CH-3 Cost Accumulation for Job-Shop and Batch Production Operations – Cost Management: Strategies for Business Decisions : Book Guide

CHAPTER 3 Cost Accumulation for Job-Shop and Batch Production Operations ANSWERS TO REVIEW QUESTIONS 3.1 A product-costing system accumulates the costs of a production process and assigns them to the products or services that constitute the organization’s output. 3.2 (a) Job-order costing: treats individual jobs as units of output and traces or allocates costs of resources used to each job (b) Process costing: treats all units of output produced in a period alike by accumulating and averaging costs over the units produced (c) Operation costing: has features of job and process costing by treating each job as a unique unit of output but by also allocating costs of standard operations to jobs in a uniform manner. 3.3 The basis cost flow model is a basic inventory model that tracks the flow of costs through an account or process by using the equation: Beginning balance + Resources transferred in – Resources transferred out = Ending balance. The beginning balance is the accumulated cost from prior periods. Resources transferred in are the costs of resources used in the current period. Resources transferred out are the costs of products, parts, or assemblies that are transferred to another account or process during the period. The ending balance is the residual cost of resources still in the account or process at the end of the period. 3.4 Beginning inventory + resources transferred in – resources transferred out = ending inventory. 3.5 Work-in-Process is the account that accumulates and monitors the costs of products that are in process but not yet completed. Finished Goods is the account that records transfers in and out and current balances of products that are finished and ready for sale or delivery to customers. Cost of Goods Sold is the account that accumulates the costs of products that have been sold during a particular period. 3.6 Normal costing assigns costs to products based on historical, average costs, which may be different from current, actual or expected costs. Actual costing attempts to assign costs to specific products (or batches) based on the costs of resources actually used. Due to fluctuations or permanent changes, actual costs may be different from normal or expected costs. Standard costing assigns costs to products based on expected costs of resources used, which may differ from both normal and actual costs. 3.7 The event “complete a job” means that all aspects of a job or customer order have been completed and that all the costs of that job have been transferred from work-in-process to finished goods. The event “sell a job” means the job has been transferred or delivered to the customer and all the costs of the job have been transferred from finished goods and into cost of goods sold. “End of the accounting period” means that inventory account balances are calculated (EI = BI + TI –TO) and overhead cost accounts are closed by making any required adjusting entries. 3.8 In concept, there is no difference in job costing in manufacturing or service organizations. Naturally, the types of costs traced to the jobs will differ and services may not have a physical presence that can be monitored in the same way as manufactured goods. But in both types of jobs, job costing accumulates the costs of resources used to complete the jobs. When service jobs are completed, they are by definition delivered to the customer so transfers from work-in-process may go directly to cost of goods sold. 3.9 Organizations may over- or under-apply overhead because predetermined overhead or cost-driver rates are incorrect for several reasons: a) normal or budgeted resource costs are inaccurate, b) normal or budgeted activity levels are inaccurate, or c) both a and b. 3.10 If the overhead variance is immaterial, by definition, it does not matter how it is disposed (sounds like a bit of a circular argument or tautology). If the overhead variance is material, it should be pro-rated across work-in-process inventory, finished-goods inventory and cost of goods sold. 3.11 Organizations or its managers can misuse job costing either by ignoring or overruling controls for uses of resources. They may assign costs improperly to jobs to gain unauthorized reimbursements or to protect profit levels of some jobs. They also may assign resource costs to jobs that actually are used for other (e.g., personal) purposes. 3.12 Managers make many types of decisions, but accurate job-cost information should be sufficient for determining the cost and profit of a specific job after it is completed. The decision to accept a job or set a certain price for a job, for example, may be based on experience with similar jobs in the past, so job-cost information may be helpful (but not sufficient) for budgeting costs of future jobs. 3.13 Companies using a job order cost system are likely to be performing services or manufacturing products according to specific customer orders and product specifications. Construction contractors, manufacturers of special equipment, aircraft manufacturers, CPA firms, attorneys, and hospitals all employ job order cost systems. 