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CHAPTER 10

188 Chapter 6 Product Costing and the Manufacturing Environment 189

CHAPTER 6

PRODUCT COSTING AND THE MANUFACTURING ENVIRONMENT

REVIEW QUESTIONS

1. The importance of inventory costing is a function of the dollar size of inventories. Because merchandising and manufacturing organizations have larger inventory investments than most service organizations, inventory costing is more important to them.

The complexity of inventory costing is a function of the number of major inventory categories and the difficulties encountered in assigning costs to each category. Because manufacturing organizations have three major inventory categories with many cost elements assigned to work-in-process and finished goods, inventory costing is more complex in manufacturing organizations than it is in service or merchandising businesses.

2. Product costing is the process of assigning costs to inventories as they are converted from raw materials to finished goods. Service costing is the process of assigning costs to services.

3. When costs are incurred in connection with manufacturing activities, they are product costs; when they are incurred in connection with other activities, they are period costs. The future service potential of manufacturing buildings and equipment is transformed into the future service potential of manufactured products. Depreciation on manufacturing buildings and equipment is absorbed by the product; hence, this depreciation is a product cost. The future service potential of office buildings and equipment expires with the passage of time. Depreciation on office buildings and equipment is not absorbed by products; hence, this depreciation is a period cost.

4. The three major product cost elements are direct materials, direct labor, and manufacturing overhead.

5. A predetermined overhead rate is determined at the start of the year by dividing the predicted overhead costs for the year by the predicted activity for the year. Predetermined overhead rates are used to avoid delays in product costing and to avoid variations in cost assignments that might result from seasonal variations in costs or the overall volume of activity.

6. In process production, a single product is produced on a continuous basis. Typical products produced on a continuous basis include beverages, electric wire, cotton yarn, and newsprint. In job production (also called job order production), products are produced in single units or in batches of identical units. Single unit jobs might include a house, a ship, or a satellite. Typical batch jobs include machine parts, clothing, and furniture.

7. Engineering is primarily concerned with determining how a product should be produced. On the basis of an engineering analysis and with the aid of cost data, engineers develop manufacturing specifications for each product. Production scheduling personnel prepare a production order for each job. The production order assigns a unique identification number to a job and specifies such details as the quantity to be produced in the job, the total raw materials requirements of the job, the manufacturing operations to be performed on the job, and perhaps the time when each manufacturing operation should be performed.

8. The job cost sheet is the most important record involved in the operation of a job-cost system. Other records include raw materials, finished goods, bills of materials, operation lists, production orders, materials requisition forms, and work tickets.

9. Purchased raw materials are recorded in the raw materials account, and incidental supplies are recorded as Manufacturing Supplies. Direct materials costs are transferred from Raw Materials to Work-in-Process. In labor-based operations, direct labor costs are added to Work-in-Process. As incurred, all other costs are accumulated in Manufacturing Overhead and periodically assigned to Work-in-Process. When products are completed, their accumulated product costs are transferred from Work-in-Process to Finished Goods Inventory. When finished goods are sold, their costs are transferred from Finished Goods Inventory to Cost of Goods Sold.

10. Service organizations should maintain detailed job records to bill clients and to evaluate the profitability or contribution of individual jobs.

11. The four major elements of a cost of production report are:

1. A summary of units in process

2. A computation of equivalent units

3. A determination of the total costs in process and the cost per equivalent unit

4. Accounting for total costs

12. Equivalent completed units are the number of completed units that are equal, in terms of production effort, to a given number of partially completed units.

13. Equivalent units in process will be different for materials and conversion costs any time units in process are produced to a different percentage of completion for materials and conversion cost components.

EXERCISES

Exercise 6-1

a.Periodi. Product, direct materialsb. Product, direct materialsj. Product, conversionc. Periodk. Product, conversiond. Product, conversionl.Periode. Product, direct materialsm. Product, conversionf. Product, direct materialsn. Periodg.Product, conversiono.Product, conversionh. Period

Exercise 6-2

a. Raw Materials Inventory: Activity Given Information Solution Beginning balance $ 70,000$ 70,000 + Purchases + ?+300,000 Answer = Total available $ ?$370,000 ( Raw materials used (290,000)(290,000) = Ending balance $ 80,000$ 80,000b. Current manufacturing costs: Direct materials

$290,000 Direct labor

? Manufacturing Overhead (60% of direct labor) ? Total

$681,000 Conversion costs = $681,000 ( $290,000 = $391,000 Conversion costs = Direct labor + Manufacturing overhead = Direct labor + 0.6 Direct labor = 1.6 Direct labor

Direct labor = $391,000/1.6 = $244,375 Answer

c. Work-in-Process: Activity

Given Information

Solution Beginning balance

$ 85,000

$ 85,000 + Current mfg. costs

+681,000

+681,000 = Total costs in process $ ?

$766,000 ( Cost of goods mfg.

( ?

(736,000) Answer = Ending balance

$ 30,000

$ 30,000

d. Finished Goods Inventory: Activity

Given Information

Solution Beginning balance

$ 90,000

$ 90,000 + Cost of goods mfg.

+ ?

+736,000 = Cost of goods available for sale

$826,000

$826,000 ( Cost of goods sold

( ?

(716,000) Answer = Ending balance

$110,000

$110,000

Exercise 6-3

Jackson Manufacturing CompanyStatement of Cost of Goods ManufacturedFor the Month Ending August 31, 2004

Current manufacturing costs: Cost of materials placed in production: Raw materials, 8/1/04

$ 7,000 Purchases

20,000 Total available

$27,000 Raw materials, 8/31/04

(5,000)$22,000 Direct labor

15,000 Manufacturing overhead

32,000 $69,000Work-in-process, 8/1/04

14,000Total costs in process

$83,000Work-in-process, 8/31/04

(11,000)Cost of goods manufactured

$72,000

Jackson Manufacturing Company Income StatementFor the Month Ending August 31, 2004

Sales

$205,000Cost of goods sold: Finished goods inventory, 8/1/04

$ 15,000 Cost of goods manufactured

72,000 Total goods available for sale

$ 87,000 Finished goods inventory, 8/31/04

(19,000) 68,000Gross profit

$137,000Selling and administrative expenses

83,000Net income

$ 54,000

Exercise 6-4

NuWay Products CompanyStatement of Cost of Goods ManufacturedFor the Year Ending December 31, 2004

