completed, all materials) ....... 10,000
(10,000 units, one-half completed) ............................ 5,000
Materials ($22,500/50,000) .............................................. $0.45
Labor ($7,200 45,000) .................................................. 0.16
Factory overhead ($10,800 45,000) ............................. 0.24
Total .......................................................................... $ 0.85
Inventory costs:
Cost of goods finished and transferred to Dept. 2
during month (40,000 $0.85) ........................................ $34,000
Materials (10,000 $0.45) ........................................ $ 4,500
Labor (10,000 1/2 $0.16)..................................... 800
Total production costs accounted for ...................................... $40,500
P6-4 Continued
Cost of goods received from Dept. 1 during month ................. $ 34,000

Materials .......................................................................... $ 23,200
Labor ............................................................................. 14,500
Materials, labor, and factory overhead:
Finished and on hand ................................................ 5,000 35,000
(5,000 units, one-fourth completed) ........................... 1,250
Materials ($23,200 36,250) ........................................... $ 0.64
Labor ($14,500 36,250) ................................................ 0.40
Factory overhead ($14,500 36,250) .............................. 0.40
Total .......................................................................... $ 1.44
Inventory costs:
Cost of goods finished and transferred to Dept. 3
during month:
Cost in Dept. 1 (30,000 $0.85) ............................... $ 25,500
Cost in Dept. 2 (30,000 $1.44) ............................... 43,200 $ 68,700
Cost of goods finished and on hand:
Cost in Dept. 1 (5,000 $0.85) ................................. $ 4,250
Cost in Dept. 2 (5,000 $1.44) ................................. 7,200 11,450
Cost in Dept. 1 (5,000 $0.85) ................................. $ 4,250
Cost in Dept. 2:
Materials (5,000 1/4 $0.64)....................... $800
Labor (5,000 1/4 $0.40) ............................ 500
Factory overhead (5,000 1/4 $0.40) ......... 500 1,800 6,050
P6-4 Continued
Cost of goods received from Dept. 2 during month ................ $ 68,700

Materials .......................................................................... $ 19,600
Labor ............................................................................. 11,800
Total costs to be accounted for............................................... $108,950
Materials:
Finished and transferred to finished goods
during month ............................................................. 28,000
Equivalent units of work in process, end of month .... 0
during month ............................................................. 28,000
(2,000 units, three-fourths completed) ...................... 1,500
Materials ($19,600 28,000) ........................................... $ 0.70
Labor ($11,800 29,500) ................................................ 0.40
Total .......................................................................... $ 1.40
Inventory costs:
Cost of goods finished and transferred to finished
goods during month:
Cost in Dept. 1 (28,000 $0.85) ............................... $ 23,800
Cost in Dept. 2 (28,000 $1.44) ............................... 40,320
Cost in Dept. 3 (28,000 $1.40) ............................... 39,200 $103,320
Cost in Dept. 1 (2,000 $0.85) ................................. $ 1,700
Cost in Dept. 2 (2,000 $1.44) ................................. 2,880
Cost in Dept. 3:
Materials ................................................... 0
Labor (2,000 3/4 $0.40) ...................... $600
Factory overhead (2,000 3/4 $0.30).... 450 1,050 5,630
Total production costs accounted for ...................................... $108,950
P6-4 Continued
2.
Departmental Cost Work Sheet

per Unit Received Transf. Charged Credited
Analysis Transf. in Dept. Or on to Dept. to Dept.
Hand
Dept. 1:
Started in process ............ 50,000
Costs for month:
Materials ..................... $0.45 $ 22,500
Labor .......................... 0.16 7,200
Factory overhead ....... 0.24 10,800
Finished and transferred
to Dept. 2 .................... $0.85 40,000 $ 34,000
Closing work in process ... _____ _____ 10,000 6,500
Total ........................... $0.85 50,000 50,000 $ 40,500 $ 40,500
Dept. 2:
Received during month
from Dept. 1 ................... 40,000 $ 34,000
Costs added during
month:
Materials ..................... 0.64 23,200
Labor .......................... 0.40 14,500
to Dept. 3 ....................... $2.29 30,000 $ 68,700
Finished and on hand ...... 5,000 11,450
Closing work in process ... _____ 5,00 6,050
Total ........................... 40,000 40,000 $ 86,200 $ 86,200
Dept. 3:
Received during month
from Dept. 2 ................... 30,000 $ 68,700
Costs added during
month:
Materials ..................... 0.70 19,600
Labor .......................... 0.40 11,800
to stock .......................... $3.69 28,000 $103,320
Closing work in process ... _____ 2,000 5,630
Total ........................... 30,000 30,000 $108,950 $108,950
P6-4 Continued
Summary:
Materials:
Dept. 1....................................................................... $ 22,500
Dept. 2....................................................................... 23,200
Dept. 3....................................................................... 19,600 $ 65,300
Labor:
Dept. 1....................................................................... $ 7,200
Dept. 2....................................................................... 14,500
Dept. 3....................................................................... 11,800 33,500
Factory overhead:
Dept. 1....................................................................... $ 10,800
Dept. 2....................................................................... 14,500
Dept. 3....................................................................... 8,850 34,150
Total production costs for January .......................................... $132,950
Deduct work in process, end of month:
Dept. 1....................................................................... $ 6,500
Dept. 2....................................................................... 17,500
Dept. 3....................................................................... 5,630 29,630
Cost of production, goods fully manufactured during January $103,320
3. Work in ProcessDept. 1 ............................................... 22,500

Work in ProcessDept. 2 ............................................... 23,200
Materials.................................................................... 65,300
Payroll ....................................................................... 33,500
Work in ProcessDept. 1 ......................................... 34,000
Finished Goods ............................................................... 103,320
P6-4 Concluded
4. Youngstown Manufacturing Co.

Materials ...................................................................................................... $ 65,300

Labor............................................................................................................ 33,500
Factory overhead ......................................................................................... 34,150
Total manufacturing cost .............................................................................. $132,950
Less work in process inventory, January 31 ......................................... 29,630
Cost of goods manufactured during the month ............................................ $103,320
P6-5
Peas Labor Overhead Cans
Completed 245,000 245,000 245,000 245,000

Inventory, Nov. 30 16,500 8,250 8,250 0
Total equivalent units 261,500 253,250 253,250 245,000
Total unit cost = $0.10 + $0.25 + $0.15 + $0.07 = $0.57
1. Completed cost of production = 245,000 $0.57 = $139,650
2. Cost of ending inventory, November 30:

Peas (16,500 $0.10) .......................................... $ 1,650.00
Labor (8,250 $0.25) ........................................... 2,062.50
Overhead (8,250 $0.15) ...................................... 1,237.50
Total ...................................................................... 4,950.00
P6-6
Toluca Products Co.


Materials .......................................................................... $ 30,000
Labor ............................................................................. 12,000
during month.................................................................... 9,500
(1,000 units, one-half completed) .............................. 500
Materials ($30,000 10,000) ........................................... $ 3.00
Labor ($12,000 10,000) ................................................ 1.20
Factory overhead ($18,000 10,000) ............................. 1.80
Total .......................................................................... $ 6.00
Inventory costs:
Cost of goods finished and transferred to
finished goods during month (9,500 $6.00) .................. $ 57,000
Materials (1,000 1/2 $3.00) ................................. $ 1,500
Labor (1,000 1/2 $1.20)....................................... 600
P6-7
Calumet Chemicals, Inc.
Cost of Production SummaryDept. A

Materials .......................................................................... $ 25,000
Labor................................................................................ 10,800
Materials:
Finished and transferred to Dept. B
during month ............................................................. 8,500
In process, end of month
(1,500 units, one-third completed, all materials) ........ 1,500
Finished and transferred to Dept. B
during month ............................................................. 8,500
(1,500 units, one-third completed) ............................. 500
Materials ($25,000 10,000) ........................................... $ 2.50
Labor ($10,800 9,000) .................................................. 1.20
Factory overhead ($8,100 9,000) .................................. 0.90
Total .......................................................................... $ 4.60
Inventory costs:
Dept. B during month (8,500 $4.60).............................. $ 39,100
Materials (1,500 $2.50)........................................... $ 3,750
Labor (1,500 1/3 $1.20) ....................................... 600
P6-7 Continued
Calumet Chemicals, Inc.
Cost of Production SummaryDept. B
Cost of goods received from Dept. A during month ................ $ 39,100

Materials .......................................................................... $ 7,500
Labor ............................................................................... 10,140
Materials:
during month ............................................................. 9,500
(500 units, 100% completed)..................................... 500
during month ............................................................. 9,500
(500 units, one-half completed) ................................. 250
Materials ($7,500 10,000) ............................................. $ 0.75
Labor ($10,140 9,750) .................................................. 1.04
Factory overhead ($7,215 9,750) ................................. 0.74
Total .......................................................................... $ 2.53
P6-7 Concluded
Inventory costs:
finished goods:
Cost in prior departments (9,500 $3.91*)................ $ 37,145
Cost in Dept. B (9,500 $2.53) ................................. 24,035 $ 61,180
Cost in prior departments (500 $3.91*)................... $ 1,955
Cost in Dept. B:
Materials (500 $0.75) ............................. $375
Labor (500 1/2 $1.04) ......................... 260
Factory overhead (500 1/2 $0.74) ....... 185 820 2,775
*Calculation of the adjusted unit cost is as follows:
Units from Dept. A ........................................................... 8,500
Units added...................................................................... 1,500
New quantity .................................................................... 10,000 units
$39,100 cost 10,000 units = $3.91 adjusted unit cost
P6-8
Bristol Beverages, Inc.
Cost of work in process, beginning of month .......................... $ 10,000

Materials .......................................................................... $ 45,000
Labor................................................................................ 30,000
Total costs to be accounted for ............................................... $100,000
To complete beginning units in process (5,000 units,
three-fourths to complete) ................................................ 3,750
Units started and finished during month (11,000 - 5,000) 6,000
Ending units in process (7,000 units, three-fourths
completed) ....................................................................... 5,250

Materials ($45,000 15,000) ............................................ $ 3.00
Labor ($30,000 15,000) ................................................ 2.00
Total .......................................................................... $ 6.00
Inventory costs:
finished goods during month:
Beginning units in process:
Prior months cost $ 10,000
Current cost to complete:
Materials (5,000 3/4 $3.00)........................ 11,250
Labor (5,000 3/4 $2.00) ............................ 7,500
Factory overhead (5,000 3/4 $1.00) ......... 3,750 $ 32,500
Units started and finished during month (6,000 $6.00) 36,000
68,500
Materials (7,000 3/4 $3.00).$ 15,750
Labor (7,000 3/4 $2.00)....................................... 10,500
Factory overhead (7,000 3/4 $1.00) ..................... 5,250 31,500
P6-9
1. Cost of goods completed and transferred:
Beginning work in process ......................................... $ 8,775
Cost to complete:
Materials .............................................................. 0
Labor (1,500 50% $1.75) ............................... $ 1,313
Overhead (1,500 50% $1.00) ......................... 750 2,063
Completed cost of beginning inventory ............................ $ 10,838
Goods started and finished:
[8,750* ($4.56 + $1.75 + $1.00)] ................................... 63,963
Cost of goods completed and transferred ........................ $ 74,801
*Units completed and transferred ...................................... 10,250
Units in beginning inventory ............................................. 1,500
Units started and finished this period ............................... 8,750
2. Cost of units in ending inventory:
Materials (3,200 $4.56)........................................... $ 14,592
Labor (3,200 60% $1.75) ..................................... 3,360
Overhead (3,200 60% $1.00) .............................. 1,920
Total cost of ending inventory .......................................... $ 19,872
P6-10
Mt. Soledad Manufacturing Company
Cost of Production SummaryMachining Department

Materials.................................................................... $ 40,000
Labor ......................................................................... 24,000
Factory overhead ...................................................... 8,000 $ 72,000
Materials.................................................................... $ 280,000
Labor ......................................................................... 180,000
Factory overhead ...................................................... 60,000 520,000
Total costs to be accounted for............................................. $592,000*
Materials:
Finished and transferred during month ................ 100,000
(40,000, 100% completed) ................................... 40,000
Finished and transferred during month ................ 100,000
(40,000, 60% completed) ..................................... 24,000
Materials ($40,000 + $280,000) 140,000 ............... $ 2.286
Labor ($24,000 + $180,000) 124,000 ..................... 1.645
Factory overhead ($8,000 + $60,000) 124,000 ...... 0.548
Total ..................................................................... $ 4.479
Inventory costs:
Cost of goods finished and transferred:
(100,000 $4.479) .................................................... $447,900
Materials (40,000 $2.286) ...................................... $ 91,440
Labor (40,000 60% $1.645) ................................ 39,480
Factory overhead (40,000 60% $0.548) .............. 13,152 144,072
Total production costs accounted for ...................................... $591,972*
*Rounding difference
P6-10 Continued
Mt. Soledad Manufacturing Company
Cost of Production SummaryFinishing Department

Cost in Machining Department ......................................... $240,000
Cost in Finishing Department:
Materials .................................................. $ 110,000
Labor ......................................................... 60,000
Factory overhead....................................... 40,000 210,000 $ 450,000
Cost of goods received from Machining during month ............ 447,900
Materials .................................................................... $ 240,000
Labor ......................................................................... 160,000
Factory overhead....................................................... 80,000 480,000
Total costs to be accounted for ........................................ $1,377,900*
Materials:
To complete beginning units in process .................... 0
Units started and fully manufactured
during month (100,000 - 40,000) .......................... 60,000
Ending units in process (40,000, all material) ............ 40,000
To complete beginning units in process
(40,000, 20% to complete) ................................... 8,000
Units started and fully manufactured during month ... 60,000
Ending units in process (40,000, 40% completed)..... 16,000
Materials ($240,000 100,000) ....................................... $ 2.400
Labor ($160,000 84,000) .............................................. 1.905
Total .......................................................................... $ 5.257
P6-10 Concluded
Inventory costs:
Cost of goods finished and transferred to finished goods during month:
Beginning units in process:
Prior months cost ................................................ $ 450,000
Current cost to complete:
Labor (40,000 20% $1.905) ...................... 15,240
Overhead (40,000 20% $0.952) ............... 7,616 $ 472,856
Units started and finished during month:
Cost in prior dept. (60,000 $4.479) ................... $ 268,740
Cost in Finishing Dept. (60,000 $5.257) ........... 315,420
Total cost transferred (60,000 $9.736) ........ 584,160
Cost in prior dept. (40,000 units $4.479) ................ $ 179,160
Materials (40,000 units $2.400) .............................. 96,000
Labor (40,000 units 40% $1.905) ........................ 30,480
Factory overhead (40,000 units 40% $0.952) ..... 15,232 320,872
Total production costs accounted for ...................................... $1, 377,888*
*Rounding Difference
P6-11
Computation using relative sales value method:
Relative
Sales Sales Allocated
Product Value* Value** Joint Cost Cost
AA $ 125,000 0.70621 $125,000 $ 88,276
A 45,000 0.25424 125,000 31,780
B 6,000 0.03390 125,000 4,238
C 1,000 0.00565 125,000 706
$ 177,000 1.00000 $ 125,000
*Computed sales value

**Rounded
P6-11 Continued
Computation of Sales Value

Quantity Sales Price Sales
Product (pounds) per Pound Value
AA 125,000 $1.00 $ 125,000

A 60,000 0.75 45,000
B 12,000 0.50 6,000
C 4,000 0.25 1,000
201,000 $ 177,000
P6-12
Product Barrels Price Ultimate Costs After Sales Value
/ bbl. Sales Value Split-off at Split-off
Gasoline 500,000 $100 $50,000,000 $2,000,000 $48,000,000

Kerosene 100,000 80 8,000,000 500,000 7,500,000
Diesel fuel 250,000 60 15,000,000 1,000,000 14,000,000
73,000,000 $3,500,000 $69,500,000
Product Sales Value at Sales Value Joint Costs Assigned

Split-off Percentage ($5,000,000-$500,000 =
$4,500,000)
Gasoline $48,000,000 69.1 % $3,109,500

Kerosene 7,500,000 10.8 486,000
Diesel fuel 14,000,000 20.1 904,500
Total $69,500,000 100% $4,500,000
P6-13
Product Barrels Price Ultimate Costs After Sales Value
/ bbl. Sales Value Split-off at Split-off
Gasoline 400,000 $98 $39,200,000 $8,000,000 $31,200,000

Kerosene 100,000 85 8,500,000 3,000,000 5,500,000
Diesel fuel 300,000 70 21,000,000 2,000,000 19,000,000
$13,000,000 $55,700,000
Product Sales Value at Sales Value Joint Costs Assigned

Split-off Percentage ($10,000,000-
$1,000,000 =
$9,000,000)
Gasoline $31,200,000 56.0 % $5,040,000

Kerosene 5,500,000 9.9 891,000
Diesel fuel 19,000,000 34.1 3,069,000
Total $55,700,000 100% $9,000,000
MINI-CASE
1.
Unit Ultimate Less Cost Sales Percent Allocation
Units Selling Sales After Value at of Sales Of Joint
Product Produced(a) Price(b) Value Split-Off Split-Off Value Costs
Plutoniu 30,000 $1.50* $ 45,000 0 $ 45,000 32.5% $ 32,500

m
Tantalu 30,000 3.20** 96,000 $ 77,500 18,500 13.4 13,400
m
Xenon 60,000 3.15*** 189,000 114,000 75,000 54.1 54,100
Total $330,000 $ 191,500 $ 138,500 100.0% $ 100,000
* $30,000/20,000 gals.
** $96,000/30,000 gals.
***$141,750/45,000 gals.
Plutonium Tantalum Xenon

Beginning inventory .............................. 0 0 0
Sold during year ................................... 20,000 30,000 45,000
On-hand, end-of-year ........................... 10,000 0 15,000
Produced during year ........................... 30,000 30,000 60,000
2. Unit cost of Plutonium = $32,500 / 30,000 gals. = $1.08 gal.

Unit Cost of Tantalum =$51,000 Direct labor + $26,500 Factory overhead +
$13,400 Joint costs = $90,900 / 30,000 gals. = $3.03 / gal.
Unit cost of Xenon = $65,000 Direct labor + 49,000 Factory overhead + 54,100
Joint costs = $168,100 / 60,000 gals. = $2.80 / gal.
3. NOTE: You may want students to read the Differential Cost Analysis section of Ch.
10 before attempting Part 3 of this case. Alternatively, you may wish to challenge
them with Part 3 to see if they can determine the relevant items to this decision
without first teaching them the concept.
The joint cost of $13,400 that is allocated to Tantalum should be ignored in
deciding whether or not it should be sold. The joint cost is a past cost that had to
be incurred just to get all three products to split-off. It will still be $100,000, even if
Tantalum is not marketed. The comparison should be made between the selling
price per unit of $3.20 and the separable costs incurred after split-off of $2.58
($77,500/30,000 gals.). Therefore, Tantalum provides incremental income of $.62
per unit and it should be processed beyond split-off and then sold.
INTERNET EXERCISE
1. Coca-Cola is headquartered in Atlanta and has approximately 139,600

associates worldwide, 50% of whom are outside the US.
2. Coca-Cola manufactures concentrates, beverage bases, and syrups and sells
them to bottling operations. To connect brands to customers, they focus on
marketing activities including print and television advertising, online programs,
retail displays, sponsorships, contests, and packaging design.
3. Coca-Cola utilizes 300 bottlers worldwide, ranging from international and
publicly-traded companies to small family owned operations.
4. The bottlers are responsible for production, packaging, distributing, and
merchandising programs worldwide. They work closely with customers to carry
out localized marketing plans.
5. The Coca-Cola company is: number one in sales of sparkling beverages and
juices and juice drinks; number two in sales of sports drinks; and number three in
sales of bottled water.
CHAPTER 7
QUESTIONS
1. A budget is a planning device that helps the Responsibility for forecasting costs and
company set goals and a gauge against accountability for actual results must be
which the results can be measured. identified with specific members of the
2. The successful use of budgets in a business organization.
setting helps to assure the maximum effi- 6. A continuous budget rolls forward so that
cient use of resources and the most favora- as one month or quarter is completed a new
ble results possible. month or quarter is added to the end of the
3. Four problem areas identified in the budget, resulting in a budget that is always
Centage/IOMA survey were: one year in advance. Advocates of continu-
* A majority of financial executives are on- ous budgeting argue that it causes manag-
ly either somewhat confident (45%) or ers to have a more long-term perspective,
not very confident/not at all confident rather than just concentrating on the next
(12%) in the accuracy of their budgets. month or quarter.
* Department managers dont take own- 7. Answers will vary. Operating budgets in-
ership or hold themselves accountable clude the sales budget, production budget,
for their pieces of the budget. direct materials budget, direct labor budget,
* Senior executives were faulted for their factory overhead budget, cost of goods sold
lack of direction on or lack of support of budget, selling and administrative expenses
the budget. budget, and the budgeted income state-
* Four out of five CFOs surveyed ex- ment. Financial budgets include the cash
pressed frustration with using spread- budget, capital expenditures budget, and
sheets in the budgeting process. pro forma financial statements including the
4. The author offered the following steps for balance sheet, retained earnings statement,
improving a companys budgeting process: and statement of cash flows.
Evaluate your process; Upgrade your tech- 8. The sales budget, or sales forecast, must be
nology; Communicate; Communicate some prepared before the other types of budgets.
more; Train and educate; Collaborate; Fol- The number of units to be sold will have a
low through. direct effect on the planning of the produc-
5. The general principles of budgeting have tion budget. Also affected will be budgets for
several requirements: administrative and selling expenses, cash,
Management must clearly define its receivables, and capital expenditures.
objectives. 9. Demand software takes numerous varia-
These goals must be realistic and pos- bles, such as projected economic conditions
sible to attain. in the industry and in the economy as a
whole, estimates of currency exchange
Development of the budget must care-
rates, and predicted weather patterns, into
fully consider global economic develop-
consideration when forecasting sales for the
ments, the general business and indus-
sales budget.
try-specific climate, and consumer and
supplier behavior that may influence 10. It is important to have front-line managers
sales and costs. participate in the budgeting process be-
cause they are the ones closest to the indi-
There must be a plan to analyze actual vidual sales territories or production depart-
operating results and compared them to ments and, therefore, should be most famil-
the budget. iar with the operations. Also, if they partici-
The budget must be flexible enough so pate in formulating the budget, they have
that it can be modified in the light of more of a vested interest in meeting or beat-
changing conditions. ing the budget numbers.
249
11. Not necessarily. The production plan must sponsible directly into the master budget at
take into consideration not only the number the budget website. This precludes em-
of units to be sold but also the inventory pol- ployees from having to prepare individual
icy, the number of units in the years begin- spreadsheets for their areas of responsibil-
ning inventory, and the number of units re- ity, which then have to uploaded and coor-
quired for the ending inventory. dinated by the budget staff.
12. a. If a companys sales fluctuate greatly 17. A flexible budget is a plan that shows what
during the year, the advantage it gains would happen to costs under varying sets of
from a stable production policy is that it conditions. Whereas the master budget is
can maintain a stable work force prepared for a single level of activity, the
throughout the year. Thus, the problems flexible budget is prepared for a range of ac-
of labor turnoversuch as hiring and tivities within which the firm may operate.
training new employees, the use of un- 18. A flexible budget is better than a master
skilled workers, and costly unem- budget for comparing actual results to
ployment insurance premiumsare budgeted expectations because the variable
greatly reduced. items such as revenue and certain costs will
A disadvantage of a stable production differ in total when the actual level of pro-
policy with fluctuating sales is that the duction or sales volume achieved is different
company must have storage facilities than the planned master budget level.
that would be unused during some part 19. It is important to distinguish between varia-
of the year, with the related costs of up- ble costs and fixed costs when preparing a
keep, insurance, and taxes. Another flexible budget because fixed costs will re-
disadvan-tage is that the company main the same in total within a relevant
would have a considerable amount of range of activity, whereas variable costs will
capital tied up in finished goods, with the change in total depending upon the volume
problem of spoilage or possible obsoles- level achieved.
cence. 20. The concept of relevant range is important
b. The advantage of a stable inventory pol- when preparing a flexible budget because
icy is that it reduces the need for stor- the assumptions made regarding unit selling
age to a minimum and releases capital prices, variable costs per unit, and total fixed
costs are only applicable within the relevant
for other purposes.
range.
A disadvantage is that fluctuating pro-
21. Yes, as illustrated in the flexible budget in
duction requires manufacturing facilities
Fig. 7-11, you may have a favorable vari-
to handle peak loads, but these would
ance for sales because the actual selling
be idle part of the time. The company
price charged was greater than the selling
would also be faced with the problems
price budgeted for, given the actual sales
of employee turnover and feelings of ill
volume achieved.
will when it attempts to adjust the labor
force to different levels of production. However, the actual sales revenue earned
13. The direct materials budget, direct labor may be less than the master budget sales
budget, and factory overhead budget can be figure because the number of units sold was
prepared subsequent to the preparation of less than the sales volume used in prepar-
the production budget. ing the master budget.
14. Kaizen means continuous improvement 22. a. Theoretical capacity represents the
and kaizen budgeting is the practice of maximum number of units that could be
building continuous improvement into the manufactured with the completely effi-
budget numbers such as labor time or mate- cient use of all facilities and personnel.
rials quantity allowable per unit of produc- b. Practical capacity is the level of pro-
tion. duction that provides complete utili-
15. Information from the sales budget, cost of zation of all facilities and personnel, but
goods sold budget, and selling and adminis- allows for some idle time due to operat-
trative expenses budget is needed to pre- ing interruptions or inefficiencies.
pare the budgeted income statement. c. Normal capacity is the level of pro-
16. Using Web-based budgeting employees duction that will meet normal require-
can input the data for which they are re- ments of an ordinary sales demand over
a period of years.
23. Yes. Normal capacity, or 100% of capacity, historical costs that have been adjusted for
usually represents the most efficient use of any distorting items and future trends and
the present facilities under normal operating possible changes. These combined estimat-
conditions with some allowance for operated overhead expenses are then divided by
ing interruptions. It is possible, however, for the standard number of units to be produced
a factory to manufacture more units than to determine the standard cost per unit.
normal by working overtime, increasing ma- 26. It is important that a standard rate, rather than
chinery or workers, and adding facilities. actual expenses, be used to charge service
department costs to producing departments,
24. No. The unit cost for factory overhead would
so that extra costs resulting from the inefficient
be determined at the 100% level of normal operation of service departments cannot be
capacity, and this unit cost would be passed on to the producing departments.
charged to Work in Process, regardless of
the number of units manufactured.
25. Factory overhead for the standard, or nor-
mal, level of production is an estimation.
The calculation must take into consideration
EXERCISES
E7-1 C. Mack Manufacturing Co.