3.14 Use of direct labor is declining as a cost driver, because direct labor is becoming a less and less important part of many manufacturing processes. Automation and computerization of manufacturing processes has resulted in a smaller proportion of manufacturing costs being due to direct labor. More importantly, the usage of direct labor by various products often does not reflect the usage of support services and manufacturing overhead by those products. 3.15 a. Material requisition form: A document upon which the production department supervisor requests the release of raw materials for production. b. Labor time record: A document upon which employees record the time they spend working on each production job or batch. c. Job-cost record: A document on which the costs of direct material, direct labor, and manufacturing overhead are recorded for a particular production job or batch. The job-cost sheet is a subsidiary ledger account for the Work-in-Process Inventory account in the general ledger. 3.16 The primary benefit of using a predetermined overhead rate instead of an actual overhead rate is to provide timely information for decision making, planning, and control. 3.17 An advantage of prorating overapplied or underapplied overhead is that it results in the adjustment of all the accounts affected by misestimating the overhead rate. These accounts include the Work-in-Process Inventory account, the Finished-Goods Inventory account, and the Cost of Goods Sold account. The resulting balances in these accounts are more accurate when proration is used than when overapplied or underapplied overhead is closed directly into Cost of Goods Sold. The primary disadvantage of prorating overapplied or underapplied overhead is that it is more complicated and time-consuming than the simpler alternative of closing overapplied or underapplied overhead directly into Cost of Goods Sold. ANSWERS TO CRITICAL ANALYSIS 3.18 It is quite likely that all of these professionals use either job costing or operation costing. It is unlikely that they would use process costing because each job or client would have sufficiently different characteristics. For example, a dentist would keep separate records for each patient, but she, for insurance reimbursement, may assign costs of standard operations to each patient insofar as possible. 3.19 The basis cost flow model, BI + TI – TO = EI, could be used to overstate profits by undervaluing costs of transfers out of finished goods to cost of goods sold (or vice versa). For example, consider the following actual and misstated cost flows: Finished goods Actual Misstated Error Beginning Inventory $1,000 $1,000 Transfers in 5,000 5,000 Transfers out 4,000 3,000 (1,000) Ending Inventory 2,000 3,000 1,000 Transfers out would be the period’s cost of goods sold, which would be understated by $1,000 and which would overstate the period’s earnings by $1,000. The problem with this scheme is that ending inventory is overstated by $1,000, and the perpetrator is either hoping for greatly increased sales soon or a quick exit from the firm. To perpetuate this scheme, ending inventory must be overstated again and again, but eventually the large, overstated inventory balance must be observed by someone and all the overstatement would be taken as a loss, which could be devastating to earnings and reputations. 3.20 Answers will vary. 3.21 Answers will vary. 3.22 Computer spreadsheets are wonderful analysis tools. However, graduating from cost analysis to a cost or financial reporting system usually requires more sophisticated software because of all the required, complex reporting that is required. A desirable feature of this software is the ability to download information into spreadsheets for individual job or project analyses. 3.23 Your manager may be trying to save you from low-value drudgery so that you can do more valued work. Furthermore, individual, job-level overhead variances may appear to be immaterial. However, they could add up to a very large adjustment to cost of goods sold. If your organization has policies and controls regarding adjustments for overhead variances, it would be best to follow them. Your manager could have ulterior motives related to a desire to cover up costs or misstate periodic earnings. 3.24 Both homebuilders and consultants provide unique outputs for customers, which would justify the expense of job costing. Both also may use some standard operations that could indicate some operation costing, too. Major differences between the job costing efforts of these types of businesses have to do with the nature of resources used, controls over resources, and types of accounts used to accumulate and report costs. 3.25 This is based on an actual case that was uncovered by a whistle-blower and the TV program 60 Minutes. The unethical and fraudulent actions, which were punished by fines and jail time, were accomplished by misstating job-cost records to overstate the cost-plus contract and understate the fixed fee contract. Because the space shuttle contract was cost-plus, the contractor would be reimbursed for all costs successfully assigned to it. Therefore, any cost overruns on the fixed-fee contract that could be assigned to the space shuttle would guarantee expected profits from both contracts. 