ACCT10 Chapter 4 Solutions

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Solutions Manual, Chapter 4 1

Chapter 4 Systems Design: Process Costing

Solutions to Questions

4-1 A process costing system should be used in situations where a homogeneous prod-uct is produced on a continuous basis.

4-2 1. In job-order costing many different jobs are worked on during each period each with its own production requirements. In process costing, a single product is produced on a continuous basis and all units are identical. 2. The job cost sheet is the key document in job-order costing while the department produc-tion report is the key document in process cost-ing. 3. Unit costs are computed by job in job-order costing while unit costs are computed by de-partment in process costing.

4-3 Cost accumulation is simpler under pro-cess costing because costs only need to be as-signed to departments—not separate jobs. A company usually has a small number of processing departments, whereas a job-order costing system often must keep track of the costs of hundreds or even thousands of jobs.

4-4 In a process costing system, a Work in Process account is maintained for each separate processing department.

4-5 The journal entry would be: Work in Process, Firing...................................... XXXX

Work in Process, Mixing ... XXXX

4-6 The costs that might be added in the Firing Department include: (1) costs transferred in from the Mixing Department; (2) materials costs added in the Firing Department; (3) labour costs added in the Firing Department; and (4) overhead costs added in the Firing Department.

4-7 Under the weighted-average method, equivalent units of production consist of units transferred to the next department (or to fi-nished goods) during the period plus the equiva-lent units in the department’s ending work in process inventory.

4-8 The company will want to distinguish be-tween the costs of the metals used to make the medallions, but the medals are otherwise iden-tical and go through the same production processes. Thus, operation costing is ideally suited for the company’s needs.

4-9 Disagree. In fact, flexible manufacturing systems may actually increase the use of pro-cess costing over time. These systems can have a major impact on costing since they allow for an easy switch from producing one type of product to another. The systems’ flexibility means product switching results in little time lost and relatively low setup costs. Therefore, com-panies are able to move between products with about the same speed as they would if they were working in a continuous processing envi-ronment. As the use of flexible manufacturing systems grows, so should the application of pro-cess costing techniques.

4-10 The number of “full-time equivalent” stu-dents is 5,000 + 50%(1,250) = 5,625.


2 Managerial Accounting, 9th Canadian Edition

Exercise 4-1 (20 minutes)

a. To record issuing raw materials for use in production:

Work in Process—Moulding Department ....... 28,000 Work in Process—Firing Department ............. 5,000 Raw Materials ....................................... 33,000 b. To record direct labour costs incurred: Work in Process—Moulding Department ....... 18,000 Work in Process—Firing Department ............. 5,000 Wages Payable ..................................... 23,000 c. To record applying manufacturing overhead: Work in Process—Moulding Department ....... 24,000 Work in Process—Firing Department ............. 37,000 Manufacturing Overhead ....................... 61,000 d. To record transfer of unfired, molded bricks from the Molding Depart-

ment to the Firing Department:

Work in Process—Firing Department ............. 67,000 Work in Process—Moulding Department . 67,000 e. To record transfer of finished bricks from the Firing Department to the

finished goods warehouse: Finished Goods............................................ 108,000 Work in Process—Firing Department ...... 108,000 f. To record Cost of Goods Sold: Cost of Goods Sold ...................................... 106,000 Finished Goods ..................................... 106,000




Weighted-Average Method Quantity Schedule Units to be accounted for: Work in process, October 1 25,000 Units started into production 195,000 Total units 220,000

Equivalent Units Materials Conversion Units transferred to the next depart-

ment ......................................................... 205,000 205,000 205,000 Ending work in process:

Materials: 15,000 units × 70% complete ................................................. 15,000 10,500

Conversion: 15,000 units × 50% complete ................................................. 7,500

Equivalent units of production ....................... 220,000 215,500 212,500




Weighted-Average Method

Costs per Equivalent Unit:

Total Cost Materials Labour Overhead

Work in process, May 1 ........ $156,270 $ 14,550 $23,620 $118,100 Cost added during May ........ 174,330 88,350 14,330 71,650 Total cost (a) ...................... $330,600 $102,900 $37,950 $189,750

Equivalent units of production (b) ...................

-----

1,200

1,100

1,100

Cost per equivalent unit (a) ÷ (b) ..........................

----- $85.75

$34.50

$172.50

Total cost per equivalent Unit = $85.75 + $34.50 + $172.50 = $292.75





Materials Conversion Total Ending work in process inventory: Equivalent units of production ................. 300 100 Cost per equivalent unit .......................... $31.56 $9.32 Cost of ending work in process inventory . $9,468 $932 $10,400 Units completed and transferred out: Units transferred to the next department . 1,300 1,300 Cost per equivalent unit .......................... $31.56 $9.32 Cost of units completed and transferred

out .................................................... $41,028 $12,116 $53,144




Work in Process—Mixing ................................................ 330,000 Raw Materials Inventory ........................................... 330,000

Work in Process—Mixing ................................................ 260,000 Work in Process—Baking ................................................ 120,000

Wages Payable ......................................................... 380,000

Work in Process—Mixing ................................................ 190,000 Work in Process—Baking ................................................ 90,000

Manufacturing Overhead ........................................... 280,000

Work in Process—Baking ................................................ 760,000 Work in Process—Mixing ........................................... 760,000

Finished Goods .............................................................. 980,000 Work in Process—Baking ........................................... 980,000





Equivalent Units 1. Materials Labour Overhead

Units transferred to the next

department .................................... 790,000 790,000 790,000 Ending work in process:

Materials: 50,000 units × 60%

complete...................................... 30,000

Labour: 50,000 units × 20%

complete...................................... 10,000

Overhead: 50,000 units × 20%

complete...................................... 10,000 Equivalent units of production ............ 820,000 800,000 800,000 2. Cost per Equivalent Unit: Materials Labour Overhead Cost of beginning work in process ....... $ 68,600 $ 30,000 $ 48,000 Costs added during the period ............ 907,200 370,000 592,000 Total cost (a) ..................................... $975,800 $400,000 $640,000 Equivalent units of production (b) ....... 820,000 800,000 800,000 Cost per equivalent unit (a) ÷ (b)........ $1.19 $0.50 $0.80




Weighted-Average Method Equivalent Units (EU)

Materials Labour & Overhead

Kilograms transferred to the Packing Department during May* ........................................................ 245,000 245,000

Work in process, May 31: Materials: 10,000 kilograms × 100% complete ...... 10,000 Labour and overhead: 10,000 kilograms × 90%

complete .......................................................... 9,000 Equivalent units of production ................................ 255,000 254,000

* Beginning WIP 15,000 + Started 240,000 – Ending WIP 10,000 = 245,000 kilograms.