Sales Budget
Unit Sales Unit Selling Total
Region Volume Price Sales
East 15,000 $25 $375,000
West 5,000 $25 125,000
Total 20,000 $500,000
C. Mack Manufacturing Co.

Production Budget
Units
Sales (from sales budget) ................................................ 20,000
Plus desired ending inventory, June 30 ........................... 2,000
Total ................................................................................. 22,000
Less estimated beginning inventory, June 1 .................... 3,000
Total production ............................................................... 19,000
E7-2 C. Howland Manufacturing Co.

a. Production Budget
Units to be sold ................................................................ 20,000
Ending inventory required ................................................ 1,000
Total ................................................................................. 21,000
Beginning inventory ......................................................... 3,000
Units to be manufactured during March ........................... 18,000
b. C. Howland Manufacturing Co.

Direct Materials Budget
Material A Material B
Materials needed for production of 18,000 units ... 18,000 gal. 18,000 lbs.
Ending inventory required ..................................... 1,000 1,000
Total ...................................................................... 19,000 gal. 19,000 lbs.
Beginning inventory .............................................. 500 1,000
Units to be purchased ........................................... 18,500 gal. 18,000 lbs.
Unit cost ................................................................ $2 $1
Materials purchases budget .................................. $ 37,000 $ 18,000
E7-3
a. J. Reutlinger Manufacturing Co.

Production Budget
Units
Sales ................................................................................ 45,000
Plus desired ending inventory, October 31....................... 4,000
Total ................................................................................. 49,000
Less estimated beginning inventory, October 1 ............... 5,000
Total production ............................................................... 44,000
b. J. Reutlinger Manufacturing Co.

Direct Labor Budget
Cutting Assembly Total

Hours required for production:
44,000 units x .25 ................................... 11,000
44,000 units x .50 ................................... 22,000
Hourly rate.............................................. $14 $12
Total direct labor cost ............................. $154,000 $264,000 $418,000
E7-4 Highlands Manufacturing Co.

Cost of Goods Sold Budget
Finished goods inventory, Jan. 1 ...................... $ 19,300

Work in process inventory, Jan. 1 ..................... $ 28,500
Direct materials inventory, Jan. 1 ...................... $ 31,000
Direct materials purchases ............................... 854,000
Direct materials available .................................. $ 885,000
Less direct materials inventory, Dec. 31 ........... 26,000
Cost of direct materials used ............................ $ 859,000
Direct labor ....................................................... 539,500
Factory overhead .............................................. 818,000
Total manufacturing costs ................................. $ 2,216,500
Total work in process during year ..................... $ 2,245,000
Less work in process inventory, Dec. 31........... 23,700
Cost of goods manufactured ............................. $ 2,221,300
Cost of goods available for sale ........................ $ 2,240,600
Less finished goods inventory, Dec. 31 ............ 22,400
Cost of goods sold ............................................ $ 2,218,200
E7-5 Kenwood Manufacturing Co.

Finished goods inventory, Jan. 1 ....................... $ 13,900

Work in process inventory, Jan. 1 ...................... $ 25,800
Direct materials inventory, Jan. 1 ...................... $ 36,000
Direct materials purchases ................................ 548,000
Direct materials available................................... $ 584,000
Less direct materials inventory, Dec. 31 ............ 23,000
Cost of direct materials used ............................. $ 561,000
Direct labor ........................................................ 395,500
Factory overhead ............................................... 481,000
Total manufacturing costs.................................. $ 1,437,500
Total work in process during year ...................... $ 1,463,300
Less work in process inventory, Dec. 31 ........... 27,300
Cost of goods manufactured.............................. $ 1,436,000
Cost of goods available for sale ......................... $ 1,449,900
Less finished goods inventory, Dec. 31 ............. 24,200
Cost of goods sold ............................................. $ 1,425,700
E7-6 Grecian Company

Budgeted Income Statement
Sales ................................................................... $ 1,222,700

Cost of goods sold .............................................. 727,300
Gross profit ......................................................... $ 495,400
Selling and administrative expenses ................... 244,500
Income from operations ...................................... $ 250,900
Income tax (30%) ................................................ 75,270
Net income .......................................................... $ 175,630
E7-7
a. Per unit items are as follows:
Sales = $100,000/10,000 units = $10

Direct materials = $20,000/10,000 units = $2
Direct labor = $15,000/10,000 units = $1.50
Variable factory overhead = $10,000/10,000 units = $1
Budgeted totals at the 8,000-unit level:
Sales (8,000 x $10) .................................................. $80,000

Direct materials (8,000 x $2) .................................... $16,000
Direct labor (8,000 x $1.50) ..................................... $12,000
Variable factory overhead (8,000 x $1) .................... $ 8,000
Fixed factory overhead (same at all levels) .............. $25,000
b. Budgeted totals at the 12,000-unit level:
Sales (12,000 x $10) ................................................ $120,000

Direct materials (12,000 x $2) .................................. $ 24,000
Direct labor (12,000 x $1.50) ................................... $ 18,000
Variable factory overhead (12,000 x $1) .................. $ 12,000
Fixed factory overhead (same at all levels) .............. $ 25,000
E7-8
14,000 units 15,000 units 16,000 units
Sales ..................... $1,050,000 $1,125,000 $1,200,000
Less variable
costs:
Direct materials ..... 336,000 360,000 384,000
Direct labor ............ 105,000 112,500 120,000
Variable factory
overhead ............... 210,000 225,000 240,000
Variable selling
and administrative
expense ................. 168,000 180,000 192,000
Contribution
margin ................... $231,000 $247,500 $264,000
Less fixed costs:
Fixed factory
overhead ............... 75,000 75,000 75,000
Fixed selling and

administrative
expense ................. 80,000 80,000 80,000
Operating income .. $76,000 $92,500 $109,000
E7-9
Budget Actual
(5,000 units) (5,000 units) Variance
Sales ................................ $125,000 $120,000 $ 5,000 U
Less variable costs:
Direct materials ................ 25,000 26,000 1,000 U
Direct labor ....................... 15,000 14,000 1,000 F
Variable factory
overhead .......................... 20,000 25,500 5,500 U
Variable selling and

administrative expense .... 5,000 5,500 500 U
Contribution margin .......... $ 60,000 $ 49,000 $11,000 U
Less fixed costs:
Fixed factory overhead ..... 25,000 26,750 1,750 U
Fixed selling and

administrative expense .... 20,000 19,800 200 F
Operating income ............. $ 15,000 $ 2,450 $12,550 U
E7-10
Budget Actual
Sales ................................ $120,000 $125,000 $ 5,000 F
Direct materials ................ 30,000 32,000 2,000 U
Direct labor ....................... 18,000 19,000 1,000 U
Variable factory
overhead .......................... 24,000 26,500 2,500 U

administrative expense .... 6,000 6,500 500 U
Contribution margin .......... $ 42,000 $ 41,000 $ 1,000 U
Less fixed costs:
Fixed factory overhead ..... 20,000 18,750 1,250 F
Fixed selling and

administrative expense .... 15,000 14,500 500 F
Operating income ............. $ 7,000 $ 7,750 $750 F
E7-11
Calculation of factory overhead allowed: 5,000 5,200 4,500
Units Units Units
(100%) (104%) (90%)
Fixed costs .................................................. $ 2,500 $ 2,500 $ 2,500
Variable costs ............................................. 7,500 7,800* 6,750**
Total factory overhead ................................ $ 10,000 $ 10,300 $ 9,250
Total application rate per unit ...................... $2.00 $1.98 $2.06

*$7,500 x 1.04 or $7,500/5,000 x 5,200
**$7,500 x .90 or $7,500/5,000 x 4,500
E7-12
Calculation of factory overhead allowed: 7,500 7,875 6,750
Units Units Units
(100%) (105%) (90%)
Fixed costs ................................................. $ 10,000 $10,000 $10,000
Variable costs ............................................. 15,000 15,750* 13,500**
Total factory overhead ............................... $ 25,000 $ 25,750 $23,500
Total application rate per unit ..................... $3.33 $3.27 $3.48

*$15,000 x 1.05 or $15,000/7,500 x 7,875
**$15,000 x .90 or $15,000/7,500 x 6,750
E7-13
Calculation of factory overhead allowed:
Standard Month1 Month2
8,000 7,200 8,400
Units Units Units
Fixed overhead .......................................... $ 4,000* $ 4,000 $ 4,000
Variable overhead ($1.50 per unit) ............. 12,000 10,800 12,600
Total ........................................................... $ 16,000 $ 14,800 $ 16,600
* $0.50 x 8,000
Month 1 Month 2
Budget Actual Variance Budget Actual Variance
$14,800 $14,700 $100 $16,600 $17,400 $800

Favorable Unfavorable
E7-14

Standard Month1 Month2
Units 10,000 9,500 11,000
Fixed overhead ........................................... $ 10,000* $ 10,000 $ 10,000

Variable overhead ($2.00 per unit).............. 20,000 19,000 22,000
Total ............................................................ $ 30,000 $ 29,000 $ 32,000
* $1.00 x 10,000
Month 1 Month 2
$29,000 $30,500 $1,500 $32,000 $32,250 $250

Unfavorable Unfavorable
PROBLEMS
P7-1
a. Maximo Manufacturing Company

Production Budget
Sales40,000
Plus desired end. inv., 5/31 6,000
Total 46,000
Less estimated beg. inv.,5/1 2,000
Total production..44,000
P7-1 Continued
b. Maximo Manufacturing Company

Material X Material Y
Quantities required for production:
44,000 units 1 gal. 44,000
44,000 units 1 lb.. 44,000
Plus desired end. Inv., 5/31 2,000 2,000
Total 46,000 46,000
Less estimated beg. Inv.,5/1. 1,000 2,000
Total quantity to be purchased 45,000 44,000
Unit price $4 $2
Total direct materials purchases $180,000 $88,000
c. Maximo Manufactng Company

Direct Labor Budget
Forming Dept. Finishing Dept.

44,000 units .50 hrs. 22,000
44,000 units 1.00 hrs.. 44,000
Hourly rate $18 $15
Total direct labor cost. $396,000 $660,000
P7-2
1.
Royal Tire Company
Sales Budget
Unit Unit Total

Product Sales Volume Selling Price Sales
Passenger car tires 120,000 $65 $ 7,800,000
Truck tires 25,000 $200 5,000,000
Total 145,000 $ 12,800,000
2.
Royal Tire Company
Production Budget
Units
Passenger Truck
Car Tires Tires
Sales (from sales budget) ............................ 120,000 25,000
Plus desired ending inventory, Dec. 31 ........ 6,000 2,500
Total ............................................................. 126,000 27,500
Less estimated beginning inventory, Jan. 1 . 5,000 2,000
Total production ........................................... 121,000 25,500
P7-2 Continued
3. Royal Tire Company

Direct Materials Total

Rubber Steel Belts
(lbs.) (lbs.)
Passenger car tires:
121,000 x 10 lbs ...................................... 1,210,000
121,000 x 1.5 lbs. .................................... 181,500
Truck tires:
25,500 x 30 lbs. ....................................... 765,000
25,500 x 4 lbs. ......................................... 102,000
Plus desired ending inventory, Dec. 31 ......... 60,000 6,000
Total .............................................................. 2,035,000 289,500
Less estimated beginning inventory, Jan. 1 .. 75,000 7,000
Total quantity to be purchased ...................... 1,960,000 282,500
Unit price ....................................................... $2 $3
Total direct materials purchases ................... $3,920,000 $847,500 $4,767,500

Direct Labor Budget
Department Total
Molding Finishing
Passenger car tires:
121,000 x .10 ..................... 12,100
121,000 x .05 ..................... 6,050
Truck tires:
25,500 x .25 ....................... 6,375
25,500 x .15 ....................... 3,825
Total ......................................... 18,475 9,875
Hourly rate ............................... $15 $13
Total direct labor cost .............. $ 277,125 $ 128,375 $405,500
P7-2 Continued

Factory Overhead Budget
Indirect materials ..................................... $198,500

Indirect labor ........................................... 213,200
Depreciation of building and equipment .. 157,500
Power and light ....................................... 122,900
Total factory overhead cost ..................... $692,100


Direct materials inventory, Jan. 11 .................... $ 171,000
Direct materials purchases................................ 4,767,500
Total direct materials available .......................... $4,938,500
Less direct materials inventory, Dec. 312 .......... 138,000
Cost of direct materials used............................. $4,800,500
Direct labor........................................................ 405,500
Cost of goods manufactured ............................. 5,898,100
Cost of goods available for sale ........................ $6,224,578
Less finished goods inventory, December 31 ... 400,510
Cost of goods sold ............................................ $ 5,824,068
1
Rubber: 75,000 lbs. x $2 $150,000
Steel belts: 7,000 lbs. x $3 21,000
$171,000
2
Rubber: 60,000 lbs. x $2 $120,000
Steel belts: 6,000 lbs. x $3 18,000
$138,000
P7-3

Selling and Administrative Expenses Budget
Selling expenses:
Advertising expense ................................ $ 942,000
Sales salaries expense ........................... 868,000
Travel expense ........................................ 443,000
Total selling expenses ............................. $2,253,000
Administrative expenses:
Office salaries expense ........................... $ 821,000
Officers salaries expense ....................... 661,000
Office rent expense ................................. 125,000
Office supplies expense .......................... 45,500
Telephone and fax expense .................... 33,500
Total administrative expenses ................. 1,686,000
Total selling and administrative expenses .... $3,939,000

Sales ..................................................... $ 12,800,000

Cost of goods sold ................................ 5,824,068
Gross profit............................................ $ 6,975,932
Selling and administrative expenses ..... 3,939,000
Income from operations......................... $ 3,036,932
Income tax............................................. 1,214,773
Net income ............................................ $ 1,822,159
P7-4
1.
Wicker Works Inc.
Sales Budget
Unit Unit Total

Product Sales Volume Selling Price Sales
Tables 30,000 $175 $ 5,250,000
Chairs 120,000 $75 9,000,000
Total 150,000 $ 14,250,000
P7-4 Continued
2.
Wicker Works, Inc.
Production Budget
Units
Tables Chairs
Sales (from sales budget) ............................ 30,000 120,000

Plus desired ending inventory, Dec. 31 ........ 1,500 6,000
Total ............................................................. 31,500 126,000
Less estimated beginning inventory, Jan. 1 . 1,000 4,000
Total production ........................................... 30,500 122,000
3. Wicker Works, Inc.

Direct Materials Total

Binding
Rattan cane
(yd.) (yd.)
Tables:
30,500 x 10 yd. ........................................ 305,000
30,500 x 6 yd.. ......................................... 183,000
Chairs:
122,000x 6 yd.. .......................................... 732,000
122,000 x 3 yd.. ....................................... 366,000
Plus desired ending inventory, Dec. 31 ......... 51,000 25,500
Total .............................................................. 1,088,000 574,500
Less estimated beginning inventory, Jan. 1... 34,000 17,000
Total quantity to be purchased ...................... 1,054,000 557,500
Unit price ....................................................... $5 $3
Total direct materials purchases .................... $5,270,000 $6,942,500
$1,672,500
P7-4 Continued

Direct Labor Budget
Department Total
Assembly Finishing
Tables:
30,500 x .5 ........................... 15,250
30,500 x .25 ....................... 7,625
Chairs:
122,000 x .25 ..................... 30,500
122,000 x .10 ....................... 12,200
Total ......................................... 45,750 19,825
Hourly rate ............................... $15 $13
Total direct labor cost .............. $ 686,250 $ 257,725 $943,975

Factory Overhead Budget
Indirect materials ..................................... $ 98,500

Indirect labor ............................................ 132,200
Depreciation of building and equipment .. 57,500
Power and light ........................................ 92,200
Total factory overhead cost ..................... $380,400
P7-4 Continued


Direct materials inventory, Jan. 11 .................... $ 221,000
Direct materials purchases................................ 6,942,500
Total direct materials available .......................... $7,163,500
Less direct materials inventory, Dec. 312 .......... 331,500
Cost of direct materials used............................. $ 6,832,000
Direct labor........................................................ 943,975
Cost of goods manufactured ............................. 8,156,375
Cost of goods available for sale ........................ $8,396,375
Less finished goods inventory, December 31 ... 360,000
Cost of goods sold ............................................ $8,036,375
1
Rubber: 34,000 lbs. x $5 $170,000
Steel belts: 17,000 lbs. x $3 51,000
$221,000
2
Rubber: 51,000 lbs. x $5 $255,000
Steel belts: 25,500 lbs. x $3 76,500
$331,500
P7-5

Selling and Administrative Expenses Budget
Selling expenses:
Advertising expense ................................ $ 429,000
Sales salaries expense ........................... 688,000
Travel expense ........................................ 244,000
Total selling expenses ............................. $1,361,000
Administrative expenses:
Office salaries expense ........................... $ 281,000
Officers salaries expense ....................... 166,000
Office rent expense ................................. 105,000
Office supplies expense .......................... 25,500
Telephone and fax expense .................... 13,500
Total administrative expenses ................. 591,000
Total selling and administrative expenses .... $1,952,000

Sales ..................................................... $ 14,250,000

Cost of goods sold ................................ 8,036,375
Gross profit............................................ $ 6,213,625
Selling and administrative expenses ..... 1,952,000
Income from operations......................... $ 4,261,625
Income tax............................................. 1,278,488
Net income ............................................ $ 2,983,137
P7-6
Sales ($150 per unit) .............................. $4,350,000 $4,650,000
Direct materials:
Lumber ($20 per unit) ............................. $ 580,000 $ 620,000
Paint ($4 per unit) ................................... 116,000 124,000
Direct labor:
Cutting ($3.75 per unit) ........................... 108,750 116,250
Assembly ($2.40 per unit) ....................... 69,600 74,400
Painting ($1.50 per unit) ......................... 43,500 46,500
Variable factory overhead

($6.93 per unit) ....................................... 200,970 214,830
Variable selling and administrative

expense ($25.79 per unit) ....................... 747,910 799,490
Total variable expense............................ $1,866,730 $1,995,470
Contribution margin ................................ $2,483,270 $2,654,530
Fixed factory overhead ........................... 207,825 207,825
Fixed selling and

administrative expense ........................... 773,825 773,825
Operating income ................................... $1,501,620 $1,672,880
P7-7
1.
Scottsdale Styles, Inc.
Performance Report
May, 2013
Budgeted Actual
Sales ($150 per unit) .......................... $4,650,000 $4,800,000 $150,000 F
Direct materials:
Lumber ($20 per unit) ......................... $ 620,000 $ 633,000 $ 13,000 U
Paint ($4 per unit) ............................... 124,000 127,500 3,500 U
Direct labor:
Cutting ($3.75 per unit) ....................... 116,250 115,200 1,050 F
Assembly ($2.40 per unit) ................... 74,400 75,300 900 U
Paint ($1.50 per unit) .......................... 46,500 47,100 600 U
Variable factory overhead

($6.93 per unit) ................................... 214,830 222,905 8,075 U
Variable selling and administrative
expense ($25.79 per unit) ................... 799,490 777, 400 22,090 F
Total variable expense ........................ $1,995,470 $1,998,405 $ 2,935 U
Contribution margin ............................ $2,654,530 $2,801,595 $147,065 F

Fixed factory overhead ....................... 207,825 210,500 2,675 U
Fixed selling and

773,825 765,800 8,025 F
administrative expense .......................
Operating income ............................... $1,672,880 $1,825,295 $152,415 F
P7-7 Continued
2. The master budget operating income at the 30,000 unit level was $1,587,250,
whereas the actual operating income at the 31,000 unit level was $1,825,295. This
difference of $238,045 was caused mostly by the difference between actual sales
revenue and master budget sales revenue--- selling 1,000 units (31,000 30,000)
more than budgeted and selling the units at an average selling price of $154.84
($4,800,000 / 31,000) as compared to the budgeted selling price of $150 per unit.
3. Its cost control was not especially good. The total variable expenses, which are the
ones that the company has the most control over, were $2,935 unfavorable. Most of
the variable manufacturing expenses were unfavorable, whereas the variable selling
expenses were favorable.
P7-8
1.
Scottsdale Styles, Inc.
Performance Report
May, 2013
Budgeted (29,000 units) Actual (29,000 units) Variance

Sales ($150 per unit) $4,350,000 $4,200,000 $150,000 U
Direct materials:
Lumber ($20 per unit) 580,000 565,000 15,000 F
Paint ($4 per unit) 116,000 121,000 5,000 U
Direct labor:
Cutting ($3.75 per unit) 108,750 110,000 1,250 U
Assembly ($2.40 per 69,600 71,200 1,600 U
unit)
Painting ($1.50 per unit) 43,500 44,600 1,100 U
Variable factory over- 200,970 202,000 1,030 U
head ($6.93 per unit)
Variable selling and 747,910 741,300 6,610 F
administrative expense
($25.79 per unit)
Total variable expense $1,866,730 $1,855,100 $ 11,630 F
Contribution margin $2,483,270 $2,344,900 $138,370 U
Fixed factory overhead 207,825 210,500 2,675 U
Fixed selling and admin- 773,825 770,200 3,625 F
istrative expense
Operating income $1,501,620 $1,364,200 $137,420 U
2. The master budget operating income at the 30,000-unit level was $1,587,250,
whereas the actual operating income at the 29,000-unit level was $1,364,200. This
$223,050 difference was caused mostly by selling 1,000 units fewer (30,000
29,000) than the master budget called for and selling the units at an average selling
price of $144.83 rather than at the budgeted selling price of $150 per unit.
3. Given the level that it operated at, the companys control of variable expenses was
quite good. The total variable expenses, which are the ones that the company has
the most control over, were $11,630 favorable. This was mostly due the large favor-
able variances for lumber and variable selling expenses.
P7-9
1. Factory Overhead Cost Budget

