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SOLUTION MANUAL Introduction to Managerial Accounting 7th Canadian Edition by Peter C. Brewer, Solution Manual forRay H. Garrison, Eric Noreen, Suresh Kalagnanam, Ganesh Introduction to Managerial Accounting 7CE Peter C.Vaidyanathan Brewer, Ray H. Garrison, Eric Noreen, Suresh Kalagnanam, Ganesh Vaidyanathan

Chapter 1 An Introduction to Managerial Accounting Solutions to Questions

1-1

Managerial accounting is concerned with providing information primarily to managers for their use internally in the organization for the purposes of strategy, planning, implementation and control. Financial accounting is concerned with providing information primarily to investors, creditors, and others outside of the organization.

1-2

Essentially, the manager carries out three major activities in an organization: planning, implementation, and control. All three activities involve decisionmaking and use managerial accounting information. This is depicted in Exhibit 11.

1-3

The Planning, Implementation and Control Cycle involves the following steps: (1) formulating plans which often includes preparing budgets, (2) overseeing day-today activities which includes organizing, directing and motivating people, resource allocation and decision making, and (3) controlling which includes providing feedback via performance reports.

1-4

In contrast to financial accounting, managerial accounting: (1) focuses on the needs of the manager; (2) places more emphasis on the future; (3) emphasizes relevance and timeliness, rather than verifiability and precision; (4) emphasizes the segments of an organization; (5) is not governed by IFRS or ASPE; and (6) is not mandatory.

1-5

The lean business model focuses on continuous improvement by eliminating waste in the organization. Companies that adopt the lean business model usually implement one or more of the following management practices. 

Just-in-time (JIT): A production and inventory control system in which materials are purchased and units are produced only as needed to meet actual customer demand.

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   1-6

1-7

Total quality management (TQM): An approach to continuous improvement that focuses on serving customers and uses teams of frontline workers to systematically identify and solve problems. Process re-engineering: An approach to improvement that involves completely redesigning business processes in order to eliminate unnecessary steps, reduce errors, and reduce costs. Theory of constraints (TOC): A management approach that emphasizes the importance of managing constraints.

Benefits  Improves operational processes that makes the business efficient  It leads to reduction or elimination of waste  It improves profitability and reduces costs  It reduces the turnaround time to fulfill customer orders improving customer satisfaction Limitations  Production schedule can get hampered if any external shocks lead to supply chain disturbance  Lean processes must be complimented with agile processes to adapt swiftly to changing customer needs. Pros  Funds tied up in maintaining inventory can be used elsewhere  Areas previously used to store inventories are made available for other more productive uses  The time required to fill an order is reduced, resulting in quicker response to customers and consequentially greater potential sales  Defect rates are reduced resulting in less waste and greater customer satisfaction  More effective operations Cons  Increased number of purchase orders to buy raw materials and/or other components used in manufacturing products  There is little room for errors and defects in products because this could throw the production facility off schedule  There is a high reliance and dependence on suppliers to meet delivery deadlines as well as supply products that have no defects and require minimal inspection

1-8

Agree. Ethical behaviour is the foundation of a successful market economy. If we cannot trust people to act ethically in their business dealings with us, we will be inclined to invest less, scrutinize more and waste money and time (scarce resources) trying to protect ourselves. Ethical standards and Codes of Conduct

Introduction to Manageria

aid the smooth running of the economy. In addition, the lack of regulatory requirements (IFRS, ASPE) regarding managerial accounting makes ethical behaviour even more critical.

Solutions to Exercises Exercise 1-1 (LO1 CC2) Item

Financial Accounting

Managerial Accounting

a) Preparing budgeted statements of income and financial position for the next year

b) Analyzing the profitability of a new project

c) Preparing the income statement and balance sheet

d) Preparing a weekly performance report for the product manager

e) Costing and pricing a new product

Exercise 1-2 (LO1 CC1) Planning a) Doing a cost–benefit analysis of buying new planes versus leasing them

b) Estimating the cost of utilities to be incurred during the next quarter

Implementation

Control

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c) Documenting variances from standard costs of different products

d) Compiling the raw material wastage report for the past month

e) Changing procurement process based on an internal audit report f) Documenting the savings from reductions in raw materials inventory resulting from the adoption of a just-in-time inventory system

Solutions to Problems Problem 1-1 (LO3 CC5) a) This has ethical implications because the code of ethics mandates that all professional accountants will abide by the fundamental principles. There are two possible issues here – integrity and objectivity. By not reporting the inventory as obsolete, Emily will be violating the principle of integrity and due care. There is also an issue of personal integrity here; as a professional accountant she is required ―to be straightforward and honest in all professional and business relationships.‖ Also, as a professional accountant, Emily should not allow her professional judgement to be compromised by bias or conflict of interest. It would be hard for Emily to take ethical action in this situation because the management team is likely to be senior to her in hierarchy. Emily should raise this matter to her chief financial officer. b) The main ethical implications here are the issues of Professional Behaviour and Objectivity. The code mandates that a member will conduct themselves at all © The McGraw-Hill Companies, Inc., 2002. All rights reserved. 4

Introduction to Manageria

times in a manner which will maintain the good reputation of the profession and serve the public interest. Also, the professional accountants should not allow their business judgement to be compromised by bias, conflict of interest or undue influence of others. Thus, the accountant should not provide better financial projections than their professional judgement.

Problem 1-2 (LO3 CC5) There is an ethical dilemma associated with the request to issue sales invoices for ‗fictitious‘ sales. The manager is wanting to meet a revenue target by recording sales at the end of the year that are later reversed. If the professional accountant records this, then it violates the principles of Professional Behaviour, Integrity and Due Care as well as Objectivity. The professional accountant should explain to the manager the rules for recognizing revenue. They should also tell the manager about the code of ethics governing the profession as well as the reputational damage to the organization when it is discovered that the company is violating the rules of rules of revenue recognition.

Chapter 2 Cost Concepts Solutions to Questions 2-1 Cost behaviour refers to how a cost will react or respond to changes in the level of business activity. 2-2 No. A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit of the activity level (e.g., number of beds occupied). A fixed cost is fixed in total, but will

vary inversely on a per-unit basis with changes in the level of activity. 2-3 When fixed costs are involved, the cost per unit of activity will depend on the activity volume (or level). For example, as production increases, the cost per unit will fall because the fixed cost is spread over more units. Conversely, as production declines, the cost per unit will rise

Solutions Manual, Chapter 2

since a constant fixed cost figure will be spread over fewer units. 2-4 The cost of direct materials included in a product is a variable cost; similarly, sales commissions paid out on a per unit basis or as a percentage of sales dollars is a variable cost. On the other hand, costs such as building rent and the salary of a general manager are fixed costs. 2-5 Fixed costs in total do not vary with volume within a relevant range. However, fixed costs per unit of volume decrease as volume increases and increases as volume decreases. Therefore, an inverse relationship exists between volume and fixed costs per unit of volume. 2-6 Manufacturing overhead is an indirect cost since these costs cannot be easily and conveniently traced to individual products. 2-7 A differential cost is a cost that differs between alternatives in a decision. An opportunity cost is the potential benefit that is given up when one alternative is selected over another. A sunk cost is a cost that has already been incurred and cannot be altered by any decision taken now or in the future. 2-8 No; differential costs can be either variable or fixed. For example, the alternatives might consist of purchasing one computer software program over another to simplify the accounts receivable process. The difference in the fixed costs of purchasing the two programs would be a differential cost. 2-9 The three major elements of product costs in a manufacturing company are direct materials, direct labour, and manufacturing overhead. 2-10 a. Direct materials: Direct materials are an integral part of a finished product and can be conveniently traced into it. b. Indirect materials: Indirect materials are generally small items of material such as glue and nails. They may become an integral part of a finished product but are traceable into the product only at great cost or inconvenience.

Indirect materials are ordinarily classified as part of manufacturing overhead. c. Direct labour: Direct labour includes those labour costs that can be easily traced to particular products. Direct labour is also called ―touch labour.‖ d. Indirect labour: Indirect labour includes the labour costs of workers who do not directly work on products but provide a support function. Examples of such labour include janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced directly to particular products. e. Manufacturing overhead: Manufacturing overhead includes all manufacturing costs except direct materials and direct labour. 2-11 PC = DM + DL CC = DL + MOH PC = DM + CC - MOH 2-12 A product cost is any cost incurred for the purchase or the manufacture of goods. In the case of manufactured goods, these costs consist of direct materials, direct labour, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred. Examples include selling (marketing) and administrative expenses. 2-13 The income statement of a manufacturing firm differs from the income statement of a merchandising firm in the cost of goods sold section. The merchandising firm sells finished goods that it has purchased from a supplier. These goods are listed as ―Purchases‖ in the cost of goods sold section. Since the manufacturing firm produces its goods rather than buying them from a supplier, it lists ―Cost of Goods Manufactured‖ in place of ―Purchases.‖ Also, the manufacturing firm identifies its inventory in this section as ―Finished Goods Inventory,‖ rather than as ―Merchandise Inventory.‖ 2-14 The schedule of cost of goods manufactured is used to list and organize the manufacturing costs that have been incurred. These costs are organized under the three major headings of direct materials, direct labour, and manufacturing overhead. The total costs

incurred are adjusted for any change in the Work in Process inventory to determine the cost of goods manufactured (i.e., finished) during the period. The schedule of cost of goods manufactured ties into the income statement through the Cost of Goods Sold section. The cost of goods manufactured is added to the beginning Finished Goods inventory to determine the goods available for sale. In effect, the cost of goods manufactured takes the place of the ―Purchases‖ account in a merchandising firm. 2-15 A manufacturing firm has three inventory accounts: Raw Materials, Work in Process, and Finished Goods. The merchandising firm generally identifies its inventory account simply as Merchandise Inventory.

called inventoriable costs. The flow is from direct materials, direct labour, and manufacturing overhead into Work in Process. As goods are completed, their cost is removed from Work in Process and transferred into Finished Goods. As goods are sold, their cost is removed from Finished Goods and transferred into Cost of Goods Sold. Cost of Goods Sold is an expense on the income statement. 2-17 Yes, costs such as salaries and depreciation can end up as assets on the balance sheet if these are manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are sold. Thus, such costs may be part of either Work in Process inventory or Finished Goods inventory at the end of a period if there are unsold units.

2-16 Since product costs follow units of product into inventory, they are sometimes

The Foundational 15 (LO1 – CC1; LO2 – CC2; LO3 – CC3; LO4 – CC4, 5, 6, 7) 1. Direct materials .................................................................... $ 6.00 Direct labour ........................................................................3.50 Variable manufacturing overhead ...........................................1.50 Variable manufacturing cost per unit ...................................... $11.00 Variable manufacturing cost per unit (a) ................................ $11.00 Number of units produced (b) ............................................... 20,000 Total variable manufacturing cost (a) × (b) ............................ Fixed manufacturing overhead per unit (c) ............................. $5.00 Number of units produced (d) ............................................... 20,000 Total fixed manufacturing cost (c) × (d) ................................. Total product (manufacturing) cost ........................................

$220,000

100,000 $320,000

2. Sales commissions ................................................................ $1.50 Variable administrative expense .............................................0.75 Variable selling and administrative per unit ............................. $2.25 Variable selling and admin. per unit (a) .................................. $2.25 Number of units sold (b) ....................................................... 20,000 Total variable selling and admin. expense (a) × (b) ........................................................................ Fixed selling and administrative expense per unit ($4 fixed selling + $3 fixed admin.) (c) ............................... $7.00 Number of units sold (d) ....................................................... 20,000 Total fixed selling and administrative expense (c) × (d) .................................................................................... Total period (nonmanufacturing) cost .....................................

$45,000

140,000 $185,000

3. Direct materials .................................................................... $ 6.00 Direct labour ........................................................................3.50 Variable manufacturing overhead ...........................................1.50 Sales commissions ................................................................1.50 Variable administrative expense .............................................0.75 Variable cost per unit sold ..................................................... $13.25

The Foundational 15 (continued) 4.

Direct materials .................................................................... $ 6.00 Direct labour ........................................................................ 3.50 Variable manufacturing overhead ........................................... 1.50 Sales commissions ................................................................ 1.50 Variable administrative expense ............................................. 0.75 Variable cost per unit sold ..................................................... $13.25

Variable cost per unit sold (a) ................................................ $12.50 Number of units sold (b) ....................................................... 8,000 Total variable costs (a) × (b) ................................................. $100,000

Variable cost per unit sold (a) ................................................ $13.25 Number of units sold (b) ....................................................... 25,000 Total variable costs (a) × (b) ................................................. $331,250

Total fixed manufacturing cost (see requirement 1) (a)...................................................... $100,000 Number of units produced (b) ............................................... 16,000 Average fixed manufacturing cost per unit produced (a) ÷ (b) ............................................................ $6.25

Total fixed manufacturing cost (see requirement 1) (a)...................................................... $100,000 Number of units produced (b) ............................................... 25,000 Average fixed manufacturing cost per unit produced (a) ÷ (b) ............................................................ $4.00

Total fixed manufacturing cost (see requirement 1) ........................................................... $100,000

10. Total fixed manufacturing cost (see requirement 1) ........................................................... $100,000

Solutions Manual, Chapter 2

The Foundational 15 (continued) 11. Variable overhead per unit (a) ............................................... $1.50 Number of units produced (b) ............................................... 16,000 Total variable overhead cost (a) × (b) .................................... Total fixed overhead (see requirement 1) ............................... Total manufacturing overhead cost ........................................