1. Equivalent Units: Materials Conversion Units transferred to the next process ............... 320,000 320,000 Ending work in process: Materials: 60,000 units × 45% complete ....... 27,000 Conversion: 60,000 units × 20% complete ...... 12,000 Equivalent units of production ......................... 347,000 332,000 2. Costs per Equivalent Unit: Materials Conversion Cost of beginning work in process .................. $ 76,600 $ 34,900 Cost added during the period ......................... 410,000 234,500 Total cost (a) ................................................ $486,600 $269,400 Equivalent units of production (b) ................... 347,000 332,000 Cost per equivalent unit (a) ÷ (b) ................... $1.40 $0.81

3. Materials Conversion Total Ending work in process inventory: Equivalent units of production

(see above) ........................ 27,000 12,000 Cost per equivalent unit (see

above) ............................... $1.40 $0.81 Cost of ending work in process

inventory ............................ $37,800 $9,720 $47,520 Units completed and transferred out: Units transferred to the next

department ........................ 320,000 320,000 Cost per equivalent unit

(see previous exercise) ........ $1.40 $0.81 Cost of units completed and

transferred out…………………. $448,000 $259,200 $707,200




Cost Reconciliation

Total Cost Materials Conversion Cost accounted for as follow: Transferred to Packaging Dept: 25,000 rolls x $17.10 $427,500 25,000 25,000 Work in process, January 31: Materials, $9.50 per EU $22,800 2,400 Conversion , $7.60 per EU $13,680

36,480 1,800

Total cost accounted for $463,980



Problem 4-10 (45 minutes)

Weighted-Average Method 1. Equivalent Units of Production Materials Conversion

Transferred to next department ........................ 450,000 450,000 Ending work in process: Materials: 80,000 units × 75% complete ........ 60,000 Conversion: 80,000 units × 25% complete ..... 20,000 Equivalent units of production .......................... 510,000 470,000

2. Cost per Equivalent Unit Materials Conversion

Cost of beginning work in process ................ $ 36,550 $ 13,500 Cost added during the period ....................... 391,850 267,300 Total cost (a) .............................................. $428,400 $280,800 Equivalent units of production (b) ................ 510,000 470,000 Cost per equivalent unit, (a) ÷ (b) ............... $0.84 $0.597*

*rounded

3.

Applying Costs to Units

Materials Conversion Total Ending work in process inventory: Equivalent units of production

(materials: 80,000 units × 75% complete; conversion: 80,000 units × 25% complete) ...... 60,000 20,000

Cost per equivalent unit ....... $0.84 $0.597 Cost of ending work in process

inventory ........................... $50,400 $11,940 $62,340 Units completed and transferred out: Units transferred to the next

department ....................... 450,000 450,000 Cost per equivalent unit ....... $0.84 $0.597 $1.437 Cost of units completed and

transferred out ................... $378,000 $268,650 $646,650



Problem 4-10 (continued)

4. Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory

($36,550 + $13,500) .................................. $ 50,050 Costs added to production during the period

($391,850 + $267,300) .............................. 659,150 Total cost to be accounted for ....................... $709,200 Costs accounted for as follows: Transferred to next department: 450,000 units x $1.437 ..................................... $646,650 Work in process June 30 Materials at $0.84 per EU ............................. 50,400 Conversion at $0.597 per EU ........................ 11,940 62,340 Total cost accounted for ............................... $708,990*

*off $210 due to rounding





Transferred to next department* ...................... 395,000 395,000 Ending work in process: Materials: 55,000 units × 65% complete ........ 35,750

Conversion: 55,000 units × 30% complete ..... 16,500

Equivalent units of production .......................... 430,750 411,500

*Units transferred to the next department = Units in beginning work in process + Units started into production − Units in ending work in process = 85,000 + 365,000 − 55,000 = 395,000

2. Cost per Equivalent Unit Materials Conversion

Cost of beginning work in process ................ $ 101,000 $ 51,000 Cost added during the period ....................... 462,000 213,000 Total cost (a) .............................................. $563,000 $264,000 Equivalent units of production (b) ................ 430,750

411,500

Cost per equivalent unit, (a) ÷ (b) ............... $1.31 $0.64




3. Cost of Ending Work in Process Inventory and Units Transferred Out Materials Conversion Total

Ending work in process inventory: Equivalent units of production

(materials: 55,000 units × 65% complete; conversion: 55,000 units × 30% complete) ...... 35,750

16,500

Cost per equivalent unit ....... $1.31 $0.64 Cost of ending work in process


department ....................... 395,000

395,000

Cost per equivalent unit ....... $1.31 $0.64 $1.95 Cost of units completed and

transferred out ................... $517,450 $252,800 $770,250




4. Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory

($101,000 + $51,000) .................................... $152,000 Costs added to production during the period

($462,000 + $213,000) .................................. 675,000

Total Cost $827,000 Costs accounted for as follows: Transferred to the Coating Department

395,000 x $1.95 $770,250 Work in process, May 31 Materials at $1.31 per EU 46,833 Conversion at $0.64 per EU 10,560 Total ending Work in process 57,393 Total cost *$827,643

*Difference of $643 due to rounding of the per unit costs




Weighted-Average Method 1. Total units transferred to the next department ... 30,000 Less units in the May 1 inventory ...................... 5,000 Units started and completed in May................... 25,000

2. The equivalent units were: Materials Conversion

Transferred to next department .................. 30,000 30,000 Ending work in process: Materials: 4,000 units × 75% complete .... 3,000 Conversion: 4,000 units × 50% complete . 2,000 Equivalent units of production .................... 33,000 32,000

3. The costs per equivalent unit were: Materials Conversion

Cost of beginning work in process ................ £ 9,000 £ 4,400 Cost added during the period ....................... 57,000 30,800 Total cost (a) .............................................. £66,000 £35,200 Equivalent units of production (b) ................ 33,000 32,000 Cost per equivalent unit, (a) ÷ (b) ............... £2.00 £1.10

4. The ending work in process figure is verified as follows: Materials Conversion Total


(see above) ................................. 3,000 2,000 Cost per equivalent unit ................. £2.00 £1.10 Cost of ending work in process

inventory ..................................... £6,000 £2,200 £8,200 5. Multiplying the unit cost figure of £3.10 per unit by 1,000 units does not

provide a valid estimate of the incremental cost of processing an addi-tional 1,000 units through the department. If there is sufficient idle ca-pacity to process an additional 1,000 units, the incremental cost per unit is almost certainly less than £3.10 per unit because the conversion costs are likely to include fixed costs.





Transferred to next department* ...................... 270,000 270,000 Ending work in process: Materials: 45,000 kilograms × 100% complete .. 45,000 Conversion: 45,000 kilograms × 2/3 complete .. 30,000 Equivalent units of production .......................... 315,000 300,000

*35,000 + 280,000 – 45,000 = 270,000. 2. Cost per Equivalent Unit Materials Conversion

Cost of beginning work in process ................ $ 43,400 $ 20,300 Cost added during the period ....................... 397,600 189,700 Total cost (a) .............................................. $441,000 $210,000 Equivalent units of production (b) ................ 315,000 300,000 Cost per equivalent unit, (a) ÷ (b) ............... $1.40 $0.70

3. Cost of Ending Work in Process Inventory and Units Transferred Out Materials Conversion Total


(see above) ....................... 45,000 30,000 Cost per equivalent unit ....... $1.40 $0.70 Cost of ending work in process


department ....................... 270,000 270,000 Cost per equivalent unit ....... $1.40 $0.70 $2.10 Cost of units completed and

transferred out ................... $378,000 $189,000 $567,000




4. In computing unit costs, the weighted-average method mixes costs of the prior period with current period costs. Thus, under the weighted-average method, unit costs are influenced to some extent by what hap-pened in a prior period. This problem becomes particularly significant when attempting to measure performance in the current period. Good (or bad) cost control in the current period might be concealed by the costs that have been brought forward in the beginning inventory.