Percent of normal capacity ........................................ 80% 90% 110%
Number of units ......................................................... 4,000 4,500 5,500
Number of standard direct labor hours ...................... 16,000 18,000 22,000
Budgeted factory overhead:
Fixed cost:
Depreciation on building and machinery .......... $ 1,200 $ 1,200 $ 1,200
Taxes on building and machinery ..................... 500 500 500
Insurance on building and machinery ............... 500 500 500
Superintendents salary .................................... 1,500 1,500 1,500
Supervisors salaries ........................................ 2,300 2,300 2,300
Maintenance wages ......................................... 1,000 1,000 1,000
Total fixed cost ............................................. $ 7,000 $ 7,000 $ 7,000
Variable cost:
Repairs ($.02 / direct labor hour) ...................... $ 320 $ 360 $ 440
Maintenance supplies ($.015 / dlh) .................. 240 270 330
Other supplies ($.01 / dlh) ................................ 160 180 220
Payroll taxes ($.04 / dlh)................................... 640 720 880
Small tools ($.015 / dlh).................................... 240 270 330
Total variable cost ........................................ $ 1,600 $ 1,800 $ 2,200
Total factory overhead cost ....................................... $ 8,600 $ 8,800 $ 9,200
The rate for application of factory overhead to work in process is $1.80 per unit
($9,000 5,000 units) or $0.45 per direct labor hour ($9,000 20,000 hours) at all
levels, because the predetermined overhead rate is based on normal capacity.
P7-9 Continued
Percent of normal capacity ....................................... 80% 90% 110%
Number of units......................................................... 4,000 4,500 5,500
Fixed cost:
Taxes on building and machinery .................... $ 500 $ 500 $ 500
Insurance on building and machinery .............. 500 500 500
Superintendents salary ................................... 1,500 1,500 1,500
Total fixed cost ............................................ $ 2,500 $ 2,500 $ 2,500

Semifixed cost:
Depreciation of building and machinery ........... $ 1,200 $ 1,200 $ 1,300*
Supervisors salaries ....................................... 2,300 2,300 3,175**
Maintenance wages ......................................... 500*** 1,000 1,000
Repairs ............................................................ 200**** 360 440
Total semifixed cost ..................................... $ 4,200 $ 4,860 $ 5,915
Variable cost:
Other supplies ................................................. 160 180 220

Payroll taxes .................................................... 640 720 880
Small tools ....................................................... 240 270 330
Maintenance supplies ...................................... 240 270 330
Total variable cost ....................................... $ 1,280 $ 1,440 $ 1,760
Total factory overhead cost ....................................... $ 7,980 $ 8,800 $10,175
* $1,200 + ($12,000/120 months) = $1,300

** $2,300 + ($10,500/12 months) = $3,175
*** $1,000 - ($6,000/12 months) = $500
**** $400
P7-10

Percent of normal capacity ........................................ 80% 90% 110%
Number of units ......................................................... 8,000 9,000 11,000
Number of standard direct labor hours ...................... 24,000 27,000 33,000
Fixed cost:
Depreciation on building and machinery .......... $ 1,800 $ 1,800 $ 1,800
Taxes on building and machinery ..................... 750 750 750
Insurance on building and machinery ............... 800 800 800
Superintendents salary .................................... 2,200 2,200 2,200
Supervisors salaries ........................................ 3,100 3,100 3,100
Maintenance wages ......................................... 1,500 1,500 1,500
Total fixed cost ............................................. $10,150 $ 10,150 $10,150
Variable cost:
Repairs ($.02 / direct labor hour) ...................... $ 480 $ 540 $ 660
Maintenance supplies ($.015 / dlh) .................. 360 405 495
Other supplies ($.01 / dlh) ................................ 240 270 330
Payroll taxes ($.04 / dlh)................................... 960 1,080 1,320
Small tools ($.02 / dlh)...................................... 480 540 660
Total variable cost ........................................ $ 2,520 $ 2,835 $ 3,465
Total factory overhead cost ....................................... $12,670 $ 12,985 $13,615
The rate for application of factory overhead to work in process is $1.33 per unit
($13,300 10,000 units) or $.443 per direct labor hour ($13,300 30,000 hours) at all
levels, because the predetermined overhead rate is based on normal capacity.
P7-10 Continued
Percent of normal capacity ....................................... 80% 90% 110%
Number of units......................................................... 8,000 9,000 11,000
Fixed cost:
Taxes on building and machinery .................... $ 750 $750 $ 750
Insurance on building and machinery .............. 800 800 800
Superintendents salary ................................... 2,200 2,200 2,200
Total fixed cost ............................................ $ 3,750 $3,750 $ 3,750

Semi-variable/fixed cost:
Depreciation of building and machinery ........... $ 1,800 $ 1,800 $ 1,950*
Supervisors salaries ....................................... 3,100 3,100 4,850**
Maintenance wages ......................................... 750*** 1,500 1,500
Repairs ............................................................ 300**** 540 660
Total semi-variable/fixed cost .......................... $ 5,950 $ 6,940 $ 8,960

Variable cost:
Other supplies ................................................ $ 240 $ 270 $ 330
Payroll taxes .................................................... 960 1,080 1,320
Small tools ....................................................... 480 540 660
Maintenance supplies ....................................... 360 405 495
Total variable cost ....................................... $ 2,040 $ 2,295 $ 2,805
Total factory overhead cost ....................................... $11,740 $12,985 $15,515
* $1,800 + ($18,000 / 120 months) = $1,950

** $3,100 + ($21,000 / 12 months) = $4,850
*** $1,500 - ($9,000/12 months) = $750
**** $600
P7-11
1. Total factory overhead per unit ............................................................. $ 32

Variable factory overhead per unit ($32 75%) .................................... $ 24
Fixed factory overhead per unit ($32 25%) ........................................ 8
Total factory overhead per unit ......................................................... $ 32
2. Variable factory overhead rate per direct labor hour
($24 4 direct labor hours per unit) .................................................. $6
Fixed factory overhead rate per direct labor hour
($8 4 direct labor hours per unit) .................................................... $2
3. Total fixed factory overhead ($2 2,400 direct labor hours) ................. $4,800
P7-12
1. Total factory overhead per unit ............................................................. $ 24

Variable factory overhead per unit ($24 2/3) ...................................... $ 16
Fixed factory overhead per unit ($24 1/3) .......................................... 8
Total factory overhead per unit ......................................................... $ 24
2. Variable factory overhead rate per direct labor hour
($16 2 direct labor hours per unit) .................................................. $8
Fixed factory overhead rate per direct labor hour
($8 2 direct labor hours per unit) .................................................... $4
3. Total fixed factory overhead ($4 2,700 direct labor hours) ................. $10,800
MINI-CASE
1. No, I do not necessarily agree with the production manager that manufacturing did
a good job controlling costs. This is an apples to oranges comparison because
master budget unit volume was 50,000, whereas actual results were based on the
production and sale of 45,000 units. One would expect the cost variances to be fa-
vorable, given this type of comparison.
2.
Flexible budget 45,000 50,000 55,000
per unit Units Units Units
Sales $ 25.00 $1,125,000 $1,250,000 $1,375,000
Less variable expenses:
Direct materials .................. $ 4.50 202,500 225,000 247,500
Direct labor ........................ 3.75 168,750 187,500 206,250
Variable factory overhead .. 2.25 101,250 112,500 123,750

administrative expense ...... 1.50 67,500 75,000 82,500
Total variable expense ....... $ 12.00 $ 540,000 $ 600,000 $ 660,000
Contribution margin............ $ 13.00 $ 585,000 $ 650,000 $ 715,000
Less fixed expenses:

expense ............................. $ 100,000 $ 100,000 $ 100,000
Fixed selling and

administrative expense ...... 150,000 150,000 150,000
Total fixed expense ............ $ 250,000 $ 250,000 $ 250,000
Income from operations ..... $ 335,000 $ 400,000 $ 465,000
MINI-CASE Concluded
3.
Actual Flexible
Flexible Results Budget
Budget (45,000 (45,000
per Unit units) units) Variance
Sales.................................... $ 25.00 $1,125,000 $1,125,000 ---
Less variable expenses:
Direct materials .................... $ 4.50 $ 212,500 202,500 $10,000 U
Direct labor .......................... 3.75 175,750 168,750 7,000 U
Variable factory overhead .... 2.25 110,250 101,250 9,000 U
administrative expense ........ 1.50 70,500 67,500 3,000 U
Total variable expense......... $ 12.00 $ 569,000 $ 540,000 $29,000 U
Contribution margin ............. $ 13.00 $ 556,000 $ 585,000 $29,000 U
Less fixed expenses:
expense .............................. $ 95,000 $ 100,000 ($ 5,000 F)
Fixed selling and
administrative expense ....... 160,000 $ 150,000 10,000 U
Total fixed expense............. $ 255,000 $ 250,000 $ 5,000 U
Income from operations ...... $ 301,000 $ 335,000 $34,000 U
4. Manufacturing did not do a good job controlling costs. The variances for direct
materials, direct labor, and variable factory overhead totaled $26,000 unfavorable.
The variance for fixed factory overhead was $5,000 favorable, but that was
probably due to a budgeting mis-estimate.
5. The accountants responsibilities, using the IMA Statement of Ethical Professional

Practice include:
Under Competence: (3.) Provide decision support information and recommenda-
tions that are accurate, clear, concise, and timely.
Under Credibility: (1.) Communicate information fairly and objectively, (2.) Dis-
close all relevant information that could reasonably be expected to influence an
intended users understanding of the reports, analyses, or recommendations.
INTERNET EXERCISE
1. Kaizen is a Japanese philosophy that focuses on continuous improvement

throughout all aspects of life. When applied to the workplace, kaizen activities con-
tinually improve all functions of a business.
2. Kaizen is a daily activity, the purpose of which goes beyond simple productivity im-
provement. When done correctly, it humanizes the workplace, eliminates overly
hard work, and teaches people how to learn to spot and eliminate waste in business
processes.
3. In Japan, after World War ll, American occupation forces brought in American
experts in statistical control methods to help restore the nation. Training Within
Industry programs included Job Instruction (standard work) and Job Methods
(process improvement) taught by experts such as W. Edwards Deming and Joseph
Juran.
4. The kaizen philosophy is focused in a different direction from the command and
control improvement programs of the mid-20th century. Large-scale preplanning
and extensive project scheduling are replaced by smaller experiments in improve-
ment, which can be rapidly adapted as new improvements are suggested.
5. The Toyota Production System is known for kaizen, where all line personnel are
expected to stop their moving production line in the case of any abnormality, and
suggestions for improvement are rewarded.1
1
Wikipedia, the free encyclopedia, viewed 8/14/2011
CHAPTER 8
QUESTIONS
1. Management determines in advance what 7. Reasons for Southwest Airlines $135 million
the cost should be to manufacture a product increase in operating income due to effi-
and subsequently compares the actual cost ciencies included: approximately $45.5 mil-
of manufacturing the product with this lion from obtaining better gas mileage per
standard. Deviations from the standard can available seat mile; $23 million from flying
be immediately determined, inefficiencies 1.4 billion fewer available seat miles to
can be readily detected, and appropriate ac- achieve targeted revenue, thereby using
tion can be taken to correct an unfavorable less fuel; and approximately $66.5 million
situation. Using a standard cost accounting due to an increase in miles flown per pas-
system, management has a specific goal for senger.
production costs. If this goal is not reached, 8. Price variances in materials costs are the
management also has the information to de- differences between standard and actual
termine why it was not achieved. costs due to fluctuations in the price paid for
2. Standard cost is the predetermined calcula- the raw materials. Quantity variances in ma-
tion of what the cost should be. Actual cost terials costs are the differences between
is the historical cost, which can be deter- standard and actual costs due to fluctua-
mined only after a product or job has been tions in the quantities of materials used.
completed. 9. Rate variances in labor costs are the differ-
3. A standard is a norm against which perfor- ences between standard and actual costs
mance can be measured. Specific answers due to fluctuations in wage rates. Efficiency
will vary, but examples might include: a 200 variances in labor costs are the differences
average in bowling; a 1300 SAT score to get between standard and actual costs due to
into a good university; and 10 sacks per fluctuations in the number of labor hours re-
season for an NFL lineman. quired to complete a product or job.
4. Standard costs are determined for direct 10. Not necessarily. A favorable variance simply
materials, direct labor, and factory over- indicates that price and/or usage was below
head. The standard costs, the actual costs, standard. Analysis might determine a good
and the variances are recorded in appropri- situation, such as more efficiency resulting
ate accounts. Variances are analyzed and in a true savings in quantity, time, price, or
investigated, and appropriate action is tak- rate; or this analysis might show a bad sit-
en. uation, such as a lower price being paid for
5. The setting of standards involves a pooling inferior materials or unskilled workers, or
of knowledge and experience of all the fac- quality being reduced by using smaller
tory personnel. It is possible to review com- quantity of materials, or speeding up pro-
pletely every manufacturing element that af- duction. An unfavorable variance indicates
fects the cost of a completed product, and to the price and/or usage was above standard.
establish a standard cost for each type of This situation can be bad if it is due to inef-
product. In setting standard materials cost, ficiencies, but good if it results in a better
the exact quantity of materials per unit that product at a competitive price.
should be used and the price per unit that
should be paid must be determined. In set- 11. A materials purchase price variance is
ting labor standards, the amount of labor based on the quantity of materials pur-
time per unit that should be used and the chased, whereas a materials price variance
cost per hour that should be paid must accu- is based on the quantity of materials used.
rately be determined. 12. Variances are usually recorded in the gen-
6. A variance is a difference or deviation from eral journal at the end of the month, except
an established goal. In standard cost ac- for the materials purchase price variance,
counting, it indicates a difference between which is recorded at the time of purchase.
the actual costs that were incurred and the 13. Standard costs for materials, labor, and factory
standard costs that should have been overhead are charged to Work in Process.
achieved.
283
14. The finished goods and work in process ac- offset by time savings, as indicated by a fa-
counts are generally valued at standard vorable labor efficiency variance; or there
cost, although some companies will adjust could be a favorable materials quantity vari-
these accounts at the end of the accounting ance due to the fact that the personnel are
period to reflect actual cost. The materials more capable. The reverse is also true; hir-
account will reflect actual cost or standard ing less skilled personnel at a lower rate
cost, depending upon whether the price var- may create a favorable labor rate variance,
iance is recorded when materials are used but this variance might be offset by an un-
or when they are purchased. favorable labor efficiency variance or an un-
15. The cost accountant must consider usage favorable materials quantity variance.
and price. Consideration must be given to 19. Definitely yes! Even when there is no net
the actual quantity of materials and labor variance, further analysis may produce a
used in comparison with the standard, and a materials price variance that exactly offsets
comparison must be made of the actual cost a materials quantity variance. These vari-
of materials and labor to the standard cost. ances, even though offsetting, must still be
16. a. Inefficient purchasing methods, use of analyzed by management.
more costly materials than the stand- 20. The entry to transfer the cost of the finished
ards called for, or an increase in market units from the first department to a subse-
price. quent department in a standard cost system
b. More efficient purchasing methods, use is made at the standard cost that should
of less costly materials than the stand- have been incurred to make the units in that
ards called for, or a decrease in market department.
price. 21. If large amounts of inventory remain in work
c. More waste or spoilage of materials in process and finished goods at the end of
than was built into the standards, the the period, it could materially misstate the fi-
deliberate use of more materials to en- nancial statements by charging the entire
hance the product, or poor quality of amount of the variances to cost of goods
materials. sold.
d. Greater efficiency in planning and usage 22. A flexible-budget variance is a deviation that
of materials, the use of higher quality arises when the actual factory overhead ex-
materials than the standard called for, or ceeds or is less than the overhead expense
the use of more highly skilled workers budgeted for a given level of production.
resulting in less waste. 23. A flexible-budget variance indicates that fac-
tory overhead was more or less than the al-
17. a. The hiring of more highly skilled workers
lowed amount. This variance must be traced
than needed for the job, or an unfore-
to the department in which it was incurred
seen change in wage rates due to labor- and the persons responsible must account
management negotiations. for this variance. If the variance is unfavora-
b. A more efficient job in hiring employees, ble, immediate action must be taken to elim-
or the hiring of less skilled personnel at inate inefficient conditions. If the variance is
a lower rate. favorable, it must be determined whether
c. Poor supervision in the factory allowing any advantage can be derived from this sit-
employees to waste time, the use of un- uation.
skilled workers, machinery breakdowns, 24. A production-volume variance arises when
poor production scheduling, or having to actual production is more or less than the
work with inferior materials. standard volume. Work in Process is charged
d. Hiring of more highly skilled personnel, with the established standard unit cost for
a speed-up in production, more efficient factory overhead when actually, due to the ef-
supervision, or working with high-quality fect of fixed costs remaining the same in total
materials. and varying on a per unit basis, it would be
logical to expect that unit cost would change
18. Yes. Quite often there is a relationship be- inversely with production volume.
tween variances. The cost accountant and
management must be alert to these situa-
tions. For example, an unfavorable labor
rate variance caused by hiring more highly
skilled personnel at a higher rate may be
25. A production-volume variance indicates that 27. The flexible-budget variance with a debit
the actual volume of production was not at balance indicates that the actual overhead
the standard level. A favorable variance in- exceeded the flexible budget for overhead at
dicates that volume was higher than stand- the level of activity attained.
ard, and an unfavorable variance indicates The production-volume variance with a
that it was lower. It is possible that the actu- debit balance indicates an underutilization of
al production volume was expected by man- capacity.
agement and is the result of normal, sea- 28. The flexible-budget variance from the two-
sonal increases and decreases in produc- variance method encompasses the variable-
tion; but if not planned, the reason for the spending, variable-efficiency, and fixed-
deviation must be investigated. spending variances from the four-variance
If actual production volume was lower method.
than anticipated, this might be due to poor 29. The primary difference between the two
scheduling, machine breakdowns, or ineffi- methods of calculation is that the three-
cient super-vision of labor. These conditions variance method determines the budget al-
must be corrected. lowances based on actual hours worked ra-
If the volume was higher than expected, ther than on the standard number of hours
this might be due to extra-efficient condi- allowed for the units produced.
tions, but it is not necessarily favorable. 30. The variable overhead spending variance
Overproduction can put a strain on facilities measures the effect of differences in the ac-
and can require extra expenditures for han- tual variable overhead rate and the standard
dling, insurance, and taxes, as well as the variable overhead rate. The variable over-
extra investment in unneeded inventory. head efficiency variance measures the
26. No. It is possible that there would be no flex- change in variable overhead usage that oc-
ible-budget variance if actual overhead is curs because of efficient or inefficient use of
the same as the amount allowed for the ac- the overhead allocation base. The fixed
tual level of production; however, when pro- overhead spending variance measures
duction volume is more or less than the the difference between the actual fixed
standard level, there will be a production- overhead and the budgeted fixed overhead.
volume variance. The fixed overhead production-volume
variance is the difference between budget-
ed fixed overhead and the overhead applied
to production via the overhead rate.
EXERCISES
E8-1
a. Standard Cost Summary

Materials2 lbs. @ $8 ............................................ $16
Labor1 hr. @ $10 ................................................. 10
Factory overhead$4,000 1,000 units ................. 4
Standard unit cost .................................................... $30
Note: The standard cost is the same for E8-2 through E8-5.
b.
Case 1: Materials price variance = AQ (AP-SP)
= 2,000 ($8.50-$8.00)
= $1,000 U
Case 2: Materials quantity variance= SP (AQ-SQ)

= $8 [1,900 - (1,000 2)]
= $800 F
c. Case 1
(1) Work in Process (2,000 $8) ........................... 16,000
Materials Price Variance (U)
(2,000 $0.50) ................................................. 1,000
Materials (2,000 $8.50) ............................ 17,000
(2) Work in Process (1,000 hrs. $10) .................. 10,000
Payroll ........................................................ 10,000
(3) Work in Process ............................................... 4,000
Factory Overhead ....................................... 4,000
Case 2
(1) Work in Process ............................................... 16,000
Materials Quantity Variance (F)
(100 $8). .................................................. 800
Materials (1,900 $8) ................................. 15,200
(2) Work in Process ............................................... 10,000
Payroll ........................................................ 10,000
(3) Work in Process ............................................... 4,000
d. Cases 1 and 2
Finished Goods (1,000 x $30) .......................... 30,000
Work in Process ......................................... 30,000
Note: This entry is the same for E8-2 and E8-3.
E8-2
a. Same as E8-1.
b.
Case 1: Labor rate variance= AQ (AP SP)
= 1,000 ($10.20 $10.00)
= $200 U
Case 2: Labor efficiency variance= SP (AQ SQ)
= $10 [900 (1,000 1)]
= $1,000 F
c. Case 1
(1) Work in Process ............................................... 16,000
Materials ..................................................... 16,000
(2) Work in Process ............................................... 10,000
Labor Rate Variance (U)
(1,000 $0.20) ................................................. 200
Payroll (1,000 $10.20) .............................. 10,200
(3) Work in Process ............................................... 4,000
Case 2
(1) Work in Process ............................................... 16,000
Materials ..................................................... 16,000
(2) Work in Process ............................................... 10,000
Labor Efficiency Variance (F)
(100 $10).................................................. 1,000
Payroll (900 $10) ...................................... 9,000
(3) Work in Process ............................................... 4,000
d. Same as E8-1
E8-3
a. Same as E8-1.
b. Materials price variance = AQ (AP SP)
= 1,900 ($8.50 $8.00)
= $950 U
Materials quantity variance same as in E8-1 ($800 F)
Labor rate variance = AQ (AP SP)

= 900 ($10.20 $10.00)
= $180 U
Labor efficiency variance = same as in E8-2 ($1,000 F)
c. (1) Work in Process ............................................... 16,000
(1,950 $0.50) ................................................. 950
(100 $8) ................................................... 800
Materials (1,900 $8.50) ............................ 16,150
(2) Work in Process ............................................... 10,000
(900 $0.20) .................................................... 180
(100 $10) ................................................. 1,000
Payroll (900 $10.20) ................................ 9,180
(3) Work in Process ............................................... 4,000
d. Same as E8-1.
E8-4
a. Same as E8-1.
b. Materials price variancesame as in E 8-3.
Materials quantity variance = SP (AQ SQ)
= $8 [1,900 (900 2)]
= $800 U
Labor rate variance --- same as in E8-3
Labor efficiency variance = SP (AQ SQ)
= $10 [900 (900 1)]
= $-0-
c. (1) Work in Process (900 $16) ............................ 14,400
(1,900 $0.50) ................................................. 950
Materials Quantity Variance (U)
(100 $8). 800
Materials (1,900 $8.50) ............................ 16,150
(2) Work in Process (900 $10)............................. 9,000
(900 $0.20) .................................................... 180
Payroll (900 $10.20) ................................. 9,180
(3) Work in Process ............................................... 3,600
Factory Overhead (900 $4) ...................... 3,600
d. Finished Goods (900 $30) ............................. 27,000
Work in Process.......................................... 27,000
E8-5
a. Same as E8-1.
b. Materials price variance--- same as in E8-3.
Materials quantity variance = SP (AQ SQ)
= $8 [1,900 (1,100 x 2)]
= $2,400 F
Labor rate variance--- same as in E8-3.
Labor efficiency variance = SP (AQ SQ)
= $10 [ 900 (1,100 x 1)]
= $2,000 F
c. (1) Work in Process (1,100 $16) ......................... 17,600
(1,900 $0.50) ................................................. 950
(300 $8) ................................................... 2,400
Materials (1,900 $8.50) ............................ 16,150
(2) Work in Process (1,100 $10) ......................... 11,000
(900 $0.20) .................................................... 180
(200 x $10).. 2,000
Payroll (900 $10.20) ................................ 9,180
(3) Work in Process ............................................... 4,400
Factory Overhead (1,100 $4) ................... 4,400
d. Finished Goods (1,100 $30) .......................... 33,000
Work in Process ......................................... 33,000
E8-6
1. Actual quantity actual price = total cost of purchases

200,000 $0.175 = $35,000
2. (Actual price Standard price) x Actual quantity purchased = Materials Price

Variance = ($.175 $.170) x 200,000 = $1,000 U
3. (Actual quantity standard quantity) x Standard price = Materials Qty. Var.