$24,000 100,000 $124,000

Total manufacturing overhead cost (a) ............................. Number of units produced (b) ......................................... Manufacturing overhead per unit (a) × (b) .......................

$124,000 16,000 $7.75

12. Variable overhead per unit (a) ............................................... $1.50 Number of units produced (b) ............................................... 25,000 Total variable overhead cost (a) × (b) .................................... Total fixed overhead (see requirement 1) ............................... Total manufacturing overhead cost ........................................

$37,500 100,000 $137,500

$137,500 25,000 $5.50

13. Sales revenue (@$22.00 per unit).......................................... $440,000 Less: Cost of goods sold (same as product costs in requirement 1) ........................... 320,000 Gross margin ........................................................................ $120,000 14. Direct materials per unit ........................................................ $6.00 Direct labour per unit ............................................................ 3.50 Direct manufacturing cost per unit (a) ................................... $9.50 Number of units produced (b) ............................................... 22,000 Total direct manufacturing cost (a) × (b) ............................... $209,000 Variable overhead per unit (a) ......................................... $1.50 Number of units produced (b) ......................................... 22,000 Total variable overhead cost (a) × (b) .............................. Total fixed overhead (see requirement 1) ......................... Total indirect manufacturing cost .....................................

$33,000 100,000 $133,000

The Foundational 15 (continued) 15. Direct materials per unit ........................................................ $6.00 Direct labour per unit ............................................................ 3.50 Variable manufacturing overhead per unit .............................. 1.50 Sales commissions 1.50 Variable administrative expense 0.75 Incremental manufacturing cost per unit ................................ $13.25

Solutions to Brief Exercises Brief Exercise 2-1(LO3 CC3) (10 minutes) The cost concept that best applies to Bill‘s response is the concept of opportunity cost. Bill‘s response of ―no free lunch‖ suggests that the cost of the lunch is the time foregone which he could have utilized in completing the report. For Bill, the alternatives are time required to complete the financial performance report and time required to attend the company lunch. If Bill attends the lunch he will have less time available to finish the report and if he stays to finish the report he would miss the company lunch. Brief Exercise 2-2(LO1 CC1) (15 minutes) Note to the instructor: A few of these costs may generate lively debate. For example, some may argue that the cost of advertising a U2 rock concert is a variable cost since the number of people who come to the rock concert depends on the amount of advertising. However, one can argue that if the price is within reason, any U2 rock concert in Vancouver will be sold out, and the function of advertising is simply to let people know the event will be happening. Moreover, while advertising may affect the number of people who ultimately buy tickets, the causation is in one direction. If more people buy tickets, the advertising costs don‘t go up.

Cost Behaviour Variable Fixed 1. The costs of advertising a BTS rock concert in Vancouver ………………………………………….. 2. The cost of leasing a CT-scan diagnostic machine at Copyright © 2023 McGraw Hill Ltd. All rights reserved.

Solutions Manual, Chapter 2

X X

the hospital in London ............................................................... 3. The costs of shipping Alexa to retail stores .................................... X 4. Property taxes on your local cinema .............................................. 5. The costs of synthetic materials used to make Reebok running shoes ........................................................................... X 6. The electrical costs of running a roller coaster at the West Edmonton Mall ................................................................. X 7. Depreciation on the Starbucks building in Halifax ...........................

Brief Exercise 2-3(LO3 CC3) (15 minutes) Item

Differential Cost

1. Cost of the old printing machine 2. The salary of the head of the Printing Department 3. The salary of the head of the Finance Department 4. Rent on the space occupied by the Printing department 5. The cost of maintaining the old printer 6. Benefits from a new state-ofthe-art scanner 7. Cost of electricity to run the printing machine

Opportunity Cost

Sunk Cost X

X X X

Note: The costs of the salaries of the heads of the Printing and the Finance Departments and the rent on the space occupied by Printing are neither differential costs, nor opportunity costs, nor sunk costs. These are costs that do not differ between the alternatives and are therefore irrelevant in the decision, but they are not sunk costs since they occur in the future. The opportunity cost of the foregone benefit from a new state-of-the-art scanner is not a differential cost in the decision to replace the old printer with a new printer, but if the decision were instead whether to acquire a scanner or a printer, this opportunity cost would also be a differential cost.

1. Monthly salary of the company‘s accountant: Administrative cost. 2. The cost of a fan installed in a computer: Direct Materials cost. 3. Rental on equipment used to assemble computers: Manufacturing Overhead 4. The cost of advertising in the local community newspaper: Marketing and Selling cost. 5. Monthly charge paid to an outside company for quality testing (20% of the computers assembled are sent for testing): Manufacturing Overhead 6. The wages of employees who assemble computers from components: Direct Labour cost. 7. The salary of the assembly shop‘s supervisor: Manufacturing Overhead. 8. Sales commissions paid to the company‘s salespeople: Marketing and Selling cost. 9. Rent on the facility: Manufacturing Overhead.

Solutions Manual, Chapter 2

Brief Exercise 2-5(LO4 CC7) (15 minutes)

Product (Inventoriable) Cost 1. Depreciation on salespersons‘ cars ................................................. 2. Rent on equipment used in the factory ........................................... X 3. Lubricants used for maintenance of factory equipment ................................................................................. X 4. Salaries of finished goods warehouse personnel .................................................................................. 5. Soap and paper towels used by factory workers at the end of a shift....................................................... X 6. Sales supervisors‘ salaries ............................................................. 7. Property taxes on the factory building ............................................ X 8. Materials used in boxing units of finished product for shipment overseas (units are not normally boxed) ................................................................... 9. Advertising outlays ........................................................................ 10. Workers‘ compensation insurance on factory employees...................................................................... X 11. Depreciation on chairs and tables in the administrative boardroom ........................................................... 12. The salary of the production quality supervisor for the company ........................................................ 13. Depreciation on a Learjet used by the company's executives................................................................. 14. Rent on rooms at a Florida resort for manufacturing conference .......................................................... X 15. Attractively designed box for packaging breakfast cereal ......................................................................... X

Period (Non-inventoriable) Cost X

X X

X X X

Brief Exercise 2-6(LO5 CC9, 10; LO6 CC 11) (15 minutes) Brides N Grooms Income Statement For the Month Ended XXXX Sales ........................................................................................... Cost of goods sold: Beginning merchandise inventory ................................................ $ 150,000 Add: Purchases .......................................................................... 950,000 Goods available for sale .............................................................. 1,100,000 Deduct: Ending merchandise inventory........................................ 200,000 Gross margin ................................................................................ Less operating expenses: Selling expense .......................................................................... 365,000 Administrative expense............................................................... 435,000 Net income ...................................................................................

$3,000,000

900,000 2,100,000

800,000 $1,300,000

Brief Exercise 2-7(LO6 CC11, 12) (15 minutes) Lompac Products Schedule of Cost of Goods Manufactured Direct materials: Beginning raw materials inventory .............................................. $340,000 Add: Purchases of raw materials ................................................. 870,000 Raw materials available for use ................................................... $1,210,000 Deduct: Ending raw materials inventory ...................................... 210,000 Raw materials used in production ............................................... Direct labour ................................................................................. Manufacturing overhead ................................................................ Total manufacturing costs ............................................................. Add: Beginning work in process inventory ...................................... Deduct: Ending work in process inventory ...................................... Cost of goods manufactured ..........................................................

$ 1,000,000 245,000 560,000 $1,805,000 150,000 $1,955,000 170,000 $ 1,785,000

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Solutions to Exercises Exercise 2-1(LO1 CC1; LO3 CC3; LO4 CC4, 5, 6, 7) (45 minutes)

By Behaviour

By Function

Product Cost Name of the Cost

Variable Cost

Fixed Cost

Direct Materials

Direct Labour

Rental revenue foregone, $75,000 per year ....................................................................... Direct materials cost, $60 per unit ........................................................................................... X X Rental cost of warehouse, $2,000 per month ...................................................................... X Rental cost of equipment, $25,000 per month .................................................................... X Direct labour cost, $80 per unit ...................................................... X X Depreciation of the annex space, $5,000 per year ............................................................... X Advertising cost, $250,000 per year .......................................................................................... X Supervisor's salary, $5,500 per month ....................................................................................... X Electricity for machines, $2.40 per unit ..................................................................................... X Shipping cost, $18 per unit ............................................................ X Copyright © 2023 McGraw Hill Ltd. All rights reserved. 16 Edition

Mfg. Overhead

By Relevance Period Cost Selling & Administr ative

Opportunity Cost

Sunk Cost

X X

X X X Introduction to Managerial Accounting, Seventh Canadian

Return earned on investments, $3,000 per year .........................................................................

Solutions Manual, Chapter 2

Exercise 2-2(LO1 CC1; LO3 CC3; LO4 CC7) (15 minutes) 1. 2. 3. 4. 5.

Product; variable Conversion Opportunity Prime Sunk

6. 7. 8. 9. 10.

Period; variable Product; period; fixed Product Period Fixed; product; conversion

Exercise 2-3(LO1 CC 1; LO2 CC2) (15 minutes)

Cost Item

Cost Behaviour Variable Fixed

To Quantity of Baked Goods Produced Direct Indirect

1. Accountant‘s salary ....................................................................... X 2. Building depreciation ..................................................................... X 3. Flour used in the making of croissants .................................................................................. X X 4. Bakery manager‘s salary ............................................................... X 5. Wages of bakers ........................................................................... X X 6. Rent of commercial ovens used in baking ........................................................................... X 7. Insurance on the building .............................................................. X

X X

Exercise 2-4(LO1 CC1; LO4 CC7) (30 minutes)

Cost Behaviour Variable Fixed

Cost Item

Selling and Administrative Cost

1. Apples processed and canned by Del Monte Corporation X 2. Advertising by a dental office ......................................................... X X 3. Shipping canned apples from a Del Monte plant to customers ..................................................... X* X 4. Insurance on IBM‘s manufacturing facilities .............................................................. X 5. Commissions paid to London Drugs salespersons .................................................................... X X 6. Steering wheels installed in BMWs ....................................................................................... X 7. Depreciation of factory lunchroom facilities at a General Electric plant ................................................................. X 8. Insurance on Samsung‘s corporate office ......................................................................... X 9. Salary of a supervisor overseeing production of circuit boards at HewlettPackard ..................................................................................... X 10. Hamburger buns in a Burger King outlet................................................................................. X

Product Cost X

X X

* This will likely be a semi-fixed cost because shipping costs will not vary by can but by a truckload of cans.

Solutions Manual, Chapter 2

Exercise 2-5(LO5 CC10; LO6 CC11, 12) (45 minutes) 1. Mason Company Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, beginning ............................................. $18,000 Add: Purchases of raw materials ................................................. 180,000 Raw materials available for use ................................................... 198,000 Deduct: Raw materials inventory, ending..................................... 12,500 Raw materials used in production ............................................... Direct labour ................................................................................. Manufacturing overhead: Indirect labour ........................................................................... 45,000 Maintenance, factory equipment ................................................. 6,000 Insurance, factory equipment ..................................................... 1,900 Rent, factory facilities ................................................................. 24,000 Supplies .................................................................................... 3,600 Depreciation, factory equipment ................................................. 4,500 Total overhead costs ..................................................................... Total manufacturing costs ............................................................. Add: Work in process, beginning .................................................... Deduct: Work in process, ending ................................................... Cost of goods manufactured ..........................................................

$185,500 70,000

85,000 340,500 10,300 350,800 15,150 $335,650

2. The cost of goods sold section of Mason Company‘s income statement: Finished goods inventory, beginning .............................................. Add: Cost of goods manufactured .................................................. Goods available for sale ................................................................. Deduct: Finished goods inventory, ending ...................................... Cost of goods sold ........................................................................

$ 18,100 335,650 353,750 23,000 $330,750

Exercise 2-6(LO4 CC8) (30 minutes) 1. a) Bolts of polyester purchased ......................................................... Bolts drawn from inventory ........................................................... Bolts remaining in inventory.......................................................... Cost per bolt ................................................................................ Cost in Raw Materials Inventory at June 30 ...................................

10,000 9,200 800 × $80 $ 64,000

b) Bolts of polyester used in production (9,200 – 200) Linens completed and transferred to Finished Goods (90% × 9,000) ...................................................................................... Linens still in Work in Process at June 30 ....................................... Cost per bolts .............................................................................. Cost in Work in Process Inventory at June 30 ................................

9,000 8,100 900 × $80 $ 72,000

c) Linens completed and transferred to Finished Goods (above) .......... Linens sold during the month (70% × 8,100) ................................ Linens still in Finished Goods at June 30 ........................................ Cost per bolts .............................................................................. Cost in Finished Goods Inventory at June 30..................................

8,100 5,670 2,430 × $80 $194,400

d) Linens sold during the month (above) ........................................... Cost per bolts .............................................................................. Cost in Cost of Goods Sold at April 30............................................