Weighted-Average Method 1. The equivalent units are:

Materials Conversion Units completed during the year ..................... 790,000 790,000 Work in process, Dec. 31:

Materials: 30,000 units × 100% complete .... 30,000 Conversion: 30,000 units × 50% complete ... 15,000

Equivalent units of production ........................ 820,000 805,000 The costs per equivalent unit are:

Materials Conversion Work in process, Jan. 1 .................................. $ 22,000 $ 48,000 Cost added during the year ............................ 880,000 2,367,000 Total cost (a) ................................................ $902,000 $2,415,000 Equivalent units of production (b) ................... 820,000 805,000 Cost per equivalent unit (a) ÷ (b) ................... $1.10 $3.00

2. The amount of cost that should be assigned to the ending inventories is:

Materials Conversion Total Ending work in process inventory: Equivalent units of production

(see above) ....................... 30,000 15,000 Cost per equivalent unit ....... $1.10 $3.00 Cost of ending work in process

inventory ........................... $33,000 $45,000 $78,000

Finished goods inventory: Equivalent units ................... 50,000 50,000 Cost per equivalent unit ....... $1.10 $3.00 $4.10 Cost of units completed and

transferred out ................... $55,000 $150,000 $205,000




3. The necessary adjustments would be:

Work in Process

Finished Goods Total

Total cost that should be assigned to inventories (see above) ............................................ $ 78,000 $205,000 $283,000

Year-end balances in the accounts .................................. 95,000 201,000 296,000 Error .............................................................................. $(17,000) $ 4,000 $(13,000)

Finished Goods Inventory ................................................ 4,000 Cost of Goods Sold ......................................................... 13,000

Work in Process Inventory ......................................... 17,000 4. The cost of goods sold can be determined as follows:

Beginning finished goods inventory.................................. 0 Units completed during the year ...................................... 790,000 Units available for sale .................................................... 790,000 Less units in ending finished goods inventory ................... 50,000 Units sold during the year ............................................... 740,000 Cost per whole unit ($1.10 + $3.00) ................................ × $4.10 Cost of goods sold .......................................................... $3,034,000

Alternative computation: Total manufacturing cost incurred:

Materials (part 1. above) .............................................. $ 902,000 Conversion (part 1. above) ........................................... 2,415,000

Total manufacturing cost ................................................ 3,317,000 Less cost assigned to inventories (part 3. above).............. 283,000 Cost of goods sold .......................................................... $3,034,000





1. a. Work in Process—Blending .............................................

495,000

Work in Process—Bottling 115,000

Raw Materials ........................................................... 610,000

b. Work in Process—Blending ............................................. 72,000 Work in Process—Bottling ............................................... 18,000 Salaries and Wages Payable ...................................... 90,000

c. Manufacturing Overhead ................................................ 225,000 Accounts Payable ...................................................... 225,000

d. Work in Process—Blending ............................................. 181,000 Manufacturing Overhead ........................................... 181,000 Work in Process—Bottling ............................................... 42,000 Manufacturing Overhead ........................................... 42,000

e. Work in Process—Bottling ............................................... 740,000 Work in Process—Blending ........................................ 740,000

f. Finished Goods .............................................................. 950,000 Work in Process—Bottling .......................................... 950,000

g. Accounts Receivable ....................................................... 1,500,000 Sales ........................................................................ 1,500,000 Cost of Goods Sold ......................................................... 890,000 Finished Goods ......................................................... 890,000




2. Work in Process—Bottling Work in Process—Blending

Bal. 65,000 (f) 950,000

Bal. 38,000

(e) 740,000

(a) 115,000

(a) 495,000

(b) 18,000 (b) 72,000

(d) 42,000 (d) 181,000

(e) 740,000

Bal. 30,000 Bal. 46,000

Manufacturing Overhead Finished Goods

(c) 225,000 (d) 181,000

Bal. 20,000 (g) 890,000

(d) 42,000

(f) 950,000

Bal. 2,000 Bal. 80,000

Raw Materials Accounts Payable

Bal. 681,000 (a) 610,000

(c) 225,000

Bal. 71,000

Salaries and Wages Payable Sales

(b) 90,000 (g) 1,500,000

Accounts Receivable Cost of Goods Sold

(g) 1,500,000 (g) 890,000




3. Production Report – Blending Department

Quantity Schedule

Units to be accounted for:

Work in process, March 1 20,000

Started into production 390,000

Total Units 410,000

Equivalent Units (EU)

Material Labour Overhead

Units accounted for as follows:

Transferred to Bottling 370,000 370,000 370,000 370,000

Work in process March 31 40,000 30,000 10,000 10,000

Total units and equivalent units of production

410,000

400,000

380,000

380,000

Costs per Equivalent Unit:

Total cost Material Labour Overhead

Cost to be accounted for:

Work in process, March 1 $38,000 $25,000 $4,000 $9,000

Cost added by the Blending Department

748,000

495,000

72,000

181,000

Total Cost $786,000 520,000 76,000 190,000

Equivalent units of production 400,000 380,000 380,000

Cost per equivalent unit $1.30 $0.20 $0.50



Case 4-16 (120 minutes)

This case is difficult—particularly part 3, which requires analytical skills. Because there are no beginning inventories, it makes no difference

whether the weighted-average or FIFO method is used by the company. You may choose to specify that the FIFO method be used rather than the weighted-average method.

1. Computation of the Cost of Goods Sold: Transferred In Conversion

Units completed and sold ....................... 250,000 250,000 Ending work in process: Transferred in:

20,000 units × 100% complete .......... 20,000 Conversion:

20,000 units × 25% complete ............ 5,000 Equivalent units of production ................ 270,000 255,000

Transferred In Conversion

Cost of beginning work in process .......... $ 0 $ 0 Cost added during the period ................. 49,221,000 16,320,000 Total cost (a) ........................................ $49,221,000 $16,320,000 Equivalent units of production (b) .......... 270,000 255,000 Cost per equivalent unit, (a) ÷ (b) ......... $182.30 $64.00

Cost of goods sold = 250,000 units × ($182.30 + $64.00) per unit =

$61,575,000. 2. The estimate of the percentage completion of ending work in process

inventories affects the unit costs of finished goods and therefore the cost of goods sold. Jason Bieler would like the estimated percentage completion of the ending work in process to be increased. The higher the percentage of completion of ending work in process, the higher the equivalent units for the period and the lower the unit costs.