(185,000 170,000) x $.17 = $2,550 U
4. Materials price variance +/ Materials quantity variance = Net materials variance

$1,000 U+ $2,550 U = $3,550 U
E8-7
Units produced standard
Actual labor hours labor hours per unit
Actual labor cost standard rate per hour standard rate per hour
31,110 hrs. $13.22* = 31,110 hrs. $12.50 = 6,100 4.5 hrs. $12.50 =
$411,274.20 $388,875 $343,125
1. Labor Rate Variance

$22,399.20 U
2. Labor Efficiency Variance
$45,750 U
3. Net Labor Variance
$68,149.20 U
* $411,274.20 31,110 hours = $13.22
E8-8
1. Standard Cost Summary

Materials1 lb.* @ $4 per lb. ......................................................................... $ 4.00
Labor2 hrs.** @ $9.00 per hr. .................................................................... 18.00
Factory overhead$20,000 10,000 units .................................................... 2.00
Standard cost per unit .................................................................................... $24.00
* 10,000 lb/10,000 units
** 20,000 hr/10,000 units
2.
(Actual price Standard price) Actual quantity purchased = Materials purchase price
variance
($ 4.20* $4.00) 10,000 = $2,000 U
(Actual quantity Standard quantity) Standard price = Materials quantity variance

[9,400 (9,500 1 lb)] $4 = $400 F
(Actual rate Standard rate) Actual hours = Labor rate variance

($8.90** $9.00) 20,000 = $2,000 F
(Actual hours Standard hours) Standard rate = Labor efficiency variance

[20,000 (9,500 2 hr)] $9 = $9,000 U
* $42,000 10,000 pounds

** $178,000 20,000 hours
E8-9
Case 1 Case 2
Units produced 1,200 2,000*
Standard hours per unit 2 0.6
Standard hours allowed 2,400* 1,200
Standard rate per hour $15 $20**
Actual hours used 2,340 1,220
Actual labor cost $35,825** 24,690***
Labor rate variance $725 U $290 U
Labor efficiency variance $900 F*** $400 U
Case 1
*Standard hours allowed= 1,200 2 = 2,400 hours
**Actual Labor Cost =
(Actual hours used Standard rate per hour) +/ Labor rate variance
(2,340 x $15) + $725 = $35,825
***Labor Efficiency Variance = SP (AQ SQ)

Labor Efficiency Variance = $15 (2,340 2,400) = $900 F
Case 2
*Units produced = 1,200 0.6 = 2,000
**Labor Efficiency Variance= SP (AQ SQ)
$400 = SP (1,220 1,200)
$400 = 20 SP
$20 = Standard rate per hour
***Actual Labor Cost=
(Actual hours used x Standard rate per hour) +/ Labor rate variance
(1,220 x $20) + $290 = $24,690
E8-10
1. Materials6 lbs. @ $2.00 per lb. ............................................ $12.00

Labor2 hrs*. @ $10 per hr. .................................................. 20.00
Factory overhead$40,000 20,000 units ............................. 2.00
Standard cost per unit ............................................................. $34.00
*40,000 hr/2,000 units
2. Work in Process (18,000 $12) ...................................... 216,000

(105,000 $0.04) ............................................................ 4,200
[105,000 (6 lb 18,000)] x $2 ................................ 6,000
Materials (105,000 $2.04)....................................... 214,200
Work in Process (18,000 $20.00) ................................. 360,000
[34,800 (2 hr 18,000)] $10 ............................... 12,000
Labor Rate Variance (F)
(34,800 $0.50) ........................................................ 17,400
Payroll (34,800 $9.50) ............................................ 330,600
E8-11
Materials (130,000 $2).. 260,000
Materials Purchase Price Variance (130,000 $.02).. 2,600
Accounts Payable (130,000 $1.98)

257,400
Work in Process (21,000 x 6 lb $ 2) ..................................... 252,000

Materials Quantity Variance (1,000 x $2) 2,000
Materials (125,000 x $2) .................................................. 250,000
Work in Process (21,000 2 hr $10) ................................... 420,000

(41,000 $0.04) ..................................................................... 1,640
(1,000 $10) ................................................................... 10,000
Payroll (41,000 $10.04) ................................................ 411,640
E8-12
Conclusions to be drawn from the four variances:
Materials price varianceThe unfavorable variance indicates that materials were
purchased at a price higher than standard.
Materials quantity varianceThe favorable variance indicates that fewer materials
were used in making the product than called for by the standard.
Labor rate varianceThe favorable variance indicates that the wage rate paid to
production workers was less than called for by the standard.
Labor efficiency varianceThe favorable variance indicates that less time was
spent on production than was called for by the standard.
E8-13
Conclusions to be drawn from the four variances:
Materials price varianceThe favorable variance indicates that materials were pur-
chased at a price below standard.
Materials quantity varianceThe unfavorable variance indicates that more materi-
als were used in making the product than called for by the standard.
Labor rate varianceThe unfavorable variance indicates that the wage rate paid to
production workers was more than called for by the standard.
Labor efficiency varianceThe unfavorable variance indicates that more time was
spent on production than was called for by the standard.
E8-14
1.
Work in Process Mixing ....................................................... 185,000
Work in Process Blending .................................................... 130,000
Materials Quantity Variance Mixing...................................... 2,000
Materials Price Variance Blending ....................................... 4,000
Materials Quantity Variance Blending .................................. 2,000
Materials Price Variance Mixing ........................................... 10,000
Materials ............................................................ 313,000
2.
Work in Process Blending .................................................... 95,000
Labor Efficiency Variance Mixing ......................................... 3,000
Labor Rate Variance Blending ............................................. 8,000
Labor Efficiency Variance Blending ..................................... 7,000
Labor Rate Variance Mixing .............................................. 10,000
Payroll .................................................................................. 213,000
3.
Various Credits ................................................................ 145,000

Work in Process Blending.................................................... 70,000
Factory Overhead ........................................................... 155,000
4.
Work in Process Blending.................................................... 380,000*
Work in Process Mixing ................................................ 380,000
Finished Goods ...................................................................... 675,000**

Work in Process Blending............................................. 675,000
*$185,000 + $110,000 + $85,000
**$380,000 + $130,000 + $95,000 + $70,000
E8-15

Standard Month 1 Month 2
8,000 7,400 8,200
Units Units Units
Fixed overhead ........................................... $ 4,000* $ 4,000* $ 4,000*
Variable overhead ($1.50 per unit).............. 12,000 11,100 12,300
Total ............................................................ $ 16,000 $ 15,100 $ 16,300
* based on $0.50 per unit x 8,000 standard units at all levels.
Month 1 Month 2
$15,100 $15,100 --0-- $16,300 $17,200 $900 U
E8-16
a. and b.
Actual factory overhead Budget based on standard hours Standard hours standard rate
Fixed costs ...... $ 52,000 Fixed cost: 9,000 units 2 hr $4/unit =
10,000 x $5.00 = $50,000
Variable costs .... 28,500 Variable cost:
9,000 $3.00 = 27,000
$ 80,500 $ 77,000 $ 72,000
Flexible-Budget Variance Production-Volume Variance

(a) $3,500 (U) (b) $5,000 (U)
Net Factory Overhead Variance

$8,500 (U)
c. Actual factory overhead (total) ......................................... $ 80,500

Applied factory overhead (18,000 hours $4) ................. 72,000
Underapplied factory overhead ........................................ $ 8,500
Net variance:
Flexible-budget variance (U) ........................................ $ 3,500
Production-volume variance (U) ................................... 5,000
Net variance (U) ............................................................... $ 8,500
E8-17
a. and b.
Actual factory overhead Budget based on standard hours Standard hours standard rate
Fixed costs ...... $103,000 Fixed cost: 11,000 units $15 /unit =
10,000 x $10.00 = $100,000
Variable costs .... 48,000 Variable cost:
11,000 $5.00 = 55,000
$151,000 $155,000 $165,000

(a)$4,000(F) (b) $10,000 (F)

$14,000 (F)
c. Actual factory overhead (total) ......................................... $151,000

Applied factory overhead ................................................. 165,000
Overrapplied factory overhead ......................................... $14,000
Net variance:
Flexible-budget variance (F) ............................................ $ 4,000
Production-volume variance (F)....................................... 10,000
Net variance (F) ............................................................... $ 14,000
E8-18
June 30 Work in Process ........................................................ 16,200

Factory OverheadProduction-Volume Variance (U) 600
Factory OverheadFlexible-Budget Variance
U) ......................................................................... 500
Calculation of the variances for June:

Budgeted overhead for
90% (18,000/20,000) of
Actual overhead normal capacity Applied overhead
Fixed: $ 6,000
Variable:
(90% of $12,000) 10,800 18,000 units $0.90* =
$ 17,300 $ 16,800 $ 16,200

$500 (U) $600 (U)
*Calculation of standard overhead cost per unit:

Fixed overhead ............................................................ $ 6,000
Variable overhead ........................................................ 12,000
Total ............................................................................. $ 18,000
Per unit ($18,000 20,000 units) ....................................... $ 0.90
July 31 Work in Process ............................................................ 18,900

Factory OverheadFlexible-Budget Variance (U... 2,200
Factory OverheadProduction-Volume Variance (F) 300
Calculation of the variances for July:

Budgeted overhead for
105% (21,000/20,000)
Actual overhead of normal capacity Applied overhead
Fixed: $ 6,000
Variable:
(105% of $12,000) 12,600 21,000 units $0.90 =

$ 20,800 $ 18,600 $ 18,900

$2,200 (U) $300 (F)
E8-19
The usual formula for calculating variances is shown below. Each step in developing the
figures is numbered in order.
(1) Actual cost (2) Budget for actual level

$27,000 $26,800
Flexible-Budget Variance
$200 (U)
1. Data given.
2. The unfavorable flexible-budget variance of $200 indicates that actual cost was
$200 more than the budget for this level of production; therefore, budgeted cost
was $26,800 ($27,000 $200). (Note that you cannot use the budget formula
to compute the budgeted overhead because the actual level of production is not
given.)
E8-20 (Appendix)
Computation of Budgeted Fixed Overhead:

Total budgeted overhead ................................................. $20,000
Variable overhead (8,000 $2) ....................................... 16,000
Budgeted fixed overhead ................................................. $ 4,000
Variable Overhead Variances:

Actual hours Actual hours
Actual variable overhead standard rate Standard hours standard rate
7,640 hrs $2 = 2,500 units 3 hrs $2 =

$16,100 $15,280 $15,000
Variable-Spending Variance Variable-Efficiency Variance

$820 (U) $280 (U)
Fixed Overhead Variances:

Actual units
Actual fixed overhead Budgeted overhead standard hours standard rate
2,500 units 3 hrs $0.50** =
$3,920 $4,000* $3,750
Fixed-Spending Variance Production-Volume Variance

$80 (F) $250 (U)
[ $20,000 (8,000 x $2) = $4,000*/ 8,000 hrs. = $.50** per direct labor hour
Net Factory Overhead Variance:

Variable-spending ............................................................ $ 820 (U)
Variable-efficiency ........................................................... 280 (U)
Fixed-spending ................................................................ 80 (F)
Production-volume ........................................................... 250 (U)
Net overhead variance............................................................ $1,270 (U)
E8-21 (Appendix)
Computation of Budgeted Fixed Overhead:

Total budgeted overhead ................................................. $42,000
Variable overhead (15,000 $2) ..................................... 30,000
Budgeted fixed overhead ................................................. $12,000
Variable Overhead Variances:

Actual hours Actual hours
Actual variable overhead standard rate Standard hours standard rate
15,500 hrs $2 = 5,500 units 3 hrs $2 =

$33,000 $31,000 $33,000
Spending Variance Efficiency Variance

$2,000 (U) $2,000 (F)
Fixed Overhead Variances:

Actual units
Actual fixed overhead Budgeted overhead standard hours standard rate
5,500 units 3 hrs $0.80* =
$11,700 $12,000 $13,200
Spending Variance Production-Volume Variance

$300 (F) $1,200 (F)
*$42,000 (15,000 x $2) = $12,000/ 15,000 hrs. = $.80 per direct labor hour

Variable-spending ............................................................ $ 2,000 (U)
Variable-efficiency............................................................ 2,000 (F)
Fixed- spending ............................................................... 300 (F)
Production-volume ........................................................... 1,200 (F)
Net overhead variance ............................................................ $1,500 (F)
E8-22 (Appendix)
a-c.
Actual Budget based on Actual hours Standard hours
overhead actual hours standard rate standard rate
Fixed: $52,000 Fixed: $50,000 18,500 $4* 9,000 units 2 hrs $4

Var: 28,500 Variable:
18,500 $1.50 =27,750
$ 80,500 $77,750 $ 74,000 $ 72,000
Spending Variance Production-Volume Variance Efficiency Variance

(a) $2,750 (U) (b) $3,750 (U) (c) $2,000 (U)
Net Factory Overhead Variance $8,500 (U)
*($5 + $3) 2 hours per unit = $4 per direct labor hour.
d. Actual factory overhead ................................................... $ 80,500

Applied factory overhead (18,000 $4) ........................... 72,000
Underapplied factory overhead........................................ $ 8,500
Net variance:
Efficiency variance (U) ................................................. $ 2,000
Production-volume variance (U)................................... 3,750
Spending variance (U) ................................................. 2,750
Net variance (U) .............................................................. $ 8,500
PROBLEMS
P8-1
(Actual price Standard price) Actual quantity = Materials price variance
($27.50 $25.00) 5.5 = $13.75 U
(Actual quantity Standard quantity) Standard price = Materials qty. var
(5.5 5.0) $25 = $12.50 U
(Actual rate Standard rate) Actual hours = Labor rate variance
($17.50 - $18.00) 80 = $40.00 F
(Actual hours Standard hours) Standard rate = Labor efficiency variance
(80 60) $18 = $ 360.00 U
P8-2
1-3. Materials:
Actual quantity Standard quantity

Actual cost standard price standard price
51,680 $0.55 = 51,680 $0.50 = *6,400 units 8 $0.50 =
$28,424 $25,840 $25,600
Materials Price Materials Quantity

Variance Variance
1. $2,584 U 2. $240 U
3. Net Materials Variance

$2,824 U
*Equivalent Production:
Completed units................... 5,600
In processAll materials ..... 800
Total equivalent units ........... 6,400
4-6. Labor:
Actual hours Standard hours
Actual cost standard rate standard rate
40,000* hours $7.60 = 40,000 hours $8.00 = 6,240** units 6 $8.00 =
$304,000 $320,000 $299,520
Labor Rate Variance Labor Efficiency Variance

4. $16,000 F 5. $20,480 U
Net Labor Variance

6. $4,480 U
*Actual hours = $304,000/$7.60 = 40,000 hours

**Equivalent ProductionLabor:
Units completed .................. 5,600
In process (800 80%) ....... 640
Total equivalent units .......... 6,240
P8-3
Standard Actual
Quantity Quantity Standard
or Hours or Hours Difference Cost Variance
1. Materials quantity variance:
Surge ............................................ 640,000 gal.* 600,000 gal. 40,000 gal. $2.00/gal. $80,000
(F) (F)
Empty drums .............................. 80,000 drums 80,000 drums -0- $1.00/drum -0-
3. Labor efficiency variance .............. 80,000 hrs. 81,000 hrs. 1,000 hrs. $8.00/hr.$ 8,000
(U) (U)
Actual
Standard Actual Quantity
Cost Cost Difference or Hours Variance
2. Materials purchase price variance:
Surge.......................................... $2.00/gal. $1.77/gal.** $0.23 645,000 gal. $148,350
(F) (F)
Empty drums .............................. $1.00/drum $1.00/drum*** $0.00 94,000 drums $-0-
4. Labor rate variance ....................... $8.00/hr. $8.08 hr.**** $0.08 80,000 hours $ 6,480
(U) (U)
* 80,000 drums produced 8 gallons per drum = 640,000 gallons
** $1,140,000 645,000 = $1.77 per gallon
*** $94,000 / 94,000 = $1.00 per drum
**** 654,480 81,000 hours = $8.08 per hour
P8-4
Standard Actual
1. Materials quantity variance ........... 5,000 lbs. 5,300 lbs. 300 lbs. $3.00/lb. $ 900
(U) (U)
3. Labor efficiency variance .............. 8,000 hrs. 8,200 hrs. 200 hrs. $10.00/hr. $2,000
(U) (U)
Actual
2. Materials purchase price variance $ 3.00/lb. $ 2.90/lb. $0.10 5,500 lbs. $ 550
(F) (F)
4. Labor rate variance ....................... $10.00/hr. $9.80/hr. $0.20 8,200 hrs. $1,640
(F) (F)
P8-5
Standard Actual
1. Materials quantity variance
for Class . ................................... 80,000 ft.* 78,000 ft. 2,000 ft. $0.75/ft. $1,500
(F) (F)
2. Materials quantity variance for
Chic ............................................ 24,000 ft.** 26,000 ft. 2,000 ft. $ 1.00/ft. $2,000
(U) (U)
5. Labor efficiency variance .............. 32,000 hrs.*** 31,000 hrs. 1,000 hrs. $8.00/hr. $8,000
(F) (F)
*10 ft (8,000 units)
**3 ft (8,000 units)
***4 hours (8,000 units)
Actual
3. Materials purchase price
variance for Class ...................... $0.75/ft. $0.72/ft. $0.03 100,000 ft. $3,000
(F) (F)
4. Materials purchase price
variance for Chic ........................ $1.00/ft. $1.05/ft. $0.05 30,000 ft. $1,500
(U) (U)
6. Labor rate variance ....................... $8.00/hr. $7.80/hr. $0.20 31,000 hrs. $6,200
(F) (F)
P8-6
Materials quantity variance:

Standard
Standard Actual Cost
Quantity Quantity Difference per Pound Variance
Aluminum........ 1,700 * 1,900 200 (U) $0.40 $ 80 (U)
Plastic ............. 8,500 9,500 1,000 (U) $0.38 $380 (U)
*8,500 units .2 lb per unit = 1,700 lbs
Materials purchase price variance:
Standard Actual
Cost Cost Quantity
per Pound per Pound Difference Purchased Variance
Aluminum........ $0.40 $0.48 $0.08 (U) 1,800 $144 (U)
Plasticregular
grade ............ $0.38 $0.50 $0.12 (U) 3,000 $360 (U)
Plasticlow
grade ............ $0.38 $0.29 $0.09 (F) 6,000 $540 (F)
Labor efficiency variance:

Standard
Standard Actual Cost
Hours Hours Difference per Hour Variance
2,550** 2,700 150 (U) $8.00 $1,200 (U)
**8,500 units .3 hrs per unit = 2,550
Labor rate variance:
Standard Actual
Cost Cost Actual
per Hour per Hour Difference Hours Variance
$8.00 $8.60 $0.60 (U) 2,700 $1,620 (U)
P8-7
1. Equivalent production Units

Materials:
Completed during the month ......................................................... 9,000
Equivalent units in ending work in process (2,000 1/2) ............... 1,000
Total ......................................................................................... 10,000
Labor and overhead:
Completed during the month ......................................................... 9,000
Equivalent units in ending work in process (2,000 1/4) ............... 500
Total ......................................................................................... 9,500
2. Liquid Lead:

21,000 gal. $1.96 = 21,000 gal. $2.00 = (10,000 units 2 gal/unit) $2.00 =
$41,160 $42,000 $40,000
Material Price Material Quantity

Variance Variance
$840 (F) $2,000 (U)
Net Liquid Lead Variance

$1,160 (U)
P8-7 Continued
Varnish:

20,000 gal. $3.00 = 20,000 gal. $3.00 = (10,000 units 2 gal/unit) $3.00 =
$60,000 $60,000 $60,000
Material Price Material Quantity

Variance Variance
0 0
Labor:
10,000 hours $11.70 = 10,000 hours $12.00 = (9,500 units 1 hr/unit) $12.00 =
$117,000 $120,000 $114,000

$3,000 (F) $6,000 (U)
Net Labor Variance

$3,000 (U)
P8-7 Concluded
3. Ending Work in Process

2,000 units, one-half complete as to materials (2,000 1/2 $10) ............... $ 10,000
2,000 units, one-fourth complete as to labor (2,000 1/4 $12) .................. 6,000
Materials and labor costs in work in process at end of month ....................... $ 16,000
4. Cost of production for month (materials and labor):
Liquid Lead ................................................................. ..................... $ 41,160
Varnish ........................................................................ ..................... 60,000
Labor ........................................................................... ..................... 117,000
Total costs to be accounted for ............................. ..................... $ 218,160
Costs accounted for (materials and labor):
Transferred to finished goods (9,000 $22) ............... $198,000
Ending work in process*.............................................. 16,000 $ 214,000
Net varianceLiquid Lead (U) .................................... $ 1,160
Net varianceLabor (U) ............................................. 3,000 4,160
Total costs accounted for ..................................... $ 218,160
*$10.00 1,000 equivalent units..................... $10,000
$12.00 500 equivalent units ..................... 6,000
$ 16,000
P8-8
1. Raw Materials Inventory (55,000 $2.20) ....................... 121,000

Materials Purchase Price Variance ($0.05* 55,000)...... 2,750
*$123,750/55,000 = $2.25; $2.25 $2.20 = $0.05
Work in Process (8,800 5.5 lbs. $2.20) ...................... 106,480
Materials Quantity Variance [(54,305 48,400) $2.20] . 12,991
Raw Materials Inventory (54,305 $2.20) .................. 119,471
2. Work in Process (8,800 1.8 hours $10.00) ................. 158,400
Labor Efficiency Variance (2,360 hours* $10.00) .......... 23,600
Labor Rate Variance (18,200 $.25)** ............................ 4,550
Payroll ......................................................................... 186,550
*18,200 (8,800 1.8 hrs.) = 2,360 hrs.

**($186,550 18,200) $10.00 = $.25 hr.
P8-9
1. Raw Materials Inventory (50,000 $4.50) ....................... 225,000

Materials Purchase Price Variance ($0.25* 50,000) ..... 12,500
*$237,500/50,000 = $4.75; $4.75 $4.50 = $0.25
Work in Process (12,000 4 lbs. $4.50) ....................... 216,000
Materials Quantity Variance [(46,000 48,000) $4.50] 9,000
Raw Materials Inventory (46,000 $4.50) .................. 207,000
2. Work in Process (12,000 2.0 hours $12.00) ............... 288,000
Labor Efficiency Variance (1,000 hours* $12.00).......... 12,000
Labor Rate Variance (25,000 $.50)** ....................... 12,500
Payroll ......................................................................... 287,500
*25,000 (12,000 2 hrs.) = 1,000 hrs.