Current manufacturing costs: Direct materials $ 64,000 Direct labor (5) 128,000 Manufacturing overhead (6) 192,000 $384,000Beginning work-in-process

0Total costs in process

$384,000Ending work-in-process

(0)

Cost of goods manufactured

$384,000Analysis of Finished Goods Inventory: Finished goods, 1/1/04 (2)

$ 64,000 Cost of goods manufactured (4)


$448,000 Finished goods, 12/31/04 (3)

(128,000) Cost of goods sold (1)

$320,000Solution steps: (1) Cost of goods sold = [$400,000 ( (1.00 ( 0.20)] (2) Beginning inventory = ($320,000 ( 0.20) (3) Ending inventory = ($64,000 ( 2) (4) Cost of goods manufactured = ($448,000 ( $64,000) (5) Direct labor = [($384,000 ( $64,000)/2.50] (6) Manufacturing overhead = ($128,000 ( 1.5)

Exercise 6-5

Piedmont Fabricating CompanyStatement of Cost of Goods ManufacturedFor the Year Ending December 31, 2004

Current manufacturing costs: Cost of materials placed in production: Raw materials, 1/1/04 (6)$ 9,000 Purchases 76,400 Total available $85,400 Raw materials, 12/31/04 (5) (18,000)$ 67,400 Direct labor

134,800 Manufacturing overhead (4)

134,800$337,000Work-in-process, 1/1/04 (3)


$343,000Work-in-process, 12/31/04


$335,000

Piedmont Fabricating CompanyIncome StatementFor the Year Ending December 31, 2004

Sales

$350,000Cost of goods sold: Finished goods inventory, 1/1/04 (2) $ 52,000 Cost of goods manufactured 335,000 Total goods available for sale $387,000 Finished goods inventory, 12/31/04 (67,000) (320,000)Gross profit

$ 30,000Selling and administrative expenses (1)

(25,000)Net income

$ 5,000

Exercise 6-5 (cont.)

Solution steps:

1. Selling and administrative expenses are five times net income.

2. If finished goods inventory increased by $15,000, the beginning inventory of finished goods must be ($67,000 ( $15,000).

3. If the ending inventory of work-in-process is 1/3 larger than the beginning inventory, the beginning inventory of work-in-process must be ($8,000 ( 3/4).

4. If prime costs are 60 percent of manufacturing costs, manufacturing overhead is 40 percent of manufacturing costs ($337,000 ( 0.40).

5. If conversion costs are 80 percent of manufacturing costs, direct materials is 20 percent of manufacturing costs ($337,000 ( 0.20).

6. If ending raw materials are twice the beginning raw materials, the beginning raw materials must be ($18,000 ( 1/2).

Exercise 6-6

a. Predetermined overhead rate per machine hour = $38,000,000/2,000,000 = $19b. Applied overhead = $19 ( 310,000 = $5,890,000c. February overhead: Actual $5,520,000 Applied (5,890,000) Overapplied for February$ (370,000) Underapplied overhead, February 1 400,000 Underapplied overhead, end of February $ 30,000

Exercise 6-7

The basic accounting problem that Barton and Young are arguing about stems from the use of actual overhead rates when there are wide fluctuations in the volume of activity. In periods of high activity, fixed overhead is spread over a large number of units, producing a relatively low per unit cost assignment. In periods of low activity, fixed overhead is spread over a small number of units,

producing a relatively high per unit cost assignment. Simko should use a


predetermined overhead rate to avoid variations in costs assigned identical products because of seasonal variations in manufacturing overhead

In addition to the accounting problem, Simko Company also has a pricing problem. Cost-based pricing should be used as a guideline, not an inflexible rule. Management should adjust cost-based prices in response to market conditions. If competitors are lowering their prices, Simko should consider doing the same. Likewise, if competitors are raising their prices, Simko should consider the desirability of a similar action. In any case, management should strive to avoid frequent price changes.

Finally, if the market for Simkos products is highly competitive, management should use the market price as a starting point to determine allowable product costs, rather than basing prices on costs. This approach, known as target costing, is discussed in Chapter 9.

b. Cost estimating equation for total manufacturing overhead:

Variable costs = ($237,500 ( $200,000)/(27,500 ( 20,000) = $5.00

Fixed costs = $200,000 ( (20,000 ( $5.00) = $100,000

Total costs = $100,000 + $5Xc. Predetermined rate for 2006:

Predetermined = $100,000 + $5(25,000) = $9.00 per direct labor hour

Overhead rate 25,000

d. Overapplied manufacturing overhead at the end of 2006 is $30,000:

Actual overhead

$240,000

Applied overhead (30,000 ( $9) (270,000)

Overapplied overhead

$ (30,000)e. The overapplied overhead may be:

Written off to Cost of Goods Sold.

Allocated among Work-in-Process, Finished Goods Inventory, and Cost of Goods Sold.

EXERCISE 6-8

Note: The balance in manufacturing overhead is closed at the end of the year.

Exercise 6-9

1.Raw Materials60,000

Manufacturing Supplies3,000

Accounts Payable

63,000

To record the purchase of raw materials and manufacturing supplies on account.

2.Work-in Process40,000

Raw Materials

40,000

To record the issuance of raw materials to the factory.

3. Work-in-Process27,000

Manufacturing Overhead4,800

Wages payable

31,800

To record direct labor and indirect labor for the period.

4.Manufacturing Overhead3,000

Manufacturing Supplies

3,000

To record the issuance of manufacturing supplies to the factory.


Accumulated Depreciation

15,000

To record factory depreciation for the period.


Other Payables

3,600

To record miscellaneous manufacturing overhead costs for the period.


7.Work-in-Process22,500

Manufacturing Overhead

22,500

To record the application of manufacturing overhead to work-in-process.

8.Finished Goods Inventory85,000

Work-in-Process

85,000

To record the cost of goods completed during the period and transferred from the factory to finished goods inventory.

9.Cost of Goods Sold96,000

Finished Goods Inventory

96,000

To record the cost of goods sold and transferred from finished goods inventory to customers.