3.26 Agreeing to a contract that does not live up to your expectations does not mean the contract was either wrong or unethical. You may have been naïve or unrealistic. SOLUTIONS TO EXERCISES 3.27 (10 min) Basic cost flow a. Beginning balance, January 1 $300,000 b. Transfers in, Purchases 820,000 c. Ending balance, December 31 270,000 d. Transfers out, TO = BB+TI-EB 850,000 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.28 (10 min) Basic cost flow (in thousands) Beginning WIP balance, January 1 $ -- 0 -- a. Transfers in, Labor………………… Building materials (.7x$270M)……. G&A overhead………………………. Total TI………………………………... 165,000 189,000 246,000 $600,000 b. Transfers out (.55 x TI) 330,000 c. Ending WIP balance, December 31 EB = BB + TI - TO ………………… $270,000 3.29 (20 min) Basic cost flow: BB + TI – TO = EB (A) (B) (C) Beginning balance $136,000 $ 56,800 $312,000 Ending balance 112,000 = 136,000 + 128,000 – 152,000 49,600 256,000 Transferred in 128,000 168,800 =49,600 + 176,000 – 56,800 560,000 Transferred out 152,000 176,000 616,000 = 312,000 +560,000 – 256,000 (D) (E) (F) Beginning balance $34,000 $14,200 $ 78,000 Ending balance 28,000 =34,000 + 32,000 – 38,000 12,400 64,000 Transferred in 32,000 42,200 = 44,000 + 12,400 – 14,200 140,000 Transferred out 38,000 44,000 154,000 = 78,000 + 140,000 – 64,000 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.30 (20 min) Basic Cost Flow Model: BB + TI - TO = EB (A) (B) (C) Beginning balance $5,000 23,000 = 16,000 + 52,000 – 45,000 $12,000 Ending balance 1,000 = 5,000 + 75,000 – 79,000 $16,000 12,000 Transferred in 75,000 45,000 56,000 Transferred out 79,000 52,000 56,000 = 12,000 +56,000 – 12,000 (D) (E) (F) Beginning balance $170,000 $71,000 $390,000 Ending balance 140,000 = 170,000 + 160,000 – 190,000 62,000 320,000 Transferred in 160,000 211,000 = 62,000 + 220,000 – 71,000 700,000 Transferred out 190,000 220,000 770,000 = 390,000 + 700,000 – 320,000 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.31 (20 min) Basic cost flow Raw Material Work in Process =3,750+10,500-9,000 (a) 5,250 3000 9,000 10,500 =10,500 (b) 10,500 3,750 8,500 =4,850+29,300-(3,000+10,500 +8,500) (e) 12,150 29,300 4,850 Finished Goods Cost of Goods Sold 23,000 41,000 =29,300 (c) 29,300 41,000 (d) =41,000 =23,000+29,300-41,000 (f) 11,300 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.32 (20 min) Basic cost flow Raw Material Work in Process =11,250+31,500-27,000 (a) 15,750 9,000 27,000 31,500 =31,500 (b) 31,500 11,250 25,500 =14,550+87,900-9,000-31,500-25,500 (e) 36,450 87,900 14,550 Finished Goods Cost of Goods Sold 69,600 123,000 =87,900 (c) 87,900 123,000 (d) =123,000 =69,600+87,900-123,000 (f) 34,500 3.33 (20 min) Assigning job costs a. Purchased material Raw-Material Inventory 10,000 Accounts Payable 10,000 b. Issued supplies Manufacturing overhead 500 Raw-Material Inventory 500 c. Purchased material Raw-Material Inventory 7,000 Accounts Payable 7,000 d. Paid for material Accounts Payable 10,000 Cash 10,000 e. Issued raw material Work-in-Process Inventory 8,500 Raw-Material Inventory 8,500 3.33 (continued) f. Production labor cost Work-in-Process Inventory 12,500 Payroll Payable 12,500 g. Overhead costs Manufacturing Overhead 23,250 Cash 23,250 h. Applied overhead Work-in-Process Inventory 15,725 Manufacturing Overhead 15,725 i. Depreciation Manufacturing Overhead 6,250 Accumulated Depr. 6,250 3.34 (30 min) Assigning job costs Raw-Material Inventory Manufacturing Overhead BB 18,525 500 b. b. 500 a. 10,000 g. 23,250 15,725 h. c. 7,000 8,500 e. i. 6,250 14,275 26,525 0 Work in Process Finished Goods BB 4,125 BB 20,750 e. 8,500 30,075* 32,925 f. 12,500 EB 17,900 h. 15,725 30,075* 4,148 10,775 22,048 2,497 13,272 Cost of Go ods Sold 32,925 7,630 40,555 To prorate underapplied overhead: Account Balance % Balance Underapplied OH WIP $ 10,775 17.49% $ 2,497 FG 17,900 29.06% 4,148 CGS 32,925 53.45% 7,630 total 61,600 100.00% 14,275 *$20,750 + X - $32,925 = $17,900 X = $30,075 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.35 (25 min) Assigning costs to jobs a. $6,400, the credit side of the Material Inventory account b. Material cost $6,400 Overhead rate 80% of materials cost Manufacturing overhead applied 0.80 x $6,400 = $5,120 c. $12,000, the debit addition to the Finished Goods Inventory account. d. BB + TI – TO = EB EB = $4,000 + Labor + Material + OH – Transferred out EB = $4,000 + ($6,000 + $6,400 + $5,120) – $12,000 EB = $9,520 e. $5,200 – $5,120 = $80 (variance, underapplied overhead) f. Sales…………………………… $17,500 Cost of goods sold…………. $8,000 Underapplied overhead……. 