**($287,500 25,000) $12.00 = $.50 hr.
P8-10
1. Direct materials cost in finished goods inventory ................. $ 87,000 20%

Direct materials cost in cost of goods sold ........................... 348,000 80
Total ..................................................................................... $ 435,000 100%
Materials price variance ....................................................... $ 10,000
Ratio of direct materials cost in finished goods inventory .... 20%
Amount to be prorated to finished goods inventory .............. $ 2,000
2. Materials price variance ....................................................... $ (10,000) (U)

Materials quantity variance .................................................. 15,000 (F)
Net materials cost variance.................................................. $ 5,000 (F)
Ratio of direct materials cost in finished goods inventory .... 20%
Net variance prorated to finished goods inventory ............... $ 1,000 (Cr.)
Direct materials cost in finished goods inventory before
variances are prorated ....................................................... 87,000 (Dr.)
Total amount of direct materials cost in finished goods
inventory ............................................................................ $ 86,000
3. Direct labor cost in finished goods inventory........................ $ 130,500 15%

Direct labor cost in cost of goods sold ................................. 739,500 85
Total ..................................................................................... $ 870,000 100%
Labor rate variance .............................................................. $ (20,000) (U)
Labor efficiency variance ..................................................... 5,000 (F)
Net labor cost variance ........................................................ $ (15,000) (U)
Ratio of direct labor cost in finished goods inventory ........... 15%
Net variance prorated to finished goods inventory ............... $ 2,250 (Dr.)
Direct labor cost in finished goods inventory before
variances are prorated ....................................................... 130,500 (Dr.)
Total amount of direct labor cost in finished goods
inventory ............................................................................ $ 132,750
P8-10 Concluded
4. Beginning balance of cost of goods sold:

Direct materials ................................... $348,000
Direct labor ......................................... 739,500
Applied manufacturing overhead ........ 591,600 $1,679,100 (Dr.)
Net materials cost variance ..................... $ 5,000 (Cr.)
Ratio of direct materials cost in cost
of goods sold ......................................... 80%
Materials cost variances prorated to
cost of goods sold ................................. 4,000 (Cr.)
Net labor cost variance ............................ $ 15,000 (Dr.)
Ratio of direct labor cost in cost
of goods sold ......................................... 85%
Labor cost variance prorated to cost of
goods sold ............................................. 12,750 (Dr.)
Total cost of goods sold ........................... $ 1,687,850 (Dr.)
Note: There is no overhead variance.
P8-11
1. Standard quantity of materials allowed:

Actual production......................................................... 4,000 units
Standard materials per unit ......................................... 5 pounds
Standard quantity of materials allowed ....................... 20,000 pounds
2. Actual quantity of materials used:

Standard quantity .............................................................. 20,000 pounds
Add unfavorable (debit) materials quantity
variance standard price per lb. ($1,000 $1 per lb.).. 1,000
Actual quantity of materials used ...................................... 21,000 pounds
3. Standard direct labor hours allowed:

Actual production .............................................................. 4,000 units
Standard hours per unit .................................................... 1
Standard hours allowed .................................................... 4,000
P8-11 Concluded
4. Actual direct labor hours worked:

Standard hours allowed..................................................... 4,000
Less favorable (credit) direct labor efficiency
variance standard rate ($1,200 $8/hr) ..................... (150)
Actual hours worked .......................................................... 3,850
5. Actual direct labor rate:

Standard direct labor rate .................................................. $ 8.00
Add unfavorable (debit) direct labor rate
variance actual hours worked ($770 3,850 hrs) ...... .20
Actual direct labor rate ...................................................... $ 8.20
6. Actual total overhead:

Standard overhead (4,000 units produced $4
standard overhead rate per unit) ................................... $ 16,000
Unfavorable (debit) overhead variance ............................. 500
Actual total overhead ........................................................ $ 16,500
P8-12
FACTORY OVERHEAD VARIANCES
Actual factory Budget at standard hours Units produced standard

overhead allowed quantity standard rate
2,500 units 4 hrs = 10,000 2,500 units 4 $3.38
10,000 hrs $1.00 = $ 10,000

Fixed cost = 20,000
$29,750 Budget at standard hrs $ 30,000 $33,800

$250 (F) $3,800 (F)
P8-13
1. Work in Process Mixing (1,100 eq. units $4) .................... 4,400

Work in Process Blending (950 eq. units $2) .................... 1,900
Factory Overhead (indirect materials) ($1,000 + $500) ........... 1,500
Materials Quantity Variance Mixing ...................................... 200*
Materials Price Variance Mixing ........................................... 115*
Materials Quantity Variance Blending. ............................. 50*
Materials Price Variance Blending.................................... 37*
Materials ($4,715 + $1,813 + $1,000 + $500) ...................... 8,028
Work in Process Mixing (1,100 eq. units $20) ................... 22,000
Work in Process Blending (950 eq. units $12) .................. 11,400
Factory Overhead (indirect labor) ($1,300 + $1,000) ............... 2,300
Labor Rate Variance Mixing ................................................. 430*
Labor Efficiency Variance Blending ..................................... 600**
Labor Efficiency Variance Mixing ..................................... 500*
Labor Rate Variance Blending.......................................... 200**
Payroll ($21,930 + $11,800 + $1,300 + $1,000)................... 36,030
Work in ProcessMixing (1,100 eq. units $6) ...................... 6,600
Work in Process Blending (950 eq. units $4) .................... 3,800
Factory Overhead--- Flexible-Budget Variance Mixing......... 500**
Factory Overhead--- Production-Volume Variance Blending 50**
Factory Overhead--- Production-Volume Variance Mixing 400**
Factory Overhead--- Flexible-Budget Variance Blending. 100**
Factory Overhead Mixing ................................................. 6,700
Factory Overhead Blending .............................................. 3,750
Factory Overhead ($4,400 + $2,250) ...................................... 6,650
Various credits ..................................................................... 6,650
Factory Overhead Mixing ..................................................... 6,700
Factory Overhead Blending ................................................. 3,750
Factory Overhead ................................................................ 10,450
*See page 272
**See page 273
Work in Process Blending (1,000 units $30) ..................... 30,000
Work in Process Mixing .................................................... 30,000
Finished Goods (900 units $48)............................................ 43,200
Work in ProcessDept. Blending ........................................ 43,200
Accounts Receivable (850 units $60) ................................... 51,000
Sales .................................................................................... 51,000
Cost of Goods Sold (850 units $48) ...................................... 40,800
Finished Goods .................................................................... 40,800
P8-13 Continued
Variances are calculated as follows:
Materials
Mixing
Actual cost Actual quantity standard price Standard cost
2,300 lbs. $2.05 = 2,300 lbs. $2.00 = 2,200 lbs. $2.00 =

$4,715 $4,600 $ 4,400
Materials Price Variance Materials Quantity Variance

$115 (U) $200 (U)
Net Materials Variance

$315 (U)
Blending
Actual cost Actual quantity standard price Standard cost
1,850 lbs. $0.98 = 1,850 lbs. $1.00 = 1,900 lbs. $1.00 =

$1,813 $1,850 $1,900

$37 (F) $50 (F)

$87 (F)
Labor
Mixing
Actual cost Actual hours standard price Standard cost
2,150 hrs $10.20 = 2,150 hrs $10.00 = 2,200 hrs $10.00 =

$21,930 $21,500 $22,000

$430 (U) $500(F)
Net Labor Variance

$70 (F)
P8-13 Continued
Blending
Actual cost Actual hours standard rate Standard cost
1,000 hours $11.80 = 1,000 hours $12.00 = 950 hours $12.00 =

$11,800 $12,000 $11,400

$200 (F) $600 (U)
Net Labor Variance

$400 (U)
Factory Overhead
Mixing
Actual overhead Budget at standard hours Standard cost
Fixed: 2,000 hrs $2 = $ 4,000

Var: 2,200 hrs $1 = 2,200 2,200 hrs $3.00 =
$6,700 $ 6,200 $ 6,600

$500 (U) $400 (F)

$100 (U)
Blending
Actual overhead Budget at standard hours Standard cost
Fixed: 1,000 hrs $1 = $ 1,000

Var: 950 hrs $3 = 2,850 950 hrs $4.00 =
$3,750 $ 3,850 $ 3,800
Controllable Variance Volume Variance

$100 (F) $50 (U)

$50 (F)
P8-13 Concluded
2. Mixing 200 units, one-half completed)

Materials (200 1/2 $4) ................................................................. $ 400
Labor (200 1/2 $20) ..................................................................... 2,000
Factory overhead (200 1/2 $6) .................................................... 600
Work in processMixing ............................................................. $ 3,000
Blending (100 units, one-half completed)
Cost from Mixing (100 $20) ............................................... $ 2,000
Cost in Blending:
Materials (100 1/2 $2) ................................................ $ 100
Labor (100 1/2 $12) .................................................... 600
Factory overhead (100 1/2 $4) ................................... 200 900
Work in processBlending .......................................... $ 2,900
3. Costs to be accounted for:

Material I ........................................................................................... $ 4,715
Material II .......................................................................................... 1,813
LaborMixing ................................................................................... 21,930
LaborBlending ............................................................................... 11,800-
Factory overheadMixing ................................................................ 6,700
Factory overheadBlending ............................................................. 3,750
Total .............................................................................................. $50,708
Costs accounted for:
Transferred to finished goods (900 units $48) ................................ $43,200
Work in processMixing................................................................... 3,000
Work in processBlending ............................................................... 3,900*
Net unfavorable variance .................................................................. 608
Total .............................................................................................. $50,708
* Mixing (100 equivalent units x $30) + Blending (50 equivalent units x $18)
P8-14
1. Standard Cost of Production for October
QuantityStandard Cost Total

Lot (Dozens)per Dozen Standard Cost
30 1,000 $49.20 $ 49,200
31 1,700 49.20 83,640
32 1,200 42.00* 50,400
Standard cost of production ............................................................. $183,240
* Standard materials cost plus 80% complete as to standard cost of labor and
overhead: $13.20 + (80% $36.00)
2. Schedule Computing Materials Price Variance
Actual cost of materials purchased ......................................................... $ 53,200

Standard cost of materials purchased (95,000 $0.55) ......................... 52,250
Materials price variance (U) .................................................................... $ 950
3. Schedule of Materials and Labor Variances for October
a. Materials quantity variance Lot 30 Lot 31 Lot 32 Total

Standard yards:
Dozens in lot ................................. 1,000 1,700 1,200 3,900
Standard yards per dozen ............. 24 24 24 24
Total standard quantity .............. 24,000 40,800 28,800 93,600
Actual yards used .............................. 24,100 40,440 28,825 93,365
Variance in yards............................... (100) 360 (25) 235
P8-14 Concluded
b. Labor efficiency variance

Standard hours:
Dozens in lot .................................. 1,000 1,700 1,200
Standard hours per dozen ............. 3 3 3
Total standard quantity .............. 3,000 5,100 3,600

Percentage of completion .............. 100% 100% 80%
Total standard hours.................. 3,000 5,100 2,880 10,980

Actual hours worked .......................... 2,980 5,130 2,890 11,000
Variance in hours............................... 20 (30) (10) (20)

( ) indicates unfavorable variance
c. Labor rate variance Lot 30 Lot 31 Lot 32 Total

Actual hours worked .......................... 2,980 5,130 2,890 11,000
Rate paid in excess of standard
($10.25 $10.00) .......................... $ 0.25 $ 0.25 $ 0.25 $ 0.25
Labor rate variance (U) ...................... $ 745.00 $ 1,282.50 722.50 $ 2,750.00
4. Schedule of Overhead Variances for October

Flexible-budget variance
Actual overhead................................................................... $ 22,800
Budgeted overhead for level of production attained:
Fixed overhead (.60 $288,000/12) .............................. $14,400
Variable overhead ($2 .40 10,980 standard hours) .. 8,784
Total budgeted overhead .......................................... 23,184
Flexible-budget variance (F) ................................................ $ 384
Production-volume variance
Budgeted overhead for level of production attained ............ $ 22,776
Overhead applied to production
(10,980 standard hours $2) .............................................. 21,960
Production-volume variance (U) .......................................... $ 816
P8-15
MATERIALS VARIANCES
Standard
Actual cost Actual gal. standard price gallons standard price
40,743 gal. $0.38* = 40,743 gal. ($32/80 gal.) = 503 batches x $32 =
$15,482.34 $16,297.20 $16,096.00

$814.86 (F) $201.20 (U)

$613.66 (F)
*Actual materials cost $15,482.34 40,743 gallons = $0.38 per gallon.
LABOR VARIANCES
Standard
Actual cost Actual hours standard rate hours standard rate
29,677 hrs $8.65 = 29,677 hrs $480/60 = 503 batches $480 =

256,706.05 $237,416.00 $241,440.00

$19,290.05 (U) $4,024.00(F)
Net Labor Variance

$15,266.05 (U)
P8-15 Concluded
Actual factory Budgeted overhead Standard

overhead at standard hours hours standard rate
Variable + Fixed Var. = 30,180 hrs* $2.20** = $ 66,396 30,180 $4.20 =

$67,080 + $60,500 = Fixed cost = ...................... 60,000
$127,580 Budget at standard hrs $126,396 $126,756

$1,184.00 (U) $360.00 (F)
Net factory overhead variance

$824.00 (U)
*503 batches 60 hours = 30,180 hours

**Variable overhead rates:
Per hour
Total overhead rate .................... $4.20 ($252 60 hours)

Less:
$60,000 fixed overhead
= 2.00 fixed overhead rate
30,000 budgeted hours * * *
Variable overhead rate ....... $2.20
***500 batches 60 hours = 30,000 budgeted hours
P8-16 (Appendix)
1. Factory OverheadVariable Costs:
Actual variable cost Actual hours standard rate Standard hrs standard rate
18,375 hrs $2 = 3,500 units 5 hrs $2 =

$33,710 $36,750 $35,000

$3,040 (F) $1,750 (U)
Factory OverheadFixed Cost:

Actual cost Budgeted fixed cost Standard hours standard rate
3,500 units 5 hrs $4 =

$61,950 $60,000 $70,000

$1,950 (U) $10,000 (F)
2. Net Factory Overhead Variance:

Variable spending ........................................................ $ 3,040 (F)
Variable efficiency ........................................................ 1,750 (U)
Fixed spending ............................................................ 1,950 (U)
Production volume ....................................................... 10,000 (F)
Net factory overhead variance ................................ $ 9,340 (F)
Since the net variance is favorable, it represents overapplied factory overhead.
P8-17 (Appendix)
1. MATERIAL VARIANCES
Actual parts Units produced standard
Actual cost standard price parts standard price
1,800 4 = 7,200 parts 7,776 $0.50 = 1,800 4 = 7,200 parts

7,200 108% = 7,776 parts 7,200 $0.50 =
$2.00/4 parts = $0.50 each
$0.50 110% = $0.550 cost
7,776 $0.550 =
$4,276.80 $3,888.00 $3,600.00

Variance Variance
$388.80 (U) $288.00 (U)

$676.80 (U)
LABOR VARIANCES
Actual hours Units produced standard
Actual cost standard rate hours standard rate
1,800 units 2 hrs = 3,600 1,800 2 hrs = 3,600

3,600 106% = 3,816 act. hrs 3,816 $3 = 3,600 $3 =
3,816 $3.15 (105% $3) =
$12,020.40 $11,448 $10,800
Labor Rate Labor Efficiency

Variance Variance
$572.40 (U) $648.00 (U)
Net Labor Variance

$1,220.40 (U)
P8-17 Concluded

2. Factory Overhead
$4,000 fixed cost $4,000
Fixed rate = = = $1.00 per hour
2,000 units 2 hours 4,000 hours
Variable rate = $3 = $1.50 per hour
2 hours
Factory OverheadVariable Cost
Actual variable cost Actual hrs standard rate Standard hrs standard rate
3,816 hrs $1.50 = 3,600 hrs $1.50 =
$4,800 $5,724 $5,400

$924 (F) $324 (U)
Budget VarianceFixed Cost
Actual fixed overhead Budgeted fixed cost Standard hours standard rate
3,600 hrs $1.00 =
$4,100 $4,000 $3,600

$100 (U) $400 (U)
Variable-spending variance .......................................... $924 (F)

Variable-efficiency variance .......................................... 324 (U)
Fixed-spending variance............................................... 100 (U)
Production-volume variance ......................................... 400 (U)
Net factory overhead variance .................................. $100 (F)
P8-18 (Appendix)
Budgeted hours = 500 units 26 hours = 13,000 hours

$44,200
Variable overhead rate = = $3.40 per hour
13,000 hours
$50,050
Fixed overhead rate = = $3.85 per hour
13,000 hours
Standard hours allowed = 510 units 26 hours = 13,260 standard hours
Factory OverheadVariable Costs:
Actual variable costs Actual hrs standard rate Standard hrs standard rate
13,015 hrs $3.40 = 13,260 hrs $3.40 =
$45,009 $44,251 $45,084

$758 (U) $833 (F)
Factory OverheadFixed Costs:
Actual fixed overhead Budgeted fixed cost Standard hours standard rate
13,260 hrs $3.85 =
$50,125 $50,050 $51,051

$75 (U) $1,001 (F)

Variable spending ......................................................... $ 758 (U)
Variable efficiency ......................................................... 833 (F)
Fixed spending............................................................... 75 (U)
Production volume ........................................................ 1,001 (F)
Net overhead variance .............................................. $ 1,001 (F)
Proof:
Applied overhead (13,260 hrs $7.25) ................................ $ 96,135
Actual total overhead ($45,009 + $50,125) .......................... 95,134
Overapplied factory overhead ....................................... $ 1,001 (F)
P8-18 Concluded
Labor Variances:
Actual labor cost Actual hrs standard rate Standard hrs standard rate
13,015 hrs $10.25 = 13,015 hrs $10.00 = 13,260 hrs $5.00 =

$133,400.00 $130,150.00 $66,300.00

$3,250.00 (U) $1,225.00 (F)
Net Labor Variance

$2,025.00 (F)
P8-19 (Appendix)
Mixing:
Actual Actual hours Applied
overhead Budgeted overhead standard rate overhead
Fixed: $ 4,000 2,150 hrs $3 = 2,200 hrs $3 =
Variable:
2,150 hrs $1 = 2,150
$6,700 $ 6,150 $6,450 $6,600
Spending Variance Production-Volume Var. Efficiency Var.

$550 (U) $300 (F) $150 (F)

$100 (U)
Blending:
Actual Actual hours Applied
overhead Budgeted overhead standard rate overhead
Fixed: $1,000 1,000 hrs $4 = 950 hrs $4 =
Variable:
1,000 hrs $3 = 3,000
$3,750 $ 4,000 $4,000 $3,800

$250 (F) $0 $200 (U)

$50 (F)
P8-20 (Appendix)
Schedule of Variances from Standard Cost for December

Three-Variance Method
Favorable variances:
Materials price [110 ft. ($0.15 $0.12) 1,200 units] ........ $ 3,960
Production volume [(5,100 hrs* $4.50**) $21,300***] ...... 1,650
Overhead spending ($21,300 $21,120) ............................. 180
Total favorable variances .................................................. $ 5,790
Unfavorable variances:
Materials quantity [$0.15 (110 ft. 100 ft.) 1,200 units] .. $ 1,800
Labor rate [4 1/4 hrs ($10.24 $10.00) 1,200 units] ....... 1,224
Labor efficiency [$10.00 (4 1/4 4) 1,200 units] ............. 3,000
Overhead efficiency [$4.50 (4 1/4 4) 1,200 units] ........ 1,350
Total unfavorable variances .............................................. 7,374
Net variance (unfavorable) ............................................ $ 1,584
Proof of computation:
Total standard cost of 1,200 units $73.00 ................................................. $ 87,600
Total actual cost of 1,200 units $74.32 ..................................................... 89,184
Total variance ....................................................................................... $ 1,584
* Actual labor hours1,200 units 4 1/4 hrs = 5,100 hrs
** Overhead application rate$10 45% = $4.50 per direct labor hour
*** Computation of overhead budget at 5,100 hours:
Actual hours worked4 1/4 per unit 1,200 units....................................... 5,100

Fixed overhead15/45 of estimated overhead at normal capacity
(15/45 $18,000) ................................................................................. $ 6,000
Variable overhead30% $10.00, or $3.00 per hour
(5,100 hours $3.00)............................................................................ 15,300
Budget at 5,100 hours.................................................................................. $ 21,300
or
Budget at 5,200 hours.................................................................................. $ 21,600
Budget at 4,800 hours.................................................................................. 20,400
Difference ............................................................................................. $ 1,200
Range between hour levels ......................................................................... 400 hrs
Dividing the difference of $1,200 by 400 hours determines an additional cost of $3.00
for each one-hour increase in the budget.
Budget at 4,800 hours.................................................................................. $ 20,400
Add increase in budgeted cost necessary to attain 5,100 hour level
($3.00 300 hours) .............................................................................. 900
Budget at 5,100 hours.................................................................................. $ 21,300
REVIEW PROBLEM FOR CHAPTERS 7 & 8

P8-21R
1.
Variable rate: Per DLH
Variable costs ............................................................ $12,500 = $2.00
Direct labor hours ...................................................... 6,250
Fixed rate:
Fixed costs .................................................................... $50,000 = $8.00

Direct labor hours .......................................................... 6,250
Total rate:
Variable costs ................................................................. $12,500
Fixed costs ..................................................................... $ 50,000

Total ............................................................................... $ 62,500 $10.00
Direct labor hours ........................................................... 6,250
2.
Direct material: 3 lbs. @ $5 per lb. ......................................... $15.00
Direct labor: 2 hours @ $10 per hour ..................................... 20.00
Factory overhead:
Variable cost: 2 hrs @ $2 ................................................. $ 4.00
Fixed cost: 2 hrs @ $8 ..................................................... 16.00 20.00
Standard cost per unit ............................................................ $55.00
3. (a)
Actual units produced ................................................................................. 3,500
Number of hours allowed by standard established for each unit of product .... 2
Total standard hours allowed ....................................................................... 7,000
P8-21R Continued
(b)
Actual factory overhead incurred:
Variable costs ............................................................................ $14,000
Fixed costs ................................................................................ 52,000
Total actual overhead costs .............................................................. 66,000
Factory overhead costs applied:
Standard hours allowed standard rate:
7,000 hours $10.00 .......................................................... 70,000
Overapplied factory overhead $4,000
4. a. Two-variance method:
Actual overhead Budget based on standard hrs Standard hrs x Std.rate

Fixed: = $50,000
Var: 7,000 hrs $2 = 14,000 7,000 hrs $10 =
$66,000* $64,000 $70,000

$2,000 (U) $6,000 (F)

$4,000 (F)
b. Three-variance method: (Appendix)
Actual Budget based on Actual hours Standard hrs

overhead actual hrs standard rate standard rate
Fixed: $50,000 7,000 hrs $10 = 7,000 hrs $10 =
Variable:
7,000 hrs $2 = 14,000
$66,000* $64,000 $70,000 $70,000

$2,000 (U) $6,000 (F) $-0-

$4,000 (F)
P8-21R Concluded
c. Four-variance method:
Variable Costs
Actual Actual hrs standard Standard hrs standard
variable overhead variable rate variable rate
7,000 hrs $2 = 7,000 hrs $2 =

$14,000* $14,000 $14,000

$-0- $-0-
Fixed Costs
Actual fixed overhead Fixed cost: budgeted Standard hrs standard fixedrate
7,000 hrs $8 =
$52,000* $50,000 $56,000

$2,000 (U) $6,000 (F)
Net factory overhead variance:

Variable-spending .............................................................. $0
Variable-efficiency ............................................................. 0
Fixed-spending .................................................................. 2,000 (U)
Production-volume............................................................. 6,000 (F)
Net overhead variance ...................................................... $4,000 (F)
*These total costs represent actual hours multiplied by actual rates per hour.
When the total cost is given, it is not necessary to determine the specific compo-
nents which make up the total cost unless you do it to understand the formulas
being used.
MINI-CASE
1. Calculation of Net Variances:
Mixing Blending Total

Equivalent production of Equivalent production of
Favorable Favorable Favorable
Standard Actual (Unfavorable) Standard Actual (Unfavorable) Standard Actual (Unfavorable)
Cost Cost Variance Cost Cost Variance Cost Cost Variance
Materials:
(7,000 units x 4 lbs) @ $14,000
$0.50
30,000 lbs @ $0.52 $15,600 $(1,600)
(5,500 units x 1 gal) @ $ 5,500
$1.00
5,500 gal @ $0.95 $ 5,225 $ 275 $ 19,500 $ 20,825 $(1,325)
Labor:
7,000 hours @ $ 8.00 56,000
6,800 hours @ $ 8.00 54,400 1,600
5,500 hours @ $10.00 55,000
5,600 hours @ $10.20 57,120 (2,120) 111,00 111,520 (520)
0
Factory overhead:
Standard cost per unit
$1.00 7,000
Actual cost 7,000 None
Standard cost per unit
$2.00 11,000
Actual cost 11,000 None 18,000 18,000 None
Total $77,000 $77,000 None $71,500 $73,345 $(1,845) $148,500 $150,345 $(1,845)
MINI-CASE Continued
2. a. Materials:
Mixing:
30,000 lbs $0.52 = 30,000 lbs $0.50 = 28,000 lbs $0.50 =
$15,600 $15,000 $14,000

Variance Variance
$600 (U) $1,000 (U)
Net Materials Var.Mixing

$1,600 (U)
Blending:

5,500 gal. $0.95 = 5,500 gal. $1.00 = 5,500 gal. $1.00 =
$5,225 $5,500 $5,500

Variance Variance
$275 (F) 0
Labor:
Mixing:
6,800 hours $8.00 = 6,800 hours $8.00 = 7,000 hours $8.00 =
$54,400 $54,400 $56,000

0 $1,600 (F)
MINI-CASE Continued
Blending:

5,600 hours $10.20 = 5,600 hours $10.00 = 5,500 hours $10.00 =
$57,120 $56,000 $55,000

$1,120 (U) $1,000 (U)
Net Labor Variance

$2,120 (U)
b. In Mixing, both the materials price variance and the materials quantity variance were
unfavorable. If they paid more for a better quality material in expectation of having a
lesser amount of waste and spoilage, the strategy was not successful. It is also
possible that there were price increases for material that were not foreseen when the
standards were determined. The labor variances were more satisfactory in Mixing.
There was no labor rate variance, and the labor efficiency variance was favorable.
This means that giving the caliber of labor they budgeted for, the amount of labor
time needed to complete production was less than budgeted.
In Blending, there was a favorable materials price variance and no materials
quantity variance. This indicates that they were able to use less expensive materials
than budgeted for, while maintaining good control over materials usage. It is also
possible that the price of materials of the quality that they had budgeted has de-
clined. Blendings difficulties lie in the area of labor costs. Both the labor rate vari-
ance and the labor efficiency variance were unfavorable. If their strategy was to
employ more expensive labor in hopes of having it complete production in a shorter
amount of time, it was not successful.
3. Work in ProcessMixing ................................................. 14,000
Materials Quantity VarianceMixing ............................... 1,000
Materials Price VarianceMixing .................................... 600
Materials Price VarianceBlending............................ 275
Materials ($20,825 + $1,500 indirect materials) .......... 22,325
Work in ProcessMixing................................................. 56,000

Labor Efficiency VarianceMixing .................................. 1,000
Labor Rate VarianceBlending ...................................... 1,120
Factory Overhead ($2,000 + $5,000 indirect labor) ......... 7,000
Labor Efficiency VarianceMixing ............................. 1,600
Payroll ($111,520 + $7,000 indirect labor) .................. 118,520
Various credits (Accounts Payable,
Prepaid Insurance, etc.) ............................................. 9,500
Work in ProcessMixing................................................. 7,000
Work in ProcessBlending 11,000
Work in ProcessMixing............................................ 66,000
Finished Goods ............................................................... 120,000
Work in ProcessBlending ........................................ 120,000
4. Mixing Blending
Costs charged to departments:
Materials .......................................................................... $ 14,000 $ 5,500
Labor ............................................................................... 56,000 55,000
Prior department .............................................................. 66,000
$ 77,000 $ 137,500
Costs credited to departments ................................................ 66,000 120,000
Balance of work in process ..................................................... $ 11,000 $ 17,500
Mixing
2,000 units, one-half completed (2,000 1/2 $11) ........ $ 11,000
Blending
Mixing cost1,000 units @ $11 ................... $ 11,000
Blending cost1,000 units, one-half completed
(1,000 1/2 $13) ........................................ 6,500 $ 17,500
5.
Mixing Blending Total
Cost of production:
Materials ....................................................... $ 15,600 $ 5,225 $ 20,825
Labor............................................................. 54,400 57,120 111,520
Factory overhead .......................................... 7,000 11,000 18,000
Total costs to be accounted for ................ $ 77,000 $ 73,345 $ 150,345
Costs accounted for:
Charged to finished goods ..................................................................... $ 120,000
Work in process ..................................................................................... 28,500
Net unfavorable variance ....................................................................... 1,845
Total costs accounted for .................................................................. $ 150,345
6.
Sales (4,000 $40) ............................................................................ $ 160,000
Cost of goods sold at standard (4,000 $24) .................................... 96,000
a. Gross margin at standard cost ........................................................... $ 64,000
Net unfavorable variance ................................................................... 1,845
b. Gross margin at actual cost ............................................................... $ 62,155
c. The gross margin at actual cost is less than the gross margin at standard cost be-
cause the net amount of all the variances was $1,845 unfavorable. In a standard
cost system, the production costs flow through the system at standard during the
accounting period. At the end of the period, the standard costs must be adjusted to
actual when preparing the financial statements.
7. a. Paula is asking you to do something that is unethical. The labor standards being
used would have been previously agreed to by Paula and her superior. Specific
IMA ethical standards that would be violated by making the change include:
Competence: (3) Provide decision support information and recommendations that are
accurate, clear, concise, and timely.
Integrity: (3) Abstain from engaging in or supporting any activity that might discredit the
profession.
Credibility: (1) Communicate information fairly and objectively; (2) Disclose all infor-
mation that could be reasonably expected to influence an intended users understanding
of the reports, analyses, or recommendations.
b. Follow your organizations established policies on the resolution of such a
conflict. If these policies do not resolve the ethical conflict, you should consider
the IMAs suggested Resolution of Ethical Conflict. In this instance, submitting
the information to the next level of management above Paula would be to the VP
of Manufacturing. That should be sufficient to resolve this issue.
INTERNET EXERCISE
One would expect food and paper costs to have a favorable variance because food and
paper costs were 33.5% of 2009 sales by company-operated restaurants versus only
32.6% of 2010 sales. Occupancy and other operating expenses and payroll and em-
ployee benefits probably had small favorable variances because they were 22.7% and
25.7% of 2009 sales, respectively versus only 22.4% and 25.4% in 2010, respectively.
Selling, general, and administrative expenses probably had little or no variance because
the 2010 percentage (9.7%) was within .1% of the 2009 percentage (9.8%). (Note that
this exercise assumes that the 2009 operating results are used in setting the 2010
standards.)
CHAPTER 9
QUESTIONS
1. Answers will vary. Examples include ac-counting 8. The revenue budget is the starting point for the
firms, airlines, architects, attorneys, hair stylists, annual budget because the amount of client
plumbers, professional sports teams, and fast- business must be projected before the amount
food businesses. of labor hours and overhead support needed
2. The two distinguishing features of service firms can be estimated.
are that they have little or no inventory and that 9. It is important for professional labor hours to be
labor costs often comprise 75% or more of total budgeted with care because if the firm
costs. overestimates the hours needed, it will be
3. Service businesses are important to the U.S. overstaffed and the additional labor costs will
economy because roughly 85% of U.S. workers reduce profits. If the number of hours needed is
are employed by service businesses and, as underestimated, the shortage of professionals
explained in the chapter introduction, that will reduce the number of jobs that can be
percentage is expected to grow. The lack of undertaken and thus reduce profits.
growth in manufacturing employment is due 10. Factory overhead for a manufacturer is
primarily to inexpensive imports and to the allocated to products and remains in inventory
automation of U.S. factories. Automated as an asset until the goods are sold. Overhead
production processes have resulted in the for a service business consists of marketing
manufacture of many more goods with fewer and administrative costs that may be allocated
workers, thus creating the need for more people to jobs for such things as pricing decisions, but
to market, distribute, and service these goods. must be expensed in the period incurred for
4. Most service businesses use job order costing financial reporting.
because the amount and complexity of services 11. A budgeted income statement may be used for
provided can vary substantially from customer to planning purposes by incorporating the best
customer. projections of operating management for the
5. In deciding whether to use direct labor dollars or fiscal year. It may also be used for control
direct labor hours to charge overhead to jobs in purposes during and at the end of the fiscal
a service firm, it is important to determine what year by comparing budgeted to actual revenue
causes the overhead to occur. If highly paid and expenses to determine the strengths and
partners create most of the overhead, then direct weaknesses of current operations.
labor dollars would be the more appropriate cost 12. Firms that use activity-based costing attempt to
allocation base. If overhead is more a function shift as many costs as possible out of the
of direct labor hours worked on a job, then direct indirect cost pool and into direct cost pools that
labor hours would be a more appropriate can be specifically traced to the individual jobs
allocation base. that caused the costs to occur. The remaining
6. Direct costs are expenses that can be costs that cannot be traced to individual jobs
specifically traced to an individual job. These are separated into homogeneous cost pools
would include professional labor dollars, travel and then al-located to individual jobs via
expenses, photocopying, and long distance separate allocation bases for each cost pool.
telephone and fax charges. Indirect costs are 13. Peanut-butter costing refers to the practice of
expenses that cannot be easily identified with a assigning costs evenly to jobs by using an
specific job and have to be allocated to the job, overhead rate when, in fact, different jobs
using a cost allocation base. These would consume resources in different pro-portions.
include secretarial support, employee fringe 14. Activity-based costing is worthwhile to
benefits, and various office expenses. implement when different jobs use resources
7. A cost performance report compares the in different proportions.
budgeted costs for a job to the actual costs
15. A cost/benefit decision attempts to deter-
incurred and indicates the variance for each
line item. mine whether the benefit of implementing a
certain course of action exceeds the cost of
its implementation. As it relates to activity-
based costing, the question is whether the
339
benefit of implementing a more sophisticated 22. Design quality indicates the degree to which
costing system in the form of more accurate a product or service satisfies customer
information for costing and pricing purposes needs. Conformance quality measures how
exceeds the cost of implementing and well the product or service performs relative
maintaining the system. to its intended design. The absence of a four-
16. A balanced scorecard translates a companys wheel drive option on an SUV was given as
strategy into performance measures that are an example of potentially low design quality,
used to implement the strategy and that whereas the failure of an anti-lock braking
employees can understand. system was given as an example of poor
17. Numerous answers are acceptable here. For conformance quality.
example, under the customer perspective, 23. Prevention costs consist of the cost of the
number of new customers, market share, and activities that are incurred to preclude the
customer satisfaction surveys could be listed. production of a product or the execution of a
Under internal business processes, service that does not conform to its design
percentage of on-time deliveries, percentage specification. Two examples of prevention
of defect-free units, and time taken to replace activities are quality circles where employees
defective products could be mentioned. meet frequently in small groups to discuss
Under the learning and growth perspective, how they can improve processes and
employee turnover ratio, number of statistical process control where production
employee suggestions adopted, and workers use charts to track the quality of
percentage of employees trained in new units being produced.
processes could be included. 24. Appraisal costs consist of the cost of
18. A companys performance measures should be activities that are incurred to identify which
highly correlated with its strategy. If a products do not conform to specifications
performance measure is being reached but the before they are sent to customers. They
companys strategy is not attained, then the consist of activities such as inspection and
performance measure is either an incorrect one product testing. The more emphasis that a
or insufficient to reach the companys strategy. company puts on prevention activities, the
19. The four categories that performance measures less that it should have to spend on appraisal
are divided into and an example of each follows: activities.
Financial (return on investment); Customer 25. Internal failure costs consist of the cost of
(market share); Internal Business Processes activities that are incurred to correct defective
(percentage of on-time deliveries); and Learning products before they are shipped to
and Growth (employee turnover ratio). Note that customers. Examples include the cost to
student answers will vary for the examples of correct defective units and the materials and
performance measures. labor costs expended on units that cannot be
20. A company should bother with a balanced corrected. External failure costs consist of
scorecard approach to performance measurement the cost of the activities that are incurred to
because, without a balanced scorecard approach, remedy the shipment of defective goods to
a company might take actions to increase short- customers. Examples include the cost to
term profits that could be harmful to long-term repair or replace products that are still under
profitability. warranty and the cost to provide customer
support
21. Managers who had a longer tenure with
Wildcat, Inc. would have been exposed to the
previous financial-only metric used for .
evaluating performance and they also would
have had more time to learn and appreciate
the BCS approach.
EXERCISES
E9-1
Budgeted overhead:
Depreciationequipment ............................ $ 50,000
Fringe benefits ............................................. 150,000
Lease expense ............................................ 220,000
Telephone and fax ....................................... 30,000
$ 450,000
Budgeted direct labor:

Associates salaries ..................................... $ 300,000
Partners salaries ......................................... 200,000
$ 500,000
Budgeted overhead rate = $450,000

$500,000
= 90% of direct labor dollars
E9-2
1.
Job cost:
Direct labor .................................................. $ 9,500
Other direct .................................................. 2,500
Overhead (150% $9,500).......................... 14,250
Total ............................................................ $ 26,250
(a)
Bid price ...................................................... $ 30,000
Job cost ....................................................... 26,250
Profit ............................................................ $ 3,750
(b) $3,750 = 12.5%

$30,000
2. $9,500 + $14,250 = 90.5%

$ 26,250
E9-3
Lyons & Rappaport, CPAs

Revenue Budget
For the Year Ending December 31, 2013
Professional Billing Total

Classification Hours Rate Revenues
Partners 4,000 $250 $ 1,000,000

Managers 10,000 120 1,200,000
Staff 25,000 80 2,000,000
Total 39,000 $ 4,200,000
E9-4
Fiorella and Sanchez, Physicians

For the Month Ending September 30, 2013
Patient revenue ...................................... $ 58,500

Operating costs:
Physicians salaries ........................... $ 28,000
Nursing wages .................................. 4,500
Fringe benefits .................................. 3,300
Lease expense .................................. 2,500
Secretarial support ............................ 2,200
Depreciationequipment .................. 1,850
Utilities............................................... 650 43,000
Operating income ................................... $ 15,500
E9-5
Herold and Silverman, Dentists

For the Month Ending September 30, 2013
Patient revenue ....................................... $ 51,500

Operating costs:
Dentists salaries ............................... $ 23,800
Hygienists wages .............................. 5,600
Fringe benefits ................................... 2,200
Lease expense .................................. 2,000
Secretarial support ............................ 1,900
Depreciationequipment .................. 1,500
Utilities ............................................... 550 37,550
Operating income.................................... $ 13,950
E9-6
Budgeted
Cost Budgeted Cost Budgeted
Pool Costs Drivers Rate
Fringe benefits $450,000 $1,500,000 30% of professional

labor dollars
Paralegal support $250,000 4,000 hours $62.50/partner
labor hour
Research support $650,000 20,000 hours $32.50/professional
labor hour
E9-7
Partners time (10 hours $125) .................................................. $ 1,250.00
Associates time (25 hours $60) ................................................ 1,500.00
Fringe benefits (30% $2,750) .................................................... 825.00
Paralegal support ($62.50 10 hours). 625.00
Research support ($32.50 35 hours) ......................................... 1,137.50
Total job cost ............................................................................... $ 5,337.50
E9-8
Professional labor ($75 35 hours) ............................................. $ 2,625.00
Professional support ($67.50 35 hours) .................................... 2,362.50
Total job cost ............................................................................... $ 4,987.50
Job costABC costing ................................................................ $ 5,337.50
Job costsimplified costing ........................................................ 4,987.50
Difference .................................................................................... $ 350.00
James used a high percentage of partner hours relative to associate hours, 28.5%, than
the 20% rate (4,000 / 20,000) built into the averaged billing rate and overhead rate. The
ABC system recognizes this difference and the resulting job costs are $350 more when
using ABC.
E9-9
Budgeted
Fringe benefits $300,000 $1,000,000 30% of professional

labor dollars
Secretarial support $175,000 3,500 hours $50/partner
labor hour
Audit support $450,000 15,000 hours $30/professional
labor hour
E9-10
Financial---Revenue from new products; Operating income
Customer---Number of new customers; Percentage of products returned
Internal Business Processes---Percentage of on-time deliveries; Time taken to replace
defective products
Learning and Growth---Employee turnover ratio; Percentage of compensation based on
team performance
E9-11
Increase in operating income through cost reduction---this should not be a primary
performance measure for a company whose strategy is to charge premium prices for
excellent service. Increase in revenue through premium pricing would be a more
logical financial performance measure.
Market share in the overall gasoline market---this is not an appropriate performance
measure in the customer perspective for Hi-End. A more appropriate measure would
be market share in the high-end service gasoline market.
Wait-time at the pump---this would be an appropriate performance measure under the
internal business processes perspective for a premium service station.
Employee bonus based on number of customers served---this would be an
acceptable performance measure as long as it was extended to number of customers
served well. The bonus should not be an impetus to service as many customers as
possible without regard to quality.
E9-12
Increase in operating income through cost reduction---this should be a primary
performance measure for a company whose strategy is to charge discount prices.
Keeping a close eye on operating costs is the best way to stay profitable with this
strategy. (Note that this comment applies to the gasoline portion of the business.)
Market share in the overall gasoline market---this is an appropriate performance
measure in the customer perspective for a company that attempts to attain a high market
share through discount pricing. However, if available, it would be even more meaningful
to determine Lo-Ends market share in the discount-pricing gasoline market.
Wait-time at the pump---this would not be an appropriate performance measure under
the internal business processes perspective for a discount-pricing service station.
Customers are pumping their own gas, rather than having attendants pump it for them.
(Measuring wait time for the grocery part of the business might be appropriate.)
Employee bonus based on number of customers served---this would not be an
acceptable performance measure for the service station part of the business, but might
be used for the grocery part of the business. This measure would also help to evaluate
how good of a job the store manager does in attracting service station customers to the
mini-market.
E9-13
Rework (IF)
Warranty repair (EF)
Product testing (A)
Statistical process control (P)
Customer support (EF)
Quality circles (P)
Inspection (A)
Scrap and spoilage (IF)
PROBLEMS
P9-1
Freeman and Lueke

Attorneys-at-Law
Summary of Engagement Account
Client name: Murphy Equipment, Inc.

Engagement type: Litigation
Engagement number: 525
Date contracted: 5/8/2013
Date completed: 12/21/2013
Partners Time:
Period Ending Hours Rate Amount

12/31/2013 20 $325 $6,500
Associates Time:
Period Ending Hours Rate Amount

12/31/2013 65 $145 $9,425
Other Direct Costs:
Period Ending
12/31/2013 Amount
Travel........................................ $2,800
Telephone/Fax/Copying............ 1,740 $ 4,540
Total Engagement Costs ............................. $20,465
P9-2
1.
Cost Performance Report
Item Actual Result Budget Variance
Partners salary and overhead.......... $ 6,500 $ 6,300 $ 200 U

Associates salary and overhead ..... 9,425 9,175 250 U
Travel ............................................... 2,800 4,150 1,350 F
Telephone/fax/copying ..................... 1,740 1,475 265 U
Total ................................................. $ 20,465 $21,100 $ 635 F
2.
Bid price ....................................... $ 30,000
Budgeted costs ............................ 21,100
Budgeted profit ............................. $ 8,900
Bid price ....................................... $ 30,000

Actual costs .................................. 20,465
Actual profit .................................. $ 9,535
P9-3
1.
Hornick and Sena
Revenue Budget
Item Professional Hours Billing Rate Total Revenues
Partners ............... 4,000 $225 $ 900,000

Associates ........... 14,000 140 1,960,000
Staff ..................... 22,000 75 1,650,000
Total ..................... 40,000 $4,510,000
2.
Hornick and Sena
Professional Labor Budget
Item Professional Hours Wage Rate Total Labor
Partners ............... 4,000 $110 $ 440,000

Associates ........... 14,000 85 1,190,000
Staff ..................... 22,000 35 770,000
Total ..................... 40,000 $2,400,000
P9-4
1.
Hornick and Sena
Overhead Budget
Secretarial support ........................................................ $ 465,000

Fringe benefits ............................................................... 385,000
Utilities ........................................................................... 193,000
Depreciationbuilding .................................................. 135,000
Telephone/fax ................................................................ 115,000
Photocopying ................................................................. 95,000
Depreciationequipment .............................................. 60,000
Total .............................................................................. $ 1,448,000
2.
Hornick and Sena
Other Direct Expenses Budget
Travel............................................................................. $ 123,000
Meals ............................................................................. 37,000
Total .............................................................................. $ 160,000
P9-5 Hornick and Sena

Revenues ...................................................................... $ 4,510,000

Operating costs:
Professional labor ...................... $ 2,400,000
Overhead support ...................... 1,448,000
Other expenses .......................... 160,000 4,008,000
Operating income .......................................................... $ 502,000
P9-6
Budgeted
Fringe benefits ...................... $400,000 $2,000,000 20% of professional

labor dollars
Technology support .............. 20,000 2,000 hours $10 per partner
labor hour
Litigation support................... 300,000 25,000 hours $12 per prof. labor hr.
P9-7
Budgeted
Fringe benefits ...................... $500,000 $2,500,000 20% of professional

labor dollars
Administrative support .......... 120,000 3,000 hours $40 per partner
labor hour
Litigation support................... 250,000 10,000 hours $25 per prof. labor hr.
P9-8
1.
Ford Mickeys
Products Markets
Professional labor cost:
50 hrs $60* ..................................... $3,000
20 hrs $60 ...................................... $1,200
Professional support:
50 hrs $40**.................................... 2,000
20 hrs $40 ...................................... _____ 800
Total ............................................................. $5,000 $2,000
* ($150,000 2) + ($60,000 4)
1,500 hrs 6
** $360,000
9,000 hrs
P9-8 Continued
2.
Ford Mickeys
Products Markets
Partner labor cost:
30 hrs $100* ........................................ $3,000
5 hrs $100 ........................................... $500
Associate labor cost:
20 hrs $40** ......................................... 800
15 hrs $40 ........................................... 600
Design support:
$3,800 .22*** ....................................... 836
$1,100 .22 ........................................... 242
Staff support:
50 hrs $26.67**** ................................. 1,334
20 hrs $26.67 ...................................... _____ 533
Total ............................................................ $5,970 $1,875
*$150,000 / 1,500 hrs.

**$ 60,000 / 1,500 hrs.
*** _________$120,000_______
($150,000 x 2) + ($60,000 4)
**** $240,000
9,000
P9-9
Ford Mickeys
Products Markets
Cost using simplified system ....................... $5,000 $2,000

Cost using activity-based system ................ 5,970 1,875
Difference ................................................... $(970) $125
The Ford job was undercosted by $970, and the Mickeys Markets job was overcosted
by $125 using the simplified costing system.
P9-10
Swoosh Athletics
Balanced Scorecard
(Note that many answers are possible for this solution)
Financial
Increase in operating income through cost reduction
Increase in revenue through the sale of defect-free products
Customer
Number of new customers
Market share in the cost-conscious market
Percentage of products returned
Internal Business Processes

Percentage of defect-free units produced
Number of manufacturing processes improved
Time taken to replace defective products
Learning and growth
Percentage of employees trained in new processes

Number of employee suggestions adopted
P9-11
Delaware Dairies
Balanced Scorecard
(Note that many answers are possible for this solution.)
Financial
Increase in revenue through charging premium prices
Increase in revenue through new product introductions
Customer
Market share in the premium ice cream market
Customer taste-testing surveys
Internal Business Processes

Number of production processes improved to ensure premium quality
Reduction in customer wait-time at the retail stores
Learning and Growth

Percentage of employees trained in new production processes
Percentage of retail employees trained in customer service
P9-12
Terbush Manufacturing, Inc.
Cost of Quality Report
For Year Ended 12/31/2013
Cost Category Amount As a Percentage of

Sales*
Prevention costs:
Quality training $ 79,000 .79%

Preventive maintenance 54,000 .54
Supplier evaluation 45,000 .45
Total prevention costs $178,000 1.78%
Appraisal costs:
Product testing $ 84,000 .84%

Inspection 59,000 .59
Total appraisal costs $143,000 1.43%
Internal failure costs:
Scrap and spoilage $ 72,000 .72%
Rework 53,000 .53
Machine repairs 41,000 .41
Total internal failure $166,000 1.66%
costs
External failure costs:
Warranty repairs $ 81,000 .81%
Warranty replacements 62,000 .62
Customer support 42,000 .42
Total external failure costs $185,000 1.85%
Total quality costs $672,000 6.72%
* sales of $10,000,000
P9-13
Terbush should invest more in its prevention and appraisal programs which then should
significantly reduce its expenditures for internal failure and external failure costs.
Currently, its internal failure costs as a percentage of sales (1.66%) and external failure
costs (1.85%) are as much as or more than its prevention costs (1.78%) and appraisal
costs (1.43%).
MINI-CASE
1a.
Wilkes Barre Scranton
Professional labor cost:
70 hrs. x $65* ...................................... $ 4,550
70 hrs. x $65 ....................................... $ 4,550
Professional support:
70 hrs. x $70** .................................... 4,900
70 hrs. x $70 ....................................... 4,900
Total cost ............................................ $ 9,450 $ 9,450
Markup on cost, 25% .......................... 2,363 2,363
Bid price .............................................. $11,813 $11,813
* [(5 $250,000) + (20 $100,000)]/ [(5 x 2,000 hrs.) + (20 x 2,000 hrs.)] = $65
per professional labor hr.
** [($2,500,000 + $1,000,000)]/([5 x 2,000) + (20 2,000)] = $70 per professional labor hr.
b. No, the results do not seem reasonable. The Wilkes Barre job had many more
expensive partner hours that also drive secretarial support costs, yet the total cost of
the two jobs was identical.
2.
Partner labor cost:
50 hrs. x $125* ......................................... $ 6,250
15 hrs. x $125 .......................................... $ 1,875
Associate labor cost:
20 hrs. x $50** ......................................... 1,000
55 x $50 ................................................... 2,750
Legal support:
70 hrs. x $50*** ........................................ 3,500
70 hrs. x $50 ............................................ 3,500
Secretarial support:
50 hrs. x $100****..................................... 5,000
15 hrs. x $100 .......................................... 1,500
Total cost ................................................. $15,750 $ 9,625
Markup on cost, 25% ............................... 3,938 2,406
Bid price ................................................... $19,688 $12,031
* $250,000 / 2,000 hrs. = $125 per partner hour.