3. Increasing the percentage of completion can increase operating income

by reducing the cost of goods sold. To increase operating income by $62,500, the cost of goods sold would have to be decreased by $62,500 from $61,575,000 down to $61,512,500. See the next page for the ne-cessary calculations.



Case 4-16 (continued)

The percentage of completion, X, affects the cost of goods sold by its effect on the unit cost, which can be determined as follows:

Unit cost = $182.30 + $16,320,000

250,000 + 20,000X

And the cost of goods sold can be computed as follows:

Cost of goods sold = 250,000 × Unit cost

Since cost of goods sold must be reduced down to $61,512,500, the unit cost must be $246.05 ($61,512,500 ÷ 250,000 units). Thus, the re-quired percentage completion, X, to obtain the $62,500 reduction in cost of goods sold can be found by solving the following equation:

$16,320,000$182.30 + = $246.05

250,000 + 20,000X

$16,320,000 = $246.05 - $182.30

250,000 + 20,000X

$16,320,000 = $63.75

250,000 + 20,000X

250,000 + 20,000X 1 =

$16,320,000 $63.75

$16,320,000250,000 + 20,000X =

$63.75

250,000 + 20,000X = 256,000

20,000X = 256,000 - 250,000

20,000X = 6,000

Thus, changing the percentage completion to 30% will decrease cost of goods sold and increase net operating income by $62,500 as verified on the next page.

6,000X = = 30%

20,000




3. (continued) Computation of the Cost of Goods Sold: Transferred In Conversion

Units completed and sold ....................... 250,000 250,000 Ending work in process: Transferred in:

20,000 units × 100% complete .......... 20,000 Conversion:

20,000 units × 30% complete ............ 6,000 Equivalent units of production ................ 270,000 256,000

Transferred In Conversion

Cost of beginning work in process .......... $ 0 $ 0 Cost added during the period ................. 49,221,000 16,320,000 Total cost (a) ........................................ $49,221,000 $16,320,000 Equivalent units of production (b) .......... 270,000 256,000 Cost per equivalent unit, (a) ÷ (b) ......... $182.30 $63.75

Cost of goods sold = 250,000 units × ($182.30 per unit + $63.75 per

unit) = $61,512,500. 4. Carol is in a very difficult position. Collaborating with Jason Bieler in

subverting the integrity of the accounting system is unethical by almost any standard. To put the situation in its starkest light, Bieler is suggest-ing that the production managers lie in order to get their bonus. Having said that, the peer pressure to go along in this situation may be intense. It is difficult on a personal level to ignore such peer pressure. Moreover, Carol probably prefers not to risk alienating people she might need to rely on in the future. On the other hand, Carol should be careful not to accept at face value Bieler’s assertion that all of the other managers are “doing as much as they can to pull this bonus out of the hat.” Those who engage in unethical or illegal acts often rationalize their own behav-iour by exaggerating the extent to which others engage in the same kind of behaviour. Other managers may actually be very uncomfortable “pulling strings” to make the target profit for the year.




From a broader perspective, if the profit figures reported by the managers in a division cannot be trusted, then the company would be foolish to base bonuses on the net profit figures. A bonus system based on divisional profits presupposes the integrity of the accounting system.

The company should perhaps reconsider how it determines the bonus. It is quite common for companies to pay an “all or nothing” bonus contin-gent on making a particular target. This inevitably creates powerful in-centives to bend the rules when the target has not quite been attained. It might be better to have a bonus without this “all or nothing” feature. For example, managers could be paid a bonus of x% of profits above target profits rather than a bonus that is a preset percentage of their base salary. Under such a policy, the effect of adding that last dollar of profits that just pushes the divisional net profits over the target profit will add a few pennies to the manager’s compensation rather than thou-sands of dollars. Therefore, the incentives to misstate the operating in-come are reduced. Why tempt people unnecessarily?




Weighted-Average Method 1. The revised computations follow:

Quantity Schedule and Equivalent Units of Pro-

duction Transferred

In Materials Conversion Transferred to next department ........................ 100,000 100,000 100,000 Ending work in process: Transferred in: 5,000 units × 100% complete . 5,000 Materials: 5,000 units × 0% complete ............ 0 Conversion: 5,000 units × 2/5 complete .......... 2,000 Equivalent units of production .......................... 105,000 100,000 102,000

Costs per equivalent unit Transferred

In Materials Conversion Cost of beginning work in process ................... $ 8,820 $ 3,400 $ 10,200 Cost added during the period .......................... 81,480 27,600 96,900 Total cost (a) ................................................. $90,300 $31,000 $107,100 Equivalent units of production (b) ................... 105,000 100,000 102,000 Cost per equivalent unit, (a) ÷ (b) .................. $0.86 $0.31 $1.05




Cost reconciliation

Transferred In Materials Conversion Total

Units completed and transferred out: Units transferred to the next department ......... 100,000 100,000 100,000 Cost per equivalent unit .................................. $0.86 $0.31 $1.05 $2.22 Cost of units completed and transferred out .... $86,000 $31,000 $105,000 $222,000 Ending work in process inventory: Equivalent units of production (see above) .. 5,000 0 2,000 Cost per equivalent unit ............................. $0.86 $0.31 $1.05 Cost of ending work in process inventory .... $4,300 $0 $2,100 $6,400

2. The unit cost computed above is $2.22 (= $0.86 + $0.31 + $1.05) versus $2.284 on the original re-

port. The unit cost on the report prepared by the accountant is high because none of the cost in-curred during the month was assigned to the units in the ending work in process inventory.




MEMORANDUM DATE: September 2010 TO: Rachel Archer FROM: Ed Switzer SUBJECT: Ending Work in Process and Finished Goods Inven-

tory Balances As agreed, I have calculated the ending inventory balances to be included in the Balance Sheet of Rachel’s Real Root Beer as at August 30. The calcu-lations assume process costing using the weighted average method. My calculations indicate an ending balance in Finished Goods Inventory of $6,456 and an ending Work in Process balance of $1,944. Details of my calculations are presented in the attached Production Report for the month of August.



Rachel’s Real Root Beer Production Report for August (weighted average method)

Quantity Schedule and Equivalent Units

Quantity Units to be accounted for:

Work in process, August 1 (75% complete for material, 60% for conversion)

550

Started into production 3,000

Total units 3,550 Equivalent Units

Materials Conversion Units accounted for as follows:

Transferred to Finished Goods 2,400 2,400 2,400

Work in process, August 30 (75% complete for material, 50% for conversion)

1,150

863

575

Total units and equivalent units 3,550 3,263 2,975

Cost per Equivalent Unit Total Cost Materials Conversion Cost to be accounted for:

Work in process, August 1 $1,080 $650 $430 Cost added during the month 7,320 3,840 3,480

Total cost $8,400 $4,490 $3,910

Equivalent units of production 3,263 2,975 Cost per equivalent unit $1.38 $1.31

Total cost per equivalent unit $2.69

Cost reconciliation: Total Cost Materials Conversion Cost accounted for as follows:

Transferred to Finished Goods 2,400 units x $2.69

$6,456

$2,400

$2,400

Work in process, August 30: Materials at $1.38 per EU

1,191

863

Conversion at $1.31 per EU 753 575

Total Work in process, Aug 30 1,944 Total cost accounted for: $8,400



Research and Application 4-19 (120 minutes)

1. The processing departments for BIC’s ballpoint pen manufacturing proc-ess are listed below in sequential order. The raw material inputs are listed in parentheses next to the department where they are added to the manufacturing process.