5,670 × $80 $453,600

e) Bolts used for customer samples ................................................... Cost per bolts .............................................................................. Cost in Selling Expense at June 30 ................................................

200 × $80 $ 16,000

2. a) Raw Materials Inventory—balance sheet b) Work in Process Inventory—balance sheet c) Finished Goods Inventory—balance sheet d) Cost of Goods Sold—income statement e) Selling Expense—income statement

Solutions Manual, Chapter 2

EXERCISE 2-7 (LO6 CC12) (15 minutes)

Less:

Direct material used = Direct labour costs = Manufacturing overhead = Total Manufacturing costs= Opening inventory of work in process = Ending inventory of work in process = Cost of goods manufactured =

$ 78,000 $ 15,000 $ 16,500 $ 109,500 $ 13,000 $ 2,000 $ 120,500

EXERCISE 2-8 (LO5 CC10; LO6 CC11, 12) (7 minutes) Cost of goods sold = Sales – Gross margin = $1,700,000 – (40% × $1,700,000) = $1,700,000 - $680,000 = $1,020,000 Note that Cost of Goods Sold =

Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory

Therefore, Beginning finished goods inventory =

Cost of goods sold – Cost of goods manufactured + Ending finished goods inventory

= $1,020,000 - $975,000 + 85,000 = $130,000

Solutions to Problems Problem 2-1 (LO1 CC1; LO4 CC4, 5, 7) (30 minutes)

By Behaviour

By Function

By Relevance Period Cost

Product Cost Variable Cost Name of the Cost

Fixed Cost

Direct Materials

Staci's present salary, $70,000/year ............................................................................. Building rent, $2,500/ month ....................................................................................... X Clay and glaze, $3.50/pot .............................................................. X X Wages of production workers, $12/pot ....................................................................... X Advertising, $2,600/month ............................................................ X Sales commission, $4/pot .............................................................. X Rent of production equipment, $1,300/month ............................................................................ X Legal and filing fees, $5,0001 ..................................................................................... X Rent of sales office, $1,250/month ............................................................................ X Phone for taking orders, X

Direct Labour

Mfg. Overhead

Selling & Adminis trative

Opportu nity Cost

Sunk Cost

X X

X X X

X X

Solutions Manual, Chapter 2

$40/month ................................................................................ Interest lost on savings account, $1,200/year ................................................................. 1

Not a fixed cost per se because they are not a recurring expense.

2. The $5,000 cost of incorporating the business is not a differential cost. Even though the cost was incurred to start the business, it is a sunk cost. Whether Staci produces pottery or stays in her present job, she will have incurred this cost.

Problem 2-2 (LO1 CC 1; LO2 CC2; LO4 CC4, 5, 6) (30 minutes) Note to the instructor: There may be several exceptions to the answers below. The purpose of this problem is to get the students to start thinking about cost behaviour and cost purposes; therefore, try to avoid lengthy discussions about how a particular cost is classified.

Variable or Fixed

Cost Item

Selling Cost

Administrative Cost

Manufacturing (Product) Cost Direct Indirect

1. Property taxes, corp. office ............................................................ F X 2. Boxes used for packaging detergent .................................................................................. V X 3. Salespersons‘ commissions ............................................................ V X 4. Production supervisor‘s salary ........................................................ F 5. Depreciation, executive automobiles ............................................................................... F X 6. Wages of workers assembling computers ................................................................................. V X 7. Packing supplies for out-ofprovince shipment...................................................................... V X 8. Insurance, finished goods warehouses ............................................................................... F X 9. Office computers .......................................................................... F X 10. Advertising costs ........................................................................... F X 11. ―Chips‖ used in producing calculators ................................................................................. V X 12. Shipping costs on merchandise sold ....................................................................... V X 13. Magazine subscriptions, factory lunchroom ...................................................................... F 14. Velcro in a garment factory ........................................................... V

X X

Solutions Manual, Chapter 2

Problem 2-2 (continued)

Cost Item

Variable or Fixed

Selling Cost

Administrative Cost

Manufacturing (Product) Cost Direct Indirect

15. Billing costs .................................................................................. V X* 16. Executive life insurance ................................................................. F X 17. Software used in textbook production ................................................................................. F 18. Fringe benefits, assembly line workers ..................................................................................... V X** 19. Yarn used in sweater production ................................................................................. V X 20. Wages of receptionist, executive offices ........................................................................ F X

* Could be administrative cost. ** Could be indirect cost.

Problem 2-3(LO1 CC1; LO2 CC2; LO4 CC4, 6) (60 minutes) 1.

Cost Behaviour Variable Fixed

Cost Item

Selling or Administrative Cost

Factory labour, direct .................................................................... $340,000 Advertising ................................................................................... $ 80,000 Factory supervision ....................................................................... 90,000 Property taxes, factory building...................................................... 14,500 Sales commissions ........................................................................ 160,000 Insurance, factory ......................................................................... 5,500 Depreciation, office equipment ...................................................... 24,000 Lease cost, factory equipment ....................................................... 16,000 Indirect materials, factory.............................................................. 26,000 Depreciation, factory building ........................................................ 18,000 General office supplies (billing) ...................................................... 8,000 General office salaries ................................................................... 80,000 Direct materials used (wood, bolts, etc.) ................................................................................. 214,000 Utilities, factory ............................................................................. 50,000 Total costs .................................................................................... $798,000 $328,000

Product Cost Direct Indirect $340,000

$ 80,000 $90,000 14,500 160,000 5,500 24,000 16,000 26,000 18,000 8,000 80,000 214,000 $352,000

$554,000

50,000 $220,000

Solutions Manual, Chapter 2

Problem 2-3 (continued) 2. Direct ........................................................................................... $554,000 Indirect ........................................................................................ 220,000 Total ............................................................................................ $774,000 $774,000 ÷ 4,000 sets = $193.50 per set 3. The average product cost per set would decrease. This is because the fixed costs would be spread over more units, causing the cost per unit to drop. 4. a) Yes. Ideally, the president would want to sell at the company‘s regular price (which may be labelled as ‗wishful thinking‘) or at the average production cost ($193.50) to avoid ―incurring a loss.‖ He might expect a figure even higher than the average production cost to cover a portion of the administrative costs. The brother-in-law probably will be thinking of ―cost‖ as including only direct materials used, or, at most, direct materials and direct labour. Direct materials alone would be only $85 per set, and direct materials and direct labour would be only $105. It is possible that the brother-in-law‘s pricing of materials at a building supply store may be more or less than $85. b) The term is relevant (or incremental) cost. The full, regular price of a set might not be appropriate here, since the company is operating only at 80% of its full capacity. Therefore, the president must ideally recover all the incremental costs that will be incurred in producing an additional patio set for the brother-in-law.

Problem 2-4 (LO4 CC7) (30 minutes) 1. The controller is correct in his viewpoint that the salary cost should be classified as a selling (marketing) cost. The duties described in the problem have nothing to do with the manufacture of a product, but rather deal with movement of finished units from the factory to distribution warehouses. As stated in the text, selling costs would include all costs necessary to secure customer orders and get the finished product into the hands of customers. Coordination of shipments of finished units from the factory to distribution warehouses fall in this category. 2. No, the president is not correct; from the point of view of the reported net income for the year, it does make a difference how the salary cost is classified. If the salary cost is classified as a selling expense, all of it will appear on the income statement as a period cost. However, if the salary cost is classified as a manufacturing (product) cost, then it will be added to Work in Process Inventory along with other manufacturing costs for the period. To the extent that goods are still in process at the end of the period, part of the salary cost will remain with these goods in the Work in Process Inventory account. Only that portion of the salary cost that has been assigned to finished units will leave the Work in Process Inventory account and be transferred into the Finished Goods Inventory account. In like manner, to the extent that goods are unsold at the end of the period, part of the salary cost will remain with these goods in the Finished Goods Inventory account. Only the portion of the salary that has been assigned to finished units that are sold during the period will appear on the income statement as an expense (part of Cost of Goods Sold) for the period.

Solutions Manual, Chapter 2

Problem 2-5 (LO5 CC10; LO6 CC11, 12) (45 minutes)

Case 1

Case 2

Case 3

Case 4

Direct materials ............................................................................ $ 14,500 $ 60,000 $ 5,000 $ 23,000 Direct labour ................................................................................. 19,000 * 23,000 7,000 14,000 Manufacturing overhead ................................................................ 25,000 44,000 8,000 * 19,000 Total manufacturing costs ............................................................. 58,500 127,000 * 20,000 56,000 * Beginning work in process inventory ................................................................................... 3,500 8,000 3,000 0 * Ending work in process inventory ................................................................................... (4,000) * (4,000) (4,000) * (8,500) Cost of goods manufactured .......................................................... $58,000 $131,000 * $19,000 $47,500 * Sales ............................................................................................ $80,000 $201,000 $36,000 $90,000 Beginning finished goods inventory ................................................................................... 10,000 12,500 3,000 * 12,000 * Cost of goods manufactured .......................................................... 58,000 * 131,000 * 19,000 * 47,500 Goods available for sale ................................................................. 68,000 * 143,500 * 22,000 * 59,500 Ending finished goods inventory ................................................................................... (4,000) * (11,500) (4,000) (3,500) Cost of goods sold ........................................................................ 64,000 * 132,000 * 18,000 56,000 * Gross margin ................................................................................ 16,000 69,000 * 18,000 34,000 * Operating expenses ...................................................................... (9,000) * (33,500) (13,000) * (25,000) * Net income ................................................................................... $ 4,000 $ 35,500 * $ 5,000 $ 9,000 * Missing data in the problem.

Problem 2-6 (LO5 CC9, 10; LO6 CC11, 12) (75 minutes) 1. GALLUP ENTERPRISES Schedule of Cost of Goods Manufactured For the Month Ended August 31 Direct materials: Raw materials inventory, August 1 .............................................. $ 51,000 Add: Purchases of raw materials ................................................. 402,000 Raw materials available for use ................................................... 453,000 Deduct: Raw materials inventory, August 31 ................................ 88,000 Raw materials used in production ............................................... Direct labour ................................................................................. Manufacturing overhead: Indirect labour cost .................................................................... 19,000 Utilities (70% × $45,000) ........................................................... 31,500 Depreciation, factory equipment ................................................. 34,000 Insurance (40% × $28,000) ....................................................... 11,200 Rent on facilities (60% × $140,000) ........................................... 84,000 Total overhead costs ..................................................................... Total manufacturing costs ............................................................. Add: Work in process inventory, August 1 ...................................... Deduct: Work in process inventory, August 31 ................................ Cost of goods manufactured ..........................................................

$365,000 120,000

179,700 664,700 28,000 692,700 34,000 $658,700

Solutions Manual, Chapter 2

Problem 2-6 (continued) 2. GALLUP ENTERPRISES Income Statement For the Month Ended August 31 Sales ............................................................................................ Less cost of goods sold: Finished goods inventory, August 1 ............................................. $ 50,000 Add: Cost of goods manufactured ............................................... 658,700 Goods available for sale .............................................................. 708,700 Deduct: Finished goods inventory, August 31 ..............................55,000 Gross margin ................................................................................ Less operating expenses: Utilities (30% × $45,000) ...........................................................13,500 Depreciation, sales equipment ....................................................18,000 Insurance (60% × $28,000) .......................................................16,800 Rent on facilities (40% × $140,000) ..........................................56,000 Selling and administrative salaries ...............................................38,000 Advertising ................................................................................95,000 Net income (loss) ..........................................................................

$920,000

653,700 266,300

237,300 $ 29,000

3. In preparing the income statement for August, Hilda did not (1) distinguish between product costs and period costs, and (2) recognize the changes in inventories between the beginning and end of the month. Once these errors have been corrected, the financial condition of the company looks much better (although net income is still just over 3% of sales ) and selling the company may not yet be advisable.

Problem 2-7 (LO1 CC1; LO5 CC10; LO6 CC11, 12) (75 minutes) 1. MERIWELL COMPANY Schedule of Cost of Goods Manufactured For the year just completed Direct materials: Raw materials inventory, beginning ............................................. $ 9,000 Add: Purchases of raw materials ................................................. 125,000 Raw materials available for use ................................................... 134,000 Deduct: Raw materials inventory, ending..................................... 6,000 Raw materials used in production ............................................... Direct labour ................................................................................. Manufacturing overhead: Depreciation, factory .................................................................. 27,000 Utilities, factory .......................................................................... 8,000 Maintenance, factory .................................................................. 40,000 Supplies, factory ........................................................................ 11,000 Insurance, factory ...................................................................... 4,000 Indirect labour ........................................................................... 15,000 Total overhead costs ..................................................................... Total manufacturing costs ............................................................. Add: Work in process inventory, beginning ..................................... Deduct: Work in process inventory, ending ..................................... Cost of goods manufactured ..........................................................

$128,000 70,000

105,000 303,000 17,000 320,000 30,000 $290,000

Solutions Manual, Chapter 2

Problem 2-7 (continued) 2. MERIWELL COMPANY Income Statement For the year just completed Sales ............................................................................................ Cost of goods sold: Finished goods inventory, beginning ........................................... $ 20,000 Add: Cost of goods manufactured ............................................... 290,000 Goods available for sale .............................................................. 310,000 Deduct: Finished goods inventory, ending ................................... 40,000 Gross margin ................................................................................ Less operating expenses: Selling expenses ........................................................................ 80,000 Administrative expenses ............................................................. 110,000 Net income ...................................................................................