EXERCISE 6-10


Exercise 6-11

1.Raw Materials24,000

Manufacturing Supplies2,000

Accounts Payable

26,000

To record the purchase of raw materials and manufacturing supplies on account.

2.Work-in Process28,000

Raw Materials

28,000

To record the issuance of raw materials to the factory.

3. Work-in-Process24,200

Manufacturing Overhead4,400

Wages payable

28,600


4.Manufacturing Overhead800


800

To record the issuance of manufacturing supplies to the factory.



12,000



Other Payables

2,800

To record miscellaneous manufacturing overhead costs for the period.


7.Work-in-Process17,600


17,600


8.Finished Goods Inventory72,000

Work-in-Process

72,000

To record the cost of goods completed during the period and transferred from the factory to finished goods inventory.

9.Cost of Goods Sold81,500


81,500

To record the cost of goods sold and transferred from finished goods inventory to customers.

EXERCISE 6-12


Exercise 6-13

1.Video Supplies1,500

Accounts Payable

1,500

To record the purchase of video supplies on account.

2.Videos-in Process27,000

Accounts Payable

27,000

To record the purchase of materials for specific jobs.

3. Videos-in-Process65,000

Studio Overhead3,200

Wages payable

68,200


4.Studio Overhead850

Video Supplies

850

To record the issuance of video supplies to the studio.



3,000



Other Payables

1,800

To record miscellaneous studio overhead costs for the period.

Exercise 6-13 (cont.)7.Work-in-Process8,640


8,640


8.Cost of Videos Completed97,000

Videos-in-Process

97,000

To record the cost of videos completed during the period.

Exercise 6-14

The best approach to solving this problem is to fill in the blanks in the accounts, starting with the most obvious solutions, such as cost of goods manufactured, beginning work-in-process, and direct materials. These solutions are then used to assist in solving for purchases, current manufacturing costs, and direct labor.

The starting point is as follows:

The solutions are developed in the following order:

e. Cost of goods manufactured = $110,000 + $20,000 = $130,000

c. Beginning work-in-process = $24,000/3 = $8,000

b. Direct materials = $75,000/1.50 =$50,000

a. Purchases = $50,000 + $12,000 ( $7,000 = $55,000

d. Direct labor = $130,000 + $24,000 ( $8,000 ( $50,000 ( $75,000 = $21,000

Exercise 6-15

The best approach to solving the problem is to fill in the blanks in the accounts, starting with the most obvious solutions, such as direct materials and ending contracts in process. These solutions are then used to assist in solving for conversion costs, direct labor, applied construction overhead, and cost of completed contracts.

The starting point is as follows:

The solutions are developed in the following order:

a. Direct materials = $4,000 + $80,000 - $9,000 = $75,000

d. Ending contracts-in-process = $12,000/2 = $6,000

b. Direct materials = 1/3 current construction costs = $75,000 Current construction costs = $75,000 ( 3 = $225,000 Conversion costs = 2/3 ( $225,000 = $150,000 Direct labor + 0.5 Direct labor = $150,000 1.5 Direct labor = $150,000 Direct labor = $150,000/1.5 = $100,000

c. Applied construction overhead = $100,000 ( 0.5 = $50,000

e. Cost of completed contracts = $12,000 + $225,000 ( $6,000 = $231,000

Exercise 6-16

a. Process. A continuous manufacturing process.

b. Process. A continuous manufacturing process (may be job order if processed in batches for specific customers).

c. Job order. Ordinarily manufactured in batches for particular combinations of size, style and color. If batches are very large, process costing could be used.

d. Job order. Ordinarily manufactured one at a time, but modern technology permits some mass producing of modular homes; this could permit process costing.

e. Job order. Ordinarily manufactured in batches for a particular size. If batches are very large, process costing could be used.

Exercise 6-17

a. Job order. Each house is ordinarily a unique product.

b. Process. A continuous manufacturing process (may be job-order if processed in batches).

c. Job order. Ordinarily manufactured in batches for particular combinations of size, color, style, etc.

d. Process. Could use job order costing if processed in batches.

e. Process. This assumes the entire department is devoted to this one product. Job order if batches of other battery products will be manufactured in the department at intervals throughout the year.

Exercise 6-18

a. Units completed 8,000 Cost per equivalent units ( $4.60 Cost of goods transferred to finished goods inventory$36,800b. Materials cost (4,000 units ( $3) $12,000 Conversion cost (4,000 units ( 0.10 ( $1.60) 640 Ending work-in-process inventory$12,640c. Beginning work-in-process plus current manufacturing costs equal total costs in process, which is also equal to the cost of goods transferred to finished goods plus ending work-in-process.

Cost of goods transferred to finished goods$36,800Plus cost of ending work-in-process 12,640Total costs (beginning work-in-process, plus current manufacturing costs) $49,440

Exercise 6-19

Fisk Paper CompanyCost of Production ReportFor the Month Ending October 31, 2004

Summary of units in process (tons):Beginning

0 Units started

90,000In process

90,000Completed

(75,000)Ending

15,000Equivalent units in process:

MaterialsConversion Total Units completed

75,00075,000Plus equivalent units in ending inventory

15,000 9,750*Equivalent units in process

90,000 84,750Total cost to be accounted for andcost per equivalent unit in process:Beginning work-in-process

$ 0$ 0$ 0Current costs

486,000 430,530** 916,530Total cost in process

$486,000$430,530$916,530Equivalent units in process

( 90,000 ( 84,750Cost per equivalent unit in process$ 5.40 $ 5.08 $ 10.48Accounting for total costs:Transferred out (75,000 ( $10.48)

$786,000Ending work-in-process: Materials (15,000 ( $5.40)

$81,000 Conversion (15,000 ( 65% ( $5.08) 49,530 130,530Total cost accounted for

$916,530

* 15,000 units 65% converted** Includes direct labor of $190,530 and mfg. overhead of $240,000

Exercise 6-20

Rodeway Paving Products CompanyCost of Production ReportFor the Month Ending October 31, 2004

Summary of units in process:Beginning

0Unit started

25,000In-process

25,000Completed

(20,000)Ending

5,000Equivalent units in process:

Materials Conversion TotalUnits completed

20,000 20,000Plus equivalent units in ending inventory

5,000 3,750*Equivalent units in process

25,000 23,750Total cost to be accounted for andcost per equivalent unit in processBeginning work-in-process