** $100,000 / 2,000 hrs. = $50 per associate hour.
*** $2,500,000 / (2,000 hrs. 25) = $50 per professional hr.
**** $1,000,000 / (2,000 hrs. 5) = $100 per partner hr.
3a.

Simplified system $11,813 $11,813
ABC system $19,688 $12,031
Difference $(7,875) $(218)
b. Each of the two jobs was undercosted using the simplified costing system.
However, the Wilkes Barre job was undercosted by a very significant amount,
$7,875, whereas the Scranton job was undercosted by an insignificant amount,
$218. The reason that the Wilkes Barre job was significantly undercosted was that
it entailed litigation work which had to be done primarily by partners. The partners
system spread the costs equally, like peanut butter, over both jobs without regard to
whether hourly labor cost is $125 whereas the associates hourly labor cost is only
$50. Also, partners consume secretarial support, and associates do not. The
simplified cost the work was being done by a partner or an associate.
INTERNET EXERCISE
1. Professional relationships, just like personal ones, take time, care and commitment
to sustain. If you only pay attention to your network when its convenient or when
you need something, your relationships wont be very strong or authentic.
2. By following people in your professional network on social media sites, you can
keep up with their news and send a hello or forward an article that might be of
interest.
3. Group involvement shows people that you value community, sharing and helping
others. Strong personal brands include demonstrating pride and loyalty to the
institutions that have shaped you.
4. It is important to share your news through your professional network because

personal branding is not just about who you know; its about who knows you. If
youve built genuine professional relationships, people will want to know how your
personal brand is evolving and how they can support you.1
1
Articulate Your Personal Brand Through Your Social Network, Holly Paul, www.pwc.tv, visited
10/15/2011.
CHAPTER 10
QUESTIONS
1. Under absorption costing, all manufacturing (b) Many accountants feel that work in
costsdirect materials, direct labor, and process and finished goods inventories
fixed and variable factory overhead exp- do not reflect true costs on the balance
ensesare charged to the cost of the sheet because no element of fixed
product. Under variable costing, only those production cost is charged to the
costs that vary directly with volumedirect inventory accounts.
materials, direct labor, and variable factory (c) The AICPA and IRS do not consider this
overhead expensesare applied to produc- method appropriate for inventory costs
tion. Since fixed costs are not affected by as used in published financial state-
changes in volume, they are not charged to ments and in computing taxable income,
the cost of the product but are expensed in respectively.
the period they are incurred.
5. Under absorbtion costing, profits are
2. Product costs are manufacturing costs that
affected by the dynamic of units produced
are included as a part of inventory costs and
versus units sold with the fixed factory
expensed when goods are sold. Period
overhead being held back in inventory when
costs are all costs that are not assigned to
production exceeds sales, thus increasing
the product, and they are recognized as
expense and charged against revenue in the ending inventory, decreasing cost of goods
period incurred. sold, and increasing net income.
3. Normally income statements prepared under 6. Gross margin is the term commonly used in
variable costing will reflect profits (or losses) absorption costing to describe the difference
that increase or decrease as sales increase between sales revenue and cost of goods
or decreasea logical pattern. When ab- sold. Manufacturing margin is used in
sorption costing is used, this relationship be- variable costing to designate the difference
tween sales and profits (or losses) does not between sales revenue and variable cost of
exist, especially in instances where the vol- goods sold.
ume of production fluctuates widely. 7. Although variable costing may provide
Use of variable costing will normally useful information for internal decision
cause inventories to be reported on the bal- making, it is not a generally accepted
ance sheet at a lower figure than under ab- method of inventory costing for external
sorption costing because no fixed costs will reporting purposes because it matches only
be charged to the product. the variable manufacturing costs with
4. Advantages of variable costing are: revenue. Under absorption costing both
(a) elimination of profit distortion in periods variable and fixed manufacturing costs are
of fluctuating production and sales, matched with revenue in the period that
(b) recognition of fixed manufacturing costs goods are sold.
as they are incurred rather than defer- 8. A segment report prepared using absorption
ring them as inventory costs until the costing may result in indirect costs being
goods are sold, and improperly allocated to the various seg-
(c) presentation of a much clearer picture of ments. Arbitrarily assigning indirect costs to
the effect of additional production on a segment may distort the profitability of that
costs and income. segment because some or all of the indirect
Disadvantages of variable costing are: cost may be common to the other segments.
(a) The measurement of income, in 9. Common costs are indirect costs that are
traditional accounting theory, is based generated by the overall operations of a
on the matching of revenues with all company. These common costs cannot be
associated costs. Variable costing directly identified with any specific segment;
matches only the variable production however, they are identifiable as common to
costs with revenue. all segments at some particular level of an
organization.
355
10. A contribution margin is determined by sub- 16. A study that highlights the significant cost
tracting the variable costs from the sales and revenue data alternatives is referred to
revenue. Its importance to management is as differential analysis. The difference in
that it can be used as a guide in making de- revenue between two alternatives is called
cisions regarding short-term opportunities differential revenue. The difference in cost
such as pricing special orders. between two alternatives is called differen-
11. The direct costs of a segment are the costs tial cost. The amount of extra profit earned
that are incurred because of the existence of from choosing the better of the alternatives
the segment. If the segment were elimi- is called differential income.
nated, the direct costs would also disappear. 17. Make-or-buy studies aid management in
12. Cost-volume-profit analysis is an analytical determining whether to produce a compo-
technique that uses the degrees of cost nent in their own factory or buy that compo-
variability for measuring the effect of nent from an outside supplier. For example,
changes in sales volume on the resulting if a plant has excess capacity and is able to
profits. manufacture products that it is presently
buying from outside vendors, such studies
13. The break-even point is the point where
may show that these products can be pro-
sales revenue is adequate to cover all costs
duced more economically than they can be
to manufacture and sell the product, but no
purchased. This savings should improve the
profit is earned
profit position of the company.
14. The break-even chart is constructed as
18. By practicing contribution pricing, the airline
follows:
will generate additional contribution margin
(a) A horizontal line, the x-axis, is drawn and profit as long as the special ticket prices
and divided into equal distances to rep- exceed the variable costs of servicing the
resent the sales volume in dollars. additional passengers.
(b) A vertical line, the y-axis, is drawn and 19. Distribution costs are the costs incurred to
spaced into equal parts representing sell and deliver the product. They include all
costs and revenues in dollars. selling expenses and a reasonable portion
(c) A fixed cost line is drawn parallel to the of the administrative expenses.
x-axis at the point representing the dol- 20. The purpose of the analysis of distribution
lar level of fixed costs on the y-axis. costs is primarily to determine the profitabil-
(d) A total cost line is drawn from the fixed ity of products, sales territories, etc., with an
cost point on the y-axis to the total cost eye to controlling, adjusting, or possibly
point at the right of the graph. eliminating costs.
(e) A sales line is drawn from the intersec- 21. The cost data and cost concepts to be in-
tion of the x-axis and the y-axis to the cluded are governed by the purpose of the
total sales point at the right of the graph. cost data. It is essential to first clearly define
(It intersects the total cost line at the the specific objective or problem for which a
break-even point.) cost study is needed.
15. The contribution margin ratio expresses the
relationship of the contribution margin to
sale The margin of safety ratio is a relation-
ship computed by dividing the difference be-
tween total sales and break-even sales by
the total sales. It establishes the percentage
by which sales can decrease before the
company reaches the break-even point.
EXERCISES
E10-1
(a) (b)
Absorption Variable
Costing Costing
Direct materials ............................................................ $ 200,000 $ 200,000
Direct labor ................................................................... 100,000 100,000
Variable factory overhead ............................................ 80,000 80,000
Fixed factory overhead ................................................. 60,000 -0-
Total cost of production ................................................ $ 440,000 $ 380,000
(1) Unit cost ....................................................................... $ 17.60* $ 15.20**
(2) Cost of 5,000 units in inventory .................................... $ 88,000 $ 76,000
*$440,000 25,000 units

**$380,000 25,000 units
E10-2
Verst Products Co.

Comparative Income Statement
For the Month Ended March 31, 2013
(a) (b)
Absorption Variable
Costing Costing
Sales (20,000 units $25) ...................... $ 500,000 $ 500,000
Cost of goods sold .................................. 352,000* 304,000**
Gross margin .......................................... $ 148,000
Contribution margin................................. $ 196,000
Fixed factory overhead ........................... $ 60,000
Selling and administrative expenses ....... 40,000 40,000 100,000
Net income .............................................. $ 108,000 $ 96,000
*20,000 units $17.60
**20,000 units $15.20
E10-3
Variable and Fixed Cost per Unit:

Materials: $90,000/ 8 0 ,000 units = $1.125 per unit
Direct labor: $120,000/ 80,000 units = $1.50 per unit
Variable factory overhead: $60,000/ 80,000 units = $0.75 per unit
Fixed overhead: $150,000/ 80,000 units = $1.875
1.
Richards Corporation
Statement of IncomeVariable Costing
Sales....................................................................................... $ 700,000
Variable cost of goods sold:
Materials ($1.125 70,000 units)..................................... $ 78,750
Direct labor ($1.50 70,000 units) ................................... 105,000
Variable overhead ($0.75 70,000 units) ........................ 52,500 236,250
Contribution margin ................................................................ $ 463,750
Fixed costs:
Fixed overhead ................................................................ $ 150,000
Fixed marketing and administrative expense ................... 180,000 330,000
Net income ............................................................................. $ 133,750
2.
Richards Corporation
Statement of IncomeAbsorption Costing
Sales....................................................................................... $ 700,000
Cost of goods sold:
Materials ($1.125 70,000 units)..................................... $ 78,750
Direct labor ($1.50 70,000 units) ................................... 105,000
Variable overhead ($0.75 70,000 units) ........................ 52,500
Fixed overhead ($1.875 70,000 units) .......................... 131,250 367,500
Gross margin on sales ............................................................ $ 332,500
Less: Fixed marketing and administrative expense ................ 180,000
Net income ....................................................................... $ 152,500
E10-4
1. Variable CostingCosts assigned to inventory:

Materials....................................................................... $ 480,000
Labor ............................................................................ 260,000
Variable factory overhead ............................................ 44,000
Total inventoriable costs .......................................... $ 784,000
Cost of production per unit:
$784,000/40,000 units = $19.60
Cost assigned to ending inventory:
5,000 units $19.60 = $98,000
Total variable cost of goods sold (35,000 units 19.60) $686,000
2. Absorption Costing:
Materials....................................................................... $ 480,000
Labor ............................................................................ 260,000
Variable factory overhead ............................................ 44,000
Fixed factory overhead ................................................. 36,800
Total inventoriable costs .......................................... $ 820,800
Cost of production per unit:
$820,800/40,000 units = $20.52
Cost assigned to ending inventory:
5,000 units $20.52 ..................................................... $ 102,600
Total absorption cost of goods sold

(35,000 units $20.52) ............................................ $ 718,200
E10-5
The net income under absorption costing differs from the variable costing net income by
the amount of fixed cost assigned to the increase or decrease in inventory.
Change in inventory:
Beginning ......................................................................... 18,000 units
Ending .............................................................................. 13,000
Decrease ..................................................................... 5,000 units
5,000 units $2 = $10,000 fixed costs released from inventory under absorption
costing.
Net income (variable costing) ................................................. $ 50,000

Deduct fixed costs released from inventory ............................ 10,000
Net income (absorption costing) ............................................. $ 40,000
E10-6
Budgeted fixed overhead per unit = $1,500,000/500,000 units = $3 per unit

First Year Second Year Third Year
Net income (variable costing)........... $ 500,000 $ 521,000 $ 497,000
Adjustment to absorption costing:
(Units produced minus Units
sold $3 fixed overhead
per unit)
502,000 496,000 = 6,000
6,000 units $3 = ................... 18,000
498,000 503,000 = 5,000
(5,000) units $3 =................. (15,000)
None ....................................... -0-
Absorption costing net income ......... $ 518,000 $ 506,000 $ 497,000
E10-7
Roman Products, Inc.

Segmented Income Statement
Total Milan Venice

Company Division Division
Sales ....................................................... $ 1,300,000 $ 500,000 $ 800,000
Less variable costs ................................. 700,000 225,000 475,000
Contribution margin................................. $ 600,000 $ 275,000 $ 325,000
Less direct fixed costs:
Production ........................................ $ 140,000 $ 60,000 $ 80,000
Administration .................................. 80,000 35,000 45,000
Total direct fixed costs ............................ $ 220,000 $ 95,000 $ 125,000
Segment margin...................................... $ 380,000 $ 180,000 $ 200,000
Less common fixed costs:
Selling .............................................. $ 33,000
Administration .................................. 27,000
Total common fixed costs ....................... $ 60,000
Net income .............................................. $ 320,000
E10-8
Sales price ................................... $ 13

Variable cost ................................ 5
Contribution margin ...................... $ 8
1. 70,000 (break-even units) $8 (contrib. margin) = $560,000 (total fixed exp.)
2. 70,000 (break-even units) $5 (unit var. exp.) = $350,000 (total var. exp.)
E10-9
$1,000,000 = $25 per unit
Variable expenses:
40,000 units
Sales price per unit ............................ $ 50

Variable expense per unit ................. 25
Unit contribution margin ..................... $ 25
$800,000 + $75,000 = 35,000 units need to be sold
$25
E10-10
1.
$100,000
100 (Sales)
$20,000
COSTS AND REVENUES (DOLLARS IN THOUSANDS)
Sales Line
90 (Net
Income)
Area
80 me $80,000
In co (Total Cost)
Net
70
60
Break-Even Point
($60,000)
50
Total Cost Line

40
Area
30
o ss
tL
Ne
20
Fixed Cost Line
10
10 20 30 40 50 60 70 80 90 100
SALES VOLUME (DOLLARS IN THOUSANDS)
2. Break-even point$50,000
Net operating income$20,000
E10-11
1. Unit Sales Mix

Product Sales Percentage
Golf Balls 60,000 60%
Tennis Balls 40,000 40
Total 100,000 100%
2. Weighted-average contribution margin per unit =

(Golf balls unit contribution x Golf balls sold) +
(Tennis balls unit contribution x Tennis balls sold)
Golf balls sold + Tennis balls sold
= [($6.00 $3.00) x 60,000] + [($4.00 $1.50) x 40,000]

60,000 + 40,000
= $280,000
100,000
= $2.80
Break-even sales volume (units) = Fixed costs

Weighted average unit contribution margin
= $100,000
$2.80
= 35,715
3. Product unit sales = Sales mix percentage x Break-even sales

Golf balls = 60% x 35,715 = 21,429
Tennis balls = 40% x 35,715 = 14,286
E10-12
1. Contribution margin ratio = Total sales Variable costs

Total sales
= $1,000,000 $250,000
$1,000,000
= 75%
2. Break-even sales volume = Fixed costs

Contribution margin ratio
= $600,000
.75
= $800,000
3. Margin of safety ratio = Total sales Break-even sales

Total sales
= $1,000,000 $800,000
$1,000,000
= 20%
4. Net income percentage = Contribution margin ratio Margin of safety ratio

= 75% 20%
= 15%
E10-13
1. Break-even sales volume = Total fixed costs

1 (Total variable costs Total sales volume)
$150,000
=
1 ($200,000 $400,000)
= $150,000
1 .50
$150,000
=
.50
= $300,000
Break-even percentage = $300,000 = 75% of total capacity of 100,000 units, or

$400,000
75,000 units
2. Sales (10,000 units $3) ................................................. $ 30,000

Less additional costs:
Variable ($2* per unit) .................................................. $ 20,000
Fixed ........................................................................... 0 20,000
Additional contribution margin .......................................... $ 10,000
The offer should be accepted; the $10,000 would be a contribution toward covering
the fixed costs.
*At 100% capacity: $200,000 variable costs 100,000 units
E10-14
1. Target volume (dollars) = Fixed costs + Target net income

1 Tax rate
= $1,000,000 + $150,000
1.30
$500 $200
$500
= $1,214,286
0.60
= $2,023,810
2. Target volume (dollars) = $1,000,000 + $150,000

0.60
= $1,916,667
E10-15
Cost of special order:
Variable costs:
Manufacturing: ($6,400,000 $4,000,000) = $2,400,000
Cost per unit: ($2,400,000 800,000* units) = $3.00
No additional selling expenses.
*$8,000,000 $10 per unit
Contribution:
Selling price ................................................................. $ 6.00
Less variable costs ...................................................... 3.00
Contribution margin per unit ......................................... $ 3.00
100,000 units $3.00 = $300,000 increase in operating income.
E10-16
1. Relevant cost per unit:

Direct materials ............................................................ $ 4.00
Direct labor ................................................................... 16.00
Variable overhead ........................................................ 12.00
Fixed overhead ($6.00 20%) ..................................... 1.20
Total ........................................................................ $ 33.20
Since Charlie will not use the released facilities, part of the fixed cost (80% $6 =
$4.80) will continue. The fixed cost that will not be continued ($1.20) is considered
relevant to the decision.
2. The part should be made by Charlie because its avoidable costs, if it buys the part,
are only $33.20 and its cost to buy from Delta is $36.
E10-17 MarJo Manufacturing, Inc.

Comparative Analysis of Net Income
From Products Sold During the Year
Product X Product Y Product Z Total
Total sales .............................. $ 1,500,000 $ 1,500,000 $ 2,000,000 $ 5,000,000
Cost of goods sold .................. 900,000 1,000,000 1,500,000 3,400,000
Gross margin .......................... $ 600,000 $ 500,000 $ 500,000 $ 1,600,000
Distribution costs:
Advertising expenses ....... $ 200,000 $ 200,000 $ 200,000 $ 600,000
Commissions.................... 150,000 210,000 360,000 720,000
Sales managers salary .... 25,000 25,000 25,000 75,000
Selling and administrative
expenses ........................ 75,000 37,500 15,000 127,500
Total ............................. $ 450,000 $ 472,500 $ 600,000 $ 1,522,500
Net operating income (loss) .... $ 150,000 $ 27,500 $ (100,000) $ 77,500
PROBLEMS
P10-1
Spaulding Manufacturing Co.

Income Statement
(1) (2)
Absorption Variable
Costing Costing
Sales (8,000 units $20) ................... $160,000 $ 160,000
Cost of goods sold
(8,000 $15; 8,000 $12) ............ $120,000 96,000
Less overapplied fixed overhead ....... 11,000* 109,000
Gross margin ..................................... $ 51,000
Contribution margin ........................... $ 64,000
Less: Fixed factory overhead ............. $ 25,000
expenses .............................. 12,000 12,000 37,000
Net income (loss) ............................... $ 39,000 $ 27,000
*Calculation of overapplied fixed factory overhead:

Fixed overhead per year$3 per unit 100,000 units = $300,000
Fixed overhead per month$300,000 12 months = $25,000
Fixed factory overhead applied to production12,000 units $3 ........... $ 36,000
Fixed factory overhead per month ........................................................... 25,000
Fixed factory overhead overapplied ......................................................... $ 11,000
P10-1 Concluded
Spaulding Manufacturing Co.

Income Statement
For the Month Ended April 30, 2013
(1) (2)
Absorption Variable
Costing Costing
Sales (12,000 units $20) ................ $ 240,000 $ 240,000
Cost of goods sold
(12,000 $15; 12,000 $12) ........ $180,000 144,000
Add underapplied fixed overhead ..... 1,000** 181,000
Gross margin .................................... $ 59,000
Contribution margin........................... $ 96,000
Less: Fixed factory overhead ............ $ 25,000
expenses ............................. 12,000 12,000 37,000
Net income (loss) .............................. $ 47,000 $ 59,000
**Calculation of underapplied fixed factory overhead:

Fixed factory overhead applied to production8,000 units $3.............. $ 24,000
Fixed factory overhead per month ............................................................ 25,000
Fixed factory overhead underapplied $ (1,000)
P10-2
Stroemann Manufacturing Co.

Income Statement
(1) (2)
Absorption Variable
Costing Costing
Sales (5,000 units $30) .................. $150,000 $ 150,000
Cost of goods sold
(5,000 $23; 5,000 $19) ............ $115,000 95,000
Less overapplied fixed overhead ...... 7,333* 107,667
Gross margin .................................... $ 42,333
Contribution margin........................... $ 55,000
Less: Fixed factory overhead ............ $ 16,667
expenses ............................. 10,000 10,000 26,667
Net income (loss) .............................. $ 32,333 $ 28,333
P10-2 Concluded
*Calculation of overapplied fixed factory overhead:

Fixed overhead per year$4 per unit 50,000 units = $200,000
Fixed overhead per month$200,000 12 months = $16,667
Fixed factory overhead applied to production6,000 units $4 ............. $ 24,000
Fixed factory overhead overapplied ......................................................... $ 7,333
Stroemann Manufacturing Co.