$500,000

270,000 230,000

190,000 $ 40,000

3. Direct materials: $128,000 ÷ 10,000 units = $12.80 per unit. Factory Depreciation: $27,000 ÷ 10,000 units = $2.70 per unit. 4. Direct materials: Average cost per unit: $12.80 (unchanged) Total cost: 15,000 units × $12.80 per unit = $192,000. Factory Depreciation: Average cost per unit: $27,000 ÷ 15,000 units = $1.80 per unit. Total cost: $27,000 (unchanged) The average production cost per unit will decrease (see explanation below). 5. Average cost per unit for depreciation dropped from $2.70 to $1.80, because of the increase in production between the two years. Since fixed costs do not change in total as the activity level changes, they will decrease on a per unit basis as the activity level rises. The average cost per unit for direct materials remained the same because a direct material is variable cost which remains constant on a per-unit basis.

Problem 2-8 (LO1 CC1; LO5 CC9, 10; LO6 CC11, 12) (90 minutes) 1. SUPERIOR COMPANY Schedule of Cost of Goods Manufactured For the Year Ended December 31 Direct materials: Raw materials inventory, beginning ............................................. $ 30,000 Add: Purchases of raw materials ................................................. 390,000 * Raw materials available for use ................................................... 420,000 Deduct: Raw materials inventory, ending..................................... 10,000 Raw materials used in production ............................................... $410,000 * Direct labour ................................................................................. 73,000 Manufacturing overhead: Insurance, factory ...................................................................... 8,000 Utilities, factory .......................................................................... 65,000 Indirect labour ........................................................................... 60,000 Cleaning supplies, factory ........................................................... 7,000 Rent, factory building ................................................................. 90,000 Maintenance, factory .................................................................. 40,000 Total overhead costs ..................................................................... 270,000 Total manufacturing costs ............................................................. 753,000 (given) Add: Work in process inventory, beginning ..................................... 37,000 * 790,000 Deduct: Work in process inventory, ending ..................................... 20,000 Cost of goods manufactured .......................................................... $770,000 The cost of goods sold section of the income statement follows on the next page.

Solutions Manual, Chapter 2

Problem 2-8 (continued)

Finished goods inventory, beginning .............................................. Add: Cost of goods manufactured .................................................. Goods available for sale ................................................................ Deduct: Finished goods inventory, ending ...................................... Cost of goods sold ........................................................................

$ 20,000 770,000 * 790,000 * 50,000 $740,000 (given)

* These items must be computed by working backwards up through the statements. An effective way of doing this is to place the form and known balances on the chalkboard, and then to work toward the unknown figures. 2. Direct materials: $410,000 ÷ 50,000 units = $8.20 per unit. Rent, factory building: $90,000 ÷ 50,000 units = $1.80 per unit. 3.

Per Unit

Total

Direct materials ............................................................................ $8.20 (Same) $328,000 ** (Changed) Rent, factory building .................................................................... $ 2.25 * (Changed) $ 90,000 (Same) * $90,000 ÷ 40,000 units = $2.25 per unit. ** $8.20 × 40,000 units = $328,000. 4. The average cost per unit for rent increased from $1.80 to $2.25, because of the decrease in production between the two years. Since fixed costs do not change in total as the activity level changes, they will decrease on a per unit basis as the activity level rises. The average cost per unit for direct materials remained the same because direct materials is a variable cost which remains constant on a per-unit basis. The total change is in relation to amount of goods produced.

PROBLEM 2-9 (LO1 – CC1; LO2 – CC2; LO4 – CC5, CC6, CC7; LO5 – CC9) (40 minutes) 1.

Direct materials & components Direct production wages Production supervisory salaries Salaries paid to sales representatives Advertising Insurance Building rent

Behaviour VARIABLE FIXED $ 3,200,000 $ 1,448,000 $ 261,400 $ 464,000 $ 84,000 $ 675,300 $ 115,670 $ 258,640

Other salaries

$1,160,000

Honorarium to the members of the Board Production quality control Market research Depreciation Facilities management Legal Personnel department Utilities - production Utilities - other Customer service

MFG $3,200,000 $1,448,000 $ 261,400

Function SALES/MKT

$ 548,000 $ 675,300 $ 75,186 $181,048

$ 38,796

$ 40,484 $ 38,796

$ 580,000

$ 232,000

$348,000

$ 430,200 $ 78,390

$ 52,260 $ 346,200 $1,326,700 $ 884,230 $ 685,600 $196,500 $ 298,410 $ 554,190 $ 144,136 $ 216,204 $ 229,350 $ 688,050

ADMIN

$430,200 $ 130,650 $ 928,690 $353,692

$ 346,200 $ 265,340

$132,670 $530,538 $685,600 $196,500

$ 852,600

$5,862,286 $7,935,144 $8,011,266 $13,797,430 Note that the amounts are calculated using the percentage breakdowns given in the data.

$ 180,170 $ 917,400

$180,170

$ 3,203,206 $ 13,797,430

$2,582,958

Solutions Manual, Chapter 2

Problem 2-9 (continued) 2. Product costs (manufacturing costs from table in Part 1) = $8,011,266 Period costs (sales/marketing + administration from table in Part 1) = $3,203,206 + $2,582,958 = $5,786,164 Product costs are classified as direct and indirect as follows: Product costs

Direct

Direct materials & components

√

Direct production wages

√

Indirect

Production supervisory salaries

√

Insurance

√

Building rent

√

Other salaries

√

Production quality control

√

Depreciation

√

Facilities management

√

Utilities - production

√

Problem 2-9 (continued) 3. CRATER CORPORATION - NORTH AMERICAN DIVISION INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2022 Sales Revenue Less: Cost of goods sold Materials and components Production wages Production supervisory salaries Insurance Building rent Other salaries Production quality control Depreciation Facilities management Utilities - production Gross margin Less: Selling & administrative expenses Salaries paid to sales representatives Advertising Insurance Building rent Other salaries Honorarium paid to Board members Market research Depreciation Facilities management Legal Personnel department Utilities - other Customer service Net income

$23,200,000 $

3,200,000 1,448,000 261,400 75,186 181,048 580,000 130,650 928,690 353,692 852,600

8,011,266 $15,188,734

548,000 675,300 40,485 77,592 580,000 430,200 346,200 398,010 530,538 685,600 196,500 360,340 917,400

5,786,165 $ 9,402,569

Gross margin per unit = $15,188,734 ÷ 60,000 ≈ $253.15

Solutions Manual, Chapter 2

PROBLEM 2-10 (LO4 CC7; LO5 CC10) (30 minutes) 1. The income statement includes several conceptual errors including:    

The amount of purchases instead of direct materials used Inventories do not seem to have been considered in computing the cost of goods manufactured and goods sold Annual insurance amount included rather than a quarterly amount Format of the income statement does not follow the conventional classification of the cost of goods sold, gross margin and selling & administrative costs

2. RUSSELL MANUFACTURING COMPANY COST OF GOODS MANUFACTURED STATEMENT FOR THE QUARTER ENDING DECEMBER 31 2022 Direct materials: Beginning inventory

+ Purchases = Direct materials available for use -

Ending inventory

7,860 171,948

179,808 6,870

= Direct materials used

$ 172,938

Direct labour Overhead: Indirect materials Indirect labour Manufacturing utilities Facility rental Depreciation Annual insurance

160,072 73,692 106,714 49,400 72,000 38,100 40,000

Management salaries

232,800

612,706

Total manufacturing costs

$ 945,716

+ Beginning WIP inventory - Ending WIP inventory = Cost of goods manufactured

9,120 8,070 $ 946,766

Problem 2-10 (continued) Notes: 1. Purchase of direct materials 2. Indirect materials 3. Direct labour 4. Indirect labour 5. Facility rental 6. Depreciation 7. Management salaries

= $245,640 × 70% = $245,640 × 30% = $266,786 × 60% = $266,786 × 40% = $90,000 × 80% = $63,500 × 60% = $388,000 × 60%

3. RUSSELL MANUFACTURING COMPANY INCOME STATEMENT FOR THE QUARTER ENDING DECEMBER 31 2022

Sales Cost of goods sold:

$1,367,600

Beginning FG inventory

$ 7,420

+ Cost of goods manufactured

946,766

= Cost of goods available for sale

54,186

11,280

Ending FG inventory

= Cost of goods sold Gross margin Selling, general and administrative expenses: Advertising

942,906 $ 424,694 37,000

Administrative travel Facility rental Depreciation Sales commissions

27,600 18,000 25,400 41,000

Office utilities

22,400

Management salaries

155,200

Net income

326,600 $

Notes: 1. Facility rental 2. Depreciation 3. Management salaries

98,094

= $90,000 × 20% = $63,500 × 40% = $388,000 × 40%

Solutions Manual, Chapter 2

Problem 2-11 (LO4 CC5; LO5 CC 9, 10; LO6 CC11, 12) (20 minutes) 1.

SofTouch Corporation Income Statement For the Year Ended December 31, XXXX

Sales (332,000 dolls @ $24 per doll) Cost of goods sold (332,000 @ $12.50 per doll) 4,150,000 Gross margin Selling and administrative expenses: Commissions ($2.50 per doll) $830,000 Advertising 650,000 Administration 570,000 Net income

$7,968,000 3,818,000

2,050,000 $1,768,000

Note: The number of dolls sold is computed as:

Beginning finished goods inventory + Number of units produced - Ending finished goods inventory =

20,000 340,000 28,000 332,000

a. Prime cost ($2.25 + $0.50) b. Conversion cost ($0.50 + $2.50 + $7.25) c. Variable cost ($2.25 + $0.50 + $2.50 + 2.50)

$2.75 $10.25 $7.75

Comprehensive Problem (LO1 CC1; LO3 CC3; LO4 CC4, 5, 6, 7) (60 minutes) 1. Cost Classification Behaviour Variable Fixed

Cost Item Lost rental income Direct materials Direct labour Equipment rental Warehouse space rental Manufacturing facility (building) depreciation Production supervisor salary Other production costs Delivery costs Selling and administrative Annual return on investments foregone

Function Product Period

Relevance Opportunity Sunk √

√ √ √ √ √ √ √ √ √

√ √ √ √ √ √ √

√

√ √ √

Solutions Manual, Chapter 2

Comprehensive Problem (continued) 2. Product Cost (₹)

Per unit

Direct materials Direct labour Manufacturing overhead: Equipment rental (₹450,000 ’ 3,600 units) Manufacturing facility depreciation (₹400,500 ’ 3,600) Production supervisor salary (₹78,120 ’ 3,600) Other production costs

6,000.00 2,750.00 125.00 111.25 21.70 80.00

Total product costs per unit

337.95 9,087.95

3. Incremental Costs for 500 Additional Units (₹) Per unit Direct materials Direct labour Other production costs Delivery costs

6,000 2,750 80 520

Total costs per unit (₹)

9,350

Total costs for 500 units (₹)

2,805,000

Note that all the variable costs are incremental costs; however, fixed costs are assumed to remain constant within a certain relevant range. The only issue is that currently the capacity is 4,000 units and producing additional 500 units will result in a capacity utilization of 102.5% (4,100 ÷ 4,000 units). This in turn means that production is outside of the relevant range and may require the incurrence of additional fixed costs.

Thinking Analytically (LO3CC5, 7; LO5CC9, 10; LO6CC11, 12) (30 minutes) Schedule of Cost of Goods Manufactured KHAN MACHINES, INC. COST OF GOODS MANUFACTURED STATEMENT FOR THE YEAR ENDING DECEMBER 31 2022 Direct materials: Beginning inventory

+ Purchases

17,310,500

= Direct materials available for use

$17,346,500

Ending inventory

36,000

30,000

= Direct materials used

$17,316,500

+ Direct labour

12,375,000

+ Manufacturing overhead

18,562,500

= Total manufacturing costs

$48,254,000

+ Beginning WIP inventory - Ending WIP inventory = Cost of goods manufactured

36,000 30,000 $48,260,000

Notes: Computing Total Manufacturing Costs Cost of goods manufactured (given)

= $48,260,000

+ Ending WIP inventory

30,000

- Beginning WIP inventory

36,000

= Total manufacturing costs

= $48,254,000

Computing Manufacturing Overhead cost We are told that manufacturing overhead = 60% of conversion costs. Therefore, the remaining 40% must be direct labour cost (recall that conversion costs are made up of direct labour and manufacturing overhead). This means manufacturing overhead cost is 1.5 times the amount of direct labour.