$ 0$ 0 $ 0Current costs

600,000 85,500** 685,500Total cost in process

$600,000 $85,500 $685,500Equivalent units in process

( 25,000 (23,750Cost per equivalent unit in process$ 24.00 $ 3.60 $ 27.60Accounting for total costs:Transferred out (20,000 ( $27.60)

$552,000Ending work-in-process Materials (5,000 ( $24)

$ 120,000 Conversion (3,750 ( $3.60)

13,500 133,500Total cost accounted for

$685,500 * 5,000 units 75% converted** Includes direct labor of $38,000 and applied mfg. overhead of $47,500

PROBLEMS

Problem 6-21

Saskatchewan CompanyStatement of Cost of Goods ManufacturedFor the Month Ending July 31, 2004


$17,000 Purchases



(25,000) $ 72,000 Direct labor

117,500 Manufacturing overhead: Manufacturing supplies ($1,500 + $3,500 ( $3,000)$ 2,000 Production employees fringe benefits

4,000 Depreciation on plant

14,000 Production supervisors' salaries 7,200 Plant maintenance

10,000 Plant utilities

35,000 Production equipment rent

6,000 78,200 $267,700Work-in-process, 7/1/04


$318,700

Work-in-process, 7/31/04 (40,000)


$278,700Problem 6-21 (cont.)

Saskatchewan CompanyIncome StatementFor the Month Ending July 31, 2004

Sales




$313,700 Finished goods inventory, 7/31/04 (27,100) (286,600)Gross profit

$139,100Selling and administrative expenses: Office supplies ($600 + $1,200 ( $1,000)$ 800 Administrative salaries

12,000 Sales commissions

50,000 Depreciation on office

20,000 Office utilities

8,000 Office maintenance

2,000 Office equipment rent

1,300 (94,100)Net income

$ 45,000

Problem 6-22

Columbus Manufacturing CorporationStatement of Cost of Goods ManufacturedFor the Month Ending December 31, 2004

Current manufacturing costs: Direct materials

$ 40,000 Direct labor

10,000 Manufacturing overhead: Utilities

$ 2,000 Supplies

3,000 Depreciation

7,000 Indirect labor

4,000 Miscellaneous

13,000 29,000 $ 79,000Work-in-process, 12/1/04


$ 85,000Work-in-process, 12/31/04

(0)Cost of goods manufactured

$ 85,000

Columbus Manufacturing CorporationIncome StatementFor the Month Ending December 31, 2004

Sales



85,000 Cost of goods available for sale

$115,000 Finished goods inventory, 12/31/04

(4,000) (111,000)Gross profit

$ 89,000Other expenses: Office supplies

$ 500 Office utilities

500 Sales salaries and wages

8,000 Administrative salaries and wages

6,000 Insurance on showroom

2,000 (17,000)Net income

$ 72,000

Problem 6-23

Case 1 Case 2 Case 3 Case 4Sales

$55,000 $64,000? $26,000? $90,500?Raw materials, beg.$10,000 $13,000 $ 0?$ 5,000Purchases

+23,000? +13,000 + 2,500 +31,700Total available

$33,000 $26,000 $ 2,500$36,700Raw materials, end. (8,000) (6,000)? (500) (6,200)Direct materials

$25,000? $20,000 $ 2,000$30,500?Direct labor

20,000 25,000 6,000 21,000?Manufacturing overhead+10,000 + 8,000 + 4,000?+29,200Current mfg. costs $55,000 $53,000? $12,000$80,700?Work-in-process, beginning

+ 5,000? + 8,000 + 8,000 + 5,300Total costs in process $60,000 $61,000 $20,000$86,000Work-in-process, ending (5,000) (7,000) (1,000)? (4,000)Cost of goods mfg. $55,000$54,000? $19,000$82,000Finished goods, beginning

+15,000?+ 6,000 + 1,500 + 8,000Total available

$70,000 $60,000 $20,500$90,000Finished goods, ending (25,000) (5,000)? (500) (10,000)Cost of goods sold (45,000)? (55,000) (20,000)? (80,000)?Gross profit

$10,000 $ 9,000 $ 6,000?$10,500Other expenses (13,000) (13,000)? (4,000) (3,500)Net income (loss) $ (3,000)?$ (4,000) $ 2,000 $ 7,000?

Problem 6-24

a.Calloway, IncorporatedStatement of Cost of Goods ManufacturedFor the Month Ending April 30, 2004


$ 5,000 Purchases



(3,500) $36,500 Direct labor [(4,800 + 200) ( $12]

60,000 Manufacturing overhead (80 percent of direct labor)

48,000 $144,500Work-in-process, 4/1/04


$146,500Work-in-process, 4/30/04


$144,200

Calloway, IncorporatedIncome StatementFor the Month Ending April 30, 2004

Sales




$152,200 Finished goods inventory, 4/30/04

(9,000) 143,200Gross profit

$ 56,800Other expenses: Office supplies ($900 + $500 ( $800)

$ 600 Administrative salaries

6,000 Sales salaries

15,000 Depreciation on office and office equipment 4,000 Office utilities

890 (26,490)Net income

$ 30,310

Problem 6-24 (cont.)

b.Actual overhead: Manufacturing supplies ($1,000 + $800 ( $1,100)

$ 700 Salaries of production supervisors

3,600 Depreciation on plant and machinery

8,000 Plant utilities

5,250 Indirect labor (600 ( $12)

7,200 Employee fringe benefits

(($60,000 + $7,200) ( 0.40)

26,880 Overtime premium (200 ( $6)

1,200 $52,830Applied overhead

(48,000)Underapplied (overapplied) overhead

$ 4,830c.