Ball and point production department (hardening and grinding) (Tungsten carbide balls, metal points and point supports are added to production).

The Moulding department (plastic casing materials moulded here). The Cartridge Filling department (ink cartridges are centrifuged and

quality checked here). The Assembly department (no raw materials are added). The Quality Control department (no raw materials added here). The Packaging department (boxes are filled and shrink wrapped for

shipping here). 2. The production process consumes fairly large amounts of manufacturing

overhead costs. This should be apparent to students based on the pho-tographs that accompany the on-line tour. There are many pictures of large pieces of capital equipment used to mould pen body assemblies, grind pen balls and set them into their metal points. In addition, the as-sembly process is described as highly automated with employees really only monitoring the output of the assembly machines. The depreciation costs associated with the equipment as well as the util-ity and maintenance costs incurred to run the equipment are three ex-amples of overhead costs. It is also worth noting that the equipment shown in the photographs is large in size, thereby suggesting that BIC’s pen-making facilities occupy a large amount of floor space—all of which needs lighting, heat, insurance, etc. These are additional examples of manufacturing overhead costs



3. The T-account model is shown below:

Wages Payable

Manufacturing Overhead

Work in Process: Molding

XXX

XXX XXX

Work in Process: Ball point

production

The T-account model shown above assumes that labour cost is incurred at each step of the process to operate and maintain the equipment.

4. While the on-line tour does not provide sufficient information to answer

this question, it is reasonable to expect students to speculate that oper-ation costing may be appropriate because BIC’s stationary line includes many different types of pens, some of which may go through a slightly different manufacturing process. This suggests that some material costs and conversion costs may be assigned to particular batches of produc-tion rather than being spread over the entire volume of production for a given period without regard to the type of pen being manufactured.



Appendix 4A – FIFO Method

Questions

4A-1 Under the weighted-average method, each unit transferred out of the department is counted as one equivalent unit—regardless of in what period the work was done to complete the units. Under the FIFO method, only the work done in the current period is counted. Units transferred out are divided into two parts. One part consists of the units transferred out from beginning inventory. Only the work needed to complete these units is shown as part of the equivalent units for the current period. The other part of the units transferred out consists of the units started and completed during the current period.

4A-2The weighted-average method mixes costs from the current period with costs from the prior period. Thus, under the weighted-average method, the department’s apparent performance in the current period is influenced to some extent by what happened in a prior period. In contrast, the FIFO method cleanly separates the costs and work of the current period from those of the prior period. This makes the FIFO method superior to the weighted-average method for cost control because current performance should be measured in relation to costs of the current period only.



Exercise 4A-1 (10 minutes)

FIFO Method

Materials Conversion To complete beginning work in process:

Materials: 400 units × (100% – 75%) ................. 100 Conversion: 400 units × (100% – 25%) ............. 300

Units started and completed during the period (42,600 units started – 500 units in ending inventory) ......................................................... 42,100 42,100

Ending work in process Materials: 500 units × 80% complete ................. 400 Conversion: 500 units × 30% complete .............. 150

Equivalent units of production ................................ 42,600 42,550



Exercise 4A-2(10 minutes)

FIFO method

Materials Labour Overhead Total Cost added during May (a) ..... $41,280 $26,460 $66,150 Equivalent units of

production (b) .................... 8,000 7,000 7,000 Cost per equivalent unit

(a) ÷ (b) ............................ $5.16 $3.78 $9.45 $18.39



Exercise 4A-3(15 minutes)

FIFO Method

Materials Conversion Total Ending work in process inventory:

Equivalent units of production ............... 800 200 Cost per equivalent unit ........................ $4.40 $1.30 Cost of ending work in process inventory $3,520 $260 $3,780

Units transferred out:

Cost in beginning work in process inventory ......................................... $2,700 $380 $3,080

Cost to complete the units in beginning work in process inventory:

Equivalent units of production required to complete the beginning inventory 400 700

Cost per equivalent unit ...................... $4.40 $1.30 Cost to complete the units in beginning

inventory ....................................... $1,760 $910 2,670 Cost of units started and completed this period:

Units started and completed this period (8,000 units completed and trans-ferred to the next department – 1,000 units in beginning work in process inventory) .......................... 7,000 7,000

Cost per equivalent unit ...................... $4.40 $1.30 Cost of units started and completed

this period ..................................... $30,800 $9,100 39,900 Total cost of units transferred out .......... $45,650




FIFO Method

1. Materials Labour Overhead To complete beginning work in process:

Materials: 80,000 litres ×

(100% − 80%) ................................ 16,000

Labour: 80,000 litres ×

(100% − 75%) ................................ 20,000

Overhead: 80,000 litres ×

(100% − 75%) ................................ 20,000

Units started and completed during the

period (790,000 – 80,000) ................... 710,000 710,000 710,000 Ending work in process: Materials: 50,000 litres × 60% ............. 30,000 Labour: 50,000 litres × 20% ................ 10,000 Overhead: 50,000 litres × 20% ............ 10,000 Equivalent units of production ................ 756,000 740,000 740,000

2. Materials Labour Overhead Cost added during the period (a) ............ $907,200 $370,000 $592,000 Equivalent units of production (b) ........... 756,000 740,000 740,000 Cost per equivalent unit (a) ÷ (b) ......... ̀ $1.20 $0.50 $0.80




FIFO method

1. Computation of the total cost per equivalent unit of production:

Cost per equivalent unit of production for material ............. $18.20 Cost per equivalent unit of production for conversion ......... 23.25 Total cost per equivalent unit of production ....................... $41.45

2. Computation of equivalent units in ending inventory:

Materials Conversion Units in ending inventory ......... 300 300 Percentage completed ............. 80 % 40 % Equivalent units of production .. 240 120

3. Computation of equivalent units required to complete the beginning in-

ventory:

Materials Conversion Units in beginning inventory ..... 400 400 Percentage uncompleted ......... 30 % 70 % Equivalent units of production .. 120 280

4. Units transferred to the next department ............. 4,400

Less units from the beginning inventory .............. 400 Units started and completed during the period ..... 4,000



Exercise 4A-5 (continued)

5. Materials Conversion Total Ending work in process inventory: Equivalent units of production ................................................... 240 120 Cost per equivalent unit ............................................................ $18.20 $23.25 Cost of ending work in process inventory ................................... $4,368 $2,790 $7,158

