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Tnblg of Conrerur
Part l-Costs: Concepts and Objectives
Management, the Controller, and Cost Accounting
Cost Concepts and the Cost accounting lnformation System l3
Cost Behavior Analysis 25
Part l-Cost Accumulation
4. Cost Systems and Cost Accumulation . . . . 6 |
5. Job Order Costing 80
6. Process Costing 102
7. The Cost of Quality and Accounting for Production Losses 145
8. Costing By-Products and Joint Products 178
Part 3-Planning and Control of Costs
Mat er i al s: Cont r ol l i ng, Cost i ng, and Pl anni ng . . . . . . . ' 203
Just-in-Time and Backflushing . Dg
Labor: Controlling and Accounting for Costs . )45
Factory Overhead: Planned, Actual, and Applied )7 |
Factory Overhead: Departmentalization 288
Activity Accounting: Activity-Based Costing
andAct i vi t y- BasedManagement . . . 319
Part 4-Budgeting and Standard Costs
15. Budgeting: Profits, Sales, Costs, and Expenses 340
16. Budgeting: Capital Expenditures, Research and
Development Expenditures, and Cash: PERT/Cost 385
Responsi bi l i tyAccounti ng and Reporti ng... 410
Standard Costing: Setting Standards and Analyzing Variances . . . . 443
Standard Costing: lncorporating Standards
t .
2.
3.
t 7 .
18.
t 9.
into the Accounting Records
- l l l -
488
Part 5-Analyris of Costs and Profits
Direct Costing and Cost-Volume-Profit Analysis
Differential Cost Analysis
Planning for Capital Expenditures . . .
Economic Evaluation of Capital Expenditures . . . .
Decision-Making under Uncertainty
5 t 3
543
588
6 r 8
65)
Profit Performance Measurements and
I
lntracompany Transfer Pricing 688
- . 1
I
- l v-
CHAPTER
1
DtscusstoN
OUESTIONS
Ot-1.
Plrnnhg ir hl drvobprnrnt
of e cqrrirron rl
of eglbnr. taaoutc.tr
md mer'ur'm'ntt by
which thr lchirvrmrnt
of obi'cilivtt cm b'
a.r.$.d Pbnnhg trkor hto eccornl thr irtrr'
Etitlt botwren thr orgrni:atkxr
errd itr rnvi'
tqln nl ir whrt'l|r b b br donr'
Cqrtrol ir thr
preolr by which trlrnrg"r
grutl
lhrt rr6urcrr rta obtrir'd rnd urd in
rn ollbbnt and .ttactiw ttlrnn.r !o crtty ot',l ttrt
pbn rnd rccornglirh thl orgrnizeti'cri'! obi'c'
tivor. Cotrtrol inpliot thrt
prrlocnrrc' 'tr{lut..
tn.ntr rto rrvilwod to drt.rmin. if corrrctivo
rtbn ir nquircd
Plennirg rnd cantrol rn htrnrbt'd' Canttol
ir crrrird out wilhh thr ortlblirhrd
plrnnhg
tnrnrworl elrd rrrrrr !o ovrludo enfqnrrrcr
b th.
Phn
rc ttrd o,Fnirrtisd obieclivor rto
rfiirwd.
Of
-2.
Shod.rrrge
plenr ucully d.d with r plrird of e
qu.ttar or I y..1, while long[nga
plmr ururlly
covrr thr.. to livo yern. Shon'rrngr Pbnt
|''
d.tdl.d rnangh b prrmit pnprntin of e csn'
Pl.l.
l.l of finrnchl rtrt.moritt u cf r lulun
dd., tiilb bng'nngo
plenr cubnindr h r wry
turnrnrrizrd rt ol lrpoc{rd ruultr or t hw
qurrditie<! obiostivtr, lrdr u firrtcld rdbr.
Ol-3. Lorg.rrngr
plrnl contrh
quenlitalive rtlultt'
wtrilr rtrdogtc ptrnr rn tfir l..|t quryltiti.bl. cil
r.[ pbnr. Lary'nngr
plrnr urudty lrlrnd lhrco
to tivo yorn hto tho futsrc, wtrib rlntogb
pbnr
tily csrlomPbta thodar fi much longnr prri'
odr. tmgFrrngr plrnr covrrirg r throo'lofivr'
yo|r poricd would br ytgr'd.vrty lht.. lo
fivo yln, or might br ryrtrrnrlialty updetrd
reclr you lo mdnlrh I compbtr
pbn, wtrilo
rtntrgic plrnr rrc lofirrbt.d rl inrgub irlrr'
vrb by en crmtLlly myrtrmrtic Prcort.
01-4. Accounlebility ir klmticrl with ruPonribilily
rccounling. Accosntrbilily dmlr with lhr dir'
c|rrtgo of
gr
irdivitulr rrrponrltility to echirvr
urignrd otrirctivu wibh hr e*l md .rP.ns'
.. dbrd fot.ito prdonnmcr end egrord to by
thr irdivilll
01
.5.
Thr cqfrolbr 6o nct ccnllol. bst ri! lh. csr'
trol tut of tht mrnrgori rl l ovrl l by i rrui ng
'
ttpodt pohthg out dcvielisc lrqn thl prcdctlr'
min d courta oa &iim.
Ol. Thr st d.plrtrnoflt ko.pt d.teil.d ncordr ol
.nattrdr. lrbor, lrsfory ovorhoad, |rld m..k.t'
hg rnd tdnhrttntiva axpon3.t: analyrs tirrr
corlr: irturr cgrtrol taPortt;
Ptaprt.t
cort
dudier tor plrnnhg end d*irbn tridhg; rnd
coordinrt.t cott rnd budgrt drte wilh olhrr
cr.trylnril.
O1.7. F
Pdrrct
roorrdr
rnd derign, thr rrrnufr'
Urhg cbperirr|.ntr nord ortinrtd cl nrlrrirl.
hbor, rnd rtrrdlirr
PtE.3l]
str; lor m.'ruting
srd offi ci rncy ol rchrdul i ng.
produci ng. rnd
htP.siing pmductr, tho drprrtm.ntt
n'od lo
bd |ha codt irun d. Thr plr:anrl drprrr'
tnlrt rrrpplba mpfoyror'wrg. r.1.3- Thr trs'
|Ury dfrytm-t n..dt rccounting, budg.lrlg.
rd nhtrd rlgo.tr h rhrduling culr roqur'
tnatrtl. Tho rnrrtothg dlgertmrnl n.'dt cott
irlsnrtirr h riting
prE.t. Tho ptblic rrblitu
dagrtltn-n nreir'hfornrtbn
qr
Ptc...
r'F'.
PtoaL,
end divUrndr h sdrr to infotm thl puts
Ia Tha Lgal'dapstrnrnt noods st hfo'mrtbn
br frqirg rrny dteirs ol thr snpany h can'
b.mfy wlh lhr lrw.
Ol. ltodrm trctlrluor h csrrnunrcatlcnt
giv. th'
contrdbr end rntf lh. m.ant to tnnttnil hfor'
mdin in thr torrn cl cruttr. sutye.t. end foo'
crtto i n r wry ntvrr bdorr
pori bl r' Profi t
oPPor t uni t i ar or conl r ol . cl i ont hl vo bol n
drbyrd or misrd rntiroly bxaurr ttn'ly hfot'
tilli*1 thrt mi!fit frrvr imprw.d lh' cosl 'nd
prolit poitbn of thr cornpeny w.s poorty cdtl'
mr,'rEsiad.
Ol-9. Thr budgot ir rn oclonlbt colt
plennrng tool
brcaser it (r) lupplilr hfonnation and lrrvrl
rl e rtrlderd of
prrlormarc. lor ct cdtttol by
thr luprrviroc rciponriOto lor cg (b) ptwitor
Jr ..tt mrthod for enticipeting
prolitr rt rn
$ticiPlt.d nlor'bvol;
(c) hrlpr in foncarling
trbl, cotl3. rrponra3. and
pro{ils lor t pricd
of orc
Yorr
or rrlr. h rdYs'tc..
Ol-tO. Thlr dendudr rill not nocr*arily bo rbb lo
pt.vonl rilntg.m.nt ftrud' but th'y do give
inttnrrl accounbtrtt scnr
guilanct on how lo
preerd il thry rncountar ! qu'stiaublr
prr'
ticr.
01-l l . CASB rtandard$
(l ) rnunci al r
a pri nci pl r or
pnrriy'rl lo b. lollow.'{
(b) Glablbh
Prtdictt
is 5rj rpptiod; (c) rpcfy crilrrie to br ornpbyrd
h rlcthg lrqrr allrnretivr
principbr rnd prl:'
t!.! in orlinrting rccutnubtng,
end rcporrr'g
cgltrrst cosb. Th. tttndatds
at' btcktd tsf lho
lutt torc. trld .l{.ct ol thr tew.
Chapter 1
.
EXERCISES
Ei -1 The exerci se requi res turo exampl es of the i nseparabi l i ty of pl anni ng
and
contnol. Thrce are listed here, and the third one
gives two illustrations:
The most obvi ous erampl e of the i nseparabi l i ty of
pl anni ng
and con-
trot is found in the definition of control: managementb slrstematic effort
to achieve objectives by comparing
performance to
plans and taking
appropriate agtion to correct important differences. The definition shows
that the specific results of
planning ane an essential input to the control
phenoi nenon; there cannot be any such thi ng as a control effort wi thout
reference to some set of
plans.
A second exampl a of the i nseparabi l i ty of
pl anni ng and control
results from the fact that they are simultaneous' In practice, the imple-
mentation of the first steps of a
plan, and any control action needed in
those steps, are begun before al l
parts
of pl anni ng are compl ete. Earl y
results and the early findings of control activity can then be used in final-
izing later
parts
of the same
plan. An example is that a single annual
budget i s usual l y not compl etel y fi nal i zed before customer orders begi n
to be received lor that year, and consideration of the number of these
actual customer orders may
point to trends that need to be considered in
finalizing the budget. Even actual financial results of the early weeks and
months of the year can
provide a basis for better
'establistring
the budget
for the later portion of the year.
The most el egant exampl e of the i nseparabi l i ty of pl anni ng and con-
trol results fronr'the fact that both planning and control are complex
human acti vi ti es, and al most al l compl ex human acti vi ti es are pl anned
acti vi ti es and al so control l ed acti vi ti es. In other words, pl anni ng can be
so compl er that the
pl anni ng
effort i s i tsel f control l ed (and pl anned), and
control can be so compler that control activities are themselves planned
{and
controlled}. T\,rro illustrations of this are
provided
as follows:
(t)
A case i n whi ch pl anni ng
i s i tsel f pl anned
and control l ed i s when a
complieated budget (plan) is to be prepared. To facilitate the cre-
ati on of the budget, a detai l ed weekl y schedul e (another pl an) i s
first agreed upon, showing which steps in the preparation
of the
budget are to be carried out during each week. Because it is
desired that the creation of the budget not be allowed to fall far
behind schedule, the responsible manager will exercise control by
making comparisons between (a) the actual progress
made on the
budget each week and (b) the schedul e. The manager wi l l al so take
some correcti ve acti on i f the di fference between the schedul e and
the actual progress
i s consi dered i rnportant.
(21
A case i n whi ch control i s i tsel f pl anned i s when a manager deci des
what ki nds of control reports wi l l be used to compare actuat resutts
wi th pl ons
i n each future peri od
of busi ness operati ons. That deci -
si on, any efforts made to acqui re a suppl y of prepri nted
report
f or ms t o be f i l l ed i n each per i od,
and any changes i n t he desi gn of
' . q
a
ChaPter
t
El -1
(Concl uded)
the cost accounti ng
system to capture and compi l e the needed i nforma-
ti on about actuat resul ts
represent evi dence that the future.control acti v-
l ty i s bei ng
Pl anned.
El-2
(11 B
(21 A
(3) c
(41 A
(51 c
i Oi
B
-
al though the ti me frame i nvol ved i n thi s ki nd of
pl an
may be
.
extremely long, there is nothing strategic about this kind of plan
or deci-
si on. l n fl cti the
pl an and obl i gati on to pay off the bonds when they
come due i s so routi ne that management
woul d not consci ousl y
aPProach it as a decision.
E1- 3
(11
paragraph
(bl comes cl osest to descri bi ng
the ki nd of control used i n
mani gi ng a busi ness, atthough
i t i s descri bed i n a nonbusi ness setti ng.
There i s I
pl an l ormutated
i n advance,
there i s a measure
of actual
resutts, there i s a deci si on maker who compares actual resul ts wi th
pl ans, i here i s a sel ecti on of a correcti ve
acti on to bri ng resul ts cl oser i n
l i ne wi th tae
pl an, and there i s a foreshadowi ng
of repeated
peri odi c con-
trol acti vi ti es
(the remai ni ng
qui zzes)'
The fact i frat i l re measures of
ptanni ng and actual
performance ane
nonfi nanci al measures i s not the governi ng consi derati on.
Much pl anned
and actual i nformati on
used i n controtl i ng a busi ness i s non-fi nanci al '
i ncl udi ng some cost accounti ng
i nfor:mati on
such as the number of uni ts
produced, the
percentage of uni ts that were defecti ve,
and the percent-
age of avai l abl e machi ne ti me that was uti l i zed'
(21 R-ragraph (a) i s a
perfect exampl e of an engi neeri ng
control ' rather than
the ki nd of control managers use i n busi ness. The si mpl e
devi ce
descri bed, whi ch i s founi i n any home bathroom, i s the ki nd of control
devi ce dei i gned to moni tor a
physi cal condi ti on, and so i t i s anal ogous
to
; th;r;;;Jt or any of a varieiy of devices called
"industrial
controls."
of
course, devi ces of tni s ki nd art used i n manufacturi ng
and other busi -
nesses, but they do not possess the essenti al attri butes
of control i n the
sense used i n busi ness and i n cost accounti ng.
The devi ce
achi eves a
conti nuous moni tori ng of the resul ts, rather than a
peri odi c compari son
of resul ts wi th
pl ans, i here i s no human deci si on maker
who sel ects
a
correcti ve acti on to be taken. A human deci si on maker i s
probabl y-the
sal i ent attri bute of control i n managi ng a busi ness that i s mi ssi ng
i n
paragraph (al .
Chaoter
1
I
E1- 3
( Goncl uded)
Par agr aph( c} coul dbei nt er pr et edasanexamp| eof p| anni ng, but i t
tacks
som!
essentiar
inntfris'ot
"ontiolGven
though
the word
"con-
trol,,
is used
in its tast senili""i.
rn"-te
is no
periodic
comparison
of
actuar
resutts
with
plan" ;;;';;
provisioi
ioi
-moairyins
the treatment
based
on
periodic resuttsl
eor
"r-".ple,
the contract
requires
five treat-
ments
each
year, even i t no;";dt
are vi si bl e'
The acti ons
taken are
"r.r*J::l"jxtlil',";efers
to the concept
of contror
that appries
to
porice
work and mi ti tary
sci enc;:
ti ;;;sts
ot bei ng
abte
to
phvsi cal l v deter-
mine
each event ttrat ocJu;
il iot"
tocaiion-
and being
able to
prevent
certain
events
from o""rJring.
rn"
pot""li"i use of coetcive
fotee'
which
is very ctear
in
paragraprr rot,
i, alwayspreient
in achieving
this kind of
control.
ln
paragraph
(d), ti;;'r"
i" no inOi""tion
tft"t
resutts
wene
periodi-
cat t ycompanedwi t hpr ans. l r u| et hat says. ' obt ai nt heobi ect i veat any
cost " i ssomet i mesassoci at edwi t ht heseact i vi t i es'
- F
Chater
t
CASES
.
cl - 1
( 1} Yes, Wi | | i amshasanet hi ca| r esponsi bi l i t yt ot akeact i on.
d;'nilis
-itanaards
of Ethicat
Conducl states that manase-
ment accountants
t'shall
not commit acts contrary
to these standards nor
shal l they condone
the commi ssi on
of such acts by others wi thi n thei r
organizations.tt
l 2l ffhe
requi rement
does not ask whi ch standards
have been vi ol ated' but'
, - ' r at her r whi chonesappl yt oWl l i ams' si t uat i on' )
Management account ant shaveanesponsi bi l i t yt o:
cori-"i"n"":
perform
their
professional duties in accordance with
relevant
6n s, tegulations;
and technical-standards'
(Dumping toxic
wastes in a residential
landfill is
generally a violation of law.)
Confidentiatitv:
Refrain from disclosing
confidential information
""quf f i eof t hei rworkexcept whenaut hori ze. d. , u. n| ess
tegi tl y obti gated to do so
(Wi l l i ams my be l egal l y obl i gated to take
action and make certain disclosures'!
fnteqritv: Refrain from either actively or
passively subverting
the
\
attainmeffi the organizationb
legitimate
and ethical objectives'
(Wi l l i ams, avoi dancJot
the i ssue woutd
passi vel y subvert
attai nment of
ethical obiectives.)
Comm-unicate
unfavorable
as well as favorable information
and
pro-
fessi onatj udgments
or opi ni ons.
(Wi l l i ams i s obl i gated to report hi s unfa-
vorable tindings to appropriate
persons')
Retr?il tion, engaging in or supporting
any activity that would dis-
credit the
professionl (lflitlia1ns' sitence
would
provide support
to the
dumping activity and, ihus, could discredit
the profession')
'Obiectivitvi
Disclose fully all relevant information that could reason-
aory G eilffid to influ"ncJan
intended usefs understanding
of the
reportS, comments, and recommendati ons
presented' (Wi tl i ams shoul d
disclose his lindings to the'appropriate
persons')
(31 Atternative
(a|, to seek ttre adiice
of his immediate superior,
is appropri-
ate. This is itri first step he is reguired to take, unless the superior is
involved.
Atternative
(bl, communication
of confidential information
to
per-
aons outsi de the company, such as the l ocal newspaper, i s i nappropri ate
unl ess there i s a l egai obi i gati on to do so. l f regui red by l aq Wi l l i ams
shoul d contact the proper authori ti es.
Alternative
(c), contacting a member of the board of directors,
would
be i nappropri ate at thi s ti me. Wi l l i ams shoul d report the
probl em to suc-
cessi vei y tri gher l evel s wi thi n the company and turn to the board of
di rectors onl y i f the probl em i s not resol ved at l ower l evel s.
-l
Chaoter t
C1-1
(Concl uded)
(4) Wl i ams shoul d fol l ow the company' s establ i shed
pol i ci es
for resol vi ng
such i ssues, i f such
pol i ci es eri st. l f the i ssue i s not resol ved through
eri sti ng
pol i ci es, he shoutd
report the probl em to successi vel y hi gher
levels within the company
until it is resolved.
ffilliams
is not required to
report this action to his superior if his superior appeani to be involved in
the conflict. He is not to disclose the matter to
persons outside the orga-
nization, untess required by taw.) During these steps' Wlliams may clarify
relevant concepts by confidential discussion with an obiective advisor to
obtain an understanding of
possible courses of action. lf tfie conflict is
not resolved after erhausting all these coursies of action' VWlliams may
have no other recourse than to resi gn and submi t an i nformati ve memo-
randum to an appropriate
representative of the olganization.
Consultation
with one's personal attorney
is also appropriate.
c1- 2
(i
) 61he
requirement does not ask which standards
have been violated' but'
rather, which ones apply to the CFO'S behavior.)
Mana
ge
ment acco untants have a' nesponsibility to:
CompLtgnce: Perform their
professional duties.in accordance with
'
relevant tawC, regulations, and technical standards.
ffhe
CFO has asked
Deerling to account for informatlon in a way that is not in accordance
wi th generatl l l accepted accounti ng
pri nci pl es.)
Prepare comptete and clear reports and recommendations after
appropriate analyses of relevant and reliable informatlon.
[The
CFob
restrictions on disclosure will resutt in incomplete reports.)
Confidentialitv: Refrain lrom using or appearing to use confidential
information acquired in the course of their work for unethlcal or illegal
advantage, either
personally or through third
parties. (The CFO is
attempting to use confidential information to
protect the
fob
security and
bonuses of top management.|
Inteqriw; Avoid astual or apparent conflicts of intercst and advise
atl appropriate
parties of any
potential conflict.
fThe
CFO has failed to
avoid a conflict of interest and has not informed the stockholders of the
conflict.)
Refuse any gift, favor, or hospitality
that would influence or would
appear to i nfl uence thei r acti ons.
[The
GFO' s bonus appears to be an
i nfl uence on hi s acti ons.)
Refrai n from ei ther acti vel y or
passi vel y subverti ng the attai nment
of the organi zati on' s l egi ti mate and ethi cal obj ecti ves. (The CFO has sub-
verted the attainment of the organization's legitimate objective,
profit for
stockhol ders, by pursui ng, i nstead, the
j ob
securi ty and bonuses of top
management . )
Communi cate unfavorabl e as wel l as favorabl e i nformati on and
pro-
fessi onal
i udgments
or opi ni ons.
fl ' he
CFO i s attempti ng to restri ct di s-
cl osure of i nf ormat i on about t he acqui si t i on. |
I
-
F
!
:
Chaptor t
C1-2
(Conti nued)
Refrai n from engagi ng i n or supporti ng
any acti vi ty that woul d di s-
credi t the
professi on.
fi he
CFO' s acti ons coul d di scredi t the
professi on.)
Obiectivitv: Communicate
information
fairly and obiectively.
ffhe
CFO is attetnpting to unfairly control the information reported, resulting
in a rePort that is not obiective.)
Disclose futty all relevant information
that could reasonably be
expected to i nftuence an i ntended userb understandi ng of the reports'
comments, and recommendati ons
presented.
ffhe
CFO i s attempti ng to
restrist disclosure of relevant information.l
(21
fthe
requi rement does not ask whi ch standards have been vi ol ated' but'
r:rther, which ones apply to Deerling's situation.)
Management accountants have a nesponsi bi l i ty to:
Comol tence: Perform thei r professi onal duti es i n accordance wi th
rel evant l aws, regul ati ons, and techni cal standards.
(Deerl i ng i s bei ng
asked to vi ol ate
general ty accepted accounti ng
pri nci pl es.)
Prepare complete and clear reports and recommendations after
appropriate analyses of relevant and reliable information.
(Deerling is
being asked to
piepare an incomplete
report.i
ggg1iEe$bt6i
Refrain from using or appearing to use confidential
information acquireO in the course of their work for unethical or illegal
advantage ei ther
personal l y or through thi rd
parti es. (Deerl i ng must not
use the confi denti al i nformati on about the possi bl e takeover to hi s own
advantage or to that of the
person(s) mounting the takeover attempt.)
l nteqri w: Refuse any gi ft, favor, or hospi tal i ty that woul d i nfl uence
or woutd appear to i nfl uence thei r acti ons.
fi he
l ast sentence of the case
suggests that Deerl i ng i s consi dered
a member of the top management
gnoupr
so he may be el i gi bl e for a bonus.)
Refrain from either actively or
passively subverting
the attainment
of the organi zati on' s l egi ti mate and ethi cal obj ecti ves.
(Deerl i ng i s bei ng
asked to subvert the attainment of the organization's legitimate obiec-
tive, profit for stockholders, by
pursuing instead the
iob
security and
bonuses of top management.)
Gommuni cate unfavorabl e as wel l as favorabl e i nformati on and
pro-
fessi onal
j udgments
or opi ni ons.
(Deerl i ng i s bei ng asked to restri ct di s-
closure of information about the acquisition.)
Refrai n from engagi ng i n or supporti ng any acti vi ty
that woul d di s-
credi t the
professi on. (Deerl i ng i s bei ng asked to take acti ons that coul d
discredit the profession.)
Obi ecti vi tv: Communi cate i nformati on fai rl y and obj ecti vel y.
(Deerl i ng i s bei ng asked to prepare a report that i s not obi ecti ve.)
Di scl ose futl y atl rel evant i nformati on that coul d reasonabl y be
expected to i nfl uence an i ntended user' s understandi ng of the reports'
comment s, and recommendat i ons
present ed. (Deerl i ng i s bei ng asked
t o
restri ct di scl osure of rel evant i nformati on.)
Chaoter 1
C1-2
(Concluded)
(31 tf the company has esta-blished
policies for dealing with such issues,
Deerl i ng shoui a fi rst fol l ow
tAese pol i ci es. l f such pol i ci es do not eri st'
or i f they ane unsuccessful
i n resol vi ng the
probl em, Deerl i ng shoul d pre-
sent the
probl em to the chai rman of the board. Deerl i ngb i mmedi ate
superi or i s i nvol ved, so he need not be i nformed of thi s acti on. l f the
matter remai ns unnesol ved, Deerl i ng shoul d report to the audi t commi t-
tee, the board
of directors, and finally the maiority owners. During these
steps, Deerling may ctarify retevant concepts
by confidential discussion
with an objective advisor to obtain an understanding of
possible courses
of action. lf the conftict is not resolved after erhausting all these counses
of action, Deerling may have no other necourse than to rcsign and'submit
an informative memoriandum to an appnrpriate repnesentative of the
organization.
Consultation with one's personal attomey is also appropriate.
(4) The primary nesponsibility tho company must tulfill betore taking defen-
sive actions is its fiduciary nesponsibility
to stockholdens. Other respon-
sibilities inctude the effects that the takeover and defensive actions
would have on creditors, bondholders, empfoyees, customers' and the 3
community. The company also has a nesponsibility to inform its external
audi tors and l egal counsel to avoi d
putti ng them i n a compromi si ng
posi -
ti on.
c1-3
(f
l ffhe
requi rement does not ask whi ch standards have been vi ol ated' but'
rather, which ones apply to Dixon's behavior.)
Management accountants have a responsi bi l i ty to:
Comoetence: Mai ntai n an appropri ate l evel of
professi onal compe-
tence by ongoi ng devel opment of thei r knowl edge and ski l l s. (By system-
atically rejecting all minority applicants, Dixon is
ieopardizing
the level of
competence among the staff.)
Perform their professional duties in accordance with relevant laws,
regulations, and technical standards.
(Equaf opportunity in employment
is required by law.)
Inteqritv: Avoid actual or apparent conflicts of interest and advise
all appropriate parties
of any
potential conflict.
(Dixon's preiudice is in
conflict with the company's legat obligatibn to
provide
equal opportunity
empl oyment, and wi th the companyfs need for the most competent staff
regardless of race.)
Refrai n from ei ther acti vel y or
passi vel y
subverti ng the attai nment
of the organi zati onb l egi ti mate and ethi cal obj ecti ves.
ffhe
company' s
obi ecti ve of equal opportuni ty empl oyment i s bei ng subveded by Di xon' s
prej udi ce.!
(21
(3)
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Cl -3
(Concl uded)
\
b
Refrai n
from engagi ng
i n or supporti ng
any acti vi ty that woul d di s-
credit the
profession. (Such peristent, systematic
discrimination
in hir-
i ng coutd di scredi t the
professi on' )
ff[e
requirement
does not ask which standards
have been violated' but
iather, which on"" apply to Foxworthts
situation.)
Because management
accountants
may noi condone
the commission
of unethical acts by
;ihd *ig,in ttreir organizations,
all of the responsibilities listed in the
sol uti on to requi rement
(1) al so appl y to Foxworth' s
si tuati on.
In addi ti on,
the fol l owi ng aPPIY:
Management
accountants
have a responsibi|ity
to:
ConfiJentialitv: Refrain from disclosing
confidential information
acqui red i n the couor of thei r work except when authori zedr unl ess
l egal l y obl i gated to do so.
(Foxworth' s suspi ci ons
about Di xon' s behavi or
shoul d not be di scl osed i nappropri atel y'
See requi rement
(3)).
gbiectivitv:
Communicate
information
fairly and objectively'
(poxworttr is oOtigated to make obiective hiring recommendations to
bi ron, i n spi te oi tri s bel i ef that Di xon wi l l be prej udi ced i n acti ng on
them.)
Alternative
(a), discussion with the director of
personnel, who is one of
Dixonb
peets, is inappropriate at this time. lf, however, Foxworth
betieves the directoi bt
personnel is an obiective
pafty, Foxworth
may
discuss the matter with the director, confidentialln
to clarify
the relevant
concepts and to obtai n an understandi ng
of
possi bl e courses of acti on.
Alternative
(b), informal discussion
with a group of MAD senior man-
agement accountants, is inappropriate.
Alternative
(cl, piivate discussion
with the CFO, Dixon's superior, is
appropri ate. Because Foxworth has atready approached hi s i mmedi ate
superi or, Di xon, who i s i nvotved i n the confl i ct, i t i s not necessary for
Foxworth to inform him of this action.
Fonarorth shoul d fol l ow the company' s establ i shed
pol i ci es for deal i ng
with this type of conflict, if such
policies exist. lf policies do not exist' or
if they are-unsuccessfut in resolving the conflict, Foxworth should dis-
cuss ihe issue with the CFO. tf the matter remains unresolved, discus-
si ons wi th successi vel y hi gher l evel s of management, i ncl udi ng
the audi t
committee and the board of directors,
should follow. During these steps'
Foxurorth may discuss the matter confidentially
with an obiective
advisor
to cl ari fy the rel evant concepts and to obtai n an understandi ng of
possi -
bl e courses of acti on. l f the matter remai ns unresol ved after exhausti ng
al l of these steps, Foxworth may have no recourse other than to resi gn
and submi t an i nformati ve memorandum to an appropri ate representati ve
of the company. Consultation with one's personal attomey is also appropriate.
Chagter 1
c1-4
,
{1) ffhe
requirement does not ask lor a list of responsibllities Rodriguez has
viotated, merely which of the fifteen responsibilities apply to his
si tuati on.)
Management accountants have a nesponsibility to :
Comoetence: Perform their professional duties in accordance with
relevant laws, regulations, and technical standards.
ffhe
figures
Hodri guel i s bei ng asked to prepare mi ght amount to fraud i n the l oan
appl i cati on.)
Prepare complete and clear reports and recommendations after
appropriate analyses of relevant and reliable information.
flhe
reliability
of the information is in doubt, and the fact that certain sales figures are
or are not sufficient to
justify
the bank loan are not relevant to prepara-
ti on of the budget)
lnteoritv: Refrain from either actively or passively subverting the
attainment of the organization's legitimate and ethical objectives. (There
is a push to subvert legitimate objectives to the immediate need for a
bank l oan.)
Recognize and communicate professional
limitations or other con-
straints that would preclude
responsible
judgement
or successful per-
formance of an activity. (Rodriguez
has not expressed to Czeista the con-
flict between his desire to be a team player and his ethical responsibili-
ti es.)
Communicate unfavorable as well as favorable information and pro-
fessional
judgements
or opinions. (Rodriguez
is being asked to report
information that reflects so favorably on the company that lt may not be
j usti fi abl e.)
Refrain from engaging in or supporting any activity that woutd dis-
credit the profession.
(Preparing
a deliberately misleading budget as
' part
of a loan application could amount to obtaining mon-y by iraud.)
Obiectivitv: Communicate information fairly and objecfivety.
(Rodriguez
feels pnessuned
to abandon his objectivity in preparing
the
budget.)
Disclose
fully all relevant information that could reasonably
be
expected to influence
an intended user's understanding
of the reports,
commentsr
and recommendations
presented. (A comparison
of the new
targeted
sales figure with the actual sales of tlre coresponding periods
of past years
would be likely to influence the bank's understanding
of
just
how large
an increase in sares is being portrayed.)
12) Rodriguez
coutd have clearly stated his concerns to Czeisla at each
stage
of the budget's
creation and revision. He could have consulted
wi th the marketi ng
manager and producti on
manager.i
"r.ry stage,
rather
than onl y upon recei vi ng the i ni ti al budget
ol ata. He coutd present
the budget,
or a summa
ry
of i t, i n a comparati ve
form to hi ghl i ght the
differences
between
each guarterts
budget
and the actual resutts of the
corespondi ng
quarter
of the precedi ng
year,
and he coul d even
t 0
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C1-4
(Concl uded)
calcutate the
percentage increase being budgeted and compare it with
actual
perceniage increases
that were achieved annually in the past. He
could have conJulted
with his staff superior at the headquarters of
Norttrwestern
(the parent company)
-
Gzeisla is his line superior'
according to the second sentence of the case'
(31 In addition to his ethical responsibiliUes
to CD, Rodriquez has ethical
responsibiliUes
to:
(a) The banks
(b) The management
accounting
profession
cl - 5
(1)
ffhe
requirement does not ask for a list of responsibilities
Jones has vio-
iated, merely which of the flfteen responslbilities
apply to his situation.)
Management accountants
have a responsibi||ty
to:
ConfiJentialitv: Refrain from disclosing confidentlal
information
acquirEA in the counse of their work except when authorized, unless
legally obligated to do so.
(lf Jones accepts the consulting engagement
with Crimson, lt is tikely she will be asked to disclose confidential SMI
information about the desired computer system')'
Refrain from using or appearing
to use confidential information
acquired in the counse of their work for unethical or illegal advantage
either
personalty or through third
parties,
[The
size of the consulting fee
suggests Grimson is seeking to buy confidential information to help win
the
job.)-
lnteqritv: Avoid actual or apparent conflicts of interest and advise
all approptiate
parties of any
potentiat conflict.
(The consulting
iob
would
constitute an apparent conflict of interest and
probably an actual one'
because Jones has been named to the SMI committee that will evaluate
and rank all the
proposats, inctuding Crimson's
proposal, which she
would have helped to write.)
Refrain from engaging in any activity that would
preiudice their abil-
ity to carry out their duUes ethically.
(The consulting
iob
with Crimson
would preiudice Jones'ability to evaluate and rank the
proposals for
SMl, because one of the proposats would be Jones' own work.)
Refuse any
gift, favor, or hospitality that would influence or would
appear to influence their actlons.
(Regardless of wbether the size of the
consulting fee is construed as being a
gift or favor, lt Is likely that other
gifts, favors, or hospitality will be extended to Jones by Grimson during
the counse of the consulting engagement)
Refrain from either actively or passively subverting the attainment
of the organization's legitimate and ethical objectives.
(SMl's legitimate
obiective of obtaining the best computer system at the best
price would
be subverted to Jones' personat need for money, as a resul t of Jones'
di sctosi ng cruci al i nformati on for Cri mson to i ncl ude i n i ts
proposal ,
especi al t y i f Cri mson mi ght not del i ver a syst em wi t h t he cruci al
attributes.)
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C1-5
(Concl uded)
Recognize
and communicate
professional limitations
or other con-
straints
that would
precluJ" *=ponsible iudgmen-t
or sucoessful
perfor-
mance of an activity.
(Accepting-tfie
consutung iob
would
preclude
responsibte iudgment
in .rlfu"ting
and ranking
the
proposals for SMI; on
the otheirr-anu,Lthicat
llmitations-of
Jones' employment
at SMI would
preclude successful
performance of the consulting
engagement
for
Crimson,
Liplcially
li Crimson
does expect her to leveal crucial lnforma-
tion to fr"lp Lin ttre
ioU-her
ethical duty to SMI would
prevent her from
delivering
what Crimson is
paying for)'
Refiin from engagin! in or supporting
any activity-
that would dis-
credit ttre
profession. (Selling confidential SMI information
to a vendor
would be a discreditable
act)
Obiectivitv:
Gommunicaie
information
fairly and obiectively.
(Jones
would Ue unliLely
to communicate
obiective evaluations
of
proposals lf
she had tretpea write one of ttrem')
Disclose fully all relevant
information that could reasonably
be
expected to influence an intended useCs understanding
of the reports'
comments,
and recommendaUons
presented. (JoneslPtt ln writing the
Crimson
pioposat would be relevant information
in SMlts
use of her eval-
uations oi
pioPosals.)
(21 Jones might have disclosed, either orally or on her
personal vita sheet or
iob
application,
the extent of her involvement
on the SMI task force and
the committee.
(3) Jones could have first investigated
all her caneer opportunities
with firms
that
presented no potential conflict of interest of this kind, but for the
sake of the arE,ument, it is reasonable to assume she did exactly that
belore applyin! for a
position at Crimson. Knowing
that Crimson ls a sup-
plier of computer systems, Jones might have revised her
personal vita
sheet and the wording of her application
for this one
iob
interview to
lessen the chances of Grimsonis being tempted to
pursue an unethical
plan. (Of course, her invotvement in SMt's upcoming
purchase might have
become known to Grimson anryay, or it might have been known to
Grimson from other sources before her interview or even before her
application for the
position.)
(41 In addition to her ethical responsibilities
to SMI
(and her financial
responsibitity to the hospltal that provides treatment for her child)' Jones
has ethical responsibilities to:
(a)
her family
(b) the management accounti ng
professi on
(c) Crimson
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CGt it lha curnnt nrnetary Yaluo c' @'
nqnic tatou.cet
givon uP or to bo givcn
up i n obt ai ni ng
goodr and ! ' r vi ces'
Ecgrqnb toloulE.! tnay bo given up by
trandening cash or othcr
propcrty, bsuitg
capital stoih
prrloming rrvbe, or ircur-
ring liabilttbt.
Coclc rrc classifird er unexpirod or
expired. Uncxpired sl! at. aslet! and
apply to tho produclict cl fulure r.venues.
Erarnplet of uncrpired @sts at. invenlo-
rira, prepaH exPent.E, plant and equip'
ment. and i nvcstmcnts. Expi rcd corl s'
s'hi$ ngl costl bosnc eventually, are
thosc that er. not applbable to tho pro'
dus{bn ol luturr rcvonuos and are dodud-
r d l r om cur t anl t evonues or char ged
agohst retahrd oamings.
E:grncr in its broadesl
gense
hcludes
all expired catr; i.r., costl $'hich do not
havc any polential futurc cqlofiiic bene-
lil A mar prrcire ddinition linits thc use
cil the tcrm'axpcnlc'!o lhe et9ired cosls
ariring from uring or con3uming
goods
and srrviccr in tho preesa ol oblaining
rcvenuss: o.g.. co3l of goods sold and
markelhg and adrninistrative expenses.
(t) Cost of
9oo&
soH is an cxpired cosl
and may bc rclorred to ss atr erpensc in
t ho br oad t . n! o of t hc t cr m. On t he
incqnr stal.m.nt. it b most sften Uenti'
fi cd ar e co!| . l nvrnl ory hel d l or sal e
which is destroyed by an abnotmal casual'
ty strould be dssitied as a loss.
(2) Urnollectble accounts expnse is usu'
ally classilied as an exPenso. Howevcr,
some aulhorilicr belicvc thal it is more
desirablc to clasrify uncolleclible accounls
as a direct reductiqr of sales revenuc
(an
of l set t o r r vcnue) . An uncol l ect i bl e
accounl whi:h was nct proviJod for in the
annual adiustmcnt, such as bankruptcy of
a maior drbtor, may be classified as a
bes.
( 3) Dcpr cci al i on . xpen! c l or pl anl
rnachhcry is a corrpooent o{ factory over-
head ard r.presrnts thc rectassifbation of
a portlcn od thc mEdrinory cqsl to product
cct (hventory). Whcn the producl ir sold,
lho doprcciation bccomes a part of lho
co$ ol gods rold which is an oxponso.
Deprccbtian cl pbnt m*hinery durhg an
unplanned atd unptoductive perir:d cl iCle-
ncss, suctr as during a slriko, should be
classified as a lcs. The torm
'expense'
CHAPTER
2
DrscussloN ouEsTloNs
a2-2.
02-3.
shouH preferably be avoided rr'hon rnak'
hg relcrmce to
Productbn
coss-
(a) Orgattizatirr ccls arc tlnse cqsts that
benefil the lirm for its entire perird ol exs'
tcncs and aro most approprbtely classi'
fiod ss a rsrcurcnt asset. When lherc is
hilbl evijence that a firm's life is limiled'
thc orgranizatbn costs Crould be allocalcd
ovor t he f i r m' s l i l e a! an expeneo ot
shoul d bc amorti zed as a l osg whrn a
goi ng conccm foresees termi nal i on. In
praclice, however, orgranizalbn costs are
oftcn writlen ofl in the early years of a
firm's eristence.
(5) Spoiled gods reaulling from normal
menulacluring
preessing shoub be lreal'
cd as a cost of the prodwr rnanulastured.
Whcn t hc
Pr oducl
i s sol d' t ho cosl
becomes an expongs. SPoi l ed
goods
rcrul l i ng from an abnormal occurrenco
shouldbe clrssilied as a kr-ss.
Cost objrts are unils for wlrich atr arrangement
is mede lo accumulate and measure cosl. They
are imporlant because ol thc need lor multiple
dimensians ct dats (c.9., by produci' csltrasl" or
departtnent) to accornplish the varbus
PutPoses
of cost accounling, including cosl fhding'
pbn'
ning, ard contrcl.
(a) To ctassily costs as direst or indirct. the
col t accounl anl musl l i r st know l he
answens to lhe
questlcns
-Directly
traced
to what?' and' l ndi rectl y i denti fi ed wi l h
what ?' Ol her wi se, t her e i s no way l o
assess the direct or indirect nature ol a
cost. lt is the choice ol a cost obiecl lhat
answers lhose lwo qugstbns.
(b) For erample, lhe cost of a department's
manager's salary cannot be cbssified as
direct or indirecl without lelecting the cosl
object first. lf the cost obiect is a prcduct
uni t produced i n the manager' s deparl '
ment, thon the sabry is indirect. ll the cct
obj ect i r the departmonl , l he sal ary i s
direcl.
(a) The product unil, batch, or b is tho cost
obiect. (8e careful about the lack cl cbrily
of the term the
product' when it is nol
known whether il is intended to meen
(a) a
single unil, batch. or lol ol a
Ptoducl.
Bs
oppced lo (b) any large number ol benti'
cal unils. lt couH easily bc laken to meatr.
say,
Product
1321, as oPPosed to somo
other item in the cornpany's catalog' ancl
that could suggost the grand total ol ali
identical pieces ol t321
produced during
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14
lhc onliro
product lilc eycb. Thr rignili'
csnc. o{ lhb dbthstion it thal sstr. cGls.
eucn s!
product dceign' Ptotoqping,
8nd
hilial worker trahhg' arc dincl codr with
rosPccl to th. tolal of all unitc tvct
pto-
ducod, bul ero indirccl with tocPesl to e
eingle uil, bdch' or bl')
(b) A diaaggrcaatkrn
of ovcrhcad
would be
uselul for lny ltudy of lpw to brttlr rnan'
age cost!. or ol what cau!'s tl l'o b'
i ncur r r d. Rol al i vr l y l r w ol l ho coel e
i ncurrod.,i n a factory arc causl d by l he
rqrthe
proargin ol ale npre unit of
qte
producl.
(c) (l) A bstch of Henlical vnits'
(2) Th. rum o{ all Uenlical unils cver po-
duced.
(3) An activity or
proco3s carried out in
prroduclicr.
(4) A gtoup or
' ccl l '
ol machi nos and
workerc wilhin a d.Parimont-
(5) A departmcnt i n whi ch producti on
GUnS.
(6) A plant or clher produclion facility.
( 7) A et r at cgi c
Aoal
ol l he f i r m ( 1. 9. '
inprovod qualny).
O2-5. A cost system ir a combinalim of prcedures
and rccordc dnignrd to providc the various
types of informEtiqr reguired in thr conducl o{
the enterprise; including cosl lhdhg, planning,
and cqllrol.
02. A gnod hformatinn rystem_reguires lhe crtab'
l i ghment of (a) l ong.rangr obi ccl i vcr; (b) an
organization phn rhoing dclegated rreponsibi l'
itier in dotail; (c) ddailcd phns for luture opera'
tbna, botr bng and rhod-lem; 8nd (d) pree-
dures for i mpl omcnl i ng and control l i ng l hese
plans.
A2-7. A charl of accountr ia ncccraary to clarrify
accounthg data, ro that thr data may bc uni-'
formly rccordrd in
irumals
and posted to lhe
ledger accountr.
02. Advantagcr of tho rlectronic data processing
lyllem for rccord keeping are: spced. larger
!torag., ringb rntry ol mulliplo transaclions.
aul omal i c conl rol fl aturel , and f l exi bi l i ty i n
r.port lonrlats.
O2-9. Thc ldbrrhg poceived
weaknessos wore mon-
lined h lh. text
(a) Tndi ti onel m.rrur.r ettompl to rcrvc
rniny purprg,
arrd ar a rcault lhey arc
not univorrslly rcanrdcd ar srrving any
qt.
purp6.
iJcally.
( b) Tr edi t i onal mea. ur . l ar o r l l ect cd by
accannting ctroicor that arc rrl ahrayr rol-
cvant to lh. purpo.. al hard; cramples od
thrsr clrobcs aro c6l flow agsumptisrs
and arbhrary fircd et allocatixrs.
(c) Tradi ti onal meesuro! arr cal cul ated by
sy3lcns lhat aro ueually sbw to rospond
to cfnn gin g srditiorrs.
Chapter 2
(d) Tndhbnal
m.lrurot of plenl uliliz'atton
c8n t .m lo ancourago orrrrutilizatbn of
caPritY'
(e) Tradi ti onal
m.l tuto! of offi ci rncy err
cilton rcPorted b bl.. ato t@ 899m9ai-
.4 lrd rt. .rry b mbhlrrPrct-
02-10. Nqtthancbt
pcrlonnerrr rn aaur.t rr. basod
an rinplr count! or clh.r phyrical date rathor
tun dlocat.d eunlhg dala. thry !n uncql-
nocird to tho grnrral fhrrcial rccounlirg rys-
trn, and thoy en cfrorn to rrflcl me sPecifb
alp-t ol
Prdorrnrncr.
O2-1 1. Four rrampbr ol nonl i nanci al prrl ormancc
mcasunrs
givcn h tho lort and the a.rpects of
portonnancr hry mi1t'tl b. ustd lo nsrits, an
(a) rcrap woi ghl .s r p.tc.nl ag. of l ol el
shppcd wcigfiB lo rnslitot cffbiency of a
- prs.s, pariicr.rlarly cllbioncy of matcrial
u8al
(b) proccring limo er r p.rc.ntaP of total
timc; to nsrita
qade etlicicnry or inv.nte
rY vclcitY
(c) dbtancc rrcvcd by a unil while insUc thr
plant to nutitc rinplifbalbn of a prarrs
(d) ruggcrl i cnr P.r
y.rt
P.r
cmpl oyoe: l o
rrr itor rnPryea ilotvrmrnl
O2-12- Tht cfiallcngr
poscd by lhr ircrrasod inlcrcrl h
'
nqrfinanciel
pldornam maarBurcs ir to defho
thc cost accountanl't rob broadly cnough lo
irctude rEr. rnasuror that arr nol preceded by
dolhr signs and thst at ncl thi lo the financial
eccqlnting !)rrlsn.
Q2-13. Cctr an most co,lutbnly claroified borrd st
lhcir rcbtictshP to
(a) thc produci (a ahgb bstch' lctt' or unit of
tho gmdorrrubo);
(b) thc Yolurnr od Elivity;
(c) tho manulacturing dcparlmcnts,
Ptsca!-
.t. o6t c||ltoili s othcr aubdivbixts:
(d) thc accounthg
Pctii;
(e) a
Propecd
decbirr, Elitn, or cvalualbn.
O2-t4. lrdircct rnstedab an thco rnslorials nroded for
tho csnplotion of lhc product bul whorc con'
aumptict is eithcr so amall or rc cornplex that
thcir trestment ar dirccl nralorialr would no( bc
foasible. For eramplo, nailr uerd lo mako the
product arc irdirccl malorialr.
02.15. lndirrt labor. in csltrasl to direct labor, b labor
rrponded lhat doo not efbc{ thr cqrrtrustiqt
or thr snpoilion of tho lhirhrd
Produc.t.
For
orarnple. thc labor of custodians ie indirct labor.
02-16. (a) A cervicr dcpartmont ir onc that ir not
diroc'tly cngngod in production, brtrl rrndrra
a partbular t!rp. of rrybo for the bonolit
od otrcr drpartmcntr. Erarmhr cf rorvbo
dopartmonl! aro rrceiving, ltor.rooms,
mai nl enancc, ti mekeepi ng,
payrol l , and
calelcria-
(b) Produchg dcparimentr clauify thcir aharo
of rorvice departmrnl .xpcnr.t ar indi-
rccl ovorhoad cp.nac8.
:
(c)
(b)
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Cluptar 2
@-17.
(r) Cepital expcndilunr are irdended lo beno.
lil nprt Oran
ql.
accounting
pcricd. Thr
oxprndiluru rhould lhoroforr br rccordrd
by e cfrargr to an ac!.t ac@snt for dls'
tin !o thc periodt bcncfiled.
Fbvrnuo cxprndi turcr brncfi l thr
oporationc of |hr cunrnt
perird mly. Thry
rhoul d bo rocordrd by chargrr l o thr
appmprialr ctp.ilta accounts.
It e ccpilal elgcndituro ir irnproperty clar'
ri fi rd ar .n axpantc' 8tl el r, rrtai nrd
oamings, and hcsnr for thl perird will bo
undrrstEted. In future
pcrids, hqnr will
br overstaled by any arnount thst would
havr bcen arrpdiecd had thc epcndiluro
born proprrl y capi tal i zrd. Anrtr and
rrtained eamings will bo undersialod st
tul urc bal anc. !h..13 by ruccorai vrl y
rrnaller amounts unlil the erct ha! becn
fulty countebalrnced.
lf a rovenuo elgonditurc ie improprrty
capilali:ed, asset!. rclained earninS' and
incqno for lhc period will br overstaled.
lrsnc will bo underslated in subrcquent
periodr as the impropedy c.Fitalized ilerrt
b cfiarged to thr goratbns of thoc peri'
ods. Agsets and retained earnings will
cqrlinuc to be ov.rstatod in subscqucnt
bal ance sheots by succesri vel y smal l er
t5
arnounlr until thc improperty capilalized
ilom has bocn canplelely writlcn ofl.
Tho basic critrrkxt for classifying eutbys
er rovonu. or capital cxpondituros is the
prriod of brncfit. Thr amount ot detail
n.cossary lo mairnah subsUiary rccotds.
tfu rratcriality of lho ctgrnditurcs, and thc
canrirtrncy wilh which vari<rur crprndi'
turu roc'rrt ftun period lo pcriod arc dtlr
crileria generally eqrridered in ertablish'
h9 a capitalizatbn poli;Y.
Firmr lnqurntty ortablirh ctt stbiltary
rrnount bckrw wtrich all oxpendilurrts ate
oxpenscd, inespectivr ol their period ol
benefiL Thr level at which thb arnount b
rot b dctrmined by itr materiality h rrb'
tirr to the rizr of hr firm. The obirtivr o{
sucfi a policy is to avoid lho rxpcnso ol
mai ntai ni ng exccssi vcl y detai l ed sub'
rUiary rccordc. E:genditurer for iternt thal
tall belnw th. lot snlounl but a't tnatorbl
in thc aggregale shouH be cePitalized, il
tctal expenditures lor these items vary sig'
nificantly lrom period to period. A capilal'
i zati on pol i cy l hat roasonabl y appl i es
lhcsc criteria, although il disreganls the
pedod cl benefil and is thsrefore bcking in
thooretical
just if ication, will not sign il icantty
misstatr periodic incomo.
t 6
Chaotar 2
s16, 957, 500
17r458, 350
gERCISES
38
+ 33
= 39
Prime
cost
Sg
.31
= 94 variable
convet:ion
cost
S
* Si
. ir
= $io
variable
manufacturing
cost
ii,oob
fired + (Slo r 5oo)
= $6'0oo
E2-2
',({}
$1o
+ $15
+ 38
= $?1
convorcion
co'st
izi
$32
+ $t
o = $42 Primc
cost
i - i 332+i . i o* i r s i $3=$60v ar i ab| ec os t
i oi
(($sz
+
${o
+g{5 +
$6
+$5) x 12' ooo)
i
1ss
x 8,ooo)
=
$8{6' 000
+
$ 24' ooo.
=
$84O' OOO
t ot al cost i ncurred
wi t h 12' OOO
uni t s
Produced
and 8, OOO uni t s sol d
E2-3 First Method:
Sa|es(ti l g' 95o' ooox85o/o|...............x.........
Lcsr: variable costs
(irrrizr,o00 x 85chl"' $9'q1?'1?o
FiXgd COSTS...""tr"tt""t"t""t!t"t""tt"t'
7t623tOOO
E,.-l
(rl
l2l
(3)
(4)
E24
OperaUng
l oss.-...
Second Method:
l st St ap:
2nd Step:
Salgg
(tlt9r95orooo
I 857o)..' ........o"""""""
L.ass: variable costs
(sl6195715OO r .58).' ... s9r835' 350
Firgd costs .............,.............,.............
!1623
|AOO
OpgraUng
l oSs """"t""t"' o"""t' tor"""""""o"
$16, 957, 500
1714581350 -
s
(500,8501
-
1 . d
2 . b
3 . b
4 . 4
5 . t
g . c
7. c
8. I
s
(5OO,85O)
Variable costs sl 1, 57l , Ooo
= .59 vari abl e cost rati o
l 9A sal es s l 9, 95O, OOO
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Clppter2
E2i5
The cost of direct labor Par
computer
is sloo' ooo'
calculated
as follows:
'
-"t--l ' ri na aac:l ---- """' $6ootooo Gi vgn)
Total manufacturing
cost"""'o""""""""'
L,gsspri mocost.....r...............o.........""""
3OOtOOo
(gi Ven)
EquaI sovorheadGoSt . . . . . . . . . . . . . . . . . . . . t . . . . . . . . . $3oo' o09
COnVgfSiOn
COSt...............................""""
$4OOtOOO
(giVgn)
Less overtlgad
cost..,' ...................o.....""
3OOtooo
(calculated abovel
EqUatS difgCt 1abOf ,..,....-o........-...............
SIOOtOOO
E24 Ttre amount
of factory
overhead
lows:
cost
per bl ade i s 93O0,
cal cul ated as fol -
3l , OOO
( gi venf
4OO
(gi venl
Lee
Total manufacturing
cost' .' .""""t""""""
Lgss convgrsion
cost"""' o"""""""' o"""'
Equals dirgct matgrial cost.""""""""""'
Direst labor cost
= 116 of direet
material
cost
= 1t 6 x 3600
= $1OO
b
Convgrsi on
cost t t "t t t t "t """"t t t t "t t t t t "ot t ""
Lgss dirggt labor C(13t"""""""""r"o""""
Equatrsove.fieadcost..............................
E2-7 The direct labor cost
per system is S200'
Total manufagturing
costs """""""""""'
Lgss
pri me Cost """""t""t"t"tt""""tt""t'
Equals overfi
gad
GoSt """""""""""""""
ConYgrsion cost.........t"""' i"to"t"""t"t""
Lgss overhgad cost o'..""'r"'o'o"""""'o""'
Equals dirgct tabor cosl..' .......r...""""""
sitoo
cal cul ated
as fol l ows:
S1,00O
(gi venl
8oO
(givenl
s 200
gAoO
(given|
2OO
(calculated abovel
Szoo
s400
l oo
(givenl
(calculated above|
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Chaoter 2
Ez-g The ampunt of faetory oyerhead cost
per machino is $1'5OO' calculated \-
as follows:
Total manuf-acturing
c95t......,....r....' .......r
S3TOOO
(given) L
Lgss conversi on
cost..,.......r.......,.,..........
2,.OOO
(gi ven)
Equatsdi rcctmatgri al cost......-.-' .".........
SITOOO
Direst lalor Gost
= 112 oI direet material cost
= 112 r $l ' 0O0
=
95OO
Conversi on cost..
.... $2' OOO
(given)
Lgss dirgct labor cost..............................
5OO
(calculated above|
Equal sovgr hgadcoSt . . . . . . . . . i . . . . . . . r . . . . . . . . . . . .
Sl 15OO
E2-9
(1) The.rclevant cost obiects are:
(a) An item of mErchandise. t
(bl The use of a bank credit catd'
(21 lt implies that cash-paying customers are
paying a part of the cost of the
banks'fees for
processing credit card transactionsr bscause these fees
are paid by the merchant who then necover them in the form of slightly
hi gher pri ces for al l mel chandi se,
(3) The competitive implications ana that the
prices paid by cash customens
are too high to be competitive with the
prices chargad by merchants who
deal only in cash, and the
prices paid by customens using bank credit
cards arp too low to reflect all the costs of a credit sala.
(4)
The raason lor not reducing all prices and charging extra for the use of a
credit card is because of the psychological effect of an extra charge. To
customsrs, lt sounds like a penalty, as If the merchant wants to discour-
age the use of bank credit cards. A discount for cash customers has a
positive
connotation, even if
prices
marked on menchandise are higher to
v
begin with. Raising all
prices
and offering a cash discount
yields the
aame net rsvenue as leaving prices
alone and charging extra for using a
'
bank credlt card, but the former method feels better to the customer
-
than the latter.
t 9
2
s14
(3)
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Thc rolovant cost obfecta arr:
(al A repalr.
(b) A
PlckuP
and daflvery
l1l
JTRSb rpalr
pricor Include an sllocaUon of thc cost of
picking up and
dallvering traAors, ln addlUon to thc cost of thc rtpainl' administraUvo
coata, markeUng costs, end profll CompeUtont
rcpair prices raflect only
tic cost of the llpalrs, adminlgtrstlve snd marko$ng costs' and
profit.
GompeUtort 8hould bc ablc to
prlcc thclr rcpalr rcrvlces lower, because
tSey do not have to reflect
plckup and dellvery costs in repair prices.
F2-11
Cluplx2
(11 Dl rect l ebor
Variable factory ove rh ead
Fi fed faCtOfy OVgfh
gad...............o......o....o.o..ro.........o............."r
Gonvemion cogt..
(21 Dlrect matoriaf
0umberf
Di r Ogt 1abOf . . . o. . r . . . o. . . . . . r . . r . . . . . . . r r r . r . . . . . . r . . o. . . . . . . . . o. o. . . . . ot . . . . . . . t . . t o. . t
Prime GOSI...............r..............
a a a a a o a a a t a a
a a a l a a a o a l a a
s
q
$ 1 1
sl 2
sl 2
2
5
sl e
sl 2
2
5
1
s20
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0
umberl ...'.........o'.......
Dlroct labor
Variablg factory ovgrfieSd .........o.........r.............' ..........oo.......' .
Variable markoting
Total variable cost.
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Chaoter 2
20
E2-11
(Goncluded)
(5) Total cost
=
(6)
rr)
total vari abl e manufacturi ng
cost
+total vari abl e marketi ng cost
+ total fixed cost
2, OOOr ( $12+32+$51
+ l r g OOr $ 1
+
2,OOO' x ($4
+
$3.50)
=
$38, OOo
+
$l ' 9Oo
+
${5' 0oo
=
55419OO
r
The volume used here to catculate
total fixed cost is the 2'OOo-unit vot-
ume levol that was used originally
to calculate the amounts of fixed
costs
per unit, as stated in the data
given in the exercise. The 2'OOO-
unit tevel of
production stated in requirement
(5) is not the reason that
2,OOO is used here to calculate total fixed cost'
The data i ndi cate the bookcases are made of l umber, and some exampl es
of the indirect materials used in making wooden bookcases would be
gl ue, sandpaperr and nai l s.
An estimate of costs referred to in the answer to requirement (6! would
be i nctuded i n the vari abl e factory overhead of 55
per uni t.
;
E2-12 Factory overhead = 113 x prime cost, so:
Total
manufacturing
cost
= prime cost + factory overhead
= pri me cost + (113 x
Pri me
cost)
= 4i:3 r prime cosl;
mufti pl yi ng both si des by 314 gi ves:
Total
314 x manufacturi ng = 314 x 413 x pri me
cost
cost
3l 4xS2O, OOO = 1 x pr i me cost
$15, OOO
= pr i me cost .
Pri me cost .....................
Less di rect materi al cost.......
Di roct l abor cost.......
s15, OOO
12, OOO (gi ven)
s 3,ooo
2l
(3)
(41
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Ctuotar2
c2-1
(11
CASES
The
percentage
profit margin will be 82.5oh, calculated
as follows:
Rgvenugs
(92 r 4)..............,,o........................
Cost of
iuice
(S2o r 4| .....' ....""""t"' r"""""
t
Cost of ong de|ivery
"""""""""x""""""t""
Profi t ...............ro....,......................o.......r.......
Revenues
(S2 r 1!
Percentage
profit margin
=
36' 60
profit divided by SB revenue
= 8.2' 5oh'
(21 The
percentage profit margin will be 6ooh, calculated
as follows:
s.80
. 60
s.20
. 60
s!.o0
1 . 4 0
s6. 60
s2.o0
. 80
sl . 20
Cost of
iuice
(S.2o r 1) .....' ....-............' o""o"'
Gost of ono dgl i very ..' ...""' o""""o"""' o"""o'
PrOf i t . . o. . . . . . . . . . . . . . . . . "' o""' r""""""""""t "' e""'
Percentago
profit margin
= $1.2O
profit divided by s2 revenue
= 609/o'
The manager i s treati ng the menu i tem as the cost obi ect, for erampl e'
one
gl ass of orange
i ui ce.
The rpfinement of the definition of cost obiect that would result in the
ptanned profit margin is the use of two different
kinds of cost obiect'
the
Item and the deti vJry, whi ch can be
pri ced separatel y at S.8O and $2' 4O'
respectively.
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Chaoter 2
C2-l
(Concluded)
(5) For an order
consisting of four
gtasses of orange iuice,
the
profit margin
will be 75e/ot calculated as follows:
Revenues:
($.8O X 4).........' ...
+
( 92. 4O X 1) . . t t " t t " " " " ' i " " " " t " t " " " t " " t " ' o" '
9.80
.60
9.20
. 60
s3.20
2. 40
$5.60
1. 40
9{.20
$ . 80
2. 40
$3.20
.80
Percentage
profit margin
=
90.2o
profit divided by $5.oo
nevenue
= 75oh.
For an order consi sti ng of one
gl ass of orange
i ui ce,
the
profi t margi n wi l l
af so be 75oh, cal cul ated as fol l ows:
Cost of
iuicg
($.2O I 4) ."""""""""""t""""'
Gost of ong dglivgry .........--....-..........o...o.r."'
Pr Of i t . . . t . . . . aaa. . . . . . a. . . . a. t ""t """"t "t """"t "o""t '
COSt Of
! ui ce
. . . . . . . . . . . . . . . . . . . . . . . . t . . . . . . . . . . . o. . " o" " t t '
Cost of ong delivery .............................o......'
RgVgnUgS:
( $. 8O X' l ) . . . . . . . . . . . . r . . . . . . . . . . . . r . o. . . . . . . . . . . . . . . . . . . . ot '
+
($2.4O X 1) ..............................................t..
(6)
PrOfi t ........o....t........
s2.40
Percentage profit margin =
$2.4O
profit divided by $3.2o nevenue
= 75oh.
The food seryice managerb
plan allocates the delivery costs over an
arbitrarily selected number of items
(two). This
plan would result in high-
or-than-planned
pnofit margin
pencentages on noom servico orders that
contain more than two items, as demonstrated in the answer to require-
ment (t). Prices on these olde6 would be higher than those of a Gom-
petitor
wlro traces costs mone carefully to cost obiects and sets
prices
sccordingty. The
plan would also result in lower-than-planned
profit mar-
gins
on room service orders containinE only one item, as demonstrated
in the answer to requirement (21. Prices on these orders would be lower
than what is needed to achieve the target
profitability.
23
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c2-2,
(il The cost objects tor which somo amount of cost is identified in the case,
and tho amount of cost idenUlied lor each' ate:
(al A new product variation
r
Zsggo (which means all units of Zeggo ever
to be producodl' S25O'OOO.
(bl A batch of Zeggo' S1'OOO.
(cl A unlt of Zeggo, $5 + $1O
=
$15.
(Notlce the $1o indirect cost
amount Includes all Indireet production costsr so it must include the
,
$1 amount stated in the problem, along with an allocation or averag-
ing of the $1r0Oo-perbatch
setup costs, a shar of the S25O,OOO
cost amount, and a sharo of any other indirect manufacturing costs.
It would be double-counUng to add the $1 and arrive at a total of
$16
per uni l |
(21 The other items mentioned in the caso that could serve as cost obiects,
and a
purposo each one could sorvr ano:
(al
CCN Company, which is the relevant cost obiect when external
financial statements are prepared.
(bl The assembly line on which Zeggo and other
products are to be pro-
duced. This cost object would be relevant in a decision on whether
to discontinue
production
of all the
products produced on the par-
ticular line, or a decision to shut down the line and shift its produc-
tion to other lines due to a redustion in customer orders.
(31 The totat "o.t erpected to result from
producing the first batch of 3oo
unlts of Zeggo is:
Cost accounted for as direct cost of a unit....,.....
Cost treated as indirect by the CCN s1ctem........
uni ts
Add: setup cost
s1, 8OO
. . . r . . o. r . . . . . . . r . . t r . . . . . . . 1
t OOO
Tot al Co*. . . . . r. . . . . . . . r. . . . . . . . . . . . . . . . . . . r. . . . . . . . . o. . . . r. . . . . rr. rr. s2,8oo
The cost erpected to result from producing ono mone unit of Zeggo is 35
+ $ 1 = 3 6 .
For the first batch of 3OO units, the CCN cost accounting system will
report a cost of:
(35
di rect cost + $1o i ndi rect cost al l ocati on) x 3oO uni ts =
S15 r 3OO =
s4,5OO
$ 5
1
S o
x 3OO
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(41
(5)
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O3-l . The total dollar amount of a fixed cost is con-
stant at difrerent levels of acttvity within the rele-
vant range, but fi xed cosl per uni t ot acti vi ty
varies. In confasl the total amount of a variable
cost varies al differeil levels ol acwity, but the
variable cost pr unit remains consEnt wilhin lhe
rel evant range. A semi vari abl e cost contai ns
both frxed and variable elements. Consequently,
both total semi vari abl e cost and semi vari abl e
cost per unil vary with changes in activity.
Q3-2. The relevant range is the range of activity over
which a fixed cost remains constant in tolal or a
variable cost remains constant per unit of activi-
ty. The underlying assumptions about the rela-
tionship of the activity and lhe incunence ot cosl
change oul si de the rel evanl range of acti vi ty.
Consequently, the amount of fixed cost or the
variable cost rate musl be recomputed for aclivi-
ty above or below the relevant range.
O3-3. The fixed and variable componenls ol a semi-
variable cost should be segregated in order to
plan, analyze, control, measure. and evaluate
costs at difterent levels of actMty. Separation ol
the fixed and variable componenls of semivari-
able cost is necessary lo:
CHAPTER 3
DISCUSSION QUESTIONS
03.
semi vari abl e costs are: (1) the hi gh and l ow
points melhort: (2) lhe statistacal scanergraph
method; and (3) the method of least sguares.
The high and low points method has the advan-
lage ol being simple to compute, but it has the
disadvantage ol using only two data points in O|e
computation, thereby resulting in a signilicant
potential lor bias and inaccuracy in cosl esti-
mates. The scanergraph has the aclvantage ot
using all of the available data. but it has the dis-
advantage of determining the fixed and vanable
components on the basis of a line drawn by vGu.
al inspection tirough a plot ot the data, thereby
resul ti ng i n bi as and i naccuracy i n cost esl i -
mal es. The method of l easl squares has the
advant age ol accur at el y descr i bi ng a l i ne
through all the available data, thereby resulting
in unbiased estimates of the fixed and variable
elements ol cost. but il has the increased disad-
vantage of computational complexity.
The $2OO in.lhe equation, referred to as the y
inlercept, is an estimate ol the tixed
portion
of
indirect supplies cost. The $4 in the equation,
referrecl to as the slope of the regression equa-
tion, is an estimate ol the variable cost a:isociat-
ed with a unit change in machine hours. These
est i mat es may not be per l ect l y accur at e
because they were deri ved l rom a sampl e ol
data that may not be entirely representative of
the universe population, and because activities
not i ncl uded i n t he r egr essi on equat i on may
have some influence on the cost being predict-
ed.
The coeffi ci enl ol correl ati on, denoted r, i s a
measure of the extent to which two variables are
related linearly. lt is a measure of lhe covariation
of the dependent and i ndepenctent vari abl es.
and its sign indicates whether the independent
variable has a posilive or negative relaUorship to
the dependent variable. The coeffcient ot dster-
mination is the square of the coefficint of corre-
lation and is denoted F. fne coefficient of d6ter-
mination is a more easity interpretsd measure ot
the covariation than b the coefficient
of conela-
lion, because il represents the percentago
of
variation in the dependent variable explained by
the independent variable.
The standard enor of ihe estimate is defined as
the standard deviation about the regression line.
tt is essentially a measure ol the variability of the
aclual observations of the dependenl varaable
from the points predicted on the regression line.
A small value lor the standard eror ol the esti-
mate indicates a good fit. A standatd errcr ol
zero would indicate a pertect
ft, i.e., afi sctual
observations would be on the regression line.
I
S
I
!
I
t
b
03-7.
(a) compute precletermined tactory overhead
rates and analyze variances:
(b) prepare flexible budgets and anatyze vari-
ances;
(c) anal yze di rect cost and l he contri buti on
margin;
(d) determine lhe break-even ooint and ana-
lyze the etfect ot volume on cost and prof-
rt;
o3-8.
(e) compule differential cost and make com-
parative
cost analyses;
(f) ma(imize short-run protits
and minimize
short-run dosts;
(S) budget capital expenditures;
(h) analyze marketing profitability
by terrilo-
nes. proclusts,
and customers.
O3-4. The obvi ous advanl age to usi ng manageri al
iudgement lo separato fixed and variable costs
is expediency, i.e., il requires less time and is,
theretore. less cos0y than the use of any of the
three com putational
methods. The disadvantage
is that the use of managerial judgement
to sepl_
rate fixed and variable cosls otlen results in O3-9.
unreliable
estimatG
qt
cost. Cost behavior is nol
always
readily apparenl lrom casual observa-
tron. As a conseguence, managers otlen err in
determining
whelher a cost is fixecl or variable
and frequenily
ignore the possibility
that some
costs are semivariable.
O3-5. The three computational methods available lor
separattng
the ftxed and variable components of
25
26
03.10.
Hotuoscodssttcity mcrn:i t|d tha distibulbn ol
observations around thc rogrcrsion linc is not
unilorm lor dl values of thc indcpcndonl vari-
able. tf hetaroscedasticity b prcocnt. thc den-
rlard eror of tp Blimde and confdcnct intlr'
val catitnd63, btsed on thc Etmdsrd 3fior, lre
unreliabh tnolsuros.
03-11. Serial coneladon mourt thd rdtcr tlun bcing
random, the obsenralions arcund thc rcgresion
line are conelated n'l$ onc ltlcfficr. ll ecrid col'
relation b prssctlt thc stlrrtttd cnor of t|c 6ti'
Chapter 3
malt tnd coflfidcncc intervai cstimltes. blsed
on thc Etandlrd olrotr atc unrcliabb molsuros.
O$12. Muldcollinaarity moatrs f|at two or moro of tho
Indcpendent veriables in a mutliple regrassion
andFb aro conohed witfi one anodtor. When
thc degrcc of multicollinearity is high. the rela.
lionship bctlloon onc or moro of tho corrol8led
indcpcndont vadables and the depondonl vati
ablc may be obscured. However, this circum'
clt lcc would normdly not aflecl the astimate of
cost
z /
I
t-
L
L
I
I
L
L
Clppter 3
I
E3-1
E)GRCISES
F
o
o
(,
o
lrf
J
G
g
3
o
L
!
L
I
L
L
L
I
L
i
t
i
L
I
l-
I
l-
I
l-
High ........
a a t a a a r a a a t a a a a a a a a a
s]ivitvlgv"l
21600 hours
2, 1OO
_5Og
hours
Cost
s1, 3OO
1
, 1OO
9__399
Low
sl , 1 OO
840
s 260
variable nate: s2oo
-r
5o0 machine hours = $.40
per
machine hour
TOtal COSI.........................
Hi gh
$1, 30O
I , O4O
E3-2
Variable cost:
$.4o x
a6o0
hours ....,....,.....
$.40 x 2rl O0 houns ...............r.........r.............
Fi xgd cost . . . ' . . . . . . . r. . . . . . . . . . r. ' . . rr. . . . . . . r. r' . . . r' . . . . . . . . r. . . . . . .
s 260
$l roo0
s900
Saoo
3700
3000
3500
$400
3300
!3200
$100
30
S4O7.5O average totat variable cost
800
$757.s0
350. O0
$407.50
5. 6936 vari abl e cost
=
p",
direct labor hour
5,87s
total direct tauorffi
Chapter 3
28
E3-3
E3-4
Janu3fl ..' ...
February ....
MSFCh' ........
April ...' ....o..
M?! . . . . . . . r . . . .
Jl l l l . . . . . . . . . . .
JUI!............
August . . . , . . .
September.
October.,' ...
November . .
December . .