Solutions Manual, Chapter 3

Thinking Analytically (continued) Therefore, overhead cost = $12,375,000 × 1.5 = $18,562,500 Computing Cost of Direct Materials Used Total manufacturing costs

= $48,254,000

- Direct labour

= $12,375,000

- Manufacturing overhead

= $18,562,500

= Direct materials used

= $17,316,500

Computing Cost of Direct Materials Purchased Direct materials used

= $17,316,500

+ Ending inventory

30,000

- Beginning inventory

36,000

= Direct materials purchased

= $17,310,000

KHAN MACHINES, INC. INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31 2022 Sales Cost of goods sold: Beginning FG inventory

$76,500,000 $

20,000

+ Cost of goods manufactured

48,260,000

= Cost of goods available for sale

48,280,000

Ending FG inventory

15,000

= Cost of goods sold

48,265,000

Gross margin

$28,235,000

$19,055,000

Selling, general and administrative expenses

Net income

$ 9,180,000

Thinking Analytically (Continued) Notes: Computing Net Income Net income

= 12% of sales revenues = 0.12 × $76,500,000 = $9,180,000

Computing SG & A Expenses Gross margin

= $28,235,000

= $ 9,180,000

Net income

= SG & A Expenses = $19,055,000

Solutions Manual, Chapter 3

Communicating in Practice (LO4 CC7, 8; LO5 CC9, 10; LO6 CC11, 12) (90 minutes) 1. Memorandum to president: Date: To: From: Subject:

Current date Brittany Patel, President Student Income Statement

I reviewed the income statement for Sun Power Communications, Inc. and noted that no distinction has been made between period expenses and product costs. Period expenses should be included on the income statement when incurred. However, product costs (that is, direct materials, direct labour, and manufacturing overhead) should be assigned to inventory (that is, capitalized or recorded as inventory on the balance sheet) when incurred and flow through to the income statement as cost of goods sold only when finished products are sold. All of the direct materials purchased and the direct labour and manufacturing overhead costs incurred during the period are included on the income statement that I reviewed for the quarter ended March 31. This treatment would be appropriate only if the inventory level does not change during the period (that is, the ending inventory is the same as the beginning inventory which is not the case in this question). As such, this income statement does not reflect the results of the company‘s operations and should be revised.

Communicating in Practice (continued) 2. SUN POWER COMMUNICATIONS, INC. Schedule of Cost of Goods Manufactured For the Quarter Ended March 31 Direct materials: Raw materials inventory, beginning ............................................. $ –0– Add: Purchases of raw materials ................................................. 660,000 Raw materials available for use ................................................... 660,000 Deduct: Raw materials inventory, ending..................................... 10,000 Raw materials used in production ............................................... Direct labour ................................................................................. Manufacturing overhead: Maintenance, production ............................................................ 96,000 Indirect labour ........................................................................... 160,000 Cleaning supplies, production ..................................................... 17,000 Rental cost, facilities (80% × $165,000) ...................................... 132,000 Insurance, production ................................................................ 28,000 Utilities (90% × $140,000) ......................................................... 126,000 Depreciation, production equipment ............................................ 180,000 Total overhead costs ..................................................................... Total manufacturing costs ............................................................. Add: Work in process inventory, beginning ..................................... Deduct: Work in process inventory, ending ..................................... Cost of goods manufactured ..........................................................

$650,000 120,000

739,000 1,509,000 –0– 1,509,000 50,000 $1,459,000

Solutions Manual, Chapter 3

Communicating in Practice (continued) 3. Before an income statement can be prepared, the cost of the 8,000 phones in the ending finished goods inventory must be determined. Altogether, the company produced 40,000 phones during the quarter; thus, the production cost per phone would be: Cost of goods manufactured

$1,459,000

Phones produced during the quarter

40,000 units

≈ $36.475 per unit

Since 8,000 phones (40,000 – 32,000 = 8,000) were in the finished goods inventory at the end of the quarter, the total cost of this inventory would be: 8,000 phones × $36.475 per phone = $291,800. With this figure and other data from the case, the company‘s income statement for the quarter can be prepared as follows: SUN POWER COMMUNUCATIONS, INC. Income Statement For the Quarter Ended March 31 Sales (32,000 phones) .................................................................. $1,920,000 Less cost of goods sold: Finished goods inventory, beginning ........................................... $ –0– Add: Cost of goods manufactured .............................................. 1,459,000 Goods available for sale ............................................................. 1,459,000 Deduct: Finished goods inventory, ending ................................... 291,800 1,167,200 Gross margin ................................................................................ 752,800 Less operating expenses: Selling and administrative salaries .............................................. 280,000 Advertising ................................................................................ 90,000 Rental cost, facilities (20% × $165,000) ..................................... 33,000 Depreciation, office equipment ................................................... 47,000 Utilities (10% × $140,000) ......................................................... 14,000 Travel, salespersons .................................................................. 80,000 544,000 Net income................................................................................... $ 208,800

Communicating in Practice (continued) 4. Memorandum to president: Date: To: From: Subject:

Current date Brittany Patel, President Student Insurance Claim

On April 3, 8,000 unsold phones were destroyed by fire. The insurance policy indicates that the company will be reimbursed for the cost of any finished phones destroyed or stolen. The key question is how ―cost‖ is defined in the insurance contract. Typically, insurance contracts limit reimbursement for losses to those costs that would normally be considered product costs—in other words, the direct materials, direct labour, and manufacturing overhead costs that were incurred to manufacture the units that were insured. The 8,000 unsold phones were in the company‘s ending finished goods inventory on March 31. As you know, the income statement for the quarter ended March 31 was recently revised. That income statement shows an ending finished goods inventory of $291,800. Accordingly, assuming cost is defined as set forth above the insurance company owes Sun Power Communications, Inc. $291,800 for the 8,000 phones that were destroyed. This amount is considerably less than the $384,000 that was computed by the company‘s accountant. The $384,000 figure is overstated for two reasons. First, it includes period costs (that is, selling and administrative expenses) as well as product costs. Period costs may not be included in inventory. Second, it includes some costs incurred during the period that were in the raw materials and work in process inventories on March 31. Those inventories were not destroyed and, as such, may not be part of the loss claimed.

Solutions Manual, Chapter 3

Ethics Challenge (LO4 CC7) (45 minutes) 1. A cost that is classified as a period cost will be recognized on the income statement as an expense in the current period. A cost that is classified as a product cost will be recognized on the income statement as an expense (i.e., cost of goods sold) only when the associated units of product are sold. If some units are unsold at the end of the period, the costs of those unsold units are treated as assets. Therefore, by reclassifying period costs as product costs, the company is able to carry forward in inventories some costs that would have been treated as current expenses. 2. The discussion below is divided into two parts—Gallant‘s actions to postpone expenditures and the actions to reclassify period costs as product costs. The decision to postpone expenditures is highly questionable. It is one thing to postpone expenditures due to a cash bind; it is quite another to postpone expenditures in order to hit a profit target. Postponing these expenditures may have the effect of ultimately increasing future costs and reducing future profits. If orders to the company‘s suppliers are changed, it may disrupt the suppliers‘ operations. The additional costs may be passed on to Gallant‘s company and may create ill-will and a feeling of mistrust. Postponing maintenance on equipment is particularly questionable. The result may be breakdowns, inefficient and/or unsafe operations, and a shortened life for the machinery. Interestingly, in a survey of 649 managers reported in Management Accounting, only 12% stated that it is unethical to defer expenses and thereby manipulate quarterly earnings. The proportion who felt it was unethical increased to 24% when it involved annual earnings. Another 41% said that deferring expenses is a questionable practice when it involved quarterly reports and 35% said this when annual reports were involved. Finally, 47% said that it is completely ethical to manipulate quarterly reports in this way and 41% gave the green light for annual reports. (See William J. Bruns, Jr. and Kenneth A. Merchant, ―The Dangerous Morality of Managing Earnings,‖ Management Accounting, August 1990, pp. 22-25) Gallant‘s decision to reclassify period costs is not ethical—assuming that there is no intention of disclosing in the financial reports this reclassification. Such a reclassification would be a violation of the principle of consistency in financial reporting and is a clear attempt to mislead readers of the financial reports. Although some may argue that the overall effect of Gallant‘s action will be a ―wash‖—that is, profits gained in this period will simply be taken from the next period—the trend of earnings will be affected. Hopefully, the auditors would discover any such attempt to manipulate annual earnings and would refuse to issue an unqualified opinion due to Copyright © 2023 McGraw Hill Ltd. All rights reserved. 52 Introduction to Managerial Accounting, Seventh Canadian Edition

the lack of consistency.

Solutions Manual, Chapter 3

Teamwork in Action (LO1 CC1) 1. A fixed cost is normally defined as a cost that remains constant, in total, for changes in activity within the relevant range. A variable cost is normally defined as a cost that varies, in total, in direct proportion to changes in the level of activity within the relevant range. 2. a) Fixed costs for a steel company consist of items such as factory rent or depreciation, insurance, and periodic equipment depreciation. Variable costs include items such as the cost of raw materials and certain supplies. Labour may or may not be a variable cost. The relevant measure of production is the volume of steel produced. As production of steel increases within the relevant range, total fixed costs and unit variable costs remain constant, while total variable costs increase and unit fixed costs decrease. b) Fixedcosts for a hospital include items such as property taxes, supervisory salaries, and insurance. Variable costs include supplies, drugs, and perhaps some nursing and other labour. A relevant measure of production might be the number of patients treated. As the number of patients treated increase within the relevant range, total fixed costs and unit variable costs remain constant, while total variable costs increase and unit fixed costs decrease. c) Fixed costs for a university include property taxes, salaries, and advertising. Variable costs depend on the measure of activity. If the measure of activity is students enrolled, the variable costs are limited to the costs of handouts and other supplies (such as in science laboratories). As the number of students enrolled increases within the relevant range, total fixed costs and unit variable costs remain constant, while total variable costs increase and unit fixed costs decrease. d) Fixed costs for an auto manufacturer would include items such as factory rent or depreciation, insurance, supervisory salaries, and periodic equipment depreciation. Variable costs include raw materials and perhaps some labour cost. A relevant measure of productive activity would be the number of cars produced. As the number of cars produced increases within the relevant range, total fixed costs and unit variable costs remain constant, while total variable costs increase and unit fixed costs decrease.

Teamwork in Action (continued) 3. As the volume of steel produced increases within the relevant range, total fixed costs remain the same; the fixed cost per unit decreases; total variable costs increase; the variable cost per unit remains the same; total cost increases (due to the increase in total variable cost); and the average unit cost declines (due to the presence of fixed costs).

550

Cost

Total fixed costs Total variable costs Total costs

0 0

1000 Tonnes produced

Solutions Manual, Chapter 3

Teamwork in Action (continued)

5. 2.50 2.25 2.00

Cost per unit

1.75 1.50 Fixed costs per unit

1.25

Variable costs per unit

1.00

Total costs per unit

0.75 0.50 0.25 0

1000 Tonnes produced

6. Once capacity has been set, total costs increase with increases in demand due to the presence of variable costs while per unit costs drop due to the presence of fixed costs.

Chapter 3 Systems Design: Job-Order Costing Solutions to Questions 3-1 By definition, overhead consists of costs that be cannot practically (or cost effectively) traced to cost objects (such as products, processes, or jobs) . Therefore, overhead costs must be allocated rather than traced if they are to be assigned to cost objects.

3-2 Job-order costing is used in situations where there are many different products or services offered each period. Each product (or job) is different from all others and requires separate costing. Process costing is used in situations where a single, homogeneous

product, such as cement, bricks, or gasoline, is produced for long periods at a time. 3-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials cost traced to the job, direct labour cost traced to the job, and manufacturing overhead cost applied to the job. When a job is completed, the job cost sheet is used to compute the cost per completed unit. The job cost sheet is also a control document for: (1) determining how many units have been produced and determining the cost of these units; and (2) determining how many units are still in inventory at the end of a period and determining the cost of these units on the balance sheet. 3-4 A predetermined overhead rate is used to apply overhead to products and services (jobs). It is determined before a period begins and is computed by dividing the estimated total manufacturing overhead for the period by the estimated total units in the allocation base. Thereafter, overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base that is incurred for each job. The most common allocation bases are direct labour hours or direct machine hours. 3-5 A sales order is issued after a firm agreement has been reached with a customer on matters relating to quantities, prices, and shipment dates for goods. This sales order then forms the basis for the production department to issue a production order. The production order summarizes the specifications of the goods involved, and forms the basis for the accounting department‘s preparation of a job cost sheet. The job cost sheet, in turn, is used to summarize the various production costs incurred in completing the job. These costs are entered on the job cost sheet by means of materials requisition forms, direct labour time tickets, and allocations of overhead via the predetermined overhead rate. 3-6 Many production costs cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. Therefore, in order to assign to products, such costs must be allocated to the products in some manner. Examples of such costs would include utilities, maintenance on machines, and depreciation of the factory building. These costs are indirect production costs, as explained in Chapter 1.