Direct

Manufacturing

Labor

Overhead

Determined above

$60,000

$52,830Reclassification of employee fringe benefits ($60,000 ( 0.40) 24,000 (24,000)Revised costs

$84,000 $28,830

Problem 6-25

a. Analysis of Work-in-Process with actual overhead rate:

*Actual manufacturing overheadAccumulated Dep.: Bldg. & Equipment

$ 500Indirect labor

1,500Utilities

600Property taxes

650Insurance

550Total

$3,800**Total costs in process: Direct materials

$3,000 Direct labor

6,000 Overhead

3,800 $12,800Less costs assigned to Job A06: Direct materials

$ 600 Direct labor

300 Overhead (30 ( $9.50***)

285 (1,185)Cost of goods manufactured

$11,615***Overhead rate = $3,800/400 = $9.50 per direct labor hour


b. Analysis of Work-in-Process with predetermined overhead rate:

*Total costs in process: Direct materials $3,000 Direct labor 6,000 Overhead 4,000 $13,000 Costs assigned to job B42: Direct materials $ 600 Direct labor 300 Overhead (30 ( $10.00) 300 (1,200) Cost of goods manufactured

$11,800At the end of January, overhead is overapplied by $200 ($3,800 actual minus $4,000 applied). This amount should be left in Manufacturing Overhead and allowed to accumulate throughout the year. If the predetermined rate is accurate, the year-end balance will be close to zero.

c. There will be considerable variation in the evaluation of overhead costs. It is likely that everyone will agree that depreciation, property taxes, and insurance are fixed. Most will classify utilities as variable, although a portion of the utilities may be fixed. There will likely be considerable variation in the classification of indirect labor. Supervision labor will be fixed while maintenance labor will likely vary. Regardless of the classification scheme selected, the essential point illustrated in (c) and (d) will remain unaffected: high volume results in low overhead rates, and low volume results in high overhead rates during a given period.


Fixed: Depreciation on plant and equipment

$ 500 Property taxes on plant

650 Insurance on plant

550 Total fixed

$1,700Variable: Utilities

$ 600 Indirect labor

1,500 Total variable

$2,100 Direct labor hours

( 400 Variable overhead per direct labor hour

$ 5.25 200 DLH1,000 DLHDirect labor hours 200 1,000Variable rate ( $5.25 ( $5.25Variable overhead $ 1,050 $ 5,250Fixed overhead 1,700 1,700Total overhead $ 2,750$ 6,950Direct labor hours ( 200 ( 1,000Actual overhead rate $ 13.75$ 6.95Costs assigned to jobs similar to A06: Direct materials

$ 600.00 $ 600.00 Direct labor

300.00

300.00 Overhead (30 direct labor hours ( $13.75) 412.50 (30 direct labor hours ( $6.95) ________ 208.50 Total

$1,312.50 $1,108.50

d. When reviewing the solutions to (a), (b), and (c), there appears to be considerable variation in the cost assigned to identical jobs. This variation is a function of the overall volume of activities. During high-volume months, the costs assigned are low compared to low-volume months. Predetermined overhead rates are preferred to avoid this fluctuation in the cost of identical jobs.

Note: At this point, the instructor might also mention the timing issue. When actual overhead costs are assigned, it must be after the end of the period when total costs and total activity are known. This delay is unacceptable if prices are based on costs. It also causes wide fluctuation in bookkeeping activities.

Problem 6-26

(Note: all numbers except hourly rates are in thousands)

Problem 6-27

*Cost of goods manufactured and sold:

Job 365Job 366Job 367Job 368Job 369Job 370TotalBeg. bal.$20,000$16,500$15,000$ 9,000$ 0$ 0$ 60,500Cur. costs: Dir. Mat.

8001,2001,60017,00013,40034,000 Dir. Lab.5003,2003,4004,1601,3002,62015,180 Mfg. OH* 450 2,880 3,060 3,744 1,170 2,358 13,662Total cost$20,950$23,380$22,660$18,504$19,470$18,378$123,342*($180,000/$200,000 ( direct labor dollars)

Problem 6-28

a.Forsythe Processing Company: Processing DepartmentCost of Production ReportFor the Month Ending December 31, 2004


2,000Units started

16,000In process

18,000Completed

(15,000)Ending

3,000Equivalent units in process: MaterialsConversion TotalUnits completed 15,00015,000Plus equivalent units in ending

inventory 3,000 1,000*

Equivalent units in process18,000 16,000Total cost to be accounted for andcost per equivalent unit in process:Beginning work-in-process

$ 17,300$ 10,000$ 27,300Current cost

142,000 102,000+ 244,000Total cost in process

$159,300 $112,000 $271,300Equivalent units in process

( 18,000 ( 16,000 Cost per equivalent unit in process $ 8.85 $ 7.00 $ 15.85Accounting for total costs:Transferred out (15,000 ( $15.85)

$237,750Ending work-in-process: Materials (3,000 ( $8.85)

$26,550 Conversion (1,000 ( $7.00)


$271,300*3,000 units, 1/3 converted+Includes direct labor of $51,000 and applied manufacturing overhead of $51,000 (100% of direct labor cost)


b.

Work-in-process:

Beginning

$ 27,300

Current manufacturing costs:

Direct materials

$142,000

Direct labor

51,000

Applied overhead

51,000 244,000

Total

$271,300


(237,750)

Ending

$ 33,550Problem 6-29

a.

Plains Peanut Butter, Inc.Cost of Production ReportFor the Month Ending June 30, 2004


210,000Units started

650,000In process

860,000Completed

(680,000)Ending

180,000Equivalent units in process: MaterialsConversion TotalUnits completed680,000680,000

Equivalent units in ending inventory180,000 90,000*Equivalent units in process860,000 770,000Total cost to be accounted for andcost per equivalent unit in process:Beginning work-in-process

$146,000$ 88,000$ 234,000Current cost

739,800 743,600+ 1,483,400Total cost in process

$885,800$831,600 $1,717,400Equivalent units in process

(860,000 (770,000Cost per equivalent unit in process$ 1.03$ 1.08 $ 2.11Accounting for total costs:Transferred out (680,000 ( $2.11)

$1,434,800Ending work-in-process Materials (180,000 ( $1.03)

$185,400 Conversion (180,000 ( 50% ( $1.08)


$1,717,400*180,000 units, 50% converted+Includes direct labor of $410,000 and manufacturing overhead of $333,600


b.Plains Peanut Butter, Inc.Statement of Cost of Goods ManufacturedFor the Month Ending June 30, 2004

Current manufacturing costs: Direct materials

$739,800 Direct labor

410,000 Manufacturing overhead

333,600 $1,483,400Plus Work-in-Process, 6/1/04


$1,717,400Less: Work-in-Process, 6/30/04


$1,434,800DISCUSSION QUESTIONS AND CASES

Question 6-30

a. The break-even point is computed as:

The unit selling price is known to be $60.