Income Statement
(1) (2)
Absorption Variable
Costing Costing
Sales (5,000 units $30) ................... $ 150,000 $ 150,000
Cost of goods sold
(5,000 $23; 5,000 $19) ............ $115,000 95,000
Add underapplied fixed overhead ...... 667** 115,667
Gross margin ..................................... $ 34,333
Contribution margin ........................... $ 55,000
Less: Fixed factory overhead ............. $ 16,667
expenses .............................. 10,000 10,000 26,667
Net income (loss) ............................... $ 24,333 $ 28,333
**Calculation of underapplied fixed factory overhead:

Fixed factory overhead applied to production4,000 units $4 ............. $16,000
Fixed factory overhead underapplied $ (667)
P10-3
Florence Corporation
Comparative Income Statements
For Three Months Ending December 31, 2013
October November December

(3,000 units sold) (4,000 units sold) (6,000 units sold)
Absorption Variable Absorption Variable Absorption Variable

Costing Costing Costing Costing Costing Costing
Sales ......... $ 66,000 $66,000 $ 88,000 $ 88,000 $ 132,000 $132,000

Less: Cost
of goods
sold ........... 45,000 *** 30,000 60,000*** 40,000 90,000*** 60,000
(Under)/
overapp.
fact. over. .. (22,500) 9,000
Gross
margin
(loss) ......... 21,000 $5,500 $51,000
Contributio
n margin .... $36,000 $ 48,000 $ 72,000
Less:
Fixed
factory
overhead ... (30,000)** (30,000) (30,000)
Selling and
admin.
exp. (4,000)* (4,000) (4,000) (4,000) (4,000) (4,000)
Net income
(loss) ......... $ 17,000 $ 2,000 $ 1,500 $ 14,000 $ 47,000 $ 38,000
* $48,000/12
** 360,000/12
*** [$10 + ($360,000 / 72,000)] x 3,000 = $45,000
[$10 + ($360,000 / 72,000)] x 4,000 = $60,000
[$10 + ($360,000 / 72,000)] x 6,000 = $90,000
P10-3 Concluded
Florence Corporation
Comparative Schedule of Cost of Goods Sold
For Three Months Ended December 31, 2013
October November December
Beginning
finished goods
inventory ............ --- --- $ 45,000 $ 30,000 --- ---
Cost of goods
manufactured .... $ 90,000 $ 60,000 15,000 10,000 $120,000 $ 80,000
Goods
available
for sale............... $ 90,000 $ 60,000 $ 60,000 $ 40,000 $120,000 $ 80,000
Less ending
finished goods
inventory ............ 45,000 30,000 --- --- 30,000 20,000
Cost of
goods sold ......... $ 45,000 $ 30,000 $ 60,000 $ 40,000 $ 90,000 $ 60,000
P10-4
Greenville Corporation
Comparative Income Statements
For Three Months Ending March 31, 2013
January February March

(3,000 units sold) (4,000 units sold) (6,000 units sold)
Absorption Variable Absorption Variable Absorption Variable

Costing Costing Costing Costing Costing Costing
Sales ......... $ 84,000 $84,000 $112,000 $112,000 $ 112,000 $112,000

Less: Cost
of goods
sold ........... 63,000 *** 48,000 84,000*** 64,000 84,000*** 64,000
(Under)/
overapp.
fact. over. .. (5,000) 5,000
Gross
margin
(loss) ......... 21,000 $23,000 $33,000
Contributio
n margin .... $36,000 $ 48,000 $ 48,000
Less:
Fixed
factory
overhead ... (20,000)** (20,000) (20,000)
Selling and
admin.
exp. (5,000)* (5,000) (5,000) (5,000) (5,000) (5,000)
Net income
(loss) ......... $ 16,000 $ 11,000 $ 18,000 $ 23,000 $ 28,000 $ 23,000
* $60,000/12
** 240,000/12
*** [$16 + ($240,000 / 48,000)] x 3,000 = $63,000
[$16 + ($240,000 / 48,000)] x 4,000 = $84,000
[$16 + ($240,000 / 48,000)] x 4,000 = $84,000
P10-4 Concluded
Greenville Corporation
Comparative Schedule of Cost of Goods Sold
For Three Months Ended March 31, 2013
January February March
Beginning
finished goods
inventory ............ --- --- $ 21,000 $ 16,000 --- ---
Cost of goods
manufactured .... $ 84,000 $ 64,000 63,000 48,000 $105,000 $ 80,000
Goods
available
for sale............... $ 84,000 $ 64,000 $ 84,000 $ 64,000 $105,000 $ 80,000
Less ending
finished goods
inventory ............ 21,000 16,000 --- --- 21,000 16,000
Cost of
goods sold ......... $ 63,000 $ 48,000 $ 84,000 $ 64,000 $ 84,000 $ 64,000
P10-5
1.
Clean-It Products, Inc.
Income Statement by Territory
Total Territories
Sales East West
Sales .................................. $ 1,000,000 $ 600,000 100.0% $ 400,000 100.0%
Less variable expenses ..... 600,000 370,000* 61.7 230,000* 57.5
Contribution margin............ $ 400,000 $ 230,000 38.3% $ 170,000 42.5%
Less direct fixed costs........ 90,000 54,000 36,000
Segment margin................. $ 310,000 $ 176,000 $ 134,000
Less common fixed costs ... 230,000
Net income ......................... $ 80,000
*Variable expense calculation:
Variable Total
Expense Variable
Sales Rate Expenses
East:
Brooms .................................................... $ 400,000 70% $ 280,000
Mops ........................................................ 200,000 45% 90,000
Total .............................................. $ 600,000 $ 370,000
West:
Brooms .................................................... $ 200,000 70% $ 140,000
Mops ........................................................ 200,000 45% 90,000
Total .............................................. $ 400,000 $ 230,000
2. The significance of the territorial analysis is that the contribution of territories toward
the net income of the company is revealed. This analysis shows that the segment
margin of East Territory ($176,000) is higher than the segment margin of West
territory ($134,000). The profitability of each territory could not be determined from
the product line segment report given in the problem.
P10-6
1.
Digital Software, Inc.
Territory and Company Income Statements
Company
North South Total
Sales:
Num 1............................................................ $240,000 $160,000 $ 400,000
Num 2............................................................ 180,000 420,000 600,000
Total sales .......................................................... $420,000 $580,000 1,000,000
Num 1 (40%* territorial sales dollars) .............. $ 96,000 $ 64,000 $ 160,000
Num 2 (40%* territorial sales dollars) .............. 72,000 168,000 240,000
Total variable costs ............................................. $168,000 $232,000 $ 400,000
Contribution margin ............................................ $252,000 $348,000 $ 600,000
Less direct fixed expenses ................................. 40,000 60,000 100,000
Territorial margin ................................................ $212,000 $288,000 $ 500,000
Less common fixed expenses:
Num 1............................................................ $ 160,000
Num 2............................................................ 140,000
Home office ................................................... 20,000
Total .......................................................... $ 320,000
Net income ......................................................... $ 180,000
* Num 1: $160,000 = 40%

$400,000
Num 2: $240,000 = 40%

$600,000
2. The direct expenses of one type of segment report may have an allocation base
which differs from another type of segment report; therefore, the direct expenses
change with the type of segment base that is being used. In the problem above, the
segment base changed from products to territories.
P10-7
1.
Western-Southern Publishing Company
Electronic Division: Product and Divisional Income Statements
Accounting Executive Management Total
Sales ............................................ $ 300,000 $ 280,000 $ 260,000 $ 840,000
Variable manufacturing:
Accounting60% .................. $ 180,000 $ 180,000
Executive40% .................... $ 112,000 112,000
Management50% .............. $ 130,000 130,000
Other variable expenses:
5% of sales............................ 15,000 14,000 13,000 42,000
Total ............................................. $ 195,000 $ 126,000 $ 143,000 $ 464,000
Contribution margin...................... $ 105,000 $ 154,000 $ 117,000 $ 376,000
Direct fixed expenses................... 100,000 150,000 100,000 350,000
Product margin............................. $ 5,000 $ 4,000 $ 17,000 $ 26,000
Common fixed expenses* ............ 90,000
Net loss ........................................ $ (64,000)
*Total direct expenses ......... $ 440,000

Less direct expenses to:
Accounting .................... $ 100,000
Executive....................... 150,000
Management ................. 100,000 350,000
Common fixed expenses $ 90,000
P10-7 Concluded
2.
Western-Southern Publishing Company
Professional Division
Market Income Statements: Accounting Books
Auditors Controllers Total
Sales............................................ $ 80,000 $ 220,000 $ 300,000
Variable manufacturing costs
(Auditors,60%;Controllers,60% of sales) 48,000 132,000 180,000
Manufacturing margin .................. $ 32,000 $ 88,000 $ 120,000
Other variable expenses:
Auditors5% of sales ............. 4,000 4,000
Controllers5% of sales ......... 11,000 11,000
Contribution margin ..................... $ 28,000 $ 77,000 $ 105,000
Direct fixed expenses .................. 30,000 50,000 80,000
Market margin .............................. $ (2,000) $ 27,000 $ 25,000
Common fixed expenses** .......... 20,000
Net income .................................. $ 5,000
** Total direct expenses ........ $ 100,000
Less direct to market......... 80,000
Common fixed to books .... $ 20,000
3. If the costs for the auditors books cannot be controlled, books for auditors should
be discontinued. Based on the level of sales dollars, the direct fixed expenses are
out of line.
P10-8
1. Amount Percent
Materials........................................................................... $ 4.00
Direct labor ....................................................................... 0.60
Factory overhead ............................................................. 1.00
Administrative expense .................................................... 1.20
Net income ....................................................................... 2.00
$ 8.80 95%
Selling expense (5% of selling price) ............................... .46 5
Selling price per unit ($8.80 0.95) ................................. $ 9.26 100%
X $6.80 .05X = $2.00

.95X $6.80 = $2.00
.95X = $8.80
X = $9.26
2.
Venetian Manufacturing Company
Income Statement
Sales (24,000 units $9.26) ................................................... $ 222,240
Materials........................................................................... $ 96,000
Direct labor ....................................................................... 14,400
Gross margin on sales ............................................................ $ 87,840
Operating expenses:
Selling expense ($.46 24,000) ....................................... $ 11,040
Administrative expense .................................................... 28,800
Total operating expenses ................................................. 39,840
Net operating income .............................................................. $ 48,000
Total fixed costs

3. Break-even sales volume =
1 (Variable cost per unit Sales price per unit)
$52,800
=
1 ($5.06* $9.26)
= $52,800
1 0.5464
= $116,402
116,402 $9.26 = 12,570 units
* $4.00 materials + $0.60 direct labor + $0.46 selling expenses
P10-9
1. Variable costs are costs that change in direct proportion to changes in the volume
of activity. If the volume of activity is increased by 50%, the costs that would also
increase by 50% are direct materials, direct labor, and indirect materials.
Fixed costs are costs that remain the same in total within a relevant range of activ-
ity. The costs that remained the same in total are depreciation, office salaries, and
advertising.
Semivariable costs are costs that change as production changes, but not propor-
tionately. These costs are indirect labor, sales salaries, and other expenses.
2. Before calculating the break-even point, costs must be separated into their fixed
and variable components.
Change in total costs $477,500 $365,000 $112,500
Change in production = 6,000 4,000 = 2,000
= $56.25 variable cost per unit
Fixed costs = Total costs Variable costs
= $365,000 $225,000 (4,000 units $56.25)
= $140,000
Break-even sales volume in units:
Total fixed costs
X = Selling price per unit Variable cost per unit
$140,000
= $100 $56.25
$140,000
= $43.75
= 3,200 units
Break-even sales volume in dollars: 3,200 units x $100 sales price per unit = $320,000
or:
Total fixed costs
X = 1 (Per unit variable costs Sales price per unit)
$140,000
= 1 ($56.25 $100)
$140,000
= .4375
= $320,000
P10-9 Concluded
3.
$600,000
(Sales)
600
COSTS AND REVENUES (DOLLARS IN THOUSANDS)
Sales Line
500
$477,500
(Total Cost)
400
Break-Even Point
($320,000) $337,500
(Variable Costs)
300
Total Cost Line
200 s
os
tL
Ne
Fixed Cost Line $140,000

100 (Fixed Costs)
100 200 300 400 500 600

SALES VOLUME (DOLLARS IN THOUSANDS)
4. Sales (5,000 units $100) ............................................... $ 500,000

Less variable costs (5,000 units $56.25) ................... 281,250
Contribution margin .......................................................... $ 218,750
Less fixed costs............................................................ 140,000
Net operating income ....................................................... $ 78,750
5. Break-even (units) $90,000

=
$100 ($56.25 120%)
$90,000
=
$32.50
= 2,769 (rounded)
P10-10
1. Let x = cans of cashews sold, therefore:

Walnuts = 2x
Almonds = 0.5x
x + 2x +0.5x = 10,000
3.5x = 10,000
x = 2,857 cashews
0.5x 2,857 = 1,429 almonds
2x 2,857 = 5,714 walnuts
2. Units Sales Mix

Product Sales Percentage
Almonds 1,429 14.29%
Cashews 2,857 28.57
Walnuts 5,714 57.14
Total 10,000 100.00%
3. Weighted-average contribution margin per unit:
(Almonds unit contribution x Almonds sold) +

(Cashews unit contribution x Cashews sold) +
(Walnuts unit contribution x Walnuts sold)
= Almonds sold + Cashews sold + Walnuts sold
= [($8 $4) x 1,429] + [($10 $5) x 2,857] + [($6 $4) x 5,714]
1,429 + 2,857 + 5,714
= $31,429 = $3.143
10,000
4. Break-even sales volume (units) = Fixed costs

Weighted-average unit contribution margin
= $40,000 = 12,727
$3.143
5. Product unit sales = Sales mix percentage x Break-even sales

Almonds = 14.29% x 12,727 = 1,819
Cashews = 28.57% x 12,727 = 3,636
Walnuts = 57.14% x 12,727 = 7,272
6. Break-even dollars sales:
= Break-even unit sales x Unit sales price

Almonds = 1,819 x $8 = $14,552
Cashews = 3,636 x $10 = 36,360
Walnuts = 7,272 x $6 = 43,632
P10-11
1. Total Percent Fixed Percent Variable

Expenses Fixed Expenses Variable Expenses
Materials ........................ $ 19,000 10% $ 1,900 90% $ 17,100
Labor.............................. 26,000 20% 5,200 80% 20,800
Overhead ....................... 40,000 40% 16,000 60% 24,000
Marketing & admin. ........ 14,000 60% 8,400 40% 5,600
Commission
(100,000 $2 10%) 20,000 0 0 100% 20,000
$ 119,000 $ 31,500 $ 87,500
$87,500/100,000 (units)=$0.875 unit variable cost

x = break-even units
$2.000x = $0.875x + $31,500

$2.000x $0.875x = $31,500
$1.125x = $31,500
x = 28,000 break-even units
2. Margin of safety ratio = 100,000 28,000

100,000
= 72%
3. Contribution margin ratio = $200,000 $87,500

$200,000
= 56.25%
P10-12
1. Pre-tax income = After-tax income
1 Tax rate
= $500,000
1 0.40
= $833,333
2. Target volume (dollars) = Fixed costs + Pre-tax income

= $2,500,000 + $833,333
$300 $150
$300
= $3,333,333
0.50
= $6,666,666
3. Target volume (units) = Fixed costs + Pre-tax income

Unit contribution margin
= $2,500,000 + $833,333
$300 $150
= $3,333,333
$150
= 22,222
4. Target volume (dollars) = Fixed costs + Net income

= $2,500,000 + $500,000
0.50
= $6,000,000
P10-13
Cost of special order:
Variable costs:
Manufacturing: ($1,000,000 $400,000) = $600,000
Cost per unit: ($600,000 20,000* units) = $30.00
No additional selling expenses.
*$3,000,000 $150 per unit
Contribution:
Selling price.................................................................. $100.00
Less variable costs ....................................................... 30.00
Contribution margin per unit ......................................... $ 70.00
1,000 units $70.00 = $70,000 increase in operating income.
P10-14
1. Cost to make the cans:

Material .................... ($12 20%) = $ 2.40
Labor .......................... ($6 10%) = .60
Overhead .................. ($3* 10%) = .30
Total ........................................ $ 3.30
Cost to buy ....................................... $ 5.00
*Total overhead = $4 per unit
Allocated fixed costs ($100,000/100,000 units) = $1 per unit
Total overhead ................................. $ 4.00
Fixed overhead ................................ 1.00
Variable overhead ............................ $ 3.00
Eradicate, Inc. should make the dispenser cans, because its cost of production per can
is $1.70 per unit less than the purchase price.
2. Eradicate, Inc. should not pay more than $3.30 per unit because that is the
differential cost if it manufactures its own cans. However, it should give serious
consideration to purchasing the cans if an offer less than $3.30 per unit is tendered
by another company.
COMPREHENSIVE REVIEW PROBLEM
P10-15R
1. Break-even sales volume = Fixed costs

1 (Variable costs Sales)
= $360,000 + $252,000
[
1 ($10 + $5) $20 ]
= $612,000
1 .75
$612,000
=
.25
= $2,448,000
2. X = Fixed costs + Net income

Unit sales price Variable cost per unit
= $612,000 + $100,000
$5
= 142,400 units
P10-15R Continued
3. a.
Musketeer Company
Absorption Costing Income Statement
Sales (150,000 $20).......................................................... $ 3,000,000
Beginning inventory, 10,000 $12* .............................. $ 120,000
Add cost of goods manufactured, 160,000 $12 .......... 1,920,000
Goods available for sale ................................................ $ 2,040,000
Ending inventory, 20,000** $12 .................................. 240,000
Cost of goods sold at standard.................................. $ 1,800,000
Add unfavorable volume variance, 20,000*** $2 ........ 40,000
Cost of goods sold ............................................................... 1,840,000
Gross margin on sales ......................................................... $ 1,160,000
Selling expenses:
Variable, 150,000 $5 .................................................. $ 750,000
Fixed ............................................................................. 252,000
Total selling expenses ............................................... 1,002,000
Net operating income ........................................................... $ 158,000
*Standard cost of production = Variable cost per unit + Fixed cost per unit
= $10 + $360,000
180,000
= $10 + $2
= $12
**Ending inventory (units)
Beginning inventory ................................................ 10,000
Add production ....................................................... 160,000
Total inventory available for sale ............................ 170,000
Less sales .............................................................. 150,000
Ending inventory ..................................................... 20,000
***Unfavorable volume variance: Units

Normal capacity ...................................................... 180,000
Actual production .................................................... 160,000
Volume varianceunfavorable 20,000
P10-15R Continued
Musketeer Company
Variable Costing Income Statement
Sales.................................................................................... $ 3,000,000
Direct costs:
Beginning inventory, 10,000 $10................................ $ 100,000
Cost of goods manufactured, 160,000 $10 ................ 1,600,000
Goods available for sale ............................................... $ 1,700,000
Ending inventory, 20,000 $10 .................................... 200,000
Variable manufacturing cost of goods sold ................... $ 1,500,000
Variable selling expense, 150,000 $5 ........................ 750,000
Total direct costs and expenses................................ 2,250,000
Contribution margin ............................................................. $ 750,000
Less period costs:
Fixed factory overhead ................................................. $ 360,000
Fixed selling expense ................................................... 252,000
Total period costs...................................................... 612,000
Net operating income .......................................................... $ 138,000
MINI-CASE 1
1. Since the fixed factory overhead of $5,500,000 is the only expense that can be
manipulated to meet the profit goal, Let X = the maximum amount of fixed factory
overhead that can be released to cost of goods sold while still reaching the profit
goal of $2,200,000:
Sales Variable mfg. Variable S&A Fixed Mfg. Fixed S&A = Target Profit
$13,500,000* - $2,250,000** - $2,520,000*** X - $2,000,000 = $2,200,000
X = $6,730,000 - $2,200,000
X = $4,530,000
Total Fixed Factory Overhead Fixed Factory Overhead Expensed = Fixed Factory
Overhead held back in inventory to meet profit goal
$5,500,000 - $4,530,000 = $970,000
Additional Units Needed to be Produced =

Fixed Factory Overhead Held Back / Fixed Factory Overhead Per Unit =
$970,000 / $11**** = 88,182 units.
450,000 units X $30

** 450,000 units X $5
*** 450,000 units X $5.60
**** $5,500,000 / 500,000 units = $11 per unit
2. Budgeted Income Statement

Sales$13,500,000
Cost of Goods Sold:
Beginning inventory$ -0-
Cost of goods manufactured 8,190,910*
Cost of goods available for sale..$8,190,910
Ending inventory..1,410,912 6,779,998
Gross
margin$6,720,002
Selling and Administrative Expenses:
Variable selling and administrative..$2,520,000
Fixed selling and administrative.2,000,000 4,520,000
Net income $2,200,002
* 538,182 units x $15.22 cost per unit
3. The member responsibility in the Credibility section of the IMA Statement of Ethical
Professional Practice that most applies to this situation is:
Disclose all relevant information that could reasonably be expected to influence an
intended users understanding of the reports, analyses, or recommendations.
There is no reason, other than the desire for the bonus, to produce the additional
88,182 units. In fact, producing those additional units will increase inventory
ordering and carrying costs. It is Dillingers responsibility to not agree to the
production of the additional units. If necessary, he should go to the CEO or the
Board of Directors to prevent such action.
4. The problem with the bonus plan is that it is all or nothing based on hitting a
certain number. It should having varying bonus amounts depending upon what level
of profit is achieved.
MINI-CASE 2
1. Liquidation sale (5,000 units $20) = $ 100,000

Less: Cost to package and ship
(5,000 units $7.50) 37,500
Contribution margin from sale $ 62,500
Yes, the liquidation sale will result in an extra $62,500 in contribution margin.
2.
Alternative 1Liquidate:
Additional contribution margin ........ = $ 62,500
Alternative 2Reprocess:
Sell at $33 5,000 = $165,000
Less variable cost to reprocess:
5,000 $8 = 40,000
Additional contribution margin
from reprocessing 125,000
Alternative 2 will result in $62,500 more contribution margin. $ 62,500
INTERNET EXERCISE
1. For the week of 10/8/11, the author found a weekend Internet roundtrip fare of
$199 plus taxes and fees from Atlanta, GA to Tulsa, OK.
2. The best fare for the same itinerary departing two weeks hence, with a Saturday
night stay, was $454 plus taxes and fees. The difference between the two fares was
$255.
3. Yes, Delta is generating positive contribution margin and not merely generating
goodwill, for reasons given in answer 4., below.
4. Most of Deltas costs are fixed relative to the individual passenger, meaning that
they will not increase due to additional passengers. The only strictly variable cost
relative to an individual passenger would be any free beverages and snacks given
out. (Note that jet fuel costs might vary slightly depending upon the number of
passengers.)
5. Most costs would be variable if the flight were the cost object. They would include
jet fuel, the pilots and co-pilots wages, and flight attendants wages. The idea is
that the airline would not incur the cost of jet fuel if the flight were not operated.
Also, the pilots and flight attendants could be assigned to other flights or laid off,
depending upon their seniority.

CostAccounting 2016 Vanderbeck

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CostAccounting 2016 Vanderbeck

Uploaded by

Copyright:

Available Formats

FOR EDUCATIONAL PURPOSES ONLY! NOT INTENDED FOR SALE!

INSTRUCTORS SOLUTIONS MANUAL

2013, 2010 South-Western, Cengage Learning ISBN-13: 978-1-133-58720-0

Cengage Learning products are represented in

READ IMPORTANT LICENSE INFORMATION

Printed in the United States of America

CHAPTER 4 ................................................................................................................................. 115

CHAPTER 5 ................................................................................................................................. 163

CHAPTER 6 ................................................................................................................................. 199

CHAPTER 7 ................................................................................................................................. 249

CHAPTER 8 ................................................................................................................................. 283

CHAPTER 9 ................................................................................................................................. 339

CHAPTER 10 ................................................................................................................................. 355

Merchandise inventory, January 1 .......................................... $ 22,000

Finished goods, July 1 ............................................................ $ 85,000

a. Steel used in an overhead door plant

Valley View Manufacturing Co.

Inventory, January 1 ..................................................... $ 25,000

b. Finished goods inventory, January 1 ................................ $ 32,000

Inventory, January 1 .................................................... $ 22,000

Indirect materials.......................................................... $ 1,000

b. Finished goods inventory, January 1 ............................... $ 30,000

a. Direct materials used during the period ............................. $ 205,000

Work in Process (Direct Materials).......................................... 21,000

a. Work in Process(Jobs1040, 1065, 1120) ..................... 7,780

1040 $ 3,600 $ 4,000 $ 1,600 $ 9,200

c. Finished Goods ............................................................... 19,260

a. Work in Process(Jobs 1100, 1200, 1300) ..................... 10,800

1100 $4,200 $5,000 $9,000 $18,200

c. Finished Goods ............................................................... 47,500

a. Work in Process ................................................................ 14,500

Saitos Sushi Bar

Performance ReportDining Room

February 28, 2013

Budgeted Actual Variance

Expense February Year-to- February Year-to- February Year-to-

Dining room $4,150 $8,450 $4,400 $9,100 $250U $650U

Laundry and 1,500 3,150 1,400 3,000 100F 150F

Utilities 2,050 4,250 2,100 4,450 50U 200U

Depreciation 1,500 3,000 1,500 3,000 ---------- ---------

Total $9,200 $18,850 $9,400 $19,550 $200U $700U

1. Merchandise inventory, April 1 .......................................... $ 38,000

2. Finished goods, April 1 ...................................................... $ 67,000

1. Merchandise inventory, Sept. 1 ......................................... $ 33,000

2. Finished goods, Sept. 1..................................................... $ 61,000

Inventory, November 1 .................................................... $ 0

Kokomo Furniture Company

Kokomo Furniture Company

Cash ...................................................................... $ 21,800

Liabilities and Stockholders Equity

Accounts payable ......................................................... $ 8,900

1. Terre Haute Plastics, Inc.

Inventory, November 1..................................................... $ 0

Terre Haute Plastics, Inc.

Terre Haute Plastics, Inc.

Liabilities and Stockholders Equity

1. a. Materials ..................................................................... 58,000

Work in Process .......................................................... 29,000

e. Factory Overhead (Miscellaneous) ............................. 8,250

Cash Accounts Receivable

Finished Goods Work in Process

Payroll Wages Payable

Capital Stock Retained Earnings

Sales Cost of Goods Sold