3-7 A firm will not know its actual manufacturing overhead costs until a period is over. Thus, if actual costs were used to cost products, it would be necessary either (1) to wait until the period is over to add overhead cost to jobs, or (2) to simply add overhead cost to jobs as the overhead cost was incurred day by day. If the manager waits until after the period is over to add overhead cost to jobs, then cost data will not be available during the period. If the manager simply adds overhead cost to jobs as the overhead cost is incurred, then unit costs may fluctuate from month to month. This is because overhead cost tends to be incurred somewhat evenly from month to month (due to the presence of fixed costs), whereas production activity often fluctuates. For these reasons, most firms use predetermined overhead rates to apply overhead cost to jobs. 3-8 An allocation base should be a cost driver of the overhead cost; that is, the base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and their costs will be distorted. 3-9 Assigning overhead costs to jobs does not ensure that there will be a profit. The units produced may not be sold and if they are sold, they may not in fact be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered and profits are earned only by selling to customers at prices that are higher than the cost—not by allocating costs. 3-10 The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred, since the predetermined overhead rate figure which is used in applying overhead is based on estimates. 3-11 Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process inventory during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period. Under-applied or overapplied overhead is disposed of by either closing out the amount to Cost of Goods Sold or allocating the amount among Cost of Goods Sold and ending inventories in proportion to the applied overhead

Solutions Manual, Chapter 3

in each account. The adjustment for underapplied overhead increases Cost of Goods Sold (and ending inventories), whereas the adjustment for overapplied overhead decreases Cost of Goods Sold (and ending inventories). 3-12 Overhead may be underapplied for a number of reasons. One reason might be that there was inadequate or lack of proper control over overhead spending and as a result, actual overhead costs exceeded estimated overhead costs. Another reason might be that some of the overhead is fixed and the actual quantity of the allocation base was less than estimated at the beginning of the period. The amount of overhead applied to Work in Process will decline in proportion to a decline in the allocation base. However, if there is any fixed cost in the overhead, it will not decline as much as the volume declines and hence overhead will be underapplied. 3-13 Underapplied overhead is added to cost of goods sold since underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold is understated. Likewise, overapplied overhead is deducted from cost of goods sold. 3-14 Yes, overhead should be applied in order to properly value the Work in Process inventory at year-end. Since $6,000 of overhead was applied to Job A on the basis of $8,000 of direct labour cost, the company‘s predetermined

overhead rate must be 75% of direct labour cost. Thus, $3,000 of overhead should be applied to Job B at year-end: $4,000 direct labour cost  75% = $3,000 overhead costs applied. 3-15 Direct material .................................................. $10,000 Direct labour..................................................... 12,000 Manufacturing overhead: $12,000 × 125% ........................................... 15,000 Total manufacturing cost ................................... $37,000 Cost per unit: $37,000 ÷ 1,000 units ................. $37 3-16 A plantwide overhead rate is a single overhead rate used throughout all departments of a company. Some companies use multiple overhead rates, rather than plantwide rates, to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another department is labour intensive. 3-17 When direct labour is replaced by automated equipment, overhead increases and direct labour decreases. This results in an increase in the predetermined overhead rate if it is based on direct labour. In such situations, a more representative allocation base like machine hours must be used.

The Foundational 15 (LO2 – CC4; LO3 – CC5; LO4 – CC8; LO5 – CC 10; LO6 – CC13; LO7 – CC14; LO8 – CC18)

3-1.

The estimated total manufacturing overhead cost is computed as follows: Y = $15,000 + ($1.80 per DLH) ˣ (3,000 DLHs)

Estimated fixed manufacturing overhead ................................ Estimated variable manufacturing overhead: $1.80 per DLH × 3,000 DLHs ............................................. Estimated total manufacturing overhead cost .........................

$15,000 5,400 $20,400

The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) ............... Estimated total direct labour hours (DLHs) (b) ........... Predetermined overhead rate (a) ÷ (b) ...................... 3-2.

$20,400 3,000 DLHs $6.80 per DLH

The manufacturing overhead applied to Jobs A and Bis computed as follows:

Actual direct labor hours worked (a) .......................... Predetermined overhead rate per DLH (b) .................. Manufacturing overhead applied (a) × (b) ..................

Job A

Job B

1,600 $6.80 $10,880

600 $6.80 $4,080

Foundational Fifteen (continued) 3-3. The direct labour hourly wage rate can be computed by focusing on either Job A or Job B as follows:

Direct labour cost (a) ................................................ Actual direct labour hours worked (b)......................... Direct labour hourly wage rate (a) ÷ (b).....................

Job A

Job B

$24,000 1,600 $15.00

$9,000 600 $15.00

3-4. Job A‘s unit product cost and Job Bs assigned manufacturing costs are computed as follows: Total manufacturing cost assigned to Job A: Direct materials ......................................... Direct labour ............................................. Manufacturing overhead applied ($76.80 per DLH × 1,600 DLHs).............. Total manufacturing cost............................

$15,000 24,000 10,880 $49,880

Unit product cost for Job A: Total manufacturing cost (a) ...................... Number of units in the job (b) .................... Unit product cost (a) ÷ (b) .........................

$49,880 20 $2,494

Introduction to Managerial Accounting, Seventh Canadian edition

Foundational Fifteen (continued) Total manufacturing cost assigned to Job B: Direct materials ......................................... Direct labour ............................................. Manufacturing overhead applied ($76.80 per DLH × 600 DLHs) ................ Total manufacturing cost............................ 3-5.

$ 10,000 9,000 4,080 $23,080

The journal entries are recorded as follows: Raw Materials............................... 26,000 Accounts Payable ............... 26,000 Work in Process............................ 25,000 Raw Materials..................... 25,000

3-6.

The journal entry is recorded as follows: Work in Process............................ 33,000 Wages Payable ................... 33,000

3-7.

The journal entry is recorded as follows:

Work in Process ................................................ 14,960 Manufacturing Overhead ................................

14,960

Foundational Fifteen (continued) 3-8.

The Schedule of Cost of Goods Manufactured is as follows:

Direct materials: Raw materials inventory, beginning .......................... Add: Purchases of raw materials ............................... Total raw materials available .................................... Deduct: Raw materials inventory, ending .................. Raw materials used in production ............................. Direct labour ................................................................ Manufacturing overhead applied to work in process inventory ................................................................... Total manufacturing costs ............................................. Add: Beginning work in process inventory ......................

$ 0 26,000 6,000 1,000 $25,000 33,000 14,960 72,960 0 72,960 23,080 $49,880

Deduct: Ending work in process inventory ...................... Cost of goods manufactured .......................................... 3-9.

The journal entry is recorded as follows:

Finished Goods ................................................. 49,880 Work in Process ............................................. 3-10.

49,880

The completed T-account is as follows: Work in Process Beg. Bal.

(a) (b) (c) (d)

(a)

25,000

(b)

33,000

(c)

14,960 (d)

49,880

End. Bal. 23,080 Raw Materials used in production Direct Labour Manufacturing Overhead applied to work in process inventory Cost of goods manufactured

Introduction to Managerial Accounting, Seventh Canadian edition

Foundational Fifteen (continued) 3-11. The Schedule of Cost of Goods Sold is as follows: Finished goods inventory, beginning .............................. Add: Cost of goods manufactured .................................. Cost of goods available for sale ..................................... Deduct: Finished goods inventory, ending ...................... Unadjusted cost of goods sold .......................................

0 49,880 49,880 0 $49,880

3-12. The journal entry is recorded as follows: Cost of Goods Sold ........................................... 49,880 Finished Goods ..............................................

49,880

3-13. The amount of overapplied overhead is computed as follows: Actual direct labour-hours (a) ............................... Predetermined overhead rate (b) .......................... Manufacturing overhead applied (a) × (b) .............

2,200 $6.80 $14,960

Actual manufacturing overhead ............................ Deduct: Manufacturing overhead applied .............. Overapplied overhead ..........................................

$14,000 14,960 $ 960

3-14. The journal entry is recorded as follows: Manufacturing Overhead ................................... 960 Cost of Goods Sold ........................................

960

Foundational Fifteen (continued) 3-15. The income statement is as follows: Sales ($3,000 x 20) .................................................... Cost of goods sold ($49,880 - $960) ............................ Gross margin .............................................................. Selling and administrative expenses ............................. Net operating income ..................................................

$60,000 48,920 11,080 10,000 $ 1,080

Solutions to Brief Exercises Brief Exercise 3-1 (15 minutes) (LO1 – CC1) 1. Job-order costing 7. Job-order costing* 2. Job-order costing 8. Process costing* 3. Job-order costing 9. Process costing 4. Process costing 10. Process costing* 5. Job-order costing 11. Job-order costing 6. Process costing costing 12. Process costing * Some of the companies listed might use either a job-order or a process costing system, depending on how operations are carried out. For example, a chemical manufacturer would typically operate with a process costing system, but a job-order costing system could be employed if products were manufactured in relatively small batches. The same thing might be true of the tire manufacturing plant in item ―10.‖

Introduction to Managerial Accounting, Seventh Canadian edition

Brief Exercise 3-2 (15 minutes) (LO2 – CC5)

1. These costs would have been recorded on five different documents: the two materials requisition forms pertaining to Job A220 (#5673 and #5678), the time ticket for Peter Unser, the time ticket for Emma Chan, and the job cost sheet for Job A220. 2. The costs would have been recorded as follows: Materials requisition form (#5673):

Blanks

Quantity

Unit cost

Total cost

$25.00

$1,000

Materials requisition form (#5678):

Quantity

Unit cost

Total cost

420

$2.00

$840

Nibs

Time ticket for Peter Unser:

Started

Ended

11:00 AM 3:00 PM

Time Consumed

Rate

Amount

Job Number

4.00

$13.00

$52.00

A220

Brief Exercise 3-2 (continued) Time ticket for Emma Chan:

Started

Ended

Time Consumed

8:00 AM

12:00 PM

4:00

Rate

Amount

Job Number

$14.00

$56.000

A220

Partial Job Cost Sheet for Job A220: Direct Materials

Direct Labour

Req. No.

Amount

Name

Hours

Amount

5673

$1,000.00

Unser

4.00

$52.00

5678

840.00

Chan

4.00

56.00

$1,840.00

$108.00

Introduction to Managerial Accounting, Seventh Canadian edition

Brief Exercise 3-3 (10 minutes) (LO3 – CC5) The predetermined overhead rate is computed as follows: Estimated manufacturing overhead cost Estimated direct labour hours

$600,000 40,000

$15 per DLH

Brief Exercise 3-4 (15 minutes) (LO4 CC8) a.

Raw Materials .............................................................................. 190,000 Accounts Payable ...................................................................... 190,000

b. Work in Process ........................................................................... 170,000 Manufacturing Overhead ............................................................... 12,000 Raw Materials ........................................................................... 182,000 c.

Work in Process ........................................................................... 207,000 Manufacturing Overhead ............................................................... 23,000 Wages Payable .......................................................................... 230,000

d. Manufacturing Overhead ............................................................... 375,000 Various Accounts ....................................................................... 375,000

Brief Exercise 3-5 (10 minutes) (LO5 – CC10) Actual direct labour-hours.............................................................. 18,700 × Predetermined overhead rate ..................................................... $14.00 = Manufacturing overhead applied ................................................. $261,800

Brief Exercise 3-6 (30 minutes) (LO6 – CC12; LO7 – CC14) Parts 1 and 2. Cash 124,000 156,000 128,000

(b) (c) (e)

(b) (c) (d)

Work in Process 98,000 142,000 140,000 380,000 380,000 Manufacturing Overhead 14,000 140,000 14,000 128,000 16,000 16,000

(a) (c) (d)

(a)

(f)

Raw Materials 124,000 112,000

(b)

Finished Goods 380,000 380,000 380,000

(f)

(e)

(f) (g)

Cost of Goods Sold 380,000 16,000 396,000

(g)

2. Cost of Goods Sold: $396,000

Introduction to Managerial Accounting, Seventh Canadian edition

Brief Exercise 3-7 (15 minutes) (LO7 – CC14) 1. Actual direct labour-hours ............................................................. 11,500 × Predetermined overhead rate ..................................................... $30.00 = Manufacturing overhead applied ................................................ $345,000 Less: Manufacturing overhead incurred .......................................... 356,500 Underapplied manufacturing overhead..................................... $11,500 2. Since manufacturing overhead is underapplied, the cost of goods sold would be increased by $11,500 and the gross margin would decrease by $11,500.

Solutions to Exercises Exercise 3-1 (30 minutes) (LO2 – CC4) 1. The predetermined overhead rate is computed as follows: Estimated manufacturing overhead cost Estimated direct labour cost

$637,000 $490,000

130

of direct labour cost

2. Direct materials =

$890 + $1,750 + $200 = $2,840

Direct labour =

$230 + $530 + $700 =

$1,460

Overhead =

$1,460× 130% =

$1,898

Introduction to Managerial Accounting, Seventh Canadian edition

Exercise 3-1 (continued) 3. Number

MT Q421-442

Department Description

Commercial Material testing

Direct Materials Req. No. Amount $ M-3316 890 $ M-3399 1,750 $ M-3407 200 $ 2,840

JOB COST SHEET Date initiated Date Completed Units Completed

Direct Labour Time-sheet Hours Amount $ L-4423 230 $ L-4437 530 $ L-4509 700 $ 1,460

Cost Summary Direct Materials $ 2,840 Direct Labour

$ 1,460

Overhead

$ 1,898

Total Cost

$ 6,198

Unit Cost

$ 6,198

DL cost $ 1,460

1-Dec-21 22-Dec-21 1

Overhead Rate Amount 130%

$ 1,898

Job Completion Status Date Progress to date 23-DecCompleted and shipped to 21 customer

Note to instructor: The completion nd shipping dates in the Job Cost Sheet are based on the fact that the last document listed in the table is 22nd December. Similarly the initiation date is based on the date of the first document (2nd December).