The fixed costs are determined as:

Fixed manufacturing overhead$ 30,000

Fixed selling and administrative 40,000

Total

$ 70,000The variable costs per unit are computed as:

Direct materials

$120,000

Direct labor

40,000

Variable manufacturing overhead 24,000

Variable selling and administrative 80,000

Total

$264,000

Units manufactured

( 8,000

Variable costs per unit

$ 33.00

Hence, the annual break-even point is = $70,000/($60 ( $33) = 2,593 units

b. The sales volume required to obtain an annual profit of $160,000 is:

Required sales volume = ($70,000 + $160,000)/($60 ( $33) = 8,519 units

c. The unit cost of goods sold and the unit cost of ending inventory used for financial reporting purposes was [($120,000 + $40,000 + $24,000 +$30,000)/8,000 units] = $26.75.

The unit cost used in determining the break-even point and the sales volume required to achieve a desired profit was $33.00. The $33 amount excludes any fixed manufacturing costs and includes variable selling and administrative expenses.

Question 6-30 (cont.)

The $33 amount reflects how total costs respond to short-run changes in unit volume. The $26.75 does not reflect short-run cost behavior. Rather, the $26.75 is based on financial reporting concepts that distinguish between manufacturing costs and nonmanufacturing costs. For financial reporting, all costs incurred in manufacturing products are called product costs and carried in the inventory accounts until the product is sold, at which time they are recognized as the expense, cost of goods sold. Product costs include an assignment of fixed manufacturing overhead. Expired costs other than those related to manufacturing inventory are called period costs and are recognized as expenses when incurred. Period costs include variable and fixed selling and administrative expenses.

d. A contribution income statement would be most useful to management in making short-run decisions. Such an income statement classifies costs according to behavior and emphasizes the contribution margin that goes toward covering fixed costs and providing a profit. With a contribution income statement, it is relatively easy to identify the fixed costs per period and the variable costs per unit.

Note: The contribution income statement was introduced in Chapter 2. Chapter 8 contains a detailed analysis of absorption and variable costing. This question previews that important topic without the complexity of changes in inventory levels.

e. White Pines should finish the chairs because this will produce an increase in annual profits of $20,000.

White Pines selling price = $112/1.40 = $80 per chair.

Incremental revenues ($80 ( $60) ( 8,000 units $160,000Incremental costs: Increase in manufacturing costs$160,000 Reduction in selling and administrative costs

(20,000) (140,000)Increase in profit

$ 20,000


Note: The sell or process further decision was first introduced in Chapter 4, while capital budgeting is introduced in Chapter 9. You could integrate these two topics by extending this requirement. This could be done by suggesting that an additional investment in manufacturing facilities of some unspecified amount, say $100,000, is required for assembly and painting. You might then review capital budgeting issues and perhaps develop a numerical example by specifying a cost of capital and an expected life.

f. If White Pines finishes the chairs, the product cost per unit will be $46.75.

Previous manufacturing costs for 8,000 units$214,000Additional manufacturing costs for 8,000 units 160,000Total

$374,000Units manufactured

( 8,000

$ 46.75g. The only relevant costs are the incremental costs associated with the decision to process further. If the product is processed further, all manufacturing costs are assigned to the product for inventory valuation purposes. Also note that in this case, the reduction in selling and administrative costs is not considered in determining the unit cost of inventory.

Question 6-31

a. For financial reporting, all costs incurred in manufacturing products are called product costs and carried in the inventory accounts until the product is sold, at which time they are recognized as the expense, cost of goods sold. At the Friendly Greeting Card Company product costs include:

Batch setup$150 per setup

Materials$100 per 1,000 cards

Conversion $80 per 1,000 cards

The cost of each card in a batch can be computed as the total cost of the batch divided by the number of units in the batch. This cost per unit can then be assigned to any ending inventory or to the cost of goods sold.


There are two additional considerations:

1. Given the large number of cards manufactured, this approach might prove too complex. Friendly Greeting might just determine the average cost of a card produced during a period and use this number for financial reporting purposes. Friendly Greeting would, of course, want more detailed information for internal decision making.

2. It is unclear how to treat the product level costs of designing a new card and preparing a production master. Theoretically, these costs should be assigned to all cards manufactured with a particular production master. The problem is that the final number of units to be manufactured with the master is unknown. There are at least four possible approaches:

i Expense these costs when incurred. This will understate the value of Friendly Greetings assets. If approximately the same number of designs and masters are developed each year, the income statement will be reasonably accurate.

ii Amortize the masters over a number of years that represent the average life of a design and production master.

iii Perform a different evaluation of the file of each design and master after obtaining information on initial sales.

iv Retain the masters at their original cost and expense them when they were deemed to be worthless.

Unfortunately, none of these alternatives directly assigns the costs of a specific design and production master to the cards produced with that master.

b. The first step in evaluating the Mall-Mart proposal is to compare the incremental revenues with the incremental costs for the initial order. If the initial order is profitable, accepting the order will not affect current sales; if Friendly Greeting has excess capacity, the order should be accepted. Relevant costs for this analysis include:

Product designs and

production masters$1,500 each

Batch setup

$150 per setup

Materials

$100 per 1,000 cards

Conversion

$80 per 1,000 cards

Shipping

$20 per batch (0.01 per card)


If the initial order would not be profitable, but accepting the order will not affect current sales and Friendly Greeting has excess capacity, management might assess the probability of additional sales to Mall-Mart, making the relationship profitable.

If accepting the Mall-Mart order would require giving up some current sales, an opportunity cost would have to be incorporated into the analysis.

c. Only product costs were considered in the answer to (a.) All manufacturing costs and shipping costs are considered in requirement (b). Also note that because the designs are exclusive for Mall-Mart, these costs are included in assessing the profitability of the order.