Units transferred out: Cost from the beginning work in process inventory ..................... $4,897 $2,989 $7,886 Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the units

in beginning inventory ....................................................... 120 280 Cost per equivalent unit ....................................................... $18.20 $23.25 Cost to complete the units in beginning inventory .................. $2,184 $6,510 8,694 Cost of units started and completed this period: Units started and completed this period ................................. 4,000 4,000 Cost per equivalent unit ....................................................... $18.20 $23.25 Cost of units started and completed this period...................... $72,800 $93,000 165,800 Total cost of units transferred out ............................................. $182,380




FIFO Method

Materials Labour & Overhead

To complete the beginning work in process: Materials: 15,000 kilograms × (100% − 100%) .... 0 Labour and overhead:

15,000 kilograms × (100% − 55%) ................... 6,750 Kilograms started and completed during May

(240,000 kilograms started − 10,000 kilograms in ending inventory) ............................................ 230,000 230,000

Ending work in process: Materials: 10,000 kilograms × 100% complete ...... 10,000 Labour and overhead: 10,000 kilograms × 90%

complete .......................................................... 9,000 Equivalent units of production ................................ 240,000 245,750



Problem 4A-7 (45 minutes)

FIFO method

1. Equivalent Units of Production Materials Conversion To complete beginning work in process: Materials: 70,000 units × (100% − 70%) ...... 21,000 Conversion: 70,000 units × (100% − 40%) ... 42,000 Units started and completed during the period

(460,000 units started − 80,000 units in end-ing inventory) ............................................... 380,000 380,000

Ending work in process: Materials: 80,000 units × 75% complete ....... 60,000 Conversion: 80,000 units × 25% complete .... 20,000 Equivalent units of production ........................... 461,000 442,000 2. Cost per Equivalent Unit Materials Conversion Cost added during the period (a) .............. $391,850 $267,300 Equivalent units of production (b) ............. 461,000 442,000 Cost per equivalent unit (a) ÷ (b) ............. $0.85 $0.605 3. See the next page. 4. Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory

($36,550 + $13,500) .......................................... $ 50,050 Costs added to production during the period

($391,850 + $267,300) ...................................... 659,150 Total cost to be accounted for ................................ $709,200 Costs accounted for as follows: Cost of ending work in process inventory ................ $ 63,100 Costs of units transferred out ................................. 646,210 Total cost accounted for ........................................ *$709,310 *Off $110 due to rounding.



Problem 4A-7 (continued)

3. Costs of Ending Work in Process Inventory and Units Transferred Out Materials Conversion Total

Ending work in process inventory: Equivalent units of production ................................................. 60,000 20,000 Cost per equivalent unit .......................................................... $0.85 $0.605 Cost of ending work in process inventory ................................. $51,000 $12,100 $63,100

Units transferred out: Cost in beginning work in process inventory ............................ $36,550 $13,500 $50,050 Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the be-

ginning inventory ............................................................ 21,000 42,000 Cost per equivalent unit ..................................................... $0.85 $0.605 Cost to complete the units in beginning inventory ................ $17,850 $25,410 43,260 Cost of units started and completed this period: Units started and completed this period .............................. 380,000 380,000 Cost per equivalent unit ..................................................... $0.85 $0.605 Cost of units started and completed this period ................... $323,000 $229,900 552,900 Cost of units transferred out ................................................... $646,210



Problem 4A-8 (45 minutes)

FIFO Method

1. Equivalent Units of Production Materials Conversion To complete beginning work in process: Materials: 50,000 units × (100% − 60%) ...... 20,000 Conversion: 50,000 units × (100% − 30%) ... 35,000 Units started and completed during the period

(500,000 units started − 60,000 units in end-ing inventory) ............................................... 440,000 440,000

Ending work in process: Materials: 60,000 units × 80% complete ....... 48,000 Conversion: 60,000 units × 40% complete .... 24,000 Equivalent units of production ........................... 508,000 499,000 2. Cost per Equivalent Unit Materials Conversion Cost added during the period (a) .............. $457,200 $349,300 Equivalent units of production (b) ............. 508,000

499,000

Cost per equivalent unit (a) ÷ (b) ............. $0.90 $0.70 3. See the next page. 4. Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory

($17,000 + $3,000) ............................................ $ 20,000 Costs added to production during the period

($457,200+ $349,300) .......................................

806,500

Total cost to be accounted for ................................ $826,500 Costs accounted for as follows: Cost of ending work in process inventory ................ $ 60,000 Costs of units transferred out ................................. 766,500 Total cost accounted for ........................................ $826,500



Problem 4A-8 (continued)

3. Costs of Ending Work in Process Inventory and Units Transferred Out Materials Conversion Total

Ending work in process inventory: Equivalent units of production ................................................. 48,000 24,000 Cost per equivalent unit .......................................................... $0.90 $0.70 Cost of ending work in process inventory ................................. $43,200

$16,800

$60,000

Units transferred out: Cost in beginning work in process inventory ............................ $17,000 $3,000 $20,000 Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the be-

ginning inventory ............................................................ 20,000 35,000 Cost per equivalent unit ..................................................... $0.90 $0.70 Cost to complete the units in beginning inventory ................ $18,000

$24,500

42,500

Cost of units started and completed this period: Units started and completed this period .............................. 440,000 440,000 Cost per equivalent unit ..................................................... $0.90 $0.70 Cost of units started and completed this period ................... $396,000 $308,000 704,000 Cost of units transferred out ................................................... $766,500



Case 4A-9 (60 minutes)

FIFO Method 1. Transferred In Materials Conversion To complete beginning work in process: Transferred in: 8,000 units × 0% .................................. 0 Materials: 8,000 units × 0% ......................................... 0 Conversion: 8,000 units × (1 − 7/8) .............................. 1,000 Units completed during the period (100,000 units started −

8,000 units in beginning inventory) ................................ 92,000 92,000 92,000 Ending work in process: Transferred in: 5,000 units x 100% complete 5,000 Materials: 5,000 units × 0% complete ........................... 0 Conversion: 5,000 units × 2/5 complete ........................ 2,000 Equivalent units of production ........................................... 97,000 92,000 95,000 Transferred In Materials Conversion Cost added during the period (a) ....................................... $81,480 $27,600 $96,900 Equivalent units of production (b) ...................................... 97,000 92,000 95,000 Cost per equivalent unit (a) ÷ (b) ...................................... $0.84 $0.30 $1.02



Case 4A-9 (continued)

Transferred In Materials Conversion Total Ending work in process inventory: Equivalent units of production .......................... 5,000 0 2,000 Cost per equivalent unit ................................... $0.84 $0.30 $1.02 Cost of ending work in process inventory .......... $4,200 $0 $2,040 $6,240

Units transferred out: Cost in beginning work in process inventory ..... $8,820 $3,400 $10,200 $22,420 Cost to complete units in beginning work in process inventory: Equivalent units of production required to

complete the beginning inventory (see above) .................................................... 0 0 1,000

Cost per equivalent unit .............................. $0.84 $0.30 $1.02 Cost to complete units in beginning

inventory ................................................. $0 $0 $1,020 $1,020 Cost of units started and completed this period: Units started and completed this period ....... 92,000 92,000 92,000 Cost per equivalent unit .............................. $0.84 $0.30 $1.02 Cost of units started and completed this

period ..................................................... $77,280 $27,600 $93,840 $198,720 Cost of units transferred out ............................ $222,160 2. The effects of the cost-cutting will tend to show up more under the FIFO method. The reason is that

the FIFO method keeps the costs of the current period separate from the costs of the prior period. Thus, under the FIFO method, the company will be able to compare unit costs of the current period to those of the prior period to see how effective the cost-cutting program has been. Under the weighted-average method, however, costs carried over from the prior period are averaged in with costs of the current period, which will tend to mask somewhat the effects of the cost-cutting effort.