Exercise 3-2 (30 minutes) (LO3 – CC5) 1. Since $247,000 of studio overhead was applied to Work in Process on the basis of $190,000 of direct staff costs, the apparent predetermined overhead rate is 130% of direct staff costs incurred:

Studio overhead applied

$247,000

Direct staff costs incurred

$190,000

1.30

2. The Great Lakes Gardens Project is the only job remaining in Work in Process at the end of the month; therefore, the entire $57,000* balance in the Work in Process account at that point must apply to it. Recognizing that the predetermined overhead rate is 130% of direct staff costs, the following computation can be made: Total cost in the Labrador Gardens Project ..................................... $57,000 Less: Direct staff costs .......................................................................... $ 5,000 Studio overhead cost ($4,000 × 130%) ................................... 6,500 11,500 Costs of subcontracted work ......................................................... $45,500 With this information, we can now complete the job cost sheet for the Labrador Gardens Project: Costs of subcontracted work ......................................................... $45,500 Direct staff costs .......................................................................... 5,000 Studio overhead ........................................................................... 6,500 Total cost to January 31 ............................................................... $57,000

* [$520,000 + $190,000 + $247,000 - $900,000]

Introduction to Managerial Accounting, Seventh Canadian edition

Exercise 3-3 (30 minutes) (LO3 – CC5) 1. The costing problem does, indeed, lie with manufacturing overhead cost, as suggested. Since manufacturing overhead is mostly fixed, the cost per unit increases as the level of production decreases. The problem can be ―solved‖ by use of predetermined overhead rates, which should be based on expected activity for the entire year. Many students will use units of product in computing the predetermined overhead rate, as follows: Estimated manufacturing overhead cost

$1,040,000

Estimated units to be produced

200,000 units

$5.20 per unit.

The predetermined overhead rate could also be set on the basis of either direct labour cost or direct materials cost. The computations are: Estimated manufacturing overhead cost Estimated direct labour cost Estimated manufacturing overhead cost Estimated direct materials cost

$1,040,000 $500,000 $1,040,000 $650,000

208 of direct labour cost. 160 of direct materials cost.

Exercise 3-3 (continued) 2. Using a predetermined overhead rate based on units produced, the unit product costs would be:

First

Quarter Second Third

Direct materials ............................................................................ $130,000 $260,000 $ 65,000 Direct labour ................................................................................ 100,000 200,000 50,000 Manufacturing overhead: Applied at $5.20 per unit, 208% of direct labour cost or 160% of direct materials cost .......................................................................................... 208,000 416,000 104,000 Total cost ..................................................................................... $438,000 $876,000 $219,000 Number of units produced ............................................................. 40,000 80,000 20,000 Unit product cost .......................................................................... $10.95 $10.95 $10.95

Fourth $195,000 150,000

312,000 $657,000 60,000 $10.95

Introduction to Managerial Accounting, Seventh Canadian edition

Exercise 3-4 (30 minutes) (LO3 – CC5; LO4 – CC8; LO5 – CC10; LO6 –CC12) 1.

a. Raw Materials Inventory Accounts Payable

400,000

b. Work in Process Manufacturing Overhead Raw Materials Inventory

228,000 62,000

c. Work in Process Manufacturing Overhead Salaries and Wages Payable

120,000 80,000

d. Manufacturing Overhead Accumulated Depreciation

80,000

e. Manufacturing Overhead Accounts Payable

140,000

378,000

Work in Process Manufacturing Overhead

400,000

290,000

200,000

80,000

140,000

378,000

[ 30,000 MH × $12.60 per MH = $378,000. ] g. Finished Goods Work in Process

726,000

h. Cost of Goods Sold Finished Goods Accounts Receivable Sales

680,000

726,000

680,000 850,000 850,000

[ $680,000 × 1.25 = $850,000. ]

Exercise 3-4 (Continued) 2. Manufacturing Overhead (b)

62,000

(c)

378,000

Work in Process Bal.

42,000

80,000

(b)

228,000

(d)

80,000

(c)

120,000

(e)

140,000

(f)

378,000

Bal.

42,000

16,000

(f)

726,000

(g)

(Overapplied overhead)

Exercise 3-5 (15 minutes) (LO4 – CC8; LO7 – CC14) 1. Item (a): Item (b): Item (c): Item (d): 2.

Actual manufacturing overhead costs for the year. Overhead cost applied to work in process for the year. Cost of goods manufactured for the year. Cost of goods sold for the year.

Cost of Goods Sold ....................................................................... 60,000 Manufacturing Overhead ............................................................ 60,000

Introduction to Managerial Accounting, Seventh Canadian edition

Exercise 3-6 (30 minutes) (LO6 – CC13; LO7 – CC14) 1. Actual manufacturing overhead costs ............................................. $683,000 Manufacturing overhead cost applied: 21,000 MH × $33 per MH................................................................. 693,000 Overapplied overhead cost ............................................................ $ 10,000 2. Carrie Corporation Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, beginning ............................................. $ 40,000 Add purchases of raw materials .................................................. 500,000 Raw materials available for use ................................................... 540,000 Deduct raw materials inventory, ending....................................... 30,000 Raw materials used in production ............................................... 510,000 Less indirect materials ................................................................ 34,000 $476,000 Direct labour ................................................................................. 85,000 Manufacturing overhead cost applied to work in process ..................................................................................... 693,000 Total manufacturing costs ............................................................. 1,254,000 Add: Work in process, beginning .................................................... 60,000 1,314,000 Deduct: Work in process, ending ................................................... 40,000 Cost of goods manufactured .......................................................... 1,274,000

Exercise 3-7 (30 minutes) (LO3 – CC5; LO7 – CC14) 1. Predetermined overhead rates: Company A: Estimated overhead cost Estimated direct labour hours

$548,000 $6.85 per DLH 80,000 DLHs

Company B: Estimated overhead cost Estimated machine hours

$520,000 $4.00 per MH 130,000 MHs

Company C: Estimated overhead cost Estimated direct materials cost

$448,000 $320,000

140 of direct materials cost

2. Actual overhead costs incurred ...................................................... $535,000 Overhead cost applied to Work in Process: 78,000* actual DLH × $6.85 per DLH ......................................... 534,300 Underapplied overhead cost .......................................................... $ 700 *16,000 hours + 24,000 hours + 38,000 hours = 78,000 hours

Introduction to Managerial Accounting, Seventh Canadian edition

Exercise 3-8 (15 minutes) (LO2 – CC4; LO3 – CC5; LO7 – CC14) 1. Budgeted labour hours = ($360,000 ÷ $24) =15,000 DLH Budgeted manufacturing overhead = Budgeted labour hours × predetermined overhead rate =15,000 × $20.00 = $300,000 2. Total Direct Cost = 15 × $75 = Total Indirect Cost = [15 × ($7,500 ÷ 150)] Total Job Cost

$ 1,125 $ 750 $ 1,875

3. The journal entry would be: Debit Manufacturing overhead Control ...................... $150 Credit Cost of Goods Sold ................ $150

Exercise 3-9 (20 minutes) (LO3 – CC5; LO5 – CC10; LO7 – CC14) 1.

Predetermined overhead rate Estimated overhead cost $4,000,000 = $20 per MH 200,000 MHs Estimated machine-hours Actual machine hours consumed during the year = $4,200,000 ÷ $20 = 210,000 (Note: actual machine hours are used to compute applied overhead; however the applied overhead amount is already given and equals $4,200,000 shown on the credit side of the T-account.)

Actual overhead is the amount shown on the debit side of the T-account $3,932,546.

Applied overhead is greater than actual overhead which means that the company overapplied overhead. The amount of overapplied overhead is $267,454 ($4,200,000 - $3,932,546).

Introduction to Managerial Accounting, Seventh Canadian edition

Exercise 3-10 (45 minutes) (LO2 – CC4; LO3 – CC5; LO4 – CC8; LO6 – CC12) 1. a. Raw Materials............................................................................... 452,000 Accounts Payable ...................................................................... 452,000 b. Work in Process............................................................................ 351,000 Manufacturing Overhead ............................................................... 39,000 Raw Materials............................................................................ 390,000 c. Work in Process............................................................................ 72,000 Manufacturing Overhead ............................................................... 108,000 Wages and Salaries Payable ....................................................... 180,000 d. Manufacturing Overhead ............................................................... 175,000 Accumulated Depreciation .......................................................... 175,000 e. Manufacturing Overhead ............................................................... 92,000 Accounts Payable ...................................................................... 92,000 f. Work in Process............................................................................ 420,000 Manufacturing Overhead ............................................................ 420,000 Estimated overhead cost Estimated machine-hours

$5,600,000 $28 per MH 200,000 MHs

15,000 MH × $28 per MH = $420,000.

Exercise 3-10 (continued) 2. (b) (c) (d) (e)

Manufacturing Overhead 39,000 420,000 108,000 175,000 92,000

(f)

(b) (c) (f)

Work in Process 351,000 72,000 420,000

3. The cost of the completed job would be $843,000 as shown in the Work in Process T-account above. The entry would be: Finished Goods ............................................................................ 843,000 Work in Process ........................................................................ 843,000 4. The cost per unit on the job cost sheet would be: $843,000 ÷ 12,000 units = $70.25 per unit.

Introduction to Managerial Accounting, Seventh Canadian edition

Exercise 3 -11 (20 minutes) (LO 7 – CC14) 1.

Overapplied. A credit balance in the Manufacturing Overhead Control T-account means that actual overhead is less than applied overhead.

In order to compute the actual overhead amount we must first compute applied overhead. Applied overhead

= $25.00 × 177,000 machine hours = $4,425,000

Actual overhead 3.

= $4,425,000 - $183,550 = $4,608,550

Adjusting the overapplied overhead amount to COGS will result in a credit to the COGS account. This, in turn, will increase gross margin and net income.

Solutions to Problems

Problem 3-1 (15 minutes) (LO2 – CC4; LO3 – CC5) 1. Overhead allocation rate Estimated overhead cost = Estimated direct labour hours

$8,500,000 500,000 MHs

$17 per DLH

Overhead applied to the three jobs: School

= 65,000 DLH × $17.00 = $11,105,000

Residential

= 38,000DLH × $17.00 = $ 646,000

Cinema

= 19,000 DLH × $17.00 = $ 323,000

Direct materials Direct labour* Overhead Total job cost

School $ 840,000 1,326,000 1,105,000 $3,271,000

Residential $1,400,000 775,200 646,000 $2,821,000

Cinema $1,475,000 387,600 323,000 $2,185,600

*Direct labour is calculated by multiplying the direct labour hours required for each job by the labour rate of $20.40 per DLH, which is computed as $10,200,000 ÷ 500,000 DLH. As an example, the direct labour cost for School ($1,326,000) is computed as 65,000 DLH × $20.40 per DLH.

Introduction to Managerial Accounting, Seventh Canadian edition

Problem 3-2 (30 minutes) (LO3 – CC5, 7; LO7 – CC17) 1. Cutting Department: Predetermined overhead rate = Estimated overhead cost Estimated machine-hours Finishing Department: Predetermined overhead rate = Estimated overhead cost Estimated direct labour cost

$405,000 $9 per MH 45,000 MHs

$520,000 $325,000

160

of direct labour cost

Overhead Applied

Cutting Department: 80 MHs × $9.00 per MH ........................... $ 720.00 Finishing Department: $320 × 160% ...................................... 512.00 Total overhead cost applied ....................................................... $1,1232.00

3. Yes; if some jobs required a large amount of machine time and little labour cost, they would be charged substantially less overhead cost if a plantwide rate based on direct labour cost were being used. It appears, for example, that this would be true of Job 203 which required considerable machine time to complete, but required only a small amount of labour cost.

Problem 3-3 (45 minutes) (LO3 – CC6, 7; LO4 – CC11; LO5 – CC14; LO6 – CC16; LO7 – CC18, 19) 1. Predetermined overhead rate =

Estimated overhead cost Estimated direct labour hours

$192,000 $24 per DLH 8,000 DLH

2. The amount of overhead cost applied to Work in Process for the year would be: 7,500 direct labour hours × $24 per machine-hour = $180,000. This amount is shown in entry (a) below: Manufacturing Overhead (Maintenance) 19,000 180,000 (a) (Indirect materials) 6,000 (Indirect labour) 60,000 (Utilities) 30,000 (Insurance) 7,000 (Depreciation) 54,000 (Property taxes) 8,000 Balance 4,000

(Direct materials) (Direct labour) (Overhead) (a)

Work in Process 710,000 90,000 180,000

Introduction to Managerial Accounting, Seventh Canadian edition

Problem 3-3 (continued) 3. Overhead is underapplied by $4,000 for the year, as shown in the Manufacturing Overhead account above. The entry to close out this balance to Cost of Goods Sold would be: Cost of Goods Sold ....................................................................... 4,000 Manufacturing Overhead ............................................................ 4,000

4. When overhead is applied using a predetermined rate based on direct labour hours, it is assumed that overhead cost is proportional to direct labour-hours. So when the actual direct labour-hours turn out to be 7,500, the costing system assumes that the overhead will be 7,500 direct labour-hours × $24 per direct labour-hour, or $180,000. This is a drop of $12,000 from the initial estimated manufacturing overhead cost of $192,000. However, the actual manufacturing overhead did not drop by this much. The actual manufacturing overhead was $184,000—a drop of $8,000 from the estimate. The manufacturing overhead did not decline by the full $12,000 because of the existence of fixed costs and/or because overhead spending was not under control. These issues will be covered in more detail in later chapters.