Note: Although it is not required, you might ask the students to evaluate the initial Mall-Mart order. The analysis is as follows:

Incremental revenues (20 designs ( 20,000 cards ( $0.40)$160,000Incremental costs: Product design and production masters (20 designs ( $1,500 each)

$ 30,000

Batch setup (20 setups ( $150 each)

3,000 Materials ($100 per 1,000 cards ( 20 (000) ( 20 designs) 40,000

Conversion ($80 per 1,000 cards ( 20 (000) ( 20 designs) 32,000

Shipping ($20 per batch ( 20 batches)

400 ($ 0.01 per card ( 20 designs ( 20,000 cards) 4,000 Total

(109,400)Advantage of accepting

$ 50,600Assuming there is available capacity, the order appears acceptable in the short run. Additional orders for the same designs will make the arrangement with Mall-Mart even more profitable.

From a long-run viewpoint, any arrangement with Mall-Mart must also cover a portion of fixed costs.

Case 6-32

It appears that the unit selling prices and the direct materials costs are not at issue. However, additional work is required to determine the proper unit conversion and selling costs. The first step is to determine what the total actual costs of each of these items were last year. Once that is done, it is possible to determine proper unit costs.

In the case of conversion costs, Cobera Electronics allocated them to units on the basis of machine hours even though they are a function of setup and operating hours. To determine the proper cost per hour:

1. Determine the conversion cost application rate per machine hour.

2. Determine the total operating hours.

3. Determine the total conversion costs.

4. Determine the total setup hours.

5. Determine the proper cost per hour.

1. Conversion cost application Conversion costs per unit rate per machine-hour = Operating hours per unit

= $25.20/0.10 hour

= $252 per hour

2. Units of product ( Operating hours/Unit = Total hours

CB radios (100,000 units ( 0.10 hour)

10,000 Other (250 batches ( 200 units/batch ( 0.20 hour)

10,000 Total operating hours

20,0003. Total operating hours

20,000 Conversion cost per operating hour

( $252 Total conversion costs

$5,040,0004. Setup hours: CB radios (10 setups ( 20 hours per setup)

200 Other (250 setups ( 20 hours per setup)

5,000 Total setup hours

5,2005. Total conversion costs

$5,040,000 Total hours (20,000 operating + 5,200 setup)

( 25,200 Operating cost per hour

$200Case 6-32 (cont.)

The total costs of a batch and the cost per unit can now be determined as follows:

Good

Buddy Other

CB Radio ProductsDirect materials: CB radio (10,000 ( $60)

$600,000 Other (200 ( $60)

$ 12,000Setup conversion (20 ( $200)

4,000 4,000Operating conversion: CB radio (10,000 units ( 0.10 ( $200) 200,000 Other (200 units ( 0.20 ( $200)

8,000Selling and distribution: CB radio Fixed ($50,000/10 batches)

5,000 Variable (10,000 ( $0.50)

5,000 Other

_______ 800Total

$814,000$ 24,800Units per batch

( 10,000 ( 200Unit cost

$ 81.40 $ 124.00

It appears that CB radios are more profitable and other products are less profitable than indicated by company data.

Selling price $90.00 $125 Unit cost (81.40) (124) Unit profit $ 8.60 $ 1Cobera should not discontinue the production of CB radios. The accounting system is generating incorrect product cost information. There appear to be two sources of this erroneous information.

1. All conversion costs are allocated on the basis of machine hours when there are significant setup hours, especially for the other products.

2. Selling and distribution costs are allocated on the basis of unit volume when it appears that the low-volume products have significantly higher costs.

Case 6-32 (cont.)

The problem is not at all unusual. When a company produces only a single product, a very simple accounting system can provide accurate product cost information. However, as an increasingly heterogeneous set of products is produced, the accounting system must be upgraded to provide accurate information. Note that when data are to be used for a special decision, such as that to continue or discontinue a product line, selling and distribution costs must also be associated with individual products.

Case 6-33

There are several acceptable ways of approaching the analysis of Dartmouth's two products. The method presented below simply restates the original gross profit financial reports with a more detailed analysis of overhead.

Bear Lion

Detector TamerSales: Units

5,000 2,000 Dollars

$500,000 $300,000Cost of goods sold: Direct materials

$100,000 $ 60,000 Direct labor

150,000 45,000 Applied overhead: Fabrication Lion Tamers (2,000 ( 1 ( $105*)

210,000 Assembly Bear Detectors (5,000 ( 2 ( $12.82**) 128,200 Lion Tamers (2,000 ( 0.50 ( 12.82**)_______ 12,820 Total

(378,200) (327,820)Gross profit

$121,800 $ (27,820)*Fabrication overhead rate: Fixed overhead

$200,000 Variable overhead (2,000 ( 1 ( $5)

10,000 Total

$210,000 Labor hours (2,000 ( 1)

( 2,000 Overhead rate

$ 105**Assembly overhead rate: Fixed overhead

$ 20,000 Variable overhead Bear Detectors (5,000 ( 2 ( $11)

110,000 Lion Tamers (2,000 ( 0.50 ( $11)

11,000 Total

$141,000 Labor hours [(5,000 ( 2) + (2,000 ( 0.50)]

( 11,000 Overhead rate

$ 12.82

Case 6-33 (cont.)

It appears that Lion Tamers are being cross-subsidized by Bear Detectors through the use of a single, plant-wide overhead rate based on direct labor. When costs are broken into two overhead cost pools for fabrication and assembly, a very different picture emerges. Lion Tamers are not profitable, while Bear Detectors are profitable. These results help explain why the Nittneys competitor places a high selling price on Lion Tamers (assuming similar cost structures and production procedures).

Note: The instructor may ask the minimum price Dartmouth Products could charge for each product without losing money or having a negative contribution margin. This would be each products unit variable cost, determined as follows:

Bear Lion

Detector TamerSales: Units

5,000 2,000Cost of goods sold: Direct materials

$100,000$ 60,000 Direct labor

150,000 45,000 Variable overhead: Fabrication Lion Tamers (2,000 ( 1 ( $5)

10,000 Assembly Bear Detectors (5,000 ( 2 ( $11) 110,000 Lion Tamers (2,000 ( 0.50 ( $11)________ 11,000 Total

$360,000$126,000Units

( 5,000 ( 2,000Unit variable cost

$ 72.00$ 63.00Any amount in excess of $72 for Bear Detectors and $63 for Lion Tamers will provide a contribution toward covering fixed costs and providing for a profit. Care should be taken in using these numbers because of the high fixed costs of the Fabricating Department. In the long run, Dartmouth Products must cover fixed as well as variable costs.