Appendix 4B – Service Department Allocations Questions 4B-1 Operating departments are the units in an organization within which the central purposes of the organization are carried out; these departments usually generate revenue. By contrast, service depart-ments provide support or assistance to the operating departments. Examples of service departments in-clude laundry services in a hotel or hospital, internal auditing, airport maintenance services (ground crews), cafeteria, personnel, cost accounting, and so on.

4B-2 Service department costs are allocated to products and services in two stages. Service department costs are first allocated to the operating departments. These allocated costs are then included in the op-erating departments’ overhead rates, which are used to cost products and services.

4B-3 Interdepartmental services exist whenever two service departments provide services to each other.

4B-4 Under the direct method, interdepartmental services are ignored; service department costs are al-located directly to operating departments. Under the step-down method, the costs of the service depart-ment performing the greatest amount of service for the other service departments are allocated first, the costs of the service department performing the next greatest amount of service are allocated next, and so forth through all the service departments. Once a service department’s costs have been allocated, costs are not reallocated back to it under the step-down method.

4B-5 The reciprocal method allocates interdepartmental services by simultaneously assigning costs of one department to another and vice versa. It differs from the step method in that the step method allo-cates services from the larger provider to the smaller but not vice versa. The step method allocates inter-departmental service work in one direction only and thus does not account for work done in the other direction.



Exercise 4B-1 (15 minutes)

Service Departments Operating Departments

Admini- stration

Physical Plant

Services Undergraduate

Programs Graduate Programs Total

Departmental costs before allocations ....................... $1,500,000

$654,000

$32,650,000

$1,890,000 $36,694,000

Allocations: Administration costs (40/50, 10/50) ............ (1,500,000)

1,200,000

300,000

Physical Plant costs (25/30, 5/30)*

(654,000)

545,000

109,000

Total costs after allocation .. $ 0 $ 0

$34,395,000

$2,299,000

$36,694,000

*Based on the space occupied by the two operating departments, which is 30,000 square metres.




Service

Departments Operating

Departments

Admini- stration

Building Services Groceries

Coffee Shop Total

Departmental costs before allocations .. $200,000 $60,000 $3,860,000 $340,000 $4,460,000 Allocations:

Administration costs (320/3,200, 2,720/3,200, 160/3,200)* ............. (200,000) 20,000 170,000 10,000

Building Services costs (9,500/10,000, 500/10,000)† ........ (80,000) 76,000 4,000

Total costs after allocation ................... $ 0 $ 0 $4,106,000 $354,000 $4,460,000 *Based on employee hours in the other three departments, 320 + 2,720 + 160 = 3,200. †Based on space occupied by the two operating departments, 9,500 + 500 = 10,000.

Both the Building Services Department costs of $60,000 and the Administration costs of $20,000 that have been allocated to the Building Services Department are allocated to the two operating depart-ments.




Service


Departments

Admini-strative

Jani-torial

Mainte-nance Prep Finishing Total

Costs before allocation .......................... $84,000 $67,800 $36,000 $256,100 $498,600 $942,500 Allocation:

Administrative: (60/1,200; 240/1,200; 600/1,200; 300/1,200) ..................... (84,000) 4,200 16,800 42,000 21,000

Janitorial: (1,000/10,000; 2,000/10,000; 7,000/10,000) ............ (72,000) 7,200 14,400 50,400

Maintenance: (10,000/40,000; 30,000/40,000) ............................... (60,000) 15,000 45,000

Total cost after allocations ..................... $ 0 $ 0 $ 0 $327,500 $615,000 $942,500




Service


Departments

Admini-strative

Jani-torial

Equip-ment

Mainte-nance Prep Finishing Total

Costs before allocation ..................... $84,000 $67,800 $36,000 $256,100 $498,600 $942,500 Allocation:

Administrative: (600/900; 300/900) (84,000) 56,000 28,000 Janitorial:

(2,000/9,000; 7,000/9,000) ......... (67,800) 15,067 52,733 Equipment Maintenance:

(10,000/40,000; 30,000/40,000) . (36,000) 9,000 27,000 Total cost after allocations ................ $ 0 $ 0 $ 0 $336,167 $606,333 $942,500



Problem 4B-5 (45 minutes)

Food Admin. X-Ray Out-

patient OB General Services Services Services Clinic Care Clinic Variable costs ................................................................ $73,150 $ 6,800 $38,100 $11,700 $ 14,850 $ 53,400 Food Services allocation:

$1.90 per meal × 1,000 meals ..................................... (1,900) 1,900 $1.90 per meal × 500 meals ....................................... (950) 950 $1.90 per meal × 7,000 meals ..................................... (13,300) 0 13,300 $1.90 per meal × 30,000 meals ................................... (57,000) 57,000

Admin. Services allocation: $0.50 per file × 1,500 files ......................................... (750) 750 $0.50 per file × 3,000 files ......................................... (1,500) 1,500 $0.50 per file × 900 files ............................................ (450) 450 $0.50 per file × 12,000 files ....................................... (6,000) 6,000

X-Ray Services allocation: $4 per X-ray × 1,200 X-rays ........................................ (4,800) 4,800 $4 per X-ray × 350 X-rays .......................................... (1,400) 1,400 $4 per X-ray × 8,400 X-rays ........................................ (33,600) 33,600

Total variable costs ........................................................ $ 0 $ 0 $ 0 $18,000 $ 30,000 $150,000



Problem 4B-5 (continued)

Food Admin. X-Ray Out-

patient OB General Services Services Services Clinic Care Clinic Fixed costs .................................................................... $48,000 $33,040 $59,520 $26,958 $ 99,738 $344,744

Food Services allocation: 2% × $48,000 .......................................................... (960) 960 1% × $48,000 .......................................................... (480) 480

17% × $48,000 .......................................................... (8,160) 0 8,160 80% × $48,000 .......................................................... (38,400) 38,400

Admin. Services allocation: 10% × $34,000 .......................................................... (3,400) 3,400 20% × $34,000 .......................................................... (6,800) 6,800 30% × $34,000 .......................................................... (10,200) 10,200 40% × $34,000 .......................................................... (13,600) 13,600

X-Ray Services allocation: 13% × $63,400 .......................................................... (8,242) 8,242 3% × $63,400 .......................................................... (1,902) 1,902