80 8,080 Gross margin………………… $9,420 S & A costs…………………… 2,900 Operating profit……………… $6,520 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.36 (15 min) Predetermined overhead rates a. Application rate = 44,000p/80,000p = .55p per direct labor peso Job 1: 20,000p x .55 = 11,000p Job 2:  30,000p x  .55 = 16,500p Job 3:  40,000p x  .55 = 22,000p 49,500p b. 49,500p – 49,000p = 500p overapplied manufacturing overhead variance 3.37  (20 min) Applying overhead using a predetermined rate Since Job No. 75 is the only job in the account, the ending balance of the account must equal the total cost of the job. We can find the account’s ending balance using the basic cost equation: BB + TI – TO = EB EB = $5,000 + ($30,000 + $20,000 + $16,000) – 60,000 EB = $11,000 We are told that direct labor for Job No. 75 is $2,500 and that overhead is applied at a rate of 80% of direct labor cost. So, Factory overhead = 80% x $2,500 = $2,000 To solve for direct material we set up the cost equation, Total cost = direct material + direct labor + factory overhead $11,000 = direct material + $2,500 + $2,000 Direct material = $11,000 – $2,500 – $2,000 Direct material = $6,500 3.38 (15 min) Calculating overhead variance Predetermined overhead rate = estimated overhead/estimated allocation base = $900,000/100,000 hours = $9 per hour Applied overhead = predetermined overhead rate x actual allocation base = $9 per hour x 110,000 hours = $990,000 Overhead variance = applied overhead - actual overhead = $990,000 - $980,000 = $10,000 overapplied EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.39 (15 min) Prorating overhead variance To prorate overapplied overhead: Account % Allocation Overapplied OH WIP 10.00% $ 1,000 FG 25.00% 2,500 CGS 65.00% 6,500 total 100.00% $10,000 Since overhead was over-applied, costs of production were overstated. These amounts would be subtracted from the previous account balances. 3.40 (5 min) Closing the overhead variance  Manufacturing overhead…………………….. 10,000   Cost of Goods Sold……………….. 10,000 3.41. (10 min) Predetermined overhead rate; compute manufacturing costs Direct material used $115,000 c Direct labor 220,000 b Manufacturing overhead applied 165,000 a Total manufacturing cost during the year 500,000 Supporting computations aManufacturing overhead applied: $165,000 = 33% x total manufacturing cost (33% x $500,000) bDirect labor: 75% of direct labor equals $165,000, so direct labor was $220,000 (= $165,000  75%) cDirect material used equals total manufacturing cost less direct labor and manufacturing overhead applied [$500,000 – ($220,000 + $165,000) = $115,000]. 3.42 (25 min) Compute job costs for a service organization a. Beginning of month: Direct Labor Applied Overhead Total X-10 $1,280 $640 $1,920 Y-12 $840 $420 $1,260 Each month: Beginning Total Additional Direct Labor Additional Applied Overhead Total X-10 $1,920 $1,400 $700 $4,020 Y-12 $1,260 $4,000 $2,000 $7,260 b. Direct Labor Applied Overhead Total Z-14 $2,840* $1,420 $4,260 *$2,840 = $8,240 – $1,400 – $4,000 c. Overhead applied during month: X-10 $  700 Y-12 2,000 Z-14 1,420 Total $4,120 Variance = $4,120 applied – $3,900 actual = $220 overapplied. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.43 (30 min) Job costing in a service organization a$70 per hour x 600 hours for Client A, and $70 per hour x 1,400 hours for Client B. b$12 per hour x 600 hours for Client A, and $12 per hour x 1,400 hours for Client B. cSum of work done during September, all billed to clients. dClosing entry to record overapplied overhead of $4,000 ( $24,000 applied – $20,000 actual). The credit would be to Cost of Services Billed, or the $4,000 overapplied overhead amount could be prorated across Work in Process, Finished Goods, and Cost of Services Billed. b. Twiddle & Company Income Statement For the Month Ended September 30 Sales revenue $280,000 a Less: Cost of services billed (164,000 ) Add: Overapplied service overhead 4,000 Gross margin 120,000 Selling and administration 84,000 Operating profit $ 36,000 a$280,000 = 2,000 hours x $140 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.44 (25 min) Job costing in a service organization Service Overhead 30,000 24,000a 6,000 b a$12 per hour x 600 hours for Client A, and $12 per hour x 1,400 hours for Client B. bClosing entry to record underapplied overhead of $6,000 ( $24,000 applied – $30,000 actual). The debit would be to Cost of Services Billed, or the $6,000 underapplied overhead amount could be prorated across Work in Process, Finished Goods, and Cost of Services Billed. b. Twiddle & Company Income Statement For the Month Ended September 30 Sales revenue $280,000 a Less: Cost of services billed (164,000 ) Less: Underapplied service overhead (6,000 ) Gross margin 110,000 Selling and administration 84,000 Operating profit $ 26,000 a$280,000 = 2,000 hours x $140 3.45 (60 min) Job-order costing for feature film production; internet Job-order costing is the appropriate product-costing system for feature film production, because a film is a unique production. The production process for each film would use labor, material and support activities (i.e., overhead) in different ways. This would be true of any type of film (e.g., filming on location, filming in the studio, or using animation). SOLUTIONS TO PROBLEMS 3.46 (25 min) Cost flows Material Inventory Manufacturing Overhead 275,000 260,000 1,040,000 Meter Assembly Case Assembly Testing Work-in- Process Work-in- Process Work-in- Process 210,000 40,000 10,000 200,000 350,000 90,000 (a) 840,000 1,125,000 (a) 160,000 (a) 40,000 125,000 (b) 1,125,000 1,591,250 (c) 1,591,250 1,731,250 83,750 0 Finished Goods Cost of Go ods Sold (d) 1,731,250 1,731,250 1,731,250 0 (a) Account Material % Material Overhead Meter Assembly WIP $ 210,000 80.77% $ 840,000 Case Assembly WIP 40,000 15.38% $ 160,000 Testing WIP 10,000 3.85% $ 40,000 Total 260,000 100.00% 1,040,000 (b) 90% of Meter Assembly cost transferred to Case Assembly (c) 95% of Case Assembly cost transferred to Testing (d) 100% of Testing cost transferred to Finished goods and to Cost of goods sold. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.47 (40 min) Analysis of overhead using a predetermined rate a. $636,000/60,000 = $10.60 per machine hour b. Beginning balance……………………………. $ 54,000 Direct material…………………………………. 45,000 Direct labor ($8 x 2,000 DLH)……………….. 16,000 Overhead applied ($9 x 3,500 MH)…………. 31,500 Total………………………………………… $146,500 c. $18,000 $9.00 x 2,000 machine hours = $18,000 d. $76,500 $9.00 x 8,500 machine hours = $76,500 e. Supplies………………………. $ 6,000 Indirect labor wages ………. 17,000 Supervisory salaries ……….. 36,000 Factory facilities……………… 6,500 Factory equipment costs…… 8,000 Total……………………….. $73,500 f. Credit it to cost of goods sold. The amount is clearly not material (0.1% of cost of goods sold), so it is not worth the effort involved in prorating. If it were material, then the proper answer would be to prorate it between work in process inventory, finished goods inventory, and cost of goods sold. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.48 (45 min) Job costs in a service organization EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE SPIC ‘N SPAN CLEANERS Income Statement for Month Ending November 30 Dry Cleaning Coin Washing and Drying Special Cleaning Repairs Total Revenue $4,625 $5,250 $2,000 $625 $12,500 Cost of Services:  Labor $2,560 a $640 a $1,000 a $720 a  Direct overhead 1,075 b 1,575 b 765 b 175 b  Indirect overhead 256 c 64 c 100 c 72 c   Total costs of services $3,891 $2,279 $1,865 $967 9,002 Department margin $734 $2,971 135 $(342 ) $ 3,498 Less other costs:  Unassigned labor costs (idle time) 200 d  Unassigned overhead indirect costs 20 e  Marketing and administrative costs 4,050 f Operating profit $  (772 ) aAmounts equal $8 per hour times direct labor hours according to the problem (dry cleaning, $8 x 320 hours; etc.) bAmounts equal the sum of direct overhead items given in the problem. cRate = Total cost = $512 = $.80 per hour. For dry cleaning, .80 x 320 hours = $256, etc. Total hours 640 hours worked (including idle time) d$200 = $8 x 25 hours e$20 = $512 – $256 – $64 – $100 – $72 fSum of marketing and administrative costs ($2,100 + $1,400 + $390 + $160) Management report: Only Coin Washing and Drying is clearly profitable. “Repairs” is losing money, and the margins of the other departments are low, considering the amount of salary for Stuart and the assistant (plus other costs) that must be covered. The company should reconsider its full-product-line strategy; perhaps dropping Repairs and raising prices on Dry Cleaning and Special Cleaning. The company could also find ways to be more efficient, perhaps eliminating the need for Stuart’s assistant or one of the other four employees . 3.49 (30 min) Service job costing a. Nocando Sails Inc. Original John’s Unassigned Costs (not required) Total Revenue $80,000 $24,000 $40,000 $144,000 (= 1,000 x $80) (= 300 x $80) (= 500 x $80) Labor $30,000 $ 9,000 $15,000 $6,000 $ 60,000 (= 1,000 x $30) (= 300 x $30) (= 500 x $30) (= 200 x $30) Overhead $15,000 a $ 4,500 a $ 7,500 a 3,000 a 30,000 Margin $35,000 $10,500 $17,500 $54,000 a$15,000 = 1,000/2,000 x $30,000; $4,500 = 300/2,000 x $30,000; etc. b. Income statement: Revenue from clients ……………………….. $144,000 Less cost of services to clients:  Labor………………………………………… $54,000  Overhead…………………………………… 27,000   Total cost of services to clients ……... 81,000 Gross margin ………………………………… $ 63,000 Less other costs:  Labor………………………………………… $ 6,000  Overhead……………………………………. 3,000  Mktg. and adm. costs…………………….. 30,000   Total other costs………………………... 39,000 Operating profit………………………………. $ 24,000 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.50 (30 min) Predetermined cost-driver rate *Proration (allocation) of over-applied overhead (not required) WIP balance before proration........... $103,400 .3430 $11,764 FG balance before proration……….. 66,400 .2202 7,612 CGS before proration………………... 131,700 .4368 15,224 Total…………………………………. $301,500 1.0000 34,600 **Unadjusted balance (before proration) ***$83,000 + X - $131,700 = $66,400 X = $115,100 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 3.50 (continued) Journal entries (not required): a. Raw-Material Inventory 71,600  Accounts Payable 71,600 b. Manufacturing Overhead 2,000  Raw-Material Inventory 2,000 c. Accounts Payable 71,600  Cash 71,600 d. Work in Process 34,000  Raw-Material Inventory 34,000 e. Payroll 56,000  Payroll Taxes Payable 18,000  Cash 38,000 f. Payroll 28,000  Fringe Benefits Payable 28,000 g. Work in Process (40% x $84,000) 33,600 Manufacturing Overhead (40% x $84,000) 33,600 Administrative and Marketing Costs (20% x $84,000) 16,800  Payroll ($56,000 + $28,000) 84,000 h. Manufacturing Overhead 43,200  Cash 43,200 i. Manufacturing Overhead 21,000  Accumulated Depreciation—  Property, Plant, and Equipment 21,000 j. Work in Process (Applied Overhead: $33,600 x 400 %) 134,400  Manufacturing Overhead (Applied) 134,400 * Manufacturing Overhead 34,600 Work-in-Process Inventory………………………………………… 11,866 Finished-Goods Inventory…………………………………………. 