T(ltal ....."
r -
x( xr
-
x) ( vr
-
Y)
_
87, ooo
_
s6o
g - -
x( xr
-
r ) 2
1' 450
a
-
9
-
b,
-
$1o, ooo
-
(Soo x 125)
-
$z, 5oo
Travef and entertainment
expense tor 2OO aales calls would be:
! i ' - a
+ b x r
- $ 2 , 5 0 0 + ( $ 6 0 x 2 O O c a l l s )
- S 1 4 ' 5 O O
( 1)
v
Electriclty
Gost
$ 1, 600
1r 510
1, 5O0
1, 450
11460
1r52O
1r 57O
1r53O
1,48O
1r47O
1, 450
1, 460
_sl8,oo9
(21
v- n
Gost
Deviation
(3)
x
Machlne
Hourc
?,790
2,68O
2160O
2,50O
2F1O
2161O
2r750
2,7OO
2,53O
2r52O
2r49O
2r52O
(4)
F- A
ActMty
Devlatlon
(6)
a
-nv -n
(a) x
(21
19, OOO
800
o
5,OOO
3,6OO
200
1O,5OO
3,OOO
I , 4OO
2r4OO
515OO
3r2OO
s,600
(!l-squared
36, 1O0
6,4OO
. o
IO' OOO
8,10O
100
22r5OO
to,ooo
4r9OO
6,4OO
12r1OO
6,4OO
!e3.0oo
(5)
(x -i)2
tg0
t o
o
Fo)
(40)
20
70
30
(20)
(30)
(50)
(40)
190
80
o
(1oo)
(e0)
10
150
t oo
rfo)
(80)
(1ro)
(801
31. 200 0
o
,
,
- 2 y + n -
$ 1 8 r o o o
* 1 2 - $ 1 r 5 0 o
-
Xx + n
-
31r 2OO * 12
-
2, 60O
Vari abl e rate (b)
-
: ( x
-
r XY
-
t ) cot umn o t ot at
54' 600
-
g.4.4
123' OOO
r ( x
-
i ) 2
Fi xedcost ( a\ - y
-
bx
=
$1,5OO
- (S.44X2' 6OO)
=
*t56
Column 5 total
x ( r r
- x ) ( v r - y )
1, 5f f _
f
-
' - f f i - ' 9 2
f f i -y)'
J(sso)(s' ooo;
r 2
- ( . g 2 ) z - . 8 4 6 4
E3-6
Month
Jenuary-. I 600
Fcbnnry - OOO
Mtl.rch -..... COO
Aprll...-....., 680
Mry.*......., 570
Juoa---.. 6ltO
July..--.-... 600
Augurt --- OIO
Scptcmbcr. GsO
Ogtobor--.. G2O
Novcmbcr.. 6il0
Elccambor.. 640
29
Ctwpter3
E3-s
(31
x
(11
v
l2l
l y- n
(40)
o
o
(201
(301
(60)
(r0)
t o
50
20
30
.lo
3 201600
3O,OOO
20rooo
2qooo
27,OOO
25,^5OO
30,OOO
33r0OO
35,OOO
3aooo
30,5OO
glr50O
IOOO
500
3,500
l 1600
o
o
400
900
2,5o,o,
roo
loo
2,50O
4(,0
000
1,OOO
(4) (51
F
-a
I
-712
(3rEOO) 12i2j,O,OOO I4O,OOO
o
o
(aooo) 4,oo0rooo 40,ooo
(3,OOO) 0,OO0,oO0 0o,ooo
(+5OO) 2O'25O,OOO ?'2SrOOO
0
SrOOO I,OO0TOOO 3OTOOO
5,OOO Z,,OOOTOOO 25O,OOO
(81
ct)
V
-AV -tl
tv
-r12
ailpplng Expcnrc Sdcr ActtvttY
Erpcmc Dcvlrtlonr Bcvcntr Dcrvlrttonr
(4}Squrrsd (a) x
F)
(2lSquared
(lrOOO) ITOOO,0OO
o o 8t]60.ooo
4TOOOTOOO 4OTOOO
2!lgr@0 l5,ooo
12,25,O,O0O laOrOOO
07.ooo.ooo 97o,ooo t 1.o(x) Totel --.. 373OO
j ' - I y -
+f t -
$7r 2OO
+12 - $6OO
i
-
xx + n
-
$3601000
+ 12
-
$3o,ooo
J: ( r
t
-
i ) ' z( y,
-
Y) '
r z
- ( . 939
) 2
-
. 882
- . 939
97O,OOO
[9?"ooo,ooo Xl
lrooo
)
l t
>( r r
-
i ) ( v
t
- y l
x( r r
-
; ) z z( v
t
30
E3-7
( 11
Clpoter 3
l2l
r z=( . 98Y=. 9216
x ( r r
- i X v r - 9 )
2, 1OO
=. 96
.',/(
e,zso
X
I,ooo)
2r4OO tt,384 varlable malntenance
6,250 cost per machlno hour
b -
x( r r
-
i ) '
( 3 )
|
- \ r 1 + t l
i ' X X l + J l
Slnce
9
-
a
a - g _ b X
a
-
$5rO00
a
-
tl5rooO
a
-
$31464
-
t35O
r0OO
* |
-
4O' O00 + 1O
+ bi , t hen:
o
-
$5 'O0O
-
4' OOO houru
($. sar
)(4, ooo )
$1, 536
E3-8
(1)
For elsctrlclty cost and dlrost labor hours:
5, 7OO
.
| oH
-. e4e7
-
+f33
-.88o5
f t
ra = (.9497F =.9O19
For electrlclty cost and machlne hours:
l t
7,OOO
(21
I ( x r
- r ) ( v r - y )
( r t - i ) ' z ( y r - y ) '
x ( r r
- i ) ( v t - v )
x( : r
-
i ) ' z( yt
-
v) '
J(so, o0o )(r, 264 )
r a=( . 880512=. 7753
ln ttrlr e88, dlrest labor hours shoutd be chosen as the approprlate
acthrtty meaauno to be used In
predletlng
electrlclty cost because the
cocfilclent
of determlnatlon (ts = .9O19) lc hlgher than that for machlne
hours pa
= .77531.
(3)
Cluptor3
E3-8
(Goncluded)
( 4 )
b '
> ( r ,
- x ) ( v t - y )
_
5r 7OO
-
$. 2O
28, 5OO
variable electriclty
cost rate
-
Xxt + nr t hen:
3 1
x ( : r
-
X) '
Slnce
I
-
a + bi and
7
-
ZYr
+ n and f
a' ( z f
t
* n)
-
D( x r
t
* n)
s
-
(42,ooo + zo)
-
(.zo)(rao,ooo + 2o)
a
-
2t 1O0
-
(. ZOx9, OOO
)
?
-
2tlOO
-
1,8OO
-
$300 flxed electriclty cost
E3-9
Month
January .........r........
February ..r.............t
March ..........r.......r..
AFd1........................
May..
JUng . . . . . . r . r . . . . . . . r . . . . . .
JUI ! . . . . . . . . . . . . . . . r. . r. . r. . .
AUgu8t ......r.............
SeptembrBl...,..........
OctObor ............r.....
l{ovombgl ..r............
Docgmbg1............,..
TOtal ....r.........r...!
(3)
l y i =a+bx )
Predicted
UUllty
Cost
$ 3,650
4rOOO
3,9OO
3,8OO
3r70O
3,55O
4rOOO
413OO
4,5OO
4r2OO
4,05O
4,35O
(4)
th-
vil
Predlctlon
Error
(2)
-
(3)
(sol
o
100
o
o
(so)
(1oo)
(2oo)
o
o
250
50
(s)
lh
-
til2
(4)
Squared
$ 2,5OO
o
l O,OOO
o
o
215OO
1O, OOO
4O, OOO
o
o
62,500
2,500
$13O,OOO
(rl
X1
. Labor
Hourc
2,65O
3rOOO
2r9OO
2,8OO
2r7OO
2,55O
3,OOO
3r3OO
3r5OO
3r2OO
3r05O
3r35O
l2l
It
Astual
tltlllty
Cost
$ 3,600
4rOOO
4,OOO
3r8OO
3r7OO
. 3r5OO
3r9OO
4, 1OO
4,5OO
4r2OO
4r30O
4,40O
36,OOO $4g,OOO $48,OOO
o
" ' -
{
> ( y ,
- y ' , ) '
n
- 2
/ $l 30, ooo
G
11 10
-
51 14 . O18
Column 5 total
32
E3rl O
Chapter:
6 t
-
i l ( v r
-
y' r ) '
n
- 2
The
g0
percent conlldence lnterval estimate at the 1'SOo-hour level of
activlty would be:
. ; - r
( x r
- , ) '
Y t
- t mX S
r i l
+ :
I
n
> ( x , - i ) t
ssoo = (t.tztXsoz
)
{,
.
#
.
(t'uotlu;#?oo
)'
S5oo - (1.771X$ez)ffi
' .
35oO ; (1.771X$62
X1.1547 )
$5OO r $126. 79
lb
33
Ctvptar3
P3-l
PROBLEMS
Coefllclent of corrtation
and cofnclent of determlnation
between:
{a)
TFavel oxpsnses
8nd lho numbr of calls made:
(r)
L
({)
{5)
(6)
m
-
F
-a g --rf
F
-49 -D
tu
-#
Aemty
Dcvlrdonr
({l Squarcd
(A) r (21
l-Squt-d
ilonth
Jrnutty---. 3 3rOOO
Fobnlry.-....
3'2OO
Hfrch-F-. 2'8OO
Apdl*---.
3rOO
il!f--
qtOO
Juno --
qzOO
July...-....--. agOO
Arilu.t.*-. 3F3OO
Scptrmbor.-. 3'5OO
C)GtoboJ---. 3r.fOO
Nolrrnbor..-.. 3'2OO
Dccamber...... 3r4OO
Tltll ......-- E3&l!99
l l )
v
Travcl
Erpcnro
l2l
(31
V- n
x
Erponro Cellr
DevlaUonr iladc
410
120
380
400
430
450
390
a70
.180
.l90
40
aoo
6,000 aO,OOO
o o
2{'OOO tOOTOOO
4,OOO 40 OOO
1,O@
IO' UOO
o o
l5,ooo 0orooo
3'OOO lorooo
12,OOO 9O,OOO
l0,ooo 40,ooo
o o
4,OOO 4OTOOO
79.OOO 520,OOO
: :
6 total
12oo)
o
(.too)
200
(1oo)
o
(3ool
loo
300
200
o
200
o
(301
tm)
(60)
20
l ro)
10
(50)
30
&
60
o
20
900
400
3rOOO
400
100
100
a5oo
900
l1600
2r5OO
o
.loo
6.280 0
: :
_l-g,4oo
l -
Column 5 total
)(Cotumn
7 total
)
79, OOO 79' OOO
J( t g, 4oox52o, ooo)
i 6' 968' OOO' OOO
79. OOO
,
'
d5;7u
-.9464
fz
-
.8957
x ( x r
- x ) ( v t - r )
x( xr
-
, ) ' zt y
t
34
P3-1 (Concluded)
(r)
v
January......
3 3,OOO
February.... 3,eOO
Marlh...-,..
aSOO
April ...-.--. 3r4OO
May....-..-. 3,1o0
June........... 3'2OO
Ju|y..,......-. 2,gOO
August....-. 3,3OO
Septembcr. 3,SOO
Octobcr......
3,400
Xovembor..
3eOO
Dccember..
3r4OO
Total.-...
g?8.40O
(31
(4)
x
F- i )
(s)
tx
--xf
l 69,OOO,OOO
ITOOOTO0O
Chap@r
3
(6)
ttl
tr
-rw -h
tr
--y*
(41x (2) (2)
Squared
2,600,000
4o,ooo
0 O
(b)
Travel expenses and otderc neceived:
t2l
u-n
Tnavcl Erpsnsc Ordcrr Achrtty
Erpensc Deviations Rcceived Dcviatons
{4)
Squarcd
(200)
o
(4ool
200
(ro0)
0
(3Oo)
100
300
200
tt 53,OOO
65,OOO
48,OOO
73,OOO
oaooo
67,OOO
60TOOO
76rOOO
82rOOO
6210OO
64rOOO
80,OOO
(t3,oool
(t,ooo)
(r8,o0ol
TrOOO
(4,OOO)
I,OOO
(6,OO0l
l O,OOO
torooo
(4,O00)
(2,OOO)
t4,ooo
o
200
o
324'OOO'OOO
7,2OO,OOO
l60'000
4g,ooorooo
1,40O,(X)O
4O,OOO
I6,000' 000
4OO,OOO
lo,ooo
I,OOO,OOO
O
O
30,oooro0o
lrSoorooo go,ooo
too,ooo,ooo
I,OOO,OOO
lO,OOO
2sETOOOTOOO
4,goo,ooo
9O,OOO
t6,000,000 (goo,ooo)
4O,OOO
4,O0O,OOO
o o
tg6,ooo,qoo
2,8OO,OOO
40,OOO
l -
7 total
)
(2'
Perfect
direct corretation
would be evidenced
by a coretation
coefficient
of one'
The coefficient
of .94il neyealed
in (lXa)
is closer
to one than the
coefficient
of .8602
in (l)(b).
This means trat the variabte portion
of t'v-
el expense
Yaries mone directly
with mov.-"nt"
in the number
of calls
made than with the value of orfoers received.
To exptain this further, the
relative
coefficients
of determination
are obtained
by squaring
the coeffi_
cients
of correration
and expressing
the ""=*.i.s
a pencentage
in each
case.
The coefficients
of determinalion
are ag,ii
oh
torcarts
made and
only
73'99o/o
tor ordens
received.
This mea"= irt"t approximately gooh
ot
the movements
in the variable portion
of travel
"tp"r="
are retated to
fluctuations
in the number
of ca[s made, ,no itr" remaining
1o% of the
moyements
are related
to other factors.
s7s2o99
-9
1..'168,000.000
2t,2oo0gg
g3o,oog
x ( x r
-
t X
v r
-
y )
J:(',
-;f;G:ry
2Tr2OO|OOO
G -
r / (
l , r 68, OOO, OOO
X52O, OOO )
21, 2OO, OOO
r - - 8 G O 2
24
16441675
)
r' -
.7399
6
Gol umn 5 total )(Col urnn
35
o
I
L
t-
I
L
L
L
I
L
L
L
L
L
L
I
!
b
I
l-
I
I
I
l-
Clnpter 3
P3-2
( 1)
Month
(51
tr'itz
{a}
Squared
0
160,000
25rEO0
lo,ooo
28r9OO
c2?5OO
1O,OOO
I/roo
aorooo
t61900
z'5,OO
0orooo
{6)
E- r W- n
(al r
P)
o
42,OOO
1O,4OO
l rSoo
9r350
21',25O
3'5OO
.loo
l5'OOO
4r550
o
24,OOO
cr)
ly
-rP
(2) Squarsd
(r)
v
Suppllcr
Co.t
(21
v- n
Cost
Dcvlrdonr
5
(ro5l
olt
t 5
Fq
(851
(351
5
75
35
o
80
o
y -
7. y + f r
-
$181000
* 12
-
$11500
i
-
Xx + t r
- 601000 + 12
-
5r 00O
l t
(3) (41
x
F- a
L-abor Acdvlty
Houn Dcvlatonr
January.-... 31r5O5
Fcbruary.... l'395
Mrrth --.... 1't65
Aprll --...-.; tr5l5
Moy............ f
r45
Junc..-....... tralS
July-.-..--. 1rf65
Arguet.--. IFOS
Scp,tcmbcr. 1'576
Octobcr...-. 11535
NoYombcr - f
i6OO
Dcccmbcr.,__-!f99
Totel......9!8,rU
SrOOO
4r6OO
Srt oo
Srtoo
4'a30
41750
4r9OO
6,O80
5'2OO
61130
4r05O
513OO
6O,OOO
0
{4o0}
180
100
(1701
(250)
(roo)
80
200
130
(50)
300
23
111025
4r2i25
225
3,025
7,2J25
7,2i25
25
5,O25
1,2ir5
o
g,40o
452.800 131. 950 40.250
131, 950
-
.977
J(*sz,Boo X
40,250
)'
12
- ( . gr z) z - . gss
b
: ( x - * ) ( v - l )
ffi
37
!.
I
!
{6)
(x
-7W -h
i
I
I
L
I
I
b
I
E
Ctnpter 3
P3-3 1
( 1)
@
(1)
v
ElcclrlclU
Cort
t2l
v- n
Cott
Dcvirtiorr
{4}
F- a
(5)
lt
-rP
rt)
v
-rtz
(3)
x
Lrbor ActvttY
L Jrnulty.'-.. 3 t'OOO
Fcbrue4y.... 1$7O
Merch....,-.
I' Cl O
Aprll -...,..-. 1r35O
May---.-...
t'530
Juna--....- 1r.640
July.-.*.-.. 11620
Augurt...- f
F3O
Soptcmbar. 1'580
OctobGr..-.. 1'O5O
NoYcmbcr.. 11660
Dcccmbcr.. IrO2O
13oo
(30)
4,OOO
(230)
4,3OO t3O
4,OOO
(2301
4,050
(r8ol
4,too
(l3o)
4,t60
-(8Ol
+2n
20
4,tEO l8o)
4FOO tto
4,OOO 37O
4/rOO 17O
20
(rol
30
(30)
(501
(40)
(ool
(60)
o
70
80
40
Dovb0onr
(a) Squercd
(4) x
{2}
(2) Sguared
(600) 4Oo
2,3OO too
3,9OO 9OO
6,900 9OO
I,OO0 2,500
5r2O0 11600
4r8OO 3,600
(l ' OOO) 2,5OO
o o
18,900 4r9OO
29,600 6140O
orSoo lrooo
85.800 25.400
900
62r0(x)
tor0oo
52r900
32,400
lG' 9OO
6r4OO
.lOO
0t'fOO
710OO
t3o,9oo
28r9OO
i
b
i
b
b
I
I
b
I
L
i
b
I
!
Total...... tl&OOO O
,
-
2y + r r
-
$181960
+ 12
-
31r 58o
x
-
xx + n
-
501760
+ 12
-
4, 30
I
L
x ( x - r ) ( v - r )
. / >( t
- r ) ' z( v- 7) '
. )
r -
- ( . 826) - - . 682
424.800
50.700 0
:: :
85,8OO
- . 826
I
(-*za,soo
X
25,4oo
)
u
Pg-3
(Concludcd)
(r)
v
Elcctrlctty
Hotr$ Co.t
(5)
lx
--rr2
{!l_squrt*
. o
z2,5AO
IO'OOO
4N
tgrcoo
trc@
ta/aOO
ror0oo
I'COO
aorooo
67,600
zAEo{,
(c)
tr
-iw -h
(.) x
12)
o
t'5oo
t ooo
tr8oo
TrOOO
11OO
rr2!,O
c'aoo
0
t+ooo
r0'2oo
c,ooo
trl
tv
-tF
{21Squrrcd
.lOO
too
D|00
900
asoo
I' OOO
SrOOO
z6,0o
o
4190O
6"lOO
I' GOO
25.aOO
Cllopter3
el
u
--n
Cort
Dadrdonr
f3)
x
f,lrchlnc
Hourt
(4)
F
-i f
AEdYttt
Dadedonc
Jlurery-..- E I'EOO
Fobrurry.... f
r57O
Ml ch..--. l r6tO
Aptl!-....-- tr660
Hry--..,.-. tF63O
Junr..-.-.- f
rAfO
Juty-.---- f
r52O
Arrlturt..-- f
r.B3O
Sopilcmbcr. f
1680
Oc{ob.r,-. f
rttO
Novrmbcr.. Ir0co
Dcccmbcr- IrC2O
Totrl....-
Ig.gg9
27,COO O 2rt.200
20
Irol
30
(301
(to)
(40)
lcol
t60l
o
70
80
40
o
2,goo
1760
244oo
2.2&
2r7CO
2J4o
1r80
1r7O
42fi
4&O
2W
2t4tj{)
o
(r60)
too
(60)
(r.o)
lco)
lr20)
(tso)
(401
no
2&
160
oa.aoo
y -
8
+ f r
-
$181960 + 12
-
31r 58O
i
-
Xr + tr
-
271600 + 12
-
2r3OO
-
rr(y
-
y)
e8, 3oo
-.93t1
x( x
-
r z
- ( . g33
) 2
-
. gl o
(21
Slnce the coefllclent of determlnaUon for electrlclty coat and machlno
houne
Qe
= .a7Q le
grestor
than the coetficlent of determlnaUon for elcc-
trlclty cost and labor houra
pe
=.682), machlno hours should be used as
the barls for estlmaUng electrlclty cost. Machlne hours explsln morp of
the varlanco In electrlclty cost thsn do labor houlr,
(3)
Wtth machine houru a8 tfio bagls for predictlng
elesffcltlr cost, the l|red
cogt and Ore varlable cogt rato can be determlned by the method of least
squanos ae followrr:
var i abt e r ar e ( t , ) - . x( r
:
i XY
I
Y)
'
X ( x - i ) '
Col umn 6t ot al
_
68, 300
_G
Gof umn 5 t ot ar '
m
-
$' 32339
Fi red
cost (a)
t
i l fi :
-
($' 3233e
,.2' 3oo)
: ( r - x ) ( v - y ' )
r)' : (
v
-
-v)z
(zt'l,2oo
)(zs,4oo )
39
I
I
L
I
I
I
t
!
I
b
br
I
!
i
b
Clwter
3
P34
,
(11
Janualy'..-.
Fcbruary '...
March -.--.
Apfi1 ...........
Mry-....-.'..
Juno-.........
Ju|y..,........'
Atgud.......
Soptcmbcr.
Oclobcr......
llovcmbcr.'
Dccombcr..
I2' 2OO
2r130
2rOOO
117O
2,O50
2,220
2r750
2r25O
2r20O
&160
2'21O
2rl OO
2r5OO
a35O
2rOOO
2r4OO
211OO
2rOOO
2r*5O
2r55O
2,7o/0
a45O
2rlOO
2,3OO
28.800
torooo
2r5OO
lOO,OOO
o
9OTOOO
40,OOo
215OO
22'5,OO
90TOOO
2,5OO
o
lorotx,
430.OOO
4rOOO
1,5OO
04,ooo
o
st,ooo
12,OOO
(5Oo)
13r5OO
39,(XX)
(5oo)
o
6,OOO
I ' COO
000
25rOOO
t oo
12r' l oo
3rOOO
l oo
I rl oo
16,9()0
l oo
15'OO
_g99
Hl gh aa. at aaaaat t t t t " t t " " t t " " t " " " r t t t " " " t t " t t t t " t " t t "
LOsf ......
a a a a a o a a t a a a o a t a a " " t t " t " l '
Dlffelonce.'.
a a a a a a a a a a a a a a a a " t t t t t t '
(1)
l2l
vt ln-h
Malntcnancc
Cott
Cod DevlaUon
{31 {4}
(5)
(6)
rt}
-
' ;;
ui-a
lou-#
tot-lwt-h
tu-vf
Machlnc ActtvttY
Houre Dcyilqgn!
(4) Squercd
(4) r
(2)
Q93urrl!
Malntenance
Gost
s2,290
2,OOO
3 2s0
Machi ne
Hours
2r7OO
2, OOO
700
Low
$2, OOO. OO
828.57
$1. 171 . 43
Varfabfe rate
= 3290
+ 7OO hour:s
= 3'4142857
per machine hour
Hl gh
Total cG,Et...........r.r.............................r.r.........
$2t290t00
Total variable crogt..,.r.' ...........................r..' ...'
l
tl
18' 57
Average ffxgd c(tSt ............................' ...' .......r
$1 .1 71 .19
l2l
I
E
I
b
I
I
!
40
(30)
(roo)
t 0
(rrol
oo
(101
00
130
(r0)
50
{o0l
100
(50)
(.o0)
0
13oo)
200
60
l EO
3{}0
50
o
(roo)
Totrl .-.. E25,920
O
o
172.OOO 76,200
,
,
I
b
I
I
-
I ; Yt + f l
-
$25r 92O
+ 12
-
$2J6O
-
Xx, + o
-
28r 8OO
* 72' 2t 4GO
I ( x - r ) ( v - i )
Column 6 total
-
6lu;;;-5-GGf
-
172'ooo
-
3.40 Yariabte cost rate
4i t0,oo0
b -
x ( x
-
i ) 2
S l n c e
Y
- 8 + b X t
a
- y t - b t
a
-
32' 160
a
-
t 12, 160
a
-
$1' 2O0
t hen:
-
( $. eo
) ( 2, 4OO
)
-
s960
10
P3-4 (Concluded)
Chapter 3
l -
x ( : - z ) ( v - 9 . )
Column 6 total
(31
f t
172, OOO
a
' 1W, - . 9565
(r)
X1
(41
1 2 -
Month
Janualy......
Februaty....
M8hCh.........
Aprll r..........
M8! . . . . . . . . . r. .
Jl l l te..r.....' ..
Jl l l !....' .......
AugU8t . . . . . . .
September.
Octobor......
llovembor..
Decgmbor..
Tot81.......
t2l
It
Actual
Malntonancc
Cort
$ 2,2OO
2r130
2rOOO
2rl 7O
2,O50
2r2,2O
2rl60
2rzf',O
2CoO
2r150
2121O
2rtoo
(31
l yi =a+br ,
Prodlstcd
Malntenence
Cost
$ 2,2OO
2r140
2rO(X'
2r160
2t04o
2r2tn
2r18f.
2r2i2o
2r2g0
2rl80
2rt 60
ztl20
(4t
lh
-
v'l
Predlctlon
Errpr
(21 - (31
8 0
(ro)
o
l o
t o
(201
(301
. 3 0
t o
(30)
50
_e9)
9_e
(s)
Ut
-
t'12
(4)
Sguarsd
$ o
100
o
too
100
400
900
900
100
900
2r5OO
400
$6,4Ot)
2r50O
2r3li0
2,ooo
2r4OO
2,1(x)
2,600
2r4EO
2,550
2,7AO
2,45O
2,4AO
2,3OO
28,800
:
- ^ ! A^ A
Et y- Y
::
t125,920
Column 5 total
-
1 2 - 2
8 t -
(5)
The 95% confidenco tnterval for matntenance cost 8t the 2r5OO machtno
hour level of acdvlty lr
m
Y ' * t p ; s x s ' . 1 1 + i +
\ - - '
- ' f
:
!
n
x( r ,
- r ) '
!+ff
-
sz' .zs*22
s. | , 2oo* ( s. eo) ( e, soo) ' ( z. zz8X?5. 2g822) { ' - +" - w
32' 2OO = $59. 29
v: (x 1
-
i )t : (
yt -
i l z . / (col umn
5 t ot al
)pot umn
i t ot at
I
172,OOO
_
172,OOO
@ - @
. . ,
' ( . 9585
) -
-
. 91489
Machlntr
Hourt
4 1
I
!
I
It
I
L
I
!
I
!
I
t
E
I
I
!
I
b
I
!
I
'
!
I
!
I
l-
I
I
E
Ctnpter 3
P3-5
1
(1) (a) The method of least sguanct:
( 11
vt
l2l
tn-f,
Dtllcrcncc
frorn
Avrngc of
(3) (41 (s) (6)
Ct)
\
Fl -i t
t n-xr2
h-rui -h
l n-i F
Dlllcrcncc
From
Avcragn of
\
tToo
3F0o
K)
Squared
{4}
r (2}
Ebc{rlclty Elcctrlclly Orrcrt OuGtt
(OOOI (OOOs
Co.t Drvladon Dryr Dryl omtttcd)- omtttedl
t2l
Squarcd
(oOOs
omlttedl
Jenuery.-.. $ 4OO
g3OO) I,OOO
(21600)
Fcbruery -. 5oo (2o0) 1F0O
l2'Ooo)
ar2,,,o
4rOOO
I' OOO
EO
I'OOO
lr0oo
IrOOO
G'25O
arooo
250
trooo
o
3 750
400
200
o
100
100
900
500
400
o
100
o
s e o
40
40
o
t o
l o
90
40
40
o
1 0
l o
M{-..-.-... 600 (tOO) 2'5OO (1'OOO)
March --- 600 (2OOl
Aprll--.-.., 7OO O
Juns--.-... 8OO lOO
Juty-..-.-... I'OOO 3OO
Au!tt3t..-... 9OO 2go
Scptcmbcr.
gOO
2OO
Octobor.-- 7OO O
Novcmbcr - 600
Dccambor.. 8OO
2,500
(trOOO)
3,OOO
{5O0}
aFoo I,ooo
o'5oo 3,ooo
o,ooo 2r5oo
6FOO 2,OO0
3,O0O
l5o0l
gtao
I
I
tt
lroo)
21600
(1,000)
t oo 3'5OO
Total...... E8.4OO O 42.OOO 0 34.000 . lxl.450
: ( t r
- r ) ( v , - y )
Column 6 total
-
tl3' 45o
-
3.1015 variable rate
34,OOO
b -
I
!
x ( r ,
-
i ) '
Golumn 5 total
Sl n c e f
-
a + b i l t h e n :
STOO
-
a+( t l . t Ol 5 x 3' 5OO)
a
-
$7OO
-$355
e
-
$345 llxed coat por month
12
P3-5
(Contlnue{)
(b) The hlgh and low
Points
method:
Electrictty
Gost
$1, OOo
400
$ 600
Clupter 3
Guest
Datrs
6r5O0
l , OOO
5,500
Hl gh . . r. . . . . . . . . . a t a a a a a a t l a a a t a a a a a a a a a a a a a l a a a a a a a a a t a a a a a a a a a a a
Low...
D1ffergnc18..r...r.....r.....................r...........' ..' ..t
Varlable nate
-
#=
-
$.1091
per guast day
5r 5t ) O
Fired cost =
$1,OOO
-
(61500 x $.1091)
=
$1' OO0
-
$7Og
= 3291
OR
Fixed cost =
S400
-
(1,OO0 x ll.1091l
=
9{OO
-
StOg
=
Szet
(c) A scattergraph wlth trend llne fltted by Inspectlon:
tE
lu
o,
F
o
o
o t
l-
> 2
= o
9 E
IE
F
o
ul
J
lll
s1, 1OO
st , ooo
s900
:8800
3700
3600
r3500
3400
3300
3200
8r 00
$o
o t , ooo
Fixed cost per
month
detormlnecl
by
I nspcctlort
............_SSSO
Averago
cc'61 ......,..,.. SZOO
Less llrcd
cost.........
g5O
variablo rGrolt
......,..... G
:
2,OOO 3,OOO
/3rOO0
S' OOO
GUEST DAYS PER MONTH
3s50
crooo 7r00o
$.1O vari abl e cost
per guest
day
3r5OO avorlge guest
days
43
t-
t_
I
S
t
I
!
I
E
Clpoter 3
P3-5 (Continued)
(Zl The coefflclent of coretatlon
(r) and tlre coefficlent of determination
(rz)'
uslng data from the requiromcnt
(lXa) answen
x( r ,
-
, ) ( v,
-
Y)
cot umn 6 t ot al
- -
l : ( t
r
-
x) ' >( v,
- y) ' . ' / ( cot umn
5. t ot al ) ( cot umn
3' 45o' ooo
- @
.l 72r92Or0OOrO0OrOOo
3r+50,O00
3r5g4
r44g
'
' 9598
r 2
-
. 9212
7 total
)
L
I
b
I
I
b
I
I
b
I
t
L
(3) The standard error of the estlmate:
( 11
X1
(21
YI
I
!
l
I
L
I
b
I
I
I
b
I
!
b
Month
January......
Fobrualy ....
Ma1ch.........
4pr11 .......,.r.
M8! . . . . . . . . . . . .
J l tJl o .........r.
J l l l ! ......' .....
August .,,....
September,
Octobor.,....
NoYember.,
Decembgr..
Total .......
' roundl ng
eror
iZU t
- y ' r ) '
j
Golumn 5 total
s
(5)'
s29,975
Guest
Days
I
'OOO
1r5OO
2,5OO
3,O00
2,5O0
4,5OO
6,50O
6rOO0
5r5OO
3rOOO
2,50O
3150O
42.OOO
Astual
Electriclty
Cost
$ 4oo
500
500
700
600
800
I ' OOO
900
900
700
600
800
sg.4oo
(3)
Vi =e+Dx1)
Predlcted
Electrlctty
Cost
$ u 7
4f'7
599
650
599
ao2
1, OO5
9S
903
650
599
700
39.405'
(4)
t h-vl
Predlction
Error
(2) - (3t
'
9(47)
3
(ee)
50
1
l2l
(51
(sl
(3)
50
I
100
(s)
t h-vF
Predistion
Error
Squared
(4)
Squared
g
2,209
I
9r8O1
2,5OO
I
4
25
2, 916
I
2r5OO
I
1O, O00
5 ' -
n
- 2
1 2
- 2
-
v
s2
,gg7
.5
-
$54.75
chapter 3
1
r3-5 (Goncluded) ,
4) The9o%conf f dence| nt er ua| f or e| ect r | c} t ycosi l sat 2' oooguest days
would
be:
t z,
ooo
-
3, 5oo
)2
(sg{s
+ ($.tor5
X2,ooo
))
t3548
3318
(t.atz
X330.75
)f
*
#,
*
(t,atz
X3s4.zs
)(r.ozz
)
$106. 35
!
t
34, OOO, OOO
P3-6
(1)
(a) The hlgh and low
polnts method:
Hl gh aa. . t a. . " " t " t t t " " " " " t " t t t t t t t ' l t " t t " t t t t t t " t " t t t " t " " '
LOW aaaaaaa" l t " t t t " t " " t " " t " " " t t " " " " " " t t " l t " " " l t t " l "
Dl f i grcnc9
. t t t t t t t t t t t t t t """t """t t ' l t ""t "t ""t t r"t ""' rt "
Varlable
rate
=
$f
OO
+ I;OOO
Bllletr
= $lO
Flred cost
=
$5Oo
-
Sl'1o
r2r4OO
Blllets)
= 3260
or
Flxed cost
= $4OO
- (!l'lO x l,4OO
Bllletr)
= $260
Cost
4stlYttY
2r4OO
l , 4oo
l.ooo
:1500
400
Sloo
45
I
I
b .
!
!
I
L
I
l
b
L
ChsPwS
P3-6
(Qontinued)
(b) A scattergraph
wlth
a trend
line
fitted
by insPection:
F
I
E
l-
o
ul
J
lll
t500
:oo
9300
$200
$t oo
30
t rOOO
I
BILLETS
Fixed
cost detormlned
by Inspection
= $260
Average
cogt
= S5t52O
total cogt
+ 12 months
= $46O
Average
aetlvtty
= 24,OOO
total
Blllets
+ 12 months
= 2'OOO
Var | abl ecoat =( g460aver i agecost - s26of i xedcost ) +29oooavef t l ge
agtlvl$
= $.1O Per
Blllet
I
I
g
I
Chapter 3
P3-6
(Continued)
(c) (r)
l2l f3)
(4) (5) (6)
rt)
y
V- n
x
F- ; l l x- i f l x- r v- t l l v- t r
Elccrriclty Cost llumbcr Activity (a) (21
uonth Cost DcviaUonr of Bllletr Devletionr Squrrcd (4) r (21 Sguarcd
Jenurry,,.... 3455
(51 2,OOO O O O 25
Fcbrury.... 450
ll0l
1'8OO
(2OO) 4O'OOO 2'OOO tOO
Mrrch........
{35
(251 1,900
(l 00l t0' O0O 2' 5OO 625
Aprf1....,.,.... 4S5 25 2,2OO 2OO 4O'O0O 5,OOO 625
1fry............ 4?O 10 2,1oO tOO IO' OOO I' OOO l OO
Junc........... 475 t5 2,OOO O O O 2i25
Ju1y........,... 4OO (60) l,4OO (8OOl
.
3EO'OOO 36'000 3'8OO
August....... 450 (f O) l ,9OO
(f O0l i 0' OOO I' OOO
' l OO
Scptamber. 4:t5
l25l
1,8OO
(2OO) tlO'OOO
5'OOO c,25
Octobcr....,. 5OO 40 2,4OO
.lOO
160'000 iO'OOO 1'600
ilovambcr.. 495 35 2r3OO 3OO
g0rOOO
1O'5OO 1r2i25
Decomber.. 47O lO 2,2OO 2OO
.3O,OOO
2'OOO loo
Total...... 35.529
_9 _?!.OOO ___9 -999,099
gr.OOO
_8.950
f
-
zy + n
-
$5r52o
+ 12
-
$460
i
-
Lx + f t
-
241000 *12 -
2r OO0
vari abte rate (b) -
:(x
-
rXv.:
f)
-
Sq9 l oFl
-
i l 9
x( x
*7) '
- cot umn
s t ot at
- 6dd; 66d' $' 10125
Fi xedcost ( a) - y
-
bi
-
($.r olzs
X
z,ooo
)
-
$257. 50
(21
The coefficient of correlation (rl and the coofffclent of determlnation (F),
using data from the answer in requlrement (lXcl
tollow:
- l - \ / - \
-
f t x r
-
x ) l y ,
_
V )
-
81' 099--
-
.957
V: ( x r
-
i ) ' z( y,
-
y) '
J( 8oo' ooo X8' e5o )
1 2 - 1 . s s z ) 2 - . 9 1 6
47
t
!
I
I
L
I
L
I
t
L
I
t
L
I
L
i
I
!
I
-
I
I
b
Ct8pr( 3
P3-O
(Concluded)
(3)
Month
J8nuary.r....
Februal y....
M8J1Oh.r......'
Aprll r..........
M8! . r. . . . . r. r. .
J1tJ|9...........
Jlll!............
Au$ust.......
September
October......
NoYember..
Decamber..
Total ..,..'.
g ' -
(r)
v
Actual
Electrlclty
Gost
$ 4{ts
4lto
4{ls
485
470
475
400
450
4it5
500
495
470
35.520
(21
x
Number
of
Blllets
2,O00
1r 8OO
11900
2r2OO
2rlOO
2rO00
1r4O0
l r 9OO
1r8O0
214OO
213O0
2r2AO
24,OOO
(3)
l y' =a+Dx)
Estimated
Eleetriclty
Cost
$ 460
#o
4{to
480
470
460
399
450
#o
501
490
480
t15.520
(4)
lv
-
v'l
(1) - (3)
(s)
1 0
(1s)
5
o
1 5
1
o
(5)
(r)
5
' ( 10)
(5)
U- vT
(4)
Squarsd
25
100
?25
25
o
225
I
o
25
1
25
100
752 o
lcolumn 5 total
-
$8.672
i
\,
I
i
!
The 9506 conlldsnce Interval level for electrlclty costs at the 2r2OO
Blllets level of agttylty would O" 0","--
a + Dx * t esst "' . , / . t *
*
*
( t
-
f ) ' =
Y
"
> ( r - i ) '
$257.5o + ($.rorzs
)(z,zoo)
' ( 2.?2s)($a.eze
)
1 2
- 2
$48o .25 * (2.zza
)($e,ozz )(t.oos )
$48O .25
*
$2O.58
or between a low of 3459.G7 and a high of SSOO.83,
!
b
I
b
I
gt52
l o
48
P3-7
( 1
)
( 1)
vi
Month
t2l
rl'.1-91
Dlffcroncr
lrom
(4)
Fi - i )
Dlflcrencc
Frctory
Dirrct from Averagc
Overhead Avcragc lrbor of 1'80O
Coctr of 37,900
Hourr Hours
Chapter 3
(61 (6)
rr)
lq
-|12
lry
-
rWi
-h
rq
-
vlz
(41
Squrrrd
'(4)
r
(2)
l2l
Squarcd
4O,OOO |2O,OOO 360,000
S60'000 l'2OO,OOO 4TOOOTOOO
t0orooo {2oro0o Irt02,5oo
2SO'OOO S5O'OOO tr2lOrOOO
4OTOOO 5O,OO0 62,500
IO'OOO
f3SrOOOl
72i2,5OO
too,ooo 34o,ooo 72t2)5oo
640'000 lrl6OrOOO 2tlO2rSOO
360,000 OOO,O0O ITOOO,OOO
to,ooo 4o,ooo 160,000
ao,ooo tSorooo 5o2,5oo
torooo
(lorooo) to,ooo
90,ooo 2/3O,O0O 84O,OOO
250rO0O TOOr0Oo I,060,000
t6o,ooo
-
680,000 1,060,000
tSo,ooo S2orooo o4o,ooo
4O,OOO 2OTOOO IOTOOO
o 0 c2r6oo
360,000 C9OTOOO tr322,5OO
25O,OOO 4{tOrOOO 640,000
0o,ooo l6li,ooo 3o2"5oo
l0,ooo 85,ooo 122,soo
9O,OOO 24O,OOo C4OTOOO
o o tbo,ooo
.3O,OO0 !4O'OOO a9O'OOO
25O,OOO 7O0,OOO 1,9OO,OOO
25O,OOO 75O,OOO 235O,OOO
t6o,ooo 320,ooo c4o,ooo
4O,OOO 4O,OOO 4O,OOO
o 0 9o,ooo
25O' OOO 45O,OOO 81O,OOO
360,000 OOOTOOO ITOOO' OOO
25O,OOO 4OO,OO0 84O,OOO
o 0 t8o,ooo
9O, OOO 27O, OO0 81O, OOO
l O, OOO (3O,OO0) 9O,OOO
(3)
xi
20A
' {
J!ll.'....... 3 81600
Fcb....-...
gr9O0
ll!1...-... 81050
APt- '..-...
grOOO
l hy--.., I' 160
Juno.--. 7'550
July --... 7,050
Aug....-... 61450
Scp......... 6'900
OcL........ 7' 5OO
NoY.-.-... 7rl 50
Dcc...--. 7' 8OO
4p
Jan.....,... 8r7OO
Fcb.-...... 9,3OO
Mrr......... 9'.iOO
Apa........ 8,7OO
i fry,..--. 8,OOO
June.....- 71650
Jul y........ 61760
Aug....--. TrtOO
Scp......... 71350
OcL........ Tr25,O
!lov..,-... TrtOO
Dcc..-.-. TpOO
20c
Jrn......... 81600
Fcb...,.....
g,3OO
Mer.........
gr4OO
Apr....-...
8r7OO
_
l l ty..-....
SrtOO
Juno.......
?1600
July -......
Z'OOO
Aug.-......
6,900
sop.........
?rl oo
OsL........
Z,EOO
Nov.........
Z,OOO
Dcc. . . . . . . .
Z, OOO
Total.......
S2g4.4Oo o o
ooo
2r0oo
1, 060
I
rl oo
25O
{3so)
(8s0)
(1/450)
(t,0ool
(4oo)
frso)
(roo)
800
lr4oo
lr4OO
800
l oo
(2rol
(t,tgol
(8ool
(6s01
(cs0l
(8ool
(4ool
700
lraoo
1Foo
800
200
(3oo)
(eoo)
(1, OOO)
(8o0)
(4oo)
(ooo)
(3Oo)
2rOOO
2,4O0
2r2OO
2,3OO
2rOOO
lr0oo
lr4OO
I' OOO
l'2oo
lr7OO
I ' COO
lr9OO
2, 1O0
2FOO
2.,.OO
2',,OO
2rOOO
trSoo
tr2oo
tr3oo
r'5oo
'tr7oo
rr5oo
lr8OO
2rOOO
2poo
2r3OO
2,.OO
2,OOO
t,8oo
lr3OO
1, 2O0
l r3oo
1, 800
1, 500
1, 9OO
64.800
200
600
400
500
200
ro0
(4oo)
(8oo)
{600}
lro0)
(2oo)
100
300
500
aoo
4(}0
200
o
(oo0l
(5oo)
(3oo)
(ro0)
f3oo)
o
200
500
600
aoo
200
o
(5oo)
(0oo)
(5o0)
o
(3oo)
100
5. 280, OO0 11, 625. 000 29. l A5. OOO
(9
I
L
I
I
lL
t-
I
b
I
,
\,
L
I
i
b
I
!
I
b
I
b
I
Lr
iL
I
b
I
qww3
P3-7
(Continued)
p -
z ( x t
-
x ) ( v t
-
l )
x( xr
-
x) '
Golumn 5 total
51280, 0O0
32.20 variable
cost rate
t hen:
Col umn 6 total
11' 625' 000
t -
Sl nce
j -
a + bi and
t
'
I;yt
* n and i
'
Xr
1
t
rtt
(Sesa, 4oo
+ 36)
-,
+ ($z. zo)(o*' aoo
* 36)
,
tz '
eoo
:
3.tl fdT:.t
ovelhaad cost
(21 The coefficlent of correlation
and the coefficient of determination'
using
data from the regulnement
(1) answen
x( r ,
-
7) ( y,
-
Y) cot umn 6 t ot at
11r025, OO0
11rA?S
' @9-
:
'
-
@)
. v153, 938, 4OO, OOO, OOO
1 2
- ( . g g z o ) 2 - . . 8 2 8 0
1 11625 , O0O
12r4O7
1191
- . 9370
chspttir3
(3)
fi
P3-7
(Continued)
Month
g
Janual Y......
FobruSrY
'.'.
M8FCh.r.......
APrl l . . . . . . . . . . t
M8! r. . . . . . . . . . .
J11JIo...........
Jl l l ! .....' ......
August .......
September.
OCtobOl......
November
..
December..
ry
JanuatY......
Febl arary....
MdFGh, . . . . . ".
Aprl l ...........
M8! . . . ' . . . . . , . .
JUl l ' . . . . . . . . . .
Jl rl ! ' . . . . . . . . . . .
August.......
September.
Ogtobor....,.
November ..
Decembgr..
20c
January......
February....
Mi hCh. . ' . . . . . .
Aprl l . . . ' . . o. . . .
M8! . . . . . . . . . . . .
Jung. . , . . . . . . . .
Ju| y. , . . . . . . . . . .
August . . . . . . .
September.
October......
November . .
December..
Total
$ 8,340
9]2i2O
8r780
I,OOO
8r34O
81120
7'p,zo
6rl 40
6r58O
71680
7
1460
81120
8,5O0
I,OOO
8,78O
8r78O
8,34O
7,9OO
6,58O
6,8OO
7
t24O
7,680
71244
7r9OO
8,34O
I,OO0
I,OOO
8,780
8,340
7r9Oo
6,8OO
6,580
6,8OO
7,9OO
7,24O
_
8, 120
E284.4O9
(4)
Ui -vl
Prudlction
Emor
(21- (3)
It 160
680
170
o
(1eo)
(5701
30
3l o
320
(r 80)
(31o)
(320)
140
300
520
(80)
(34o)
(250)
170
300
1 1 0
(43o)
(r40)
(4oo)
260
300
400
(80)
(240)
(3o0)
200
320
300
(4o0)
(240)
(s20)
(5)
tvi
-
vF
Prediction
Error
Squared
(Cl_Squarea
$ 25,600
462,4OO
28,9OO
o
36, 1OO
324,9OO
900
96, 1OO
to2,40o
32,4OO
96, 1O0
1O2,4O0
19, 600
9O,OO0
27Or4OA
6,4OO
I l 5,600
62,5OO
28,9OO
9O,O0O
12, l OO
184,9OO
l 91600
l 60,000
67,600
9O,OOo
16O,O(x)
6,4O0
571600
90rooo
40rooo
1O2|4AO
90,OOO
160, OOO
57,6OO
27O,4OO
|x1.580.200
The standard
omor of thc cstimate:
(r)
l2l
(3)
x1 lr
luj=
?.+.brJ)
Actlsl
Predlcted
Dlract
Factory
Factory
Labor Overhead
Overhead
Houns
Gosts
Costs
2rO00
2'd,oo
2r2OO
2,3(X)
2,OOO
1,9O0
1,4(X)
I,OOO
l,2oo
1r 7O0
1, 600
1, 9O0
2r1O0
2,30O
2r2OO
2r2OO
2,OOO
l r8OO
1, 2O0
l r3oo
l rSoo
l ,7oo
1,5OO
1,8O0
2,OOO
2,3OO
2,3OO
2,2OO
2,OOO
1, 8OO
l r 3OO
I , 200
1r 3O0
1, 8O0
1, 5OO
l
r9OO
8r5OO
9,9OO
8,95O
I,OO0
8r l 50
71550
7rO5O
6,45O
6,900
7,500
7r l 50
7,80O
8,70o
9,3OO
9,300
8,7OO
8,0oo
7,650
6,75O
7r l OO
7,3lio
7r?So
7,10o
7r5OO
8,60O
9r3OO
9,4O0
8,70O
8, 1OO
7r60O
7,OOO
6,9OO
7, 1OO
7,500
TrOOO
7,600
s284.400
o
ff,800
I
I
iL
I
I
! chtPrer 3
l_
Ps-T
(concluded)
5 t
=-
-
i >( y,
- y- ' , 12
- , @-
; $i l , 56o' 2oo
- - [ r ga- zt 2 - s324
b
i I t - 2
' \ - 6 : z
\ 3 4
|
(4) Slncc a large sample
ls usod
In thls
probtem, tgS%
= zgsYo and the confi'
r dcnce lnterval
ls:
i
Y' t
i z e s y r 9 '
(sspm * ($z.eo
)(z,zoo
))
t (t.eoo
)($sze )
l38, 78O t $635
I
I
b
t
I
tt
I
I
L
I
I
b
*
I
I
E ,
!
I
L
!t
)
b
I
Cnsgter
3
52
P3-8
(r
)
(1)
vt
(4)
Fr
-t)
ActlvltY
Dovlation
(5)
ui -7f
(4)
Squarrd
(6)
Vt-7Wr-h
tt)
ti l -h"
(2)
Squarsd
(2)
ru-h
(3)
xi
[.abor
jloto
950
1rO24
1rl o0
' l , l
1r313
1,.C1
11552
11372
t,360
11455
t pl
I r l So
009
1)Oz2
1po
r}283
r,&?9
r' 260
lr44O
r}20o
r1335
I rl 64
1$73
11124
2,.JCO
Maintenancc
Coct
Ug1!r
Cost
Dovlrdon
.lan,
ZOe ' .-.$' l' l05
(286)
Feb. ,
2OA , . . . l ' 110
(365)
fnar.,
2OA ...
tt39O Pf)
Oot.,
tOO....
l' 449
F2)
May,
2OA. ' . '
I t Gt S
t 37
. t une, 2OA
. . l F?5
U
JulY,
2OA -..
1' 687
2Oo
Arg.r
2OA ...
I;OSO
169
Sep.,
ZOI ...
f
1595
l l /f
o"t., ZOI ....
1t675
104
not . , 2OA
. . . 1, 405
t t 6)
o"". , 2OA. . "
1125. 1
1230)
.,;;:;io"
..'
eso
(cgr)
;;;:,
ro",.,.
I' 175
(3oc)
"". , 2O8
"' 1/ ; ?5
158)
;;;:;ro'
"" r'5oo
25
""r, aOt
""
I' COB
127
, ; ; , 2o8
. . l ' 6s3
172
, ri t , ' t o"
"" 1' 675
t g4
;;;;
2oB
"' 1'724
243
; ; ; . , 2oB
"' 1' 626
145
O",.r
rO"
"" 1]576
04
*; ". ; 2oB
"' l ' 633
172
;".: 2oB
..' t,/tt'
(63)
Totsl.-..$$ J
(2e0)
(210)
( 13r )
(02)
73
21
312
132
128
216
(ro)
(eo)
(24r)
(2r8)
1zo)
43
00
l o
200
60
05
ct6)
133
(1r o)
J
84,1@
46,656
l 7, l 6l
8,{d
61329
u1
97rg
17,121
16}876
4,Sl?,l5
3C1
8,l oo
68108t
471324
aoo
11849
eBOr
l oo
40,OOO
2"oo
9rO25
51776
17,689
13,456
543.682
82r94O
78,84O
t 1, 921
zo4
to,o0t
921
c4..:72
22FOB
r4,304
41r?t o
1t4/4
20'7OO
1271''71
06'708
I rl 20
I1076
12$73
1'72O
38,8OO
t 2' 150
'
t3r776
ct,t+0)
2i2,876
T,3S
G51.300
8i 1796
133)225
8128t
I , O24
18, 769
11936
12143'6
2AF81
121996
37,636
6t776
52,90O
2811961
93r636
3r136
c,25
t 3rt 29
23F84
37,6;:!6
60,o49
21rO?5
8rgl6
zfF84
3r9O9
<
34ee
-v
7
-
I y t
+ n
-
-
! X, j
* n
-
f -
335, 54{
+24
-
$11481
? 9 , 7 6 0
+ 2 4 ' 1 1 2 4 0
x( xr
-
t X v,
-
i )
- r 2
x ( x r
-
f ) " x ( v r
-
Y) -
651, 30o
651, 300
- 0 6 )
J(ss3, 682
X
t ' o
Column
7 total
)
651, 3OO
-
fr|sfr
eol um4
ffitumn
5 total
r2
- (, ezot zs
)z
- . 758162
. E59798, 983
' 092
- . 870725
53
I
b
t
I
!
l
S
I
I
b
I
t
i
I
-
I
!
I
t
!
Cnagter
g
P3-B
(Cohtinued)
(r)
(2) F)
vt
ru-f,
-.-:!
Mtlnttnanct
ion
Machlnc
Uontf,,
.
*"
Dcvladon
ry
,I',-r0o....31'195
(2so)
8oo
;;;:;
too,,' .
r' 116
(365)
7u
;;20A...
i ' 3eo
'
Pl )
?tt
ior-
ioo-.. ttas
t32)
e87
mt y,
t O", . . . I ' 018
197
I ' 186
,;;;,
2oA..
t,EE
u
l ' l tn
]",r,' ro"-.
1' 087
2Oo
1391
;;;.,20A...
t,6o
l oe
1' 2u,
Sep. ,
2OA. . .
1' 595
1t 4
I t l 86
oct . , 2OA*
l ' 675
194
t , l $
Nov.,2OA' ..
l ' 4O5
f' O)
997
Dec.,
2OA..'
1331
(23O)
841
Jan.r
2oB '.'
95o
($r)
60'2
Feb. , 2OB. ' .
1' 175
(306)
73t l
Mar.,
2o8...
1,4?5
FO)
1' O*
Apr.,2OB...
r.rfo
25
1' t*
MaY,2OB
..'
I' OOB
127
1' 174
June,
2o8. .
I ' O53
172
: 2*
Jul y,2oB
' -.
,,i zo
t94
1,.oA
Aug.,
2O8...
1t124
28
13,23
SeP.,
2OB ' ..
1' 026
145
133x)
Oct . r
2OB. . .
11675
94
l ' 1S
Nov.,2oB' ..
1' 653
172
\A7
Dec. , 2oB. -
1118
(O3)
I ' O35
Totll..-.5.!!!l J
25'8oo
({)
trl
-i)
ActivttY
ry!91!gn
(2o0)
(3:lr)
(88)
(88)
t t t
70
214
163
t l l
171
rrsl
t234.l
(573)
(342)
1 6
oo
00
171
189
28
' 155
00
l 02
(5)
v,-il'
(4)
(6)
V
-
xW' rt
rD
v-
j f
(2)
Souarcd
8rJe6
$332s
8,'81
1'o24
l 8' 769
11936
42,436
2,.FO1
12'996
37'Gi:l6
6J76
52'9OO
28t'0ol
93'636
3' 136
. o,25
t0' 129
z?.F84
37'336
59'o49
21,p25
8p3O
2aF84
3,S9
Squrrod
7oJ56
to9r50r
7r7U
7;t+4
12,321
a,|1
a8,650
23FOe
121521
2' ,3l1
oro84
641753
328r38
116, 964
a25
3,ooo
0r8Ol
29,l 1
9,721
01r5O4
21tQ?s
Irl oo
26,44
(4) r
(2)
76,076
120, 8t 5
8roo8
21816
15.r2O7
3,a76
44,4S
27F17
12,A31
33,174
51928
53,82O
304,203
1041652
(s4ol
lFOo
121573
N,112
36'665
oo,,:0,
n1476
8'4OO
27r8*
I
!
b
I,013.8?9
lol0'600
,
,
- x Y t + f t - s 3 s r $ &
- f ' 2 5 r 8 O0
*
- - '
1 i r ( x t - x ) ' x ( r r
- Y )
+ 24
-
$1,481
24
- Iro75
(Gol umn
z tout
)
1, O13, 826
1, o13 , 826
@, 506)
- f f i
- ' ee1176
(10)
l,600
2F20
J
J.o35349
Columq
Cofumn
5 total
r ?
- ( . 9 9 1 1 2 6
) 2
- . 9 8 2 4 3 0
ffi46@366'o88
v
54
chaotar 3
P3-B
(Contlnued)'
i2l
-
'
Th; activlty moa3uro us9-d to
predlct- maintenanco
cxpcnee should be
machlne
h6urs, nrhlch wlll result In ttre following
cost cstlmates:
b -
x( :
-
t ) ( v
-
Y)
: ( x - f ) 2
Cotumn 6 total
Column 5 total
s I , 195
I , l l 6
1, 39O
lr4d.g
1, 618
1r5,?S
11687
1, 650
1r5f i 5
I , 675
1,4o5
1r?J5',l
950
11175
1r4?S
1,506
1, 608
1165!l
11675
1?724
11626
1, 575
11653
I , 418
sss.5!{
1, Ol 3
, 826
3. 979213
-
mEim
-
variable rate
slnco
y r
a + bi
rthen
the estlmated
fixed
cost ls determlned
as follows:
t
r j --bl x
r
r
s1,481
-
(3,e2e213
x1' O75
)
t
-
$l ' 481
- 31' 052. 65
e
r
3428.35
(r)
l2l
(31
x1
rt
Ui=
1.+-bx!
Actiral
Predleted
Machine Malntenance
Malntenance
]lours Cogt
Cogt
(5)
tq
-viF
(3)
Months
(41
ln
-vil
Pmdlctlon
Ertor
(2)
- (31
q26)
(4r)
(s)
54
2A
(33)
(0)
I
5 .
27
o
(r)
30
29
('tl)
(34)
30
5
I
o
rt)
6
i 3 '
lze'1
E-lg)'
(4)
Squared
3 676
11681
25
2, 916
7U
I rO89
36
8t
25
729
o
. 1
900
841
5r041
I , 156
900
25
81
o
49
36
169
576
sl zsr 7
Jan. , 2OA. . . .
Feb.r 2OA ...
Mar. , 2O4. . .
Apr . , 2OA. . . .
May, 2OA, . .
June, 2OA, .
Jul y, 2OA, . . .
Aug. , 2O4. . .
Sep. , 2OA. . .
Oct . r 20A, . . .
Nov. , 2O4. . .
Dec. , z0n. . . .
Jan. , 2O8. . .
Feb., 2O8...
Mar. , 2O8. . .
Apr. , 208, . . .
May, 2OB
. . .
June, 2O8. .
Jul y, 2O8. . .
Aug. , 2O8. . "
Sep. , 2. O8. . .
Oct . , 2O8. , .
Nov. , 2O8. . ,
Dec., 20-Et...
Tot 81. . . . . . .
809
7#
987
9,87
1, 186
1r 154
-11291
11238
11186
11246
997
841
.
502
733
I , O9O
I , 135
1;174
11246
1126,.
1,323
1,23O
1, 165
11237
I , O35
39.8gg
3 1&21
1r 157
1,395
1, 395
1r 59O
11558
1,693
11641
1, 59O
11648
1,4O5
1r?52
920
I r l 46
11496
1r54O
11578
11648
1, 666
11724
11633
1, 569
1,ffO
1r 4f . 2
g{z'
' rounding
error
j t ( "
t
-
v ' ) 2
Column 5 total
2 4
- 2
I
\
" ' -
\ n
- 2
1317
,817
,
-
\ f r-
-
S2B. 4sBl o3
lF
I
I
>
!
I
+ Clqter 3
I
I
P3-8
(Cgncluded)
!
r
(a)
ffirfflffi:;|;ffi,T:"t""'
lor maintenance
cost at the 1'1oo machine
b
I
I
b
I
I
I
t
I
!
I
tt
I
I
!
55
t - t l
{ { r r
-
x l
Y'
* t g; s* S' . , i 1 +
I
+
r
- - ' c v ' -
\
n
t ( r ,
- x ) '
i
- _ _ - ^ - . i r
( t r t o o - 1 , o 7 5 ) 2
9028 .3tt + (s.ezezl 3
)(r,1oo)
r (e.ozl
)(ze.rcarm )!
, *
*
-
r,agsff
31,505.48
* $80.26
I
! :
!
b
\,
1
>
I
56
Cnapter
3
W
= a + b S
CASES
= 5.062
+
(.023) (1' 20O)
= 5.062 + 27.6
= 32.662 or about 33 total workens
Total workgl.s negdgd ....,.........rr...............................r.
LeSS
pgnnanent WOfkgllS ......' ......................t"""""""
Number
of temporary
workers needed'
Regression
2 appoars to be better than Regrcsslon 1 because:
i"i-
O"t outside the rclevant r.tnge have been excluded'
thereby nemov'
i ng anY bi as.
(b) fhe standard error of the estimate
(s') for Regrcssion
2Js smaller
than the standard error of the estimate for Begression
1 (.432 com'
pared to 2.012).
(c) The coefficieni of determinatlon
(r2) ls hlgher for Regrcsslon 2 tfian
the coefficient of determinatlon
for Regrcssion
t (.998 compared to
.962).
Jim Locter can use the legression
in his
plannlng for tempolary
workers
lf the foltowing condltlons exist:
(a) The forecasted dally shlpments
are
greater than 3oo and do rrot
deviate too much from the agtual shlpments.
(b) The amount of work to be done is dependent only on the number of
shipments to be made and does not change from shipment to shlp-
ment.
(c) Worlier
productlvlty is erpected to remain approximately
the same
as that experienced during the
period used to develop the negnes-
si on.
(d) A strong cause and effect relationship exists between the depen-
dent variable and the Independent variable.
(e) The time frame for a forecast ls short'term'
The regression could be improved by the following:
(a) Redeveloplng the regression using the number of hours worked as
the dependent variable.
(b)
Performlng another analysis ll rush orders or deviations of actual
otderc fiom forecasts occur wlth any degree of ragularlty.
(c)
tnvestigating the historical data used as a basis for the regrcssion
to determine lf there aFe any further unusual circumstances that
should be temoved from the data set.
td)
Redoing the regression after a
period of tlme' such as four to slx
months, to discover lf thens have been any changes In the relatlon-
shl p bet ween t he dependent and t he I ndependent varl abl es.
c3-1
(r)
33
1 0
23
tzl
(3)
(4)
l
-
I
I
t
Clnpter3
c3-2
( 1) The| nct oase| nyassoci at edwl t haun| t Jncneasei nxl s. l . 2, Ther ef or e, e
Soo-untt
tn"r""i"
tn x
wtti-J;ilin
a 6'O'unitln"t"t"e
11'2
x 5O0)
in
y
(2) [:i"T,::riJ"i?,1P."rr.
unreriable
rf the corrararon
rs spurious'
rhe
' assumpt i oni st t r at 1; #i " " ] ogi * r . Li " i i " " shi pbet weenout put
and
the use of efee#c
powgr and dirsct
labor'
(b) rrre equa$on
may
b; Ji"ble
undsr
ii"
"onattions
at the time
of th
studv,butfconOl ti Jns-tt' "ng"' theresul tsmaybeunrel i abl e'
(c) D"tj;;;;;-
limitJ
i" " l'ige
of 5oO.2'ooo
unlts.
(d}rt s-assumeat rrat ast ral ght -| | neassumpt i on| sva| | d.
(e)rrrecoemcbnt of correl at | onl g"' """, ' "of t t reext ent t owhi ch
two
varlables
ars ,;;i;ttiearty.
n i"
t t"railve
masune
of
good-
ness
of fit. More
or iil"-""tiatlon
ln
yi" ttpl"lned
by ora rugrcssion
egua*on
for direct
f,rl]o,
nours
than'ior
elbctrfc Powen
that
ls' the
esuatlon
for dlrsct
ffi;;
iiouo
ts a uJtt"r
flt ttan
the equatlon
for
elecilric Power'
( 0Thest andar der or of t heest l mat e. l sameasuneot var | at | onf r om
the regrcsston
ltne.li
il; ;;t
"tlon"
tt" not-alty
dlstrlbuted
about
the regrc"",on
.qu"ii*,
tne
sGndard
errcr
can be lnterpret-
ed ln tllre
same
r"y'",
it " "t"no"tu-i-"'r"uon'
The
stsndard
entr
ls
gruater In the case
;id;;
i"Uo'
f'o'u-o
tft"n
In trs
caso
of elestric
power'
GGA-canada
(adapted).
Reprint
wtttr
permisslon
( 1) An advantage
of Alternative
A ls that using
time-as
an IndePendent
vari-
abte is a conyenl""i*"V
to take il;
;;;;ideqtlon
all
posslble
factors
that may be lnfluencing
the depeidtnfvartaUrc
Juring
each
period of
time.
A disadvantage
of Alternatire
A rs that there
ls no loglcal
rclation-
shlp between
years and rental
expense'
An advantage
of Atternatf"e
b-ts that this method
ls loglcal
because
as rovenu""
tnciase,
the stgryi
lnrr""r",
and, thus,
rsntal
exPense
lncreases.
A di;-d';tage
of eliernatfv"
6 t" that an estimate
of ruv-
.n""il"J#[l;
of Arternative
c is that the mathematicar
carcurationr
are relailvely
eaiy and
the mc-thod
ls easy to underctand'
A disadvantag
of arternativ,
diJ.ffi
il;
arnrrm"t.
.rr-r"9" rs an oversrmptfica*on
that does ,rot *r"oi;;;';;t
rchilonship
between
varlables'
OuPter
3
C3-3
(Concluded)
| 2| Mot orcoGor?orat i onshoul dse| ect A| t ernat i veBbecau. set here| at i on-
rhtp between
neyan,r"
riJt}
" ,"nt"l
.;;;;;b
ioglcal'
the coefficient
of
corrslafion
ls hlgh,
rnaiii"
tt"ndard
eqor
of the estimate
ls low'
(3)
A "t"ti#;iirr[iiq*
i" "'n-"pp-priati-ieirtoa
for es*matins
rental
cxpense
betorp
i[otorro-;;ft.d"iTi'il;["
attto
Parts'
A statistical
tcchnigue
attempts
to- -"""r-
ttrt "o'"iation
between
tre variables
trat
aru
pnesumeO
to fral]IE"it
"nA ttftA
rclatlonshlp'
and such
a
relailonship
appea*
to "iriiiirti"
"ttuauon'
of cout:e'
Motorco
ls
lssumrng
that
any neratl-J"iiJs
tnat-.rr=t
in *re hrstorrcar
data
wttt con'
tlnue
ln ttre ftrture
wnnout-ln;ig"'
Management
mav-want
to adiust
the
variabtes
for chang".
i;i rr"ip*tt
*irr"t"iu6
and
Motorco
may
wish
to
i ntroo
uc-e
-oit'tt
q Jantltative
vari
ab les'
c3-4
(r) The
phraso
,,-gle""ion provides a rclational
statement
nther than a
causal
statementn
means
that reg;"ion
analysls
ls used to determine
a
relationshlp,
but not nt"""sarffyi
cause-and'etfect
relationship'
A spe'
clftc
value for a negnession
cosfficlent
does not imply
that the lndepen-
dent var | ab| e( s1ca- usesachangei nt hedependent var i ab| e.
The meaning of each of the "VtJb;i"
in tt i basic
formula
for a tegression
oquatlon follows:
y' r = estlmateJ value of the lth observation
of the dependent
variable'
a=t hey. axl s| nt er cept or const ant t er m( 9. 9. , t hef i r edpor t i onof a
semivariable
exPense)'
b = the rcgrcsston
coefficient
corresponding
to the Independent
vari-
ab| er ( e. g. gt hevar i abt ecost el ement associ at edwi t haoneuni t
change in actlvlty
r).
x1
= the tth ou""r""tibn-of
the first Independent
varlable.
c = the regrcsslon coefficlenl
iott""ponding
to the lndependent
vari'
ab| ez( e. 9. , t hevar i ab| ecost e| ement associ at edw} t haoneun| t
change ln activity:).
21 = the lth observatibn
of the second
independent
variable.
d
= the error term associated
with the lth observation.
Statistical factors used to test a negrcssion
equation
for
goodness of flt
i ncl ude:
(a) The coeffi ci ent of determi nati on,;2,
whi ch l ndi cates the
porti on of
the varian"" i" the dependent
variable
erplained
by the lndepen-
dent variabtes. A coefficieni
of determination
approaching
I lndi-
cates a good llt.
l2l
(3)
59
(b)
(a)
(b)
(4)
I
lv
I
L.
l
b
I
lb
I
|-
I
b
L
t,
I
!
I
I
!
l
!
b
I
I
:,
L
Clapter3
l -
C3-4
(Concluded)
c3-5
( 1)
(c)
(d)
(e)
The standard orror of the estimate which measures the dispersion
of the observed
points about the regression line. A standard error of
the estimate approaching zeno Indicates a
good
flt.
The term
"linearl$l
wlthln a relevant ranget' means that in a specific
sltuation, a straight-line relationship between the dependent vari-
able and the independent variables can be assumed only within the
range of historically observed values.
The term
rconstant
variance
(homoscedasticltyl" means that the
distrlbution of the observations about the regression line is unlform
for all values ol the independent varlables within the observed
rrange of values.
The term
"serial
correlation" refens to the lack of independence in a
geries
of successlve observations oyer tlme. The deviation of a
value from the regression line should be unrelated to the deviation
of any other point from this line.
The term
'normality"
means that the
ioint
probabllity disHbution of
Ure variables ls normally distributed
(multlvariate normal). The fre-
quency
of the observatlons should approximate a norrnal curve.
The term
smultlcolllnearlty'
refers to tfie correlatlon of lndependent
variables. When Independent variables are hlghly correlated wltfl
each other, the relationshlp(s) between the Independent vzrlablee
may obscure the relationship between the lndependent varlables(s)
and t he dependent vari abl e.
( a) D = ( 2. 455+( . 188X1, 5OO, O0O* 1O01O00) ) x 1O, OO0unl t s
= (2.455
+ 2,821x 1O,0OO unlts
= 5.275 x 1O,OO0 unl ts
=
82,750 unlts
(bl
D = (2,491 + (.441(12,OOO,OOO + 1,O0O1OO0)) r IO,OOO unlts
=
12,491
+ 5.28| x IO,OOO unlts
= 7, 771r l O, OOO unl t s
= 77,71O unlts
The 5o7o confidence interval for demand is calculated as follows:
D =
104,160 unl ts=
{.59X,922
x 10,OOO untts)
= 1O4r 16O unl t s
*
6, 361. 8 unl t s
or between 97,798 unlts and 1 10,522 unlts.
l
:
\
\
tzl
&
c3-5
(3)
Cl?.pter
3
(Concluded)
Eguation 4 ls the best The coefficient of correlatlon and the coefficient
of determination arp the hlghest of ttre four equatlons. The coefficient of
determination
Indlcates that 70.3oh of the sample variance of automoblle
sales ls explalned by the rcgrcssion. For
predigtlve purposesr the stan-
dard arror
gf the estlmate a|.922 is also tfie lowest of tfie four models'
giving the tlghtest
(smallestl phyrsical confidence Interval of any of the
equatlons.
Equation 3 assumes that factory rebates
(R) are dependent on advertls-
ing funds
(A). The rcsuJts of the analysls show that factoly rcbates and
advertlsing funds are almost totally independent andr ttrereforc' cannot
be used to predict
each othea The rcsults of Equatlon 3 lend credlblllty
to the use of A and R ln Equatlon 4. The Independence of A and R
leduces ttte posslble
negative aspects of colllnearlty'
(4)
I
!
S
I
CHAPTER
4
DISCUSSION QUESTIONS
'I
O4-1. The five
Parts
arc:
(a) Direct nraterblg reqtbn
(b) Direct lsbor ceclbn
(c) Frlory ovefiead
(O Work h
Pr@oer
hventories
(c) Fhbhed
grood hvmtorbr
*2. iho bahnc" rhoet ir t 3tal.ment ct finsncbl
pcrttbt; the hcqrr ctBternont b a dalement of
sttYity. The incqne lbtement is ccnplementary
to thc babnce sheet, munthg in padicubr for
tho ctrange in hr prcprietary equrty Bs a resull
of operatims during the year. In |hat respecl' the
incornc atatemenl ir eeaentially nothing more
than a major rection of the retained eamings
accounl. Thereforc, tht rsvenue and expense
accounls in the income 3talemont have been
lcrmed'cxplanatoqf ac@unl3, explaining the
cbb and lkrw of r.YcnueE and cxpensee lhat
bod to thc new hcqno (or bce) and to the new
rrtahed camhgs balancc h the balance sheet.
O4-3. Thr ordinary babncr rhecl and incqne slate-
menl aro htended to ptwkJe hlormalist as lo
financial peilion and resulb of operation of a
burinesl, in sctordancc wilh several assump'
liqs that arc made h preparhg |he stalements.