84% × $63,400 .......................................................... (53,256) 53,256 Total fixed costs ............................................................ 0 0 0 42,000 120,000 450,000 Total overhead costs ...................................................... $ 0 $ 0 $ 0 $60,000 $150,000 $600,000



Problem 4B-5 (continued)

Computation of allocation rates: Variable Food Services:

Variable food service cost $73,150

= =$1.90 per mealTotal meals served 38,500 meals

Variable Admin. Services:

Variable administrative cost $6,800+$1,900

= =$0.50 per fileFiles processed 17,400 files

Variable X-Ray Services:

Variable X-ray cost $38,100+$950+$750

= =$4.00 per X-rayX-rays taken 9,950 X-rays



Problem 4B-6 (30 minutes)

1. Direct Method

Allocate Accounting dept. (AD) costs to Consulting depts.:

Allocate to Accounting Consulting (AC)

= 60% / (60% + 20%) = 75% = 75% x $10,000 = $7,500 Allocate to Legal Consulting (LC) = 20% / (60% + (20%) = 25% = 25% x $10,000 = $2,500

Allocate Legal dept.(LD) costs to Consulting depts.: Allocate to Accounting Consulting (AC) = 10% / (10% + 40%) = 20% = 20% x $15,000 = $3,000 Allocate to Legal Consulting (LC) = 40% / (10% + 40%) = 80% = 80% x $15,000 = $12,000

Income Statement

Accounting Consulting

Legal Consulting

Revenue .............................................................. $40,000 $25,500 Costs AC = 30% × $20,000 LC = 70% × $20,000

(6,000

)

(14,000)

Allocated costs AD*, LD** .................................... (10,500 ) (14,500) Net income .......................................................... $23,500 $ (3,000) * ($7,500 + $3,000), ** ($2,500 + $12,000)



2. Step-down Method

Start with Legal Department costs:

Allocate to AD: 50% x $15,000 = $7,500

Allocate to AC: 10% x $15,000= $1,500

Allocate to LC: 40% x $15,000 = $6,000

Now Allocate Accounting Department costs:

Allocate to AC:

60%/ (60% + 20%) of ($10,000 + $7,500 from LD) = $13,125

Allocate to LC:

20%/(60% + 20%) x ($10,000 +$7,500 from LD) = $4,375

Income Statement

Accounting Consulting

Legal Consulting

Revenue .............................................................. $40,000 $25,500 Costs AC = 30% × $20,000 LC = 70% × $20,000

(6,000

)

(14,000)

Allocated AD*, LD** ............................................ (14,625 ) (10,375) Net income .......................................................... $19,375 $ 1,125 * ($1,500+$13,125), ** ($6,000+$4,375)

The step-down method is preferable since it allows the firm to recognize that some service departments use the services of other service depart-ments (in this case, it recognizes that the Accounting Department uses ser-vices of the Legal Department). Although this method does not also recog-nize that the Legal Department uses Accounting Department services, it is still a more accurate method than the direct allocation method. Sometimes accuracy comes at a higher cost, but in this case the cost of a slightly more complex system is worthwhile. Note that Legal Consulting operated at a loss under the Direct Method, but actually shows a positive Net Income



under the step-down method. This is due to the fact that the Accounting Department uses a significant amount of Legal Department services; there-fore, the direct method under-allocates costs to the Accounting Consulting department.



Case 4B-7 (90 minutes)

1. Step-down method:

Cafeteria Custodial Services

Machinery Maintenance Milling Finishing

Total costs before allocations............... $320,000 $65,400 $ 93,600 $416,000 $166,000 Allocations:

Cafeteria (40/500; 60/500; 100/500; 300/500)1 ..................................... (320,000) 25,600 38,400 64,000 192,000

Custodial Services (10,000/70,000; 40,000/70,000; 20,000/70,000)2 .... (91,000) 13,000 52,000 26,000

Machinery Maintenance (160,000/200,000; 40,000/200,000)3 .......................... (145,000) 116,000 29,000

Total overhead after allocations ........... $ 0 $ 0 $ 0 $648,000 $413,000

1Based on 40+60+100+300=500 employees 2Based on 10,000+40,000+20,000=70,000 square metres 3Based on 160,000+ 40,000 = 200,000 machine-hours

Milling predetermined overhead rate

= $648,000 160,000 machine hr.

= $4.05 per machine hr.

Finishing predeter-mined overhead rate

= $413,000 70,000 direct labour hr.

= $5.90 per DLH



Case 4B-7 (continued)

2. Direct method:

Cafeteria Custodial Services

Machinery Maintenance Milling Finishing

Total costs before allocations................. $320,000 $65,400 $93,600 $416,000 $166,000 Allocations:

Cafeteria (100/400; 300/400)1 ............ (320,000) 80,000 240,000 Custodial Services (40,000/60,000;

20,000/60,000)2 .............................. (65,400) 43,600 21,800 Machinery Maintenance

(160,000/200,000; 40,000/200,000)3 . (93,600) 74,880 18,720 Total overhead after allocations ............. $ 0 $ 0 $ 0 $ 614,480 $446,520 Divide by machine-hours ....................... ÷160,000 Divide by direct labour-hours ................ ÷70,000 Predetermined overhead rate ................ $ 3.84 $ 6.38

1 Based on 100 + 300 = 400 employees. 2 Based on 40,000 + 20,000 = 60,000 square metres. 3 Based on 160,000 + 40,000 = 200,000 machine-hours.



Case 4B-7 (continued)

3. a. The amount of overhead cost assigned to the job would be:

Step-down method: Milling Department:

2,000 machine-hours × $4.05 per machine-hour ....... $ 8,100 Finishing Department:

13,000 DLHs × $5.90 per DLH ................................. 76,700 Total overhead cost .................................................... $84,800

Direct method: Milling Department:

2,000 machine-hours × $3.84 per machine-hour ....... $ 7,680 Finishing Department:

13,000 DLHs × $6.38 per DLH ................................. 82,940 Total overhead cost .................................................... $90,620

b. The step-down method provides a better basis for computing

predetermined overhead rates than the direct method because it gives recognition to services provided between service departments. If this interdepartmental service is not recognized, then either too much or too little of a service department’s costs may be allocated to a producing department. The result will be an inaccuracy in the producing department’s predetermined overhead rate.

For example, notice from the computations in (2) above that using the direct method and ignoring interdepartmental services causes the predetermined overhead rate in the Milling Department to fall to $3.84 per machine-hour (from $4.05 per machine-hour when the step-down method is used), and causes the predetermined overhead rate in the Finishing Department to rise to $6.38 per direct labour-hour (from $5.90 per direct labour-hour when the step-down method is used). These inaccuracies in the predetermined overhead rate af-fect bids for jobs. Since the direct method in this case understates the rate in the Milling Department and overstates the rate in the Finishing Department, it is not surprising that the company tends to bid low on jobs requiring a lot of milling work and tends to bid too high on jobs that require a lot of finishing work.

ACCT10 Chapter 4 Solutions

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