7,620 Cost of Goods Sold…………………………………………………. 15,114 3.51 (30 min) Estimating costs using alternative cost-driver rates a. Cost driver rates: Proposed overhead cost driver bases Percent Amount Cost driver base Cost driver rate Material overhead 65% $ 64,870 $ 34,000 191% Production labor overhead 35% 34,930 33,600 104% Total actual overhead 99,800 b. (1) Original overhead rate A B Material $ 40,000 $ 30,000 Labor 20,000 30,000 Original overhead @400% of DL 80,000 120,000 Estimated cost $ 140,000 $ 180,000 (2) Proposed overhead rates A B Material $ 40,000 $ 30,000 Labor 20,000 30,000 New overhead @ 191% of material 76,318 57,238 New overhead @104% of DL 20,792 31,188 Estimated cost $ 157,110 $ 148,426 Estimating errors A B Difference in estimated costs $ (17,109) $ 31,574 Percentage difference -12% 18% Undercosted Overcosted c. Possible outcomes include winning the bid for Job A and losing the bid for Job B if competitors accurately know their costs. Arrow Space would be stuck with unprofitable jobs and would not be competitive on bids for jobs that it might have won and made profitable. 3.52 (45 min) Cost flows a. Actual costing: First quarter jobs Material Production Labor Overhead Sales revenue 81 $13,720 $ 49,000 $13,390 $ 89,500 82 9,300 31,240 11,570 62,500 83 9,400 19,760 2,160 Totals $32,420 $100,000 $27,120 $152,000 Material Inventory Manufact’g Overhead 32,420 27,120 27,120 EB 0 Work in Process Finished Goods Material added to jobs 32,420 Labor added to jobs 100,000 76,110 completed 128,220 128,220 Actual overhead added 27,120 52,110 jobs EB 0 EB 31,320 Cost of Goods Sold 128,220 Pay roll 100,000 b. Normal costing: Normal overhead rates Percent Amount Cost-driver base Cost-driver rate Unit-level overhead 30% $ 31,200 $103,540 30.13%* of mat’l cost Facility-level overhead 70% 72,800 400,000 18.20% of labor cost Manufacturing overhead $ 104,000 First quarter jobs Material Production Labor Unit-level OH Facility-level OH Sales revenue 81 $13,720 $ 49,000 $4,134* $ 8,918* $ 89,500 82 9,300 31,240 2,802* 5,686* 62,500 83 9,400 19,760 2,833* 3,596* Totals $32,420 $100,000 $9,769* $18,200* $152,000 *Rounded 3.52 (continued) e. As the preceding income statements show, it does make a significant difference as to which costing method is used. 3.53 (60 min) Cost flows to jobs 3.53 (continued) 3.53 (continued) c. Inventory balances Material and Equipment Inventory Balance 9/1 48,000 (7) 40,600 (2) 18,700 (5) 310 Balance 9/30 25,790 Work in Process Inventory Balance 9/1 162,250 * Current charges (7) 53,690 Job 111 (8) 136,480 Balance 9/30 79,460 Cost of Goods Sold** (8) 136,480 Underapplied OH 560 Balance 9/30 137,040 *Job 106 + Job 111 = $43,300 + $118,950 **Not required. 3.54 (60 min) Deriving cost-driver rates This problem relates overhead allocation to decision making. It could be assigned in later chapters on decision making or budgeting, as well as here. We like to use it here to motivate overhead cost assignment for decision making and performance evaluation. Calculate the cost and activity differentials to determine the variable overhead rate: $34,500,000 – $29,880,000 = $4,620,000 1,380,000 – 1,080,000 300,000 = $15.40 per machine hour  Total overhead (20x5) $34,500,000  Total variable overhead (1,380,000 x $15.40) (21,252,000)  Total fixed overhead $13,248,000 Total overhead costs at 1,150,000 machine hours  Total variable overhead (1,150,000 x $15.40) $17,710,000  Total fixed overhead 13,248,000  Total overhead $30,958,000 Total overhead rate = $30,958,000 = $26.92. 1,150,000 hrs. Fixed overhead rate = $26.92 – $15.40 = $11.52. Also, fixed overhead rate = $13,248,000 = $11.52. 1,150,000 hours The information above should be incorporated into a report to management. The advisability of using an average cost-driver rate for all jobs is inherently a cost-benefit issue. The simple system employed by the company is less costly to implement than a more elaborate multiple-driver system would be. However, the cost information it provides is less accurate than that provided by a more complex costing system. 3.54 (continued) We find it helpful to present the following graph of these relationships: *$29,880 + [(1,150 hrs. – 1,080 hrs) x $15.40] = $30,958. 3.55 (25 min) Journal entries in job-order costing a. b. Journal entries: 1. Raw-Material Inventory 7,850 Accounts Payable 7,850 2. Work-in-Process Inventory 180 Raw-Material Inventory 180 3. Manufacturing Overhead 30 Manufacturing-Supplies Inventory 30 4. Manufacturing Overhead 800 Cash 800 5. Work-in-Process Inventory 75,000 Wages Payable 75,000 6. Selling and Administrative Expense 1,800 Prepaid Insurance 1,800 7. Raw-Material Inventory 3,000 Accounts Payable 3,000 8. Accounts Payable 1,700 Cash 1,700 9. Manufacturing Overhead 21,000 Wages Payable 21,000 10. Manufacturing Overhead 7,000 Accumulated Depreciation: Equipment 7,000 11. Finished-Goods Inventory 1,100 Work-in-Process Inventory 1,100 3.55 (continued) 12. Work-in-Process Inventory 138,000* Manufacturing Overhead 138,000 *Applied manufacturing overhead = 6,900 machine hours$20 per hour. 13. Accounts Receivable 179,000 Sales Revenue 179,000 Cost of Goods Sold 141,000 Finished-Goods