Frqn the standpoinl cil the criticisms rnade, the
most important cil these assumptions are lhal
cocl lost appropdale arnortization of cost mea'
rurca unelgired cct, and that a business mey
bo a$umod lo bc gohg to conlinue operatbns
i ndcl i ni l el y i nto l he future. Accounti ng state-
mcntg sre usually prepared on lhe heory lhal a
cale or
gome
other definite event is essenlial
bcfore revenur i s recogni zed. Basi cal l y, the
aseot sUe of a balancc aheet coctaha a preson-
tstbn o{ the anrounts cl cost incurred, which can
bc pr esumed l o bencf i t f ut ur e per i ods. ' An
incornc slalement presents the srnounl of rov-
cnue recognized as having been realized during
thc period, less the podioo cl all cosls incuned
thsl doe3 not appear to be lairly delerrable lo
ftnurc perinds.
Thc ircome staternonl is prirrnrity a masure
cd what lres been camcd, and not a measure of
'camhg
power.' For plant assots, the balance
rheot b pdnarily a rnasure cl accountability for
cxp.ndi tureE,
rhowi ng acgui si ti on cosl s l ees
codr sllocalod to past operatbns. This rneasure
of accounlability may br quile diflerent from
1rur velue.'
To hcreese ilg usefuhess as one elemerd in
judChC
eaming porver, the ircsne stalement is
picparcd
with a dietinclion between operating
and nonoperaling items. For the samo roason,
c.rtain iterns may be climinoled frorn the incorne
sl st omenl and shown i n t he st at emont ol
nrtained eemings. However, the effec-t of nmre'
curring and nonoperaling transaclions is not
entirelY eliminated.
lnfonnalion revoaled by a serios of income
3tatcments b morc rignilinnt in
iudghg
eaming
power than informatbn revcaled by ane hcqnc
statcmstl. The incqne of a bushess rnay folbw
or .Yen exaggetat the ups and downs ol the
bueinesg cyclo and, therefore, lhe inccne of any
crc year will ncl represent eaming powor.
Changes in law or local zoning ordinances
may result in a marked change in lhe eaming
power ol a bushess. Ukewise, changes in public
taste, devebpment of new prodtrts' apPgarance
ol new conrpetilion, acquisition ol subsiJiaries'
changes in management and lhe like, all may
change earni ng power and yet not be cl earl y
rellecled, il reflected at all, ir one incorne stale'
menl.
The accounting use of historical. rather lhan
curront, dollars in measuring depreciation and
cost of goods sold may resull in distoding any
view of earning power obtained frorn a single
incorne statemenl.
ln regnrd to plant assls, il can be said lhat
their value to a going concetn is usually depen'
dent uPon the eaming power of the business.
Such s value is not necessarily the same as lQ'
ui dati on val ue, cost, cost l egs amorti zati on.
repbcement value, or any other kind of value'
The phrase
.true
value'has no definile connota'
tion.
O4-4. Actusl describes the way cosls are measured.
i.e., at actual historical arnounts; /ull absaption
describos which elemenis of cost are allocaled
to hvenlory accounls, i,e., all elements of rnanu-
lacluring cost are fully allocated to hventories;
p/ootss describes how cqsl infonnation is accu'
mubted, i .e., costs are accumul ated for each
procoss or deparlment in the laclory.
O4-5. Prime costing systems albcate only lhe prime
costs, direct material and direcl bbor, lo hvento-
ry accounts. Direct costing systms, abo called
variable costing syslems, albcale the variable
manulacluring ccts, direcl materbl, direci labor,
and variable factory overhead lo lhe inventory
accounts. Absorpticn costing systems albcate lo
Ilvenlories parl or all of tixed frtory overhead,
in addilioo to all varlrble manufacluring costs.
04. Actual costing masuros product costs at actual
hislorical arnounts, while standard ceting mea-
sures product costs by uei ng predetermi ned
arnounts ol resourceg to be coosurrned and pre-
determined prices o{ those resources.
62
Q,4-7. Preess costi ng ai cumul ates costs fot oach
pt@olts or department
in the ladory end rnah'
tains detailcd recordr and calculationr of the
cotl of *ork h preest. Job order cting accu-
mulales cotr lor oach
irb,
lc', balcfi' or contrasl
and mEhtains detBilsd records and calculalbng
od tho cost! of tork in prceas. BacHlush st'
ing accumulal.r coltr by working backwards
through ihc availablc inlormatiqr afler produc-
ticn is cornpleted
(i.e., at the end of the accounl'
hg pori<rd) and rnahtahr no detailed records ol
lhe costs cl ttPrk ir
Prcesr.
O.4. Actual cosihg il more cornmon lhan standard
coothg in defense'rebted industries, while stan'
dard cosiing ic adnewhat more cornmon else'
where.
O4-9. Super'full absorpfbn or suPer absorption refers
to tho income lax requiremenl thal some
pur'
chasing and storage costs be allocated to inven'
tory ac@unts.
O4-lO. Job order costing would be colrlmon in repair
shops. buiHhg cotslructicr, and prhting; and in
servicc bushesse
guclr
as medical, legal' archi-
leclurat, corutrucliqr engineering, accounling'
and consulling lirms, as mentioned in the lexl'
Other exampl es i ncl ude shi pbui l di ng. bri dge
bui l di ng, tool and di e manufacturi ng, arl and
antique resloratirn, and contracl rossarch'
o4-1 1. As mentixred h tho text,
Pr66!ts
costing would
be common i n thc mi l l i ng, brewi ng, chemi cal '
and textile industries; in sirnple assembly oPra-
tions: and in seryice businesseg serving large
numbers o( cuglorners simultanrcusly, ruch as
airlhes. Other erampleg include petroleum refin-
ing, basic food preessing, and manufacture of
ChaPter 4
low*ost @nsumor
products such as toys, dis'
posable
Pens,
na:ronr' and lighters.
04-12. Aspecls cqrtrnon lo
icb
order and prccess cost-
ing are:
(a) They can be used by rervi ce organi za'
tbns.
(b) They requin cqrsiderablo detail to calcu'
late tho cost ol *ork h
Procells.
(c) The wprk h process accotnl in the gener'
al l cdgcr i r l uppor t ed by subsi di ar y
tcordg.
O4-1 3. A blended cthg method uee
irb
order ccting
l o accumul ate sofl rc cl ement(s) ol cost and
prcces3 ccthg to accumulale ofien-
O4-14. Flcxible manufacluring 3yslems consisl of an
integrated collection ol automated production
pnocesges, autornated rnaterials rpvemonl, and
cornputerized systetn csttrob lo utilize facilities
ln etticiently rnanulacturing a highly flerible vari-
ety cl
Products.
Q4-15. The adnantages of a llexble nranufacturing sys'
le.n over the cther systems include shorl (near-
zero) setuP l i mes, l he absence of a l earni ng
curve, lflet lead times to chipmont' lower diresl
labor cost
per unil, lower direct labor cost in
total, and bwer work in prccess invenlories.
O4-16. Thc hilial cost of creathg a flerible rnanufactur'
i ng system i s much hi gher than l hat of ol her
rngnuf asturing systoms.
O4-17. l,lanufacturing setthg suiied for bacHlush cosl'
i ng are di sti ngui shed by very fasl processi ng
speeds, which rernoves both the incentive and
the opportuni l y to track the detai l ed costs of
work in
Pr@ess'
63
l-
I
t
L
I
\-
I
b
I
b
I
S
I
b
I
S
I
b
I
b
Chaptor I
.
EXERCISES
E4-1 Cal cul ati on of cost of
goods sol d
(i n thousands):
TOtal manUfaCtUfi ng COSt ...........' ................r.r.....t
Add work i n
process i nventory begi nni ng """""
Less work i n
process i nventory endi ng.r..........".
Cost of
goods manufacturgd r.......o.r.-........' ....r..' .,
Add fi ni shed
goods i nventory begi nni ng ........!....
GOSI Of
gOOdS ayai t abl g f Of Sa| g. . . . . . . . . . . o. . . . . . oo. . . . . . .
Less fi ni shed
goods i nventory, endi ng ...o......' ......
Cost of
goods sotd .....' . .-,....................' ..
E4-2 Cal cul ati on of cost of
goods sol d (i n thousands):
Di rgCt matgri al s used.....................r...,...r,...' ........
Di f gCt 1abOf . . . . . . . . . . . . . . . . . . . . . . . ' . r. . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . .
FaCt Of y Ovgf h
gad
. o. . . ' . . r. . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tot al manuf aCt Uri ng COSt . . . . . . . . r. . . . . . . . . . . . . . o. . . . . . . . . . . . .
Add work i n process i nventory begi nni ng ........' ..
Less work i n process i nventory, endi ng
Gost of goods manuf act ur ed. . . . . . .
Add f i ni shed goods i nvent or y begi nni ng . . . . . . . . ' . . . .
Gost of goodsavai | abt ef or sa| e. . . . . . . . . . . . . .
Less fi ni shed
goods
i nventory endi ng..............,..
Gost of
goods sol d .......o............. ..t......' ..
sl 10
80
$1eo
90
$t oo
150
$250
60
$.11D
$230
250
$480
210
$27o'
340
$610
27fJ
s340
$ s o
60
80
i
I
Clpptcrl
E44
(Goncluded)
(21 Gost of
goods
manufactured:
Stores, Apri l 30.......' .' ........r.,..
.....--..----.
PUf ChaSgS. . . . . . . . . . . . . . . . . r r . . . . . . . . . . . . . r r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . .
LoSS: StOrtSt May 3t ro....rr...........r.................r....o......r..o....or....
Di rgct mat gri al s COnSUmgd ' . . . . . . ". . . . . . . . . . . . rr. . . . . . . . t . . r. . . . o. . . . . . . . . . . r.
Di rgct tabor used (4r25O x5221..r,.....,.........o.,............r.,...o......
FaCt Of y OYef head . . . . . . . r . . . . . r . . . . . . . . . . . o. . . . . . . . . . r . . . . . . . . . . . ' . . . . . r . . . . . . . ' . . . . .
Total manufacturing cost
Add work in process, beginning inventory
Loss wgrk i n
process, endi ng i nventory................r.....,...........
COSI Of
gOOdS
manUfaCtUngd ....' .....' .........r......................' .......
Endi ng bal ance of fi ni shed
goods:
Finished Cost of Finished
goods,
+
goods goods, =
April 30 manufactured May 31
S 4 5 , 6 0 2 + $ 2 8 2 r O g O X =
X =
Therefore, the finished
goods ending balances is $47,662.
E4 (al
*",i135";;;;;il..:::.::::::.::::::::::::::-:::::: 35,ooo
(b)
Work i n Process............ t...........r.... 33' OOO
Factory olrgrhead Gontro| ..o............r...,........ 21000
Mat gr i al s . or . . r . . . . . ' r . r . . . . . . . . . . . . . . . . . . . . . . r . r . . . . . . o.
(c)
Payroll 4O,OOO
Accrugd Payro11.....,....,.r,.r..,.....r....,...r...,
Accrugd Payroll .r................,......,...,.............. 4OTOOO
CaSh. . . . r r . . . . . . . . r . . . . . . . . o. r . . . r . . . . . . . . . r . . . . . . . . . or . . . .
Work i n Procgss . . . . . . . . . . . . . . . . . r. . . . o, . . . , . , . . r. . . . . . . . . .
g2rOOO
Factory Overhead control,.. S' OOO
Payrol l . . . . . . . . . .
(0
Factory
gverhead
Control 4,OOO
65
(31
s 1O, 25O
105, OOO
sl 15, 250
12r7AO
sl 02,550
93, 500
77. 390
5273r4/,O
61.420
s334,86O
52, 80O
s282,O60
Cost of
goods
sol d
s28O,OOO
$ 47,662
35, OOO
35, OOO
4O, OOO
4O, OOO
4O, OOO
4, OOO
(d,
(el
Cash
ffi
E4-S
(Concl uded)
(g) Factory Overhead Control .."""' r"""""""""
Account s
Payabl e . . . . . . . . . . . , . . . . . . . . . . . . . . """"
Factory Overhead Gontrol .....-.................' ."'
Accumul at ed
Depreci at i on. . . . . . . . . . . . . . . . . . . ' .
Prepai d Expenses . . . . r, . . . . , -. . . . . . . . . . . -. . . . . . . . . .
Accrued Property Taxes .,..,........r........"'
WOf k i n Pf OCeSS . . . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . . .
Factory Overhead Control
Fi ni shgd GOOdS. . . . . . . . , . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . , . .
Wor k i n Pr ocess. . . . . . . . . . . . . . . . . . . . . . . . . .
Account s Rgcei vabl . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . "
Sal es
. . . . . . . . . . . . . .
Gash . . . . . . . . . . . r . . . . . . . . . . . . . . . .
Account s Recgi vabl . . . . . . . . . . . . . . . . . . . . . . . . . . . . "
Cost of Goods So1d. . . . . . . . . . . . . . . . . . . . . . . . ! . . . . . . . . """
E4-6
(al
Work i n Procgss ......................' ...............,..,.
Factory Ovgrhead Control .r....r..,r.' .............,.
Marketi ng Expenses Control ........-...............
Admi ni strati ve Expenses Control
Payr ol l . . . . . . . . . . . , . .
Factory Overhead Control
Cash. . . . . . . . . . . . . .
Factory Overhead
Control
Accounts PaYabl e
Wor k i n Pr ocess
. . . . . - . - . . - .
Factory Overhead
Gontrol
Fi ni shed Goods. . ' .
Wor k i n Pr ocess
""""""
Chapter 4
l 8, ooo
_
18, OOO
4, 130
2, 1OO
780
11254
36, 130
36, 130
92, OOO
92, OOO
8O, OOO
8O, O0O
4O, OOO
4O, OoO
60, 000
:
17, 5OO
'
17, 5OO
1, 800
1, 800
27,OOO
17, 0OO
2, 000
5, 000
3, 000
27, OOO
2r5OB
:
2,5O8
8, 5OO
B, 5OO
14, 8O8
14, BOB
60, 1OO
60, 1OO
(hl
(il
o
(k)
Fi ni shed Goods . . r . . . . . . . . . . . . . . . . ' . . . , . . . , . , """"
6Ot 000
13, 50O
Account s Payabl e
13' 5oo
(bl
(c)
(d)
Accrued Payrol l .....,.' ......
27
|OOO
(e)
(0
(gl
(h)
Chaptor I
E4-O (poncluded)
O
Accounts R9cgivab18.............o...............oo' ....
Cost of Goods Sold'
Finished Goods
' sl 5,ooo
+ $oo,roo
-$1s,roo
=
$8o,ooo
67
Sa
8O, OOO
6O, OOO
8O, OOO
60,o00
E4-7 WALLACE INDUSTRIES
Cost of Goods Manufactured Statement
For May
( i n t housands of dol l ar s)
Direct materials:
Direct materials, April 30, 20A.........o
Purchases ......,...,.
Fr ei ght i l l . . . . . . . . . . . r . . . . . . . . . . . . r . . . . . r . . . . r . r . . . t . .
Direct materials available for use.....t.
Less direct materials, May. 31r 2OA...
Dirgct materials consumed ..........
Di rgCt tabOr.........roo........i ..r.......o.,
Factory overhead:
Indirect factory labor ..............,...r.......
Utilities ($f
gs
r
go o/o).............,..,...o..r..
Propefi t?,if, ..........r.....,.............r.........
l nsuran co ($2O
x
gO%1..r...,...............r.
Depreciation
Sl2O
+ $3O).....
Total factory ovgrhgad,r...r..r.r.......
Total manufacturing
coSt..........o....r............
Add work in process, April 30, 2OA,...
Less work i n process, May 31, 20A.,.
Cost of goods
manufactured
s5f o
t 5
$ zs,
525
sss3
23
$ e o
108
60
1 2
50
s s30
260
320
$t , t 1o
150
$1, 28O
210
${ . 050
:
Chaptor I
ffi
E+8
cll{l{ABAR
69ffiplMf
Statement of Cost of Goods
Sold
For Year Ended December
31
Raw materials:
Purchase3
.........' ."
Less dlgcounts on raw
materials
Punchagod
.""
Lesg raw materials on handt
Dgcgmbgr 3{
e
2OA.........""t
Cost of raw materials consumod
Dirgct labor ...........o."""""""""""r'
Factory overheads
Factory mainte na!1co"...............
Factory suppllgs used ....""'t""'
Powgr and hgat-factofl
......'...'
lnsuranco erpense-factorY
bui l di ng and equi Prl l ol l t...."
Dep reciation-factory
bullding
and eqUi pmgnt .."""""""""
Factory superintendence
..........
tndirgct factory |abor.........."""'
Total factory overhead
........
Total manufacturing costs-,....--.....-.-.
Add work i n
Process,
January 1r 2OA
Less work i n
Process,
December 31t
204
Cost of
goods manufacturgd....-........
Add fi ni shed
goods,Jbnuary 1r2OA.
Cost of
goods available for sale o....-..
Less fi ni shed
goodsr December 3l '
2OA' . . . . . . . . . . . . . . . . . . . . . o. . . . . t . . . . . . " t " " "
Cost of
goods sol d ....................o.......
$40o,ooo
4,2OO $ggs,goo
24,0O0
s371' 8OO
l Eo, ooo
s?8,4OO
22t4AO
19, 400
4,8OO
l 7, 5OO
1O0, 000
20,OO0
222,5AO
$774,3OO
.
84,OOO
$858,30O
3O,OOO
$828,3OO
37, 5OO
s865,80o
.
7O.OQ0
szggJsq
CGA-Canada
(adaptedl . Repri nt wi th
permi ssi on'
Chaptor I
PROBLEMS
P4-1
(rl
BRTDGEWELL COMPANY
Gost of Goods Sol d Statement
For Month Ended Jul y 31
(i n thousands)
Di rect materi al s consumed,...,....... .....r......r...,.
Di r gCt 1abOf . . . . . . . . r . r . r . . . . . . . . . . . . . . . . . r . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . r . . r r . r . o. . . . ' r . . r . . r
FactOry ovgrhgad ................' .....................................' .....r............
Total manufacturi ng cost
(a)...............................rr..,....,............
Add work i n process i nventory Jul y 1.......,......,.....,............,........
s7s
Lgss work i n process i nventory, Jul y 3' l ..........,.......................,... 25
Cost of goods manufacturgd r.....,........r..,r....r...,........o..........,.......
55O
Add fi ni shed goods i nvgntory, Jul y I (b) .............r....................... 20
Cost of goods
avai l abl g for sal g r........r............,.,..........,.....o......... S?O
Lgss finishgd goods
inventory, July 31(G) ................_.-.-.u.r..........
15
Cost of goods
sotd ........,.........' ......r.r....................,..,.....,...r......,..
G
Cal cul at i ons:
(a)
Cost of goodsmanuf act ured. . . . . . . , . . . . . . . . . . . . . , . .
Add work i n process, endi ng
Less wor k i n pr ocess, begi nni ng. . . . . , . . . . . . . - . , . . .
Equal s t ot al manuf act ur i ng cost . . . . . . . . . . . . . . . . . .
( b)
69
s 16
24
20
s60
1 5
$50
25
s75
l 5
_999
( c)
Cost of goods
avai l abl e for sa| e.,.,......,..r...o.
$ZO
Less cost of
goods
manuf act ur ed. . . , . , . . . . . . , . . . 50
Equal s f i ni shed goods,
begi nni ng . . . . . . , . . . . , , , . .
14
Gost of goods
avai l abl e f or saf e. . . . . . . . . . . . . . . . . . . $ZO
Less cost of
goods
so| d. . . . . . . .
55
Equal s fi ni shed goods,
endi ng
gg
' 70
(b) Work In Process
a a a a a a a a a a a a a a a a a a a a a l a
a a a a a a a t a a a a a a a a a a a a a a '
Chapter 4
25, OOO
16, OOO
2,OOO
29,OOO
24rOOO
5,O00
25, OOO
29' 0oo
5O, OOO
5O, OOO
105, O00
105, 0OO
55, OOO
55r O0o
P4-1
(Concl uded)
l 2l
(al Mat ef i a1S. o. . r. . . . . . . . . . . . . . . . . . . . . . . . . . o. . . . . . . . . . o. . . . . . . . . . .
Account sPayabl e. . . . . . . . . . . . . . . . . . . . . t . | . . . . . . . . . .
Factory
Ovgrhgad
Gontrol ....."""""""""""'
Mat gri al s
. . . . . . . . . . . . . . . r' . . . . . . . . """""""""""'
(cl Payrol t
($ZCrOoO +$5' OOO)"""""""""""t""'
Accru
gd
Payro11 """"""""tr"""""D"""' r'
(dl work i n Procgss ..............r....r.....................' .
Factory Ovgrhgad
Gontrol r""""""""""t"o"
Payr Ol l t . . . . . . . " t " " " " " " " t " t " " r t " " " " " " " t "
(e) Finished Goods
18, OOO
29, OOO
Work i n ProcesS
"""t"""""""""""""""
(0 Accounts Rgcei vabte""""""""""""""""""
Sales
($60'000 + (75o/o of $6O10O0))
"""'
cost of Goods so1d............................,..o.......
Fi ni shgd Goods """""""""""""' r"""""
Chapten4
P4-2
(11
SCOTTSBURG COMPANY
Cost of Goods Sol d Statement
For Mont h Ended June 3O
( i n t housands)
Direct materials:
Materi al s i nventory June 1 ........................
Purchases........................., ..........
Mat eri al s avai l abl e f or use. . . . . . . . . . .
Less: Indi rect materi al s used.................... S 1
sl s
33
s48
Mat eri al s i nvent ory June 30. . . . . . . . . . . 19 ZO
Total manufacturi ng cost (b)........
Add work i n process
i nvent ory June 1. . . . . . . . . . . . . . . . . .
Less work i n process
i nventory June 30...............
Cost of goods
manufactured ......
Add f i ni shed goods
i nvent ory June 1
(c). . . . . . . . . . . . , .
Cost of goods
avai l abl e for sal e.,
Less fi ni shed goods
i nventory, June 30
(d)..........:.
Cost of
goods
so| d. . . . . . .
Gal cul at i ons:
(a)
i ndi rect l abor + di rect l abor =
$4g
i ndi rect l abor + (i ndi rect l abor x 6) =
$49
i ndi r ec t l abor x T=949
i ndi rect l abor = 37
d i r e c t l a b o r = 6 x $ 7 = 9 4 2
( b) Cost of goodsmanuf act ur ed. . , . . . . . . . . . . . . . . . , . . . . .
$120
Add work i n process,
endi ng
gO
sl 50
Less wor k i n pr ocess,
begi nni ng. . . . . . . . .
40
Equal s t ot al manuf act ur i ng cost .
Sl i O
( c)
Cost of goods
avai l abl e f or sal e
S19O
Less cost of goods manuf act ur ed
. . . . . . . 12O
Equal s f i ni shed goods, begi nni ng
S ?O
s ,
t,
$ 1
7
1 7
2
1 3 4
s l 1
4
s1s
3
sl 2
7
s l 9
3
sl s
72
P4-2
(Concluded)
(d) Cost of
goods avai l abl e for sal e r......' ..""""'
Lgss cost of
goods so1d......................,......,..
Equal s fi ni shed
goods, endi ng ..............."""
Chapter 4
33, OOO
29, 0OO
49, OOO
49, OOO
120, OOO
210, OOO
155, OOO
l2l
(al
(b)
(c)
(d)
(e)
n
Mat gf i al s . . . . . . . . . . . . . . r. . . . . . . . r. . . . . . . . . . . r. . . , . . . . . . . . . , . . . .
Accounts Payabl e ...,......r.....,.........o..,....
Wor k i n Pr ocgss . . . . . . . . . t r . . . . t t ' ot r " " " " " " " " t ' r " '
Factory Ovgrhgad Gontrol ............................
Mat gri al s . . . . . . . . t . . . . . . . . ' t """""""""t ""t ""'
Payr ol l . . . . o. . . . . . . . . . . . . . . . " " " " t t t t " t " t " " t t " " " " " t "
Accru
gd
Payro11...t..r..""""""""""""""'
WOf k i n Pf OCgSS . . . , . . . . . . . . . . . . . . r . . . . . ' . . . . . r . , o. . r . . . . . .
Factory Ovgrhgad Control ....t..r......"""""""
Payrol l ...............""""""""""""""""""'
Fi ni shgd GOOdS. . . . , r r , . . . . . . . r . . . . , . . . , . . . . . . . o. . r . . . . . . . . .
Work i n ProcgsS. . . . . . ' . . . . . ""r"""o""""""'
Account s Rgcgi vabl . . . . . . . . ". . . . . . . . """""t t """
Sal es ($14o, ooo + (50% ot $14o' o00)). . .
Cost of Goods So1d...................,....,..ro..........
Fi ni shgd Goods . . . ' . . . . . . . . . . """""""""""'
$1 90
{ 55
s 3 5
33,O0O
28, OOO
I , OOO
49,OOO
42rOOO
7, OOO
12O,OOO
21O, O0O
{ 55, OOO
-
ChaPtar I
P4-3
,
( 11
73
MADEIRA COMPANY
Schedul e
of Cost of Goods Manufactured
For Mont h Ended March 31
work i n
process, March
I .............r.......r,.......
Production costs:
Di rgct mat gri at s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$l o4rooo
t r
r Di rect l abor....r.-....."
"""""""" l 6otooo
ttt
Factory overhead
..............,......"""""""
8or999
*tt
-344t009
Lgss work i n
procgss, March 31 ............."""'
Cost of
goods manufacturgd..-.' ....,...............'
r
Cost of
goods sold
($345,O0O) + ending finished
goods inventory
($tos,ooo)
-
begi nni ng fi ni shed
goods i nventory
(sl o2,ooo) =
s348r000.
' rpurchases
of materi al s duri ng March
($l tO,OOO) + begi nni ng materi al s
i nventory
(S2O,OOO)
-
endi ng materi al s i nventory
($26' 000) =
Sl O4' OOO.
r.'
production
costs for March ($gCC,OOO)
-
direct materials
($t Oe
'OOO1
=
direct labor and factory overhead
($24O'0Oo).
Let x = di r ect l abor
1.5r =
S24O,OOO
x =
$l 60' 000
di rect l abor
.5x =
$8O,OOO
factory overhead
(21 Prime cost:
Di rect materi al s (requi rement (1)) .........,..r.o........, Sl O4r0gO
Di rgct l abor (requi remgnt (1))....:....,..................... l 6OIOOO
_9261poo
(31
Conversion cost:
Di rect t abor (requi rement (1))' . . . . . . r. . . . . , . . . . . . . . . . . . . . . . . $160rO0O
Fact oryoverhead(requi rement (1)1. . . . . . . . . . . . . , . . . . . , . . 80' 0OO
_9240,999
s 4o,o0o
s384, 000
36,000
$a8, @'
P4-4
CompanY
A:
Sal gs " " " " t " " " " " t " t t " " t t t " t t " " t " " " t t t " " " " " t "
Cost ol
goods sold:
Finished
goods inventory
Janualy
i """
Gost of
goods manutactlli9d"""""""""
Gost of
goods avai l abl o
l or sa|e""""""'
Finished
goods Inventory
December
3l
. Cost of
goods Sol d tt""t' o""t""""t"""t"'
Gross
profit
l2oo/o
Of Sales).o......'..............r.....
GompanY B:
'
ctst of
goods availablg
tor 3a1o.,..r.........,......
Less finished
goods ending
inventory""""""
COSI Of
gOods Sol d "t t ""t """"""""""r"""""'
CompanY C:
Sal eS . . . " " " t " ' r t " t " ' ot " " t " " " " " " " o" t 1" " " " " " t "
Cost of
goods sold:
Cost ol
goods manufacttlrl9d"""""""""
Add bsginning finished
goods inventory
Cost of
goods availablo
lor 8a1e""""""'
Less ending finished
goods inventory""
Cost of
goods Sold """"' o"""""""""""'
Gross
profit """"t""""' r""""""""""""""""'
P4-5
S
600,000
3,80O,OOO
$4,4oO,ooo
l r2OO' OOO
51, 5{ O, OOO
_
2'l o.ooo
slJggJoo
$
34O,OOO
45,OOO
$
385,OOO
52,OOO
Work in Process
Chaptor 4
s4,oo0,ooo
3, 20O, OOO
s
Soo,ooo
S
429,ooo
333,OOO
$
96, 000
346,OOO
13, OOO
55, OOO
2OO, OOO
268,N
End. 9, Ooo
Finished Goods
Beg.
(41
34,0OO
348r00O
38Ct,o(to
End.3O,W
2O, OOO
65, OOO
85,O@
End. 7S, OOQ
35O,OO0
2O,OOO
5O,OOO
70,O@
7,0oo
5O,OOO
20O,OOO
loo,0oo
357,W
End. 17, @
Beg.
M
L(2)
FOH
Materi al s and Suppl i es
Accnred PaYroll
(8)
( 11
259,OOO Beg.
75
Chapter 4
P4-5
(Concl uded)
Accounts Recei vabl e
54, 000
5OO,OOO
554,OOO
End.22,OOO
,Factory Overhead Gontrol
Accounts Payabl e
77, OOO Beg.
(7)
(6) 18, OOO
65, OOO
83,OOO
End.6,00O
2O, 000
55, 000
10, 00o
2, OOO
13, OOO
l OO,AOO
(3)
532, OOO
l OO, OOO
55, 000
2OO,OOO
255,OAO
Payrol l
Cost of Goods Sol d
350, OOO
55, 00O
20O, OOO
255,OOO
(5)
( 11
l2l
(3)
(41
(51
(61
rtl
(81
Materi al s i ssued to
producti on' 55O' OOO
Di rect l abor, $2OO,000
Total factory overhead' $1OO' 0OO
Gost of
goods manufactured, $346' OOO
Cost of goods sol d, S35O,OOO
Payment of accounts
payabl e' 577' 0OO
Col l ect i on of account s r ecei vabl e, 5532, OOO
Payment of
Payrol l '
S259' 0OO
GGA-Ganada
(adapted).Repri nt wi th
Permi ssi on.
Sal es
t
1
, <
76
P4-6
Work
in Process
Materi al 8...
Cost ol
gOodg SOl d ttt"tt""t"""""t""tt""
Add finished
goods inventoq/ inclase"
Cost of
goods manufactllhod..' ...' ...r..""'
Add work in
process inventory increase
Total manufagturing
cost -....--.-...........o"
Less : Factory overhead.t..... $35' OOO
Dirgct t:lbor.......,....o...
4OTOOO
Materials used in manufacturing .,.r,......
Mat er i al s . . . . . . . . . . t . . . . . t . . . t " " " t " " " t t t t t " t " t t " t t t t "
Accounts Payablg .....'.."""""""""""""
Materials ussd in manufacturing
(from above| .........o...."r""""""' rt"""'
Add materials inventory increase ....'.....
Matgri al s
punchasgd ".........""""' r""""'
Payrol l .....' .' .......
l a a a a t a
Chapter 4
84, OOO
84,OOO
91, OOO
9l , ooo
40,ooo
4O,OOO
4O,OOO
4O,OOO
35,OOO
35,OOO
35,0OO
35,OOO
t 57, 0oo
t 57, OOO
l 40, ooo
l 4o, ooo
$14o,ooo
l 7,ooo
s157, OOO
2,OOO
s159, OOO
75rOOO
l_84,OOO
$
84,OOO
7,OOO
$ er, ooo
a a t a - a a a a a a a
Accnrgd Paytoll.......' .........""""""""to"'
Wor k i n Pr ocgsS . . . . . . . . . . . . . . . . . . . . . . . . t t " " t " " " t t t r t '
Payr ol l . . . . . . . . . r . . . . . . . . . . " " t " " t " " " " " " " " " t '
Factory Overhgad Gontrcl ......r' .r.t,,.....""""'
Va ri o u s C rgd its.' ........ "' t " " "" " " "r' r t " " "'
Wor k i n Pr ocgs3 . . . . . . . . . . . . . . ' . t " " t ' o" t " t " t t t " r " ' t r
Factory Ovgrhgad Control o..r........ro""""
Fi ni shed Goods
(12' OOO + 84' OOO + 4O' OOO +
35t OOO
-
1 4t OOO) . . . . . . . . . . . . . """""""""t
Work in ProcgsS .............' ...r"""""r""""
Cost of Goods Sol d (28' 000 + 157' O0O
-
45t OOOl . . . . . . . . . . . . . . . . . . . . . . . . . ' . . " t " " t " t " " t " '
Fi ni shed Goods ..............
GGA-Canada
(adapted). Reprint with
permission'
n
(c) Payrol l ... 86,000
' '
Accrued Payrol l .............. 86,000
Work i n Process....................r............................. 6Or5OO
Factory Overhgad Contro| ..........,.,....,...........,..... 1215OO
Marketi ng Expenses Control ,..............t............., IrOOO
Admi ni strati ve Expenses Gontrol 5,OOO
86, OOO
92, OOO
26, 530
47,33O
188, OOO
241, 150
185, 5OO
(hl
Cash !........,r.........,......,..
ZOSrGO2
Sal es Di scounts,...........
...,...... 4r2i g
Accounts
Recei vabl e........... 212rg2}
(i )
Marketi ng
Expenses
Control ...,............ 18,ooo
Administrative
F.xpenses
Control 12,OOO
Accounts
Payabl e
3O,OOO
0 Account s
Payabl e
1O4, OOO
rt
Cash
1O4, OOO
78
P4-7
(Gontinued)
88,25O
l 04, o0o
't92,250
212,924
2,25O
86, OOO
Materi al s
Machi nery
Chapter 4
9O, 8OO
15, 5OO
92, OOO
26,53O
3O,OOO
,64\030
l /l Bal '
(hl
Cash
20,O0O
2O8,662
2i28,662
36,412
Accounts Receivable
(c)
0l
t7,2OO
l / 1 Bal '
(gl
25,O0O
241,15O
26art50
(hl 1/ 1 Bal . 4O' OOO
53J,3O
Fi ni shed Goods
(g) 1B5, 5oO
188, O0O
Accumul ated DePreci ati on
111 Bal . 1O, OOO
Accounts Payabl e
1t 7
(0
Bal .
t/l Bal .
(c)
(dt
(e)
9r5OO
l 88, OOO
,97,5OO
4,50O
6O,5OO
82,50O
47,330
(q4,>e3<t
Accrued Payroll
88,25O 111 Bal .
(c)
Sal es
104, OOO1/ l Bal .
(a)
(b)
(i)
Retai ned Earni ngs
111 Bal . 21,25O
Cost of Goods Sol d
(g) 185, 5OO
I
Payroll
(c)
111 Bal . 1o' ooo
I
(d)
(a) 92,OOO
102,OOO
Work in Process
241,15O
Sal es Di scounts
I
86,0O0
|
(c) 86, OOO
L
L
L
I
\
79 Clppterl
P4-7
(Concluded)
(b)
(cl
(d)
(cl
(i)
(cl
(il
t_
I
!
I
!
I
I
!
b
Administrative Expenses Gontrol
5,O0O
12, OOO
17,AOO
Factory Overhead Control
26,53O
l 2r 5OO
8r3OO
47,33tO
(e) 47, 330
Marketing Expenses Controf
810oo
' l 8,0oo
2l,ooct
(31 HOPKINS & WHITE COMPANY
Thial Balance
January 31
Common Stock
CSSh ' ........
AcCOuntS RgCgivabl...tr..............r............................r......
Fi ni shed GOOdS. . . . . . r . . . . . . . . . . . r . o. . . . ' . . r . . r . . . . . . r . . . r ' . . . . . . . . . . r . . . . . . r .
WOrk l n PrOCgSS.........' .o,.r.,.....,..r' .......r.' ....' .rr.' .....r........t
Materfals a a a a a a a r o a a a a a a a a a a t t a a a a a a a a a a a a
$ 36, 412
53,23O
12, OOO
6,830
11r 2OO
4O,OOO
4,258
185, 5OO
26,OOO
l 7' OOO
s
60,030
l O, OOO
6O, 0OO
21r25O
241,15O
Machine
Accounts Papble a a a a a a a a a a a a o a a a a a a a a t a a a a a a t t a a a l a a
Accumul atgd Depreci ati on....,...,......,,.,.....,....,................
Common Stock..,. a t
Retained Earnin a a r a o t a a a a a a a a a a a t a a a a
Sales
Salgs Discounts,...,..
1993,430 _$3e2,499
l
CHAPTER 5
DISCUSSION QUESTIONS
O5-1. The cost attached to 8
Producl
il an amount
'
assi gned
by the costi ng mel hods ul ed-an
amounl cont r ol l ed
by t he ci t cumst ancer ,
assumpti ons'
and l i mi tati ons ol l ha mel hod
under which il was ccrnfiled' Product cosb ato
cornposiles ol historbal outlay thal have, per'
haps, been modifki by estlnateo or slandards,
by processer assigning or proratlng expendi'
tures to periods, or by lracing the direct costs
and allocating the indirect cosls lo particular
producls so thal the total period outby b spread
over the aggrgatt or'ipli. Despile these shorl-
comi ngs, product costs aro usel ul i n cosl i ng
invenlories, cornpaling
prices and tolal unit cost'
measuring current profil or loss, and indicating
the rni ni mum cosl bel ow whi ch a sal es
pri ce
cannot go in the long run. Sorne confusion will
result al times in usitlg cosl intonnatbn h mak'
ing management decisions unless informatioo
relevant only to the decisbo is used.
O5-2. The primary obiectivc h
irb
order costing is lo
determine the cost ol materiats, labor, and faclo'
ry
overhead used to produce a specific otder or
conl tact. Cost esti matss ato made when the
order is taken, and the
iob
order praeduros ate
desi gned l o r eveal cosl s as l he or der goes
through prodrrction, thereby giving an opportuni'
ty lo control costs.
O5-3. The typ of cost accumulaiion melhod used by a
cotrlpany will be determined by the tlpe ct man'
uf acturing operatbns pedormed. A rnanuf actur'
ing company should uso
Process
c6l accumub-
tion lor product ccthg putpos3 when like units
are continuousty nrass
Produced;
when cuslorn'
rnade or unQue gpods are produced'
icb
order
costi ng woul d be more aPProPri al e. Process
costing is otten used in industries such as chem-
icals, food processing, oil, mining, rubber, and
electrical appliances. With a continuous mass
produclian ol like units, lhe cenler ol atlenllcn is
the i ndi vi dual process (usual l y a dopartmonl )'
The unit ccts by cost category as well as lotal
unil cct lor each
Ptocess
(deparrment) are nec'
e3sary lor product cosling
PutPosss'
O5-4. A
icb
order cost sheet is used:
("i to keep track of the direct rnaterials and
direct labor used on a
icb
plus atl aPPro-
Priate
share cl frtorY overhead;
(b) to comPara actual cost3 to esti mal ed
cqsts:
(c) as a subsi di ary l edger for the work i n
procoss accounl.
O5-5. The work in procesr accounl is a conlrol account
i n t he gener al l edger , r ef l ect i ng l ol al cosl s
assigned or applied to
jobs. The individual
iob
cgst shoots lorm the work in process acco{'nt's
subsidiary ledger, indicathg the direct malerbls'
direct labor, and factory overhead charged to
each
irb.
05. Job order cosl sheets serve a control funclion'
Comparisons are made between estimates ol
pb cosrs and cosls actually accumulated lor lhe
job. ln addition, cost control is enhanced by
accumulating direcl materials and labor as well
as factory overhead co3l3 by cost cenlers or
departments, and by comparing lhe aclual cosls
to cGt conter budgets.
O5-7. Actual lactory overhead consisls of the day'by'
day cosl s that ato actuatl y experi enced and
incurred by the cornpany. Applied lactory over-
head is the overhead charged to pbs based on
the predelermined factory overhead rate. This
rale is crealed by divirJing total stirnated over'
head by toial estimated nurnber ol units (or any
other appropriate base). ThE dilference between
aclual and applied factory overhead is lhe ovet-
or underaPPlied faclory overhead,
05. The characteri sti c of a servi ce busi ness l hal
rnakes likely the use ol
job order costing is lhat
al l
j obs are not al i ke and cost i nformati on for
each
iob
is desired.
8l
Chapter 5
E5-3
( 1) The amount of di r ect l abor i n f i ni shed
goods:
Fi ni shgd
gOOdS. . , . . . . . . . . . . . . o, . . . o. . , . . . .
. . . . . . . . . . . . . t t . . ' . ' . . . t ' . . . . .
Mat er i al s i nct uded i n f i ni shed
goods
{$15' 5OO
-
93' 2OO}. . . . . . . .
Di rect l abor and l actory overhead
i n fi ni shed
goods """""""
s l 1, 80O
a
= - = d
sl 4 , 75O
s84, OOO
1, 5OO
s24,07O
221832
1OrO24
s56,926
S 4, 420
2, 600
2, OOO
s 9, o2o
s37,5OO
12, 30O
s25,2OO
$
I , OOO
85, 5O0
$94,5OO
4,5OO
Let X = di r ect l abor i n f i ni shed
goods
1. 8X =
$25, 2OO
di r ect l abor and f act or y over head i n f i ni shed
goods
X =
514' ooo
di r ect l abor i n f i ni shed
goods
The amount of factory overhead i n fi ni shed
goods:
X =
$14, OOO
.8X = .8 ($14,000)
. 8X =
$11, 2OO
f act or y over head
i n f i ni shed
goods
Factory overhead charged to work i n
process
Di rect l abor charged to work i n
process
December mat er i al s used:
Materi al s i nventory, Decembei 1 .......................' .
Mat er i al s pur chased. . . . . . . . . . . .
Frei ght-i n
Materi al s avai l abl e
Materi al s i nventory, December
31 .......
l2l
( 1)
E5-4
$9O, OOO
82
E5-4
(Concluded)
l2l
Work
in
Process,
December
3l:
Per
Unit
$6, 4OO
312OO
Chapter 5
s 9O, O0O
3O, OOO
6O, 0OO
sl 80, OOO
l 4, 4OO
s
5,ooo
3, OOO
6, OOO
$ 14, OOO
Di rectmateri al s.......r..
$2.4o
Dirgct
tabor -.r.,-.......--.
.8O
, i?.2o
r 2,ooo units
=
Factory
overhead
.....'..32 machine hrs' @ $t
OO =
$9,6OO
(31 Dscember
cost ol
goods manufactured:
Materials
used
(direct) (requirement
(1)) """""t""""""t""""'
Di f | ' Ct
1abOf . . . . r r r r . . . . . . . . . . . . r . . . . . . . . . r . . ' . . . . . . Dr . . . . . . . . . . . . . . . . . . ' t " " " " " " " '
Factory
overhead
(600 machine hours
(}SlO0)"""' t""""tt"""
TOt al manUf aCt Uf i ng COSt . . . . . . . . . . or. . . . . . . . . . . . ' . . . . . . . . . . . . . . . . t . """"""'
Add work i n
Process,
December 1:
Direct Material' S2.4o
x 3'ooo
=
Direct Labor, $.8o r 3'ooo
=
Overhead, $t0o r 48 machine hours
=
Fi ni shed
goods, December 31:
Di f gCt mat gf i al S. , . r. . , . . . . ' . . , . . . . . . . . . . . . . . . . , . . . . . , . . . . . . . . . . . r. . . . . .
Di f gCt t abOf . . . . . . . . . . . . . . . . . . . . . . . . . . r . . r . . . . . r . . . . . . r . . r r . . . . . . . . . . o. . t . . . " r " " " t t "
Factory overhead
(60 machine hours CDSl OO)""' r""""""""t' r'
December cost of
goods sol d:
Cost of
goods manufactured
(requi rement
(3))""""""""""""
Add fi ni shed
goods, December
1' -.............""""""""""""""'
Cost of goods avai l abl e
for sal e ' ............'
"""""""""
Less fi ni shed
goods, December
31
(requi rement
(4))"""""""
s7,2Oo
2r4OO
4, 8OO
s194, 40O
Less work in
process, December 31
(requirement
(2))""'r""" 9'600
s184, 8OO
(4)
(sl
s184, 80O
12, 00O
s196, 800
14, OOO
9l_93,8oo
permi ssi on.
CGA-Canada
(adapted). Reprint with
83
Chapter 5
E5-5 Materi al s:
Begi nni ng
i nventory
""""
PUr ChaSgS t t t t t t t t t t t " " " ' o" " " r t " " " " " " " " " " " " '
Mat eri al s avai t abt e
f or usg """""""""""""'
LeSS endi ng i nVent Ory
. . . . . r. . . . . . . . . . r. . . . . . r. . . . . . . . . .
Mat gri al s usd. . , r. . . . r. . . . . . . . . . . , . . . . . . . . . . . . . . r. . . . . . . . . .
Di rect l abor
(($gaO
-
$s201
' r
1' 61""""o""""""""
Factory overhead
(S225 x ' 6)""""""""""""""""
' i
TOt al manUt aCt Uf i ng
COSt . . . . . . . . . . . . . . . . . . . . . , . . . t """""o
Add work i n
process, begi nni ng
i nvent of """""'
E5-6
(rl
$ 7 5
336
( 1)
$411
85
9geo
225
135
s766
30
s736
(3)
90
s826
125
s701
(4)
s13, OOO
15, OOO
2, 7OO
2, 1OO
s32,8OO
$13, 000
15, 000
s28,009
s15, 0oo
4, 8O0
s19, 8OO
l2l
s586
80
(21
(31
Less work i n process, endi ng i nventory
Gost of goods manufactured
""' r"""""'
Add ti ni shed
goods, begi nni ng
i nventot]
""""""'
cost of
goods avai l abl g
for sa19........,.,..............o.
Less fi ni shed
goodsr endi ng i nventory""""""""'
Cost of
goods sol d . . . . . . . . . . . . . . ' . . . . . r . . . . . . . ' . """' t """t "
Materi al s
....' r""""
Di f eCt 1abOf . . . . r . . . . . . . . . . , . . . . . . , . . . r . . . . . ' . . . . . ' . . . . . . . . . t . . . t t " " " " " " " " " " " '
Factory overhead:
Mol di ng
( 1, OOO DLH x $2. 70)
. . . ' . . . . . . . , . . . . , """""""""""""
Decorati ng
($6,OOO x 35oh1...............
Esti mated cost to produce -........-..........,..""""""""
Ma t g r i a l s a a . . . . . . . r . . o . . o . . . r r . r . . r . . . . r . . . . . . . . . . . . . t . a . . r . . . . a . . . . a r . . . . . . . . . . . . r a . r o 4 a r
Di f e Ct 1 a b Of . . r . . . . r . . r . . . . . . . . . . r . r . . r . . r . . . . . r . . . . . . . . . r . r . r . . . . . o . . . . . . . r . o . t . . . . . . . j 1
Est i mat gd pr i me COSt . . . . . . . . . . . . . . . . . . . . . , . . . . . . . r . . . . . . r . . . . . . . . . . . . . . . . " " " r "
Di r eCt 1abOf . . . . . . . . . . . . . , . . . . . . . . . r . . . . . . . . . r . . . . . . . . . . . . r . o. . . . . . ' . . . r . . . . . . . . . . . , . " ' t
Factory ovgrhead
($zrzoo + $2rl
ool ...........' ....o..............""""'
Esti matgd convgrsi on cost................'
"""""""""""'
Est i mat ed cost t o pr oduce ( r equi r ement
( 1) ) . . . . . . ' , . . . . . . S32' 8OO
Markup ($32,8OO x 45' hl
14' 760
Bi d pri ce
S4?F6o
(4)
a
E5-7
I
(r)
Chaoter 5
WADSWOBTH MACHINE WORKS
Job Order Cost Sheet-.Job 9O9
Dlrgct Materlalt
Datc
lgsucd
9114 t OOO
sl20 331
9122 200
st , 13l
Dlreet l,.abor
Houn
Datc
gt(ryO
Appl i gd f act ory ovgrhead' . r. . ' . . ' . , . . . . . . . . . ""' D"'
Total factory CoSt...' ........t...t.."""""' o"' o"""'
Appllcd Factory Orerhead
Datc
(Week o0 Houn Bate Cost
sl20 1 0 s80 s800
s800
:
800
s3,OOO
1, 5OO
Debi t Credi t
134, OOO
12O, O0O
96,O0O
288,OOO
Rata Cogt
sl20 90
9126 70
3s.20 3
7.30
558
511
31, 060
(2) sales
price of Job 9o9, contracted a markup of Sooh of cost:
Di f gCt mat gf i a1S. . . . . . . . . . . . , . . . . . . o. . . . . . . . . . . . . . r. . . . ' . . . .
S1t t 31
Di rgCt l abOr . . . . . . . . r. r. . . . . . ' . . . r. . . . . . . . ' . . . . . . . . . . . . . . o. . ' .
I
t O69
Markup SOoh of cost
Sal gS
pf i Cg. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ! . . . . . . o. . ' . . .
S4r500
:
E5-8
(f
)
Work i n Process
(35' OOO + 45' OOO +54' OOO)........
Mat gf i al s . . . . . . . . . . . r . . . . . . r r r . . . . . . . . . or . . . . . . . . . . . . . . . . t t . . . .
(2) Work in Process (45rOOO + 4O' OOO + 35r0OO)."....,
Payr ol l . . . . . . . . ' . . . " " " " " t t ' r " " " " t t " t " " " " t " t " " " '
(3)
Work i n Process (36' 000 + 32,000 + 28' O0O)....1."
Factory Ovgrhgad Control ..' o' ......r........."""'
(4) Fi ni shed Goods
(156' 000+ 132' O00)........' -' ...-.o.,.
WOr k i n Pf OCeSS . . . . . . . . . . . . . . r r . . . . r . . r . . . . . . . . . . . . ' . . . . . .
134, OOO
l 2o, oQo
96,OOO
288, OO0
I
I
E
I
I
I
- ,
I
b
Chapter 5
E5- 9, ( a)
E5- 10
Inv.
Purch.
wtP 1 1O, OOO lnv.
Materi al s
Factory
overhead
Labor
35, OOO
8, OOO
2, OOO
9, 4OO
7, 6OO
1, 8OO
1r2OO
1r 22O
4, 5OO
1r25O
6, 10O
4, 50O
Work i n Process
I 1O, OOO
90, 000
18O, OOO
41O, OOO
11O, OOO
85
(b)
(cl
I
I
!
(d)
(e)
(0
(g)
I
b
L
b
Materi al s
35, OOO
10, 000
9, 4OO
9, 4O0
1, 2OO
1, 22O
4, 5O0
1, 25O
6, 10O
4, 5OO
1O, 0OO
138,O0O
,48,OOO
5O, OOO
3OO, OOO
35O,OOO
t So, ooo
3OO, OOO
:
Fi ni shed Goods Cost of Goods Sol d
2OO, OOO FG 2OO, OOO
Inv.
wt P
CGS
GGA- Canada ( adapt ed) . Repr i nt wi t h per mi ssi on.
Es-t I
(f l WOf k i n PrcCI SS. . . . . . ' . . . ' . . . . . . . . . . . . . . . . . . . . . . . . . . . o. . . . . . r. t . . .
Mat gf i al s
. . . . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . rr.
Payf Ol l . . . . . . . . . . . or. . . . r. . . o. . . . r. . . r. . . . . . . . . . . . . . . . . . . . . . t . . . .
Appl i ed Factory Overhead ................""""""
(21 Fi ni shgd GOOdS. r. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r. . r. . r. . . . .
WOf k i n Pf OCBSS . . . . . . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . . . . . .
19, 1 12. 5O
19, 1 12. 5O
Chapter 5
gr25O.OO
3r945.0O
5r gl 7. 5O
19, { t 2. 5O
I ,
87
I
l>
I
I
b
I
:'
\,
Chapter 5
Ps-1
(1) Total
PROBLEMS
cost of work
put i nto
Process:
Mat gri al S. r. . . . . . . . . . o. . r. . . . . . . . . . . . . . . . . . . . ' . . . . . . r. . . . . ' . . . . . . . .
S 6Ot OOO
Labon Gri ndi ng
t8r00O
hrs. x S5.60l ...............,...o.......... 441800
Machi ni ng
( 4, 600 hr s. x $6) . . . . . . . . . . . . . . . . . ' . ".
27' 600
Factory overhead: Gri ndi ng
(8,ooo
hrs. x $6)
.........' ..,... 48' ooo
Machi ni ng ( 4, 60O hr s. x S8) . . . . . . . . . . . . .
36, 800
s31l,2oo
s217,2OO
15, OOO
Cost of goods
sol d:
Cost of goods manufactured (from requi rement
(2)) .......
Fi ni shgd goodsr begi nni ng i nvgnt or y. . . . , ' . - . . , . ' . . . . . . . . . . . . ' . . . .
Fi ni shed goods,
endi ng i nvent or y . . , . . . . . . r . . . . . . . , . . . .
s232,2OO
17, 600
s21_1,699
s214, 600
22rOOO
s236.600
21. 000
52{ 5. 600
I
b
(21 Cost of
goods
manufactured:
Total cost of work put i nto process (from requi rement (1)l
Work i n Process, begi nni ng i nventory........
Work i n process, endi ng i nvent ory. . . . . . r, . . . . . ,
Cost of materi al s purchased:
Mat er i al s put i nt o pr ocess
. . . . . . . . . . . . . . . . . . . , . . . . . r . o. . . o
Add mat er i al s, endi ng i nvent or y
Less mat er i al s, begi nni ng i nvent or y, . . . . . . . . . . . . . . . . , . . . . . . ! . . . , . , .
(3)
(4)
Gonversi on cost:
Labon Gr i ndi ng ( 8r OOO hr s. x S5. 60l . . . . . . . . . . . . . . . r r r . . . . . . . . . ' . . $
4418OO
Machi ni ng( 4, 6oOhr s. xSO) . . . . . . . . , . . . . . . , . . . . . . . . . . . . . . . . 271600
Fact or y over head: Gr i ndi ng ( 8, OOO hr s. x $6) . . . . . . . . . . . . . . . .
48r OOo
Machi ni ng ( 4, 6OO hr s. x $8) . . . . . . . . . . . ' .
36' 800
g!_qz'209
$
60,000
18, 000
$ 78, OoO
2O, OOO
s_99p99
(s)
I
.t
I
P5-2
(r)
Materials
Chapter 5
Job 206
Total
411
2r75O
Purchases t l'5OO
14'"250
1,755
lndirect
Material
Direct
Material
2r790
gr7o5
|
114s5
r
$9,7OS
=
$2r45O
+ S97O
+ 36' 285
(Job 2O7)
(Job 2O4)
(Jobs 2O2,2O3,2O5,
& 206l
work in
process ending inventory consists of
iobg
2o3 & 206:
Job 203
Di rgct matgri a| s.........................r.....
(Sl r48O + $
555)
Di fgCt | abOf .,...r...............................
( I
rOOO
+ 115OO)
Appl i edoverhead.....' .,.' .........-.........
( SoOr+
14991
Total ...r....r......r..,.................. F3,.280
"
#-S-l
' Applied
overhead is 80% of direct labor cost'
l 2l
Worki nProcess....o.....,.................
Mat er i al s . . . t . . " " t " " " t " " ' t " " t t " " " t " " " " " " " t r '
Payr ol l " " " " r " " " t t " t " " " " " " " " " " t ' r " " " " r " " ' t
Appl i ed Overhgad ....""""""""""' t"""""""'
Fi ni shad Goods
(4' 7OO + 1r25O + 2,OOO + 116OO) "
work i n Procgss ..........r..........r,.....,........r.....
COst of GoodS So1d"""t""""""' o""""""t""""""'
Fi ni shgd Goods................................r.' ..........
ACCOUnt S RgCgi Vab18. . . . . . . . . . . . ". . . . . . . o. . . . . . . ' . . . . . . . . ' . ""
Sa l g 3 t t t t t t " " t t " t t t " t " t t " t t t t t " ' r " " t " t t t " t t " ' r " t " " '
+ St ' 98O
+ I ' OOO
+ 8OO
+ S3' 78O
4, 85O
9, 550
9, 55O
14,325
s
4, 015
3,5OO
2,8OO
$1o, gt
s
1r25O
2,OOO
I , 600
9,55O
9, 550
141325
I
I
I
I
L.
I
!
t-
89
i
E
I
I
!
Chaoter 5
P5-2
(Concluded)
(31 Cost ol
goods manufactured
= cost of
iobs
finished in April'
Job 2O5:
Dirgct matgrial ........' ........
Di rgct 1abor......".........' .o..
Appl i ed overhead' ....,.o' ....
'
Total Job 205...' ......' ....
Job 2O2. . . . . . . . . r . r . . . r ' . . . . t . . . . . . . . . " " t
Job 204 r . . . . t . . . . . . . t . . . . . . . . . t . . . ' r " " " '
JOb 2O7' . . . . . . . . . . . . . . . . . . ' . ' . . r . . ' . . . . " ' t
$ 2,5OO
2,7OO
(l 05 direct labor hours x S2Ol
I,O8O
(105 di rect l abor hours x 516)
$ 6,280
9,550
(see requirement
(2))
6193O
5, 87O
I
!
Bal .
(i)
(4)
s 5,280
1r52O
800
$36,420
124,2801
, ( 1, 76s)
$1O, 375
s 9, 365
7, 6OO
91t99
(5) Jobs 2O1r 2O2, and 205 wene sold. Their costs are S8' 45O + S9,55O +
56' 280
=
S24' 28O.
Sal es (524,280 x 1.5)
Cost of goods sol d .......
Underappl i
gd
ovgrh3d ......' ..........' .........r..r..' ......
Gross profit for April
.' ....r...r....'
P5-3
Fi ni shed Goods
Work in Process
32O, OOO
8O, OOO
32O, OOO
40O,OOO
36O, OOO
3OrCnO
' $?3o,ooo
-
SSo,ooo
-
$25o,ooo di rect l abor and factory overhead.
Factory overhead i s l 50% of di rect l abo6 thereforo, di rect l abor i s
sl oo,ooo
Bal
(c)
(e)
Tot a| . . . r. . , , . . . . . . . . . . . . , . ' . . . . . . S28rO3O
Actuat overhead
(1' 375 + 2,5OO + 2r7OO + 2r790l.
Appl i ed overhead:
Jobs 2O2' 2O3, 2O5' 2Og (330r hours x $16!.
Job 207 .' ........' ....
.........' .."""' r"""'
Job 2O4
($l
rZgO
-
5960l .r..' .r.......t..........".."
Total appl i gd ovgrhgad r...' ........r-........r.....
Undef appl i ed. ' . . . . ' . . D. . . . . . . . ' . ' r. . . . . . . . . . . . r. ' . r. . . ' . . . . . . ' . . . . . .
' 1 O O + 7 5 + 1 0 5 + 5 O
20,OOO
l (i l
15O, OOO
go,ooo
l OO, OOO'
35O,OOO
Materials
90
I
P5-3
(Concluded|
ChwterS
l 5o,ooo
I I , OOO
175, OOO
l8o,@o
Cost of Goods Sold
360,OOO
Bal.
(b)
Bal .
(a)
l 5' OOO
loo,ooo
t t ' , NO
29,N
8O,O(X)
12,OOO
92,W
( 1t
l2l
t3)
(4)
(5)
(6)
rr)
(8)
Factory Overhead Gontrol
Applied Factory Overhead
6OTOOO
l 2' OOO
75,OOO
147,N
Accounts Payable
Accrued Payroll
1O2, O0OBal . TrOOO
loo,ooo
707,N
t72,OOO Bal.
5rW
Accounts Receivable
45,OOO
5OO,OOO
g5,o@
65,AOO
480,OOO
"Cost
of
goods
sold is 72% of sales (r0o%
-
28ohl.
Materials
purchased-$l oo'ooo
Cost ol goods sold-$360'OOO
Finished
goods ending inventoryt4O,OOO
Work in
process ending invento4;-$3O'O00
Direct labor cost-$l o0,00o
Applied factory overhead-$l 5O'OOO
Ovep or underapplied factory overhead-$3,OOO
overapplied
Glosed out to the cost of
goods sold account
Sales
GGA-Canada
(adapted). Reprint with permission-
Chaptor 5
P5-4
l
( 1)
9l
COLUMBUS COMPA}TY
Cost of Goods Sold Statement
For Month Ended October 3{
Materials:
Materials and supplies inventory, OcL I
PurghaseS .........' ..r.........o........r................................t
Materials and supplies available for ]|so......,..........,.
Less: Factory suppl i es used.......r...r........ $ 3195O
Materials and supplies inventory
OcL 31 31, 75O
Materials consumed
Di rgCt l abOr .........rr..r..........' ...r.' .
Appl i ed factory ovgrhad.....r.,r.....,.........D,.....rt...............
Total manufacturing cost........o..o............r.......r.......r........
Add work i n process
i nvgntory Oct 1................,........o,..
Less work in process
inventory Oct 31
Gost of goods
manufactunad o.r.,........o..................r.........,
Add fi ni shed goods
i nventory Oct 1.,..,..............r......,....
Cost of goods
available for salg .............r........o..,....o.......
Less finished goods
inventory, Oct 31 (2,500 units x
53. 7O)r. . . . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods
so!d...................... .............r....,....
rCal cul ati ons:
Units in finished goods inventory, OcL 1
Units manufactured 20,4OO
(2Or7OOl Units sold
Units in finished goods inventory, OcL 31
Cost of
goods
manufactured
s4O,7OO
24,8OO
sgs,5O0
35r7OO
2, 8OO
(3oo)
_3's09
s29,8OO
18, 600
27,45O
s75,850
4, O7O
s79, 920
4, 44O
$75,480
g, g0o
s85,280
9, 250
s76, 03O
Units manufactured
s75, 480
=
-t- -
'1-.-.-
-
Sif .7O
20, 4OO
92
I
P5-4 (Concl uded)
tzl
COLUMBUS COMPANY
Income Statement
For Month Ended October
3{
Chapter
S
Sales t a l a a a a a a a a a a a a a a a a a a a a a a r a a a a a a a a r a a a a o a a
s144, 9OO
1, 3OO
$143, 600
76, 03O
$ 67, 570
$25,O96
19,744
44,940
$ 22, 730
Less safes returns and al l owances ......................
Ngt sa| gs. . . . . . . . . . . r . . . t . . . . o. . . . . r . . . . . . . . . . . . . . . r . . . . r . . . . . . . . r r . . . .
Lgss cost of
goods
so1d...,...,.........,................,.r.r.
Gt pss pr of i t . . . . . . . . r . . . . . . r . . r . . . . . . . . . . . . . . r . . r . . . . r . . . r . . . . r . . . . . . .
Less commercial expenses:
Marketin g
expensr ............
Deprecl ati on-bui l di ng
....,.........
Depreciation-office
equipment
Admi ni strati vg
expense.....r.......
Depreci ati on-bui l di ng
..............
Depreci ati on-offi ce
equi pment
Incomg bgforg i ncomg t?x..........r...r..
Amount of over- or underappti ed factory
Actual factory overhead:
Factory overhgad pai d,.............r
In di rect materi af s ..,...,...............
Depreci ati on-bui l di ng
.....r.....r..
Depreci ati on-machi nery
and
ggui pment
. . . . . . . . . . . . . , . . . . . . . . . . . . . r .
Indi rgct 1abor.,.......r...,...,....,...r..
Appl i ed factory overhgad ..........,......,
Underappf i ed factory overhead.........
$25, O5O
30
1 6
$19, 7OO
20
24
(3t
overhead:
$2O, 1OO
3, 95O
1 5 0
800
4, 4OO .s29,40O
27, 45O
$ 1, 950
\'
Chapter 5
-
"
P5- 5'
( 11 MORRISVILLE CANNING COMPANY
Bal ance sheet
December 31, 208
93
Assets
-
Current assets:
CaSh. . . ' . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . r . . . . r . . . . D. . . . . . . . . $1 9t OOO
Accounts recei vabl G!............................... 1O,OOO
lnventories:
Fi ni shgd
goods .........,......r............r.. S4rooo
Wor ki npr ocess. . . . . . . . . . . . r . . . . . . . r . r . . . . . . . . l r 0O0
M at gri a l S. . ' . ' . . . . r. . . . . . ' . . . . o. . . . . . . . r. . . . . . . . . . ' 2t OOO 7t OOO
Prgpai d expensgs. . . . r. . . . ' . . . . . . . . . . o. . . . . . . . . o. . . . 5OO
v
Property,
;[:1:
lllTll,lr',i?",";ffiil::::.::.::::
TOt al aSSgt S t . . . . r. . ' . . . . . . . . . . . . . , . . . . . . . . . . . . . . . ' . . . . . . . . . . .
-
Li abi l i ti es
Currgnt l i abi l i t i gs. . . . . . . . . . . . , . . rr. . r. . . ' . r. . . . . . . . . . . r. r. .
s3o,ooo
15, OOO
s36,5OO
26, 00O
s63,599
sl 7, 5oo
45, 000
s62, 5OO
Stockhol ders' Egui ty
Common st ock' , . . . ' . . ' . . ' . . . . . . . . ' . . ! . . . , r
Ret ai ned ear ni ngs, . . . . . . . . . . , . . . . . . . . . . . . . . . . .
Total stockhol ders' equi ty ............
Total l i abi l i ti es and stockhol ders' equi ty......
94
P5-5
(Concludedf
l2l
Chagter
5
MORRISVILLE CANNING COMPANY
lncome Statement
For Year Ended December 31, 2OB
S3l esar aaaaaaa. . . aaaar aaaar . . aaa. aaaaaa. a. aa
ar aaaa. a. aaaaat aaaa aaaa aaaaaar aaa a aaaaaaa
Gost of
goods sold:
Materials:
tnvgntOryrJanuary1.....' ......r...' ..' ..........' ............
$ 4tOOO
PUrchaS
gS
....r....................r....r......r.....' ....t..o.t..t..
I 5t O OO
Matgri al s avai | ab| gforuser.........................' ......
$l grOOO
LgsSl nventOryrDeCgmbgf3l ...' ........' ................
2rOOO
Matgri al s consumod....' ........o..........r..........' ....... SIZpOO
Di rgCt 13bOf .......o..rr..........................r.........o..............
ITOOO
s60,000
Appfied factoly overhead r.,.......
I,O0O
Total manufagturing GoSt .....,........,.......,...ro.............. 335rOOO
Add work In
process Inventoryr Januafl I ......' ..r,..... jrOOO
s37,DDO
Less work in process inventoryr December 3l ...o.o... I' OOO
Cost of
goods manutactllrr8d...........o....r.....r.........r.... S36r,OOO
Add finished
goods inventory Januafl' t ........o........o 6' 000
Cost of
goods avai l abtoforsal e..' .' ...oo................o' ..r- $.02rOOO
Less finished
goods inventory, December 3' l .....-..... 4rOOO
Gost of
goods 30l d. . . ' . . ' . . . r. . . . . . . . . . . ' rr. . . . . . . o. . . . . . . . . ' r. . . t t . t t
$38^OOO
Add underappl l od factory overhgad.,...,....................
2t999
COSI Of
gOOdS SOl d-adi USt gd . . . . . . . . . . . . , . . o. . ' . . . . . o. , . . . . r. . .
4O,OOO
$2O,OOO
Gross
profit
Less commencial expenses:
Markgti ng expgns(0..........,,..............' ...' ..' .....' ...' ....r..
$
6rOOO
Admi ni strati vg
gxpensg...' ....o......' ............,..' ..,.,......t 9t9OO 15tOOO
l ncOmg bgf Org i nCOmg t 8X. ' . . , . J. . . . . . . . . ' . . . . . . . . . . . . . . . . . . ' r. . . . . ' . . . .
s 5,ooo
a a a a t a a a a a t a a a a a a a a a a a a a t a a a . a a a a a a a a a a a a a t t t t " '
Chagler 5
P5-6
(1) and (2)
9:
TROPEZ INC.
Job Order Cost Sheets To Post Beginning Inventory Data
March 1, 19-
Mat gri al s . , . . . . . . . . . r, r. . . . r. .
LI l bOr . . . . . . . . . . . . r . . . r . . r r r . . . . .
Factory Overhead.......,
TOt al . D. . . . . . . . . . r " . . . . . r .
(bl M ............,.......
(cl M. . , . . . . . . . ,
( f } L. . . r . . . . . ' . . . r . . . . . . .
(hl oH ......,.........,.
Tot al . . . . . . . . . . . . . r. . . . . . . .
0l
Compl eted and
to warehouse
(21
s29,e49
Compl eted and trans-
ferred to warehouse
Job 621
$ 2,8OO
2r1OO
1, 680
$ 6,580
5,30O
6r42O
51136
s23,436
transferred
$ 8,260
7r4OO
(4oo)
8r 160
6, 528
Job 622
$
g,4oo
2r7OO
2, 160
Job 623
s 1, 800
1, 350
I , O8O
s 4, 230
5, 9OO
6, 32O
5, 056
s21,s99
Sti l l i n
pnocess
Cr.
(a)
(b)
(c)
Materi al s
Bui l di ng & Equi pment . . . . , . . . .
Dr.
22,OOO.OO
22,OOO.OO
18, 6OO. OO
2, 4OO. OO
u
21, OOO. OO
600.0o
400. oo
200. 00
800.o0
800. oo
38, OOO, O0
38, OOO. OO
2O, 9OO, OO
7, 6OO. OO
5, 7OO. OO
3, 8OO. OO
38, OOO. OO
9, 404. 5O
7, 154. 5O
2, OOO. OO
250. 0o
(d)
(e)
(0
(gl
Pr epai d I nsur ance
.t
_ t l
Chatsr 5
96
P5-6
(Concl uded)
(h) Work
i n
ProcgsS""""t""' r"""""ott"t"' t"""""""'
Faaory
Overhead
Control
(or Applied
Factoryoverhead)...' .....................' .....|t...
{ i l
Fi ni shgd
GoodSt t " " r " " " " ' ot ' or " " " " t " " " " t " " " " " o'
Work'
in PrcCess
""""""""""""""""t"""""
nl AccountS
Rgcei vab16.............o.."""tto""""""""'
Y'
S3l 9st t t t t t " " " " " t t t t " " " " " t " " " t " " t t " t " " t t 1t " " "
GostofGoodsSo| d..............t...........| .t................
Fi ni shgd
GoodS"""""""""' r""""""""t""""
( k ) Ca Sh t " t r t t " " ' t " " ' r t t t " t t " t " t t " " " " " " " t " t " " t t t " t t t t " '
AccountsRecei vabIo' ...' ........................t......
'
(s53,38 4 r 4oohl + $53,384
=
$74' 738
Dr.
16, 720. OO
53,384.OO
741738. OO'
53,384.OO
69,45O.OO
Cr.
16, 720. O0
53,384.OO
74,738.O0
53, 384. 00
69, 450. O0
Work in Process
Materi al s
311
(a)
(c)
Bal .
t 4' 000
22,OOO
600
38,600
14, 8N
(b)
(d)
21r OO0
800
2t,8oo
53, 384
3/1 Bal.
(bl
(0
(h)
19, O7O
t 8, 600
20,9OO
16,720
753X)
400
53, 384
53,784
(c)
(i)
27,506
3/ 1 Bal '
0)
Fi ni shed Goods
15, 000
53,384
68,3U
| 5,OOO
(31
TROPEZ
INC.
Schedute
of l nventori es,
March
31
s14, 8OO
21, 506
15, OOO
s51, 306
Chapter 5
P5-7
'
(r) and
(3)
311
(g)
Bal . 78,83O.OO
94, 5O1. 65
173,331.65
78,83O.U'
97
Accounts Receivable
I 17, 5OO. OO
Fi ni shed Goods
(g) 94, 5O1. 65
Materials
3/1 Bal. 65,000.00
(al 42,3OO.OO
(bi s,aoo.oo'
tt3,loo.ao
59,37O.OO
53,73O.O0
Accounts Payabl e
42,3O0.O0
5, 8OO. OO
48,tOO.OO
Accrued Payroll
( c) I 1 1, 364. 00
Payroll
( c) 111, 364, 00
|
( cl 11 1, 364. 00
Appl i ed Factory Overhead
3O, 20O. 15 30, 2OO. l 5
(dl
(al
(b)
Work in Process
3/1 Bal. 2921627.OO
(cl 98' 884.00
(d) 53,73O.0O
(0 3o,2OO.l 5
475,435.15
380,933.50
12, 48O. OO
281467.87
40,941.87
94, 501. 65
3O,2OO.15
1O,741.72
40,941.87
(g)
Gost of Goods Sol d
94, 5O1. 65
Factory Overhead Control
(cl
(e)
(f)
(3)
Over. or Underappl i ed
Factory Overhead
281461.87
(31
1,558.28
.S5I8OO
coul d al so be posted di rectl y
to the work i n process accountr reduci ng
entry
(d) to $47,930.
Various Credits
Sal es
(g) 117, 50o. oo
98
Drrcct matcrrarr.,..
rtlill:ll
Dlrcct labor......-....