Work-in-Process

Beginning balance ($5,640 + $2,400)$ 8,040Current manufacturing costs:Direct materials$25,500Direct labor 39,600Applied overhead (3,300 ( $6) 19,800 84,900Total costs in process$92,940

Less cost of completed jobs:522$11,040523 20,200

524 34,100 (65,340)Ending balance$27,600

Job # 524

Beg. Bal. $ 0DM 12,500DL 14,400OH (1,200 ( $6) 7,200Total $34,100

Job # 523Beg. Bal. $ 2,400DM 3,400DL 9,600OH (800 ( $6) 4,800Total $20,200

Job # 522

Beg. Bal. $ 5,640DM 0DL 3,600OH (300 ( 6) 1,800Total $11,040

Job # 525

Beg. Bal. $ -0-DM 9,600DL 12,000OH (1,000 ( $6) 6,000Total $27,600

Cost of Goods Sold

(9) Cost of goods sold $96,000


Beginning balance $ 20,000(8) Cost of goods manufactured 85,000Total available$105,000(9) Cost of goods sold (96,000)Ending balance$ 9,000

Work-in-Processs

Beginning balance $ 5,000Current Manufacturing Costs:

(2) Direct materials $40,000 (3) Direct labor 27,000 (7) Applied overhead 22,500( 89,500Total work-in-process$ 94,500 (8) Cost of goods mfg. (85,000)Ending balance$ 9,500

Raw Materials

Beginning balance $ 7,000(1) Purchases 60,000Total available$67,000

(2) Direct materials (40,000) Ending Balance$27,000

Wages Payable

(3) Current earnings$31,800


Beginning balance $ 500(1) Purchases 3,000Total available$3,500(4) Issued 3,000) Ending Balance$ 500


Beginning balance $ 0Current:

(3) Indirect labor$4,800 (4) Mfg.supplies 3,000 (5) Depreciation15,000 (6) Miscellaneous 3,600 26,400Total$26,400 (7) Applied overhead (22,500)Ending balance$ 3,900

Accumulated Depreciation:Factory Assets

(5) Increase$15,000

Other Payables

(6) Increase $3,600

Cost of Goods Sold



Beginning balance $ 20,000(8) Cost of goods manufactured 72,000Total available$ 92,000(9) Cost of goods sold (81,500)Ending balance$ 10,500

Work-in-Processs


(2) Direct materials $28,000 (3) Direct labor 24,200 (7) Applied overhead 17,600 69,800Total work-in-process$ 73,800 (8) Cost of goods mfg. (72,000)Ending balance$ 1,800

Raw Materials

Beginning balance $ 8,000(1) Purchases 24,000Total available$32,000

(2) Direct materials (28,000) Ending Balance$ 4,000

Wages Payable

(3) Current earnings$28,600


Beginning balance $ 100(1) Purchases 2,000Total available$2,100(4) Issued (800) Ending Balance$1,300


Beginning balance $ (400)Current:

(3) Indirect labor$4,400 (4) Mfg.supplies 800 (5) Depreciation12,000 (6) Miscellaneous 2,800 20,000Total$19,600 (7) Applied: (17,600)Ending balance$ 2,000

Accumulated Depreciation:Factory Assets

(5) Increase$12,000

Other Payables

(6) Increase $2,800

Cost of Videos Completed


Work-in-Process

Beginning balance$ 8,000 (c)Current manufacturing costs:

Direct materials$50,000 (b) Direct labor 21,000 (d) Applied overhead 75,000_146,000 ?

Total costs in process$154,000 ?

Cost of goods manufactured (130,000) (e)

Ending balance$ 24,000

Videos-in-Processs


(2) Direct materials $27,000 (3) Direct labor 65,000 (7) Applied overhead 8,640 ( 100,640Total work-in-process $101,640 (8) Cost of goods sold (97,000)Ending balance $ 4,640

Raw Materials

Beg. balance$ 7,000Purchases 55,000 (a)

Available$ 62,000 ?

Direct materials (50,000) (b)


Wages Payable

(3) Current wages$68,200

Video Supplies

Beginning balance $ 275(1) Purchases 1,500Total available$1,775(4) Issued (850) Ending Balance$ 925

Studio Overhead

Beginning balance $ (250)Current:

(3) Indirect labor$3,200 (4) Mfg.supplies 850 (5) Depreciation 3,000 (6) Miscellaneous 1,800(8,850Total$8,600 (7) Applied overhead:(8,640Ending balance$ (40)

Accumulated Depreciation:Studio Assets

(5) Increase$3,000

Other Payables

(6) Increase $1,800


Beg. balance$ 0Cost of goods mfg. 130,000 (e)

Available$130,000 ?

Cost of goods sold (110,000)


Contracts-in-Process

Beginning balance$ 12,000Current construction costs:

Direct materials$ 75,000 (a) Direct labor 100,000 (b) Applied overhead 50,000 (c)_225,000 ?

Total costs in process$237,000 ?

Cost of completed contracts (231,000) (e)

Ending balance$ 6,000 (d)

Raw Materials

Beg. balance$ 4,000Purchases 80,000

Available$ 84,000 ?

Direct materials (75,000) (a)

End balance$ 9,000

Work-in-Process

Beginning balance$ 0Current manufacturing costs:Direct materials$ 3,000Direct labor 6,000Actual overhead 3,800* 12,800Total costs in process$12,800

Less cost of completed jobs (11,615)**Ending balance$ 1,185**

Work-in-Process

Beginning balance$ 60,500Current manufacturing costs:Direct materials$46,300Direct labor 17,180Applied overhead (DL ( 0.90) 15,462 78,942Total costs in process$139,442

Less cost of completed jobs* (123,342)Ending balance$ 16,100

Accounts Payable

(1) Increase $26,000

Accounts Payable

(1) Increase $1,500(2) Increase27,000

Work-in-Process

Beginning balance$ 0Current manufacturing costs:Direct materials$ 3,000Direct labor 6,000Applied overhead (400 ( $10) 4,000 13,000Total costs in process$13,000

Less cost of completed jobs: 11,800*Ending balance$ 1,200*

Accounts Payable

(1) Increase $63,000

230

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