Inventory 141,000 3.56 (40 min) Basic cost flow model a. T-accounts follow these answers: 1. Selling and Administrative Costs: Gross Margin – Operating Profit = Selling and Administrative Costs $4,000 – $1,000 = $3,000 2. Cost of Goods Sold: Total Revenue – Gross Margin = Cost of Goods Sold $13,500 – $4,000 = $9,500 3. Beginning Finished-Goods Inventory: BB + Cost of Goods Manufactured = Cost of Goods Sold + EB BB + $8,000 = $9,500 + $3,000 BB = $4,500 3.56 (continued) 4. Direct Material Used: Beg. WIP. + Direct Material Used + Direct Labor Incurred + Actual Overhead = Cost of Goods Manufactured + Ending Work in Process $1,500 + Direct Material Used + (125 x $15) + $750 = $8,000 + $2,000 Direct Material Used = $5,875 5. Ending Raw-Material Inventory: BB + Purchases = Direct Material Used + EB $1,400 + $5,250 = $5,875 + EB $775 = Ending Raw-Material Inventory Raw-Material Inventory BB 1,400 Purch. 5,250 5,875 Used EB 775 Work-in-Process Inventory BB 1,500 Direct matl. 5,875 Cost of Direct labor 1,875 8,000 Goods Overhead 750 Manufactured EB 2,000 Finished-Goods Inventory BB 4,500 8,000 9,500 C.G.S. EB 3,000 3.56 (continued) Wages and Accounts Payable Purch. 5,250 Overhead 750 Direct Labor 1,875 Marketing and Admin. 3,000 Manufacturing Overhead 750 750 Cost of Goods Sold 9,500 Marketing and Administrative Costs 3,000 b. Income Statement Revenue $13,500 Cost of goods sold 9,500 Gross margin 4,000 Marketing and administrative costs 3,000 Operating profit $ 1,000 3.57 (50 min) Job costs in a service company Material Inventory Balance 6/1 (given) 920 16 Indirect Materials Purchases (given) 116 314 Requisition Balance 6/30 706 Work-in-Process Inventory (a) Balance 6/1 576 504 Job P-20 (c) (b) Job P-20 170 850 Job P-43 (e) (d) Job P-43 608 (f) New Job P-45 556 Balance 6/30 556 Finished-Goods Inventory Balance 6/1 ($392 + $158) 550 (c) Job P-20 504 550 Sold (e) Job P-43 850 Balance 6/30 1,354 a. Direct Material + Direct Labor + Applied Overhead = $174 + $32 + $64 + $84 + [150% + ($64 + $84)] = $576 . b. To complete Job P-20: $68 Direct Labor + ($68 x 150%) Applied Overhead = $170 . c. Transfer to Finished Goods: Job P-20 Beginning Inventory Cost + Current Cost = $174 + $64 + 150%($64) + $170 = $504 . d. To complete Job P-43: $108 Material + $200 Direct Labor + (150% x $200) Applied Overhead = $108 + $200 + $300 = $608 . 3.57 (continued) e. Transfer of Job P-43: Beginning Inventory Cost + Current Cost = [$32 + $84 + 150%($84)] + [$108 + $200 + 150%($200)] = $850 . f. New Job Cost = Current Charges to WIP less Current Charges for Jobs P-20 and P-43: = Current Material + Direct Labor + Overhead – Job P-20 Current Cost – Job P-43 Current Cost = $314 + $408 + $150%($408) – $170(b)* – $608(d)* = $556 . EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE *These letters refer to solution parts (b) and (d) above. 3.58 (70 min) Reconstruct missing data This is a challenging problem. We recommend displaying the work-in-process account (e.g., on the blackboard) for the "big picture," then solving for each item in the account as follows: Work-in-Process (a) Balance, beginning 86,200 Transferred to (b) Direct material 70,314  finished goods 53,500 (d) (c) Direct labor 67,700 Disaster loss 204,014 (f) (e) Overhead applied 33,300 Balance, ending –0– The calculations follow. We usually present these using both T-accounts and the following formulas. (a) Given (b) Direct material = Beginning inventory + Purchases –  Ending inventory – Indirect material = $49,000a + $66,400* – $43,000a – $2,086b = $70,314 *Purchases = Accounts payable, ending + Cash payments –  Accounts payable, beginning = $50,100a + $37,900a – $21,600a = $66,400 ( c) Direct labor = Payroll – Indirect labor = $82,400a – $14,700a = $67,700 3.58 (continued) (d) Cost transferred to finished goods = Finished goods, ending + Cost of goods sold – Finished goods, beginning = $37,500a + ($396,600a – $348,600a) – $32,000a = $53,500 (e) Overhead applied = Ending manufacturing overhead – beginning manufacturing overhead + overapplied overhead = $217,000a – $184,900a + $1,200a = $33,300 (f) Loss = $86,200a + $70,314 + $67,700 + $33,300 – $53,500 = $204,014 Note: The insurance company may dispute paying the $1,200 overapplied overhead. aGiven in problem bGiven in paper fragments 3.59 (45 min) Incomplete data; job-order costing The following information should be included (in summary) in a report to management. Explanatory information follows in the form of T-accounts showing cost flows and supporting calculations. a. Cost elements for jobs sold: Job DM DL OH Total Cost 101 $2,000 $19,200 $9,600 $30,800 102 3,000 12,000 6,000 21,000 b. Cost elements for unfinished job: Job DM DL OH Total Cost 103 $1,600 $10,400 $5,200 $17,200 c. Underapplied overhead: $3,000 3.59 (continued) M refers to direct material L refers to direct labor O refers to manufacturing overhead *Numbers given in the problem 3.60 (30 min) Prepare Gantt chart Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Weeks from start 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 a Select team plan actual b Meetings plan actual c Identify product plan actual d Select IT plan actual e Select production plan actual f Advertising plan actual g Target