21'4alO.OO
26,844.OO
Factorl oYerhosd..
l 3' 8OO.0O
7,717.65
'
Total CogL $94,501.65
Chapter 5
3 OO,875.OO sl O,O4O
l o,49o.oo
5,800 $170,285.00
43,800.O0
28,920.00 2O' 37O 210,414.OO
19,388.00
9,314.50 0,893 85,736.15
P5.-T
(Concluded)
l 2 l Th e t o t a l c o s t o t e a c h f o b a t t h e e n d o f Ma r c h :
Job 2O4 Job 2O5 Job 2OO Job 207 Total
t 4or4lio
11r32O
33,24O
a2t750
22137O
7' 375
The balancd in the work in
process account
(JObS 2O5, 206, an d 207). . . . ' . . . . . . . . . . . o' . . . . . . . . . r. . . . . . . , . . . . ' . .
'
3,355.5 hours r sz.go
=
$7r717.65
Dr.
M at
g
f i a 1S. . . . . . . r . r . . r . . . . r . . r . . . . . . . . . . , . . . . . .
r . . . . . . . . . . ' . . . . r . r . . . I
Accounts Payabl e......-' .-......
Payr O11. . . . . . . . . . . D. t . . . " t " " t ' r t ' r " " " " t " " " " ' r " r " t " t " " " '
ACCrugd Payf Ol l . . r. . . . r. . ' . . . . . . . . . . . . . . . . . . . . . . . . . . ' . ". . .
(c) Work in Process
FaCt Ory OVgf hgad COnt l OJ. . . ' . . . . . . . . . . . . . . . . . . . . . . . . . . ' . . ' .
Marketing and Administrative
Expenses """"""
Pay r ol l . . . . . . . t t " t " t " " t t " " t " t " t " " " t " t t " " ' t t t " " " '
Work i n Proc8sS..........."""""""""""""""""' t"'
FaCtOry OVgfhgad COnttO1.........r.....' .............,,...
Matgfi al s ................................r..................' .,
WOf k i n Pf OC9SS. . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . r . . r ' . . . . r . ' . . . .
Appl i ed Fact ory Overhead. . . . . . . . . . , . . . . . """"""
Cost of Goods Sol d' . . . . -. , . . . r. . . . . . . . . r. . . . , ' . . """"r"""
Work i n Procgss . . . i . -. . . . . . . . . . ' . . . . . . r"'
$159,605 3171,825.50
$49' 503 3475' 495j 5
s38O,933,50
Cr.
114,52O
I I O, OOo
78rOOO
12, 00O
2O,0OO
I 08, 175
7
r52O
42t75,0
190, 35O
1 1O, OOO
P5-8
(21
(a)
(b)
(d)
(e)
(0
114,520
11O, OOO
115, 695
421750
19O, 350
Chapter 5
P5-B
(Continued)
99
Sal gS Di SCOUnt S . . . . . . r . . . . r . r . . . o. . . . . . . . . . . r . . . . r . . . . . . . . . . . r . . .
Accounts Rgcgi vabl o .....................o....r.........
(hl Marketing and Administrative Expenses...........-
Factory Ovgrhgad Gontrol........'.....r........'.....'-..r,
a
CaSh a. aaa. a. . aaa. . . . . . r . . r . . a. . . . r r . . . r . . . . . . . . 4. . . . . . . . . . . . . . . o.
Acc u m u I ate d D e p re c i ati o n{tl a c h i n e ry .......
(i l ACCOUnt S Payabl g' . r. . r. . . . r. . . . . . , . ". . . . . . . r. r. . . . . . . . . . . . . . . .
CaSh . . . . . . . . . . . r . . . . . . . . . . . . . . . . r r . . r . . . . . . . . . . . . . . . . . t . . . . . . . . t .
0)
Appl i ed Fact ory Ovgrhead . . . . . . . . . . . . ' . . . . . , . . . . . . . . . . --. . .
Factory Ovgrhead Gontrol .....r..r' .....' ...' r..-.-r.
GOSI Of GOOdS SOl d . . . . ' . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . . . . . . . .
Fagt ory Ovgrhgad Cont rol . . . . . , . . . . . . ' . . . , . . . . . r. . -. '
(11 and (3) GENERAL LEDGER
Gash
(sl Gash
47,0OO
247rOOO
294,OOO
l 7' t,32O
Accounts Receivable
Bal . 5O,00o
255,OOO
3O5,OOO
(gl 26O,OOO
Fi ni shed Goods
32, 5OO
I
Work in Process
Machi ner y
1/ 1 Bal . 45, 3OO I
Accu mul ated DePreci ati on-
Machi nery
111 Bal .
(h)
a a a a a a a a a a a a a a a a o a t t t a t a a a 247
|OOO
13, OOO
l 5, ooo
24, 68O
85, O0O
421750
1, 45O
Materi al s
260,000
37,68O
2,O0O
85,OOO
42,750
1, 450
1 15, 695
1/1 Bal .
(g)
(hl
(i)
371680
85,OOO
122,680
1/ 1 Bal .
(al
22'oOO
114,520
138,52O
(dl
1t 1
(0
1/ 1 Bal .
Accounts Payabl e
111 Bal .
(al
l O, OOO
2,OOO
12,OOO
59,375
114, 520
173,895
1t 7
(c)
(dl
(e)
7, 5OO
78, OOO
108, 175
421750
236,425
Bal . 19O, 35O
85, OOO
I N
P5-8
(Continuedl
Accrued Payroll
Chapter 5
Sal es
Retained Earnings
lor
11O, OO0
l rn
zss,ooo
Factory Overhead Gontrol
l 2, o0o
7,52O
241680
41t 200
(cl
(dl
(ht
42,750
1, 45O
u,2oo
(gl
1/1 Bal .-MaL
1/1 Baf.-[l b.
1/1 Bel .-OH
(c) Labor
(d) Materialc
(e) otrerhead
1/l Bal .-Mat
1/l Bal.-L.b
1/l Bal .-OH
(c) Labor
(d) Materlalr
(e) Overhead
13, OOO
I
Cost of Goods Sold
19O, 35O
1, 45O
79r,goo
Common Stock
600
1, OOO
400
4O, 000
42,OOO
18, OOO
to4@o
It/' r
e"r.
g4,gzs
Sal es Di scounts
Applied Factory Overhead
(t) 42,7so
l (e)
42,750
Marketing and Administrative
Expenses
2OTOOO
15, OOO
35,OOO
111 Bal . 100, 000
WORK IN PROCESS SUBSIDIARY LEDGER
Job l oi Job 1O3
(cl Labor 18,0oo
(dl Materi al a 14,575
(e)
Overhoad 13,5Oo
16,O75
Job l 02
Palroll
Chapter 5
P5- 8, ( Concl uded)
(4) MID.STATE COMPANY
Tri al Bal ance
January 31
101
MID.STATE COMPANY
Cost of Goods Sol d Statement
For Month Ended January 3{
171, 32O
45, OOO
32,5OO
46,O75
20,925
45, 3OO
35, OOO
13, OOO
191, 8OO
12, OOO
88, 895
11O, OOO
l OO, OOO
34, 925
255, 000
600,820 600,820
(sl
Less work i n process i nventory January 31
Cost of
goods
so1d. . . . . . . . . . . . . . . . . . . , . . . . r . t . . . . . r . . . r .
Add underappl i ed factory overhead .........,,....
Cost of goods sol d-adj usted......
$l 08, 175
78, OOO
42,750
s228,925
7,5qO
$236,425
46,O75
s190, 350
1, 45O
s191, 8O0
06-1. The basi c obi ecti ve ol process costi ng i s l o
determine
the costs of the products manufac'
tured by the conrpany. Determinhg the cost of
the
productr manutactured
is necessary h order
to properly cost ending invenlories for exlemal
reporting Purpo3o!
(i'e., teporting to credilors
and ownen of thd company, lhe SEC' and the
IRS) and lo evalual. the ptofilability of the man'
ulacturing ac-tivity. In order to cost products, the
costs musl be determined for malerials, labor,
and taclory ovefiead used to process each unit
of producl lhtough eaclr deparlmenl.
06-2. The products rnanufactured wilhh a departmenl
(or cost center) during the period can be helero-
geneous il
pb order costing is used, but musl be
honrogeneous if process costing is used. In
icb
order cosl i ng, producl s are accounted l or i n
batches. The cost cil each unil ol product manu-
factuted on a pb is determined by dividing lhe
total cost charged to the
pb by the number ol
unils produced on the
iob.
Since the nranufactur'
ing cosl ol each
iob
is accounted for sepamtely'
accuralo and uselul product cosl can be deter'
mined even when the producls rnanulac{urad on
dilferent
ircbs
are substantially diflerent' By con'
trast, in procesr cosling, all nranulacturing costg
are charged to the departrnent, and the unit cost
is determined by dividing the cost charged to the
deparlment by the number ol units produced' As
a consequence, the unils ol producl manufac-
tured wi thi n a department musl be essenti al l y
alike in order tor the cost allaated to each unil
lo be meaningrtul (i.e., to reasonably reflect the
actual c6l of the resources used to manulacture
the prcducl).
06-3. (a) Process
(b) Process, unless signilicantly ditferent rnod'
els are manulactured
(c) Process
(d) Job order
(e)
Process
(t)
Process
(S)
Job order
(h)
Process, unless dillerent fabrics are used
l or di f f er ent model s, i n whi ch caso t he
conversi on cosl s may be accounl ed for
using proce*s, but the materials using
iob
order
06-4. Three product fkrw fonnats are: sequential,
par'
allel, ard seleclive,
Seouenti al maans that the producl fl ows or i s
manul act ut od i n an unchangi ng f i xed set ol
oporal i ons,
9oi n9
l rom one dparl msnt to tho
nen.
Paral l el moans that certai n operati onal
phases
take place simultaneously
in othor departments
CHAPTER 6
DtscussloN ouEsTloNs
06-5.
06.
and the
parti al l y compl eted uni l s or
Parl s
atg
brought togethet in subsequenl
deparlments'
Selective refers to the fact that a product does
not necossatily rnove through every dopatiment'
Depending
uPon the characler or shape of the
fhal
product, ditlerent deparlments
are angagecl
in ccnptethg the desired
Prcduct
Materials Costs-{n
irb
order costhg, rnaterials
fiuisitbnr
are uged and charges are nrade to
jobs; in procoss costing, charges for malerials
isgued to productinn are rnade to departmenls'
with inlrequent usc of rnaterbls requisilians'
Labor Costs-Time tickets are used h
iob
oder
-osting lo accumulate labor costs for each
job; in
pr ocess cost i ng, l abor cosl s at s char god l o
depar t ment s, and, t her ef or e, del ai l ed l i me
racords arg nol nocossary.
Factorv Overhead-Job order costing requires
l ho use of pr edel er mi nad r at es f or char gi ng
overhead to
j obs; i n process costi ng, actual
overhead may be used.
(However,
predeter'
minEd rales are otten used in order lo smooth
ovefiead that is not hcurred at the sarne rata a3
productior activity to the products manulactured
throughoul the
Year.)
Summarizino Costs-A
iob
order cosl sheet is
*Ja to accumulate lhe costs of an order in
iob
order costing; a cct of production rePorl is usod
i n process costi ng. In
i ob
order costi ng, costs
aro summari zed on compl eti on of the
j ob; i n
process costi ng, costs charged to l he depart-
menl and cosls accounted for are summarized in
the cost of producti on report each month (or
sornetimes each week).
Predetermined overhead tatos can and should
be used if the pattem of overhEad cost incur'
rence does not follow the pattern of produclion
activity. Some items of overhead are fixed and
not responsive to changes in production aclivity'
It production volume varies each month, then
predetermined overhead rates should be used'
Some i tems of overhead are i ncurred onl y at
cerlain times during the year, but benefil produc-
t i on t hr oughout t he year ( e' 9. , payr ol l t axos,
i nsurance,
property taxes, vacal i on
pay, ei c' )'
These i t ems can be r ecor ded as pr epai d
oxpenses and amor t i zed uni l or ml y t o each
rnonth it actual overhead is charged to produc'
tion. Altematively, estimates of such costs can
be included in the predetermined ovefiead rale'
and the actual cosi charged to overhead
when
i ncurred. The use of predetermi nsd ral es i s often
si mpl er t han t he al l ocat i on ol acl ual cost s
because a si ngl e pr edel er mi ned r al e r equi r es
onl y one overhead charge to aach department
each monl h. l n contrast. the capi tal i zal bn
and
l5,
I
I
L,
I
!
Clppter6
arnorli:alion of .ach itcm ol astual ovcrhead
nogld rcquirc nurrr.,orr. chargcr rach rnoth.
OO-7. A sl of prodtgtioh npod b an offetivo rnqth-
ly (c wookly) ourynary of tho cod of rnatorbb,
labor, ard overhcad consrrm.d by eadr deparl-
rrJrl or cocl c.nl.r, abng with a rrcord cl tho
guenlity ol productr menufrclurcd. ll providor
hfsnnlbn necrslary lo col prodrctr, prep.r.
irumel
.nlrier lo rccord lhr trandcr of coslr
bolwecn departmcnlr, end cmtrol cob.
06. The rectbns ccnnurly lound in a cocl of pro
ducttn reporl arc: (a) e quantity achcdub incJi-
calhg thc soursr and dispeitim oil thr unib of
producl, (b) a cel charged lo the departrnent
t clbn, indicathg the cost h total and pcr unil
for lho cl lrenlf.rrod in from tho procoding
dopartmont, as woll as rnatcriab, labor and ovcr-
hoad cfnrgod lo the depadrnent, and (c) a el
eounled for seclisr indicalhg the anpunt of
cod assigned to thr unitr tranderred oti c/ the
143
dsparfnml, as well as tho eet of ending hven-
tory.
06- 9. Scpar al o depar l menl al cosl of pr oduct i on
ropgrtt arc uced to accumul al o costs more
accuralely and to prwUe rnore detailed data lor
c6t cqrtrol purpooo. than a planl-wUe cct of
;roductbn
rcport couki prwirto. In sornc ceses
(c.9., a msnuteglurhg plant tul hss a sel*live
prodwtim flow for its producta), a planl-wide
c6t of prcduclirn reporl cannot bo usd.
06-10. An cquivalenl unit cil produclicr ir thc anrornt cil
a nrsounco (r.9, malcrbb, labof, or ovrfiead)
lhat wouH bc required to csnplcto
qrr
unit of
thr producl with respecl to thc cost clemenl
behg cansidered- Thc lolal number of equiva-
lonl unite. with rcspecl to a particular element of
cod, ropresonls lhe number ol unils of the prcd-
usl lhal could have been cornpletod with lhe
resource3 used durhg the perird.
I
t
I
b
\,
ta1
Chaptar 6
Factory
labor Overhead
Cort from
Precedlng
Department Materlalr
2O,OOO 2O,OOO
5r00o
5, O0O
l5,oo9 __?!,ooo
Cost from
Precedlng
Department Materialg
EXERCISES
E6-1
(11
Equivalent
units
transferred
out """"""
Equivalent
units
!n
ending
inventorln
Cost from
Pniceding
dePartment
(1OO% r 5rO0Ol "' t"""""r' r""""'
Materi al s
(l 00oh r 5' OOO) """"""""'
Labor
(60% r 5rOOO)"""""""o' t""""
Factory overhead
(4O% x 5' OOO) """
Total equi val ent
uni ts...' .,..........."' r""""
l2l
Cost i n begi nni ng
i nventory....."""""""
Cost added duri ng current
peri od' .""""
Total cost to be accounted fot' .....,.......' .
Di vi ded by total equi val ent uni ts......,.' ...
Cost
per equi val ent uni t . . . . . . . .
S15, OOO
s 9, 200 sl s, 4oo
25,OOO 23,OOO 22,AOO
2O,OOO 20,OOO
3, OOO
23, OOO
2,OOO
22,AOO
Factory
Overhead
o
st5,4oo
o
$4o,ooo
$4o,0oo
25,OO0
o
sl 5,ooo
o
s
9,200
E6-2
WOf k i n Pf OCgSS-Depaf t mgnt
X' . . . . . . ". . . . . . . . . . . . . . . . . . t . . """'
WOf k i n Pf OCgSS-Depaf t mgnt
Y . . . . . . . . . . . . . r. . . . . . . . ' . . , """""'
Mat gr i a1s. . r . . . . . . . . . . r r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
WOf k i n Pf OCgSS-Depaf t mgnt
X. . . . . . ' . . ' . . r. . . . . . . . . . . t """"""
WOf k i n Pf OCgSS-Depaf t mgnt
Y. . . . . . . . . . . . . . . . . . . . . . . . . . """t ""
Pay r o11 . . . . . . . . . . . " " t " " ' i " " t " " t t " " t t t " t " " t t " " t t " " t t " t "
WOf k i n Pf OCeSS-Depaf t ment X. . . . . . . . . . . . r. . . . . . . . . . . . . . . . , . . . . . "
WOf k i n Pf OCgSS-Depaf t mgnt
Y . . . . . . . . . . . . . . . . . ' . . o. , . . . . . . . . . . . . . .
FaCt Ory OVgf hgad . . r. . . . . . . . . . . . . . . . . . . , . r. . . . . . . . . . . . . . . . . . . . . "'
WOrk i n PTOCSSS-Depaf t ment
Y . . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . r. .
Work i n Process-Depart ment
X' . . . . . """"""""""
Fi ni shed Goods l nvent or y
Work i n Process-Depart ment
Y . . """"""""""""
5O, 0OO
4O, OOO
8O, OOO
70, 00o
18O, OOO
7O, OOO
31O, 0OO
476, OOO
9O, OOO
l 5o,ooo
25O,OOO
31O, OOO
476, OOO
105
I
l>
:
I
b
\
L.
l-
ClppterO
E6-3
Tlndol FabricatorE Inc.
Cutting and Forming
DePartment
Cost of Produstion RePort
'
For November
QusnUV Schcdub
Bcglnnlng lnvrntotY
!'ttrt d h proccg thb
Prrlod
Tnnrfcrrrd to Aromblhg Dopertmrnt
End h g lnvcntoty..,...'.........'.......'..--.
Cost Chargcd to DePartmcnt
Eeglnnlng Inventory:
Matcrlafr
Labor
Fsdory ovcrhced
Totel cort h bcglnnhg hvcntory ..otso'-...'..'....Fo..
Cort rddcd durlng currcnt Pcrlod:
Matarlalr - .......oo...' ...r...' .F......' .' .
[.:bor
Frctory
Totel coot eddcd durlng currcnt
pcdod......*-.-
Total coct chargcd to deparbnct|t.......................'....'..,.'...,.
i/lst rbb Labor
7l4r 1gY. EV.
Total
Cort
Overhcad QuanUty
800
3"20O
a,ooo
3/lOO
ooo
4, OOO
Equl val ent Unl t
Unlta' Cost"
3113,377
3137,452
Vt
Gompl eta Unl t Cogt
too% 336.70
Cort Accountcd tor ar Followr
Tnnrlrrrcd to Arrembllng Dcprrtmcnt
Wort In Prccclr, cndlng hvcntory
Equtvebnt unttr tranrfrrrcd o9t......
Equl vel ent unttr h ondl ng Inventory
Total cqul val ent unl tr -
s36.70
Total Cogt
3124,780
310, 1I O
1,128
Unltr
171923
2rJ52
3l8OO
t 21',07|'
t 08,025
14r75|,
29190O
3U2A8
1.70
0.52
3,85O
3rO4O
3,55O
t22,4a
a,70
9.52
Metrrlelr
Labor
Factory ovcrhcad
11428 12,f,72
Total coct accounted tor
t137,452
.Total
number of cquhralent unltr roqulrcd In thc coot accounted tor rccUon detormlned ar tol'
lorvr:
Mrt rlsb Lebor Orcrhcad
34oo 3/fOO
alro 240
3,8!tO 3rO4O
-
Total cort
0,c.,
thc cort In begl nnl ng Invcntory pl ur thc cort edded durl ng thc curront
pcrl od)
dtvl ded by thc total number ol cqul val ent unl tr requl red l n thc cost accountod l or ractl on
3/|OO
@o
ooo
ooo
75t/.
&.h
at.h
I
t
3/0OO
150
3,55O
:
ta6
Chagtor 6
E6-4
Quantl ty Schedul s
Beglnning InventorY
Started In procesa thlr per|od...........
Transferred to Flnlshlng Department
Endl ng i nven tory,.................,
Sonora Manufacturi ng
GomPanY
Mol di ng DePartment
Cost of Production
RePort
For August
Materiatr
L:bor Overhead Quantity
75% 25o/o 25o/o
Total
Gost
I ' OOO
0,ooo
l OrO0O
9,200
800
I O, OoO
Equlvalent Unit
Unlts' Cost"
Cost Charged to Department
Begi nni ng i nventonn
Materi al s
Factory overhead
Total cost In beginnlng inventorY
Cost added duri ng current
peri od:
Mat eri al s
[abor....
Factory overhead
S 4, 120
522
9El
Total cost added durl ng
Total cost charged to department
Cost Accounted for as Fol l owr
Transterred to Flnlshlng Departmcnt
Work In Process, endl ng Inventory:
Mat eri al s
l abor. . . . . . . .
Factory overhead
Total cost accounted for' ,..-,.............
:::::::::ll ::::::::::::::: ffi
:
o/o
Unlts Complete Unit Cost
$e.so
Iotaf Coet
378,200
33,ooo
280
42O 3,700
s81, 900
9r200
800
800
800
lOOo/t
750h
25o/c
25%
3 5,603
344,880
12, 638
18r779
s8.50
35.00
1, 40
2. 10
9, 800
9, 400
-!9,400
s5.00
1, 40
2. 10
Total number ol equi val ent unl ts requi red In the
fol l ows:
Materi al s
Equi val ent uni ts transferred out....
Equi val ent uni t s i n endi ng i nvent ory
Total equi val ent uni ts
cost accounted for secti on determl ned
Labor Overhead
9, 200 9, 200
200 200
9, 800 9, 400 9, 400
Tot al cost ( 1. e. , t he cost i n begi nni ng i nvent or y pt us t he cost added dur i ng t f i e cur r ent
per i od)
di vi ded by t he t ot al number of equi val ent uni t s r equi r ed i n t he cost account ed f or sect i on
9r 2OO
800
L
\--
I
I
L
I
L
I
b
ChapterG
E6-5
Quanti tY
Schedul c
Beglnnlng
InYentotY..
Received
from Cutting Departmcnt"'
Trangfcrred
to Paintlng DepartmenL'
Hypertec CorPoration
Forming DePartment
Cost of Production
RePort
For SePtember
Materialr
Labor Overhead
Total
Cost
t 21,120
5,880
2, 914
5,228
g
34,U2
3178,24O
Unl t Cost
Quanti tY
1r 4OO
4, 600
Endlng InventorY
80o/.
3Oo/n 300h
Coat Charged to Departmcnt
Eeginnlng lnventorY:
Cost from
precedlng department"""
Materials
FactorY overhead
Total cost In beglnnlng
lnventory """'t""""""""
Coat added during curent Period:
Cost from
precedlng department"""""""'
Matarialr ....."...-....-.
Ll bo 1...............o......r.......ro......r.....-......o...o...................
Factory overhcad
.""'t"""""
Total cost addcd durlng crrrcnt
period"""'
Total cost charged to departmcnt..""""'
3 70, 380
20,Uo
17,526
35,052
tl43,398
6, 000
5, 0oo
1, 000
I , OO0
Equi val ent
Uni t
Units'
Cost"
Coat Accountcd for as Follows
Tranrtcrrcd to PainUng Dcpartmcnl.
Work lrr Proccssl cndlng InventorY:
Gort from
preccding dcPartrncnt
Matorlalr ........o.......'..
[.abor........
Factory overhead
Total cost accounted for ...-.'....-..-..
Equlval ent unitc transf erred out....
Equl val ent unl ts In endi ng Inventory
Total equi val ent uni ts
5' OOO
5, 000 5rOO0 5, 000
1, OOO OOO 300 3O0
6, O0o
Unlts
ch
ComPl et e
o,0oo
5, 800
5, 300
5, 30O
sl 5, 25O
2,82O
1 , 1 4 0
2,28O
5, 300
s15. 25
4. 70
3.80
7. 60
331. 35
Total Cost
s156, 750
21,49O
s178, 240
5rOoO
I r O0O
1r 00o
I , O0O
1, 00O
1000h $31.35
l AOo/. sl 5.25
8go/o 4.79
3ooh
3.gO
30,h 7.60
I
Total number of cqul val ent unl ts requi red
In ths cost accounted
tor eecuon determi ned as
followg:
Pri or DePL
Gost
Materi al s Labor Overhead
5, OoO 5, 300
-
Total cost
(i .e., tJre cost i n begi nni ng i nventory pl us the cost added duri ng the current
peri od)
dl vl ded by thc total numbcr of cqul val ent' unl ts requi red l n thc cost accounted for
gecUon
\
1@
E6-o
'
Ramirez Corporation
Assembly DePartment
Cost of ProducUon
RePort
For February
Quantlty Schedub
Beglnnlng InventorY
Recahved lrom Cuttlng Departmcnt.-
Trangferrcd to Flnlghcd Goodg..-.....
En dln g Inven tory..,..........,..r....,....8....
Cost Charged to Departmcnt
Beginning inventory:
Chapter 6
Materlalr
l.abor Overhcad QuanUty
400
al oo
2,5O0
Fooo
8Oo/, EO'/o 8Oo/o 50O
2r5OO
Totat Equhralent Unlt
Coat Unlts' Cost"
s 67,410 2,500 s32.00
21,200 2,400 10.50
Cost from precedl ng
deparbnent.............,. . $ 12' 590
Materi al s 4,OOO
1, 20O
2,49O
3 20, 190
Labor.
Factory ove
Total cost In beglnnlng Inven
Cost added during eurrent
perlodl
Cort from
preceding department.
Materl al a
l :bor 171060 2r3OO 8.2O
35, 320 2, 3OO 18. 40
Factory overhead
Totat cost added durl ng current
perl od..,....
8141,59o
Total cost charged to department
:-
sl 81, 78O
.h
Cost Accounted tor ag Fol l ory! Unl tg Compl cta Unl t Cort
Transferred to Finlshed Goodr..,....... 2,000 l00th 387.10
Work In Process, cndlng Invcntory:
'
Cost from precedi ng
department 500 l OOc/, S32.OO 316' 000
Materi a1s....,............ 500 8O' /,
' l
O.5O 4,2OO
[abor....,... 500 $Oc/o a.2O 2,460
Factory overhesd
Total cost accounted for................... s191, 780
'
Total number of equl val ent unl ts requl red In the cost accounted for
gectl on
determi ned as
fol l ows:
Prl or DepL
Cost Materi al g l abor Overhead
Equi val ent unl ts transferred out.... 2,0OO 2,OOO 2,OOO 2,OOO
Equi val ent uni t s I n endi ng l nvent ory 5O0 4O0 3OO 3OO
Total equi val ent unl ts Z"SoO Z*C}O Z,SOO ,"3OO
: : : :
-
Total cost (1.e., the cost In begi nnl ng i nventory
pl us the coat added duri ng thc current
peri od)
di vi ded by thc total numbcr ol equtval ent unl ts rcqul rcd In thc cost accounted tor secUon
s67. 10
WI
si 34,20o
L.
I
L
L
Clppter6
E&7
Zupton Manufacturing
Corporation
Formlng DePartmant
Cost of Pmduction
RePort
For June
Matcrbl A Materbl B
109
Overhead QuanUtY
o00
31000
4,500
4, l oo
a00 300h
4' 50O
Equl val ent Unl t
Unltr' Coct"
I
I
Lt
I
I
b
i-
QuanUV
tlchsdulc
Bog lnnln
g hvcntorr...m'o..--....c.
Recolvcd fl.,om Cutdng Drpartmont-.
Tranrlerrrd to Fhlrtrlng Departmcnt
End lng lnvcntory...-'..--...o..0-......6..
Labor
100% o% 30%
Cort Chargcd to DePartmcnt
Beglnnlng lnventorY:
Cort trom
praccdlng dcpartmcnt......-"'-""""""""""
*letarbl A.--..**...,.'.'..-o-oo
lletrrld 8........*..--........'.-.6.-6'Fts
|.e bor....'.....'..........D...................
Frctory ovcrhcad
Total cogt ln beglnnhg
hventorY
@et addcd durlng curcnt Perlod:
Cort from
precedlng department...........""
Matsrlal 4..-.....................,......
Total
Cost
I
I
J
4A22
2, 805
0
1, 25O
1. 875
3 1 0 . 3 s 2
:
3 29, 32E
19, 695
14, 350
151630
23.4a5
JtOZ.tt$
rl_1_?@o
Unl t Coot
326.00
97'50
5. 00
3.50
4,OO
o.oo
4,5OO
4,5OO
4, 1OO
4,2i2O
4,2J20
$!l,ooo
2rOOO
o
4ao
720.
3 7.50
5. 00
326. O0
Total Cogt
3100, 000
o,200
sl 12, 800
Fectory ovcrhcad
3.50
4.00
o. 00
'fotat
cori rdded durlng csrent
porlod"""'
Total cort charged to department..-'.--'--
V'
Unltr Gompletc
Cort Aceounted tor r Followr
Trandrrrod to Flnlrtrlng Doparbncnt
Work h Proccgr cndhtg hvontorY;
Cort from procsdlng dePartmcnt
Matsrlal A -.-.-*
Matsrlal I
Lebor
Fectort ovcrhcad r....-................
Totrl cort eccountod for ..-....,...-*..
Equhralcnt unltr tranctcrcd out.... 4,1OO
Equtval ent unl tr In cndl ng Inventory 4oO
Total cqul vatent unl tr I,5OO
4rl oO
400
400
400
400
400
100%
100.h
lOOc/.
Ot/o
4r l oo
400
4, 5OO
-
3Oc/o
3004
'
Tottl numbor of rqutvelent unltr rcqulrcd In the cost eccounted tor rccUon dctormlncd ar
followr:
Prlor DepL
Coot
{ttttbt
A
Utt.t"l i
l ' ' abor Overhead
4rl oo
o
4, 1OO 4, 1OO
120 120
4,1OO 4,220 1,220.
-
Total cort
(1,c., thc coct In begl nnl ng Invcntory ptur thc coct added durl ng thc current porl od)
dtvlded by thc total numbcr of cqulvalont unltr requlrcd ln thc cogt accountod for rcctlon
QuanUty Schcdulo
Beglnnln
g lnvcntotT -x..o'd"""-"'-o".*tr"
Recelved from
gyn
rp Depe rtm c J1t....."""'-'-'
Addcd to
grocou ln CarbonsUon
Departrncnt
Tranrferrod to BotUlng Dcpertmcnt -......-.....
End In g brventory...osso....F.r-.-......h"'!"il'
.l
_ _
Pop Col a Company
Carbonation Department
Cost of Productlon Report
For October
Hatcrllb L^abor
100% 25%
Totrl
Co.t
Chaoter 6
ry
QuenUtY
I rOOO
2,OOO
c,ooo
25V.
e,ooo
7"8OO
13OO
0,ooo
Equlvelcnt Unlt
Unltt' Cocti'
o,ooo
9rOOO
8, l oo
8, 1OO
32.0O
Totel Cort
il5,ooo
1 1 0
E6-8
Cogt Chargcd to Dsprrtmcnt
Beginnlng hvcntorY:
Coat f mm
prcccd In g departmcnt..............-
lvlaterlalr
Labor
Fectory
Total colt ln boglnnhg hvcntory
Coat added durlng curcnt
Pcrlod:
Cort from
prrcrdlng doptrtmcnt
Matorlelr
[abor
Factory ovcrhced
Total coct addcd during current
pcrlod....-.,"""'t
Total coet chargcd to deparhnent.........--
Unltr
7'800
l Soo
11200
1'3,OO
1, 200
x
Complctr
100%
1oo%
100%
25.h
25.h
3 1 , 1 2 0
190
oo
120
t f/a90
3 o,oao
1, O1O
lFEo
3, 120
315, e7O
3t 7/ | 60
Unlt Cct
SrLOO
31: O
20
.20
AO
31tO
2AO
co
120
tl .20
20
.20
AO
Cort Accountcd for r Followr
Tranrforrcd to Botdlng Dcpertrnrnt -
Wort In Ploceur cndlng lnvcntoryl
Cort from
pncedlng dcPartrncnt
Mats r1a1r,...........,......
Labor
Factory ovcrhcad -..............'......
Total cort eccounted for -'.-...-.*.
l BOO
317,400
.
Total numbcr of rquhutlcnt unltrr rcqulrod ln thr cort eccountod tor locUm dctcrmlncd I
fol l owr:
Prlor DcpL
Coct Matcrlab Lrbor Ovcficed
Equlvelcnt unltt trenrfcrcd out ... TBoo TBoo 7,8oO TBoo
Equlvalent unltr h cndlng lnventory l,2OO 1' 200 3OO
3OO
Total cqulvalsnt unttr
!'099 I'o99
JrL99 81199
*
Totat coet (1.r., tfir cg4t ln bcalnnlng Invcntory
plur thc colt addod durlng tlro currcnt
perlod)
dhvldsd by thr total numbcr oi oqulwlcnt unltr rcqulrcd ln thc coat eccounted
for rcctlon
Chapter6
E6- 9,
Labor
1 1 1
Quantlty Schedule
Beglnnlng lnventory,.
Recelyed trom Reflnlng Department............,..
Added
!o
process In Bl endi ng Department..,..
Tranaterrcd to Fin lsh In g Departmen t .............
Endl ng l nventory..
Cogt Charged to Department
Beglnning lnventory:
Donegal Chemi cal Company
Bl endi ng Department
Cost of Production Report
For Mar ch
Materials Labor
100ah
gooh
Total
Cost
Overhead QuanUty
5,0o0
2O, 0OO
5, 000
goeh
3O, 0OO
26, OO0
4, OO0
99'o99
Unl t
Costtt
Equi val ent
Uni ts'
Cost trom precedl ng department
Gost added duri ng current peri od:
Cost from precedi ng
department...............
Materlale
Total cost In beglnnlng Inventory I 8,072
3 4,750
21375
180
7fJ7
s25,25O
_12,A25
2r740
8, 113
94,8,728
956,80O
Unl t Gost
. . . a . . . a . a a a a a
29, 000
4, 000
4, 000
4, 0o0
4, 00o
'1000h
1000h
1000h
aoeh
sooh
91. 90
$1. oo
.50
. 1 0
.30
3O, O0O
3O, O0O
29,2OO
29, 600
$4,OOo
2, 0oo
320
1, 08O
s1. o0
.50
, t o
.30
$1. eo
Total Cost
$49, 40O
7,4OO
358,80O
Factory overhead
Transferred to Finlshing Department
Worl In Process, endlng Inventory:
Cost from precedi ng
department
Materi al s
Labor........
Factory
overhead
Total cost accounted for ......._..........
Equ i val ent
u ni ts transferred out....
Equi val ent
uni t s I n endi ng i nvent ory
Tot al equi val ent
uni t s
Total cost added duri ng current peri od.......
Total cost charged to department...........
Cost Accounted for as Foltowt
c/o
Unl ts Compl ete
r
Total number of equl vatent uni ts requi red In the cost accounted for
gecUon
determl ned aa
follorrs:
Pri or DepL
Cost Materi al s Labor Overhead
28, 000 26, 000
4, OOO 4, OOO
3O, 0OO 3O, OOO 29,2OO 29,600
26, OOO
3, 20O
28rOOO
3, OOO
"
Tgtal cost (i .e., the cost i n begi nni ng i nventory pl us the cost added duri ng the current perl od)
di vi ded by the totat number of equi val ent uni ts regui red In the cost accounted for aectl on
112
E6.10
APPENDIX
For Jul Y
euanUV
Schedulc
Matertalr
ry
onerhead
Bcginnlng
Invcntory....""""'o"""''"-
AOoh
2O'h
2Oo/o
Starbd ln
Procesr
thle
Perlod
t
Chapter 6
Brimhall Manufachlrlng
GomPanY
Cuttlng
Departrncnt
Cort of ProducUon
Reoort
\
Transferred
to Assgmbly
Department
Endlng lnventorY'.
Cogt Gharged to Department
Beginning inventorln
Materl al l
Labor
Factory overhead
Total cost In beglnning
InventolY
Cost added duri ng current Peri od:
Cogt Accounted
for aa Fol l owr
Transferred
to Assembly Departments
Begi nnl ng i nvent ol Y.
Gost to compl ete:
Materi al g.-
Labor
Factory overhead
""""
Started and comPl eted
thi s Peri od
Total cost transferred to Assembly
DePartment ....' ..........
Work i n Process, endi ng i nventorY:
Materl al s..
Labor........
FactorY overhead
Total cost accounted tor ..............' ..' .
To compl et e begi nnl ng i nvent ory. .
Started and compl eted thi s Peri od
Endi ng I nvent ory. .
Total equi val ent unl ts
-
Cost added duri ng thc current
peri od
durl ng thc currcnt Perl od
lOOo/.
50'/o
5Oolt
CurentT.
$ 2,940
390
585
3 3, 915
340,530
t 8, 100
27r15O
39t,78o
395,895
:
Unit Gost
QuanUtY
100
000
I , OOO
850
150
I , OOO
Equl nal ent
Unlts'
33, 915
1, 98O
1, 600
2, 4O0
87,425
1, 50O
2,25O
Uni t
Costt'
349.50
20. 00
.
30.oo
See.5o
Total Cost
$
9, 895
74,A25
s84,520
111175
s95' 695
as fol l ows:
Total
Gost
Materlala ..............-......
Labor...' ...
Factory overhead t....................................................t.'
Totat cost added during current
period'-'-""o""'
Totat cost charged to department
"""""""'
940
905
905
Unl tc
100
t oo
1 0 0
750
1 5 0
150
t 50
7so
1 5 0
40ch
8Ac/o
sooh
100.h
t4e.so
20.o0
30. o0
99, 50
.
Number of equi val ent uni t s of cost added duri ng
t t ro current
peri od det ermi ned
Materi al s
l :bor Overhead
40
80 80
lOOo/c $49.50
3Oo/.
20.00
5Oo/o
3O.OO
750 750
75 75
940
905 905
di vi ded
by t he number of equi vat ent uni t s
of cost
added
1 1 3
Chapter 6
E6.11. APPENDIX
QuanUty Schodul c
Beglnnlng InventorY
Kandu Tool GomPanY
Assembly DePartment
Cost of Production Report
For November
Materl al s
5Oolo
Becel ved from Cutung Department...
Transferred to Finished Goods
Endlng lnventorY..
Coet Charged to Department
Beginnlng Inventory:
Cost trom precodi ng department..........' ....
Materl al s .................
Labor
Factory overhead
Total cost In beginning inventorY
Cost added durl ng current
peri od:
Cost from precedi n g d epartment."..........................,...
Factory overhead
Total cost added duri ng current
peri od.......
Total cost charged to department...........
9Oo/.
gooh gooh
l.abor Overhead
4ooh 4Oolo
QuanUty
1r2OO
2,80O
4, 00O
3, O0O
1, 000
4, O00
Equi val ent Uni t
Uni ts' Cost"
Total
Cost
17,28O
5, 55O
2,4OO
3, 8OO
s 28,830
s 40, 600
30, 89O
1A,932
25 398
I_1_3,610
s142, 450
2r8OO
3, 300
3, 320
3, 320
314. 50
9.30
5. 10
7. 65
s36.55
l l 1
E6-1
I APPENDIX
(Concluded|
Coat
Accountcd
tor ar Followa
Tranctcrrcd
to Finlghed Ooodg:
Beginn
ing Inventoty """""""""'
Cost to comPl ete:
Materlall.-
Labor.....'..
Fa ctg-rY ove rh ca d ...'....
Started and comPl atcd thl l
Pcrl od
Total cogt transferrcd to Flnlshcd
Work In Proce3s, cndl ng InventorY:
Cogt trom
Precedi ng
dePartment
Mat eri al c. .
L:bor .................-.
Factory overhead
Total cogt accounted tol .......-.-...' ....
To compl ete begi nni ng i nventorY -
Started and compl eted thi l
Porl od
End i n g i nventory............................
Unltr Currcnt'/o Unlt Coot
Chagter 6
Total Cott
328,&tO
5,39O
3,A72
5,508 3 {3,590
o5, 79O
3100, 380
314, 500
8,37O
4, 08O
a, 12O 3:!,070
s142,45O
determl ncd ar totl ow::
Overhced
.
Number of equl val ent unl ts of cogt added duri ng the current
perl od
Prlor DepL
Cott Materialr Labor
1, 200
1, 20O
1, 20O
I , 8OO
Goodr
1, 00o
1, 00o
1r 000
1, 00o
3Ot/t
sooh
60.h
1OOV.
100.h
00.h
80e/o
800h
EOO
1, 800
900
3 e.30
5. 10
7.85
36.55
314.50
0.30
5. 10
7.85
o
1, 800
1, 000
720
1, 80O
800
720
1, 80O
800
Total equl val ent unl ts
-2' 800 -9' 399 -3' 339 -3' 329
Cost added duri ng thc current
pcrl od dl yl ded by thc numbcr ol cqui val ent uni tr of col t added
duri ng t hc current peri od
Chapter 6
E6-12 APPENDIX
1 t 5
QuanUty Schcdul c
Begl nnl ng l nvcntory
Recelved from Retinlng Department..,..........-
Added to proceae
In Blendlng Department.,...
Transtered to Flnlshed Goods
Endl ng Inventory..
Coat Charged to Department
Begi nnl ng l nventory:
Cost from precedi ng
department
Materl al s ........,.....,
L:bor........
Factory overhead
Total cost In beginnlng Inventory
Cost added during current perlod:
Northeastern Chemical Corporation
Bl endi ng Department
Cost of Production Roport
For May
Materlals Labor
100.h 20ch
lOOo/t 800h
Overhead Quantity
4OV. 2rOOO
5, 000
5, 0o0
gooh
12, 0O0
1O, 5O0
1, 5OO
12, 0OO
Equi val ent Uni t
Units' Cost"
Total
Cost
3 2, 490
500
150
600
Cost lrom procedlng
departnrant;,
Materl al s...
l.abor
Factory overhead
Total cost added duri ng current peri od,......
Total cost charged to department.........
$ 3, 71O
s12, 5OO
2,500
3,3OO
7163O
$25,930
_s29,64O
1O, O0O
10, o00
1 1 , OOO
1O, 9OO
s1. 25
,25
,30
.70
32.50
n6
I
Ef-l 2 APPENDIX
(Concluded)
Cort Accountcd
lor er FollorYr
frz-"tf-"tt"a
to Flnlrhcd
Ooodr:
Bcglnnln
g Invcntory
"""""""''-
Cogt to complcta:
Matcrlrlr
""""""""""""
Itbol ."*-
Fecto rI oYcrh4ad............
Started and comPl eted thl a
Perl od
Total coat trancferrcd to Flnlshcd
Ooods
Work ln Proces!, cndlng InventorY:
Cost from
Prsccdl ng
dePartment
Mat edal r. . . . . .
Labor...............
Factory overhead
Total coat accountsd l or ...................
To compl et e begi nni ng i nvent ory. .
Started and compl etcd thl a
Perl od
Endl ng InventorY..
Total equl val ent unl tr
Unltr Curcnwl Unlt Coct
Chagter 6
Totel Cort
3 5,030
21,25O
s26, 28O
31, 875
375
3, 360
s20,640
Prlor Dept.
Coat Materlalt
31. 25
. 25
270
840
L:bor Ovarhoad
1, 000 1, 200
8, 500 8, 500
900 1, 200
2, OoO
2,00o
2,00O
8, 50O
1, 5OO
1, 50O
1, 5OO
1, 5O0
0
8, 500
1, 500
ooh
8.0ch
aoch
100%
100ch
1000h
6Oc/c
80o/c
0
8, 50O
1, 500
3 .25
.30
. 70
2.50
t 3, 71O
n
480
840
.30
. 70
,
Number of equl val ent unl tr of coct added duri ng thc cutzent
perl od detsrml ned aa fol l owg:
l O, OOO
' l
O, OOO 1 l , Ooo 1O, 9oO
:
Cost added durl ng thc currcnt
pcrl od dhl dad by thc numbcr of cqul val cnt unl tr of cost added
duri ng t hc current
perl od
Chagter 6
1
P6-1
( 1)
1 1 7
PROBLEMS
Modern Cabi net ComPanY
Cutting Department
Cost ol Production BePort
QuanUV Schedul c
Begl nnl ng InventorY..
Startgd In proceso this
Perlod
Transf erred to Assembly Department
Endi ng Inventoty
Cost Charged
_to
Department
Begl nnl ng Inventorp
For August
Materlalr Labor
Materl al s
l abor...
Factory overhead
Total cost i n begi nni ng i nventory....' ...-......' ...-.r...
Cost added duri ng current
peri od:
Materl al s
[.abor
Factory overhead
Total cost added duri ng current
peri od-.-.-..
Total cost charged to department...........
Overhead QuanUty
200
800
gooh
60ch 600h
Total
Cost
800
650
150
800
Equi val ent Unl t
Uni ts' Cost"
S 5,385
530
795
s 6, 890
s28,035
8, 35O
12,323
$48, 91O
s53,6O0
Unl t Cost
7A5
740
740
3f0.oo
12. O0
18. OO
Cost Accounted for as Follows
Transferred to Assembl y Department
Work i n Process, endi ng i nventory:
Materi al s
l-abor
Factory overhead
Total cost accounted for ...................
'
Tot al number of equi val ent unl t s requi red
fol l ows:
Unlts
150
150
%
0ompl et e
050 lO0o/c
150 900h
s70. o0
rot"l C*!
s45,50O
35,4O0
1r 08O
1,620
8, 10O
gooh
6Ao/c
970. 00
s40. 00
12.OO
18. 00
s53,000
i n t he cost account ed f or sect i on det ermi ned as
Mat eri al s Labor Overhead
Eguhral ent
unl t s t ransf erred out . . . . . . . . . . . . 05O 05O 85o
Equl val ent uni t s i n endi ng i nvent ory. . 135 90 90
Total equi vatent unl ts
_JE _J79 _Jl 9
-
Tot al cost (1. e. , t he cost i n begi nni ng i nvent ory
pl us t he cost added duri ng t he current
peri odl
di vi ded by t he t ot at number of equi val ent uni t s requi red i n t he cost account ed f or aecUon
Chaptar 6
1 t 8
P6-1
(Conti nuedi
Modern
Cabinet
ComPanY
AssemblY
DePartment
Cost of Production
RePort
For August
QuanUV Schcdul c
\
Beglnnin
g Inventory.-,........""""'-'d
Racelved from Cuttlng Departmsnt"'
Tranaferred
to Finiahed Goodr ""'-'-
En d in g Inventoty..-..'...-.....'...
Coat Charsed
to DcPartmcnt
Beginnlng InvcntorY:
Matcrialr
l:bor Overhead Quantlty
Coct trom
precedlng d epartnrent
""""""""""""""""'
3 17,41O
3,451
3, 811
3, 011
Materl al a
Labor
Total cost ln beginnlng
Inventory
3 28,083
Cost added durl ng curtent Pcrl od:
Cogt from
pt ""oiiJ departrnent"""""""'
' 3 45'5oo
Materlall
13'43:l
tabor......' .
20' 989
Factory ovefi ead
20' 989
4ooh
2Oo/o
20t/.
250
050
900
800
100
Total
Cost
900
Equivalent
Unit
Unlts'
Cosf'
sl oo, 911
$128, 994
$
69.eO
20. 10
30.o0
30. 00
s150. 00
900
940
820
820
Total cost addcd durl ng curent
perl od"""'
Totat cost charged
to department"""""'
fi9
Chapter6
P6-1
(Goncl uded)
Coat Accounted tor as Follows
Trangferred
to Finlshed Goods....-....
Work ln Process, endlng lnventorY:
Cogt from
Preccdlng
department
Materlala-
labor
FactorY overhead
Total cost accounted for.....' .......-.....
%
Unl ts Compl ete Unlt Cost
100% s' | 50. 00
Total Cost
sl 20,ooo
8,994
s128, 994
800
100
100
100
100
1000h I
4Ao/.
69. 90
20.10
30. 00
30. 00
36,99O
804
soo
600
20o/c
200h
'
Total number of equi val ent uni ts regui red tn the cost accounted for secti on determi ned as
fol l owr:
Pri or Dept.
Cost Materi al s Labor Overhead
Equlvalent unlts transterred out....
Equtvalent unlts In ending Inventory
Total equivalent unlts
800
100
800
40
800
20
800
20
420 840 900
*
Totat cost
(i.e., the cost in beginning
inventory
plus the cost added during t*te current
periodl
divided by the total number oi equivalent units required in the cost accounted lor section
(21 Work in Process-Cutting
Department""""'
Work i n Process-Assembl y
Department
Mat gf i al s . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . r . . r . . . r . . r . . . . . . ' . . . . t . .
Work i n Process-Gutti ng
Depattment""""'
Work i n Process-Assembl y
Department
Payrol l ..' ........' ......."....r..
Work i n Process-Gutti ng
Department ........
Work i n Process-Assembl y
Department
Appl i ed Fact or y Over head' , . . . . . . , . . . . .
Work in Process-Assembly
Department
Work i n Process-Cutti ng
Depanment......."
Fi ni shed Goods Inventory
Work i n Process-Assembl y
Department ...,'
26, O35
13, 433
39, 468
8, 35O
2O, 989
29, 339
121525
2O, 989
33, 514
45, 5O0
45, 50O
120, OOO
12O, OOO
ChaDter 6
120
P0.2
(rl
Endlng lnventoty.
Coat Charged
to DePartment
Begl nnl ng InventorY:
Rathbone
Tool GorPoration
Casting
DePartment
Cost of Production
Report
For December
QuanUty
Schedulc
Materialg
Beglnnlng
Invcntory-""""n"'xo""'r"
StartcO In
Prcccg
thlc Perlod
Trancf errod to Flnlghlng
Department
Labor Onerhead QuanUty
I , OOO
8,OOO
1000h
80%
8Oa/c
0rooo
7150O
1, 5O0
-9' ooo
Equl val ent Unl t
Unltsr Cost"
Mat erl al r
Total
Cogt
$
ot s
60
90
Total cost In beglnn
Cost addcd durl ng current Pe
Total cost charged to department...
Cogt Accounted for aa Followg
Transferred to Fl nl shl ng Department
Work In Proceal , cndl ng i nventory:
Materl al s
l abor........
Factory overhead
Total cost accounted for ..' ....--..........
Ing lnventofl ...........-......t..."'
rl od:
s 1,085
Materi al r
sl 7, 085
4,29O
6,435
I,OOO
8r7OO
817OO
$3,OOO
600
900
7, 5OO
1, 2OO
32.0O
.50
.75
s3.25
Total Cost
324,375
4, 500
FactorY overhead
Total cost added duri ng current
peri od""-' s27, 81O
Unltg
7r5oo
1, 500
11500
1, 500
.h
Completa
100eh
7, 5O0
1, 5OO
s28,875
Unlt Cost
$3.25
7, 5OO
1, 2OO
l0Oc/o 32.00
gO./o .50
ggoh .75
Tot al number of equi val ent uni t s requl red
fol l owg:
Equi val ent unl ts transferred out...........
Equi val ent unl t r i n endi ng i nvent ory. .
Tot al equi val ent uni t s
s28,875
ln the cost accounted
for
gecUon determined
as
Materi al s
Labor Overhead
9, ooo 8, 7OO
8' 7OO
-
Tot al coat (i . e. , t he cost i n begi nni ng i nvent ory
pl us t he cost added duri ng t he current
peri od)
di vi ded by thc total number of equi vai ent
uni ts requi red In the cost accounted
for secgon
- ClpPter6
-
.
P6-2
(Conti nued|
Rathbone Tool Corporation
Fi ni shi ng DePartment
Cost of Production Rcport
For December
QtrenUV 9chcdul c
Bcgl nnl ng Inventory..
-
Rccel vcdfromCastl ngDcpartmcnt.............-.
Tnnrforred to Finirhed Goodr
-
Endl ng l nventory..
Cogt Charged to Departnent
Bcginnlng Inventorp
Cort from praccding
departmcnt...............r.r....oo6.ooeoor. 3 a'78!i
[.abor-. 291
Factory ovcrhead
555
Total cost ln beginning inventory 3 5,54l
Cort edded during currcnt pcrlod:
121
l-abor Ovcrhced QuantitY
1, 50O
715OO
9, 00o
7, 00O
4O.h 'o.h 2,0oo
I,OOO
Totel Equi val ent Unh
Cort Unttr' Cort"
324,375 I,OOO 3324
2, 130 TBOO . 30
3, 18 A, OOO
AA
Cost from prccedlng
departmmt
[-abor.-.-
Faetory overhcad
Totrl cct charged to dcpertmcnt-.-........
Totel cst rddcd durlng current period.......
32r"g3,
335,180
9r.oo
t2
P&2
(Goncluded)
%
Cort &countod
tor er Followr Unltr Compbtr Unlt Cqt
Tnnrferrrd
to FhLh.d Ooodt.--.- 7,000 1o0% 3t.oo
Work ln Ptpcs, oodlng hvrotorn
Cort trom pncrdlng dcprrtrnrnt 2,O0O lOO% 33.2a $S/38O
Crtcplcr 6
Totrt Cort
328,OOO
2,OOO
/30L
30 21O
Fretory ovrr.hord 2,0OO 30.A .U 4CO 7,i8O
Totrl cot eccountrd tor,.......--.--
t35,180
'
Totel numbcr of rqulvelcnt unttt ruqulrcd In thr cqt rccountcd for rocUon dotcrmlncd er
followr:
Prlor DrpL
Cort t-abor Ovcrhcad
Equlvrlcnt unltr tnnrfcrrcd out........... 7,000 7,OOO T'OOO
Equl vel cnt unttr h rndl ng Invontory.. 2,OOO 8OO I,OOO
Totel cqutvrl cnt un|tr..........-.....
g,0OO
7OO 8,0OO
-
Totel coet
0.1.,
tfrr cort In bcalnnhg lnvcntory plur tfrr cort rddod durlng llrr currant
pcrlodl
'
dlyldod by t|rr totrl numbrr of rqulvrlcnt unltr nqulrrd h tho cort rccountcd for rocUon
l2l
Work in Process--Casting Department | 7, 085
Matgri al s ......,....,.,,..........,..,.............
Work In Process--Casti ng Departmont....o........... 4r29O
Work In Process-Fl nl shl ng Department... 2,139
Payr ol l . . ' o. . . . o. . . . . . . r . . . . . . . . . . . . . . . . . . . . . . r . .
Work i n Proces!-Casti ng Department................ 6,435
Work i n Process-Fl nl shi ng Department.............. 3,125
Appl l ed Factory Overhead ....,.........
Worki nProcess-Fi ni shi ngDepart ment . . . . . . . . , . . . . . 241375
Work In Process-Castlng Departmont ........
Fi ni shed
Goods l nventory-.................,................. 28rOOO
Work In Process-Fl ni shl ng Department ......
17, 085
6, 429
-
cl EAA
g r J v Y
_
24.375
28, OOO
Ctpptcr 6
P.3
( 11
chrtnUty
gchodub
--
Beglnnlng
lnirrnbry
atrrt d h procrs
thb porfoa
Hetrrletr
*F.-_.-.
bbor-_.,_
Fr ctory ovcrft ced,......8_..,.rts,..
Totrl
cct rccountad
for.__.**.
Totel
rgutvelcnt
unltr
Jettcr Engine Corporation
Gasting Departnrent
Cost of Production Report
For February
123
Hrt rbb bbor orlrrhcrd
QuenUty
500
3,OOO
Tnnctrrr.d
to Anmbly
Dcprrtnmt
Endhg Lrvrntory-E*_Ea
Tnnrfrrrrd
to Arrmbty
Olptrtnrnt
Wort_h
Proce,
rndbrj
hyrntorrl
-
Coct Chrrpcd
to Dc?rrtnrrt
Beetnntng
h;;t"m
-
Ml tarbb
--..-EE----H-E*-8..-
bbof
-*..s--.E..-*_
Frctory
ovcrtrced
Totrl cqt h beghnhg
trvcntory
Cort eddrd durlng currurt prrlod:
Hetrrlelr
b&8,
I ^ L _-
H. - . - __
* _c _aa
Itbof ---.----.,
D- - - aa- aa- gFa_
Ftelory
ovcrhotd
Totrl cort rddcd durlng currrnt p.riod_.._
Totrl cst clrergad
to rlcprrtmont_.._..-
Co.t Aorrntrd
for rr Folbwr
%
Unltr Compbtr
too!a 80'. 90%
Totrl
Cost
t 1O,9?S
ssa
2.&?9
3 ta,1o2
s1.0575
to,3E2
4a/aEl
35OO
2,7oo
aoo
3"5OO
Equtvrhnt
Unlt
Unltr'
CotF
2r7OO
aoo
800
800
l oo%
100%
80%
go.h
3211' 398
s23g5og
Unlt Cct
sas.oo
845.OO
33E,OOO
5.OO
33OO
15. 00
I O, SOO
3,5OO
3r3ao
3lzo
345.OO
5,OO
t5.oo
305.o0
Total Cort
3r75^5OO
50,oo0
3225,5O0
'
A;*mbrr
of rqulvlbnt
unltr rogulrcd
In thc cct rccountad
tor rocuon dctarmlncd er
Equlnbnt
unttt trenrtrrrrd
out..
Egulnhnt
unttr
h rndtng rnvcntory-:*.*.
Mrtarbb
Lebor
OYcrhced
2,7OO
720
3r42O
17oo
aoo
2,7oo
G40
35OO
3,340
-
Totel
cct (lr-
thr.cort In bcainnlng
brvcntory plur
thc cor-t edded
durrng $rc current pertod)
dhddcd
by thr totrl numbct
";;;;bnt
unti
-r.oo-"ii"l'n
t,,a cort rccountod
tor rccuon
Chaoter 6
121
l
P8-3
(ConUnued) Jetter Engi ne
CorPorati on
Assembl Y
DePartment
Cost of Production
RePort
For
February
QuanUty Schcdulc
Matcrials
Bcglnnlng Invcntqtt-
Rccclvrd from CerUng DcPartment -
I'latcrialr
1:bor
tabor Orerhead QuanUty
I ' OOO
2,7OO
3,700
2,9O0
800
Trendcrrcd to Flnlrhlng Dcparlrnent
Endlng lnvcntolY-
7Ot/.
3oth 3Ot/t
Cort Charged to Dcpartmcnt
Begi nni ng
l nvcntoDn
Cost trom
prcccding departmcnt.*.-...
Matcrl al r...
[:bor.......-
Factory ovcrhcad
Totel coet h bcginnlng
Cost added durlng current Pcrlod:
Cost from
praccdlng dcparlrncnt -..*-...
3,70O
Equi val cnt Uni t
Uni ts' Cost-
Total
Cost
3
ql , l 50
40',28
12'426
12,424
3128,260
3175, 5OO
119, 480
44r4O8
44,4O8
3,7OO
3,49O
3,' t4O
3, 140
3 04.50
45.30
18. 10
18. 10
Factory ovcrhead
Total coct added durl ng current
peri od"""' 3380' 798
Totat cct charged to departnent.-.--...... t"ttg
Coat Accountcd for ar Followr
Transf crrcd to Flnlshln g Dcpartmcnt
Worl in Ptlceca, cnding invcntorY
Cost from prcceding dePartmant
Materlalr
[:bor
Fectory ovcrheed
Total cct accounted for .'.................
Equhral ent unl tr transferred out....
Equi vatant unl ts l n cndi ng i nventory
Total oquhrelent unlts
c/o
Units ComPlete Unit Cct
s146. OO
Tottl Cosl
t423'4OO
351, 600
25,368
41344
2,9OO
24o
2, 90O
800
800
800
800
2, 900
800
3, 7OO
2, 9O0
s60
2, 9O0
240
10c.h s't40.oo
10o.h s 84.50
70.h 45.30
30.h 18.10
30ch
' t
8. 10 4t3'44
85,65O
3509,058
'
Total numbcr ol cqui val ent uni ts requi red i n the cost accounted for secUon determi ned
as
followr:
Pri or DepL
Cost Mate rials Labor Overhead
3, 400 3, 140 3, ' t 40
-
Totel coct (k., thr cort ln bcglnning invcntory
plus
ttrc cost added during thc current
period)
dMdcd by tho total numbcr of cqutvetcnt unlts requlred In the cost accountcd
for rccdon
125
A189ter 6
P6- 3
( Cont i nued) Jet t er Engi ne Cor Por at i on
Fi ni shi ng DePar t ment
Cost of Producti on Report
For February
QurnUtY
Schcdulc
Bcgl nnl ng
InvantorY..
Rcccl vcd from Ascmbty Dcpaftment ."""""""'
Tnnctorcd to Finlshcd Ooodl
Endl ng l nvcnt ot T. .
Cort Charged to Department
Begl nnl ng l nventory:
Tnnsl crrcd to Fl nl ched Goods
Work l n Proceu, endl ng Inventory:
Cost trom precedi ng department
Labor........
Factory overhead
Total coct accountcd for ...................
2, 8O9
'
Tot al number ol squi val ant unl t s requi red
l ol l owg:
Equl val ent
unl t s t ranst erred out . . . . . . . . . . . .
Egul val ent
unl t s l n endi ng l nvent ory. .
Tot al oqul val ent
unl t r
-
Tot al coat ( 1. o. , t hc cost l n begi nni ng i nvent or y
dMdcd by t he t ot al number ol equi val ent unl t s
Lrbor Ovcrhcad QuanUty
300
2, 9O0
50% 50.h
3, 200
2, 8O0
ao0
100ch 3158. 20
100ch s145. 70
50cL 5.O0
5Oc/c 7.5O
i n t he cost account ed l or
Pri or Dept .
Cost Labor
2, 800 2, 8OO
400 200
3, 200 3, OO0
pl us
t he cost added
r equi r ed I n t he cost
3,2O0
Equl val ent Unl t
Unl ts' Cost"
3, 200 3145. 70
3, OOO 5. 00
3, 00o 7.30
-
3158. 20
Total Cost
34f2,9O0
858,280
1, O00
1, 50O oo,78o
35O3' 74O
gecti on
determl ned al
Ovefi ead
2,BOO
200
g,ogg
durl ng thc current
Perl od)
accountcd l or recuon
Total
Cort
Cort l rom p reced i n g d epa rtment.' ..............
l-abor
Factory overhcad ...............' .
Total cost i n begi nni ng i nventorY
Cort added duri ng current
peri od:
Coat f rom p reced i n g d epartm ent.....' ..........
Labor. . .
Fectory overfrcad
Total cost added durlng current
pcriod...............'
Totel coct charged to department..,,.......
Cort Accountod l or ar Fol l owr
.h
Uni t s Compl et e
I 42,840
2,780
4, 140
3 49, 740
9423,4O0
12,240
18, 300
agj,ooo
3503,740
Unlt Cost
400
400
400
tfi
P6-3
(Concluded|
(21 Work in Process-4asting
DepartmeJlt """"""""
Work in Process-Assembly
Departmellt """"""'
Matgrials ..o......,................o.,.........................
Work in Process.-Casting
Department
""""""""
Worki nProcess-Assemb|yDepartmetl t.............
Work in Prccess-Finishing
Department
"""""""
Payroll " "" "" """ """""" """"" ""
Work in Process.-Gasting
Departmont "..""""""
Work in Pttcess-Assembty
Department
"o"""""
Work i n Process-Finish
i ng Department
""""""o'
Appl i ed Factory Overhead....""""""""""""
Work in Process-Assembly
Department
""""""'
Work in Process'-Casting
Department
Worki nProcess-Fi ni shi ngDepartmel l t..............
Work in Process-Assembly
Departttlgrlt
""'
Finished Goods Inventory'......-.'.
Work in Process-Finishing
Depalt[lellt
"""
148,575
1 16, 480
16, 362
44,4O8
12,240
48, 461
44,4O8
18, 360
175, 5OO
423,4OO
442,960
haoter6
263,055
73, Ol O
111,229
175, 5OO
423r4OA
442,960
s Ctnptar6
P6-4
,
( 11
-
Quandtf Schcdulc
Startad In procegs thls period
Transterrod to Flnlshlng Department
Endlng hventory..
Cogt Chargcd to Department
Beglnnlng Invcntory:
Persona Col ogne Company
Bl endi ng Department
Cost of Production Roport
For June
127
Materlalg Labor Overhead QuanUty
1r O0O
8r000
6Oc/t 2oth %'/.
7,00o
6,4OO
ooo
7,OOO
Total Equl val ent Unl t
Cost Unlts' Cogt"
Materlalc $ 19, 620
tabor 9U
Factory ovcrhead 2,375
Total cost In beglnning inventory....o..,................. 3 22,939
Coat added durlng current perlod:
Matcrlall .to..........'.r....................................i.......-......... $129rloo
61760 S22.oo
l,.abor o,88O 01520 120
29,005 E' 55O
/3.80
Factory oycrhcad ..r..............
Total coct addcd durlng current perlod...,... SlO5,o45
Total cort chtrged to department......... ...... 3187,984
328.OO
Total Cort
oh
Cort Accountad tor ar Fol towe Unl ts Compl ete Unl t Coat
Traneforad to Finlshlng Department 0,400 lOOc/o 328.00
Work ln Pmcess, cndlng Inventoryn
Mater|a|r.,..o......,,....................... 600 6ooh $22.00 $7,920
s179, 200
Iabor..........,.......
600 200h 1.20 1U
Factory overhead,...................... OOO 25% 4.8O 72o 817&4
Total cocteccounted
for"""""""""'
3187' 984
'
Total number of equl val ent unl ts requi red In the cost accounted for secUon detarml ned
ae
, lollowr:
-
Materl al s Labor Overhaad
Equl val ent
uni ts transferred out........,.. 6,400 O,4OO 6,400
Equtval ent
unl ts In endtng Inventory.. 360 1?:O 15O
Total cqul val ent
unl tg
_
| cqulvalent
unltg
SISS _q,*9 li?gg
"
Total cost (1.e., thc cost i n begl nni ng i nventory pl us the cost added durl ng the currsnt pcrl od)
.
dtvi dod by tho total number of equi val ent uni ts requi red In thc coet eccountcd for rcsuon
128
P&,4
(Conti nued)
Pelsona Cologne
ComPanY
Flnishing
Department
Gost of Production
RePort
For June
Hrt rbb
100%
70%
ChWter6
Ovrrhoed Quan0V
rroo
6,.1o0
10, 2O0
70%
27IOOO
20,OOO
I , OOO
27,OOO
Equlvalcnt
Unlt
Unltr' ColF
thranUty Schcdub
Beglnn Ing Invcntoty..F--.o.'--E-o.*@'F
Rccclvcd from Bbndlng Dcpartmcflt*--'-".-
Added to
proccta h FlnbhlnO Dcprrtmont '."""
Transferrcd to Flnlsh.d Ooodr
Endlng Invcntory
lrbor
t to,61o
317e' 2OO
z'r605
1g, el o
oo,75l
Coat Chargcd to DePartrncnt
Beginnlng InvcntorY:
Total cot h bcglnnlng lnventorY
Cogt eddod durlni currcnt Pcrlod:
Tote!
Cort
Coat frpm
pnccodln g d cpartmcnt.-..-.--.---..-F.*.-.-
Matsrlalr
L-cbor...
Factory ovcrhced
i
g/aso
11395
100
050
Cort f ro m p nccd In
g d epertnrcnt --.---.-.-.'-..
Matsrl al r
t-abor
Factory
27,OOO
27t OO
2Q,7OO
2gr7OO
36.e5
t . oo
.75
2.30
311. OO
Totat coot rddcd durlng curront
pcrlod-..-....-... 3245/a75
Total cst chergc'd to dcPrrtmcnt
329O,O85
Clppter 6
P-,4
(Concluded)
Cort Accountad for er Follon
Tnnrf rrrrd to Flnlrficd Ooodt.-....-
Work br Proccr' rndlng lnventorY:
Cort from
Pncccdlng
dcPartmcnt
lletcrlrlr-
lrbot
Fectory ovcrhcad
Totrl cott rccounted for .....--.-..---
Equhralent unltr transfered out....
Egutvalcnt unltr In cndlng lnvcntory
Totel rquhnlcnt unltr ...................,
Vr
Gomplctr Unlt Coct
129
Total Cost
3280,ooO
t8,950
I
rOOO
525
1, 81O 1O,O85
329O,O85
26,OOo
700
26t7OO
l 29, 1OO
25r605
1541705
6r88O
19, 919
26,799
29, O65
6O,751
89, 816
179,2O4
. 17g,2OO
286,OOO
286' 0oo
Unltr
2OTOOO
I' OOO
I ' OOO
1, 000
I
'OOO
20,0OO
l r0oo
100%
100%
100%
28rO0O
I ' OOO
tt 1.oo
3 6.e5
1. OO
.74
230
26,0OO
700
7OY.
70%
.
Totel numbcr ol equlvalent unltt rsqulrcd In thc cot accountod for rocUon determlned er
lollorvr:
Prlor DepL
Cort Matsrhlr Labor Overhead
27',0OO 27IOOO 26,7OO
il
Total cort
0,c.,
thc cort In beglnnlng lnvcntory
plur thc cort addcd durlng tlrc curront
perlod)
dMded by thc total number of cquhyalent unltr reguirsd ln thc cort accounted for recUon
( 21 Wor ki nPr ocess- Bl endi ngDepar t ment . . . r . . . . . r . . . o
Work in Process-Finishing
Department' .............
Matgri al s ..."........".....-...' .' -.
Work i n Process-Blen ding Departmellt ...' .....' ....
Work i n Process-Finish ing De
partment .............'
Payf Ol l . . . . . . . ' . . . . . r. . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . r. . . . . . . . . . . . .
Work i n Process-8len
din
g Department ...r..' ...,r.'
Work in Process-Finishing
Department..........' ."
Appli
gd
Factory Ovgrhgad .' .....o..' ......' .....r""
Work in Process-Finish ing Department...' .......o..
Work in Process-Blending
Department ..' ...
Fi ni shgd GoOds Inventory.........,....,....................' .
Work in Process-Finishing
Departmont.-' ...
tfr
Hytest Chemical CorPoraUon
Reltning
DePartment
Cost of Production
RePort
For March
*btrrLrb
Labor
100rA 75i *
Totel
Cort
Chaptor 6
Otrcrhcad Quentty
800
7r2OO
8,OOO
50}|
T' OOO
1, O00
P6-5
(rl
ol-nnEhr
Uchcduh
Beglnn ln
g Invrntory
--....-'-"""''d"'d---.*
Startod ln
procccl thb prrlod """"""'d""-'s
Trenctcrrad
to B|cnd In g Dcpartmont'*""""'--
Endlng lnvrntort
Coct Chargcd to DaPartrncnt
Beglnnlng InvcntorY:
Matorlelr
L-abor
Fa
gtort
ovcrhced ....""r"-".-'D-t'-F""""n'-""""-o
Total coet ln bcglnnlng
lnvcntory
Cort rddcd durlng cunrnt Pcrlod:
Matcrlrlr ......E....-'-r""-"--"'--""-"'Do'-'-'--oF
[ : bor. . ' --. . ---Mo"h"""""*---H"' E' F
". -' F'
Factoryovcrhcrd...-....o8....'.|..g.-'.........-...-....9...d
1o1t1 6oct rddcd durtng curcnt
perlod
Total coct chargcd to departmcnt....--...
3 725
30
00
818
, 7,272
1,920
4*O
311, 732
tl 2,550
x
Complotr Unlt Coet
Coct Accountcd tor ta Followf
Tranglerred to Blcndlng Dcpartncnt.
Work In Procc.r, rndlng lnvcntorY:
Materlalr
Labor........,...
Unltr
7r0oo
I ' OOO
I , OOO
l r0o0
100%
100%
73.h
50%
ll.ao
31, 00
.20
AO
8,OOO
7r75O
7,5OO
t1,ooo
150
200
31. 00
20
,10
31.60
Total Cort
i l 1, 200
1,350
312, 550
Total cot rccountcd for.-..--**
Totel numbor of oqutvtlcnt unltr rrqulrod ln tfir colt rccountrd
for lccUon dctarmlncd
ll
followr:
Mrt rbb Lebor Ovcrhcad
Fastory
EquhraIcnt unttr trandcrrcd out...........
Equl val cnt unl tr l n rndl ng Invcnto:y..
Total cqul val cnt unl tt
T' OOO 7,OoO 7,OOo
I , OOO 75O 50o
7, 5OO 8, OOO 7,75O
-
Total coct (1.r., ttrr cort ln bcalnnhg
lnvcntory
plur thc cort added during thc currcnt
pcrlodl
dhyldcd by thr total numbcr oi rgulvatcnt
unltr rcqutrcd !n thc cort eccountcd
for rccuon
8,O0O
Equlvalcnt Unh
Unltr' CorF
Chaptor 6
P6-5
(Continuedl
Quandty t]chedulc
Begl nnl ng
Recclvcd from Refinlng Dcpartmottt ........-..--.