Problem 3-4 (45 minutes) (LO3 – CC5; LO5 – CC10; LO6 CC12; LO7 – CC14; LO8 – CC18) 1. The transactions will be posted to T-accounts as follows: Beginning inventory Costs added during the quarter Direct materials Direct professional labour Applied overhead

Jobs in Process Control 315,464 $ 3,320,949 Transferred to Cost of jobs billed

$ $ $

149,580 1,380,770 1,943,669

468,535

Cost of Jobs Billed 3,320,949 $ 3,320,949 Transferred to income statement

Direct professional labour - consulting Direct professional labour - design

Direct Professional Labour Control $ 604,540 $ 1,380,770 Transferred to Jobs-in-Process $ 776,230

Applied overhead - consulting support Applied overhead - design support

$ $

Support overhead allocated 1,027,718 $ 1,943,669 Transferred to Jobs-in-Process 915,951

$ $

Support overhead Control 982,110 $ 1,943,669 Applied overhead 917,560

Consulting support incurred Design support incurred

$ Cash Control $ $ $

43,999 overapplied overhead

149,580 Direct materials 1,380,770 Direct professional labour 1,899,670 Overhead incurred

Introduction to Managerial Accounting, Seventh Canadian edition

Problem 3-4 (continued) The preliminary computations for determining the above amounts are as follows: POHR (consulting support) POHR (design support)

170% of direct professional labour - consulting 118% of direct professional labour - design Amounts Beginning Jobs Ending Jobs in assigned to JIP in Process (JIP) Process (JIP) in Q3

Direct materials Direct professional labour - Consulting Direct professional labour - Design Applied overhead - Consulting support Applied overhead - Design support

$ $ $ $ $

22,460 108,520 184,484 -

$ $ $ $ $

149,580 604,540 776,230 1,027,718 915,951

$ $ $ $ $

36,764 198,060 233,711

Total amounts assigned

315,464

3,474,019

468,535

Notes: Pre-determined overhead rates (POHRs) are computed as follows: Predetermined overhead rate (Consulting)= Estimated overhead cost $2,875,040 170 Estimated consulting professional labour cost $1,691,200 Predetermined overhead rate (Design)= Estimated overhead cost $2,124,000 118 Estimated design professional labour cost $1,800,000

Problem 3-4 (continued) Applied overhead is calculated as follows: Assigned to Assigned to Beginning Jobs-in-Process Jobs-in-Process (Quarter 3) (Quarter 3) 170% × $184,484 Applied $108520 Consulting 170% × $1,027,718 Support $604,540 170% × $0 118% × $0 $0 118% × Applied Design $776,230 $915,951 Support 118% × $198,060 Total $184,484 $1,943,669

Assigned to Ending Jobs-inProcess (Quarter 3)

$233,711 $233,711

2. The amounts are shown above (in the T-account); the computation is shown in the table above. Beginning WIP = $315,464 and Ending WIP = $468,535. 3. The over- or under-allocated overhead would be computed as follows: Actual: Applied: Difference:

$1,899,670 (from the debit side of the support overhead control account) $1,943,669 (from the credit side of the support overhead control account) $ 43,999 over-applied

Introduction to Managerial Accounting, Seventh Canadian edition

Problem 3-4 (continued) Applied overhead is greater than actual overhead; therefore, we must credit (decrease) the Cost of Jobs Billed by that much amount. The appropriate journal entry would be as follows: Support Overhead Control $43,999 Cost of Jobs Billed $43,999 This amount would show up as a credit entry in the t-account for Cost of Jobs Billed (Note: The Cost of Jobs Billed account is similar to the Cost of Goods Sold account.) 4. Sales Less: Cost of Jobs Billed Less overapplied overhead Gross margin Less: SG&A Expenses Operating income

$ $

3,320,949 43,999

4,853,000

3,276,949

$ $

1,576,051 675,280

900,771

Problem 3-5 (75 minutes) (LO6 – CC12; LO7 – CC14) 1. The cost of raw materials put into production would be: Raw materials inventory, 1/1 ......................................................... $ 25,000 Debits (purchases of materials) ..................................................... 150,000 Materials available for use ............................................................. 175,000 Raw materials inventory, 12/31 ..................................................... 45,000 Materials requisitioned for production ............................................. $130,000 2. Of the $130,000 in materials requisitioned for production, $90,000 was debited to Work in Process as direct materials. Therefore, the difference of $40,000 would have been debited to Manufacturing Overhead as indirect materials. 3. Total factory wages accrued during the year (credits to the Factory Wages Payable account) ................................................ $180,000 Less direct labour cost (from Work in Process) ............................... 170,000 Indirect labour cost ....................................................................... $ 10,000 4. The cost of goods manufactured would have been $490,000—the credits to the Work in Process account. 5. The Cost of Goods Sold for the year would have been: Finished goods inventory, 1/1 ........................................................ $ 50,000 Add: Cost of goods manufactured (from Work in Process) ............... 490,000 Goods available for sale ................................................................ 540,000 Deduct Finished goods inventory, 12/31 .........................................70,000 Cost of goods sold ........................................................................ $470,000

Introduction to Managerial Accounting, Seventh Canadian edition

Problem 3-5 (continued) 6. The predetermined overhead rate would have been: Manufacturing overhead cost applied $250,000 Direct labour cost $170,000

147

7. Manufacturing overhead would have been underapplied by $10,000, computed as follows: Actual manufacturing overhead cost for the year (debits) ................ $260,000 Applied manufacturing overhead cost (from Work in Process—this would have been the credits to the Manufacturing Overhead account) .............................................. 250,000 Underapplied overhead ................................................................. $ 10,000 8. The ending balance in Work in Process is $50,000. Direct materials make up $10,000 of this balance, and manufacturing overhead makes up $12,000. The computations are: Balance, Work in Process, 12/31 ....................................................$50,000 Less: Direct labour cost (given) ..................................................... (8,000) Manufacturing overhead cost ($8,000 × 147%) .................(11,760) Direct materials cost (remainder) ...................................................$30,240

Problem 3-6 (75 minutes) (LO3 – CC5; LO6 – CC13; LO7 – CC14) 1. a.

Estimated overhead cost

$650,000

130 Estimated direct materials used $500,000 b. Before the under- or overapplied overhead can be computed, we must determine the amount of direct materials used in production for the year. Raw materials inventory, beginning ............................................... $ 80,000 Add, Purchases of raw materials ................................................... 510,000 Raw materials available ................................................................ 590,000 Deduct: Raw materials inventory, ending .......................................20,000 Raw materials used in production .................................................. $570,000 Since no indirect materials are identified in the problem, these would all be direct materials. With this figure, we can proceed as follows: Actual manufacturing overhead costs: Indirect labour .......................................................................... $170,000 Property taxes ..........................................................................48,000 Depreciation of equipment ......................................................... 260,000 Maintenance .............................................................................95,000 Insurance ................................................................................. 7,000 Rent, building ........................................................................... 180,000 Total actual costs ......................................................................... 760,000 Applied manufacturing overhead costs: $570,000 × 130% ..................................................................... 741,000 Underapplied overhead................................................................. $ 19,000

Introduction to Managerial Accounting, Seventh Canadian edition

Problem 3-6 (continued) 2.

GITANO PRODUCTS Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, beginning ............................................ $ 80,000 Add purchases of raw materials .................................................. 510,000 Total raw materials available ...................................................... 590,000 Deduct raw materials inventory, ending ...................................... 20,000 Raw materials used in production .................................................. Direct labour ................................................................................ Manufacturing overhead applied to work in process ........................ Total manufacturing costs ............................................................. Add: Work in process, beginning ...................................................

$ 570,000 90,000 741,000 1,401,000 70,000 1,471,000 150,000 $1,321,000

Deduct: Work in process, ending ................................................... Cost of goods manufactured ......................................................... 3. Cost of goods sold: Finished goods inventory, beginning ........................................... $ 400,000 Add cost of goods manufactured ................................................ 1,321,000 Goods available for sale ............................................................. 1,721,000 Deduct finished goods inventory, ending.....................................260,000 Cost of goods sold ..................................................................... $1,461,000

Problem 3-6 (continued) 4. Direct materials ............................................................................ $ 8,500 Direct labour ................................................................................ 2,700 Overhead applied ($8,500 × 130%)...............................................11,050 Total manufacturing cost............................................................... $22,250 $22,250 × 140% = $31,150 price to the customer. 5. The amount of overhead cost in Work in Process would be: $48,000 direct materials cost × 130% = $62,400. The amount of direct labour cost in Work in Process would be: Total ending work in process ........................................................ $150,000 Deduct: Direct materials .............................................................. $48,000 Manufacturing overhead.................................................. 62,400 110,400 Direct labour cost ......................................................................... $ 39,600 The completed schedule of costs in Work in Process would be: Direct materials ............................................................................ $48,000 Direct labour ................................................................................ 39,600 Manufacturing overhead ............................................................... 62,400 Total Work in Process ................................................................... $150,000

Introduction to Managerial Accounting, Seventh Canadian edition

Problem 3-7 (30 minutes) (LO3 – CC5; LO5 – CC10, 11; LO8 – CC18) 1. Predetermined overhead rate for 2022 = Estimated overhead cost Estimated direct labour cost 2.

$1,200,000 $4,000,000

Cost of jobs completed for the month of July: Beginning jobs in process inventory:

22,800

Add costs incurred in July: Direct materials:

$60,000

Direct labour ($980,000 - $180,000)

800,000

Applied overhead: (30% X $800,000)

240,000

1,100,000

Less: ending jobs in process inventory: Cost of jobs completed

34,600 $1,088,200

Income Statement Sales revenues Less: Cost of jobs completed

$2,400,000 *

Gross profit

1,156,200 1,243,800

Less: Selling & administration Net profit

640,000 $ 603,800

* Includes $68,000 underapplied overhead Actual overhead (8,000+180,000+120,000) = 308,000

Problem 3-8 (45 minutes) (LO2 – CC4; LO3 – CC6, 7; LO7 – CC18) 1. Moulding Department predetermined overhead rate: Estimated overhead cost Estimated machine-hours

$518,000 70,000 MHs

$7.40 per machine hour.

Painting Department predetermined overhead rate: Estimated overhead cost Estimated direct labour cost

$798,000 $420,000

190 of direct labour cost.

2. Moulding Department overhead applied: 110 machine-hours × $7.40 per machine-hour ........................ $ 814 Painting Department overhead applied: $570 direct labour cost × 190% ..........................................1,083 Total overhead cost ...................................................................... $1,897 3. Total cost of job 210:

Moulding Dept.

Painting Dept.

Total

Direct materials ............................................................................ $ 470 $ 350 $ 820 Direct labour ................................................................................ 280 570 850 Manufacturing overhead applied .................................................... 814 1,083 1,897 Total cost ..................................................................................... $1,564 $2,003 $3,567

Introduction to Managerial Accounting, Seventh Canadian edition

Problem 3-8 (continued) Cost per unit for job 210:

Total cost Number of units

$3,567 50

$71.34

Moulding Dept.

Painting Dept.

Manufacturing overhead incurred .................................................. $620,000 $705,000 Manufacturing overhead applied: 68,000 machine-hours × $7.40 per machinehour ...................................................................................... 503,200 $404,000 direct labour cost × 190% ........................................... 767,600 Underapplied (or overapplied) overhead......................................... $116,800 $ (62,600)

Problem 3-9 (90 minutes) (LO4 – CC8; LO6 – CC12; LO7 – CC14; LO8 – CC18) 1. a. Raw Materials ............................................................................... 180,000 Accounts Payable .......................................................................

180,000

b. Work in Process ............................................................................ 160,000 Manufacturing Overhead ............................................................... 40,000 Raw Materials ............................................................................

200,000

c. Work in Process ............................................................................ 200,000 Manufacturing Overhead ............................................................... 85,000 Salaries Expense ........................................................................... 130,000 Salaries and Wages Payable .......................................................

415,000

d. Manufacturing Overhead ............................................................... 80,000 Accounts Payable .......................................................................

80,000

e. Advertising Expense ...................................................................... 75,000 Accounts Payable .......................................................................

75,000

f. Manufacturing Overhead ............................................................... 18,000 Insurance Expense........................................................................ 6,000 Prepaid Insurance ......................................................................

24,000

g. Manufacturing Overhead ............................................................... 120,000 Depreciation Expense .................................................................... 30,000 Accumulated Depreciation ..........................................................

150,000

h. Work in Process ............................................................................ 300,000 Manufacturing Overhead ............................................................ 300,000 $200,000 actual direct labour cost × 150% = $300,000 overhead applied i. Finished Goods ............................................................................. 700,000 Work in Process .........................................................................

700,000

j. Accounts Receivable ..................................................................... 1,000,000 Sales ......................................................................................... 1,000,000 Cost of Goods Sold ....................................................................... 710,000 Finished Goods .......................................................................... 710,000

Introduction to Managerial Accounting, Seventh Canadian edition