costing plan actual h Forecasting plan actual i Design product plan actual j Develop prototype plan actual k Test market plan actual l Presentation plan actual 3.61 (30 min) Prepare Gantt chart Month 1 Month 2 Month 3 Month 4 Month 5 Weeks from start 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 a Find location plan actual b Hire team plan actual c Obtain permits plan actual d Obtain materials plan actual e Construct bldg plan actual 3.62 (25 min) Job costing and ethics a. It would be unethical for Garcia to falsify job cost reports by improperly assigning costs to the U.S. government job which were actually part of the cost of the Arrow Space job. Since Garcia’s boss suggested this course of action, she should approach higher levels of management with her problem. Given the potential illegality and other possible negative ramifications of this problem (such as lost reputation), it is likely that management will decide to write off the cost overruns instead of falsely reporting them. b. The fact that Garcia’s company is reimbursed on the U.S. government contract makes it particularly enticing to charge the excess costs to this project. However, since the U.S. government contract is based on costs, it may be an illegal action for the company to misrepresent costs charged to this project. If this action is discovered and proven in court, the company could be liable for the excess charges, interest and punitive damages. Garcia and her boss could be held responsible for civil and criminal penalties, not to mention the loss of their jobs and their reputations. SOLUTION TO CASES 3.63 (45 min) Interpreting information from a job-costing system a. A job order costing system is appropriate in any environment where costs can be readily identified with specific products, batches, contracts, or projects. b. The only job remaining in Work-in-Process Inventory on December 31 is DRS114. The dollar value of DRS114 is calculated as follows: DRS114 balance, 11/30 $250,000 December additions: Direct material used $124,000 Purchased parts 87,000 Direct labor 200,500 Manufacturing overhead (19,500 hours$7.50*) 146,250  557,750  Work-in-process inventory, 12/31 $807,750 c. The dollar value of the playpens remaining in finished-goods inventory on December 31 is $455,600, calculated as follows: Playpen Units Finished-goods inventory, 11/30 19,400 Units completed in December 15,000 Units available for sale 34,400 Units shipped in December 21,000 Finished-goods inventory, 12/31 13,400 3.63 (continued) Since the company uses the FIFO inventory method, all units remaining in finished- goods inventory were completed in December. Unit cost of playpens completed in December: Work in process inventory, 11/30 $420,000 December additions: Direct material used $ 3,000  Purchased parts 10,800 Direct labor 43,200 Manufacturing overhead (4,400 hours$7.50) 33,000  90,000   Total cost $510,000 Unit cost = = = $34 per unit Value of finished-goods inventory on 12/31 = Unit costquantity = $3413,400 = $455,600 3.64 (40 min) Motion picture project accounting Box office gross revenues………………………………………………. $ 382.00 Amount retained by movie theaters (50%)……………………………. 191.00 Studio’s gross revenues…………………………………………………. $191.00 Negative costs: Production costs……………………………………………………… $ 66.80 Gross profit participation (director, actors, 16% of studio gross revenues) ……………………………………………………………….. 30.60 Other costs: Studio’s overhead (15% of negative costs above)……………….. 14.60 Promotion and distribution costs…………………………………… 67.20 Advertising overhead (10% of promotion and distribution cost) 6.70 Distribution fee (32% of studio gross revenue) …………………… 61.10 Total operating costs…………………………………………………… $ 247.00 Operating profit (loss) ……………………………………………………… $ (56.00) Financing costs (3% above prime on operating loss, assume amount is fixed) ……………………………………………………………… 6.00 Net profit (loss) for distribution to net profit participants……………. $ (62.00) Net Profit Participation vs Profit • Net Profit Participation is a Contract • Not the Same as Profit for the Film • Contract Specifies Which Costs are Allocated and How • Need to Understand How Costs are Allocated Contract Costs Costs Based on Box Office Revenues • Retained by Theaters = 50% • Gross Profit Participation (16%)(50%) = 8% • Studio Overhead (15%)(8%) = 1.2% • Distribution Fee (32%)(50%) = 16% • Total = 75.2% 3.64 (continued) Contract Costs • Other Costs (millions) • Production Costs = $66.8 • Studio Overhead = (15%)($66.8) = $10.02 • Promotion and Distribution = $67.2 • Advertising Overhead = (10%)($67.2) = $6.72 • Total = $150.74 Contract Profits • Profits = Revenues - Costs • If Profit = 0, Revenues (R) = Costs • R = .752 R + $150.74 • (1 - 0.752) R = $150.74 • R = $608 million Paramount Profits • Which Costs are Artifacts of the Contract? • Distribution Fee Clearly not a Cost • Which Costs are Traced to the Film? (Perhaps None of the Overhead Costs) EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE Solution Manual for Cost Management: Strategies for Business Decisions Ronald W. Hilton, Michael W. Maher, Frank H. Selto 9780073526805, 9780072430332, 9780072830088, 9780072299021, 9780072881820, 9780072882551, 9780070874664, 9780072388404, 9780072343533