Addcd to
proccrr ln Blendlng Departmcnt.....--
Transferred to Finlshed Gooda
Ending InventorY..
89t/t
Cogt Charged to Departtnent
Begl nnl ng Inventory:
Cort fro m p rcccdln g d epa rtment'......'........
Materl al a
131
Hytest Chemical Corporation
Bl endi ng Department
Cost of Production RoPort
For March
Matcrlalr Labor Overhcad QuanUty
1r4O0
7' Oo0
1, 80O
40o/c
10, 20o
9,20o
1, O0O
10, 200
Equlualent Unlt
Unlts' Cogt"
40ch
Total
Cort
$ t , 7sl
420
88
100
labor
Factory overhead
Total cost ln beglnning lnventorY
Coat addad durlng curront
porlod:
t 2, 602
Goat from precedlng department
911, 200
4,380
3r l oo
SrOOO
Materlalr
Labor.....,.
Factory overhead
Total cost added during current
pcrlod 924,280
Total cost charged to department...........
10r2OO
10, 000
9,6OO
I,OO0
s1.27
.50
.33
. 60
t?n
t32
P6-5
(Goncludeil)
Cort Accountcd
for ar Followa
Tnngfcrrcd
to Flnlghed Good3"""""
Worlt In Proccar,
cndlng InventorY:
Cort from PrPcedlng
departmcnt
Materlala
Labor
Factory overh
gad
..""""""""""'
Total cogt accounted
for .........-..---
Equlvalent unib transferred out..'.
Eguivalent units In ending Inventory
Total equivalent unlts.......:..........-.
%
Compl ctc Unl t Cost
Chapter 6
Total Cost
s24,840
2rO42
s26,882
9,200
400
9r 60O
7
1272
4, 38O
11, 652
I , 520
3, 1O0
41620
2r940
5, 6OO
8, 54O
11,2OO
11r2OO
241844
24,84O
Total number of egul val ent uni ts requi red i n the cost accounted for secuon determi ned as
followa:
Prior Dept.
Cost
Overhead
0,200.
I ' OOO
' l ,0oo
1, OoO
I
' OOO
g,2oo
l r ooo
1O, 2OO
100%
1OO'/o
gooh
49o/c
10o/o
s2.70
91.27
.50
.33
. 60
sl ,270
400
132
240
Materi al s Labor
9,20O
400
9r 8OO
g,2oo
800
1O, Ooo
-
Totat coct
(1.c., the cogt tn beginning Inventory
plus the cogt added during t|re current
period)
dl vl ded by thc totat number oi equi vatent unl ts requl red In the cost accounted tor sectl on
l 2l
Worki nProcess-Ref i ni ngDepart ment . . . , ' . """"'
Work i n Process-Bl endi ng
Department ....,""""'
Mat gri al s . . . . ' . . """""""' t "t ' r"""""""
Work i n Process-Refi ni ng Department' ......' t"""
Work i n Process-Bl endi ng Department
"""""""
Payr ol l . t . . . . " t " " " t " " t " " " " " " t " ' r " " " " " " " " " "
Work i n Process-Refi ni ng Department
"""' r"""'
Work i n Process-Bl endi ng
Department
Appt i ed Fact or y Over head' . . , . . . . . . . . . . . . . . . """"'
Work i n Process-Bl endi ng Department
r......."""
Work i n Process-Refi ni ng
Department
"""'
Fi ni shed Goods 1nvent or y. . . . . . . , . . ' . . . . . . . . . . . . . . . . , . . . . . . . . .
Work i n Process-Bl endi ng
Department """
Chapter 6
P6.6 APPENDIX
(1t
Cluand(y Schcdub
Beglnnlng
Stsrtrd h
proccs thb pcrlod..-.'.-.
Tranrf rrrrd to Asrombly Dopertmont
End hg lnvrntory........--x...
Cort Chargcd to Dcpertmrnt
Beglnnlng Invcntory:
Upton Manufasturing CompanY
Cuftlng Department
Cost of Production Roport
For Oct ober
t33
H.trrbb Labor Orerhead Ouantlty
00t6 1AV. 20Vr I , OOO
0,ooo
100% 80%
'loo.h
1O, OOO
8,5O0
1, 50O
l O, OOO
Totel
Coet
l-abor
8, 01O
1, 750
790
Factory overhcad
Total cct h beglnnlng hventory .'...... $ 10'550
Cort rddrd durlng currcnt
pcrlod:
Matarlelr 3 81, 900
18, OOO
3930O
l.bor
Fectory ovcrhcrd
Totrl coct rddrd durlng currcrit
pcrlod-.'..' 3130'7oo
Equi val ont Unl t
Unltr' Cogt"'
1o61 sot chergcd to depertrncnt
Cort Accountcd for rr Followr
Transtcrrrd to Arocmbty Dcpartmcnts
Ecglnnlng lnvcntoty .s.-6*
Colt to complctr:
Metcrlelt-
[rbor-*.-
Frctory ovrrhred ----
Strrt d end complct d thb pcrlod
Totrl coet trenrfrrnd to Ascmbly
Doprrtmcnt --*.
fVork ln Proccs, rndlng hvcntory:
Metcdelr
l.ebor
Factory ovcrhced
Total colt eccountcd tor ...................
-... 3150J250
Unltr Current' A Unlt Cogt
I , OOO
I
' OOO
l , OOO
7,5OO
1, 50O
1, 50O
l
r5OO
10.h
go.h
80%
100.h
100ch
aooh
1O0'/.
3 c.oo
LOO
4. OO
15. O0
t c.oo
2.OO
4. OO
9, 1OO
or3oo
9r800
310, 550
ooo
1r2OO
3,2OO
313, 50O
2,4OO
orooo
$ 9. oo
2.00
4.00
3l 5. OO
Total Cogt
3 15,850
112, 500
3128,35O
21, 9O0
$15O, 250
134
Chapter 6
P6-6 APPENDTX
(Contin ued)
.
llumbcr of equlvalent
unltr ol colt added durlng thc c'urant
perlod detsrmined
ar follows:
Materlab
Labor Overhead
100
000
7r5OO
71500
7' 5OO
Endlng lnventorY
1,500
1r2OO
1r500
To comptetc
bcglnn|ng
Invontory"""o'D,""'o"
Startod end complgtad
thlr
perlod o'D'-oo"o-"
Total cqulvalont unltr
e,1o0 o,3oo
e,8oo
-
cogt addsd durlng thc current
perlod dtvlded by thc numbor ol cqulvalent
unlts of cost addod
durlng the current Perlod
i-.'<--
Clwtor6
P6-6
+PPENDI X
(Gont i nued)
t 35
Upton Manufacturi ng Company
Assembly Department
Cost of Production Repod
For Oct ober
Materials labor QuanUty Schedul c
Beglnnlng Inventory
Rccetved trom Cuttlng Department...
Tranctcrred to Finished Goods Inventory
Endlng lnventory..
75% $Oo/t 8Oo/o
60c/c 4Oo/t 40ch
Overhead QuanUty
2, OOO
8,50O
' l o, 5oo
915OO
1, OOO
1O, 5OO
Equivalent Unlt
Units' Cost"
Cort Charged to Department
Bcglnnlng Inventory:
Coet from preceding department................................. $
Matcrialr
lsbor
Factory overhead
Total cost In begl nnl ng Inventory
Coat added durlng current
period:
Cort from preccdlng department...,........,....................
Matorlalr...
Labor..........
Factory overhead
Total cost added duri ng current
perl od.......
Total cogt charged to department,..........
Cort Accounted tor as Followr Units Current % Unlt Cost
Trangtarrad to Finlshed Goods:
Begl nni ng i nventory,.
Cost t o compl et c:
Mat eri al s. .
Labor........
Factory overhead ........
Started and compl eted thi s peri od
Total cost transferred to Fi ni shed
Ooods
Work In Process,
endi ng Inventory:
Cost from precedi ng
departrnent
Mat erl al s
Labor........
Factory overhead
Tot al cost account ed f or . , . . . . . . . . . . . . . . . . .
Total
Cost
4, 000
400
800
1, 800
$ 0, 800
3128,350
30, 100
21, 315
30, 015
$2O9,78O
s216, 58O
8,50O
81600
8, 7OO
8, 7OO
315. 10
3.50
2.43
3.45
2, 000
2, OOO
2, 00o
7, 5O0
1, 0oo
1, OOO
1, OOO
1, OOO
2s%
40%
40%
1000h
1000h
600h
400h
400h
s 3.50
2.43
3.45
24,50
315. 10
3. 50
2.45
3. 45
s24,50
Total Cost
$ 6, 800
1, 750
1, 960
2,760
g
13,270
18:t,75O
3197' o2o
$15, 1OO
2. 1OO
980
1, 38O 19, 590
93:l'599
t6
P6-6 APPENDI X' (Concl uded)
Chapter 6
.
llumber
of equhralent unlts of cort added during thc current
perlod determlned as follows:
7o completc
beglnnlng Inventory..
tltartsd and completsd
thlc
pcrlod
Endlng Inventoly-r.-...................t..
Total equlvalent unltr
Prlor DepL
Cort Materlale
0 500
7,500 71500
1, 000 Eoo
' 8, 500
8, 60O
Labor Overhead
800 800
7,500 71500
400 4oo
8,7OO 8,700
-
Coat added durlng thc current
perlod
dtvlded by the number of equlnalent unlts ol cost added
durlng ttre currpnt
perlod
tzl
Work in Process-Cutti n g Dep artm ent'................
Work in Process-Assembly Depa rtm e nt ....--....-'.
Mat gri al s r. . . . . . r. . r. . . r. . . . . . . . . ' . . ' . . . r. . . . . . . .
Work in Process-Guttin
g Dep a rtm 8f1t......' ..........
Work in Process-Assembly De
partme nt ....."..' .o.
Payr ol l . . . . . . . r . . . . . t . . . . . . . . . . . . . . . . . . . . . t " t " " t " " " t " t t " '
Work in Process-Cutti n g Departm
gflt' ................
Work in Process-Assem bly De partm ent ........' ..,.
Appl i ed Factory Ovgrh
gad
......"..............' .....
Work i n Process-Assembl y Department....r.....r..
Work i n Proc ess-Cutti n
g Depa rtm
gllt' ........
Fi ni shgd Goods 1nventory...,....o......"........' ,..r.......
Work i n Process-Assembl y Department ..,..
81, 900
30, 1OO
18, 600
21, 315
39,20O
3O, Ot 5
128, 350
197rO2O
1 12, OOO
39, 915
69, 215
128r35O
197, 02O
Chapter 6
P6.7 APPENDIX
(rl Marston Manufacturi ng GompanY
Fabri cati ng Department
Cost of Producti on Report
For August
QuanUty Schedulc Materi al a Labor Overhead QuanUty
1OO'/. 4och 80o/o 400
1, 2OO
1, 600
Beglnnlng Inventory
Stlrtod In
process thls perlod
Tranrfered to Finlshlng Departmcnt 1,100
y
Endlng Invcntory.. 1OO'h 8oo/c 9Oo/o 5OO
-1f99
Coet Charged to Department
Total Equi val ent Unl t
-
Begl nnl ng Inventory: Cost Uni ts' Cost"
Materl al s .. $ 29,280
Factory overhead
1, 900
11, 80O
Total cost i n begl nni ng i nventory
Coat added duri ng current peri od:
I 42,980
Materl al c... $
9O,OOO 1,2OO $ 75.OO
1O,o8O 1,340 I2' OO
48,740 1,230 38.00
137
. a . . . a a a a a a a a a a
l.abor
Factory overhcad
Total cost added durl ng current peri od....... S152,820
Total cost charged to department...........
!199f99
s125. OO
,g
P8-7 APPENDIX {Continued}
och
aoch
2Oolc
lOAo/"
3 75. 00
12. 0O
38.00
125. OO
942,980
$37,500
4, 800
17, 10O
80
700
450
Chaptar 6
Total Coet
g
48,900
87,500
$130, 4O0
59, 4OO
$195, 8OO
Cort Accountod
for ar!g!!ow:
f-rtf"-.a
to Flnlshlng
Department:
Bcglnnlng
lnventory.'
Cort to complste:
Materlalr..
l-abor..-.--.
FactotY overhead
""""
Startcd and completed
thlr
Perlod
Total coct transfcrrsd to Finlshlng
Dcpertmont
Work tn Procesr, ending Inventory:
Materl al e..
Labor........
'
Factory overhead
Total coat accounted for ...-.--.-..........
To completc beglnnlng Inventory
Startad and completed thls
Perlod
Endl ng InvcntotY..
Total equl val ent unl tg
-
Cost added duri ng the current
peri od di vi ded by
durl ng the current
Perl od
Unitg
Current 7r Unlt Cost
o
2,880
31040
400
400
400
700
500
500
500
1000h I 75,00
800h 12.OO
9Oo/o 38'00
240
700
400
.
l l umber ol equl vatent uni ts of cost added duri ng the current
peri od determi ned ac fol l ows:
Materials Labor Overhead
o
700
500
1. 200 1, 340 1, 230
: :
:
the number of equi vatent uni ts of cost added
CluptcrG
7g--7 APPENDX (Contlnuod|
Marston Manufasturing Company
Finlshlng Departrtent
Cost ol Produstion Report
For August
Or||nuU&hodub llrt rbb lrbor Ovrrhcrd
*
tnV.
20V. 3gYr
Rocrlvod from Frbrbrtlng D.p.rbnltt
Tnnrfrrrrd to Flnlrhed Ooodr hvrntory
Endhg lnvrntory...,.o..m..F6.os,,o IOO%
Cort Chrrg.d to Dopertm.ot
Boglnnlng Invrntory:
Cort from pncrdlng
dcprrtnont --*...n...-.,...,. t 74'OOO
lbtarfrb-es.e..-F..F= An
t bot I , OOO
2,52O Frctory
Total coct h bcglnnlng hvcntory
Cort rddrd durfng curnrnt
pcrlod:
Cort from pncodlng
drprrtmmt---...-,......,,.....,.
Hl tarhbH*ed-nare
s 78r3!to
trbor
3130/a0o
2r02O
19,880
20,42o
Frctory ovrrhred
Totrf coet rddrd durlng currrnt p.r|od.......
Totel cct clrtrgcd to dcprrbncnt.,.*.-
ti 80,020
Cort Accountod
tor rr Followt Unltr Currrnt 16 Unlt Cort
Tnnrfrmrd
to Fhlrhcd Ooodr:
Boglnnlng
Invcntory .-.-..-F.,-.-
Cort to complctr:
Mattrlalr.-F.-.*nE
bbor.--.*ffi
Frctory oyrrftlad -*
Ettrt d end complrt d trb p.rfod
Totrl
cort trrnrfrrnd to Flnbhcd
Omdt Hhs.*
Wort
h Procan,
ondlng hvrntory:
C;ort from pncrdlng
dapertnrrnt
Httorletr
_ F.....r........
139
oo?6 oof)6
Totel
Co.t
Quentfu
ooo
1, 1OO
1, 7OO
l
r3OO
.3OO
1, 700
Egul vel ent Unl t
Unl tr' CorF'
oo0
oo0
ao.h s 2-oo
w. A 14. OO
w% 2t . oo
100% 101. 00
3267,37O
l r l oo
1r4OO
1t12O
1l 2O
t78,&5O
720
Q1720
l Or O8O
3124. 00
LOO
14. 00
21.O0
3101. 00
Totel Cort
3 95p7O
112t7OO
3208"570
58r8OO
3267,370
ooo
700
L^abor
Fectory
ovcrhcad
Totel
coct tccountcd tor ...................
100% sl 24. 00 3{9, OOO
100cA 2-oo aoo
oo.h 14.OO 3,3OO
6O.h 21.OO 5,O4O
400
.fOO
.3OO
400
140
Chapter 6
P6-7 APPENDIX,(Goncl uded)
.
llumbcr
of cqulvalent
unlta of coct added durlng t{rc curent
perlod determlned al follows:
To compteto
beglnnlng
lnvanto4y "
st *.0-"nd
comPletcd
thlt
Perlod
Prlor DepL
Coct Materlalr
o
700
400
Labor Overhead
480
700
240
380 4ao
700 700
400 240
Endlng InventorY
Total equlvalent
uhltl
1, 42O 1, 42O
9O, O0O
21920
921920
16, 080
19r 880
35, 960
46,7 40
29,82O
76, 56O
136, 400
136, 4OO
208, 570-
208, 57O
1, 46O
ft
Coat added durl ng the current
perl od dl vi ded by the number of equl val ent unl tc of cost added
durlng tlrc currtnt Perlod
l2l
Work in Process-Fabricating
Department
"""""
Work i n Process-Fi ni shi ng
Department......' ...' ...
Mat gri al s . . . . . . . . . . . . . . . . . . . . . . . . . -. . . . . . . . . , ' . . r
Work in Process-Fabricating
Departmeflt ..........
Work i n Process-Fi ni shi ng
Department....' ..o.r....
Payf Ol l . . . . . . . . . . . . . r . . . . r . . . . . . . . . . . . . . r t r . . . . . . . . . . . . . . . . t . t . r .
Work in Process-Fabricatin
g Departm ellt .'........
Work in Process-Finishing Depa rtme nt ..'.-....,..'.
ApFl i ed Factory Overhead ......-.........' ......,....
Work i n Process-Fi ni shi ng Department........r....,
Work i n Process-Fabri cati ng
Department
"
Fi ni shed Goods Inventory
Work i n Process-Fi ni shi ng
Department.....'
141
ClvgtorO
P6.8 APPENDIX
( 1)
QrranUV Schcdulc
Bcglnnlng lnventorY
Strrtld In
Proccsc
thla
Pcrlod
Trandcrrcd to Bl
Endlng hvcntory
endi ng Departmant.
TWonka Beverage
GomPanY
Mashi ng DePartment
Cost of Production
RePort
For SePt ember
Matcrlalr
[.abor
9Oc/, 60oh
00% 400h 20c/o
gvcrhead
QuanUtY
30o/c 800
3, OOO
3, 6OO
3r l oo
500
3,600
Equi val ent Unl t
Uni ts' Cost"
Cort Ghargcd to DePartmcnt
Begl nnl ng Inventory:
Matarl al s
l^abor
Factory overhead...
Total cost In begi nni ng i nventory...........' ..' ..,.......
Coat added duri ng current
Pcrl od:
Materl al r
Total
Cost
3 1, 088
172
172
3 1, 432
3 O, O0g
1. 47O
3, 020
2,84O
2r94O
3, 020
32. 10
-50
1. O0
33.60
Factory
Total cort addcd durl ng currcnt
peri od....-.. 310' 496
Total cogt charged to department............ 3t1i 93g
112
P6-8 APPENDIX
f0ontin
ued)
Cort Accountrd
for al Followr
Tnnrtcrad to Etendlng Department
Beglnnlng Invontory .......,...""""
Cogt to comPlete:
Matgrial
g..."""""""""
labor.-..,...
Factory overhcad """"
Stsrtad and compteted thls
Perlod
Total coct trancterred to Blending
Departn ent .....'..................
Work ln Proccct, cndlng Inventory:
Materlalr..
l-abor........
Factory overhead
Total cost accounted for....,..............
Untts Currant 7o Unit Cost
Chaptor 6
Total Cort
$1,4i 12
I 2,098
I rOOO
311, 008
t 6:10
100
100 830
800
600
600
2,5OO
500
500
500
10%
40o/o
7Oo/"
'loooh
8Oo/.
400h
200h
s2.10
.50
1. 00
3. 60
$2, 10
.50
1. 00
126
120
420
.
Humbcr ol equl val ent uni ts of cost added duri ng the current
peri od determi ned ar tol l ows:
To completc beglnnlng Inventory
Startod and com
pleted th lg period .................
Endlng Inventory
Total cqul val ent unl tr
Coat added duri ng the current
peri od di vi ded
duri ng tfi e currrnt peri od
sl 1, 928
Materi al s Labor Overhead
240 420
2,500 2,500
200 100
2,890 2,940 3,020
by t he number of equi val ent uni t s of cost added
60
2,500
300
Chapter 6
Po-8
APPENDIX
(Gonti nued)
143)
Twonka Beverage Company
Bl endi ng Department
Gost of Producti on Report
For September
QuanUty Schedul e
eeglnnlFg Inycntoty.......,..r.,.........r........,............
Recclvcd from Mashlng Department..................
Added to process In Bl endi ng Department.........
Matarlala Labor
50ch 20.h
Overhcad QuenUty
2otlo I
'OO0
3, 1OO
3, 1O0
60o/c
73OO
6,40O
800
J-,n9
Equl val ent Unl t
Unlts' Cogt"
Transterred to Finished Goods Inventory
End ln g lnventory.......... 1000h 6Oc/o
Coat Charged to Department
Begi nnl ng i nventory:
Cost trom
precedl ng department................ $
Total
Cost
Materlals
Labor
Factory overhead
Total cost i n begi nni ng i nventorY
Cost added duri ng current
peri od:
Cort from precedl ng d epartment...........' ...
Materials
Factory overhead
Total cost added duri ng current peri od.......
Total cogt charged to department...........
Coat Accounted for ss Follows Units Current 7n Unlt Cost
Transferred to Fi ni shed Goods:
Begi nni ng i nventory..
Cost to compl ete:
Materi al s..
l,-abor........
Factory overh ead ........
Started and compl eted thi s peri od
Total coat transferrcd to Finished
Goods
Work In Process, endi ng i nventory:
Cogt f rom precedi ng
depart ment
Materl al s
l :bor........
Factory overhead
Tot al cost account ed f or . . . . . . . . . . . . . . . . . . .
1r77O
100
55
74
s 1, 999
-lt
t,ogg
1r4O7
2,OO4
2,''72
$17, 181
$19, 180
6,2OO
g, 7oo
o1680
6,ego
$1. 70
21
.30
. 40
1, 000
1, 00o
1, 000
5, 400
goo
800
soo
BOO
500h
800h
sooh
1000h
1000h
' loooh
600h
gooh
3 . 21
.30
,40
2.70
s1. 79
. 21
. 30
. 40
$2.70
Total Cost
si , 999
s 2,664
14, 580
317,244
s1, 432
168
144
' 192
1, 930
319, 180
105
240,
320
,41
P6-8
APPENDIX (Gonctuded|
'
Xumbcr
of cquhrafent
unltr of cogt
added
during
Chapter
6
.
thc
current period
determlned
as foftows:
To completc
beglnnfng
Inventory..
gt"rt"d and comptetad thlc perl;d
Endln g Inven toly..-,F.F.........,.......,
Total cqulvalent
unltr
Prlor
DepL
Cogt
o
5,400
800
6,20o
Materlab
Labor
5OO
8OO
5,400
5,400
800
480
6,700
9.880
Overhead
800
5,40o
480
6,ogo
"
ff:;ffi'"HlllSil;t"'t
perlod
divlded
bv the number
or equivarent
units
or cost added
(21
Worki nprocess_Mashi ngDepart ment . . . . . . . . . . . . . . .
Work i n
process_Btendi ng
Department,o............
Mat gr i al s' r " " " . . . . . - . . . r . . . . r . . . - . . . - . r . . . . . . . . . . r . . . . . r . . . .
Work
in
process_Mashin
g
Department
...........r,..
Work
in
pro.cess_Blen
din g
Depa rtm
ent .....r..,.,...
Payr ol l
" r " " r " " " r r r " " r . . . - - . . . . r . . . r r . . . . . . . . . r r - . r . - . . . . .
Work
in tT:
::s_!l-ashi1
g
Dep artm
nt,......,.......
Work
in
process_AlenOini
Departmelt
..............
Applie
d Facto
ry
Ovgrir ga
d r.................,......rD.
6, O06
7, 4O7
1r47O
2rOO4
3,O2O
21672
7, 413
31474
5, 692
Work
i n
process-B_l endi ng
Department
............,.
I 1,Ogg
work
i n
process_rraai ni ni
oepart-;;f::.::::
1l ,oeg
Fi ni shed
Goods
Inventory..............
.........
1Tr244
work
in
process-Biending
oepatt.;;i::::::
I t
' z' rq
12,244
I
CHAPTER
7
DTSCUSSION QUESTIONS
O7-1. Ot slity cost! rnay be groupcd hto the folbwing
three classifications:
1. Preventicn costs are the ccts hcurred lo
Ptcvent
product failure. They include the
cdt ct designing high quality productr and
prcductbn rystenrs, irrludhg thc coett o{
implementing and maintaining such sys'
'
lems.
2. Appraisal coots ate the coets incuned to
detecl
producl fai l ure. They i ncl ude l he
cet of inspccting and testing malerials,
hspecting produc'ts during
prodwlion, and
thr cogt d obtahhg hlonnatinn lrqn cus'
lorners aborn
product salisfastiqt.
3. Failure ccts ato the cosls incuned when
a product tails, ard may occur inlemally or
externally. Intsmal failure cosls are those
that occur during the manufacluring
gr
Pro-
ductbn procoss (e'g., scrap, spoilage' and
rework), and external fai l ure cosl s aro
t hose t hat occur at l sf t he
Pr oduct
has
been sol d ( e' g. , war r anl y r epai r s and
r epl acement s, 3al s r ef unds, handl i ng
cuslomr cornplaints, and bsl sales result'
hg frorn
Poor Producl
qualtty).
Q7-2. TOM stands for total quality nwragemenl' which
b a cornpany'wirCe approach to quality improve'
menl in all processes and activities. TOM is a
pervasi ve phi l osophy ol doi ng busi ness thal
appl i es to al l funsti onal areas of the company
and to ail personnel.
Q7-3. Five characteristics of TQM syslems are:
1. The company' s obi ecti ve l or al l busi ness
activily is to serve ils cuslorners' The term
product' is extended to include services
as well as groods, and'custorner'hcludes
htemal usors as well as those outside of
the cornpany who purctrase the company's
products. Each empbyee's activity is ori'
entod to provirCing service to the cuslorner.
2. Top marngement prcvlCes an aclive lead-
er shi p r ol e i n t he qual i l y i mpr ovemenl
rnovoment.
3. Al l empl oyees ar e acl i vel y i nvol ved i n
qusl i ty i mprovement. Empl oyees aro nol
only asked to contribute ideas, but also lo
l i nd bat t er ways of doi ng l hi ngs-
Involvemenl can be successlul only when
there is oncourago.neol and an open and
honest environment cl trust.
4. Thc cornpany has a sysiem of idenlifying
qual i l y pr obl ems, devel opi ng sol ut i ons,
and set t i ng qual i l y i mpr ovement obj ec-
t i ves. Thi s t ypi cal l y i nvol ves or gani zi ng
empbyees lrorn all ranks and lrom dilfer-
enl orgnnizational units along with man'
agers who have authority to take the nec-
essary actbn lo solve
Prcblems.
5. The company
places a high value on its
empbyees and proviCes cqrtinuous train-
i ng, ar wel l as recogni ti on for achi eve'
ment. Employees perform besl wfien they
are well lrained, and they have the greal'
est capacily to contribute when lhey are
hightY educaled.
Q7-4. The concept cl continuous quality improvement
ditlers frorn the cmcept ol quality optimization in
that csrtinuous
quality improvemenl is a dynam-
b process of change under lhe assumption that
the iCeal is not an abrclute loown value; where'
as, quality optimization is a slalic approach to
fhding the best solutbn to a given set of fixed
and knorvn constraints.
O7-5. The fi rst
probl em wi th tryi ng to i nspect qual i l y
into the
product is that il delects inlemal lailures
only afler coosiderable cost has been incurred.
The second
problem is that the rnagnilude ol the
cost of the internal failures, delecled by inspec-
lion, is rarely measured and typically ignored.
Q7. Cornpanies should concEntrale their eflorls on
preventhg poor gualily rather than on lrying lo
inspect it into the
Process,
because il will result
in less total quality cost. The approach is found'
ed on the bel i ef i hat by i ncreasi ng preventi on
cost s, t he cosl of i nt er nal l ai l ur es- such as
scr ap, spoi l age, r ewor k, and downt i me- wi l l
decline by a larger amount than the increase in
prevention cosls'
O7-7. Ouality costs should be measured and reported
lo managemenl in order to provide incenlive and
di r ect i on f or i mpr ovi ng qual i l y. Lar ge qual i t y
costs indicate large opportunities for improve-
menl . Al so, moasuremnts
provi de a basi s l or
moni l ori ng the cosl of qual i ty and eval uati ng
improvemenls.
07. Scr ap i ncl udes ( 1) t he f i l i ngs and t r i mmi ngs
remaining aller processing nraterials'
(2) defec'
live materbls that cannot be used or returned lo
the vendor, and (3) broken parts resulting trorn
empl oyee rrors or machi ne fai l ures' Spoi l ed
goods differ lrom scrap in that they are parlially
or ful l y compl eted uni ts l hat are i n some way
delective and are not econornically or physically
conectable. Spoiled goods rnay be unils of the
product or componont
Parts,
and they may of
may not have a sal vage val ue. Bework i s l he
pr ocss ol cor r ect i ng del ect i ve manuf acl ur ed
gooos.
Q7-9, Tho cost of scrap, spcilage, and rework shouH
nol be i gnored, because such costs are ofl en
145
,16
quit. high and ofton re3ult trom hternal failures
tirat can Uc elimihatod lgnoring lhe cosl of these
htemd failures
snds a signal to rnanagers lhal
urc*r codr arc acceg,table. Reporling such costr
provido inccntivl
tor improvement, particularly
il tho cctc are la'rgc'
OZIO. tn ordor to know what to do with lhe cosl' the
accountant
musl know whether lhe spoilage or
rework is caused by thc custorner or by an inler'
Chapter 7
nal failure. ll spoilage or rework is the result cl a
custorner requiremenl, lhe unrecoverable cosl
shoutd be charged to the
trb.
On lhe other hand,
il the spoilage o rework is thc cutsequerrc o{
an intemal lailuro, lhr unrecovrrabb cocl should
be r emoved l r om t hc
i ob
( i . e. , char ged l o
Factory Ovefi ead Control ) and reported to
responsible managomenl
CliwterZ
E)GRCISES
I
E7-1
(1) Accounts Rgcgi vabl 8...' .......o..o..o................."....... 1
r8O0
Scrap Salgs (or Other Income)...' .............o....
l2' l
AccountS RgCgivab|o......................r..' .................. I
r8O0
Cost of Goods Sofd
(31 '
ACCOUnIS RgCgivablg."...' ."...' ......' r.....".' ...' .....' .' . 1r8O0
Factory Ovgrhgad Gontrof ..r....' .....r..r...........
(4) AccountS RgCgi vab19........................' ................... I
,8OO
Work i n Procgss ........,.,.,,,.r....................r..,..
E7-2 Spoi l ed Goods Inventory.,...,.r....,..ro...,................. 12o
Factory Overhgad Control ......,.........,..........o........ 152
Work i n Process .........,.. 272
E7-3 $27,OOO total
i ob
cosVl ,00O chai rs =
$27 cost per chai r
Spoi l ed Goods l nvent or y ( $g x 1OO chai r s) , . . . . . . , . . . 9OO
Factory Overhead Control
((,$zz
-
$9) x 1Oo).........
1,80o
Finished Goods Inventory ($22 x
gOO
chairsl ...,... 24,3oo
Work i n Process...................,.,..r. 2TTOAO
E7- 4 Spoi l ed goods
I nvent or y ( $9o x 1OO' uni t s) . . . . . . . . . . . . 9, OOO
Gost of Goods So| d.,...., .r.............,...,r...D. 95.OOO
Work i n Procgss ,.....,,.....,,.............o.......o..r,.. l O4' OOO
t 47
1, 8OO
1, 80O
1, 800
1, 800
E7-5 FactoryOvgrhgad Contro1.r..,..,....,............,........,.
Mat er i al s ( 10O
uni t s x $1. 5O) . . . . . , . .
Payrol l (1OO uni ts x 114 hour r $1O
per' hour)
Applied Factory Overh ead
( 1OO
r 114 hr x $12 r at e) . , . , . , . . . . . . . . , . . r . . . . . . . .
700
Fi ni shed Goods Inventory.....,........
.,.....,. 6,900
Work in Process
150
250
300
6, 80O
18
E7-6
Work
in Pnocess
""""""
Mat ef i al s
(1
, OOO
Uni t S X $1). . . r. . . . . . . . . . . . r, . . . , , . . .
Payroll
(l
'OOO
units x 116 hour x $151...........
ApbtieO
Factory Overhead (l'ooo r 716 r $3ol
COSt
Of GOOdS SO1d...........................' r...r.........o....
Work in Process
($651000 + $8r5O0!.....'.......
Accounts
Receivable
($73r5oo r I 5oVo1...........r...
Sal
gSt ' . . . . . r . . . . r . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . r . . . r . . . . . . . . . r . . .
8, 5OO
73,50O
I l o, 25O
ChapterT
1r0oo
215OO
5,OOO
73,5OO
1 1O, 25O
ChapterT
E7-7
,
( 11
Quantl ty Schcdul c
Beglnnlng Invenlory
Started In
procesc thla perlod s.........
Transterrcd to Finishlng Department
En ding Inventory............,.....,.............
Spolled In
procccr.....x..,,........,.'s.....
Gogt Charged to Department
Begi nnl ng Inventory:
Manx ComPanY
Forming Department
Cost of Production RePort
For August
149
Matarlalr Labor Otrarhcad QuanUty
I , OOO
9r 000
19'009
8,OOO
1, 50O
500
100%
100%
7,rh
100.h
50o/o
100.h
Total
Cogt
$ 1, 260
770
1, 4O0
g
3,430
$?6,240
10, 78O
21,725
s7.45
3S.ZS
1. 20
2.50
s3.7s
1. 20
2. 50
1O, OOO
Equl val ont Unl t
Unl ts' Coat"
L.abor
Factory overhead
Total cost In beginnlng lnventorY
Cost added durlng curent
perlod:
Materliglr
Labor
Transfered to Finlshlng Dcpartmcnt
Chargc to Factont Overheod tor
gpollage:
Materlialc....
l-abor.....
Factory ove rh ead .......................
Work l n Procees, endl ng Inventorp
Materi al s,.
Labor.....,..
Factory
overhoad
Total cost accounted for ...................
1O, O0O
9,825
9, 25O
s3.75
1. 20
2.50
Factory overhcad
Total cost added duri ng current
peri od-..' ... Soa' 745
Totaf cost charged to department.......,.., Sry-
Cost Accounted for ac Follolvl Unl tr
' /aCompl ste
Unl t Cost
I , O0O
500
1r 500
1, 50O
1r 500
100.h
l Ogo/.
1000h
100.h
1000h
750h
500h
s7.45
f:trt C-!
s59,OO0
s1, 875
800
1, 250
3,725
s5, 625
1, 35O
1, 875
8,850
372,175
500
500
150
Chapter 7
E7-7
(Goncluded|
'
Totat number
of cqulYalcnt
unltr rsqulred h thc cort eccountod lor recuon determlned ar
lollorvr:
Matsrlalr
Labor ovcrhead
I,OOO I,OOO I,OoO
1, 500 1, 125 750
500 500 500
to,ooo 0$25 er?99
= a : :
:
Egu hra I ent u n ltr tran cto rrcd ou t "-""'-"'o"""
Equlvalent unltr ln cndlng lnventory"
Equ lva tent unltr of rpollagc...*."'-"""""':'
Total equlvalont unltf .....'............,..............""
h
Total coet
fl.c.,
thc coct In beglnnlng Inventory
plut the coet added durlng Bro currant
period)
dlvtded by the total numbcr of equlnalent unltr requlrad ln tha cogt accounted for section
(Zl Work In Process-Finishing
Depattment.............,
591600
Fact oryOverhgadCOnt rol . . . , , . . . . . , . . , . . . . . . . . . , . r. . . ' . . . ro.
3r725
work l n Process-Formi ng Depart ment . , . . . . ,
63' 325
Totrl cort ehargcd to dcpertnrcnt.........- 1126'200
Cort Accountcd lor er Followr Unltr %Completr Unlt Cort
Tnnrlrrnd to Flnlrhrd O,oodr-..---
Trenrtcrrr'd to Spollcd Ooodr krvcntory
rt rahrago vrlur .-s-.....-..*..
Ghergr to Ftctory Ovrrhod for rpollrgo:
Cort of complctcd rpolbd unttr
l.rrr ratvagr vtlur oil tpotlcd unltr
Work h Proccsr rndkrg brwntorf
Cod from prrcrdlng
dcpertnrcnt
Matrrl el r_
L-e bor..-....
Fectory
ovcrhcad
3B0O
400
400
400
800
800
800
800
100.h $27.00
510. OO
100.h s27.oo
10. oo
100.A 31e00
10.h 5.oo
20ch
29Vr
4.OO
o.oo
5,OOO
Equlvafent Unlt
Unltr' Cst"
151
ClppterT
E7-8
,
(r) Juni per ComPanY
Finishing Department
Cost of Production Report
For Jul y
QurnU(y Echrdulo
Rccrlvcd trom CutUng Dcprrtmtnt-
Trenrfrrrrd to Flnldt.d Ooodr...-*
Frd hg humtot7...*.-.o.s....'......-r.
8polbd h prccoE.-.m--..,.x.d.
Cort Chrryo'd to Dcprrtmont
Boghnlng hvontory:
Coct from prcccdlng
Matcrlalr
L.abor
Frctory ovcrttcad
Total cort In bcglnnlng InventorY
Gort rddrd durlng cgrrant
prrlo'd:
Hdrrlrb Lrbor Orcrhcad Quan$ty
500
41500
5,000
3,800
800
400
&Vr
100%
20%
100%
20%
100.h
Total
Colt
3 5r5OO
1ro5o
11180
11770
s 1o,4oo
3 54,500
20,olto
10.200
24,39O
3115, 800
Coct from
Hrt rlrlt
prrcodlng
dcpr
Frctory ovcrhcad
Totrl cort eddcd durlng currcnt
pcrld.--..
5, 000
1r52O
ar36O
ar3oo
$1O, 80O
4. O00
s or6oo
1, 600
040
000
31e00
5.OO
327.0O
Total Coat
t i 02, 000
4, OOO
6, 8OO
12, 800
312O, 20O
4.OO
o.oo
Totrl cort rccountcd
for
152
Chapter 7
E7-g
(Gonctudedl
.
Totat numbcr of rqulvrtent
unltr nqulrrd h thr cott tccountcd for rccUon
dctcrmlnod r
followr:
Equ hva lent unltr trandcrrcd
ollt -"
Equlyalsnt unttr h rndlng
lnvcntory
Equ bra le nt unttr o'f rpof bgc....'.*'
Total equlvalcnt unltr
Hor
DcoL Gct Metorbb
Labor Ovorhced
3BOO 3BOO
t8o l8o
aoo aoo
15,20 a,3oo 4,3OO
spoo
320
400
3r8OO
800
400
5,000
-
Total cort
(1.o., thr coct In bcglnnlng Invcntory
plur thr-colt eddcd durlng llrr currcnt
pcrlodl
dtvtdcd by thr toUf i"iUrr oi rquliiini
u"ftt rrqutrrd br t1'r cort eccountrd tor rostbn
(21 Fi ni shgd Goods I nvent ory. . , , . . . . . . . . o. . . r. . ' . ' . . . . . . r. . . . . . . .
1O2t 60O
spoiled Goodg Inventory ..' ...r...........' ..........' ....""
4tOOO
FaCtOly OVgfhgad
COntfOl .....,r.......t..""""""rtt""
6t8OO
Woik in
process-finishing Department"""
l13t4OO
ChagtarT
E7-9
1
(11
$
' l,9oo
380
127,72O
_320,989
QuanUty
55, 0OO
53,200
$2,400
sro
t53
Unl t
Cogtt'
3.no
. 15
s.55
Total Coat
326,950
3rO3O
QuanUty Schgdul c
Beglnnlng lnventory
Startsd In
procer tfilr
perlod
Transfemad to Reflnlng Department
Endl ng
100ch
logt h pnocar
Coet Chargcd to Departmant
Beglnnlng Inventory:
Matcr1a1c..............,.o...........'..... .......'.....'.....
Convgrrslon cost................,.....,.....................,.o,..F...r...
Total cort added durlng current perlod.....-..,......
Totel cort charged to department...........
Cost Accounted for ar Follorrr
Coastal Petroleum Inc.
Cracking Department
Gost of Production Rsport
For MaY
Matcrbb Convcrslon Coot
7O'/.
5,OOO
55,000
99499
49,000
6,0O0
5,00o
60,ooo
Total Egulvalent
Coet Unltr'
Total cost In beglnnlng Inventory.......'...'.........o... 3 2'280
Cost added durl ng current
Perl od:
Materi al s s2o,1oo
-
7,420 Convenlon colt
Trangferrcd to Reflnlng Department
Work ln Procesc, ondlng Invontorp
Materlalg
Convcrgion coct
Total cost accounted for
Total number of equl val ent unl ts
tol l owr:
Equhralent unltr translerred out....
Equl val ent unl tr In endi ng Inventory
Total equl val ent unl ts
Z. C"-prclc Unlt Cost
100ch s.55
7000h
70.h
49, OoO
4r2,OO
53, 2OO
Unltr
49, OOO
o,o0o
9,000
40,00o
o, 0oo
55, 00o
,4O
. 15
s20,980
raqul red l n the cost accounted for l ecUon detcrml ncd ae
Materialg Conversion Coat
Total cost (1.c., thc coat In begi nnl ng Inventory pl ue the cost added durl ng thc currcnt parl odl
di vl ded by tho total number of equl val ent unl ts requl red In the cost accounted for rectl on
( 2)
Wor ki nPr ocess- Ref i ni ngDepar t ment . . . . . . . . . . . . . . .
Work i n Process-Cracki ng Department......
26, 95O
26, 95O
1il
E7.1O APPENDIX
(r)
Chapter 7
15, 00o
Equlvalent Unlt
Unlts' Cost"
Sun Valve Gompany
Tooling Department
Gost ol Productlon Report
For March
l,lstrrlab Labor
lO0t/o 70%
100%
lOOt/o
QuanUV lichcdulr
l
B eglnnln
g InYcntoly',...."""""'"r"{
Startod thlr
pcriod........"""""""!"-',
Tranderred
to Flnlshlng Dapartment
Endlng InYcntory........"'t""""""FF
-'
Spolled In
proccar.-...................-."'-
Coet Chargcd to DePartment
Beglnnlng InventolY:
Total
Cogt edded du
Matcrlala
Labor
Total coct charged to departmcnt
Cogt Accounted tor er Follorvr
Transterrcd to Flnlshln g Dcpartmenb
From bcglnnlng lnvcntory ---*
Coat to complato thla perlod:
Materlala,..........F...-d
Chargc to Factory Ovartread for apollagc:
Materl al r..
Labor.-.....
Factory overhead
Work ln Proccu, cndlng Invantory:
Mat erl al a
L:bor........
Factory overhcad
Total cqt tccountod 1or.........-...-
Chrerhead QuanUty
go.h
2r0oo
13rO0O
15, 000
7r000
3r00o
5, 000
c0%
9Ot/o
10?r,
90./,
3 1, 600
290
950
3 2,&oO
3 0,750
2r32O
0,2oo
13, OoO
' l 1, 600
11, 500
s2,840
o
120
640
g?,75O
900
3, 80O
s2,25O
300
9EO
3 ,75
.20
.80
s1,7s
Tota! Cost
$ 3,ooo
8,750
sl 2, 350
8,25O
3, 51O
324, 1' l O
Total
Gogt
Labor
Factory overhead ....
cost ln bcAlnnlng lnventory ..'..........r........-
ring current
pcrlod:
Factory ovcrhcad
Total cort added durlng currant
perlod'...... 821,270
324, 110
Unltr Currcnt % Unlt Cost
labor
2, 000
2,OoO
2,000 Factory ovcrhead -....-
Startod and completcd thlr pcrlod 5,000
Total cost trangforrsd to Flnlahlng Departmcnt
5, 000
5, 00o
5, 00o
3, OOO
3, 0oo
3, OOO
o.h
30'/t
40t/o
100.h
lOOt/.
9O'/o
99o/o
1000h
30c/t
40ch
3 .75
.20
,80
31. 75
t .75
20
.80
$ .zs
.20
.80
ChapterT
E7
-1O
APPENDIX (Concludedl
'
llumbcr of cgutvalcnt unltr o,f coot addcd durlng tlto currsnt perlod determlned as follows:
Matcrialr Lrbor Overhoad
155
To completo beglnnlng hvcntory,.*.m.o
abrtrd end complctrd thlr pcrlod Em&i
Endlng lnvcntory
c o00 800
5,OOO 5,OOO 5,OOO
3,OOO 1,500
5,000 4,500
1r2OO
4,5O0 8pollcd unltr
Total cqulvalent unltr
' t 3, ooo
1' t , 600 11, 50O
'
Cort added during thc curront
period divlded by thc number of cquivalent unlts of cost added
durlng lfic curent perlod
(2' l Worki nProcess-Fi ni shi ngDepartment.............,
Factory Ovgrhgad Control ..........'......r.,,...'......r....
Work in Process-Tooling Departme[t.....,,.. 2O,600
12, 350
8,25O
1ffi
E7-1I
APPENDIX
(1)
Plastico Furniture
ComPanY
Finishing DePartment
Cost ol Production
RePort
For SePtember
Quantlty
llchcdutc
Mlterlgls
ry,
Overhead
Beglnnfng
InYontoty"""'F""""""""o'
.
8Oo/'
4Oc/o 4O'/o
naiclvcd-trom
Fabrlcatln
g Dep artment
Tranrtercd
to Flnlshed Goodg"""""
Chaptar 7
Quantity
1r2OO
0,000
7,2OO
5, 000
1, 50O
700
7,2OO
Equivalent
Unit
Units'
Cost"
Endlng
lnvantorY
Spolled
ln
Prccer
Coat Chargcd
to DePartmen!
Beginnlng
InYcntorY:
Cort from
precedlng department
""""'
l abor' ..............
Factory overhead
Totat cost In beginning
inventorY
Cost addod durtng current Perlod:
Cort from
precedlnf department
"""""""'
Matcrlalr
......'.""""'
Labor..' ...-
...."i """""
FactolY ovorhead
Total cost added durl ng current
peri od"""'
Total coct charged to dcpartmet1t
"""""""""""""""""""'
lOOo/o
100%
80.h
100.h
80%
1000h
Total
Cost
i 14, 160
1r 21O
1, 30O
3,250
s 19, 920
s 72,000
6,24O
12,24f)
30, 600
!t
r1,o80
3141, 0O0
I rOOO
a,24O
8, 120
6,120
312. OO
' l .oo
2.OO
5. OO
320.O0
Labor
r3oo
13oO
1r2OO
Factory ovsrft cld ....-..
St rt d rnd complctod thb
porlod SBOO
Tottl cort tranrfcrrod to Flnbhhg Dcprrbncnt
Trenrfcrrod to Spollod Ooodl lnventort
rt uhragn velur rs...'...-.......s..
7oo
Chargo to Factory Ovcrhcad for rpollagc:
Cort of complctrd rpollcd unltr 7Oo
Lcg ralvagc valuc of rpollsd unltr 7oo
Work h Procaor, cndlng hvcntorn
Cort trom
Prccedlng
dePartment 1r5OO
1, 5OO
1,500
I , 50O
Matorlalr
bbor
Frctory ovorhead ...,.......n-....'..,.
Totel cott eccounted tol .......-..........
ChapterT
ET
-1
1
APPENDIX
(Concluded)
Cort Accountad for lr Followr
Trenrfrmd to Flnlsh.d Ooodr:
Frorn boglnnln
g lnvontott .-.-..--
Coft to complctc thb
Pcrlod:
Metr da b.....-o.od-..D.
To completc beglnnlng lnvontory..
atert d end complctcd thb
Pcrlod
End ln g hventory.........'.....-...........
Spolled untts
Unltr Currcnt
116
Unlt Cot
20%
@.h
31e,e2o
3 1.00 2a
2-oO 1r4.4o
5.OO
3zo,oo
312-OO
320.00
1LOo
i l zoo t18,ooo
1.OO 1,5OO
157
Total Cort
25,80O
tl 4t,ooo
oo%
100%
100%
100%
10a.h
80%
oo%
2.00
5.00
trSoo
4,500
3,O00 $ 25too
7O,0oo
t l ol l 2oo
8,4OO
tlJtr0oo
8/fOO 5'800
.
Xumber of cqutvatrnt unltt of cct addcd durlng tfio currrnt
pcrlod dctrrmlncd .r followr:
Hor
DcpL Coat Materbb Lrbor Ovorhead
o
3FOO
1, 5OO
700
240
3B0O
1, 500
700
720
sBOO
900
700
720
3BOO
900
700
Totaf cgulvalent unltr O^0OO 6,rAC' o, 120
*
Cort tddcd durlng tttr curcnt
pcrlod dtvldcd by thc numbcr ol cqulvalont unltr of cort addcd
durlng tlrc currant
pcrlod
l 2l
Fi ni shgd GOOdS I nVent Of y. oo. . . . . . . . . . , . . . . . , . r. . . . . . . . . . . . . . .
l Ol r2OO
Spoilod Goods Inventory .................r.t.o..........r.....
8t4OO
Factory Overhead Gontrol .' ...............-' .-..-......-.-...
51600
Work I n Proce*s-Fi ni shi ng
Depart met l t . . . . . '
115t 20O
a' J20
-
tfi
E7.12
APPENDIX
( 1)
ouenutv
!c!g!g!: i
Beglnnlng InvcntotY
Racclvcd from Mhlng Depertncnt-
Tranrferred
to Botulng E)'epartmont -
End In
g lnventory..F.o"o""'o'tr-"-i"
Loat In
procotl ......"o"@'
Gost Chargcd to DePartmcnt
Beglnning InventorY:
Cost from
Preccdlng
departmcnt
Matcrlalr
[abor....'.....
Local PoP Inc'
Cooking DePartment
Cost of Produstion
RePort
For December
Mtt rbt! Labor
7s%
At%
100.h
73.4 75V.
Total
Cort
(hrcrhred
QuanUty
at% lorooo
aor0oo
60,o99
37,000
8,OOO
5,OOO
ChaptorT
5O, O0O
Equlvalent Unlt
Unltr' Colt"'
t 2,920
305
140
210
Factory ovcrhcad
Totel
Cogt added du
Cost from
Materl al r
cct In bcgtnnlng lnventory
rlng currcnt
parlodl
prscedlng dcPartment-..' .
t 3,575
3lo,85O
l ,5oo
21430
3,645
sl8,425
Unltr Currant 7r
322,OOO
Unlt Gost
35,OoO
371500
4Or5OO
40, 500
3-5o
Total Cort
33,575
t oo
/gto
673 3
4, 8OO
13, 50O
3' t 8' 3OO
32,480
320
360
540
3, 7OO
322,OOO
S,31
.04
.o6
.o9
Total coct chargcd to
Cost Accounted for ar Follorvr
Translarred to Bottllng Departmcnt
From begl nnl ng l nvcntotY..."*
Cort to comPlcto thir
Psrlod:
Mater1a14.................o..
La bor........r.'..r""""'..'
FactorY ovcrhcad
...--.
Work ln Procesr, endlng Invcnto4n
Cost l rom preccdl ng dcPartment
Materl al r
l -abor........
Factory overhead
Total cost accounted l or ...-.--....--..
I OrOOO
l Or0OO
10,ooo
8, 000
8, 0oo
8, ooo
I , OOO
100ch
100ch
3. 31
.o4
. 06
. 09
8.04
.0E
,oo
9.50
25t/o
75%
73.h
Started and compteted thla
pcdod 27.OOO 1OO'A
Total cost transferrad to Flnlshlng
Departmant
7sch
7' ch
CtpptorT
E7-72 APPENDIX (Concludad|
s
; '
XumUer of rqutvaturt unltr of eort rdd.d durtng ttrc curcnt pcrlod dctarmlncd rl follorvr:
Hor
DcpL Cot tlatcrlab lrbor Ovcrhcrd
To cornplctc bcglnnhg lnvcntory.. O 2FOO 7,5OO 7r5OO
Stlrt d rnd complct d thb pcrlod
27,OOO 27POO 27,OOO 2T,OOO
Endlng 8'OOO 8,OOO O,0OO O,O0O
Totel rquhnlcnt unttr
-3s,o09
gFog
_lo'5gg
JoFgg
"
Cost lddod durlng Ott cgrrent
pcrlod
dtvHcd by thr numbcr of cgulvelent unltr ol cort tddcd
durlng thr curant pcrbd
(21 Work in Process-Sottling Dopartment................ 1gr3OO
Work in Process-Cooking Department ....... 18, 300
t 59
1ffi
450
1, 35O
I r O0O
3,00o
600
86, 4OO
120, 960
3, OOO
87, OOO
121, 80O
Chagter 7
1, 80O
550
450
3, 6O0
86, 400
120, 960
3,OOO
87,000
121, 8OO
PROBLEMS
P7-1
(1) Spoiled Goods lnventory
(2oo units x $2'25)""""
FaCtOry OVgfhead GOntfOl .r............r.................' o.r
WOfk i n PfOCgSS .................r......r...........t.t..t.
l2l
Accounts Receivable
($55O + $450)
"""""""r""t'
SCfap Sa1eS r.,.....r.............r..r....................t...
Spoiled Goods lnventory t..o...."""""""""""
P7-2
S9O,OOO total
j ob
cost
=
S18
per uni t
( 1)
5, OOO uni t s on
j ob
Spoi l ed Goods tnventory
(200 uni ts x St5 sal vage)
FaCt Ory OVgf hgad COnt f Ol . . . . . . . . . . . r. . . . . . . . . . r. . ' . ' . . . . . . . .
Work i n Process
(2OO uni ts r $18
cost).."' r"
COSt Of GOOdS SO1d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ' . . . . ' . t . . . . t
Work in Process
(S9or00o
-
$31600|,.'......,...
Accounts Recei vabte
(586,400 r l 4O%l ,..............
Sal gs""" """""""'
"""""
{2)
Spoi l ed Goods tnventory
(200 uni ts x $15
sal vage}
Work i n Process .' ......' ......,..r....r....' ....' ...' .....
COSt of GOOdS SO1d. . . . . . . . . . , . . , . . . . . . . . . . r. , . . . . . . . . . . . . . . . ' . . . . .
Work i n Process
($90,00o
-
$3,000).-...-...-...
Accounts Recei vabl e ($azrooo r 1 4a%l ,..' .....--r...
Sal gs' . ' . . . " " " " " " " " ' o" ' r " '
ChaPtarT
P7-3
(1) Factory Ovgrhgad Control ,.......,...,.....,...,...,.......,. 2r2oo
Matgrials (1 oO units x $4|.....,....,,.,r.....,.,...,..
Payroll (lOO
units x 112 hr r $12 ratef ..........
Applied Factory Overhead
(1 OO r 112 hr x $24 ratgl ,.........,.........,......
Cost of Goods Sold..
161
2OOTOOO
3O0,0oo
2r2OO
400
600
l 12oo
20O,OOO
3OO,OOO
WOrk i n PrOCgSS r.....rr...r...............o.r.o...r......r
Accounts Receivable ($2OO'O0O x 15O%)..,..........
Sal gS. . . r . . r . . r r . . . . . . . . . . . . . . ' . ' . . . r . . . r . . . . . or . .
l2l
Work in Process.,.......
Materials (1 0O units r $4).....r......,....r,..........
Payroll (lOO
units x 112 hour r
$12 ratel ...,..
Applied Factory Overhead
(1 OO r 112hr r $Ze rate)....,..............D.......
Cost of Goods So1d.,.,.....,....r..........,r...rr.....r.........
Work in Process ($200roo0 + $2r20O|,,.........
Accounts Receivable (S2O2.20O
x 1 50%) .............
Sa|
gS. . . . . . r . . . . . . r . . . . . . . r . . . . . . . . . . . . . . r . r . r . r r . . . . . . r r . . . r . . . . .
400
600
1r2OO
202,2OO
202,2OO
303,3OO
3O3,3OO
'te
P7-4
(1)
I
QrandU Schcdub
Bcglnnlng
tltrrt d ln
Procar
tlrb
Pcrlod
Tnnrferrcd to Ascmblln
g Dcpartrncnt
Endlng lnvcntorY.' ...-d-
Spolled ln procog
Cort Chargcd to DcPertmcnt
Be!lnnlng InventorY:
Mate
Labor
Factory ovcrhaad
Total cogt ln beglnning InventorY
Coct added durlng curcnt
Pcrlod:
Materialc
l:bor
Factory ovcrhcad
Metcrlalr
Labor
Factory overhead
Total coct accountad fof ..........-*...
'
25,OOO
Total Equhnlcnt Unlt
Cost Unttr' Cort"
3 1,260
780
l r78O
$ 3,838
330,240
25,OoO 3150
l o, 7ot 23, 100 50
21, 311 23, 100 t . OO
Chaptar 7
;
ir.oo
@!
$54,OOO
Overstrost GompanY
Cuttlng Department
Cost of Produetion Repor
For Apri l
Matcrlrb Labor Orcrlrcrd Quen$ty
5,OOO
2O,0OO
2!t,ooo
:
18,OOO
1AO.A OO% 60% a,ooo
too%
g0%
eo% 3,000
Total cort addcd durlng curcnt
pcrlod...---..-. $88,312
Total cogt charged to
372,150
Cost Accounted for !t Followt Unltr
y.Co.pl"t"
Unlt Coat
Trangferrcd to Asscmbttng Departmcnt i8,OOO l0O% if'OO
Charga to Factory Ovcrhcad for rpollagc:
3,OOO l OO% 3150 34' 500
3'OOO eO'/. 50 1'350
Factory overlrcad u.,...-.-.d.--.
3'OOO
g}'h
1.00 2r7OO 8'550
Work In Proccsr, cndlng Invantory:
Materlalr....... a,ooo 1oo' .h $l.so
80' 000
a,ooo ao%
50 l' 2oo
4,OOO 6O.h 1.00 2,4OO
9' 600
$72,150
l:bor.........
.
Total number of equl val ent unl tc requl red In thc cost accounted tor recUon determl ned aa
follorvlr:
Materlalr Labor Ovefioad
Squl val cnt unl tr transl errad out.. 18' oOo 18' o0O 18,OOO
Equlvatent unltg ln cndlng Invcntory'.. 4,OOO 2,4OO 2'4oo
Equl val ent unl tr of rpol l agc....
3' OOO 2,7OO 2r7OO
Total cqulvalcnt unltr
3!'099 39'109
-23'199
-
Total cort
fl .c.,
thr cest In bcAtnnl ng tnvcntory
pl ur thc cott added durl ng thc currant
pcrl od)
dtvl ded Uy tfrc totat numbcr of cqutvatcnt unl b rcqul rcd l n tho cort accounted tor rcstl on
ClppterT
P7-4
(ConUnued|
CFenU(y Schcduh
Rccrlvrd lrom CutUng Dopertm.nt-.
Tranrtrrrrd to Fhlrhrd Ooodr lnvcntory
Endhg hvrntory
Epolbd ln proccs
Cort Chargcd to Departmcnt
Ecalnnlng hvcntory:
Overttreet Gompany
Assembllng Department
Cost of Produstion Roport
For Apri l
tletcrtrb Lrbor Otcrhced
,63
QuanUty
80%
100%
2gYr
100%
20?i',
100%
Total
Coct
$ 1O, 9OO
38,028
t 54,OOO
"ll,4.r4g2
15Aat
23, 1OO
8257,U2
9314,300
4' OOO
18,OOO
22,099
17, 0O0
4,0oo
I rO0O
22,OO0
Equl val ent Unl t
Unltr' Cort"
Cort fromprcccdlng
departmcnt
Matcrlelr
t 57pr8 Totel cort ln bcghnhg lnvcntory
@rt rddrd durlng currrnt
prrlod:
Cort from pnctdlng
drprrtmont....-..--.
lletrrfalt
Lrbor
Fectory ovc
Totel cort eddad durlng current
pcrlod.......
Total cort chargcd to deparbncnt ..,...,,.........r,....r..............,
22,OOO
21,2OO
18, 8O0
18, 8OO
t ze5
9.55
1, O0
150
a4,360
g?14,3OO
Cort Accountcd for
g
Followr Unltr % Complctc Unlt Colt
Tnndcrrod
to Fhlrlrcd Ooodt.....-..
Trenrfcrcd
to Spollod Ooodr hvontory
rt rahragc virlur M-o..mo..o...
17,OOO l OO% 315,OO
Chergc to Fectory Ovcrtrcad lor tpollagc:
Cort ol complctod rpollcd unltt
bu ralvagc veluc st rpollcd unltl
Work In Proccr, cndlng Invcntorp
Cort lrom precedlng
departmcnt
Materl al r..
t^ebor_......
Fectory
ovcrhcad.
Totel cott rccountod lor .......-...---.
I,OOO $ 5.OO
I,OOO 1OO.A 315.00
I ' O0O 5. OO
t 15, 00
Totel Cort
3255,000
5,000
i 15, OOo
5, 000 10r00o
a,ooo
4, 00o
4, OOO
4, O0O
100.4
80.h
29Yr
20ch
2. 95 311, 800
0.55 30,560
1. 00 800
1' 5o 1' 2oo
164
Chaoter7
.
P7-4
(Concluded|
.
Total numbcr od rqulvalcnt
unltr rrqulnd In t||r cat rccountcd
for rocUon dctcrmlncd ar
follom:
Hor
DcpL Cot Mtt rbtt lebor Ovcrhcad
Equlyalent unltr tranrtorrsd
out-.. l7rOOO lTtOOO l7'O0O
'17'0OO
Eiun^i"nt unttr ln ondtng Invcntory ''OoO 3,2OO 8oO
8oo
iiuhralent unttr of ryollagc'-"---
I'OOO I'OOO I'OOO I'OOO
Total equlvalent un|tr..r..............r..
2,OOO. 212OO.
't8eo9
l8po9
-
Total coct
0...,
thr cort ln bcglnnhg hvcntory
ptur thr cort eddrd durhg tfro current
pcrlod)
dtyldod by thr total numbcr oi rqulvatcnt unltr rcqulrcd h thc colt rccountcd for rccdon
l2l
Work in Process-Assembting
Departmellt."...."'
54IOOO
Factory Ovgrhgad COntrOt ....ro.,.....r......................
8t550
Work in Process-Gutting
DepartmeJlt.........
621550
Finished Goods lnventorY....
255,O00
SpOiled GOOdS InVentOfy ..r....r.....r......' ....r............
5r00O i
FaCtOfyOVgfhgad COntfO|......r........,.................' ..
lOr00O
Work In Procegs-Assombling
Department..
27O'OOO
ChapterT
P7-5
,
( 11
10.h 1OV.
Total
Goot
4rOO0
36, OOO
10'9.99
28,0OO
6, OOO
o,0oo
4O,OOO
Equl val ent Unl t
Unl ts' Cost"
34,0OO
3O,4OO
3O,4OO
165
s.23
Total Cost
36,44O
1r1?8
Hometown Brewery ComPany
Miring and Brewing Department
Cost ol Production Report
For January
Meterlrb l.ebor Ovcrhcad QuanUty
Matarlalt
l,.abor
Factory overfiead 124
Total cort h beglnnlng lnventory 3 810
Coct addcd durlng currunt perlod:
Metrrhlr
9{rso
8.24
1,O88
Lrbor
Frctory ovcrbcrd
Total cott eddcd durlng currcnt pcrlod.......
Total cort charged to departmcnt...........
38,752
QuenUU llchcdulc
Bcglnnlng lnvcntory
Startod ln procer thlr perlod
Tranrfrrrrd to Cennlng Dcpertmrnt
Endlng hvcntory 100%
loet h pnoc..f
Cogt Chergcd to Dcpartmcnt
Beglnnlng lnvcntory:
Cort Accountrd
lor tr Followr Unltr
Tnnrfcrrcd
to Cannlng Dcperbnant
Work h Procor, ondlng hvcntorln
Matrrlelr
l^ebor
Fectory
ovorhcad
Totel cott tccounted for
Equhratont
unttr trancf orrcd ou t...........
Equhral cnt
unl tr h ondl ng Inventory-.
Total cqul val ent
unl tr
$ 600
8a
$16
.o3
.o4
s7,5O8
Vr
Compl eta Unl t Gogt
28,000
6, 0oo
0,00o
or0oo
1OO'/o
lOOt/o
40ch
&ch
28, OOO
o,ooo
34, OOO
3.zs
3. ro
.03
.04
28, OOO
2r4OO
3960
72
96
28, OOO
2,4OO
3O, 4OO 3O, 4OO
h
Totel cort (1.c.,
thr coot In begl nni ng l nventory pl ut thc cort added durl ng tho currant
perl odl
dtvl dcd by thc totat numbcr of cqul val ent unl tr roqul red l n tho coet accounted l or tectton
37,568
Totel numbcr
ol cqutval cnt unl tr requl rcd In tho cogt accounted for recUon determi ned as
followr:
Materials Labor Overhead
tffi
P7-S
(Conti nued)
ChaoterT
Unlt
Coett'
Hometown Brewery Company
Canning Department
Cost of Production Report
For January
QuanUty Schcdub
Becelvcd from Mlxlng and
B rewln
g Departm4nt..................
Translerred b Flnlghed Goodg lnventory
Endlng lnvantory..
Spolled In procau
Cort Charged to Departmcnt
Beginnlng Inventory:
Cost lro m p rec edln
g d epa rtment............................'....
Labor
Factory overhead
Total coat ln beglnnlng Inventory
Cost added durl ng current perl od:
Cogt from precedl ng
department...............
Materl al r
[-abor...
Factory overfrcad ........
Total cort addad durlng currcnt
pcrlod
Total cost charged to departmcnt
Mltrr|lb Lebor overhced Quan$ty
,poo
28,000
30,OOO
25r000
1, OOO
4rOOO
3O,00o
Total Equlvalent
Cogt Unlts'
3 550
190
75
150
0gtt
1OO' /o
,looc/.
30% 50!h
800oh ao.a
Cogt Accounted l or aa Fol l owr Unl tr
Trancferrsd to Flnlshed Goodr lnventory25,0OO
Chargc to Factory Ovcrhcad tor apollagc:
Cost from precedlng
departmcnt
Matcrl al a..
Labor...-..-
Factory
overhead
Work In Proce8s,
endlng Inventory:
Cost from precedl ng
department
Matari al t..
Labor........
Factory overhcad
Total cost accounted for .................-
a,o0o
4, 000
4, 000
4, 000
1r OO0
1, O00
1, OOO
1, OOO
100%
100.h
100.h
ao.h
80t/c
lOOo/.
lOOo/.
50ch
500h
3,38o
3.23:t
.057
. 030
.060
s.233
.057
, 030
. 060
V.
Completc
3 6,440
1,52O
786
1, 572
i 1O, 318
$11,28dt
Unl t Coat
30, 000
30,00o
28,7OO
28,7OO
s932
228.
96
192
s233
57
1 5
30
$.23:t
.057
.030
.os0
s.380
Total Coat
I 9,500
lr4/.g
$11, 2a3
fuptor7
P7-6 (Concludedf
'
Tottl numbrr ol ogulvrbnt unltr nqulrrd In thr cot rccountrd for rcctlon dctarmhed at
blbwrs
Prbr
DopL Co.t lbtrrbb bbor Ovcrhod
t67
Equlvrbnt unltr trenrfrrrcd out* 2tt,OOO
Equlyetrnt unltr ln rndlng Invcntory lr0OO
Egulnlcnt unltr of lpol!rgo.-.-.. ar000
Totrlrqulvdrntunltr-.*...o...-.. 3OrOoO
25,OOO ZI,OOO Z,,OOO
1,OOO 5OO IIOO
4,OOO 33OO 3'200
3OTOOO 2,,r7OO 28!7OO
-
Totel coct
S.l.r
thr coet In boglnnhg lnvrntory plur the cort rddcd durlng thc cunrnt pcrlodl
dMd.d by tltr totrl numbrr of rqulvelont unltr mqulr.d h thr cort eccountcd for rcctlon
(21 Worki nProcess.-anni ngDepartmeJtt..,..........,.
Work In Procass-Ittliring and
Brewing DepartmeJlt .......................r........
6,44O
6r44O
Flnished Goods Inventory 9,5OO
11448
a a t a a a a a a a a a
Factory Overhead Control
Work In Process--Canning Department ....... 10, 948
168
P7-A APPENDD(
(r)
Chagter 7
OuenUty Schrdub
Handy Tool Gompany
Fabrlcatlng Departmont
Cost of Productlon Report
For Apri l
l/lrt rbb trbor orrcrhred
QurnS(Y
Strrtad thlr
pcdod*i..-.rude
100%?6 7O% 70%
2'OOO
3' 000
:l-'oo9
Tnndcrnd to Flnbhhg Drplrtnrrt
e'OoO
Endlng hvontory-s-dFs
lOO%
&*
'aota
t'5o0
spoilcd In
procctrD-...-..-d-.H lOO% 60% COta Eoo
I I,OOO
Cort Cherged to Dcpertrncnt
Totel Equhnlcnt Unlt
Beglnnlng Invontory:
Cort Unltr' Cort"
Hgtafletf -t..--.-.dr,....''..s.--qd*o.*.-is
I ItgOO
Labor
340
IrO2O
I 33oO
Factory ovcrhcad
Totat coct h bcglnnlng lnvcntorY
@rt addrd durlng surtrnt Pcrlod:
Metadalr-.---.F-H6.E*d*-dd-.*s
t
gtt80 gtooO
3t'02
1sbor..........--.r.r..-d.m.._..-Fff.-.....-'.'F.*
21125 8r5oo '25
' I
Fectory ovcrhord ----6-..tr.--.*.-.r.--..-.*
C'375 8i5OO '73
Totet coet rddcd durlng curont
pcrlod-...' 317'O8O
Totaf coct chargcd to dcprrtrncfrt ---.-aimrp..-..,.m
32O'?4O
_-t2,o2
ClppterT
P7-q APPENDIX
(Continued)
@rt Accountcd lor er Follon
Tranrlcrrrd to Flnlrhlng DcprrtmcnE
From bcalnnhg lnvcntoty -........
Cost to complctl thb
Pcrtod:
1:bor-*.
FactorY ovortctd.*-
8trrttd end complctcd thb
Prrbd
Totrl cort trenrtcrrcd to Fktbhlng
Dcpartmont
Chergr to Ftctory Orrcrhead for rpollagc:
Metorlalr .-.i....-..-.-O
labor
Factory ovorhcad'.---.1...-........
Work In Proccsr' ondlng InventorF
Matcrlalr
lrbor
Frctory ovcrhead
Totel cort rccountcd fot ..--..-"......
Unltr Currcnt !6 Unlt Cost
2,000
2rOOO.
TrOOO
500
500
500
'
1,5O0
l "5oo
1, 5OO
30%
3(,%
100%
100%
EOV.
AOV'
1000h
10ch
10V.
t 2 5
.73
3LO2
31, 02
.25
.75
$1. 02
25
.75
33,26O
150
4so
169
Total Cost
3 3BOO
14, 140
318,OOO
810
2,130
32O,94O
3 sl o
75
225
91r5:!O
150
450
r
Humbsr of cqulvalent unltr of cott added durlng thc cument
perlod determlned ar lollowg:
Materialg Labor Overhead
To completc beglnning lnventory
tltrrted end completad thlr perlod
Endlng hvcntory
Spolled unltl-....... a................,......
Totel rqulvalcnt unltr
o
TrOOO
1r5OO
500
9,OOO
600
TrOOO
ooo
300
600
TrOOO
ooo
300
8,5OO 8,5OO
-
Cort rddcd durl ng trc currcnt
pcrtod dl vl ded by thc number ot oqul val ent unl tr of cost added
durhg thc curront
pedod
,70
P7
-6
APPENDX
(Continuedl
Qurndty tlchcdub
Bcglnnlng InvcntorY
Chapter 7
;
Handy Tool Company
Finlshlng Department
Cost ol Produetlon Report
For APri l
Hrt rbb Lrbor otrcftcrd QurnUS
Rccclved trom Febrbrtlng Deplrtnrtt
Tranctercd to Fhlth.d Ooodl--* er000
Endlng hvcntory-o-sffiH_ l0Ort 2!'?A zr?i 2'OOO
Spollcd ln procar roo% 100% l oot 6 100
l2,ooo
Coat Chargcd to Dcpertmcnt
Total Equlvelcnt Unh
Beglnnlng lnvsntory: Cort Unltr' Cortft
Cort from prccrdlng dcprrtncnt i c,roo
Factory
520
780
Totel cort h beglnnlng hvcntory 310,000
Cort rddcd durlng currrnt prrlod:
Cort from
prrcodlng
drprrtm
Metorlelr
l.abor
Fastory
lO0.A &%
/fo?l
trOOO
\
I'OOO
12,OOO
Totel colt eddrd durlng curront
prrlod-.** :l38,too
Total cot cherpod to dcprrtncnt t4rpoo
lt8,ooo o,ooo
Szoo
' '
l0Boo o,ooo 1,;o
3,720 eFOo ,A
5r38O 0,3OO .3O
3r.,:o
I
t 7,
Fectort ovcrhoed .'......
3,OOO
SrOOO
Sttrt d rnd elmplctod $b
pcrlod 6'900
Total cort trenctcrred to Flnlsh.d Ooodr
Trrndrrrrd to Spollod Goodr lnvcntory
rt rehregr vrlur ......Fo.o..........xr
l OO
Cfrrrgr to Fectory Orrrhead for rpollrgc:
Cort ol complctcd rpolbd unttr
Lor relvagc velur of rpollod unltr
Work h Procc+ ondhg hvcntorP
Cort trom
prcccdlng departmcnt
Mrtrrlelr.-
lrbo r......................,..
Frctory ovarhaad ..............-.......
Total cort eccounted for .'.................
ChapterT
P7
-O
APPENDTX
(Concludedl
Cort Accountad for r Folbwr
Tnnrforrrd to Flnlthod Ooodr:
From beglnnhg lnvcntort ----.
Co.t to comPlrtl thb
Pcrlod:
To complctr bcglnnlng lnventory..
Strrt d end complet d thb
perlod
Endlng lnvcntoly.....o.......-...o.........
Spollcd unltr.......-.,..-......-...........
Unltr Curront !6 Unlt Coct
Total Cogt
31O, 9OO
720
1, O8O 312, 700
28,980
3f 1'880
100
9 .20
100 320
3 4,OOO
2,4OO
6,90O
s49,O0O
1, 8O0
8,90O
500
100
100
100
2,OOO
2,O0O
2,000
2,OOO
o
or0oo
2,00o
100
60%
60%
100%
100rA
100%
100%
t r o
.60
3f30
tl .oo
3l:o
1. OO
32OO
1. 20
200
300
AO
,60
%t/.
%rh
.
llumbcr of
qqulvalent
unltr of coot edded durlng thc curront
perlod determined ar follows:
Prlor
DcpL Cqt Metcrbb Labor Ovcrhcad
o
Greoo
21000
100
1,8OO
6r00o
5oo
roo
Total rqulvalent unltr
,POo I,OOO 9r3OO 9r3OO
n
Cott rddcd durlng lhc currcnt
perlod dhlded by thc number of cquivalent unlb of cogt added
durlng trr curront pcrlod
l2l
Work in Process-Finishing Departmeflt..'.'.........
l8rooo
Factory Overhead Gontrol ..o........' ....' -.-.......r.-......
81o
Work i n Process-Fabri cati ng
Department..
18' 810
Fi ni shgd Goods tnventory' ...........,.....o.......r..........
41r68O
Spoi l ed Goods l nventory..' ......' .' ..o.......r.-......-' .--.r
l OO
Factory Overhead Contro|..............
32O
Work in Process-Finishing Department..-...
42r1OO
172
P7-7
APPENDD(
.
(f
l
)OO( Chemical ComPanY
DlstillaUon Department
Cost of Produstion Report
For June
Chapter 7
-
QuanUty tlchcdub
Beglnnlng lnvcntory.i
Stlrtod thlr pcrlod
Tranrfcrrcd to Rcflnlng Dcpertmtnt .
End In g Invcntory...,.-*,.--
l-ot In pnocclr
Coet Charged to Departmcnt
Beglnnlng Inventory:
Matedalr
,
M8tortlb l^rbor overhced QuenUty
1OO% z0.h 20% a,000
1Or00o
20r0OO
1{,00o
1OOV. 80% 80% 2'OOO
4,OOO
20,OOO
Total Equlmlent Unlt
Cost Unltrr Costs'
Labor
3 3,824
90
480
Total coct h beglnnlng lnvcntorY
Coct addcd durlng currrnt
parlod:
Materlalr
Labor
Factory
t 4,200
sto,8oo 12,ooo 3 ,eO
1/480 14r8OO .l O i
7,4OO l4r8OO 50
$' t.50
Total cort addcd durlng currcnt
perlod..,,.-.......- 31e1680
Total coot chargcd to dcparbncnt 323,880
Chapter 7
P7
-T
APPENDIX (Gontinued)
t
Cogt Accountad for ar Followz Unltr Current 7r Unlt Cost
Transferrcd to Refl nlng Departnrenb
From bcginning lnventory ......*
Cogt to completa thle perlod:
Factory overhead
Total cmt accounted for ..........-..-...
173
Total Cost
94,2OO
labor 4'000 BOV. S .10 32O
Factoty overhead........ 4,OOO AOoh .50 1,600
S 6,120
Startsd rnd compl stod thi s
peri od
1O,OOO l OOo/. S1.SO 15, OOO
Total coet transferrsd to Refinlng Department
SC1)12O
Work In Proce!1, cndlng Invcntory:
Materl al g
2,OOO l 00o/c
$ .eO
31,800
2' 000 8Oo/o .10 180
2,000 Sooh ,50
go!
2,78' 0
323,880
Labor
'
Number of equi val ent unl ts of cost added duri ng tfi e current peri od
determi ned as tol l ows:
To complete beginning inventory
Materi al s Labor Overhead
0 3, 200 3, 200
1O, OOO I O' OOO I O, OOO
2, OOO l r8OO l rgoo
12, OOO 14, 800 14"SOO
Started and completed thts period
Endlng Inventory
Total equlvalent unlts .,o..,..,..r
: :
-
Cost added duri ng the current peri od
di vi ded by the number of egui val ent uni ts of cost added
durl i g the current peri od
t71
P7
-7
APPENDTX
(Continuedl
QuanUty Schcdulc
Beglnnlng Inventory
Bccolved from DlcUllaUon Dcpartment
Trangferred to Flnlghed Goodr lnventory
End In
g lnventory........-...'ar-......D'-..
lost In procest
Cost Charged to Departmcnt
Beginnlng lnventory:
Labor
)OO( Chemical Company
Refining Department
Gost of Productlon Report
For June
Matcrblr Labor olrefiead QuanttY
339,540
lOO% 50% iOV. 2'OOO
1a,0oo
:_6,0Og
12' OOO
100.h 30ra 30'h 2,ooo
2rOOO
ll'o9.9
Total Equlvalont UnR
Cct Unltr' Cocti'
Coct f rom
preccdlng departrnent..,..-............-.-.-.-.--6. I S'SOO
Materl al s
240
t oo
Labor
Factory overhead........'.....,..
9oo
Total coct ln bcolnning InventorY 3 a,8oo
Cost added duri ng curont
pcrl od:
Cost l rom precedl ng department............... . SZtrtZO
12' O0O 31.7C
Ma terla lr .......,............ 1, Ua 12, OOO . 12
1, 740 1l , 600 . 15
1O, t ' 4O 1l , 600 . 9o
Factory ovcrhead .....
Chapter 7
t2.03
Total Gogt
Total cost added during currcnt
prrlod.--- SSarTaO
Total cost charged to deparbnent
Cost Accounted lor ar Follorw Unltr Current % Unlt Cost
Transferred to Finlshcd Gooda:
From beginning Inventorlf .....,....
Cost to complete thls perlod:
Started and compl eted thi a pedod 1O,O0O l OO' /t 92.93
Total coat transferrcd to Flnlshcd
Goodr
Work In Procest, andlng Inventory:
Cost from precedl ng
department 2,000
' l 00ch
31.76 33,520
335, 150
Materl al r 2,O0O 1OO.h .12 24O
2, 000 30ch . 15 90 [abor....
Factory overhead 2,OOO 3}oh .9O 54O 4' 390
939,540
$4,80O
[abor 2' 000 5ot/o 3 .15 15O
Factory ovsrficad..-,-. 2,OoO 50% '90
g0O
3 5'850
20, 300
Total cost accounted tor .............,..-.
QEpterT
175
P7
-7
APPENDIX (Concluded)
I
Xum,brr of equlvalcnt unttr of cot rddcd durlng thc currcnt prrlod dctcrmlncd er lollorrr:
Hor
DcpL Cot Hatcrbb Lebor otrcrhced
To complrta bcglnnhg hvcntory - O O I'0OO I'OOO
tltlrtrd end completod $b
perbd lO,OOO lO'OOO 10'OOO 1O'OOO
Endlng
2,000
aooo
ooo Goo
Totrl rsulvalent unltr...................,
12'999 i2'999 _11'099 l_1499
.l
Cort rddcd durlng thr currrnt
pcrfod dlvHcd by thr numbor of rqulvalcnt unltr of cort eddcd
durlng llrr currcnt
porlod
121
Workin Procegg-Refinlng DepartmeJlt,.......,.,.... 21r12o
Work in Process-Distillation Dopartment... 21,120
Finishgd Goods 1nvOntoryo....o...r...............' ......D...o 351150
Work in Process-Refining Departmeflt.,.,... 35r15O
t 76
Chapter 7
CASES
C7-1
Although improvement in product quality was clearly a stated
goal at Star
Disk Corporatlon,
the company' s reward structure suggests otherwise.
Employees cannot be expected to
put quality first if rewards are dis'
pensed for achieving obiectives
that are often in conflict with
quality
improvement
(i.e., short-run
production volume
goals). The quality
i mprovemgnt i tto* seems to have been focused sol el y on manufacturi ng
aciivity, and the approach taken seems to have been to improve
quality
by i nspecti ng i t i nto the
product. Such an approach i s i nadequate,
blcause it waits too late in the
pnocess (i.e., after costs have been
incuped in manufacturing defective
prcducts, instead of before) and
focuses on onl y one
pi ece of the
probl em rather than the whol e
probl em.
In order to turn the
probl em anound, top management must become
actively involved. The reward structure should be changed to ensune
compati bi l i ty wi th qual i ty goal s. Qual i ty teams that i ncl ude empl oyees
from al l busi ness functi ons
(product desi gn as wel l as manufacturi ng)
and al l l evel s
(l abor as wel l as management) shoul d be created to hel p
i denti fy
qual i ty probl ems and fi nd ways to sol ve the i denti fi ed
probl ems.
Top management shoul d acti vel y
parti ci pate i n these teams i n order to
emphasi ze the i mportance of qual i ty, coordi nate efforts between organi '
zati on uni ts, and
provi de di recti on. Empl oyees are more l i kel y to become
moti vated when they understand the i mportance of
qual i tg and top man-
agement parti ci pati on and l eadershi p underscore that i mportance. In
addi ti on, al t empl oyees must refocus thei r efforts on servi ng thei r
respecti ve customers. The data
presented i n the case suggest that man-
agers frpm the di fferent departments
put al l thei r attenti on on meeti ng
producti on vol ume goal s rather than on meeti ng the needs of thei r cus-
tomers (i .e., the department recei vi ng thei r output).
Atthough product i nspecti on shoul d be conti nued, emphasi s shoul d
be shi fted to preventi ng poor qual i ty rather than detecti ng i t. Preventi on
shoul d start wi th product desi gn and extend throughout the enti re manu-
facturi ng process. Some thi ngs to be consi dered i ncl ude:
(al reduci ng the number of
parts requi red i n the product;
(bl
usi ng hi gher qual i ty materi al s;
(c) using standardized
parts;
( d) usi ng wel l - known
pr oduct i on t echnol ogi es wher e
possi bl e;
(e)
mi ni mi zi ng retool i ngs;
(0 i ncreasi ng empl oyee trai ni ng;
(g) reorgani zi ng the manufacturi ng faci l i ty from producti on depart-
ments to manufacturi ng cel l s to promote teamwork and decrease
inventory costs;
(h)
upgradi ng or modi fyi ng machi nery;
(i ) i nstal l i ng a stati sti cal
process control system to moni tor producti on
qual i t y
and r educe pr oduct i on var i abi l i t y.
Chaptor 7
t77
C7-1 (Concl uded)
A few of the bi ggest and most urgent probl ems shoul d be i denti fi ed
and tackled. In order to achieve results, effort should be concentrated on
a lew costly
problems that can be solved. Tackling too many problems
results in dispersed efforG and little observable accomplishment.
lmproving
guality takes time and never ends. The company and its
employees need some successes to build confidence and create the
momentum needed to turn the
qual i ty probl em around.
C7-2 Product cost may be increasing as a result of an increasing amount of
scrap, spoilage, and rework. Since the costs of these internal failures are
not measured, management cannot evaluate the significance of the prob-
l em. In addi ti on, si nce these costs are not measured, empl oyees have no
i ncenti ve to reduce or el i mi nate them. Treati ng scrapr spoi l age, and
rework as a norrnal
production cost encourages such waste. As a conse-
quence,
overall costs rise. The company' s cost accountants should
develop a system of determining the cost of scrap, spoilage, and rework;
i mpl ement the system
0.e.,
begi n measuri ng such costs); and repod
these costs to responsi bl e managers. l f the cost of scrap, spoi l age, and
rework is high, management should initiate a
guality
improvement pro-
gram
that concentrates on
preventing these internal failures. This may
involve organizing employee
quality teams to identify problems
and
develop solutions, locating new vendors to obtain higher quality
materi-
als, redesigning products to improve
quality, modifying or upgrading
manufacturing machinery, training or retraining employees, andlor reor-
gani zi ng
the producti on processes.
CHAPTER 8
DISCUSSION QUESTIONS
Og-1 . Joint
products represenl lwo or more produds
sepaiated in the course ol the same processing
operation, with each produci having such rela-
live vatue that no one produd can be designated
as a maior
Produd.
A by-product
i s rel ati vel y mi nor i n l erms of
torat vaiue and is derived incidsntally ftom lhe
production or manufac'ture ol onE or more maior
Producls.
O8-2. Revenue from the sale ol by'producls may be
listed as olhet incoms, addilional sales revenue.
a deduction from the cost ol goods sold of the
main product. or as a deduaion from the cost of
produclion of the main
Product-
O8-3. Yes, when by'producl revenue is deducled from
the total production cost ol ths main product' lhe
unit cost of the main product is reduced; conse'
quent l y, t he cost of t he endi ng i nvent or y
changes also.
O8-4. The rpl acement cost method can be used i n
such cases. In this method, the by'ptoducls that
go into making other unils are valuEd at ths cost
the company would have to pay il it wete to
90
out on the market and purchase such materials'
O8-5.
(a) Ths treatment described tor by'products
may be
j usti ti ed when, rel ati ve to mai n
products, the revenue
generated by l he
by-producl is insQnilicant; when no clearly
del i ned basi s ol i dent i f yi ng by' pr oduct
cosl s oxi st : or whsn t he cosl of mor e
relined accounting would be disproportion-
ato to lho benelits teceived.
( b) The t r eat menl descr i bed has sever al
shortcomings. All gross profil is ascribed
l o mai or products and i s i ncorrscl as a
measure of total gross profi t, si nce the
i nvenl or i es of by- pr oduct s t hat may be
unsol d at the end ol the
peri od wi l l have a
zero value. Failure to assign values lo by'
products may well mean lhey are not rsc-
ognized as inventoriss at all. This' in turn.
coul d l ead to thei r wasl s, l heft, or other
mishandling. ll by-products are sold irregu-
larly and invenlories are albwed to accu'
mulate, bolh a material understatemont ot
invenlories and a distorlion ol reported net
income of suqcessive periods may rssun.
QB- 6. Yes, some of l he i ni t i al manul act ur i ng cosl s,
addi ti onal manufacturi ng costs (when by' ptod'
ucl s aro l urther processed al ter separati on), and
per haps even mar ket i ng and admi ni st r al i ve
expensss may be charged to l he by' produds.
O8-7. Methods for al l ocati ng the total
i oi nt
produdi on
cosl to
joint products are:
(a) Allocate the
pint oost on the basis of the
relative market value of lhe
pint producls.
(b) Allocate the
Fint
cosl by using an .werage
unit cosl obtained by dMding the tolal
joint
manulacturing cost by lhc total number of
units produced.
( c) Al l ocat e t he
j oi nt cosl on t he basi s ol
weight factors such as size' ditficulty ol
manufaciure, ot amount ol materials used.
(d) Atlocate the
joint
cost on the basis of some
uni t of measut ement such as
Pounds,
lons, or gallons. ll lhe
ioint
products are
mt measured in the same way' they musl
be converted to I denomi nator thal i s
common to all the unils
Produced.
O8- 8. The mar ket val ue met hod consi der s t he
revenuegroducing
ability of lhe
ioint
produds by
assuming that each shouH be valued according
to ils cost absorption ability. Resulling invenlory
@sts are i n harmony wi l h revenue produci ng
abitity and, il the combined
joint producls are
profitable, the market value method avoirJs allo-
cating more cosl lo a producl than hs revenue;
thus achieving a neutral elfect. However, this
method may be diflicult to apply if the matket
value al the splitofl point is nol known.
The average unit cost method, while simple lo
appl y when uni l s are measursd i n l i ks tsrms'
lails to consider the heterogeneous nature of tho
individual Products.
O8-9. Joint costs musl be allocated to
ioint
producls
when lhere is invsnlory to be costed.
O8-10. Not exaal y. A new manufadurer woul d do wel l
l o consul l the Internal Revenue Servi ce aboul
the methods to be used, so that an IRS agent
can make a decisbn before the tax rslutn is pro'
par ed. l n ot her cases, wher e an al l ocat i on
method has been apdied consistently lrom year
to year, to apply for a ruling would not be good
$ral egY.
O8-11. The method used i n cabul ati ng uni l costs
pro'
duces the same unh cost l or al l grades of l umber
sold. The owner is then led to bolieve thal lhe
same cosls in the sams ratio are attributable to
the l ow as wel l as the hi gh grade number.
h must also be recognized that because of lhe
i nhotent nal ure ol thE materi al s and the mi l l i ng
promss, il is not possible to eliminate low grade
number. Thus, the profitability of the oPeration
can be vi ewed best by consi deri ng the aggre-
gale ol tovonue and costs of both the high and
l ow grades ol l umber, coupl ed wi th conttol s to
assure that all practical stsps are laken to obtain
hi gh qual i ty l ogs and to mi l l them properl y. A
I
I
I
I
L
I
!
I
|}
CtuptorB
highor prbo lor bgr rf,y b
,utttti.d
h tonrr of
r gnclrr erncrnl of ltigh grrado lumbor'
6-1?4 Fq debi'rcrt nnoh,itrg,
iinl
ab ero inolovanl
rnlo{ thoy arc rlgrslcd b changc !| t r..ui
179
of h. docitixr. Uaualty, stly co.ts bcywtd thr
lplldl ero rebvanl
Chapter I
E8-l
(f
l
Net revenuo method:
PGRGISES
Grogs ngvenuo lrom sale of by-product..............
Productlon cogt aftgr soparatioll.......'.............r..
Ngt rgvgnue film sale of by-product'.................
(21 Market
yalue
(reversal cost) method:
Final market valua
Less: Profit ($eOrOOO r lOTo)........... $2,ooo
MarkeUngandadmi ni straUveerpetl sos...
2' OOO
Prpductlon cost aftor 8oparaUoJl.............. 5' OOO I,OOO
$2O,OOO
5,OOO
glg,ogg
$2o,ooo
Jolnt cost allocated to the by-produGt......'.........
E8-2
(1) Calculation of manufacturing cost betono separation for by-products,
By-Product
A B
Sal es. r.............. $61000 $3r5oo
Manufacturing cost
gftgr
separatioJ| ..............,...,....... $trlOo S 9Oo
Marketing and administrafive oxpenses..........,.......... 75O 55O
Profit allowance (A, l5%i B, 12oh1 ..........,........,,.......r. 9OO 42O
$2,750 $1,87O
s11, OOO
Manufacturing cost beforg separation,.......,...r..,..o..,. S3r25O
9I' 639
L
I
I
It'
I
\>
I
I
!
Chapter I
E8-2 (Concf uded)
t2l
t 8l
\
LOGAN COMPAI{Y
lncome Statement
For Mont h Ended Apri l 3O
Main
Product
$zs,ooo
s32,620
1 1, 5OO
$30,880
6, 000
S24,ggq
By-Product
A Total
s3,500 sg4,soo -
b
Sal gS i r . . . . . . . . . . . . r . r . r r . . . . . . . . . . r r r r . r . . . . . r . . . . r . . . . .
Cost of
goods
sold:
Before separation (requirement (1)).
Aftgr se parati ort...,..................,.,.....,
GrOSS
p rOf i t . . . . ' . . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . . r. . . . . .
Less marketing and administrative
gxpgnsgs
r . . . . . . . . . . . . , . . . . r . . . . . . . . r , . . , . . . . . , . . . . r .
Profi t from operati onS..........,.........,....r..
E8-3
s6,0oo
t
\
Product
t t ,
Ul r r r r r r r r r r r r
. . . . . . . . . . . r . .
\t
, 4 . . . . . . . . . . . .
Y
I r a . a a a a a r a . . a . . . . a a a . . . r . a
a a . a a a . r . r . a a r r . . a a t
,
G r r r e r r r o r r r o a a a a a a a a a a a a a a r a a a a a a r a a a a a a a a a a t a a a a a r r a r r a t a a ,
? a a a l
I V r Ct l o r r r e o . . . . . . . . . . . r . .
, r . . r . . . .
s44,12O $4,350
s3,250 51,630
1, 100 90O
$1, 650
750
s 900
s37,5oo
13, 500
$2,530 $51,000
$ 97O s33,5oo
550 7,300
$ 420 s26,200
Apportlonment of
Joint Production
Gost'
s 64,000
48,OOO
32,000
16, 000
$160, 000
$ 6,00
2.AO
$ 4.00
2.OO
$ 2.00
91' 009
Market Value
at Split-Off
$ 8O,OO0
6O,OOO
40,OO0
20,000
s200,000
'9Ln9,00O.
=
goo/o
s200,000
E8' 4 z: Mar ket val ug pgr
unt t . . . r . . . . . . . . . , , . . , . . . . . . . . . . . , , , . . . . . . . . . r , .
Gross profit,
consisting of:
Oper at i ng pr of i t . . . . r . . . . . . , . .
. . . . . . . . . , . . . , . . . . . . 31, OO
Mar keUngandadmi ni st r at i veexpenses. o. . . . . . . . . .
1. OO
Further processi ng
cost
Val ue per
uni t of by-product at spl i t-off..............
Val ue
of by-product to be credi ted to
j oi nt
cost
( 2, OOO uni t s x 52)
r
I
I
\
ta
I
E8-4
(Goncludedl
X and Y:
Uttlmate
Martet
Valuc
por
Product
UnR
E8-5
{1}
Product
$4.3o
6.OO
6.OO
Spllt-Off
Processing
Cost
After
$
4O,OOO
7O,OOO
Processing
Gost
After
Split-Off
$3O,OOO
2{,OOO
27
|OOO
991'o09
Chagter 8
Apportion-
ment ot
Joi nt
Production
Cost'
Units
Produced
IrOOO
I O,OOO
Ultlmate
Mar|cet
Value
por Units
Unit Produced
Uttimate
Martet
Value
Hy?o-
theUcal
Markot
Value
$eo
25
x
Y
318O,OOO
25O,OOO
Ultimate
Market
Value
$129,OOO
99, OOO
78,0OO
33O8,OOO
$l2o,ooo
18O, OOO
$
8O,OOO
l 20,ooo
s4l O,O{)q
sl l O,OOO - sstoo,ooo $2oorooo'r
'
Ratio to allocate cost
prior to separauon
:19'999
=
3
$3OO ' OOO
3
..$2O4,OOO
cumulatlve foint
cost less $4'OOO
value of credit for by-producl
Hypo-
thetical
Market
Value
Apportion-
ment ol
Joint
Production
Cost
E
s
c
Total
3OTOOO
15, OOO
13, OOO
$
99,OOO
75,0OO
5l , ooo
$
66, 000'
5O,OOO
34,OOO
Net eflgct of sgparable
processing .""""o""""t
Conctusi on: Based on tho Informati on
gi ven, S shoul d be sol d at the
split-oft
poinL
$(3,7sO)
s225,OOO $15O,OOO
'$15O,OOO
+
SZ2S'OOO=
2/3; $99,OOO
r 213
=
966'000
l 2l
Di fferentl al revenue
(t5rooox ($6.60' $5' 25)1"""""""""' t""
Di f f gf gnt i al COSI . . . . . . . . . . . . . . . r. . . . . . . . . . o. . . . r. . r. . . . . . . . t t rt t t """"""t t ' t t "t '
$20,25O
24rOOO
CGA-Ganada
(adapted). Reprint with
permission'
f
t83
ClvpterS
I
I
I
I
l>
I
I
EiEgg3q;l
gfcl
Fs F
rfuil
is
3
Ei:EI
iFfli]I
iFiti
irqgl
$fiil
iaqfll
r
i'sgl $allfll
#l
ffflfll
I
\,
s
N
F
tl
o
o
o_
o
o
I,
o
+
0
o
0_
o
q,
N
J'
r o
e
o
0
(,
tr
I
t
J
T'
9
b
ct
E
a
o
r i r ! 0
c 9
E 9
C L E
t o
9 . v
. L o
= E D
cL r0
d =
o d
+ o
..t O
r !
cil
ssg
!r; il
;'
'
u
J I
H
?
o
I
c'
lrl
b
\
\
i
<! o o
6
F
\
___ __--t\
,u
E8-o
(Conctudedi
t2l
Diffgrgntial
revgnue
per unit ....,""""""""""""""""'
Differential
cost
Per
unit:
$25rOOO
*
1rO0O. . . . . . . . . . . . r. . . . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . .
360TOOO
+ 31O0O. . r . . . . . . . . . . . r . . . . . . . . . r . . . . o. . . . r . . . . . . . . . . . . . . . .
Sl
O5TOOO
+ 5rOOO. . . . . . . . . . . . . , . . . . . . . . . . . . , . . , . . . . . . . . . . . . . . . . . . . . .
Product
A B
900 $rs
25
20
Chwter I
$zs
c
27
3, OOO
4, OOO
3, OOO
$
30,ooo
4O, OOO
3O, OOO
sl
oo,ooo
$
2o,ooo
3O, OOO
5O, OOO
s 4
$r s
1 4
$ r
_
Total
Producti on
Cost
$
5o,ooo
7O, OOO
8O, OOO
s2oo,ooo
$1s
(3)
(l n the l ong-run deci si on to i nvest i n the capaci ty
(faci l i ti es) needed to
i urther
process B, the fi xed cost shoul d, of course, be consi dered.)
(4) No. From part (31, the benefit of further
processing is 91 for each of the
3,ooo uni ts of b,
-or
$g,OOO.
But that must be compared wi th the benefi t
of the al ternati ve use of faci l i ti es, $6,000
-
$1,OOO
=
$5' O0O
of short-run
benefit. So it is better in the short-run to selt B at split' off and devote the
faci l i ti es (the ones that woutd have been used to do B' s further
process'
i ng) to thei r al ternati ve use.
CGA-Canada
(adapted). Repri nt wi th
permi ssi on'
Di ffergnti al rcvgnu................r.........-.
Di fferenti al cost:
($60,000
-
$18rOO0)
+ 3' OOO ...' ."""
Bgngfi t to furthgr
processi n$ .........,...............' .o""""'
E8-7 (1) Average uni t cost method:
units
ooT;*.1:ilf""t
H:,'ffil:
Product Produced Producti on Cost Spl i t-Off
A
B
c
$
(5)
Conctusion: Only
product Bts differential
cost exceeds its differential
revenue. Therefore, only
product B should be sold at the split-off
point.
Yes, because the short-run i mpact ol further
processi ng of B i s then:
Total sl oo,ooo
ChagterB
E8-l (concl uded)
(21 Market val ue method:
A
c
Total .....
Processing
Gost
After
Split-Off
$ 2o,ooo
3O, OOO
5OTOOO
s1g9'oog
3. 0
2. O
4. O
2. 5
Hypo-
thetical
Market
Value
s 4O,OOO
8O, OOO
4O, OOO
Joi nt Cost
Per Uni t
s1. 40
1. 40
1. 40
1. 40
Wei ghted
= Uni ts x
15, OOO
4O, OOO
6O, OOO
25, OOO
14O, OOO
Apportion-
ment of
Joi nt
Production
Cost
$ 25, OO0'
SOTOOO
25, OOO
Joi nt
Cost
s 7,OOO
28, OOO
21, OOO
14, OOO
s?o,ooo
per
uni t
Joi nt
Cost
Per
Wei ghted
Uni t'
$.so
. 50
. 50
. 50
185
Total
Production
Gost
s 45,ooo
8O, OOO
75rOOO
Joi nt
Cost
I 7,5oo
2O,00o
3O,000
12, 5O0
$7O,OOo
Ultimate
Market
Product Value
I 60,000
11O, OOO
9O,OOO
$26q999
5, OOO
2O, OOO
15, 0O0
l O, OOO
Joi nt cost
$169, 009 sl oo,ooo
9?oo,00g
'
$l
oorooo *
$160,000
=
.6zsi $4o,ooo x .625
=
$25,ooo
E8-8
(1) Average uni t cost met hod:
Uni ts
Product Produced
'
Joi nt cost
Total number of uni ts produced
(21
The wei ghted average method:
Units
Product
Produced x
points
5, OOO
2O, OOO
15, 00O
1O, OOO
_so,o99
K
L
M
N
tr|ffi
=
$1.4o
K
L
M
N
$70. ooo
i Aopoo
=
S' 5o
Per
wei ght ed uni t Total number of wei ghteO uni ts
)
186
l
E8-8
(Concludedf
(31 Ttre market value method:
Product
Ultlmate
Market
Value
per
Unit
s5.50 .
1. 60
1. 50
3.OO
Units
Produced
SrOOO
2o,ooo
15,Ooo
l O, OOO
UlUmate
Market
Value
$ z7,soo
321000
22r5OO
30,0oo
Processing
Cost
After
Split-Off
$ 1,5OO
3,OOO
2,500
-
5,0oo
Hy?o-
thetical
Market
Value
$ 2o,ooo
29,OOO
20,0O0
25,OO0
Chapter I
Joi nt
Cost
Allocation
$18, 2OO
2Or3OO
l 4, oo0
17, 50O
Materlalt
Cost
por
Product
Unlt
Converaion
Cogt
per
Product
= Unl t
37.5o
6.00
K
L
M
lf
Joint cost
Hypothetlcal market value
E8-g Materials cost:
Welghted
product
Unlt r Polnta = Unltr
st t 2.ooo sl2,ooo sl oo' ooo $7o,ooo
-
$7o' ooo
-
. 7o
=
Tooh
$1OO, OOO
l o, ooo
8,0oo
x topoo 6
Y 8,000 1
3
2
x
Y
30TOOO
16, 00O
50,OOO
32,OOO
82,OOO
Matsrlalr
Cost
pcr
Welghted
Unlt =
Converslon
Coct
par
Wclghtod
Unlt
31. 5o
1 5 0
Total
Materialg
Coat
360,OoO
32,000
392,O00
Total
Convcrrlon
Cort
+
3 75,000
48,O00
3123,O0O
Product
Unltg
1O, OOO
8,000
Product
Unltr
1O, O00
8,00o
$6
4
32
2
40,OOO
Gonversion cost
Welghted
Product Unlt r Polntr = Unltt
CtnpterE 187
Tot81..,.... 20 00O
PROBLEMS
$53O,OOO sl r3OOrOOO
I
P8-t
-
'
(ll Average unit cost method:
Apportionmont Processing Total
Units (kgl of Joint Cost After Production
Product Produced Production Cost Split-Off Cost
, B. 1OO0O S2O5,OOOr $ 58O,OOO
$ 845,OOO
c f o 0oo 2o5,ooo 72qooo 985,OOO
gl,83g,ogg
'Jolnt
cost of $59O,0OO less $O,OOO by-product credit ($f S r 4 OOo kg) =
SS3O,OOq $S3O,OOQ
+ 20 OOO kg =
$26.5O
per
unig $28.50 r 1O OOO kg =
$265,00O.
Total Production Units in Finished Finished Goods
Product Gost per Unit Goods Inventoly Inyentory
B
$84.50 I OOO kg $ B4,SOO
c 98.50 5OO 49,250
9193,?sg
(21 Market value mothod:
Apportion-
Processing Hypo- ment of
Ultimate Cost theticat Joint Total
Market After Market
production production
Product
Value Split-Off Value Gost Cost
B
$1,300,ooo $ 580,ooo
$ 72o,0oo
$318,000 $ 898,OOO
c 1,2OO,OOO 720rO0O 4go,ooo 2l2,ooo 932'OOO
Total...-.-.
$2Ego,ogg
91,3og,ogg
$tggg,oog $sgo,ooor $t,B3o,ooo
r
Joint cost loss by-product credit SS3O,OOO
*
$1,2OO1OOO
= .4417; .441T x
$72OrOoO =
$318,ro24 = 8ppnoximately
S3l8rOoO; .4417 x $ego,o6o
=
$21 2r0i O = approrimately
$Zi 2,OOO.
Total Production
Cost of
Produst
cost per
unit Units sold Goods Sold
B
agg^Bo , ooo kg
$ 8og"?oo
c
93.20 e 5oo 885;4OO
$1, 693, 6o0
{
\
tffi
Chapter I
P&l
(Concluded)
(31 Neither the market valuE method nor average unit cost method of allo-
cating
joint
cost is a more accurate way of determining
ioint
product
costs. Joint cost, because of its nature, cannot be accurately split up
among
ioint
products, sincs
joint
cost is incurred to producs ono or all of
the
ioint
products. That is,
ioint
cost cannot be reduced by dropping one
of the
products. Thus, to make decisions about
joint productionr
one
must look at the revenue and separable cost of each
product to deter-
mine whether it ls
profitable on the margin. In such decislonsr
foint
cost
ls not relevant. The only
purpose for allocating
ioint
costs is to determine
a cost for inventories on the balance sheet and for cost of
goods
sold on
the income statement.
For financial statement
purposes, in most situationsr better argu-
ments can be made for a value-based allocation basis rather than a
physically-based one. At times, the physical base can result in absurd
allocations of costs among
products because of the disproportionate
relationship between the relative value of the
joint product
and the units
produced, relative to other
ioint
products.
189
ChaptorB
o t o t l
o l 0 l l
OJ 'f,JI
nl$ll
3al
ol nl l
'l$ll
ol c, l l
IJ tJI
$lBll
ol ol l
ot c)tl
ot ot l
Flfill
o
o
ao
o
0
o
5)
tr
o
o
c)
o
I)
|1,
o
o
o
u)
F
, o c
l o c
t o n
l l j F
I F E
o
l Bo
o o
o n
f , F
? o
{t
6l
o o
o c )
o o
o ra)
o| 1,
N r
!,
o o
0 0
q q
l ()u)
O F
t)
o o
o o
q q
o o
CD| . )
o
o
q
o
CD
o
ss
El
s!
3{
rfl
E3l
;=*l i
6c*l 6l l
0 0 1
o o l
o 0 t
o o l
n l ' l
g ) |
o
I
o_
ct
!t
&
t l
o
0
0
c'
;
!.
s A
O . -
! t 0 t -
i : 8- 6
x 0 l l
X t o a
- - N
x
P{ D5
6
r r d
. gl o
F
r C { r
, o :
R x P
o o o
I
qE
C{ ( l l -
Q - { t
F o . t ?
ststl
ot ot l
'lgll
I
-fqrAa1ax
Si'lr-qfl
e - l o o o t o t t
E E 318 8 8l8ll
s
s
slgr
Flgll
d
o
F
F i i
t : 3
F i i I i
?a!
g
5- ! 3
i
Oi l Cl y
o r ! g o o
egj :
! s !
6
3 B : *
er g
g
sl
*sleee
= gl ui dd
q l r r c l
! l ssl qeq
= Es b l RP.
sJ 3t
I
e l
ol
5 l
N S l o J F
ob tl
o . = N
'_
\
\
190
P8-3
(rl
Product
Al pha. . . . . .
Gamma ' ..
Tota1.........
Ultimate
Market
Value
per
Unit
$ 5
1 2
Units
Producedl
46,2OO
4O,OOO
Market
Value
Processing
Gost
After
Spllt-Oft
Hypo-
thetical
Market
Value
Chapter 8
Joi nt
Cost
Allocation3
t$zgt,ooo 1$
t
15ro6oe
r
38' OOO sl gs,Ooo $
44,4OO
23r66O
4SOrOOO 1651000 315,OOO 75,600
Al pha
Beta
s23,76O
8, 1OO
$15, 660
s726.66O $220,O60 S5OO,OOO $l 2O' OOO
rDiagram
of Flow of Pounds
(not raquiredl
$?8, OOO
$23,660
(41 46,200
pounds
(2) 66,00O
pounds
$120,OOO
l 9, 8OO
pounds
( 11 11O, OOO
pounds
$l 65, OOO
Gamma
(31 44,OOO
Pounds
-4'OOO
Pounds
lost
_4O' OOO
pounds'
'Computation
of
pounds of
good output of Gamma:
Let X=l oodout put
44, OOO
- . l X
= X
{o,ooo = X
zMarket
val ue of Beta
(19r80o pounds x $1.2O|
...r,.................
Less marketing expense of Beta ....r.........."......-...............' ...
Ngt rgal i zabl g Val Ue Of Bgta.' ....r..............o.....o.........' ..r.r......ro
sThe
joint
cost is 24oh of the hypothetical market value.
Chapter I
P8-? (Concluded)
(2'1
t 9l
BROOKS CORPORATION
Statement of Gross Profit for Alpha
Sal gS (38r4O0 poUndS X $5)
. . . , . r. . . . . . . . . . r. . . . . . . . . . . . . ' . . . . . . . . . r. . , .
Productlon costs:
Allocated
joint
cost
s192, OoO
t a . a r a a a r a a a a a a a a a . a a sl 02, ooo
38, O0O
23, 660
Gross cost of
productlon
Less net realizable value
(11
Sa| es.....................
Cost of goods
sold:
Joi nt cost ($236,000
-
Bynd net revenue
($l 1,OOO -
$5,000 separabl e cost))..,.
Separable cost ($215,0OO -
$5,OOO for
Bynd) . . . r r . . . . . . . r . . . . . . . . . . . . . . . . .
Total cost ..........r.r....e...rrr.............
Gross profi t (12%
of sal es).......,o,.....
(21
Ul ti mate
sal es va1ue.....,..,r..r..
Less 72oh gross protit
.........t..,.....,
Total
cost..,....................
Separabl e
cost ......................
Joi nt cost al l ocati on......
s163, 660
l 5r gOO
r
$147, 760
2gr552t
Jana Reta Total
$2OO, OOO $3OO, OOO S50O, 0OO
$23O,000
21O, OOO 2. 1O, 00O
s44O,OOO
$ 60,000
Total Jana Reta
of Beta
Ngt cOSt Of prOduCtl OIl ....' ..' .......' .....ro.....,.........r.........' ...r
Less
gndi ng
i nventory.....r.,...............,...........r.,,..............
Cost of
goods
so1d...........rr.r........ ................,...,
Gf OSS pr Of i t . ' . . r . . r r r . . . r . . . . . . . . . ' . . r . . . . . . . . . . . . . . . . r . . . . . . . . . . r . . . . . . . . . . . r r .
118, 208
s 73,792
' Net
real i zabl e val ue of Beta equal s the revenue fnom Beta (S24,OOO)
l ess i ts
related marketing expense
t$erf
OO).
nEndi ng
i nventory egual s the net cost of producti on (S147,760) ti mes 2O%.
P8-4
$5OO, OOO
6O, OOO
$44O, OOO
21O, OOO
S2OO,OOO
24|AOO
$t 76, OOO
$3OO,O0O
36,000
$264,0O0
21O, OOO
$23O,OOO 9176,000 $ S4,OOO
(31
Gross profit
for Jana and Reta-see line 2 of requirement (2),
t.
192
P8-5
(ll Ultimate
Market
Value
Chapter I
Apportion-
Processing HYPo- ment of
Uhimate Cost thetical Joint
per units Market After Market Produetion
Product Unit Produced Value Split-Off Value Cost'
spr--g 3o.oo Too,ooo S2,8OO,OOO $ 874,000 $1,926'000 $
960'000
*
psT-4
6.00 35O,OOO 2rl O0rooo 816,000 l r281rO0O 640' 000
$4,9OO,0O9
9!,690,009 99,2lO,OOO 9!,8OO,OOO
'Joint
production cost
............ $l rTO2rOOO
Less cost assigned to by-Product
RJ-s (f TOrOOO
gallons r (S.7O*S.1O)!....-..... 1O2'OOO
$1,8oo,ooo
"(51, 926, 000
+
s3r2l O, OOOl
rsl , 6OO, dOO= $960' 000
l2l
sPL PST-4 RJ-s
Joi ntcosta1toc3ti on..................r............ $
g6OrOOO
$
6401000 $l O2,OOO
Additional
processing
cost.........r,.......... 8741000 81qr090
Total cost $1,83{,OO0 $1,456,000 $l O2,OOO
Di vi ded by
gal tons produced.......,........., TOOIOOO 35OrOOO l TO,OOO
Cost per gal l on....
lnventory costing:
s2.62 $4.16 $.go
: : : :
November I inventory (gatlonS) ....... l8rOOO 52' OOO 3' OOO
November production 700,ooo 35o,o0o 17o,ooo
7t8,OOO 4O2,OOO t73,OOO
November sal es 650,000 325,OO0 15O,OOO
November 30 inventoil[.................... 68,000 77rOOO 23rOOO
Cost per ga| | on...o.......,.,..................
$2.62 $4.16 $.OO
Cost assigned to November 30
finished goods
inventory....,...,....
9._!-Z91169
$
32or32o $ l3' 8o9
(31
Per gallon
sales value beyond the split-off
point.,.... $6.00
Per gallon
sales value at the split-off
point.......,...... 3.8o
--
Diffgrontial salgs value .r......,.........r..r...r.....r,............ 52.20
Additional processing
cost
per gallon
(S816rOoO + 35O' OOO gallons).....................r.......... 2.33
Per gallon gain (loss! of turther
processinft..............
l_!:!31
Alderon lndustries should selt PST-4 at the split-off point,
as the difforential
novenue of the sal es beyond the spl i t-off
poi nt
i s l ess than the addi ti onal
cost of further processing.
-T
I
193
I
I
Chaptor I
( '
t o l
r \ l Ol
F. l ! ol
o t F l
l g , l
t F t
l ral
g
lgtl
-l -l l
o t F l l
-l sl l
I
( ' o l
I
F o l
F O I
- - l
o o t
s l
I
F
ol
t\
1\
N
I
N
o
(o
{o
('
{,
q t l
(oi l
co ll
a?
ll
Ell
o t l
ot l
nt l
r t l
( ?t l
5l l
or l
( ot l
F I I
ei l
$tl
8i l t
l 8l
ol l
( ' ,
ol
r-11 d oil
S l l
o l
8i l I t Et l
o l l o l o l l
ql l
d l dl l
$ll E l8ll
o r o r l
I l al
rt l rt l l
tEil
: : i
a a
; : :
o : : :
; : FE :
E
:EEg
i
t r t r c x o :
- - . - - r r
*Ecgs i
- L Y F -
g ^ r - b
-
u b . - L
! f i ?E
e
i
Eg, [ H; t
- = | / ) t r . U ' :
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-
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0
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t r ' af
HE
Ag
E
^ - - - 6 -
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o
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c
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n
J
o
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it
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o o o i l o l o
s i r o ol l ol I
q r c l l l c ? l q
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o o r o r o o
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N I N I
l''t{''l
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o o l o l
N C O I O I
r l N l
& l s) |
t o n t oi l
N F t O i l
r
( ?
l l f ) l l
q ol
l HI
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0 0 t o
o o l o
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a . L
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o r '
o !
o
tg .,
a g
rL' 3
7 O
o
o
tt
o
o
o
t t :
H :
6 :
nE
e
j 9
s +
8B
o
J
!t
o
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t,
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o
.o
tt
G
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o
o
G
!t
c
tl,
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o
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G
J
! t :
o :
L .
o :
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o :
l - .
a !
- o
E3
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L
? r o
= + .
w ( E
6=,
o
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b i
o :
E i
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ct t
.-
t!
si
c o
t r >
. 6o
o F
f 6
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3 r
- c
s a U
c LL
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r_5
o
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g
y E
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F O
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g8_
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f i o
E E *
q l r r
O
=o t r
: O E
E q F
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- N o
r . - E
U , +
6 8 :
E3
oF t t
59? O
E E
o
fit
: !
> :
O 3
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;, 9E
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P c t
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frs
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t r l : t
Ef i :
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+ l O t !
8=' :
o
v
tr
o
fit
CL
o
o
o
o
!t
o
B
|ll
o
o
o
o
194
P8-O
(Continued)
Additional
GomPutations:
Equivalent Production:
Transf gf f ed
oUt "i """""' r""""""' o"""""r"""""'
Ending inventory
(work this
period)""""""""""
Uni t costs:
Matgri al s, Process 1 ............' ....""""""""""
Labor and factory overhead, Process
1""""
Total cost to be accounted for, Plocess 1 ""
Labor and factory overhead, Process 2.......'
Labor and factory overhead, Process 3........
Cost from
preceding department,
Process 2
Cost from
preceding department,
Process
3
Joint cost apportionment:
Chapter I
Labor and Factory Overhead
Process 2
Process 3
9,OOO units
20'000 units
' l ,000
1, 000
21,OOO uni ts
=
$1. 8125 Per
unl t
=
$ .9375
per uni t
= S2.g00O Per
unlt
=
$2.0000 Per
unit
=
S3.0ooo Per
unlt
=
$2.0769 Per
uni t
=
$3.2391
per uni t
Process 2 Process 3
Product
Product
Sal gs
pr i ce . . . . . . t . . . . . . . . . . t . . . . t t t " " " " 1" t " r t t " t " r t " " ' t " t t " t " " t l "
Less processing cost subsequent
to split-off
point r"""'
Hypothetical market value at split' off
point:
58
x 1Or00O units transferrd .....' ............r""""""""
S12 x 20' OOO uni ts transferl gd
....................""""""'
Joi nt cost al l ocati on:
SSO,OOO x .2625' .
S24O,OOO r .2625
.
S84,OOO
-. (S8O,OOO + $24O,O00)
= -2625
$10
2
$ e
:
$8O,ooo
$1s
3
$t e
-
9240,009
1O,0OO
uni ts
s58,OOO
32,OOO
$30,000
32,OOO
$ga,ooo
30,ooo
92,0OO
+ $18' 0OO
10,0oo
i3,OOO
+ $60'O0O
21, OOO
s27,OOO
13, OOO
$74,500
23,OOO
s21, OOO
s63,OOO
f- Chapter I
: -
P8-6 (Conti nued)
.
' "ttt?"t",:oo
+ l o,ooo uni ts............o.. s2.1o
$691000
+ 2o,ooo uni ts
:
s3.15
-
.- Transferred to finished goods
storeroom:
Procgss 2.............,r.......,.............r....
54.O769 x Iroo0 uni ts =
$ 361692
, Pnocess 3.........................r...............
$6.3864 x 2OTOOO uni ts =
S12T.T2Z,
' S6.3864
x 2O,OOO uni ts =
$1271728, To avoi d a deci mal di screpancy, the cost
transferred to fi ni shed
goods
storeroom i s computed as fol l ows:
$137r5o0
-
s S9,773 cost assi gned to endi ng i nventory =
51271727.
r
*ot[,T":T"";:'-"noins inventory:
Cost from precedi ng department...,..
$2.0769 x 4,OOO uni ts =
Sg,gOB
Labor and f act or y over head. . . . . . . . . . . . . .
S2. O0OO x l , OOO uni t s =
S2, OOO
- Process 3:
.
Adj usted cost from precedi ng
.
department..............,.....,...,.......,...
53.9864 x 2' OOO uni ts =
$61723
*
.
Labor and f act or y over head. . . . . . . . . . . . . . $3. oooo x 1, ooo uni t s =
S3, OOO
(2t
fii:flTHllSl;:;;;;;;';':::::.::::::::.:::::::::.::::.:.
"l;BBl
Work i n Process-Process 3 ..,.... O3,OOO
Work i n Process-Process 1........ 8B,OOO
Fi ni shed Goods
Wor k i n Pr ocess- Pr ocess 2. . . . . . , . . , . . . , . . . . . , r . . . . . . .
36, 692
Fi ni shed Goods. . . . . . , , . . . . . . . . . . . . . . . . 1Z7. TZ7
Work i n Process-Process 3........
12Z,TZ7
195
Chaotor I
o o
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dr i
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d 6
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e - o
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f ' 6 | l )
l l L ^ -
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? # s
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!
g t '
, = d c '
o P o
3 ! i
r l i J
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E
Chapter I
P8-6
(Continued|
Additional Computations:
Equivalent
production:
Thansl grrg d o l tt .................. "..r..... t.......o...t... r' t....
Less beginning inventory
(all units) r..........r........
Started and fi ni shed thi s
peri od........,.,..........' ...
Add begi nni ng i nventory
(work thi s peri od)........
Add endi ng i nventory (work thi s peri od).............
Unit costs:
Matgri al s, Process 1......,,......,..' r..................
l -abor and factory overhead, Process 1........
Total cost to be accounted for, Process 1 ....
Labor and factory overhead, Process 2........
Labor and factory overhead, Process 3........
Joi nt cost apporti onment:
197
Labor and Factory Overhead
Process 2 Process 3
I' OOO uni ts 2OTOOO uni ts
3,OOO 3,OOO
6,000 uni ts 17,OOO uni ts
2,OOO
l , OOO
I,OOO units
358,ooo
uni ts
=
51. 8125
per
uni t
=
S . 9375
per uni t
=
S2. 8OOO
per uni t
=
$2, oooo
per uni t
=
S.3.OOOO
per uni t
Process 2 Process 3
Product Product
!
I
t-
2,OOO
I , OOO
2O,OOO
32, 00o
33o,ooo
32,00o
$t4,ooo
3O, O0O
$18, OOO
9r0oo
36O, OoO
20, OOO
Sal es
pri ce , ro, . . . , . . . . . . . . , . . . . . . . . . . .
. . . . . . . . . . ' . . .
Less pnocessi ng
cost subsequent to spl i t-off
poi nt ........
Hypothetical market value at split-off
point:
$8 r 1O,OOO units transferred .....
$12 r 2OrO0O uni ts transferred ..,....,......,.....,,....,.r....
Joi nt cost al l ocati on:
SSOTOOO r . 2625t . . . r. . , . . . . . . . . .
S24O,OOO x .2625
r
SB4,OOO
+ (S8O,OOO + S24O,OOO)
= .2625
sl o
2
sl 5
3
$_g
99o,ooo
s2lr9oo
s 12
9319'099
99!'o99
r - l
I
r
t w
P8-6
(Goncluded|
Unit cost:
$21 rooo
+ I Or0oo unitS .....r.......r.............r.....r.o...o' .' ..
$6{lrOOO
+ 2OTOOO UnitS r............r...............' ......,...."t'
t4l Finished
goods.............r.............r.........................
I '
WOfk In PfOC.SS-P.OC.SS
2.,......o.....' -""""""""
Work In Process-ProcgSg
3 """"""'t"t"""""""r
WOf k I n PfOC oSSl-PfOC
g!l!J
I ..............t.o"r"
"o"'
Fi ni shgd Goods . . . . . . . . . . . f . . rrrrroI rroi rr. r. . . . . . . . . . . . . . . r. . . . . .
work I n Proc
gss-Procesa 2................' .........r.
Fi ni ghed
Goods ...........r.............,..........' .,.............
work In Proc
gss-ProcgsS 3......................' .....
Chapter 8
$2. 1o
4r0oo
21r00o
63,OOO
88,OOO
36,8OO
38,600
727
1860
127
$60
s3. 15
CASES
c8-1
(1) The markot valuo method of
ioint
cost allocation
assigns cost in
pnopor-
tion to oa;h
productb markel Yaluo to all
products as follows:
Market Value of Each
Product at Split-off
Total Market Value of
All Products at SPlit'off
Joi nt
x Producti on
Gost
lf thera ls no market valuo at split-off,
then the value at the first sales
point, tess separable cost, lg used. lf
ioint
products have a markot
valuo
at the split-off
point, the margin for ail
ioini
products at the split-off
will
be the samo.
The
joint
cost i3 altocated in
proportion to n8vnuo
gensrating ability
(as
contrastod to some
quantita*re'measunes
not rlated to rsvenue)'
Therefore, this accomplishes
Jim Simpsonb obiective
that inventoriabls
cost shoutd be based on each
productb ability to contribute
to the recov-
ery ol
ioint
production cosltt
Chapter I
C8-1
(Conti nued)
(21 (a) Because both main products have a market
point, this value, rather than the tinal sales
the
ioint
cost
199
value at the split-off
value, is used to allocate
Joint production cost to be allocated ..r.t..................
Net revenue value of by-product (24OrOOO x (.55
-.05))
Joint cost to be allocated to main
products
Market Value at Split-off
Product Units Produced Per Unit Total
$2,640,000
12O,OOO
93,s20,009
Percentage
of Total
Market Value
Pepco-1......,.r.r.......... 900r0OO
gal l ons
Repke-3............r.,...... T20rOOO
gal l ons
s2.00
1. 50
s1, 800, oo0
I , 080, 0OO
62.5o/o
37. 5
s1, 575, 000
945,00O
120, O00
s2,880,OO0 100. 0%
Allocation of Joint Cost
November
Pepco-1
(s2r5Z0r00O x .625)...........................
Repke-3 ($2r52or000 x .375) .,...,.......,.....o.........r.......
SE-s ............ a a t a a r a r a a a a a a a a a a a a a a a a a a a a
(b)
November
i oi nt
producti on cost.... 52,640,000
Pepco-l Repke-3 SE-s
Allocation of
joint production
cost . . . . . . . . , . . . . . . . . r. . r. .
Additional
processing cost
aftgr spl i t-off .....................r'
Total manufacturing cost.........
Divide by
gallons produced......
Manufacturing cost
per gallon.
Inventory costing:
l nventory November 1 .,......
November producti on........,.
I nventory available ..,r.o.......r
Novgmber sal gs ..................
Inventory, November 30 ......
Manufacturi ng cost per gal l on.
Cost of fi ni shed goods
s1, 575, 0OO
1, 800, 000
s3,375,000
90o,0oo
s 945, 000 s120, 000
720,OOO
s 3. 75
20,000
900,000
920,000
800,o0o
s1, 665, 000
72O,OO0
$120,ooo
24O,O00
50,000
x $.50
9_23125
g___-99
40, 000 10, 000
720,000 24o,ooo
760,000 250,000
70o,o0o 200,000
120,Ooo
x S3.zs
6O,O0O
x 52. 3125
inventory
:_glggfoo
S13B,ZsO S25,ooO
T
E
Chapter I
C8-1
(Gonctuded)
(31 When SE-s becomes a mai n
product,
the
j oi nt producti on cost woul d be
al tocated
proporti onal l y to al l three products on the basi s of the market
valuo of each
product at the split-off
point. The net revenue of SE-5 will
no l onger be deducted from the
j oi nt producti on cost
pri or to afl ocati on
because SE-s wi l l no l onger be a by-product.
c8.2
There are a number of areas that appear to be probl emati c i n Hayes Products'
costi ng and deci si on-maki ng
pnocesses. These areas, whi ch are outl i ned bel ow,
need to be revi ewed and
perhaps modi fi ed.
(f
l
The use of the average uni t cost method for al tocati ng
j oi nt product cost.
Uni ts
produced, al though a si mpl e method of al l ocati on, i s not necessari -
l y the best method for apporti oni ng cost across
j oi nt products. Thi s
method can di stort the cost-val ue rel ati onshi p of a
j oi nt product and
gi ve
an ospeci al l y mi sl eadi ng
pi cture of the
gross margi n provi ded
by a
i oi nt
producl For exampl e, assume that i n meat processi ng
of cattl e, one
produced ground
beef and steaks. Each
pound of
ground
beef woul d be
assi gned the same
i oi nt
cost as each
pound of steak, yet the sal es
pri ces
per pound
are qui te di fferent. For thi s reason, i t i s better to use some
val ue-rel ated al l ocati on base, such as the market or sal es val ue method,
to al l ocate cost.
l 2l
Incl usi on of al l spoi l age costs i n product cost. Spoi l age i n producti on
pnocesses
can be assessed as normal or abnormal . Whether spoi l age i s
normal (expected)
or abnormal
(unexpected) shoul d
gui de the way i n
whi ch spoi l age costs are handl ed i n
product costi ng. Normal spoi l age i s
part
of
product
cost si nce i t i s pl anned for i n i mpl ementati ng the
produc-
ti on technol ogy. Abnormal spoi l age shoul d be wri tten off as a l oss i n the
peri od,
and i f the amount i s materi al or the spoi l age conti nues over some
peri od,
the source of spoi l age shoul d be found and corrected. Hayes
Products does not seem to be di sti ngui shi ng cl earl y between normal and
abnormal spoi l age. Thi s needs t o be st udi ed, and some changes need t o
be made i n t he appl i cat i on of spoi l age cost s t o product .
(31
Deci si on
maki ng based on ful l y al tocated cost. Hayes appears to be
about to make a product l i ne deci si on on ful l y al l ocated cost data wi th
i oi nt cost i ncl uded. Deci si ons wi th rel ati on to any of the products shoul d
be based on the separabl e contri buti on margi n of products,
i .e., separa-
bl e revenue l ess separabl e vari abl e cost . Thi s probl em
needs t o be
l ooked
at cl osel y si nce t he al l ocat ed
j oi nt
cost f i gures shoul d be used
onl y f or f i nanci al st at ement
purposes.
Chaptor I
cg-3
,
( 1)
c8-4
201
I
t-
L
The market value mothod does not
proviile additional data for the rlsr-
keUng deeision. Joint cost sllocation is necessarily arbitrary and'
although used lor financial accounting
purposes,
ls not relevant to the
decision to market DMZ-3 and Pestrol, The VDB
joint
cost is irrelevant to
this decision because it ls incurred in both cases, i.e.' the method of cost
altocafion has no impact on tho differential
profit. Talor Chemical
Gompany should calculate the differential
prolit of its alternate choices
by comparing the differential rsvenues and diflerential costs.
Talorb analysis is incorrsct because it incorporates allocated
portions of
the
joint
cost of VDB. The weekly cost of VDB (3246,000) will be incurred
whether or not RllA-2 ia converted through lurther
processing. Thus' any
allocation of the
ioint
cost of VDB is strictly arbitraty and not rslevant to
tho decision to market DMZ-3 and Pestrol. Talorb decision not to
pnocess RNA-2 further is incorrect The decision results in a loss of
$2O'OOO in profit per week, as indicated by the following analysis:
Revenue'from further
processing of RNA-2:
(21
DMZ-$ (4OO' 00O r ($57.5O + 1OO)| ,...................,..............
Pestrol (40Or00O r ($57.5O + l oO))' ...' r.' ...................-......
Total nBvenuo f ro m fulther
p rocessin
9...............r..........
L8SS ngvgnUg f f Om Sal e Of RNA-2, . . . . , . . . . . . D. . . . . . . . . . . . . . o, r. . . . . . .
Di f f gf gnt i al f 9V9nU9. . . . . . . . . . . ' . . . . . . . . . r. . . . . . . . . ' . . r. . r. . . . . . . . . . ' .
Di fferenti al cost' .' .' ...r' .,....r........"...
Di ffgrgnti al profi t .......,......r........-........,' ..' .' .,' .
s23O,OOO
23O,OOO
s46O,OOO
32O,OOO
sl 4O, OOO
12O, OOO
s 2o,ooo
( 11
' The
cost of VDB i s not rel evant and, thus, i s omi tted l rom the sol uti on.
[The
requirement does not ask for a list of responsibilities Vickery has
vi ol ated, but, merel y, whi ch of the fi fteen responsi bi l i ti es appl y to
Vickeryb
situation,)
Management accountants have a responsi bi l i ty to:
Comoetence: Perform thei r professi onal duti es i n accordance
wi th
relevant
laws, regulations, and technical standards.
ffhe
inventory cost
Vi ckery
i s bei ng asked to accept vi ol ates accounti ng pri nci pl es of con-
gervatism
and of matching current cost against current revenue.)
Chapter 8
c8-4
(Concludedl
preparo
comploto and clsar reports 8nd nocommondations
after
.
appropriate analy:et of rolsvant and rsllable information.
(Vickery has
coiryinclng evidence that lallure to make the adiustment
will misstate the
resulting fi nanclal stataments.|
lnteoritv: Befraln from either actively or
passively subverting the
attainmeFt of the organizationb legiUmate and ethical obiectives.
fflrere
is prrssurc to subvart legitimate and ethical obiectives to the immediate
need for tavorable financial statements.|
Communicate unfavorable, ag welt ag favorable, Informatlon and
professional
fudgmentg
or opinions.
(Vickery is being asked to thwart
communlcation of unfavorable information.)
Refrain from engaging In or supporting any activity that would
discredit the profession. (Preparing deliberately misleading financial
statements, clearly ls a discredit to the
profession')
Obiectivihn Communicate information fairly and objectively.
,
Mckery
would violate this responsibility if the inventory wete not
restated.)
Disclose lutly att relevant information that could reasonably be
'
-
erpected to influenco an intended userb understanding of the rtports'
comments, and nocommendations
presented.
ffhis
material overstate-
ment of inventory and
profit violates this ethical responsibility.) -
(21 In addiUon to his ethical responsibilities to his company, Vickery has eth-
ical responsibilities to:
(al the bank
(bl the companyb stockholders
(cl the management accounting
profession
:_
CHAPTER 9
DISCUSSION OUESTIONS
O9-1. The mosl lreguently used documents in the pro-
curemenl and use ol materials are purchase reg-
ui si ti ons, purchase orders, recei vi ng reports,
materi al s requi si l i ons, bi l l s ol mal eri al s, and
malerials ledger recods.
O9-2. The invoice shouH be routed to the Accounting
Department immedidely upon receipt. A copy of
lhe purchase order and a copy of the receiving
report'with an inspection report should be com-
pared by lhe accounting clerK When lhe invoice
is found lo be correcl in all aspects or has been
adj usted for errors or rej ects, the accounti ng
cl erk approves the i nvoi ce, anaches i l to the
underlying documents il they are in hard-copy
l orm, and sends these documenl s to another
clerk for lhe preparation of the voucher.
O9- 3. I nvent or i abl e cosl shoul d i ncl ude al l cost s
incrrred lo get the produc.t ready for sale to lhe
customer. lt includes not only the net purchase
prica bul also the olher associated costs, such
as freiThl-in, incurred up to ths lime producls are
ready for sale to the customer.
Q9-4. No, administration costs are assumed to expir
with lhe passage of time and do not anach lo the
product. Furthermore, admi ni stral i ve costs do
not relale directly to inventories, but are incursd
for the benefit of all lunciions of the business.
O9-5. The three key questions to anstvr in designing
an inventory control sygm are:
( a) how much t o or der - economi c or der
quanlity
(b) when to order-order point
(c) satety stock required
09. The fi rm benefi l s l rom l hese techni ques by hav-
i ng a crnsi stenl , standardi zed approach to i ts
inventory managsment. lnventory costs and ser-
vica lo customsrs will be optimally balanced.
O9-7. The purpose
ol an economi c ordor quanti l y
model i s to determi ne the opti mum quanti ty to
order or produce when fi l l i ng i nventory needs.
The optimum quantily
is delined as lhat quanlity
l hal mi ni mi zss the cost of i nventory manage-
ment.
Q9-8. The decision concerning how much to order or
produce
at a given lime involves a compromise
belween inventory carrying costs and ordering or
sol up cosl s, Exampl es ol i nvent or y car r yi ng
cost s ar e: i nt er ssl on t he monsy i nvest ed i n
invontories
that could have ben invested else-
where, property
tar and insurance, warehousing
or slorage, handling, deterioration, and obsoles-
cence. Ordering costs include ths cost of prepar-
ing the requisilion and purchase order, receiving
l he order, and accounl i ng for l he order. Setup
@sts i nvol ve the costs ol seni ng up equi pment
to make l he actual producti on runs. For al l these
costs, only lhose thd vary with adivity are rele-
vant lo the E@ model.
O9-9. The @nsequencos of maintaining inadequare
invenlory levels indude hi;her purcfrasing, han-
dling, and transportation costs, bss ol quantity
discounls, produclion disruptions, inllation-relat-
ed pr i ce i ncr eases when pur chases ar e
deferred, and bst sales and customer goodwill.
Mgasursment of the costs of lost orders and
z bst repeat business is not easy because mea-
suremenl may be l argel y subj ecti ve. On the
other hand, the other factors listed can be mea-
sured with fair certainty and grealer ease.
09-10. In computing optimum produaion
run size, CO
ropresenls an estimale ol lhe setup cost and CU
is lhe variable manulacluring cost per unit.
09-11. (a) The order poi nt i s the l ow poi nr ol stock
levef that, when reached, means a replen-
ishing order should be placed.
(b) Lead time is the interval between placing an
order and delivery of lhe ordered gmds.
(c) Salety stodt is the minimum inventory thar
pr ovi des a cushi on agai nst r easonabl y
expecl ed maxi mum demands and agai nst
varialions in lead time.
O9- 12. Mat er i al s r egui r ement s pl anni ng ( MRP) i s a
compuler simulation that integratos each prod,
rjct's bill ol mderials, inventory slalus, and man-
ufacturi ng process i nto a feasi bl e producti on
plan.
09-13. Eftecti ve uti l i zati on of capi tal , whi ch i nctudes
i nvesl ment i n i nventory, i s the responsi bi l i ty of
gener al managment ; l her el or e. t he pr i mar y
interest is in linancial control. Atthough general
or top-level managernsnl is inlerested in provid-
ing customers with gmd products and services,
the scheduling of produaion inrolves unit control
primarily and is the responsibility of production
and purchasing
departmnts.
09-14. ln the control ol materials, the opposing needs
are the mainlenance of an inventory ol sufficient
size and diversity lor efficient operations, and
the mainlenance of an investmenl in inventory at
a level that will maximize earnings and minimiza
costs.
O9-15. When a rel ati vel y few mal eri al s i tms account
f or a consi der abl e por l i on ol t ot al i nvent or y
investmonl selective control is indicatod. Hbh.
value ilems would be under tight control, whilu
low-value items would be under simple physical
conlrols.
Automati c control refers l o orderi ng when a
malerials record shows that lhe balance on hand
has dropped to the order point. At this time, the
quanl i l y t o or dor i s aul omal i c, havi ng been
del ermi ned by bal anci ng the cost to order wi th
203
(-
_ \
2U
the cost lo catry inventory' Aulomatic control is
mosl el l ecti ve i h compani es l hat use an EDP
syslem.
09-16. Appendir The average cost mlhod assumes
that each batch takon ftom the slore'
room is composed ol uniform quanti'
ties from each shipment in slodt at the
dale of issue. The lilo method is based
on the assumption thd the firsl goods
received are the first issued. The lilo
method i s based on the assumpl i on
that lhi latest gds received are lhe
lirst issued.
O9-17. Appendir In an inflationary economy' lifo pro'
vi des a bet t er mat chi ng ol cur r enl
costs wi th currenl rovenue because
costs ol inventory issued are at mora
Chapter 9
r ecenl pur chase pr i ces. Net cash
inflow is generally increased bscause
t axabl e i ncome i s gener al l y
decreased, resul ti ng i n payment of
bwer income lax.
O9.18. Appondix Fifo. The higher costs ol the earlier
purchases would be charyed against
cosl of goods sold.
GGA-Canad a (adapted). Beprint with permiss bn.
09-19. Appendix (a) lilo
(b) filo
(c) fifo
(d) lifo
(e) lifo
(t) lilo
CGA-Canada (adaptsd). Roprint with permissbn.
-
ChaPter 9
EXERCISES
*
\
Eg-l
-
(1) Freight allocated to materials based on cost
E9-2
205
= l=21o= =
=
$- 016
Per
doltar of cost
s17, 5O0
Part A: $ 8,600 x S' or0
=
$137.60
Part B: 5,060 x .O16 = 80.96
Part C: 3,840 x .016
= 61.44
qlzrsoo s280,oo
(21 Freight allocated to materials based on shipping weight
s280
=
S. 20
I 400 ki l ograms
Part A: 63okg x S'2O
=
S126
Part B: 49O x .2O = 98
Part C: 28O x .2O =
.!!
1:j99kg
E289
Units
Total to be
provided ...,........,.......
Quant i t yonhandr Sept ember l , . . , . . , . . . . ' . . . . . . . ' . . . . . . . . o' . . '
4r 4OO
On ordgrfor Septembgr dg1i vgryr....r........................' r
3r600
On ordgr for October del i very,.........,.......................... 4.1OO 12.1OO
Quanti ty to ordgr for Novgmbgr dgl i v]1| ' ...................
4. 800
4,2OO
4, 400
4,7OO
3,600
16, 90O
I
206
E9-3
(1) Forecast
usage:
J anUar y t t t " " t " " ' t t t " o" " t " " " " t t " " t t t ' t t t t "
February
"t "t """"t """"t t "t ""t ot "t t """'
Mar c h
t " t " " " " t " t " t " t " t ' t ' t " " t " ot " t " t " t t "
Desired March 31 inventory
level
( 61000 x 80%) " " " " " " " " t " t " t " r " " " " " t "
Total to bg
providgd""""t""""r"""'
Schedul ed
suPPl Y:
January 1 l nvgntoff """"""""o"""""r'
On orden
January del i very' .."""""""""""""'
February del i very' r""""' o""""""""'
Quantity
to order for March delivery
"""'
4,8OO unlts
5,000
5,600
15,400 uni ts
4,8O0
6,000 unlts
4, 1OO
:l,6oo
Chapter 9
2O,2OO unlts
l 2l
JanUary 1 i nVgnt Of ] . . . . . . . . . . r. . . . . o. r. . . r. . ". . . . . . . . . """""' t t "t t ' rt ""
On order for January and February
de|ivery"""""""""""'
FOfgCaSt USagg-ranuary
and Fgbruar1/.' ........""""""t"""'
( a) Maf Ch
' l
i nVgnt Of l . . . . . . . . . . . . . . . . . . . o. . . . . . . . . . . . . . . . . . t . t t " r t t t t t t " t t
To order lor March delivery
(requirement
(1))"""""""
FOf gCaSt USage- M3l ch
. . . . . . . . . r . r . . r . . . . . . . . . . . ' . . . . . . . . r . . . . . . ' . "
(b) Maf Ch 31 i nVgnt of y . . . . . . . , . . . . . . . . . . . . . . . . . . ' . . . . . . . ' . . . . . . . . . . t . . . . . . .
14. 700
5. 5OO unl t s
61000
uni ts
8. 700
14r7OO uni ts
9. 800
4r9OO unl ts
5. 500
1O' 4OO uni t s
5. 500
-4eo
units
E9-4
( 1) EOQ
=
tzl EOQ
=
=
fiopoo
=
3oo Aiets
, a l
(3)
EoQ
=
rl
=
r $25
=
J5iloob-
=
24O units
2 x100 x $5
S55 x 15o/o
2 1 2 , 2 5 0 x $ 1 2
1, 440, 000
L
207
Chapter 9
E9-4
(Continuedl
(41 (a)
(b)
(a) (6)
(b)
EOQ
2x25, 000 r $20
$8 x 25o/o
=
7O7 cartons
Annual required units
Economic order
quantitY
=
ry
=
35 order:
per year
J
5OO
,O0O
I
S
\-
365 days
=
10.4 orevery 1O days orders shoul d be pl aced
35 orders
=
Jl 8o,ooo
=
424
18J990
= 42.4s or approxlmately 42 orders
per year
424
365 days
=
8,2 or approximately one order every 9 days
42 orders
(a) (s)
(b)
-
( c)
EOQ
= - 12
x 18' 000 x S15
-
\r|
$6 x 2Oo/o
=
{ 450, 000
=
677
EOe
= - j 2
x 18' 000 x S15
-
Y 57.50 x 2oo/o
=
600 units
. 6 A A A
#
=
30 orders
per year
OUU
=
{
360, OOO
lr
\
365 days in year
30 orders per year
E^A m
E L ' I J =
; - =
Y 52.50 x 2Oo/o
=
11039 unl t s
=
12.767 or approxinrately
one order every 12 days
(c)
l , ooorooo
al
I
540, 0oo
LN
540, 000
54O
'
OO0
E---
; 1i 5-
=
11, 08O, 0OO
I
Chapter 9
n8
E9-4
(GonUnuedl
2 x 4 8 r OOO r $ 1 O
ftl
(al EoQ
=
$2O r 12Vo'
632 dozen basebal l s
lo5-oFdd-
l J z ; l r -
t'4o
+ 1oo/o return on investment
$20
Annual ordering cost
=
$ffi
=
-
EoO
=
-f2
r 5t0oo r $Jrooo
-
V Sg r 2oo/o
^/ 6125O' OOO
=
2r 5OO col umns
= 12oh
48, OOO r $1O
800
=
$600
(bl
Annual carrying cost
=
C U T C C T E OQ
2
$2O x 12oh r 8OO
-
Total annual inventory cost to sell 48'OOO dozen
basgbal 1s. . t . . t 1. . . . . . . . . . . . . . . . . . r i t t t """t t t t t "t "t "t "t """t ""
960
sl . 560
(8)
(al (e)
(bl
EOQ
=
2 r t 2 , OO0 r 5 1 6
$9 r 2ooh
384, OOO
1. 80
=
462 units
The frequency of order
placement:
l 2roo0 annual usage
=
26 orders
per
Year
462 EOQ
(cl
365 days
26 orders
14 days
2 r 8 , O O O r $ 1 6
$9 r 22oh
EOQ
=
256, OOO
1. 98
36O uni ts
- .,!Tzg,zgg
2 x 5 0 0 x 5 6
$1O
x . 25
Chapter I
E9-4 (Qoncluded)
(10) (a)
EoQ
=
16, 00o
= 4 l - =
Y 2. 50
209
E3,ooo
3,OO0
s6,ooo
$9,600
5OO x $6
49
=
49 units
$61.22 + $61 .25
=
$122.47
=
total ordering and carrying cost
per year
(b) 49 + (49 x.10) = 54 uni ts
per
order
5ot}9q
.
Y
=
S.5s.56 + $6z.so
=
$123.06
The effect is small because the total cost curve ls relatively flat
around the opti mum l evel .
(11) To compare the two alternatives, the carrying cost and the production
initiation cost must be calculated for each alternative. These two
amounts are calculated as follows:
Carrying cost
=
Annual cost of carrying (2OYol x manufacturing cost
(SSO1 x average annual inventory.
Production initiation cost
-
Number of runs x cost to initiate a run
(s3oo)
Current situation: 2
production runs of 3,000 units per run
Average inventory: 3,OOO units + 2 = 1,50O units
Present costs:
Carryi ng cost (.2O x $5O x 1,500)..... 51S,O0O
Production initiation cost (2 x $3OO) OOO
s15"600
Proposed si tuati on:
The EOQ formul a can be used to determi ne producti on
run
quantities
by substituting cost per order with production
ini-
tiation cost
producti on
quanti ty,
,/2
x 6-' 000 x 9?00
r $ 5 O x ' 2
=
V360, 000
=
60O uni t s
$ 1 0 x . 2 5 x 4 9
6 OO+ 2 = 3 0 Ou n i t s
6, 000 + 600 = 10 r uns
Carryi ng cost (.20
x
$5O x 300)......,.....,......
Producti on i ni Uati on cost (1O x $3O0)
Average inventory:
Number of runs:
Proposed
costs:
2r4OO
3, 600, 000
Expected annual savi ngs
2t 0
E9-5
(11
(21
Chapter
g
-
l z r ( ' t z x l , 5 o o ) r S5 o
E O Q = r l - =
1
i 3 r . 4 O
=
t';500,
ooo
=
tin?"u
Lots ol 2,AOO units should be ordered, based on the following computa-
tions:
QUANTITATIVE DATA
Order size
'11225
units 2r00O units
'14.7
I
612.5 units 1,000 unlts
a a . a . a a a a a a a a a a a a a a a a a a a a a a
Number of orders
Per Year.
Average i nvent ory . . . . r. . . ' . . . . ' . . . . . . r. . . . . . . . . . . . . . . . . . r. '
.
COST DATA
Gost of
pl aci ng orders at $5o r..........r.....,..r.,r
Gost of carrying inventory:
612.5 x $3.00 x .40 ..r......r.........' ....r...........
IrOOO x 92.85
x .4O ..............,........,............
Di scounts l ost (12 x 11500 x 33 x .05)..,.....,...
Cost to ordgr and carry..' ............r.,......r"' o.....
$ 735
735
2r7OO
$4. 170
$ 4so
1, 140
$1, 590
E9-6
(1) Orderi ng and carryi ng costs under current pol i cy:
(T
, $3Bo)*
(sr
'
#)
=
s2, 2Bo
+ $zso
=
s2, s3o
(21 Economic order
quantity
and the related ordering and carrying costs:
j2
x 3' ooo t stSo
=
\fm-o-
=
1,5i0 units
! s l
i +#x$380) . ( t " r y)
=
$zss + $755
=
$1,510
rel ated
ordering and carrying costs
I
Chapter 9
E9-6,(Concl uded)
(3) George should decide to order In quantlties of 3' OOO unlts, based on the
following computations:
QUANTITATTVE DATA
2 l i
3,000 unlts
I
1,50O unl ts
COST DATA
Cost of
ptaclng orders at $380 '...'...o............. $ 755
Gost of carrying inventory:
$1 x755. . . . . . . . . . . o. . . r . . . . . . . . . . t t . ' t r . . r . r r . t . . . t . t . . . . . . . 755
($f
-
S. 05) x 1r500. . . . . . ' . . . . . . . t . . . . ' o. . . . . . . . . . . . . . . or
Di scount l ost (31000 x $5 x .05).................,..o. 750
Gost to ordgr and carryr.o........................r...... $2r260 $1, 805
CGAanada (
E9-7 91600 + 24O = 4O units daity usage
Normal lead time usage (2O days x 4O unlts)...,..................,....
Safety stock ((30 days
-
2O days) x 4O unlts)..........,i.o.............
Ordgr poi nt . . . . . . . i . . . . . . . . . . . . . . . , . . . . . . . . . r. . r. . . . . , . . . . . . . . . . . . . . . . . . . . . . . . , r. . . . . . . . .
Le99
E9-8
( 1) Maxi mumuseper day. . . . . . . . . . . . . . . . , . . . . . . . . . , . , o- . . . . 6OO unl t s
NOrmal usg
PgrdS!...' .............r.....................r
500
Safety stock (maximum)..........................r.r....
i6-O unlts x 5 days of lgad
tlme = 50O unlts
Order si 2g. , . . . . . . . . . . . . r. . . . . r. . . . . r. . . r. . . . . r. . . . . . o. . . . . . ' . . .
1r510 unl t s
Numbgr of orders
pgr year.....,..........' ........' ... 1.9868
,Averagei nventory....................o........r..r......... 755 unl ts
$ 380
11425
adapted). Reprint with permission.
800
400
(21
2,500 unl ts
500
3.000 unl ts
3,000 unl ts
2,500
500 units
3,500
(3)
{0AA
units
Chapter 9
2r2
E9-8
(Concluded)
(41 Order
poi ot.........r...........rr.....................o....ttt""""' o""""t"""'
3tOoO uni ts
Minimum'*"
Juring
leaoii;6
(1OO r 5).....,..o....'..---.'..-.........
5oo
on hand
st time order ngcgiyod......................................."f'
"" 60
units
QUanUty
Ofdgfgd
......"..."t""""""r"t""t"t"t"""""""""""""t'
3' 500 Uni tS
Absolutg
marimum
inventoly .........................""""""'o"""""'
gJQg units
. c G A - G a n a d a ( a d a p t e d } . R e p r i n t w i t h p a r mi s s i o n .
E9-9
(1) Mari mum
ugo
per dS!""""""""""t""o"""""
Normal uso
por d8!"t"""""t"""""""""""""
Safg$ stock
{marimum}
""""""""""""""""'
2OO units
120
6 units r 12 daYs of
l ead ti me
= 960 uni ts
l 2l
Normal use
per day
(120) r days of l ead ti me
(i 2!........o......,...
l t44O
uni ts
Saf ety stock .r......or....................' ......o.............."' tt"t' o"tr""t""'
96O '
order
po1t1t............r....t....r........r..........r..............""tt"t""""tt
"
&
uni ts
2r4OO units
I , 44O
960 uni ts
3,OOO
Order
poi
3,960 uni ts
2r4OO units
960
Mi ni mum uso duri ng l ead ti me
(8o r 12)
On hand at time ordor tceivod......--..r.
1r44O uni ts
3,OOO
Q u a ntity o rd ergd ..r..........o....' ....""'
Absof utg mari mum i nventory.........r...,.................' ...o....r.,.......
4A4O uni ts
CGA-Canada
(adapted). Reprint with
permission'
(31 Of dgf
pOi nt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. . . . . . . . . . "t "t t t t t t t "'
HOrmal USe dUring lgdd timg
(t20 I'
' 1
2| .' ..' .................' ........"'
On hand St timg Ofdef tCeiVd.........' ....,........r' ..o..................'
QUan$ty Ofdefgd r........r...' .........r.o...........r................' .."' r""""
NOf mal madmUm i nVent Ory. . . r. . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . o. . . . . . . . . . . "' t "
(4)
E9- 10
3efcU
Stock Lcvrl
(Unltel
1 0
20
40
80
Annuel
Humbcr
of
Ordorr
Annual
Stocltout
Coat +
3t50.oo
75.OO
30.oo
15. OO
Annual
llafety
Stock
Carrylng
Co.t Ff
pcr unltl
Annual
Comblncd
= Coct
3100. oo
95.OO
70. oo
c5.oo
Probabltl$ ErPcsted Goct
of Annual P.r
x
Secr(993
=9tockoutlr
gglgt =
. 4 2 3 7 5
2 1 7 5
.oa .1 75
.o4 .2 76
level of saletY stock is 40 units.
6
6
!
6
310
20
tn
8('
The recommendod
I
!
I
Chapter I
E9- 11 APPENDI X
r-
(1)
Average costing:
I
I
:,
I
!
I
!
!
el
Fifo costing:
213
Date
Received
lssued
Inventory
Quan- Unit Total
tity Cost Cost
Quan- Unit Total
tity Cost Gost
Quan- Unit
tity Cost
Balance
Jan, I
5OO S1.2O
S 600
6 200 $1.25 $250
70o 1.21 g5o
1 0 400 1.30 520
l r 1OO 1. 25
1, 370
15
560
$1. 25 SZOO 54O 1.25
670
25 500 1. 40 700
1, 040 1. 32
1, 370
27
400 1.32 528 640 1.32
842
Date
Received
l ssued
Inventory
Quan- Unit Total
tity
Cost Cost
Quan- Unit Total
tity Cost Cost
Quan- Unit Total
tity Cost Cost Balance
Jan. 1
6
500 $1.20
$600 $ 600
2OO
$1.25 $250
500 1.20 600
200 1.25 250
850
1 0 400
1.30
520
so0
200
400
1. 20 600
1.25 250
1.30
52O
1,370
15
500
s1. 20 $OOO
50 1. 2s 75
140
1. 25 175
400 1.30 520
695
25
500
1. 40 700
140 1. 25 175
400 1.30 520
50o 1. 40 7OO 1, 395
27
140
1. 25 175
260 1. 30
338
140 1. 30
500 1. 40
182
700
882
I
214
E9-1 1 APPENDIX (Concluded)
(3) Lifo costing:
Chapter
g
Date
Received lssued Inventory
Quan- Unit Total
tity Cost Gost
Quan- Unit Total
tity Gost Gost
Quan- Unit Total
tity Cost Cost Balance
Jan. 1
s00 $r.zo $600 s 600
6 200
$1.25 $250 500 1.20 600
200 1.25 250 850
1 0 400 1.30 520 s00
200
400
7.20 600
1.25 250
1.30 52O 1,37O
1 5
400
160
$r. go
1. 25
$seo
200
500 1.20 600
40 1.25 50 650
25 s00 1. 40 700
500 1.20 600
40 7.25 50
500 1. 40 7OO 1, 350
27
400 1. 40 560 500 1.20 600
40 7. 25 50
100 1. 40 140 790
I
Chapter 9
215
P9- 1
( 1)
(21
PROBLEMS
Budgeted acquisition cost
Budgeted purchases
$148r5O0 net purchases
x
_
$18, O0O
_
12.Soh applied acquisition
=- - - =
S144, OOO eosting rate for the month
12.5o/o applled
acqulsition =
$18,562.50 applled
costing
cost added
rate
to
materials
purchased
during the
month
(3)
The overapplied acquisition eost of $362.50 (Sig,562.50
applied cost
_
S18' 200 actual cost) should be credited to Cost of Goods Sold or prorat-
ed to Cost of Goods Sold and inventories.
P9-2
( 1)
EOe =
. / 2
x 2- 4' 00O x $1. 20
-
\ l
S1O xTOYo
(21
Annual regulrements
_
24.OOO
EOe
' W
=
100 orders needed peryear
(3) E$ (Cartying::"t
) *
Annual reguirements
fOrderins
cost
)
z
1
per
unrr
/
EOe ( p",
order
)
5240 total cost
=
ry($ro
x 1oo/o) .'hi#o ($r.eo
)
=
$reo + $120
=
:t#iltr"ill
for the year
(41
The next order shoutd be placed
in three days. This conctusion is arrived
at as follows:
(a)
Number of days' suppty in each orden
Days in year
@= # = 3 ' 6 d a Y s
(b)
Number
of days' supply left in inventory:
Uni ts In i nventory
,
Days, suppl y
_
4OO
6 days'
f
x
in each oii"r
=
ffi
x 3' 6 days
-
supply
left
(c)
Days before next order should
be placed:
(Days'
supply left)
-
(Delivery
lead
time) =
6 days
_
3 days =
3
=
24O units
57, 600
1
Pg-2
(Gonctuded)
(51 some of the difficulties
most firms have in attempting
to apply the EoQ
formuta
to Inventory Problems
are:
(a) Inventory
ls not always used at a_ constant
rate; the constant usage
assumptlon
ls lmpllclt in the EOQ formula'
(b) fne Ede lormularequires
estimates
of
(1) annual requirements'
(2)
orde-ng
cos!
(3) purchase price per unit, and
(4) cost of carrying
lnveritoiies.
These estimates
may be extremeff difficult to obtain
with accuracy.
2,300
1, 500
800
4,0o0
4. 800
216
P9-3
(1) Normal use
per day
(2OO) x days of lead time
(10) """""""'
Saf gt y SI OCk. . r . . . . . . r . . . . . . . . . r . . . . . r . . . . . . . . . . . . . o. . . . . . . o. ' . . . r . . . . . . . . r " " " ot "
Of dgf
pOi t 1t . . . . . . r . . . . . . . . . . . . . . . r . . r . . . . . . . .
. . . . . . . . . r . . . . . . . . . . . . . . . . .
Chapter 9
2,000 uni ts
300
3i3o9 units
2,300 units
2,000
300 units
4,000
(21 Of def
pgi nt . . . . . r . . . . , . . r . . . r . . . . . . . . . . . r . . i . . . . . . . . r . . . . . . ' . 3. . . ' . r . . . . . . . . . . . . . . . t . t
Normal use duri ng l ead ti me
(2O0 x 1O).....' .."""""""""""'
On hand at ti mg Ofdgf fgCgi Ved ..........,......' .,....r..................
QUant i t y Of dgf gd. . . . . . . . . . ' , . . . . . r . . . . . . . . . . . . . o. . . . . . . . . . . . . . r . . . . . . . . . ' o. . . . . . . .
Normal maxi mum i nventory..-......r....
""""""""""'
Of dgf
poi nt . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . r . . . ' . r ' . ' . . . . r . ' . " "
Mi ni mum use dur i ng t ead t i me
( 150 x 10) . . . . . . . . . . . . , . """""""
On hand at time order received
Quanti ty ordered....' .......' .
....' ..,......
Absol ute maxi mum i nventory.,.,..............r............' ..""""""'
Let S equal cost of storing one unit for one
year.
EOQ
=
(3)
4.3OO unlts
uni ts
uni ts
uni ts
(4)
! 2
x (2oo x 250) x S8o
4 ' o o 0 = r l >
, Y S
4' 000
=
16' 000' 00O
=
s
8, 000, ooo
=
S. 5O
1 6, 0OO
,
OOO
2 x R U x C O
C U x G G
8, 0o0, o00
g, ooo, ooo
S -
GGA-Ganada
(adapt ed).
Repri nt wi t h
permi ssi on.
217
.F
o
o
I
f
o
o
3
o
l
I
ir
L
b l
g n l
; I
r . L I
o t l
-
,_:_-.
J I
8 o I
i c - l
S E s l
f i ; o l
E o I
o l
Chapter 9
I
o o o o o F
C ' ( \ | F O C D F
N ( r | N C { r ' -
o
o o o o o 6 |
o N C O r t F
C ! r r
{,
E 6
x o
F O
. " .
3
9 E
E 6
u,
I
b
I
E
t
:
I
S.
o o o o 0 0
E r . c o c o c o
o
;fi
s
o o o o o c D
t O $ c ) $ l r -
3 : E
3 - " a
EEg
5 5 8
1
x
n n o n | o l o
( ' ) ( ' ( ? ( ' ) ( ' ) ( l )
0
I
It
b
o o o o o u )
( ? ( o g ) N u ) ( o
F F F
s,
t l
fui
; i r
: '
!t
I
o)
o.
o o o o o t { )
v - C { C ? r C l O l { '
Chapter 9
218
I
P9.5 APPENDIX
(1) Fi fo:
Date
Recelved
lssued
Inveniory
Quan- Unit
tity Cost
Total
Cost
Quan- Unit Total
tity Cost Cost
Ouan- Unit Total
tity Cost Cost Balance
Marchl
75O 32O.OO $15,OOO $15,OOO
3 40() s19.50 $ 7,800
750 2O.0O 15,0OO
4O0 19.50 7,8OO 22,8OO
5
600 $20.00 sl2,ooo
150 20.00 3,000
4O0 19.50 7,8OO 1O,80O
1 2 a5o 21.50 7,525
150 20.00 3,000
4OO 19.5O 7,8OO
35tO 21.50 7,525 18,325
t 5 15O 2O.OO 3,O0O
350 19.50 6,825
50 19.50 975
350 21.50 7,525 8,500
1 8 s00 22.OO 11,0OO
50 19.so 975
35O 21.50 7,525
5OO 22.OO 11,000 19,500
22 50 19.50 975
350 21.50 7,525 5OO 22.OO 11,OOO I 1
,OOO
26 550 21. OO 11, 55O
500 22.OO 11,000
55O 21.0O 11,550 22,550
28 5OO 22.OO 11,000
150 21. 0O 3, 150 4OO 21.OO 8,4OO 8,400
31 2AO 20.00 4,OOO
4OO 21.0O 8,4OO
200 20.00 4,000 12,400
219 Chapter 9
1
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Chapter I
\.
-
P9-6 APPENDIX
(1) Cost of the ending inventory under the fifo method when a periodic
!
inventory system is used:
b
133'"'o 3
tll
:
tl:i33
100 @ 12 = 1, 2OO
$4.300
(21 Cost of the ending inventory under the lifo method:
(a)
When a periodic inventory system is used:
20ouni t s @ $t O
=
S2, 000
100 @ 11 = 1, 100
$3, 100
(b) When a perpetual
inventory system is used:
221
Date
Recei ved lssued lnventory
Quan- Unit Total
tity Cost Cost
Quan. Unlt Total
tity Cost Cost
Quan- Unlt Total
tity Cost Cost Balance
Jan. I
2OO $rO S2,OOO S2,OOO
1 2 l OO 31 I $1, 1OO 2AO 10
100 1l
2,O00
t , l oo 3, 1OO
Feb. I 100 9r r $1, 1oo
1OO 10 1, 000 l OO 10 I , OOO I , OOO
Apri l 16 200 12 2, 4OO 100 10
200 72
1,000
2,4OO 3,4OO
May 1 100 12 1, 2OO 100 10
100 12
1, O00
1,200 2,2OO
Jul y 15 l OO 14 1, 4OO
100 10
100 12
100 14
1,000
1,2OO
1,400 3,600
Nov. 10
100 14 1, 4OO 100 10
100
72
1,00o
7r2OO 2,2OO
Dec. 5 100 17 1, 700
100
10
100
72
100 17
1,000
1,2OO
l,7oo 3,goo
CGA-Canada
(adapted).
Reprlnt wlth permlsslon.
r +
Chapter 9
Y
j
222
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Chapter
g
P9-7, APPENDIX (Continued)
(b)
First-in, first-out method:
223
Dste
Received lssued
Inventory
Quan- Unlt
tity Cosl
Total
Cost
Ouan-
tity
Unit Total
Cost Cost
Quan- Unit Total
tity Cost Cost Balance
Jan.2 2,000 s5 310,000 2,000
35
$10,ooo
15 500 s5 $2,500 t,500 5
7,500
31 700 5 3,500 800 5
4,OOO
Feb. 2 1,200 6 7,2OO
8OO 5 S e,ooo
1,2OO 6 7,2OO 11,2OO
1 5
600 5 3,000 20o 5 1,0oo
1,2OO 6 7,2OO
g,2oo
28
200 5
700 6
1,0oo
4,2OO s00 6
3,OOO
Mar.2
1,500 8 12,0OO
5OO 6 3,OOO
1,5OO
g
12,0OO
.ts,(x)o
t 5
s00
t o0
6 3,000
I 800 1, 4OO I
11, 2OO
31
800 8 6,40O 600 8
4,800
DOr. 2
1,900 7 13,3OO
600 I 4,800
l , goo 7 l 3, 3OO 19, 1(X)
1 5
600 8 4,8OO
100 7 700 1, 800 7 t 2, 6OO
30
700 7 4,900 1, 100 7
7, 7OO
r - r
I t
t
224
P9-7 APPENbIX (Concl uded)
(c) Last-in, first.out method:
Sal es ( 5, 500
uni t s @ SI O)
Cost of goods
sotd:
s55,000.00
$42,5OO.O0
7, 805. 60
s34, 694. 4O
s20, 305. 60
(21
Average Fifo
Chapter I
Lifo
$55,oOO
$42,5OO
6,8OO
s35,7OO
El
e,gqg
permi ssi on.
Purchases
........,...
Less i nventory, Apri t 30..........
s55,00o
$42,500
7
r7OO
s34,gOO
939199
Repri nt wi th
Date
Received
lssued Inventory
Quan- Unit Total
tity Cost Cost
Quan- Unit Total
tity Cost Cost
Quan- Unit Total
tity Cost Cost Balance
Jan.2 2,000 S5 91O,0OO 2,OOO 35 |S|O,OOO
1 5 5OO $5 $2,500 1,5OO 5 7,5(X'
31 700 5 3,50O 800 5 4,OOO
Feb. 2 1,200 6 7,2OO
8OO 5 S 4,0OO
1,200 6 7,2OO 11,200
1 5
600 6 3,600 800
600
5 4,000
6 3,600 7,600
28
600 6
300 5
3,6OO
1, 5OO s00 5 2,500
Mar. 2 1,5OO
g
12,000
500 5 2,5OO
1,500
g
12,OOO 14,5OO
1 5
600 8 4,800 500 5
900 8
2,5OO
7r2OO
g,7OO
31
8OO 8 6,400 5OO 5 2,500
100
g
800 3,300
Apr . 2 t , goo 7 13, 300
500 5 2,500
100 I 800
1, 900 7 13, 300 16, 600
1 5
7OO 7 4,900 500 5 2,500
100 I 800
7, 2OO 7
g, 4OO
11, 7OO
30
70o 7 4,9OO 500 5 2,500
100 8 800
500 7 3,500 6,900
Gross profi t
CGA Canada (adapt ed).
I
Chapter I
CASES
c9-1
(1) (a) Topp Desk Gompany would be attempting to minimize total setup
cost and total carrying cost
(b) Variable manufacturing costs per unit
t
Di r gCt mat gf i al s. ' . . . . . . . . . . . . . . r . . . . . . . . . . . r . . . . . . . . . . . . . . . . . . r . t . . r . . . . . o. . .
Di f gCt | abOf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . ' . . r . . ' r r . . . . ' . . . . . . . . . r . . . . . . .
Vari abl g factory overhead..,..........................,.,.,.......*....
Total variable manufacturing cost per unit........
Numbgr of dgsks destroyed,.........,r.,..............,...................
Tot al set up cost . . . . . . . . . . . . . . . . . . r. . r. r. . r. . . . r. , r' . . r. . . . . . . . . . . . . . . . . . . . . . . r. . .
225
$ 5 0
x 1 2
s 3 0
1 4
6
s600
Optimum
production run:
=
1 $50'
x 10. 870
{4F66p6o
=
2,ooo desks
rVariable
manufacturing cost per
unit
(c) Number of
production runs
per yean
Annual demand
Opti mum
producti on run
=
#
=
9
Production
runs
(a) (21 The following factors affect the desired size of the safety stock for
any Inventory itemr
'
(1) Variability of
product demand
(21 VariabiliU of lead time
(3)
Stockout costs
(4)
Carrying costs
The minimum safety stock level that could be maintained without
being worse off than being unable to fill orders equal to an average
dayts demand is the level at which the safety stock carrying cost
equals the cost of a stockout, i.e.,
Stockout cost s2, 295
(b)
=f f i
=42s desks
21, 600, 000
Per uni t carryi ng cost
S50 x 1O.B%
226
c9-2
1
( 1)
$ 90.00
18. 00
Chapter 9
$108. 00
Equipment
Maintenance Department costs:
Sal af i eS
(2 X 5 X $91
' . . . . . . . . . r. . . . . . ' . . . . . . . . . . . . . . . ' . . ! . . . ' . . '
Empl oyee benefi ts
($90 x 2O%1.............-..' .......' .
Production department costs:
Sal afi gs
(5 X 5 X $7.501
.....................r........' ........
Variable factory overhead:
Direct labor hours base
(25 x $2.75).-..'.....-....
Machi ng hours basg (1 x $5).....,.,-..-............,r.
Di rect materi al s
($ZOO
-
$50)....' ..........' .............' ..r..' ..
Estlmate of Model JE 40 setup costs...........,..........-,.
$r
gz.so
68.75
s.00 261.2s
150, 00
s519.2s
Explanation of costs:
(a) The full cost of the maintenance salaries and employee benefits ls
included because the $1o.8o St9.0o
+ ($9'00 x20%17 incurred
per
labor hour is incurred solely for the
purpose of effecting the
changeover.
(bl The other costs of the Equipment Maintenance Department are not
inctuded in the estimate because they are fixed costs of the depart-
ment and will be incurred regardtess of the maintenance workers'
activities.
(c) The sataries of the 5 production workers for the full 5 hours each
are included in the setup cost because they must be in attendance
all of the time, though they are needed only
part of the time. lf the
workers could have been assigned to other
iobs
during the
changeover, then the full amount would not be charged to setup.
(d) The variable factory overhead costs of the
production department
applled on the direct tabor hours base are incurred as a function of
the direct labor hours; therefore, a full 25 hours of cost are
assigned to the setup cost.
(e) The variable factory overhead costs of the
production department
applied on the machine hours base are incurred as a function of the
operation of the machineryl therefore, I hour is assigned to setup
cost for the t hour the machinery is used in testing.
(0 All production department fixed factory overhead costs (both those
applied on the basis of direct labor and those applied on the basis
of machlne hours) are not included in the setup cost because they
would be incurred regardless of the activity in the departmenL
(g)
The net materials cost of $f SO is included because it represents the
unsal vageabl e
porti on of the materi al s used for the setup and not
f or t he product i on of a sal abl e desk.
I
I
!
I
-
Chapter 9
227
-
C9-2
(Concluded)
\,
(21 The cost items that would be included In an estimate of Pointer Furniture
Gompany's cost of carrying desks in inventory include:
'
(a) All costs related to warehousing and handting the desks In Inventory
!
that vary in amount by the number of items stored.
, tb)
The cost of the funds committed to the investment in inventory.
b
cg-3
'
(11 Circumstances necessary to shift raw materials inventory carrying costs
\
(a)
Reliability of the supplier. Will the supplier ship products
on a mone
rigorous timetable and be willing to keep inventory within its own
storage facilities?
.
lf;:$ff""1H;i*:;iili,g,""""XXiii;i1""ff'il#i:fiS"?$il':i,-
traet terms.
*
(c)
Careful control of inventory requirements. Are production
schedules
clearly defined to reduce the potential
for stockouts?
(21 Gircumstances necessary to shift finished goods
inventory carrying costs
!
to the customer include:
>
(a)
i.,?::[FT[il:;:?H'i;ffill=ll?lil?ll#:,'take
the risk or
(bl
Closer production planning.
Gan production schedules be refined to
such an extent that delays in the sale and distribution of the fin-
b
ished inventory are minimized?
(c)
Gareful controt of inventory reguirements. Are customer orders
carefully monitored and anticipated to reduce the probability of fin-
E
ished goods
stockouts?
OlO-1.
The purpooe cil a JIT system is to minimize the
levelc of raw malerials and work in process
i nvcntory i nverl mcnt!, whi l e i mprovi ng thc
werall rnanufacturing pross. Thc htent b to
pull inventory through the syslem mly as il is
required.
010-2. JIT seeks l ol el i mi nate al l formr of wasl e,
including produclion losses such as defects.
Successful reduclion of these problems
con-
tribules lo producl guality, and, so, is a part ol
TOM.
010-3. To avcid inventory buildup, the entire JIT sys-
tem shuts down whenaver defecls are found;
so to achieve a good rale of flow, lhe number
of defects must be srnall.
Qt0-4. Theoretbally, h an ideaf JIT system the EOQ
i! o.re; each time nrcre oulput is needed, one
more part or unil is produced.
Ql0-5. Although a zero inventory level is unattainable,
JIT stimulates improvernent in the environmen-
lal condilions lhat cause inventory buildup,
such as l ong sei up ti mes, hi gh sel up costs,
. p@r guliy, and poorly bahnced work loads.
O10. The relalbnship between velocity and WIP lev-
el s i s an i nverse rel ati onshi p; doubl i ng the
vekrcity mans lnlving the WIP level, provided
lhe outpul rate is held constiant. This is sirnilar,
bul not irdentical, to the relationship expressed
in lhe familiar inventoqy tumover ratio used in
f inancial statemnt analysis.
010-7. The stralegic advantage ol improving velocity
t hr oughout l he company, l r om pr oduct
research and devekrpment to shipping, is that
lhe company can then respond taster to any
changing cuslomer need or to an opportunity
for a new or altered product.
Ql 0. Reduci ng the l evel of WIP al so reduces l ha
maximum numbsr ol detectives, il the defects
are c{ a kind that will be discovered al the nexl
work stai i on afl er l he uni l s are hel d wai ti ng
bel ween sl al i ons. l f
. l 00
uni t s ar e wai l i ng
btwen stati ons, up to l OO detecti ves mi ght
be produced
before the
problem
would be dis.
CHAPTER 10
DISCUSSION QUESTIONS
covered; il 10 units ars heH waiting, no rpr.
than
't0
delectives could b. produced before
lhe prcblem would be discovered.
Q10-9. A bl anket purchasc order i r an agreement
between buycr and sel l er sl al i ng l ho total
quanlity expcled to be needed over a period
ol three or six rnonthr.
Ot0-10. In many JIT work cel l s, these di sti ncti onr-
between dirrl and indirecl labor and between
producing deparlments and ssn6 service lunc-
tions--do nol exist, because the sarne workers
(l he l eam assi gned to the cel l ) perl orm al l
these tasks.
Q10-1 1. In bacldlush costing, the work in process inven-
lory accounl is not adjusled lhroughoul lhe
per i od t o r el l ect al l l he cosl s of uni t s i n
pr ocess; t hor e ar e no del ai l ed subsi di ar y
records mainlalned for work in process; and a
single accounl may be used lor both raw male-
rials and work in process.
010-'12. In bacKlush costing, lhe rnaterials and work in
process inventory accounts mighl be cornbined
into a single account because malerials might
be pul irnmedialely inlo production when lhey
are received.
010-13. Posldedusiion is the sublraslbn lrom the work
in process accounl cil sorne or all elements d
the cosl of completed work, afler the work is
completed.
Q10-14. The peri odi c i nventory method used by many
mer chandi si ng compani es i s anal ogous l o
backllush cosling as used by manufacturers.
010-15. lf a backflush costing system expnses all con-
ver si on cost s t o t he cost of goods sol d
account, tho corrgct arnounl of conversion co.sl
is included in hventory accounts by making an
end- ol - per i od adj ust ment of t he i nvenl or y
accounts' balances. The oflsetling entry is an
adfustment of lhe cost of goods sold accounl.
The corracl amounl of sonversion cost to be
included in each inventory account is estimaled
when invenlories are physically counled.
228
I
I
Chapter l0
EXERCISES
b
' Elo'l rhe:::ffi:
:llt"ir:1H'""J,rr:ii'.'r'i;l:n',"r'J,'"ll"liiilSlJiJ?I,
tollows:
>
Carrying cost savings = 2Ooh r reduction in average variabte cost of Wlp
= ZOoh r 3O7o x past
average vari abl e cost of Wl p
= . 2 x. 3 x ( 1O r 3OO x SBO)
=
$14r4o}
Savi ngs i n cost of defects
=
$25 x reducti on i n number of defecti ve uni ts
\'
(reduction
in
number of (number
of out-of-
=
S25 x defective units x control conditions
produced per
not di scovered
undi scovered i mmedi atel y)
out-of-control
v
ondi ti on)
=
$25 x
l 3O%
x 3oO x S%l x (1/3
x 600)
=
$25 x 4.5 x 2QO
=
$22,500
\-
El O-z The average l ead ti me wi l l be 26 days, cal cul ated as fol l ows:
Reduct i on of vendor l ead t i me = 116 x 18 days = 3 days
Because t he r at e of out put wi l l be unchanged, a r educt i on of Wl p t o one-
thi rd of i ts present l evel wi l l tri pl e the vel oci ty. The average order wi l l
then remai n i n wl P onl y one-thi rd as l ong, savi ng two-thi rds of ti me
presentl y
bei ng spent i n WIP:
Reducti on of ti me i n WIP = 213 of present
ti me i n Wl p
=
A3 x i 2 days
=
g
days
New l ead ti me = present
l ead ti me
-
reducti ons
= 26 days
-
IH::iJffx""n.;:H:
:ffs,:Tlillff :'xiJ":"J3::i:ff'.:il"i,i11'"
components
of total l ead ti me are known, as i n thi s exerci se, then the
i new l ead t i me can be cal cul at ed by addi ng al l i t s component s:
( 5 / 6 x 1 8 ) +
2 + ( 1 1 3 x 1 2 ) + 2 + 3
=
1 3 + Z + 4 + Z + 3
=
26 days
- -
2g
Chaptor 1O
EIO-3
The expei ted
annual savi ngs i s S2,2OO,OOO,
cal cul ated as fol l ows:
Doubl i ng
the vel oci ty of al l tasks, from recei pt of order to shi pment and
from ordering materials to issuing materials to
production, will reduce
WIP and materials inventories by half' therefore:
. Reduction
in materials carrying costs = Z}oh x materials reduction
= 2Ooh x(112 x $3,0O0' OOO)
$3OO' 0OO
Reduction in wlP carrying costs
= 2ooh x wlP reduction
= 2|oh x (712 x $5,OOO' O0O}
=
$5OO,O0O
Thi s change wi l l al so reduce customer l ead ti me from ei ght weeks to
four weeks. Because customers are wi l l i ng to wai t up to fi ve weeks for
shi pment, al t shi pments can then be made-to-order.
There wi l l no l onger
be a need for fi ni shed
goods i nventory. Once the exi sti ng
fi ni shed
goods
i nventory i s l i qui dated by sal es or scrappi ng, the annual savi ngs from not
carryi ng fi ni shed goods wi l l be:
Reducti on i n fi ni shed
goods carryi ng costs
= zl oh x fi ni shed
goods reducti on
= zl oh x (l OO% x $7' O0O' OOO)
=
sl , 400, oo0
Total savi ngs =
s300,000
+ s5o0,0oo
+ sl ,4oo,o0o
-
$2,200' OOO
fl hi s
exerci se i s based cl osel y on an actual case of a
parti al JIT i mpl e-
ment at i on. The name of t he company and dol l ar amount s have been
al tered.)
E10- 4
(1) (al Equi val ent
producti on = 4,500 + (.5O t-2gl
= 4,51O uni ts;
s3OO, 74O
_
4, 51O
$66. 683
per uni t
. \ -
. -
(b)
st,o9l ?oo
=
$i 66.067
per uni t
r - '
4r 5OO
(c) uni ts started
= 4,500 + 2O
-
24 = 4,496 uni ts;
s3oo, o0o
=
566. 726
per uni t
4, 496
(2)
5667, because 2O x . 5O x 566. 683
=
$666. 83.
5667, because 20 x . 5o x 566. 667
= 5666. 67.
S667, because 20 x . 5o x $66. 726
=
$667' 26'
i -
Chapter l0
EIO-4. (Goncl uded|
(3) Considering
that the results of requirement (2)
wene the same (to
the
nearest dollar) for all three methods, then method (il (b) would be recom-
mended because of its ease and simplicity. Method-tii
ttl
is a ctose sec-
ond choi ce, al so because of ease and si mpti ci ty. The deti i l s of method
(11 (al may not be
iustifiable
in these circumstances.
(41 Prccessing speed is very fast, with the result that work in process
inven-
tory levefs ane kept to a very low level-both in absolute terms
and in
ielation to totat production
activity for a month.
El o-5 Journal entri es i nvol vi ng Rrp and/or fi ni shed goods
are:
Raw and I n Procgss. . . . . . . . . . . . t . r. . . . ! . . r! . . . . . . . rr. . . . . . . . , . . . . . . .
Account s Payabl e . r. . . . . . ' . . . . . . . . . . . . . . . . , . . . . . . . . . r. o. . . . . .
456, OOO
456, OOO
A-summary entry for all receipts of raw materials during the period.
when di rect materi al s are used, no entry i s needed, be-ause the
materi al s remai n i n Rl P.
Fi ni shed Goods. . . . . . t . . . . . , . . r . . . . - . . . , . . . . . . . . . . . . . . . . , . . . o. . . . . . . . r
4SSTOOO
Raw and I n Procgss' . . . ' . . . . . ' . . . r' r. . . . . . . . . . . . . . . . . r. . . . , .
455, 000
To backflush material cost from Rfp to finished goods.
This is a
postdeducti on,
The cal cul ati on i s:
Materi al i n May I Rl p ba1ance...,.....,.....,.,.
S 19,OOO
Mat er i al r ecei veddur i ngMay. . . . . . . . . . . . . . . . . . . .
456; OOO
s475, OOO
Mat er i al i n May 31 RI R per physi cal
count 2O, OOO
Amount t o be backf l ushed. . . . . . . . . .
$4SSpOO
Cost of Goods So1d. . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . , . . . . . . . . . . .
461r OOO
Fi ni shgd Goods. . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . D. . , . . . . . . . . .
46i
r OOO
To backfl ush materi al cost from fi ni shed goods
to cost of goods
sol d. Thi s i s a postdeducti on.
The cal cutati on i s:
Materi al i n May I fi ni shed goods
r......,....,.
S 16,OOO
Materi al backfl ushed to fi ni shed goods....
4S5,OOO
:_--
$471, 00O
Materi al i n May 31 fi ni shed goods, per
physi cal
count . . . . . . . . . . . . . . r . . . . . . . . . . , . . . . . . . . . . . . .
I Or OOO
231
L
Amount
t o be backf ! ushed. . . . . . . . . . . . . r . . . . . . , . . , . . . . . . .
$461, OOO
, r
I
i
Chapter l0
232
Eto-5
(Concl uddd)
COSI Ol GOOdS SO1d. . . t . . . . . . . . . . . . . . r . . . . . . o. . . . . . . . . . . . . ' . . . . t . . . ' .
Raw and In Procgss.....o.....
Fi nl sh
gd
Good3. . . . . t t . t . . . . . . . . . . . t ""t ""t t t "t ""t t t "t t '
Matgri at In Jung I RIP bal ance o..' ....r......i .
Matgri al rBcEi rgd duri ng June r...............' .
Material In June 30 RIR
per physical count
Amount to bg backflushlgd ...........'.......""'
Materi al i n June 30 fi ni shed
goods' per
physi cal
cou! 1t . . . . . . . , . . . . r, . . . . . . . . . . . . . . r. . . . ' . -. ' .
Amount t o be backf l ushed . . . . . . . . . . ' . . . . o. . r' . . . '
2,300
300
2, OOO
Conversion cost in RIP is adiusted trom the $2,3OO
of May I to the
$2'OOOosgmato at May 31. bonvsrsion
cost In finished
goods is
aOjusteJ trom ttre $Sr5bO
of May t to the $4'5Oo
estimate
at May
3i. The offsettlng ontry ls made to the cost ol
goods sold account'
where all conve*ion
costs weno charged during May.
El0-6 The
Journal
entries Involving RIP and/or finished
good! 8r1o:
Baw and ln Ptlc8ss.........o......'
'...... 222'OOO
Accounts Payabl g.....t""' r""' ot"""o"""""""""
222,OOO
A
gummary
ontry for all receipts ol raw materials during tho
period.
When direct maierials atu used, no entry is needed, because the
materials nBmain In BlP.
Fi ni shgd GOOd3...r..r.r...............r........r....r....r......."r..
221r5OO
RaW and In PfOCSSS..............i ....' ........r..o.....' .!.
221
,5OO
To backflush material cost from BIP to finished
goods. This is'a
postdeduction. The calculation ls:
I
I O,5O0
222,AOO
$232,5O0
11, OOO
s22t , 5OO
Cost of Goods Sotd.............................-..............r.tt..
223t5OA
Finishgd Goods....r.....o...........i.....................' ...
223r5OO
To backflush materlal cost from finished
goods to cost of
goods
sold. This ls a
postdeduction. Tho calculation
is:
Materi al i n Juna I fi ni shed
goods............' $
8rO00
Materi al backfl ushedfromRl P.""""""""'
221r5oo
s229,500
o,ooo
s223,5OO
I
I
!
Clppter 1O
Elo-O (Concluded|
Raw and In Process..........r.....................................r
Fi ni shgd
Goods.....................D........r...r,.....r......
Gost of Goods Sol d ;..........,.,..................,.!....r..
Elo'7 Journal ontriss Involving the Rlp accounta arl':
Raw and in Procgss r................r....................r..........
Account s Payabl e . r. . . . ' . . . . . . r. . . . . . . . . . . . r. . . r, , or. . . . . . . , .
2s3
300
200
Gonverslon
cost In Rtp ls adjusted lrom tho $lr2oo of June I to the
$lrT0oostimate at Juno 3o. convorsion
cost in finished goods
is
adjusted from the
94rooo
gt
June I to the $3rzoo estima.-te
"i .1u""
3o. The offsetting entry la made to the cost of goods
sofd account,
nfiero all conversion costs wero charged durini June.
500
20O, OO0
2OO, O0O
A-summary entry for all receipts of raw materials during the period.
when dlrect materiafs aro used, no entry is needed, belausJtrrev
remain a part
of RlP.
Finlshed
Good8....................r..........r.........o.....o........
199, 8OO
Raw and in Process
199, 8O0
r t a a a o a a a a a a a a a a a
To backflush material cost from Rtp to Finished Goods. This is a
postdedugtion.
The calcutation is:
Material in March I RIP balance
s I , OOO
2OO, OOO
s2O9, OOO
9,2OO
Materi af rccei ved duri ng March,..........,...,
Materi al i n March 31 RIR per physi cal
count
Amountto be backfl ushed.,.....,...,,,........,.
Si 99,gOO
Raw and i n Procgss...........................................o...o,
3OO
Cost of Goods So1d............,.......,........,.......,..,. gOO
conversion cost in RIP is adjusted from the $1,ooo of March 1 to
the $lr3OO estimate at March 31, The offisetting entry is made to the
cost of goods
sold account, where all conversion costs wene
charged during March.
r
I
I
I
I
Y - )
- . 1
I
: . ;
!
Chapter lO
.
e
El 0-8 Journal ehtri es i nvol vi ng the RIP accounts are:
Raw and i n Process............ 367' 000
Agcounts Payab|e.r............,.,...........................
367rO0O
A summary entry for all receipts of raw materials during the period.
When direct materials are used, no entry is needed, because they .'
remain a
part of RlP.
Fi ni shgd GOOdS, . . . . . . . . . . . . . . ' . . . . . . . o. . . . . . . . . . r. . . . . . . . . . . . . . . . o. . . .
365r4O0
Raw and in Process..,..
365,4OO a a a a a a a a o a a a t
To backflush material cost from RIP to Finished Goods' This is a
post-deducti on. The cal cul ati on i s:
Materi al i n Apri l I RIP ba1ance.................. $ 291600
Mat er i al r ecei veddur i ngApr i l . . . . . . . . . , . r . . . . . . . 36710OO
$396,6O0
Materi al i n Apri l 30 RIR per physi cal
sount 31,2OO
Amount t o be backf | ushed. . . . . . . . . . . . . . . . . . . . . . . . S365, 4OO
:
Raw and i n Process..........,...r,........,.. 4OO
y
Cost of Goods So| d.,..... .........,.......... 4OO
Conversi on cost i n RIP i s adj usted from the
$1,4OO of Apri l I to the
S1,8OO estimate at April 30. The offsetting entry is made to the cost
of goods
sold account, where all conversion costs wene charged
duri ng Apri l .
'
_,
EIO-9 Journal entri es i nvol vi ng the BIP accounts are:
Raw and i n Pr ocess. . . . . . . . . . . . 246. 000
Accounts Payabl e .............. 246, OOO
A summary entry for al l recei pts of raw materi al s duri ng the peri od.
When di rect materi al s are used, no entry i s needed, because they
remain a part
of RlP.
Cost of Goods So1d......................
,........o...,. 24Z.OOO
Raw and i n Process........,.,. 247r0OO
To backflush material cost from RIP to Cost of Goods Sold. This is a
postdeducti on.
The cal cul ati on i s: v
Mat er i al i n May 1 RI P bal ance. ,
$ 11, 000
Materi al recei ved duri ng May........ 246,000
$257,OOO
Mat er i al i n May 31 RI R per physi cal count l O, OOO
Amount t o be backf l ushed. . . . . . . . . .
S24Z, OOO
l
, / t
t -
1
)
V
I
>-
I
I
1
Chapter 10
EIO-9 (Concl uded|
'
Raw and i n Process ,..........,...,.r.
El o- l o
235
800
Cost of Goods So1d....,.......o,.......
800
conversion cost in RtP is adjusted from the $lr3oo of May I to the
$2'1oo estimate at May 3r. The offsetting entry is made tb the cost
of goods
sold account, where all convercion costs were charged
during May.
( 1)
(21
(3)
(41
The most recent purchase
involved a quantity greater
than the total
materials in ending inventories, and that purchase gives
a cost of materi-
als of $42o'o0o/l,4oo, or $3oo
per
unit of output; t6erefore,
Materi al s cost of fi ni shed goods
endi ng i nventory
= 50 uni ts x $3OO
per
uni t =
$15' OOO
The conversion cost per
unit is calculated by dividing the total GoDVr-
sion cost by (al
the number of units startedrlb) the number
"o.pl"t"d, or
(cl the number completed plus
the number oi partially
"onu"tt"i
units in
the RIP ending inventory (not
an equivalent units calculation|:
(l )
$eSOrl SO + 3,OOO =
$96.72 conversi on cost per
uni t
(Ot $29Orl 6O
-r grl OO
=
993.60 conversi on cost per
uni t
(c)
s29o' l 6o +
t,f 2o =
$g3.oo conversi on cost per
uni t
The three possi bl e
amounts for the conversi on cost of the 5O uni ts i n fi n-
i shed goods
endi ng i nventory are:
5O uni ts @ $96.22 =
$4,93O of conversi on cost
5O uni ts @ $93.60 =
$4,690 of conversi on cost
5O uni ts @ S93.OO =
$4,650 of conversi on cost
L-owest =
g15,OOO
materi al s +
g4,650
conversi on =
$19,650
Hi ghest =
$l 5,OOo materi al s +
$4,g36 conversi on =
btg,ggb
Dol l ar
di f f erence =
$19, 936
-
$19, 650 =
$1gO
Di fference,
to nearest l /1O percent =
$1gO
*
$19,650 = O.9%
b
7-1-
2ffi Chapter lO
810-1 |
r
(f
l
A $3OO
materials cost
per
unit was calculated in requirement (lf of the
pnevious exercise; therefore,
Materials cost of RIP ending inventory = 22O units x S3OO Fer
unit =
$66,OoO
\
(21 The three possible amounts for the conversion cost of the RIP ending
lnventoly ol 20 units, SAoh converted, are:
2O units x SOoh x $96.72
=
$967.2O of conversion cost
20 units r SOTo r $gg.0O
=
$9gO of conversion cost
2O units x SOoh x $93.00
=
9990 of conversion cost
It seems inconsistent to assign 50% conversion costs to RIP when the
uni ts i n RIP l yere counted as whol e
physi cal uni ts i n the denomi nator of
the conversi on cost per uni t cal cul ati on i n requi rement 2(c) of EIO-IO,
y
and when they were not counted at al l i n the denomi nator of the cal cul a-
Uon i n requi rement 2(b) of El 0-10. But the total dol l ar di fference
assigned to RIP is immaterial. Whatever the amount of conversion costs \d
assigned to RIP and finished
goods, the remainder of total conver':sion
costs si mpl y remai ns i n cost of
goods
sol d.
- t s
(3) Lowest =
$66,000 materials + S93O conversion
=
$66,930
Highest =
$66,OOO materials + $S0Z conversion =
$66,967
Dol l ar di fference =
566,967
-
$66,93o
=
$37
-
-
Di fference, to nearest 1/1O percent =
$37
+
$66,930
=.1oh
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1
l>
t
I
t
Clpptsl0
PROBLEMS
Pto-l
(11
The erpected annual savings 8no $72OrooO, consisting of $gg4,ooo csny-
Ing costs savings and $336'O00 savings in the cost of defects, calculateb
ag follour:
Carrying cogt savings = 30% r redustlon In avoriago variable
cost of Wlp
= 3Ooh r 4Ao/o r
past
avoriago variable cost of Wp
= ,3 r .4 x (4O r 2OO r $lOO1
=
$384,0OO
Savings in cost of delects
=
$60 r rsdustion in number of defeetive units
(reduction
in number
=
$6O x of defective units x
produced per
undiscovered flaw)
=
$60 r (4O% r 2OO r 2Oo/ol x
=
$60r 19 r 350
=
$33610OO
I
-
b
!
(number
of flaws not
discovered immediately|
(114
r 1, 4o0l
(2',
Likely benefits that are not assessable from the information given
includs the following:
(al
Faster cycle time resulting from the higher velocity of VUlp. (Because
the rate of final output will not change, velocity wiil change'inverse-
ly with the change in WIP levets.) The faster cytle time will imptove
the speed with which orders can be filled, thul increasing
cusio;ne1.
saUsfacUon
and perhaps
increasing perceived prcduct
value so that
prices
can be raised (or price
cuts delayed oravoided|.
(bl
lf, as a rasult of the shorter cycle time, total lead Ume becomes less
than the Ume customens are willing to urait for an order, then the
company would no longer need to maintain a linished goods
inven-
tory. This possibility
woutd resutt in additional savings in ffoor spaco
and other Inventory carrying costs.
flhe
value of the floor spacg ireJo up by eliminatin g 4o7o of Wlp storage
lc not an addltional
benofig Inventory cirrying cosfi includa etorage
costs, so the valua of the floor space is incluoed in the cirrying cJst s""-
Ingr calculated
In requiroment
1i;.|
(31
Costs and other negatives
to be comparsd with the savings inctude:
(al
Tho Increased
liketihood
of shutdowns due to work l6cations being
gtarved
for WIP; lower WIP levels at each staiion nepnesent lower
safety stocks, so stockouts
are mone likely at all toca-Uons,
(bl
The cost
9f -starting
a larger nu-u"iof
baiches oi lot" into produq-
uon, which incrudes
the iost of processing
.o* ;;* orderc, pro_
2fi
Chapter l0 .-
-
Pl o-l
(Concl uded)
:
-
duction orders, and material requisitions.
flo
reduce average WIP
size, either smaller batches must be started at shorter intervals, or
protracted stockouts must be allowed to occu6 otherwise, the
averags size of WIP will not drop.l
"
(c) The cost of handling more loads of materials. lf lot sizes are small
enough to require only one load per lot both before and after the
chanCe, then a larger number of lots will result in a larger total
number of l oads.
(dl The cost of
performing a larger number ol setups to
permit
running
a larger number of batches or lots of smaller size. ldeally, as part of
the JtT implementation, setup cost will be driven down to eliminate
thi s probl em.
Pl0-2
(1) Protech coul d achi eve an average l ead ti me on these orders of 42 days'
cal cul ated as fol l ows:
Reducti on of ti me i n WIP = 314 of
present ti me i n WIP
= 314 r (360 days
+ I O!
= 314 x 36 days
= 27 days
Reduction of vendor lead time = 113 r27 days = 9 days
New l ead ti me = present l ead Ume
-
reducti ons
= 78 days
-
127
days + 9 days)
= 42 days
Note: lt is not stated that Protech defines WIP and WIP turnover in a way
that excludes the two days spent in receiving and the three days spent
in linal inspection. To check that the average cycle time of 360 days/lO,
or 36 dalrs, does excludE those steps (sothat there is no double-count-
ing), note that a cycle time of 36 days, when added to the other intervals
mentioned, gives
the stated total lead time of 78 days: 6 + 27 + 2 + 36 +
3 + 4 = 7 8 .
(21 The advantages of shorter lead time inctude:
(al
The value of the floor space freed up by eliminating three-foudhs of
WIP storage,
(b)
lmprovement in the speed with which orders can be filled, which
:
should increase customer satisfaction and
perhaps
increase
per-
ceived product
value so that prices can be raised (or price cuts
del ayed or avoi ded).
(c)
lf the new 42-day total lead time is less than the time customers
are willing to wait for an order, ttren the company would no longer
need to mai ntai n a fi ni shed
goods i nventory. Thi s possi bi l i ty woul d
resuJt i n addi ti onal savi ngs i n fl oor space and other i nventory carry-
i ng costs-T
I
i
I
dnpW'10
I
rc
Plo-2lConcludcd|
t3l
Costs and other negatlver to bc compatrd rxlth Ste savlngs Includa:
(al The Incrsaged llkellhood of rhutdonmr duc to work tocations belng
gtaryed
for WIB lower WIP levelg rt cach ctatlon repnosont lower
safety rtockr, so stockoutr erc mort llkely at alf locaUom.
(bl Tha co;t of startlng r larger numbcr of bgtchee or totr Into produc-
Uon, wlrlch.lncludcr thr cort of
pmccedng monc work ordera, pro-
ductlon ordan, and mgtorlal nqulgldonr (Beduclng averagc WIP
rlza generally rcqulrca rtartlng rmaller batcher
gt ghorter
Intervals.)
(cl Thc cogt of hendling morr loadr ol materlalr. ll lot sizac arc srnall
enough to rcqulra only onc load
pcr
fot both befgrc and after the
change, then a larger number of lotr wlfl rosult ln a larger total
number ol loads.
(d) The cost of
performlng
e larger numbcr of eetups to permlt
running
a larger number ol batchcc, or lo'tr, ol rmaller 3lze. ldeatly, as
part
ol the JIT lmpfementatlon, lotup cogt wlll be driven do*m to elimi-
natc thlr problem.
(el
The tmc and eftort that may bc rcqulrcd to Induce
yendors
to
reducc thelr lead Umc by onc-tlrlrd.
Pt o
(1) (a)
Raw and In Procasg 85O,OOO
AccOunts Payable ........o........................r.......r. 8so;ooo
A summary entry lor all receipts of raw materials during the
perlod.
When dlrect materlals aro used, no entry ls needed,
because they rrmaln a
psrt
of RlP.
(bl Fastory
Overhead Gontrol l 3, ooo
Supplles ,..or.......
13,OOO
lndirest materials ara rccorded as used.
Pa1rro11...........r.D....o..r...........D.rr..............o....o........
AcCru
gd
Payroll ................r...o.........r.....r.........
ACCru
gd
Payrott .o...................r..r.........................
Gas h r . r o. . . . r . . . r . . . . r - . . . r . . . . r . . oo. r . . . . . . . . r . o. . aa. . . . . . . . . . . . . .
cost ol Goods sold -......r.r........oo............o...,,.,.....
Factory overhead contro|.....D....o..,,,...................
MarkeUng Erpenses Control ..................o.....o...o.
Admlnlstrauvg
Expensgg contro|,.o............o.,.,...
P81rO11...............ro.rr..,...
4OO, OOO
Dirost labor ls crpenaed to thc cost of goods gold
accounL
(e)
Factory Overhead Gontrot......r........,.....t....,..r..,..
6gi' OOO
Accumulated DepreclaUon
.,.....D..........,...r......
Oggrooo
Prepald In9urance...............................o........,..
t3' OOO
(c)
(d)
4OO,OOO
4OO,OOO
6O, OOO
120, OOO
l 3orooo
9OTOOO
4OO,OOO
4OO,OOO
\
r
I
24)
Pl O
(Conti nuedl
(fl Factory Overhead Contro1.o,................,......'.
Chaptor l0
83, OOO
54,OOO
29,OOO
897, OOO
844,OOO
844,OOO
Cash
AcCounts Payab1e................o....................
bl
CoSt of Goods So1d..............
897,OOO
Faetory Overhead Gontrol
Overhead ls erpensed to the cost of
goods sold account.
(hl Finlshed Goods
Raw and In Process......r..
To backflush material cost lrom RIP to finished
goods. This is a
postdedustion. The calculatlon ls:
Materlal in Juno 1 RIP balance ' .' r.......r.. $ 4OTOOO
Mat er i al r ecei veddur i ngJune. . . . . . . . . . . . . . .
S5Or OOO
$89O,oOO
Material In June 30 RIR
per phyaical
COUl l t . . . . r . . . . . . . . . . . . . . . . r . . . . . . . . o. . . . . . .
46r OO0
Amount t obebackf l ushod. . . . . . . . . ' . . . . . . . . . . . S844. OOO
(i l Gost of Goods So|d,...........,..............' ..r....,..'
tt**
Fi ni shgd Good3. . . . . . oo. . . . o. . . . . . . . . . . . . . . . . . . o. . . t . . ' t
852I OOO
To backflush material cost from Finished Goods to Gost of Goods
Sold. The calculation ls:
Materi al i n June I Fi ni shed Goods.,r....o $ l gor0oo
Material cost transferred trom RlP..'..... 844'OOO
sl r034, OOO
Materi al i n June 3O fi ni shed
goods, per
physical
CoUtlt.....' r' ......r.................' ...
I 82tOOO
Amount to be backfl ushd ' ......' ..' .......... 3 852' Ooo
0l
Raw and i n Procgs3. . . o. . . . . , . . . o. . r. . . . . r. . . . . , . . . . . . . . .
3oo
Cost of Goods So1d...,,....r..t......' ..r..r..r...........
2r7OO
Fi ni shgd Goods. . . . . ' . . . . ! . . . . . . . . . . r. . . r. . . . . ". . . . . r. . 3I OOO
Conversion costs In tho inventoly accounts are adiusted to the
estimates made in ths June 3O physical counl For RIR the adiust-
ment i s from the $11600 of June I to $1r9OO on June 3Q for
Fi nl shed
Goods, the adi ustment i s from the $18O,OOO of Juno I to
$177' OOOon June 3O. The offsetti ng entry i s made to the cost of
goods
sol d account, where al l conversi on costs were charged dur-
i ng June.
:v
\_/
.
242 Chapter 10 .
-
P1o-4
(Conti nued) . -
(gl Gost of Goods So1d..,.,.....,........... 656,000
Factory Overhgad Control ....,...................... 656' 000
Overhead i s expensed to the cost of goods sol d account.
(hl Fi ni shed Goods........rt..........................r....,....' . 6t 5rooo
Raw and In Process................o.................... 615rooo
To backfl ush materi al cost from RIP to Fi ni shed Goods. Thi s i s a
post-deducti on. The cal cul ati on i s:
Mat er i al i n May 1 RI P ba1ance. , . . . . . . . . . . . r . , o. . $
SO, OOO
Mat er i al r ecei veddur i ngMay. . . . . . . . . . . . . . , . . . . . 620r OOO
5650,000
!
Mat er i al i n May 31 RI R per physi cal count 35, OOO
Amount t o be backf l ushed . . . . . . . . . . S615, OOO
:
( i ) Cost of Goods So| d. . . . . . . 605, 000
Fi ni shed Goods. . . . . . . . . . . . . . . . . . . , . . . . . . . r . 605, 000
To backl l ush materi al cost from Fi ni shed Goods to Cost of Goods
Sol d. The cal cul at i on i s:
Mat er i al i n May 1 Fi ni shed Goods. . . . . . . . . , , . . S15O, 0OO
r
v
Materi al cost transferred from RIP ........... 615,OOO
$765, O0O
Mat er i al i n May 31 Fi ni shed Goods,
Fer
physi cal
count . . . . . 160, 000
Amount t o be backf l ushed. . . . . . . . . . $605, 000
0)
Raw and I n Pr ocgss. . . . . . . . , . . . . . . . . . . . . . . , . , . . . . r . . . . , . . . . . 800
Fi ni shed Goods. . . . 4, OOO
Cost of Goods So| d. . . . . . . 4, 8OO
Conversi on costs i n the i nventory accounts are adj usted to the
esti mates made i n the May 31 physi cal count. For BIR the adj ust-
ment i s f r om t he $1, 30O of May 1 t o $2, 10O on May 31; f or
Fi ni shed Goods, the adj ustment i s from the S13O,OOO of May 1 to
S134,OOO on May 31. The offsetti ng entry i s made to the cost of
goods
sol d account, where al l conversi on costs were changed
i
duri ng May.
24a
I
I
Chaptar l0
Pl O- 4 ( Goncl uded)
(21
The three compl eted accounts are
Raw and in Process
Fi ni shed Goods
5t 1
(al
(r)
5/31
3l r 3OO
62O,OOO
800
37,1OO
( h) 615, OOO 511 28O,OOO
(h)
6i 5,OOO
0
4, OOO
5/31 294,OOO
(i ) 605, 000
s 12.OO
s4.50
1. OO
$5.50
$6.50
r 2O,OOO
s(l 3O, 000)
s
(4O,OOO'
6O,OO0
13, 5OO
14, OOO
120, 000
Gost of Goods Sol d
511
-O-
(d) 50,000
(g)
656,000
(i ) 605,000
5/31 1,306,200
Pl o- 5
(f
)
Contri buti on margi n of l ost sal es (2O,OOO
uni ts):
Revenue ( $1 O, gOO - 900 uni t s) . . . . . . . . , . . . . . . , . . . . . . . . . . . , . . . . . . .
Vari abl e costs:
Gost of sal es (S4r050 + 9O0),.............................,....
Marketi ng and admi ni strati ve ($gOO - 9O0).,.,........
Tot al var i abl g cost . . . , . . . . . , . . . . . . . . . . . . . , . , , . . . . r . . . . . , . . . . . . . ,
Uni t cont r i but i on
mar gi n. . . . . . . . . . , . . . . r . , , . . . . . . . . . . . . . . . . . . . . . . . . . ,
Vol ume of l ost sal es. . . , , .
Total contri buti on margi n of l ost sal es,...,.....,........
Overti me premi ums (overti me
cost i s l ess than the.
addi ti onal contri buti on margi n of tost sal es):
15, OOO x $6. 50 =
597, 500 > $4O, OOO
Rgnt al savi ngs. . . , r . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . , . . . . , . .
Rental i ncome from owned warehouse
( 1 2, 000 x . 75 x
S1. 50) . . . , . . . . . . . . . . . . . . . . . r . . . , . . , . , . , . . . . . . , . . . . .
El i mi nati on
of i nsurance and property
taxes
Opportuni ty
cost of funds rel eased from i nventory
i nvestment:
Investment
i n i nventory
I nt er est bel or e t ax
i
. t z
' 1
\ 1 - . 4 0 /
Esti mated
before-tax dol l ar savi ngs
$6OO, OOO
. 20
I
I
I
I
t>
9_q2tr9_
v
Chapter tO .
*
PI O-S
(Goncl uded)
: -
l 2l
Condi ti ons that shoul d exi st i n order for a company to i nstal l
j ust-i n-ti me
i nventory successful l y i ncl ude the fol l owi ng: -
(al Top management must be commi tted and
provi de the necessary
l eadershi p support i n order to ensure a company-wi de, coordi nated
effort.
(bl A deQi l ed system for i ntegrati ng the sequenti al operati ons of the
manufacturi ng process needs to be devel oped and i mpl emented.
Raw materi al s must arri ve when needed for each subassembl y, so
that the producti on pnocess tuncti ons smoothl y.
(cl Accurate sal es forecasts are needed for effecti ve fi ni shed goods
pl anni ng and product i on schedul i ng. s
.
(dl Products shoul d be desi gned to use standardi zed
parts to reduce
manufacturi ng ti me and reduce costs,
(el Rel i abl e vendors who can del i ver qual i ty raw materi al s on ti me wi th
mi ni mum l ead t i me must be obt ai ned.
I
L
I
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!
CHAPTER 11
DISCUSSION
QUESTIONS
,l
b
Ol 1-'1. Yes, lo lhe exlent that il is practical
to masure
the r,ralue
added or the productivity
of a worker.
However, msasurement of lhe cootribution of
each individual is never exacl. Also, a business
cannot pay more for materials or labor than the
sales price will recover. Materials, workers, and
machi nes produce products and servi ces.
There must be a difference belween revenue
irnd oosts consumed; othenrvise, lhe business
cannol sun/ive.
Otl-2. Productivity may be defined as the measure-
menl of producl i on performance
usi ng the
expenditure of hurnan elfort as a yardstick.
ln a
broader sense, it may be described as the etfi.
ciency with which resourcas are converled into
cornmodities ancVor services that people wanl.
Ql 1-3. Productivity is important to a lirm because high
productivity
reduces the unit cost ol the outpul
and makes i he f i r m mor e compel i t i ve. t t i s
important to workers because lheir real earn-
ings should be increased when productivity
is
hi gh. Pr oduct i vi t y
i s i mpor t anl t o soci et y
bEcause increased productivity
enables society
to gel
moro and better oulput from the basic
resources of lhe econorny.
Ql 1-4. To measure labor efficiency, it is necessary to
esl abl i sh
a st andar d of per f or mance.
Thi s
means determining
how much a worker should
be able to produce,
or how much a worK cr6w
shoul d be abl e l o produce.
The standard i s
delermined
by time and motion study, lest runs
by skilled workers, and averages oi past per-
formance
by skilled workers.
Q1 1-5. The purpose
of an i ncenti vs wage pl an i s to
induce a worker lo produce
more, iesulting in a
higher wage and reduced conversion cosl oe,
uni t. Fregueni l y,
machi ne outpul i s l i mi ted by
worker performance.
lt employee perlormance
can be increased,
machine cost per unit of pro-
duclion will decreasa. An incentive wage ptan
may at so r educe l oaf i ng, i ndi f f er ence,
and
carel essness,
and may generate
a cost.con-
scious labor force.
Ql 1- 6. Gener al l y,
hour l y ear ni ngs go up wi t h
increased
production,
and labor co.-st per
unit ol
outpul i s reduced. Hi gh producti on
rates al so
reduce
overhead cosl per unit of output, which
_
i s often the most si gni fi cant savi ngs.
Ql 1-7. (a)
Duri ng peri ods
ol curfai l ej acti vi ty,
i t i s
iust
as ncessary to keep cosls down as
i t i s when oper at i ng al f ul l capacr t y,
Assumi ng
that the i ncenl i ve
wage pl an
r esul t ed
i n gr eal er l abor ef f i ci ency
ano
l ower cosl s per uni t at ful l capaci l y,
than
the l abor cost per uni t shoul d be l ower i n
a sl ack peri od i f the i ncenti ve
wage scate
i s conl i nued,
A shdrter workweek or
sorne other syslem of sharing lhe work
wouH be indicated.
(b) Ordinarity, it is not a propiliour
tine to hi-
tiato an hcentive wagr ptan wtren a phnt
is operating far below capacity, because
the worker is already fearful d sornething
less than full employrnent. ll a ,eason-
able day's work is being received for the
going rate ol pay, po.stponement
of the
.
i ncenl i ve pl an
i s i ndi cated.
However,
there is a nalural tendency for workers lo
reduce output durhg such perlgds,
there-
by increasing cosls, wilh a lendency lo
bring about further reduction in the vol-
ume lhat can be soH. With luft e4plana-
lion and underslandhg
of thc situation,
the incentive wage could be htroduced
-
with a planl operating at 6006 capacity.
O1 1-8. In the straight piecework plan, each worker is
paiC a certain amount for eadr unit produced,
while being guaranteed
a base hourly wage. ln
the 100% bonus plan, ach workor L pai<J for
the standard time to cornplete the job
or unils if
the job
or units are finished in slandard time or
l ess. In the group bonus pl an,
workers i n i
group
are paid
lheir standard hourly wage. lf
the group produces
unils in oxcss of the stan-
dard, lhe workers are paid for the time saved.
Q1 1-9. An organizational or gainsharing
incentive plan
i s desi gned to provi de
i ncenti ve pay to al l
empl oyees by way of an organi zati on-wi de
plan thal rewards for improved productivity.
01 1-1O. The basi c concepl underl yi ng the rel atbnshi p
involved in the cumulative average lime learn.
ing curve modet is that every time the cumula.
live quantity
of unils produced
is doubled, the
cumuhlive averags lim per unil is reduced by
a given pgrcentage.
The l earni ng curve l heory i s used to sol ve
.problems
such as determining labor costs in
bids for governmenl
conlracls, determhing bt
costs tor various slagos ol production
runs,
predicting
labor-hour requirements, permitting
l he cal cul ati ons
of sl andard l abor cost vari l
ances, assisting in lhe evalualion of a manag-
er' s performance,
and provi di ng a basi s for
cost control.
0 1 1 - 1 1 .
Q1 1-12. The f i nanci al account i ng
aspecl i s concemed
wilh a record of earnings of each employee
and pay ment
of t he wor ker s . Fi nanc i at
account i ng records i ncome, FI CA, and ot her
payroll
laxes and deductions wilhheld; proviCer
l or di sbursi ng
l unds l o workers and t o t axi ng
and ot her agenci es; reporl s i o each empl oyee
al least annually the arriount ol wages eamed
245
246
and tho arnountl withheld for various
PurP'
es; and recordg the payroll liability and pay'
ment each
PaYroll Period
Thc cost accannting 8sPcl is concemod with
time worked oo each
Fb
or h each cost conlet,
in order to detetmine the labor houn and bbor
cosil ol
Ptoduclion.
Ot1-13. tui eflbient labor force beghs with the design
ol the producl
gnd
en analysir of produclion
teclrnQuce and
i9b
reguiremenls. Wi|h he per'
sonnel department adeqtntely informed aboul
j ob
speci fi cati ons, i t i s l he l uncl i on ol thi s
deportneot !o locura the pcrsanel qualilied lo
do each
iob.
The produclion planning deparl'
menl keeps the work llowing smoothly. Ths
ti mekeepi ng,
payrol l , and cost accounti ng
departments contribute to lhe lotal elficiency by
accounting for the time purchased and by rnak'
ing payment lor the work as well as charging
the cost to lhe proper dePartment and producl.
Q1 1-14. (a) Delermining labor hours worked by each
empbyee is prirnarity lor payroll
PurPo3-
es and linancial accounting,
(b) Determinatirn ol labot hourc consumed
on each
irb
or h a department is a part
ol cosl det er mi nal i on f or a
j ob or
pnocoss. lt shouH also be a measure of
labor efliciency, since hours consumed
and productive output can be cornpared.
Ol 1-15. (a) The cbck card showg the amounl ol time
an employee spenl in lhe plant ach day
ol a payroll period. lt is evidence that lhe
empbyee's time has been purchased.
(b) The time ticket shows tho amounl ol lime
an employee spends each daY on 6ach
icb
or in each department. ll is an ilem'
ized invoice ol the time thal the employ'
ee selb to lhe empbyer.
01 1-16. Since the clock cards show the time employ'
oes are h the pbnt, the lirst step is to make
sure no error exists on the time tickets. lf the
total time shown on the time tickets is cortecl,
trren the workers speot time in the phnt when
nol working or not assigned lo specific'
jobs ot
dopartments, gr
when assi gned l o mai nte-
nance or repair work For the time thal is idle or
assigned to indirect bbor, a chargo is made to
Factory Overhead.
Chapter 11
01 1-17. Bar codes are symbols thal can be processed
el ectroni cal l y to i denti fy numbers, l etl ers, or
special characlers. Bar-coded empbyee idenlF
lication cards or badges, and lask identilica-
tbns can be used to replace clock cards and
time tickets to collect payroll data ard to mea'
sure worker activitY.
Q1 1-18. Appendix One method would be lo charge the
premium costs directly to lho
Prod'
usts in thc same rtra rne, as straighl'
l i me l abor cosl s. Thi s woul d be
aPpr oPr i at e when
Par t i cul ar i obs
have to be rushed to ccnPlelbn. A
secmd method woub be to trat the
ptgmium as an ovefiead elemnt lo
be ctrarged to all ptoduclirxt through
the allocation ol overhead. lt would
be appropriate when lho ovatlim is
a recurring condilion normally inci'
dsnt to the level of oPeratiens'
011-19. Appendi xThe bonus and vacati on pay shoul d
be accrued ovet the benefi ted ti me
peri od. When the bonus and vaca-
tinn pay are pairJ, the accrued liabilily
account is debited and the cash and
withholding accounls are crediled.
Ol 1-20. AppendixThe recornmended method in com'
puting costs under a pension plan is
to detemine aciuariatly lhe eventual
pension paymenls lo covered empkry'
ees and to cfrarge these luture pay'
menls as a cost
gt
curtnt
production
over the exPected
geri od of acl i ve
service of covered employees' Costs
based on Past
servi ces shoul d be
wr i t l en ol l over some r easonabl e
period on a systematic and rational
basis that doos not distorl the operat'
i ng resul ts of anY one
Year.
These
costs are incurred in contemplation
of lhe presenl and luture seryices nol
only of the individual employee' bul
also ol lhe organi:ation as a whole'
Benef i t s ol t he
Pl an- such
as
improved morale. removal of super'
annuated employees' and attraction
of mor e desi r abl e
Per sonnel - ar e
exPecl ed l o i mProve the oPerati ng
etficiencY of a comPanY.
I
217
Chapts ll
El 1- 1
EXERGISES
ORANGE CITY CA"I{NING COMPANY
t^abor Schedule for Terry Paco
For Fi rst Week i n June
Units producod
a r a a . a a a a a o a a r a . a . a a a a . . . a r . a r
40
1, 32O
1r2OA
110o/ o
S9
9396
s9.90
s.30
E11-2
(11
Tuesday Wednesday
Hours x hourly ratg............
Unlts above standard.
H ou rs saved............r..........
Value of tlme
gavgd....o...o..
SOoh of value of Ume saved
Earninga ............................
U9"d"y
$64.00
o
s64.OO
t o
. 50
s 4.OO
$ 3.20
s67.20
s64. OO
l 5
.75
$ 6.00
s 4.80
$68.80 s200.oo s64.OO
(21
Efficiency ratio: l o7, 50h
Earnings: 1O7.soh r $8 hourly rate r 4O hours =
$344
(31
Earnings: ($8 hourly rate + 5Yc rate increase) r 24 hours =
S8.4O x 24 hours s
$2O1.EO
860
- =
800
!
I
I
Chapter 11
248
t o
e 5
; !
: q
o E )
8 g
E{ t
E T
E:
Es
s 3
E g
. L
= o
o b
E O
r 3
S F
Er r
$ g
3 e
gt E
tg cD
r t c
o !
E ! t
o o
O L
> 5
' 6 9
E E
g.E
: t r o
e f -
E t r +
o
9 u )
. g t r r O
(, tt,
-:
gg
' Er 9
; t t
u i O O
< ' 3
EEI
i;gnFl
rfrI
;EFH3l
o r { ) o o o l o
l r F t f g ) r \ l
a a a a
t o r t @t r q , t r '
o
s E
o
O r
- tll \r n @ o N ot
N 6 l
J d o i ' { i d c . i
f i t
F F F F ' .
\ t O @ O
( 1,
l Fl l
N O r t @
( ' l o) t l
q r \ ' o N G ' l c o l l
- l q I
r = N N N l o l l
I t O q , g g l l F l l
N O I r CO
( ,
l o| l l
o N o l ' F l N l l
- t d l
N I O c l r \ ( o l C ) l l
F F F r - l @ l l
o o o o o l o l
o o o o o t o l
o c , o N \ t l \ t l
- l - l
o ! t o l o t r l @ l
F r F r r l F l
- < l r O C {
0 ) C O O f - f r l
F 1 C { $ l r -
a t
g ) g , ( ' , ( ' ) g ,
I
F r - O N
c o N n N @
q q e q q
N C \ l p p r
{,
! t f i , o o o
o | o n s r r o
( Y , N N N N
a a t a a
t - F ? . r F F
g,
o o o o o
o o o o u ,
d d u i u t F :
O O v . N O
o ( o ( o ( o ( o
{,
o o o
o o g ,
o o u i u i r " i
r ( Y G l
{,
o o o o o
o o o o o
o a o ( o ( o ( o
{,
E e l
. j
J i @ @ @
f l
t r t c * ' r i t ! c
. b
l 9
q s
.3
EE5
!t
GI
c ' . t
Z t t a - *
T ' C l v L
6 ( )
q 3
o
sgi g
o
o
[)
(,
x
ur
t'Ft
:B
gl
3 o 5 l
i o l
FFut
E r
o l
E sl
t El
L I
g '
E ! l
E;I
o ; l
s i
r ;
I
>l
( 0l
o l
? l
,.l
( El
" l
(!,
I
ul
E. E, ^ EI
t e # 3 l
q u ? q q q
E = s ; i
g l s 3 6
t r ,
=
dl
o r o N o o
t r l F Q O r
\ t \ t c l o t o
(!
. >E e
f f ; ! E e Y
: o x = E F
; F ; F E i l
!
o $
. i :
! ! t
- r P
o.
C\|
o <t o @ c{t ottl
c o r - o - - l
Sl l
G
Et$rs
s
E F } F T
lgl
rfrrl
lfl
r t r t G ' O O
o o o o l |
a a a o
r F O ? G |
q ( , t t t o l o
6
t r o
t 3
o c
t r o
i r 0
I
I
I
I
ChWtar ll
Ell\5 19A productivity
ratio =
'
194 standard hours for work done *
19A total actuar dirsct and Indirect rabor hours =
943,823 +
|
$251324
= .422089
Hours needed for i 98 production
at l
gA
productivity
ratio =
198 standard hours for work done
-r
i 9A productivity
ratio =
558t51o +
t422o89 ..r.rr.........o.....r.r....o.....o...............................
Less l9B total actual direct and indirect labor hourt,...,....:.-,
Hours savgd ............-...o...........r...........r..r...r.r.......
Value of wages saved = hours saved r lgB
svoriage hourly pay plus
labor fringe benefits =
38,221 r $i 4.7O =
$561,949
Employee gainsharing
incentive totaf =
vafue of wages saved r 5OZo =
S561,849 x SOoh =
$28O,g24.5O
Gainsharing
incentive per
employee =
total gainsharing
incentive r-
number
of eligible employees =
$28Or924.5O +
755 employees =
$?Z2.Og
219
113231204
1r2g4rgg3
38'227
Ef l -6 I bat ch . . . r. . . . , . . . . . , . . . . . , . . t . , . . . . . . . . . . . . . o. . . . . . . . . .
$60rooo
2 batches..........,...,...........,.............,..,.,,
$l groOO
l go%
of $6Oroogf
4 batchgs..o.r.......................r.r................
Sggrcoo
i gorh
or
Scgroooi
8 batches....................,..........r...,.r.......,.
$gorzzo
i aoy" or $grcooi
16 batches............r.,..........,........r............
$zorszg
i gow of $3or72o)
E11-7
Cumulative
Average
Required
Weeks per
Bridge
100
BO (1OO
weeks r 8O%l
64 (8O
weeks r 8O%f
57.2 (64
weeks x 8O%)
7 addi ti onal
bri dges
must be bui tt i n order to bri ng the cumul ati ve
BVB' -
age bel ow 52 weeks.
Bri dge
Number
x
I
2
4
I
I
Y
I
I
Chapter | 1
El l - 8
(f
l
The schedule below demonstrates
the 8O7o learning curve that the com-
pany expects to experienco in
producing the time devices:
Cumulative
Lots x
Cumulative
Average
Time
=
9O.OO hours
72.OO
57.60
46.08
Cumulative
Time
9O.OO hours
144. OO
230.40
368.64
I
2
4
8
At an SOoh learning factor, the cumulative time to produce 8 lots
should be 368.64 hours. At a standard labor rate of $9
per direct
'
tabor hour, the standard amount for total direct labor cost should be
set at $3,317.76
(368.64 x S9).
l2l
The company shoutd estabtish the standard for direct labor time equal to
the marginal direct labor time required to produce the eighth lot'
provid-
ing steady-state
production occurc after the eighth lot. To assure that
this standard time will be accurate, the company should:
(al Keep accurate records through the first I tots to determine if an
EOoh learning factor is experienced.
(bl Continue to keep accurate records for each successive
production
lot to provide
a basis for:
1. Conformance to expectati ons about l abor ti me (i .e.' steady
state
production after 8 lots)' or
2. Determi ni ng when steady-state
producti on does occur.
E1 1-9 APPENDI X
(1) Overti me premi um
charged to producti on worked on duri ng the overti me
hours:
Work i n ProcgsS...,......,.....,..............,,.......,.................
Payrol l (4O
hours x $91 + (1O hours x 1.5 x $9)..,,..,.
(21
Overtime premium
charged to factory overhead:
Work i n Process (5O hours x $91........,....,..,......o.........
Factory
Overhead Control (1O hours x.5 x S9)...........
Payrol l .... .........,.....
495
450
45
495
495
I
I
I
I
I
Chagter ll
E1 1-1 O APPENDIX
Subsi di ary
Record
Factory Ovgrhead Controt.........,.................
Bonus Pg1| . . . . . . . . . . . . . . . . . . , . . . . , . r. . . . . . . . . . . . . . . . .
l 34. 4Ot
VaCatiOn P8f.......r........r...r.............o....
G7.ZOz
Liability for 8onus..........r............r,........r.
Liability for Vacation Pay .....o.r..........;.....
"
(9lO +
g32l
x 40 hours r 4 weeks =
S6' Z20 + 5O weeks
2
($fO +
$32) x 4O hours x 2 weeks =
g?,36O
+
5O weeks
EI 1.' 1 APPENDIX
Factory Overhead Controt
lgeS,OOo
x 2gTo1...,....
Marketing Expenses Gontrol (SgrOOO
x Zg;/o1......
AdministraUve
Erpenses Control ($7,ooo
x 2a./"1
Liability for Pensions (S5OTOOO
r T.go/o1..,...,,-
Liability for Other
postretirement
Benefits
($5o,
ooo x 2.3o/o1.....r.r.,,...r......,......
Ff CA Tax Payab le (95 0,O0 O r T .S%1..........,...
Federal Unemployment
Tax
payable
($50, ooO x .g/ol ....r,....r.......r.....................
State Unemployment
Tar
payable
($SO, OOO x 4.6Tol ...,..........ro...............,.....,
Workerst Compensation
Insurance
payable
($5o, ooo
r l %1. , . , . . . . . . . , . . .
. . . . . , . . . . . .
Medi cal Insurance
payabl e
($SO,OOO
x 4%1..
GGA-Canada (Adapted).
Repri nt
El 1. 12 APPENDI X
t l )
The entry to record the payroll
liabilitp
Payrol l
. . . t . . . . . . . . . . r. . . . . r. . . . , . . . . . . . . . . . . . . . . . .
26r7OO. OO
Empl oyees
Federal Income Tar
payabl e
..........
Empl oyees
State Income Tax
payaL| o.......,......
Employees
City Wage Tax
payable
.......,.,...,,....
l l CA
Tax Payab18....................,.....
Accrued
Payroll !.,...,,......
25r
l-
b
Dr.
Cr.
201. 60
134. 40
67.20
=
5134. 4O
=
67.20
9,8OO
2124O
1, 960
3r go0
1, 150
3, 750
400
2r3OO
500
2,OOO
wi th permi ssi on.
2,5OO.OO
500.oo
267.OO
2rOA2.5O
21, 430. 50
(21
The entry to distribute the payroll:
Work i n Process,....................,......,..,,........
fac-tory
Overhead
Control ..,............
Marketi ng
Erpenses
Control ............................r...
Admi n i strati ve
Expenses
Control
.............,....,..,...
Payroll
l
18, OOO. OO
3, OOO. OO
4r2OO.OO
1, 5OO. OO
l-
26, 7OO. OO
_\
252
E1 1-12 APPENOf i
(Concl uded)
(31 The entry to record the employer's
payroll taxes:
Factory Ovgrhgad Gontrol ....................' ...........--..
Markgting EXpenSgS COntrOl ........'.......................
Administrative Expenses Control ............or'..........
FI CA TaI Payab19. . . . . . . . ' . . r. . . . . . ' o. ' . . . . . . . . . . . . . . . . r. . . . . . .
'
State Udemptoyment Tax Payab|g...............,..,.
Federal Unemployment Tax Payabl....'.".........
2,394,OO
478.80
171. 00
Chagter | 1
2,O02.5O
854.40
186. 90
I
L
I
L
I
I
I
I
!
ChWter tt
Pr l - 1
(fl Present cost
Direct labor per
hour
PROBLEMS
$10
12
$22
-r
5 units per
hour =
$4.4O conversion cost per
unit
253
Convcnbn Cal
pcr
Unlt
t
l
I
!
Factory overhead per
dirrct labor hour...
PcrWorkcr por
8-Hour Dey
unltrlrromblcd
Plccowort Dlrcct Fectory Totaf convcrzlon
pcr
&Hour Day Rrt Labor Ovcrhead
Coot
( t )
Boguhr Worksoot
Employoe
Hourty
Rrtr
Clrnct D--...-
!O.OO r
l,,ukon, T.--..-
B.OO r
&hott, J...-.....
I.0O r
3 80.oo rs9s.oo
05,40 eo.00
110. 00 06. 00
12650 00.00
144.00 03.00
Totrl dlnct lebor -
lncrndyo lflagr Plan
Boe Pay
Incrntlvr Pay
(Unltr
Producrd r
(Boo
Frtr r Wort Hourr) + InconUvo
prrmlum)
r
10
szoo
4ft
2.12
50
z.2o
55
e.3o
80
z4o
3176. 00
101, 40
20s.00
222.50
240.00
Sf.4o
1.8
1. 12
.3.05
a.oo
(21
lf a
producuon
rate above 4o units per
employeo per
g-hour
day is
noasonably
attainable by the worksr, the employeo oarnings wili increase
under the plecework proposal,
Since convercion cost per-unit
decreases
with increased
output, management
should favor the
iiecework
proposal.
P11-2
b
Totrl
Worl- l'bor
Work Cort
4O hn, E
32a0
,3O
h.!. r 320
aO hrr e 280
lc.go r 4o hn = 't.to
5.5O r 4O hn - 2t2O
4.5O r 4O hn = 18O
Totrl
Lrbor
Coel
Totrl dnct hbor._._._.
_t&ao
flrclt -
t8.fo r llog hbor oori Incroor
l O5 r $t , OO= 3t o! t t OO5
iO5 r l.OO = t0tt 3S!t
105 r l .0O = t0tl O45
tl ,ql 5
Proot:
#*
=
2g.2% trborcort Incro'r
b
254
Chaptor | |
'
Pl 1-2(Gonctudedl
l2l
To assess
properly the effectiveness of the new
plan,
it is nocessary to
anallze lts eftect on convorslon costs and not
just
on direct labor costs.
Although dlrect labor cost
per
unit may rise, this Increase may be moro
than offset by distributlng the overhead over a larger Yolume.
A comparison ol the two
pay plans and their effects on convsrsion cost
per unit shows:
Totrl lrbor Tctrl Totrl Unlt
bbor Cort Frctory Ovorlrerd Convotrlon Corwonlon
Cort prr Ur*t orrorhod por Unlt Cott Cott
tncsntlvc wagc plan
tl,o35 tA.Zt tlr2Oo J|ZZ t2,235 $1355r
Stnfght hourly ratc 84O 5,OO IJIOO 8.OO 2,O4O 13.002
Dtflcrcncc t .o7
l.El 9_1.09)
nct
decrearc
152, 235+165=$13. 55
2
$2, O4O
+
150 =
$i 3. OO
The decreaso In conversion cost is minimat; however, the fact that cus-
tomels can be sryed sooner might be worth additional labor cost.
Based on learning curyo theory the
productivity of the worker might
increase sufficiently to reach a more satisfactory output and cost level.
Chapter 11
I
t
I
L
255
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s! 6i
;
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q q
si sl
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gE
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\ q q
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eE9l
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l i i
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o o, o o
5l
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o .,
t t
? r
i g i
e
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g
s
e
#l
.f
gl
$
N
Egl
5
N s s s
t t l
. e El o
. Et
\ ' I
p
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= 6 l
F t ' F F
N
l - l
r i
i l
l >
! e,i
f i E il
: A
d l
5 e H
5 d
n = , t E
P I F E
5;l
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-1
256
Pl l -3
(Concl udeUf
Hours worked
Chaptar l1
. a a a r a a a a a a a a 40
855
800
Units
produced
Standard
produgtion (20 units x 4O hours|..-..............
Efficiency ratlo (855 + SOOI
Base wage per hour
Base wage plus
bonus (1.O6875 r $91 ...............o.....,..
Wggkly earnings ($9.9t975
r 4o hou1s1........r.............
Unit cost ($384.75 + 855 unltsl ..or.......t.....r....,....,r.o...
1.06875
$9.0o
$9.91975
$384.75
$.45
(_
Clpptor l1
!
257
g'ilglc
r o i I
A - - I
i i s$! i qf i n$r
,3 i E
"l '
- o i I
iEfFl fiFFEF
t i i { l ; . . EE
; eE^l
Es$gl sesss
5
i!
tl$
n
6r c! '!
g; FsF"
i El"*=*=*
"
si;l
"
sil
tFF$s
r : c ! t F S E i
gsrgli
EsfE sl
gfiggH
5i i ' i -
5- E! =1"
l r O r . O U t
@ N O t o N
O u ) N ( \ | @
N N N N N
a a a a
o
EEI Bs s s s
E$l gBddd
N
o
F
g;l
'
! r o 6
3 s E
o s E
: 5
&l r- r-
c t o S
J e g
grliS;$3
ifl$
;
$;l;
;
$l'
EgE3E33
o o l '
O N N
N N N
b
s'r
g
e sle
E g l
'lgggFs
u l
r 8 l o
= : 1 5
5 F l - -
_ l
G I
l : l
3 x l 3
g
= i r
A
t
rl
gi l i .
-'
gEJEF
o o 6 | O
N ( '
: -El
El g
5 3 l '
o
i l
F$l g33Es
I
>
!t
I
G g
- i
2fi
P11- 5
Straight Piecework
Units
produced-regular
tlme
Piecework
rate
Pi gCgWOf k
p3! r. . . . . . . r. o. . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . t . . r. . . . t . . t . . . .
Downtimo PaY
Chapter | 1
Dodd
Hare Lowo
400 410 370
$
.66 $
.66
I
.O6
$264.00 $270.eo 9244.20
30.oo
o 24'OO
o 54.OO
r
36'00
s294.OO $aZc,oo $304.20
284.OO 277.2A
302.20
$ IO.OO $
47.40 $
2.99
: = - z :
Ober
RuPP
a a a a a t a a a a a a a a a a
OVgfti me
p8!....r...........r....r....rr........r...r........o...........
Tot al l \ r 3$l B3 . . . . . . . t t t """"t t ""t o"""' r t t t ""t t """t "' t t t """'
WaggS
por bookst t "t t t "t t t ""t t t ""r t "t t "' r "t o""t t "t """"'
U n d efp aym OJ1t...............r......r.....i ....o.r..
r.....o...........r..
t6.r
$6
x 15ooh
= $54
Percentage
Bonus Plan
Uni t S
pf OdUCgd, o. . r. . r. . . . . . . . . . . . . . . . . . . . . . . . . ' r. . . . ' . . . . . ' r. . . . . . . . . ' . . . . "'
Standafd
pfOdUCti Otl ................' ..o......' .......o......r..............
Ef f i Ci gnCy f at i O. o. . . . . , o. r. . . . rr. . . . . . . . . . . r' . . . . . . r. . . . r. . r. . . r. . . . . . . t . . "' r'
RegUl af Wa993. . . . . . . r . o. . . . . . . . . . D. . . . . . . . . . . . . . . . . . . o. . r . . r . . . t . . . . t r . . . . t " '
8OnUS. . . . . . . . . . . . . . . . . oo. . . r . . . r . . r . . . . . . . . . . . r r . . . . r . r . . . . . . . r . . . . r . . . . . . . . . . " "
TOt al wageS . . . . . . . . . . . . . . . . . . . . . . . . . t ""t t rt t "t ""t ' t t ' t ""t "t t """"t "o
WageS
pef bOOkS . . r . . . . . . . . . r . . r . . . . . . . . . r . . . r . . r . o. . . . . . . . . r . . o. r . . . . r . . . t . .
Undef paymO; . 1t . . . . . . r . . . r . . . . . r . . . . . . . . r . . r . . . r . . . . . . . . . . . . . . r o. . . r . . . . . . . . . . . .
r25oh
pnemi um x $24O
regul ar wage =
$60
or S6.00 hourly rate
x .25
pnemi um
51. 5O bonus pay
S1,5O x 4O hours
=
$60
250
200
125o/o
s240.oo
60.oo1
$3OO.OO
280.OO
180
200
gooh
S2oo.oo
o
$2oo.oo
l 71. OO
$ 20.oo s 29.OO
=:
::z:
I
I
I
E
Chaptar 11
Pl l -5 (Concl uded)
Em erson Effi cien ca System
Unitg
produced..t.........r..
Standard
production
Efficigncy ratio..........
BOnUS l i l l t8 .......r..,.,....r...............
Rggul ar wago.r...or............r..........,......r..................r...
Bon us' uraff o ...............r.r......r.....r.r...r...................r.r...
Downtime pay (2 houra x
35.60}.
Total wages ............,.....
b Wages por
books........r........,.,
I
b
Suggs Ward
259
590
5701
103.5%
450h
s2l2.go3
95.76
11. 20
240
300
80o/o
20o/o
5224,oo2
$ 44.90
a a t a o a a a a a a a a a a a r a a a a a
s268,8O
S319.76
233.20
2go.o0
:----
$ 35.60
$ sg.zo
Un d erp aym
(!Dt....r..rr".........r........,.r.r.....r.r......
i ..........
t
6OO units
(standard production
for 4O hours
)
=
15 uni ts per
hour
15 units per
hour r 38 productive
hours = 57O units (standard production
for 3g
hours)
z4O
hours x $5.60 =
$Z24,OO
s38
hours x $5.60 =
S2i 2.gO
P11- 6
( 1)
Hours worked (5 workers r 4O hours)................,,.r...,,.........,...
Regul ar
wage (2OO
hours r $61.........,..........
Uni t s produced. . . . . . . . . . . r. . . . . . . . . . . r. . . . . . . . . . . r. . . . . D. . . . . . , . . r. . . . . . r. . . . r. . . r. . . .
Bo n u s " " t ' o t ' r t a Dt a a a a . a a a a a t a a a a r a a . a a a a . a r r a a a a a a a a a a . . a a a a o a a a a r a a r r . . . . . a a . a a a a a a o r . a .
we-ekly
garnings.o....r......rr........r...................,...........,..o.......r...
uni t
l abor
cost
Gt l 1252
+
452), . . . . . , . , . . . . . . . . . . r. . . . . , . . . o. . . . . . . . o. . r. . . . , . .
Unit factory
overhead ($f
r4O6
*
452).............r..r..,...,...o.r..,.r..,
Uni t convgrsi on
coSt . . . . ' . . . . . . . . . . . . . . . . . . . r. . r. . . . . . rr. . . . . . . r. . . . . r. . r. . . . . . . r. .
t
452 unlts produced
4OO units standard
_52
units above standard
52 units x $i workersr
share =
$S2 bonus
200
s1, 2OO
45.2
s52
r
$i , 252
$2.7699
$.?.0973
$5.8672
b
l-
b
I
I
Chaptor | |
P11- 6
( Concl uded)
t
4Oo uni ts per 40 hours = 10 uni ts
per hour
1O uni ts
per
hour + 5 workerc = 2 uni ts
per hour
72 uni ts produced + 2 uni ts
per hour = 36 hours standard ti me
z
lf the
group bonus is computed for the week, rather than daily' the bonus
woul d be 36 x 2o hours saved, or $156. Then, $1,356
+ 432 uni ts =
$3 uni t
labor cost. Overhead cost would be S1,4OO
+ 452 units, or 9?.O973
per
unit.
P11- 7
( 1) THOMAS INC.
Quarterly Bonus Allotment
At End of March
Unltl-...'......-..
Standard houn
for unltt.--..-..
Actual houn..-
Bonurr to r
houn ttvcd..-
Total carnlngr.
Unit labor cort.
Unlt factory
ovgrhcad ,....,.{
Unlt convcnion
coat ,............,.-
72
3 6 1
. , 4
3zlo
333333
*r.8e8e
glzaul
8t
nrn
&
3 s
32'til
Sr.oooo
33.45A8
toJ508
95
171t2
10
t r s
328!t
33,0000
32.9471
35.947a
102
5t
ao
f 0 6
3soo
ir.oooo
327451
35.74tn
102
5l
40
f o o
3300
33.OOOO
3Z74nl
35.74tt1
152
22A
200
3 t 8 o 2
31,380
$3.Os31
33.0073
30.1504
Empl oyees
Participating
1 Works managgr....r......
2 Produsti on engi neers.,
5 Shop supervisot' tg.........
1 Storgkgopor.,.,..,....r...,.
5 Factory office clerks ...
l5O Factoty workefs ......
Points
Allowed for
Each Employee
250
200
200
l oo
1 0
20
Shara
per Poi nt
s3.125r
3.725
3.125
3. 125
3.725
3. 125
Total
Share
s 781.25
1, 25O, 00
3, 125. 0O
312. 50
156. 25
9,375.0O
9!9'o99.09
Total
Points
250
400
l , 0oo
100
50
3,O0O
4, 8OO
ra
27O, OOO
24O, OOO
3O, OOO
3O, OOO
s15, OOO
uni ts actual producti on
uni ts normal producti on
units excess ovor normal
uni t s r $5O=$15, OoO
+ 4,8OO
poi nts =
33.125
qer poi nt
f
' l
I
Chapter | 1
Pl 1- 8
(rl
Gumulative
-Cumulative
Number Number of Uni ts Cumul ati ve
of Lots
(Lot Size = 50) Average Time Per Unit Cumulative Time
50 4.0000
l o0 3.6000 (4.oooo x.9l 360.00 (3.6000 x 1oo)
2OO 3.24OO (3.60OO x .9! 648.00 (3.24OO x 2OO)
4OO 2. 9160
( 3. 240O x. 9l 1' 166. 40 ( 2. 9f 6O r 4OO)
8OO 2.6244 (2.916O x .9) 2rO99.52
12.6244
x 8OO)
Ti me i n Hours
I
2
4
I
1 6
DireCt tabOr hOUrS reqUired tO prOdUCe the firSt 8OO UnitS r..,............... 2tO99.52
Di rect l abor hours requi red t o produce t he f i rst 2OO uni t s . . . . . . . ' . . . . o' . . . . , 648. 00
Di reCt f abOr hoUrS f eqUi red t O prOduCe t he next Ordet ' . . . . . , . . . . . . . . . . . . . . . . . . .
11457. 52
:
Numbgr of uni t s i n t hg ngxt ordgt ' . . . . , . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . ' . . . . . . r. . . . . . o. . .
---
600
Di rect l abor hOUrs
per
uni t f or t he next order (1' 451 . 52
+ 600) . ' . . . . . . . . . . 2. 4192
Catoni c Part Number PGB-31
Uni t Costs and Pri ces for Rex Engi neeri ng Company
Estimates
Incorporati ng
a 9ooh Learni ng
Gurve
Materi al s S18O.OO
Labor and empl oyee benef i t s
( 2, 419 x $20) . , , . , . . . . . . . . . . . . r . . . . . . . . ,
48. 38
Var i abl o over head ( 5O% of l abor ) , . . . . . . . , , . . . . . . . , . . . . . . . . . . . . .
24. 19
Total vari abtg coSt.,.......r,..r....i ................,,..,....' ..r...... 5252-5|
Fi xgd ovgr head . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . . , . . . ' . . . . r . . . . r 4O. 0O
Ful t cost. .....!........ SZSZ.SZ
Profi t contri buti on (1 Ooh of ful l cost) .,...........,...,....
.
29.26
Esti mated contract pri ce...........,.,. S321.83
l 2l
The i mpl i cati ons of an 80% l earni ng curve as opposed to a
gOoh
l earni ng
curye are:
(a)
An 80% l earni ng cunre i ndi cates a
greater effect of experi ence on
efficiency.
(b)
Most of the i ncrease i n effi ci ency (decrease i n ti me and cost per
uni t) due to an SOoh l earni ng curve occurs earl y i n the
producti on
r un; t hus, sat ur at i on i n l ear ni ng i s achi eved ear l i er wi t h an AOoh
l ear ni ng cun e.
f
' l
I
Chapter | 1
Pl 1- 8
(rl
Gumulative
-Cumulative
Number Number of Uni ts Cumul ati ve
of Lots
(Lot Size = 50) Average Time Per Unit Cumulative Time
50 4.0000
l o0 3.6000 (4.oooo x.9l 360.00 (3.6000 x 1oo)
2OO 3.24OO (3.60OO x .9! 648.00 (3.24OO x 2OO)
4OO 2. 9160
( 3. 240O x. 9l 1' 166. 40 ( 2. 9f 6O r 4OO)
8OO 2.6244 (2.916O x .9) 2rO99.52
12.6244
x 8OO)
Ti me i n Hours
I
2
4
I
1 6
DireCt tabOr hOUrS reqUired tO prOdUCe the firSt 8OO UnitS r..,............... 2tO99.52
Di rect l abor hours requi red t o produce t he f i rst 2OO uni t s . . . . . . . ' . . . . o' . . . . , 648. 00
Di reCt f abOr hoUrS f eqUi red t O prOduCe t he next Ordet ' . . . . . , . . . . . . . . . . . . . . . . . . .
11457. 52
:
Numbgr of uni t s i n t hg ngxt ordgt ' . . . . , . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . ' . . . . . . r. . . . . . o. . .
---
600
Di rect l abor hOUrs
per
uni t f or t he next order (1' 451 . 52
+ 600) . ' . . . . . . . . . . 2. 4192
Catoni c Part Number PGB-31
Uni t Costs and Pri ces for Rex Engi neeri ng Company
Estimates
Incorporati ng
a 9ooh Learni ng
Gurve
Materi al s S18O.OO
Labor and empl oyee benef i t s
( 2, 419 x $20) . , , . , . . . . . . . . . . . . r . . . . . . . . ,
48. 38
Var i abl o over head ( 5O% of l abor ) , . . . . . . . , , . . . . . . . , . . . . . . . . . . . . .
24. 19
Total vari abtg coSt.,.......r,..r....i ................,,..,....' ..r...... 5252-5|
Fi xgd ovgr head . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . . , . . . ' . . . . r . . . . r 4O. 0O
Ful t cost. .....!........ SZSZ.SZ
Profi t contri buti on (1 Ooh of ful l cost) .,...........,...,....
.
29.26
Esti mated contract pri ce...........,.,. S321.83
l 2l
The i mpl i cati ons of an 80% l earni ng curve as opposed to a
gOoh
l earni ng
curye are:
(a)
An 80% l earni ng cunre i ndi cates a
greater effect of experi ence on
efficiency.
(b)
Most of the i ncrease i n effi ci ency (decrease i n ti me and cost per
uni t) due to an SOoh l earni ng curve occurs earl y i n the
producti on
r un; t hus, sat ur at i on i n l ear ni ng i s achi eved ear l i er wi t h an AOoh
l ear ni ng cun e.
I
I
i
Chapter | 1
P11-a (Goncl uded)
(31
'
The degree of tearning that takes
place
in an industrial operation would
be reduced by
(al
a low proportion
of assembly labor to machine labor;
(bl
an operation ol low complerity;
(cl
high employoe turnoveq
(dl tedium;
(el poor
working conditions.
Pl 1-9 APPENDIX
(11 Charge to work-in-pnocoss:
Normal working houns = 40 houra r 2 = 80 hours
Let X=over t i mehour s
X =
s r , r 4 o - ( 8 o r $ r 2 )
( $l z r r . 5)
X = 10 hours
Therefore, charge to work in process =
gO
r
$lZ
=
$l,OgO
l2l
Factory overhead charge for Emptoyee tloTl:
Gompany benefits paid
by employer....,,
$273.20
Overtimg premium
t............oo..................
6O.O!t ($trf
40
_
Slrogol
s."99
(31
The cost of idleness should be charged to the departmentaf factory over-
head account
PI I.I O APPENDIX
(l )
Apr. 7 Payrol l ,..,..........
........,....r.
Accrugd Payro| 1......r.....r...rr..................r.
Employees lncome Tar
payable
(9.5olo)..
FICA Tar
payable
(2.5|.,.....,....r..r,..,........
14 Payro11........................,..r....,.........
Accrugd Pa1rclt.' ..........r...............r......,..
Employees
Income Tar
payabfe
..,....,...,.
FICA Tar
payable
..,...,.......,.....,..,....,,.....
5, 8gO. OO
21 Payrol l . . . . . . o. . . r. . . . . . . . . . . . . . . . . . , . t . . . . . . , . . . . . . . . . . . . . . . r
srgoo. oo
Accrugd Pa1ro11. . . . . . r. . . . . . . . . r. . . . . . . . . . . . r. . . . . . . .
4rggZ. OO
Empl oyees
I ncome Tar
payabt s. . . . . . . . . . . . .
560. 50
FlcA Tar
payabto
.............:.....................
44z.so
2A Payro!| .......r.......r........,..r.
...r.....,.
4rggo.oo
Accnred
payrol l ....
,...................
4,O5O.4O
Empl oyees
l nco^me Tar
payabfo.............
463.60
Fl cA Tar
payabl e
.............:.....................
366.00
4,92O.OO
4,888.70
559.55
441.75
4r083.6O
467.4A
36g.OO
I
l-
264
Pl l-1 O APPENDD( (Goncluded|
t2l
Apr. 5189O
4rg20
5,9OO
4188O
2164(,
24.23O
Chapter l1
Dr. Cr.
Apa 3O Work In Procgss ..r........r..............o.....
Factory Overhgad Gontrcl' ...,....' .......
lndirgct Labor .' .......r.........' .....
Payro|1 tt...............................t........
Apa 30 Factory Ovgrhgad Gontrol .................
FlcA TaxlS22rOOO r 7.5o/o1.,....
Federal Unemploymont Tax
($22rOOO x' 8oh1.....................
State Unemployment Tar
($2Zr OOO x 4oh1...,..................
Vacation Pay
l922rOOO
x 8o/o1..
FICA Tax Payab19 "..................r.....
Federal Unemployment Tar Payable
State Unemployment Tar Payable
Liability for Vacation Pay.......,......
Payroll
Subsidiary
Record
5,6OO
16, 400
5,6OO
4r4eB
22rOOO
1, 65O
176
880
1, 760
(31
1r 650
17f,
880
1, 760
Accnred Payroll
I
7
1 4
21
28
Apr. I
30
7
1 4
21
28
30
2r23O Apa
22rOAO
24J,sO
Mar.31 Bal .2,23O.OO
Apr. 7 4r888,7O
14 4, 083. 60
21 4r897.OO
2A 4' O5O.4O
30 2,04O.0O
2e789.74
2,840.OO
2,640
2,640
2r23O.OO
4r888.7O
4,O83.60
4r897,OO
4,O5O.4O
20,149.7O
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Chapter 11 265
CASES
I
c t 1- l
(1) Arguments used by each proponent:
(a) 1,00O-pieces-per-hour-rate:
{1}
Studies show that machines can be operated at this rate.
(21 Variances determined by this output rate will measure the inef-
' '
fective use of the machines.
(3) This rate can be a target level to be strived for, and the chang-
ing variances will show pnogness toward this ta4get.
(4) A goal of this natute will motivate the supervisor, and thereby
the workers, to reach this rate of output.
(b)
750-pieces-per-hour-rate;
(1)
This rate of output has been attained by some workers.
(21 The IroOo-pieces-per-hour rate has not been attained, nor has
any rate near to it been attained.
(3)
The 6oo-pieces-per-hour rate is an average of actual perfor-
mance and does not represent good economical performance.
(4) The standard cost should reflect production
rates that can be
attained when good economical performance
occurs. The 75O-
pieces-per-hour
rate, capable of being achieved by some workers,
would seem to be such a
per{ormance.
. (5) The variances would measune the extent by which this economi-
cal levef has been exceeded or the extent to which it has not been
met.
(6) lt should provide
motivation for the supervisor to improve on the
60o-pieces-per-hour cunent rate and in turn motivate the employ-
ees to improve their performance.
(c)
6OO-pi eces-per-hourrate:
(1)
This rate has been achieved by the departments as a whole. The
standard costs should be set to reflect the ability of the whole
department.
l2l
The variances from standard cost based upon the 6Oo-pieces-
per-hour
rate would measure the departures, favorabte and unfavor-
able, from the current effective level of operations.
(31 For two thirds of the workers, the 75O-pieces-per-hour
rate
would be dlfficult
lo attain and would tend to frustrate them, thus
making even the present
6oo-pieces-per-hour
rate difficutt to main-
tain. For all workens, the 1r0Oo-pieces-per-hour
rate could not be
attained' thus lowering the morale of the department and probably
lowering output below current levels.
(4) The 6oo-pieces-per-hour-rate,
when passed
down to the pro-
ducti on worker, wourd be an appropri ate goal
for those three
empl oyees who are produci ng
fewer than 6oo pi eces per hour.
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Chapter | |
C11-1
(Concl uded)
l2l
The
purpose
of standard costs and standard cost reporting is to measure
the performance
of a department agai nst a l evel of cost i ncurrence that
nepnesents attainable good
economical performance.
The variances indi-
cate the periods when the performance
varied (favorably
or unfavorably)
from this acceptable level.
To be used effectively, the rate to motivate the supervisor and, thereby,
the worker,s to improve performance
would depend upon the perceptions
as to what is attainable. lt would also depend upon the reward structures
within the firm. Other variables would also affect what output rate would
motivate improved performances.
The val ue pi cked (e,9.,
i r00o, T5o, or 600) must be a compromi se
between the level that witt have the most effective motivational result
and that whi ch wi l l be an effecti ve representati on of the costs when the
department i s operati ng at an acceptabte economi caf l evel . The 1,OOO-
pi eces-per-hour
rate shoul d be rei ected because i t does not provi de
the
basi s for a measure of an acceptabl e cost tevel . l t woutd al so be of ques-
ti onabl e val ue from a moti vati onal poi nt of vi ew, because i t appears to be
unattainable by the production
workers.
The 75o-pi eces-per-hour
rate i s a possi bl e
choi ce. l t i s capabte of bei ng
achieved by some workers and as such may
provide
motivation to the
supervisor to bring other workers up to that level, thus achieving a
departmental
output of 750 pi eces per
hour. tt al so may represent the
appropri ate
basi s for a standard cost because i t i s a possi bl e
acceptabl e
l evel of performance.
tt may al so be a sui tabl e departmental target
establ i shed i n connecti on wi th the i ntroducti on of the standard cost sys-
t em.
The 6oO-pi eces-per-hour
rate i s al so a possi bte
candi date. The Punch
Press Department
has achi eved thi s tevef, and three of the si x empl oyees
have been abl e to achi eve i t. l t i s, however, the current l evel of oui put
and that may make i t i neffecti ve i n moti vati ng the department and i ts
workers to improve the level of output. As the basis for standard costs, it
coufd represent an acceptabl e l evel of output; but i t does not i ncorporate
the possi bl e
i mprovement ti kel y to be obtai ned i n connecti on wi th an
introduction
of a cost system.
The
75o-pi eces-per-hour
rate seems to be the best choi ce of the three
al ternati ves.
More i nformati on about the condi ti ons under whi ch the
engi neeri ng
studi es were done, the trai ni ng and experi ence of the work-
ers' and the trend of worker and department output i n recent peri ods
woul d
be necessary before the number coul d bs chosen wi th some
assurance
that i t woul d meet the stated obj ecti ves.
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Chapter 11
267
c11- 2
(1)
'
An advantage of the new payrol l i ncenti ve pl an
i s that i t recogni zes a
probl em'
whi ch shoul d i mprove empl oyee moti vati on. Acti on taken by
management will be perceived
as a positive
effort to resotve a
problem,
and empl oyees may feel more a part
of the group and behave as team
members.
Some di sadvantages, whi ch coul d l ower empl oyee moti vati on, are that
empl oyees' fi l es are open to scruti ny by peers,
and that empl oyees may
feel that they have to be a
part
of the
"i n
grouptt
to be assured-recogni -
ti on for wage i ncreases. The pl an
coul d degenerate i nto a popul ari ty
con-
test.
some advantages that shoul d i mprove empl oyee producti vi ty
are the
i ncenti ves the pl an provi des
for empl oyees to perform
effi ci l nt| y and
effecti vel y, and the benefi ci al competi ti on i t promotes
among empl oyees,
as l ong as i t i s i n harmony wi th corporate goal s.
A di sadvantage that coul d l ower empl oyee producti vi ty
i s that the pl an
coul d l ead to col l usi on among groups
of empl oyees to keep producti vi ty
l evel s arti fi ci al ty l ow. Empl oyees coul d approve each otherb' wage
requests wi thout appropri ate meri t. The pl an
al so coutd resutt i n i neffi -
ci enci es, because empl oyees who have had thei r wage i ncreases turned
down may not work up to capaci ty due to a l oss of i ni erest.
some advantages that shoutd i mprove goal
congruence between the
empl oyee and the company are that the pl an
i ndi cates the company' s
i nterest i n the needs of the empl oyees, and that the pl an
may resul t i n
i ncreased profi t
through i mproved producti vi ty,
whi ch may l ead to
empl oyees
earni ng a l arger i ncome through i ncreases i n wages.
Some di sadvant ages
t hat coul d l ower goal
congr uence ar e t hat empl oy- .
ees may mi st r ust a wage pl an
suggest ed and i mpl ement ed
by manage-
ment, and that there may be an overemphasi s on a l i mi ted range of per-
formance
measures.
Some advantages
that shoul d i mprove admi ni strati on
of the pl an
are that
procedures
for requesti ng
a wage i ncrease and for i ts approvat are cl ear
and unambi guous,
and the pl an
al l ows for rel ati vel y qui ck posi ti ve
feed-
back and peer
r ecogni t i on.
Some di sadvantages
that coul d hamper pl an
admi ni strati on
are that
there i s a l i mi ted amount of management i nput and control , and that
there wi l l be addi ti onal record-keepi ng
responsi bi l i ti es
associ ated wi th
the voti ng procedures
and mai ntenanJe
ot' empi ov"" producti vi ty
records
and per sonnel
f i t es.
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(3)
(41
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(31
2ffi
cl 1- 3
(rl
(41
Chpter 1l
I
The basic premise
of the learning curve is increased productivity
as
experience is gained
in the performance
of repetitive tasks. Various
lnputs to the production process
may be used more efficienily as cumu-
lative output increases, but in most production processes
the maiority of
cost savings associated with a learning phenomenon
involve the use of
human labor.
( s , z oo +2, 24o) +16
=
;;3
=
BSoh tearnins rate
3, 200 + 8
With a learning rate up to cumulative output of 32 units, average direct
l abor hours used to produce
these 32 uni ts shoul d equal
gs%
of the
average di rect l abor hours used to produce
the fi rst 16 uni ts. tn short,
average hours empl oyed for each uni t when 32 uni ts are compl eted
shoul d equal :
340 x . 85 =
289 hours per
uni t .
Thi s i mpl i es a total of 289 x 32
=
9,249 hours used i n the producti on
of
the first 32 units, or
91248
-
3, 200
-
2, 240
=
31808 hours
usgd i n the producti on
of uni ts l z through 32.l f the average hours per
uni t i n thi s producti on
batch i s taken as the di rect l abor standard, the
standard per
uni t becomes:
3, 8O8 hour s
238 hour s per
uni t
16 uni t s
Bi d pri ce
on order of 96 uni ts:
s 1, 500
5, 95O
9, 52O
16, 97O
5, 091
22rO61
x 9 6
(5)
FoT"
appl i cati ons of the tearni ng curve i n the pl anni ng
and control l i ng of
busi ness
operati ons are setti ng performance
si andardi , prepari ng
cost
esti mates
i n competi ti ve bi ddi ng, determi ni ng budget ai l owances for
l abor
and l abor - r el at ed cost s, schedul i ng l abor r equi r ement s,
and det er -
mi ni ng per f or mance
evat uat i ons i n whi ch per i odi c pr ogr ess
r epor t s ar e
compar ed
wi t h accompl i shment s expect ed under t he cur ve.
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Chapter | 1
c l 1- 4
Shoi tcomi ngs:
(1) Actual payrol l
hours are not approved by producti on
managernent.
(21 There is inadequate segregation of duties within the Payroll Department.
(31 Personnel Department shoul d not have access to payrol l
checks.
(4) Departmen-t supervisors should not distribute the payroll
checks.
Suggested corrective action:
(f
l
Al l i ncomi ng ti me cards shoul d be si gned by both the ernpl oyee and
supervi sor.
(2' l The payroll
clerk preparing
the input for data processing
should not do
the reconci l i ng, but rather a second cl erk shoul d reconci l e the payrol l
j ournal
to the ti me cards.
(31 An empl oyee of supervi sory l evel shoul d authori ze voi di ng of computer,
gener at ed
checks and t he subsequent pr epar at i on
of a manuat r epl ace-
ment check.
( 4) Repl acement checks shoul d be pr ocessed
f ol t owi ng good
i nt er nal cont r ol
pr ocedur es.
( 5) Al l payr ol l
checks, i ncl udi ng unsi gned r epl acement checks, shoul d t hen
be gi ven
to the Accounti ng Department rather than to the Personnel
Department for storage i n a secure l ocati on unti l payday.
No Accounti ng
Departm ent emp l oyee wi th payrotl
recordkeepi n g responsi bi l i ty sh oul d
have access to the undi stri buted checks.
(6) On payday,
checks shoul d be di stri buted, preferabty
by a Treasurerrs
Depar t ment
empl oyee or by an Account i ng Depaf t ment empl oyee who
does not have r ecor d- keepi ng r esponsi bi l i t i es.
cl 1- 5
f i f he
r equi r ement does not ask f or a l i st of r esponsi bi l i t i es Osbor ne has
vi ol at ed, but , mer el y, whi ch of t he f i f t een r esponsi bi l i t i es
appl y t o
Osbor ne, s
si t uat i on. )
Management account ant s have a r esponsi bi l i t y t o:
Comoet ence: Pr epar e compl et e and ct ear r epor t s and r ecommen-
dat i ons af t er appr opr i at e anal yses of r el evant and r et i abl e i nf or mat i on.
(Osborne
knows that i f he consents to Wal l ace' s request, the resul ti ng
mai nt enance j ob
cost r epor t s woul d be mat er i at l y mi sst at ed and woul d
pr esent
f al se and mi sl eadi ng i nf or mat i on. )
Integri ty: Refrai n from engagi ng i n any acti vi ty that woul d prej udi ce
t hei r abi l i t y t o car r y out t hei r Out i l s et t r i cal l y. ( osbor ne
i s bei ng asked t o
be a party
to an acti vi ty that woutd erode hi i abi ti ty to carry out hi s
duti es ethi cal l y.)
Communi cat e
unf avor abt e
as wel l as f avor abt e
i nf or mat i on and pr o-
f essi onal j udgment s
or opi ni ons. ( osbor ne
i s bei ng asked t o t hwar t com-
muni cat i on of unf avor abl e
i nf or mat i on. )
Chapter l1
Cl 1-5
(Concl uded)
Refrain from engaging in or supporting any activity that woutd dis-
credit the profession. (Preparing deliberately misteadin! maintenance job
cost reports clearly would be a discredit to the profession.)
Obiectivity: Communicate information fairly and objectively.
(Osborne woul d vi ol ate thi s responsi bi l i ty i f the mai ntenance
j ob
cost
reports are,altered.)
Di scl ose ful ty al l rel evant i nformati on that coul d reasonabl y be
expected to i nfl uence an i ntended user' s understandi ng of the reports,
comments' and recommendati ons presented. (The shi fti ng of cost among
mai ntenance
i obs
woul d vi ol ate thi s ethi cal responsi bi l i ty.)
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012-1. Supervircrs' salaries, hdirect labor, overlimo
prcrniurn,
lupplier, indirrct nratorials, payroll
tarq tactory hlurancc, and deprrciatian.
Ql2-2. Thr nst inportant r.elon fa variatbn in fae-
lory ovrfiead b tho pnroncc of lired and rarF
ablo rrpenrer. Thordorc, ar prcduction
vol-
urno changs frqn nrnth to rrcrth, tho coCc
will do likowicc. Howcvor, ovcrhead alco wifl
''
cltrtgo bccause of inrprovcd or dccrcssed cflF
ciencies and ctrangos in pricer paU for over-
head ilrns LEh s! rupplies ard repairs.
012. 3. Pr edcl er mi nod
r al cs ar o ur ed when i t
beconres obvious that 8ny other melhod of
charghg overhead resullr in inequilabfc coct-
hg and delays tho reporthg ct firancisl results.
Charghg aclual overhead io
ic6s
and producir
can resufl h charging
unreasonable arnounls
of owrhead to varbur perirdr and in dehyed
rcporling
of corl data. Thc urr ol prcdclcr-
mined ralcs alao onhances control through
analyria ol over. or underapplied laclory over-
head
012-4. Sir bases used for applying taciory overhead
aro unitr prodrced,
direst rnateriatr cost, direci
labor cosl, direct labor houc, machhe hours,
and transaclions.
lmportant consideratioog in
seleclhg
a base are the relatbnship (conela-
tion) ol the base used and lhe use d ovefiead
items in manufacturing
operalbns, as woll as
the clerical prac-ticability
ol using a particuhr
bge.
012-5. Predetermhed
rde! are used to charge over-
head and becorne the basis for determining the
cost cil a
lcb
or producl.
Thereforo, the reason-
abl eness
of such costs i s to a hrge exl ent
determhed
by the reasonableness
ol-the rat.
Shce these cqsts are used for costing hvenlo
ries and play
sn important
ole h esiabtishing
sales prices,
the selectbn ol proper predeter-
mined rates can be appreciated.
Q12. An objective in seleciing the baso lor a prede_
lermined factory ovefiead rale b lo engure lhe
application
of factory overhead in reasonable
proporikm
to a benefbial or causal relatbnship
lo jobr,
producls,
or work perlormed
or lo be
por f or mcd.
i , c. , f or r r t i mal i ng pur pose! .
Ordiurily,
the base selostod ehojj be'closety
rolded to ttnctions
represenled
by the applioC
overhcad
cost. lf tactory overhead cosls are
predorninantly
labq oriente4 such as supervi-
sirt and indirect hbor, the proper
base would
probably
be dirccl bbor hours. lf taclory over-
head costs are predominantly
retated to the
cosl incurred in the ownership
and operatbn
ol
thc madrinery,
the proper
base would probably
be machhe hours.
GH4pTgR 72
DISCUSSION
QUESTIONS
Anotrer otriectivo in selecthg the base b to
minimizo clericel st and dfort relativo to tho
bonrlitr ottaincd. When two or more ber.s
pro\rid.
apprcximatcly
thr rgrno applicrJ ovor_
hood cst to specilb unils 6t prodrrtbn,
the
rirplcsl ba$ lhouH be usrd.
Q12-7. (a) Theqrfrcal capecity b actuslly tho nrari-
rnum produclion possible
frorn e givon
pbnl wit|r no allo*arrr rnade for ccsla.
lion of operations
for hotidays, wrok_
endr, malerials shorleges,
or machino
bnakdorns.
(b)
precticsl
capacity ig theoretical capechy
lege an ellow.ance
for interruptimr euch
as brealdo*,na,
delayr in recciving rup
plict, and worker abgencer.
prjcticsl
capacily is usualty 75 to 85 pcrcent
of
theorelical capacity.
(c)
Erprctrd ectual caprci ty i r prtcti cal
capacity adjusted lor tho lach of autfbiont
dcmrnd h a tinglo oporathg period and
may br usod h building oporating bu+
gelr tdrcn expected capacity ditfen
gub.,
stantially lun norrnel capaciV.
(d) Normal .capaci ty
i s practi cal
capaci ty
adjusted to give
consideratbn
to t o toci
of suflicient dernand over a pcrird
bng
enough lo hclude cyclical and reassral
fluc.luatbns.
This is usually the basis for
l ong- r ange pl anni ng.
sl andar da,
and
preferably
for the determinalbn
cJ owr-
head rates.
012-8. The underappl i ed
overhead wi l l be hi gher l f
marinum capacity is used and bwer if normal
is used. ll this cost is charged lo lhc currrnl
perird, then nraxirnum capacity will prcducr
a
krwer, and normal capacrty
a higher,
operating
prcrtii.
O12- 9. ( a)
l dl e capaci t y cost s ar i sc f r om i dl c
empl oyees
and i dt e t aci l i t i ec.
l dl e
empl oyeer gi ve ri se l o col te auch ar
base wages paid, employor,r
sharc of
payrol l
l axes, and other l ri ngo benefi t
cosls. ldle facilities cause capacity
6te
due lo delerbratbn
with time, appreh-
i ng obaol eoconce,
cost ! f or upkor p,
readiness,
maintenance,
repairs, lhelter,
and pr ol ect i on
of val uabl ee
r uch ar
hsurance.
(b)
When iile capacity b prescnl,
an dtenrpt
shoul d be made t o r egr egal r i dl o
empl oyees
and i dl e l aci l i ti er through
proper
recbssiticatbn.
Tho rcurnula$on
ol lhe cost attributabte
lo theso Ulc work-
srs or facililiec in excess
_cl a reasonablc
budgnted
arnounl migrht be in aorno ki,rd
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ol overhead account to be lreated sepa-
rately aa e'rnanagemenl by erceplion'
facl or. l db capaci l y corl r shoul d bt
accounlod lor soparalely lor lhoro rea-
!ons: (1) to
Pttv.nl
dittortkn end srlu-
rirr h thr rna[air of ptoduclin cctt;
(2) to bililetr ircqne dclominalixt; (3)
to csrtrol ogcraticts; 8nd (4) lo phn nrrt
year'r hdget edrquatdy.
(c) Exeorc crpe.*ty cod h8! bem iJentilhJ
with thoo capacity.cootr thol rcrull frqn
grealrr produclion capacily lhan lhc
cqnpsny couH rvcr lrqe lo usa, or frcrn
unbal ancrd rqui pmenl or machi ncry
withh dcparUnenls. In creatng lhc fote
casl budgrl, il ir irportanl lo bobto the
.xc.r capacily cosl ro lhal manago-
mcnl can bo made aware cil ilr responsi-
bility rcaardng the excess invesUnent in
labor and machhec.
Q12-10. (a) Anaty":r and identify the ovefiead trans-
actisrs.
(b) Joumali:,c thc lransrlisrs.
(c) Enlcr transaclbnr in general and
gub-
sktbry lodgen.
Ol2-1 1. Ovefiead applicd lo prcduclicn ir enlered as a
credil h |he lactory orerhead control accounL
Acl ual ovr r hr ad i t debi l ed l o l hc same
Chapter l2
accounl Therefore, ovefiead has beon oer-
applied when lhc account lras a crcdil balanc..
Q12-1z- Ovcrhead cen br ovcrappliod beceuso (a)
actual oveficad waa bss than budg.l.d; (b)
capeity utli:.d war greetor |h8n that eslirnaF
od h cnpdhg ovofirad rale; (c) lho wcr-
hcad cdinatc war lo hiCh (a mirtate); (d) lhr
produclian ortimab wat l low (a mirtakc);
(r) corn|liulkns of thr abor.
Q12-13. Over. or undcrapplicd faclory ovcrhead may
be proralod arrrcng work h proc.ss, finished
goods, and cosl of goodr sold, or it may bc
lrcaled rntirrly ar a period cogl. The firsl
method would have a smsller effcl oo cct ct
goods soH and |hcrelqc
qr
lho net ircorne for
the pcriod.
012-14. Thr cxislcncc ol largc undcrabcorbed vari-
ancis doot nol necossarily mcan ihat unil
costs ar. incorrecl. An analysis of thc under-
absorbod figwer will irdlplc (a) whether actu-
al ororhead ir loo high or whcthcr oxponseg
havo been incorreclty estirnated; and (b) what
part of thc underabsorpl i on i s caused by
unusod capacity. ll Eclual ovrhead is cmtiJ-
ered lo b. t@ high and thcro ic Ule capacity,
unil coctr ccnpulcd ate morc rearcnablo lhan
they would bc if overhead rale! wero cornput-
ed to absorb all of the aclual overhead.
1
\-
;
Chapter 12
2n
EXERCISES
I
E12-7
(l)
$l'75oro0o fixed overhead and
$72o variable
overhead per
ton, calculat-
ed as follows:
For both the ngrmal capaclty and expected
actual capacity, the problem
states the total budgeted overhead cost and the number
oi ton" of activi-
'
ty. The high'low method of estimating cost behavlor
can be used to
determine the overhead budget, usin-g those two points:
Activity Level
Normal capacity
Expected
actual
Difference
Tons
6, 000
5,000
I , O0O
Budgeted
Overhead
$6,O7O,OOO
5,35OrOOO
s 720,Ooo
- .
Vari abl e
5720,00O
.
over headr at e=f f i - =$72ovar i ab| eover headper t on
Budgeted
fixed overhead =
$5rg5O,0OO totat overhead
-
($ZeO
x 5,000) variable
overhead
=
55,350,000
-
S3,OOO,O0O =
g1,75O,OOO
or, budgeted
fixed overhead =
$6,070,000 total overhead
-
($72O
x 6,000) variable
overhead
=
$6, 070, O0O
-
$4, 320, OOO =
gt , TSO, OOO
lv
\
274
Chapter 12
I
E12-1 (Concl uded)
(2'l The predetermined rate at practical
capaclty would be $895 per
ton.
Using the budget for fixed and variable overhead, a
predetermined
oyer-
head rate can be calculated at any level of acUvity withln the relevant
range. Assuming
practical
capacity ls wlthln that range, Ore calculation
is:
Predetermined
overhead rate at
practical
capacity
=
(8, 0OO t ons
)
Budgeted total overhead at practlcal capaelty
PracUcal capaclty In tons
Budgeted fixed overhead
+ Budgeted variable
overhead at 1O, O0O t ons
_
$1, 7S0, 000 + ($ZZO
x l Or0OO)
= -
{O' 0OO t ons I O' OOO t ons
_
91, 750, 000 + $7, 200, 00O)
_
$8r 95Or OOO
{OTOOO tons I O' OOO t ons
o\
$72o vari abl e overhead per ton + ($trT5orooo/l orooo
tons)
=
$72O
per
ton +
$175
per ton
=
$895
per
ton.
Factory overhead..........
Di r ect l abor , . . . . . . . . . . . . . o. . ,
515,840 dl ol ot x
20, 160 56 x
=
$895
per ton
$6,640
6,640
$12, 200
5,56O
$ 6,6co
=
$2' 921. 60
=
3t718.4O
$6,g4O.Oo
E12-2
Work i n process
bal ance, Septernb:r 3O........,....r........r...r.r.....,.........,..
Lgss materi al s sti !l i n procgss...,...,......,.,.....,..,.............................,,....r.
Factory overhead and di rgct l abor sUl f i n pnocgss...,.,.......,.r.,...........,..
Charged to
V/ork In Process
Amount
o/o
s36,o0o 100%
' s15, 840
*
$36, o0o = 44oh
(or)
S15,840-(factory
overhead) *
S2O,16O (di rect tabor) =.7gST
Let X = di rect
l abor sti l l i n process
Then, X+. 7857X
=
S6, 640
1. 7957X =
56, 640
X
=
$3,218.429T di rect l abor sti l l i n process
.7857X =
S2,g21.SZO2 factory overhead stilt in process
s6,639.9999
>
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b
Chapter 12
El2-3'
(11 135 peopte
r 8 hrs. per
day r 5 days
per
w6ek r 4g weeks =
259r2OO direct labor hm.
l2l
{35 people
r lo hrs. per
day r 4 days per
week r 49 weeks =
259,2OO direct fabor hrs.
Et24
275
!
b
Factory overhead rates:
(11 Units of production:
$225,000
+ 5y000 units
=
S45
(2f
Materials cost
$ZeS,OOo
*
$SoO,oOO
=,{5 =
45oh
(3| Direct labor hours:
$225,OOO
+ 56,25O DLH =
34
(41
Direct labor cost:
$225,oo0
+ (56,2s0
DLH r $81
=
.5o =
soo/o
(5| Machine houns:
$225,OOO
+
75,OO0 machine houns =
i3
El 2-5
(fl
Assuming
normal capaclty:
(al
The factory overhead rate: (90OO,OOO + 5O,OOO| + $6.69
=
$14.69
(bl
The fired part
of the factory overhead rate:
$e6o,ooO
+
5o,ooo =
38
l2l Assuming
erpected aetual capacitln
(al
The factory overhead rate:
1$lOo,oOo
+
4oroo0! + $6.89
=
$i6;69
(bl
The lixed parf
of the factory overhead rata:
$lbo,ooo
+ .to,Ooo =
$lo
El 2
Actual
l l Aoty
ovgrhgad
r.......' .r...r.....r.....r,...r...,.............,..!......r..r,........
SZZgTOOO
Applied
factory
overhead (S2rSoO
machine hours r $5.iOrt..............r...
267.TSo \- -
underapplied
factory
ovgrhgad for thg period
......,..........r......,r......... a
-
r"se' sPP"tttl
l .l gtCl ry
overneao tor tne pgrl od
......,..........r,......r............
$ 1j 1r?54
!
t$255,o0o
+
5oro0o
budgeted machi ne hours =
$s.1o
,:
Chapter l2
I
El 2- 7
(1
l
Work in Process.' .' ..............................o......o................1
,45OrOOO
Matef| a18..........r..r.........r.......o.....o....rrr.o.....o........
l
r45OrOOO
Work in Procgs,.....,......o...o...
928,OOO
Pa1rc!|......
928,OOO
563, OOO
551, OOO
551, OOO
Factory Overhead Contrcl... . . . . . . i . . . . 563t OOO
Materials, Palnoll, Accruals, and Various Credlts
Work In Process
551, OOO
Overhead rato :
Estimated factoly overhead
$57O, OOO
Applled Factory Ovgrhgad,..........,.........,.......,...r
Appfied Factory Overhgad .r.................' .,......' rj-,r.rorr S5lrOOO
Factory Ovgrhgad Contrcl ...or......,..o.,rrr-ooooorrroi ror
Estimated production
l 2l
Underappl i ed
factory overhead:
$563,000
E12- 8
E12- 9
(f
l
Applied factory oyerhosds
sl 6, 92O
36,OOO machi ne hours
30, OOO
.
$551, 0OO
$19
per dr i l l
=
$12' OOO
Agtual factory ovgrh
gad
r.....t.......r......!.................t.....
Applied tactory oyerhead (4rlO0 units x
$2.46)r..,....r.
Overappligd ovgrhead....?.......o......o..r,,.,..,.......r......,....
*
va tiabl
g
facto ry ovgrh
gad
fiito .......,...........,r....,..r.o....
Fired fastory overhead rate ($ir44O + 4' OOO units)....
Total fa ctory overhead rilto ......,.r,...........r......rr.....,..,.
$ 9, 5OO
10. 086
s
( 586)
$2. 10
.36
92.46
=
$ .47 lired portion
of rate
2.7O variable portion
of rate
_S2I
total rate
$2.57 x 2,7OA machi ne hours =
g6,939
appti ed factory
Actual tactory overhead ........................,...
Applied
factory overhead
Under appl i ed
over head
overhead
57, 4OO
6. 939
s 46,1
t2l
I
I
I*
L
L .
I
Chagter 12
Et 2- 10
Agtual factory ovorhoSd ..D.....................r' ................r..!....o..,...
$836rooo
Applied factory ovarhoad (2ro,ooo
machine hours r tt.:::::.
-iio.ooo
o1rgrapplied factory overhe8d............'.................,.................
s ta.ooot
E72-17
(21
( 11
Fixed portion
of the factory overhead application
rate:
st 50, ooo
=
$1.50
per
machi na hour
tOOTOOO
machi ne hours
277
I
I
b
I
I
\-
I
variable portlon
of the factory overhead application rate:
=
$2.5O per
machi ne hour
1OO, 0OO
machi ne hours
(31
Actual factory overhead
. . . . . . . . . r. . . . . . . . . . .
$4i {, OOO
Applied factory overhead (lOS,ooo
x S4.oo1.....::::::::::
-654
Overapplied
factory overhead ...
r.........
r(9oo)
E72-12
fctu--al tactory
overhgad .........' ........r...........r.........................
$141334
Appl i ed factory
overhead (2Oo%
of $gri l Z) .........,...,.,,...,.....
16.234
overappl i ed
ovgrhg?d.........,...,..........................,....r..,.ro.r......
E_f:.gggl
: t
Chapter 12
278
812-13
Work in
process ..' o""' r"t""'
Finishgd $ood8..,.....t""""""
Cost ol
goods 8old.-.....,......
Regulrements
(11 &
(21
Account Percentage
Balance of Total
5 %
31
zgoh
631noh
t 00
ch
Applled
Percentage
Overhead
of Total
$
2,ooo
16,000
32rOOO
$50,ooo 1oo%.
300
1, 9OO
3,8OO
o,ooo
$
6,000
38,00O
76,OOO
4%
32%
64oh
( 11
(21
Tota1...............r...................
$12OtOO]9
work in Procesz
l5o/o
of $8r0oo)
,.......,......r.......'..'r....r
Finishgd GOOdS
131
Znoh
Of $8rOO0)............'......,...'o'..
cost of Goods sold
1631noh
of $610001.....,................
FaCtOfy OVefhgad GOntfOl.,,.,..' ...,..,....' ....' ..r' o.....
FaCtOfy OVgfhgad Contt!|........,......' .............r..' ....' .r"'
Work in Process
(5% of $6t000|""""""""""' t"' t
Finishod Goods
131
znoh
ol $6' 0OO)""-""""' o""
Gost of Goods Sotd
(63
lnoh
of $6tooo1"""""""
WOfk in PfOCgSS
l4o/o
Of $6rOO0|
.' ...,...' ..' r..............t.."
Finished Goods
l32o/o
of 361000)""""""""""""""""'
Cost of Goods Sotd
lA4%
of $61000!"""""""""""""'
Factory Ovgrhgad
Contt!1
"""" """"""t"""t"""'
240
1, 920
3r84O
o,ooo
300
l
r9OO
3r80O
6,O0o
' v
(31
L
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b
a
I
Chaptu 12
P72-7
(rl
)
b
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I
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!
E
Agtual oVorhead lpcurred .........' ...' ....' ...........r.r...r,.r..........r.....
Applied ovorhoadt..........................r.....r.........t......,.o...............
Underapplied ovgrhgad r.......' .........' ..............r..tr..D......r..........r
PROBLEMS
Machi ne
Hours
l o,ooo
I,OOO
279
$3r3g5, OOO
3. 325. 000
s 60. 000
(21
'acrr3!It41_t_
prodoterminsd
rate based on expected astual capacity
=
9, 5OO MH x ($3, 500, 000/ l O, 00O
MH)
=
9,5OO MH x $35O
per MH
=
$3,325,OOO
The predetormined
rate at
practicaf
capacity would be $316.67 per
machino hour (MHl,
calculated as follonrs:
Flrsg find thc budgeted total lired oyorhoad and the budgeted variable
ovorhead rato par
MH. The
problem
states both the total budgeted over-
head cost and thc number of MH of actlvity, at both the normil capacity
and orpected astual capacity levels, so the high-low method of estimai-
ing cost behavior can bE used:
Astivlty Level
Erpected actual
Normal capacity
Differsnce
Budgeted
Overhead
$3r5OO,OOO
_
3TOOOTOOO
$ 5OO,OOO 2,OOO
Var i abl e $5OO, OOO
a
or"rf,""J'i"t"
=
frffi
=
$25O variable overhead per MH
Budgeted fixed overhead
=
S3,50O,O00 total overhead
-
($2SO
x 1O,OOO| varfable overhead
=
s?r500,ooo
-
$2r500,ooo
=
$l ,ooo,ooo
or, budgeted
fired
overhead =
$3,ooo,oo0 totat overhead
-
(S2SO
r I,O00f variable ovorhead
=
$3,0001000
-
$2rooo,ooo =
$l ,ooo,ooo
Then,
usi ng the budget for fi xed and vari abl e overhead, a predetermi ned
overhead
rate can be cal cul ated
at any l evel of acti vi ty wi thi n the rel e-
vant
range. Assumi ng practi cal
capaci ty i s wi thi n that range, the cal cul a-
t i on i s:
7
--' 1
\
2W
I
P12-1
(Goncluded|
Predetermined
overhead rate at
practical capacity
=
(15, OOO MHI
Budgeted total overhead at practical capacity
Practlcal capacity in MH
Chapter 12
Budgeted fired overhead
+ BUdgeted variable
overhead at 15'OOO MH
_
Sl , ooo, ooo +
($25o x 15, OOO}
15, OOO MH
$1, 0OO, 00O + $3, 75O, OOO
15, OoO MH
$4, 750, oOO
=
$316. 67
per MH
15, OOO MH
$15, OOO MH
ot'r $25o variable overhead per MH + ($f
TOOO,OOO
+ 15,OOO MHf
=
$25O
per
MH + $66.67
per MH
=
$.?16.67
per MH.
(31 lt the actual overhead ol $?,405,O0O
yyere
underapplied by $1O,OOO,
then
Applied Overhead would have a credlt balance of $3r4O5rOoO
-
Slor0o0,
or 33,395,000. The closing entries ane:
Appl i ed Overhgad.....r.......,.,......................r...o...... 3r395rO0O
Factory Ovgrhgad Control r...,,.........r.,..........
3r395rOOO
Gost of Goods So| d....... ..,...........r........' .. 1or00o
Factory Overhead Control .r.............r........t...
IOrOOO
(41
Account
Bal ance
Work in process
............o...r.r.,r.......
Fi ni shgd goods. . . . . . . . . . . . . . . . . . or. , . . . , . . . . .
Cost of goods
sold
Total
_s8,ooo,oo9
Work i n Process (2.5
% of $l Or0Oo)...........r......r...r.....
Fi ni shed Goods,.,.
Gost of Goods Sold
Factory OYgrhgad GonttD1..............r...' ..........t.....
$ 2oo,ooo
4OO,OOO
7,4OOrOOO
Percentags
of Total
2.5%
5.O%
92.50h
100.ooh
1O, OOO
250
500
9r25O
I
i L
281
C@ter 12 :
I
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i
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I
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I
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b
I
!
i
g
vl
o
E
L
o
' c t
3
]P
g
CL
o
tr
4
!l
o
o,
G
!t
(E
G
tt
ct
tr
o
o
I
g
o
o t o t l
t o t l
tfll
o
o
o-
o
I'
0 0
o
to-
7
o o
o o
n- o-
t t N
F
0
- A
o o
o o
o o
- -
rD ra)
Y Y
o o
E N
N
'aD
I
+ +
6 6
- -
o o
o o
0 0
u ) u )
t-
Y
. Y
o o
t t F
0 0
+ +
6 6
i l i l i l l l
^ l ^ ^ l ^
o l o o l o
o l o o l o
o l o 0 l 0
- t - r t -
o l o N l o
@ l ? ' r l p
e l { a l
I
l r
r
l r
t l
o l o o l o
o l o o l o
o t o o l o
- l - - l -
o l l o o l n
F I r
p
l p
r h l o l
v l v v l v
^ l ^ ^ l -
o l o o l o
8_
18-
t_
18-
o
l o
x
l o
. " 1" *
l -
r l , , l ,
3 1 8 8 1 8
313
3l F
sl :
gl :
G
.o
o
o
c
t!
c
O
' =
=
: :
o i
c :
r r !
3 :
i
L
o
. J l -
( J 0
6 r t
b o
c
o 6
o , c )
o . !
X n
F S
!t
o
o
5
o
o
o.
CL
:t
a
!
:
L
o
:
t r
P- 3
o
$FE.'iiFi5
E
I E F f
l l n i l t l
s
3gl
o 6 0 6
o o
o- o-
o o
F F
o 9
or l
;ll
o
N
n
o
o
N
I
o 6 0 q t
o o
o- ro-
q ' o
F
r h 0
o
F
o
!l
a
th
l l
=tr5l
-Eg
il
P12-3
(f
l
Total cost of Job 50:
Work In process, December I
December costs:
Matorlal8..... a a a a a a a a a r a a a t a a a r a a a a a a a a t a t a a a r a a a a
Chwter t2
3 54,OOO
45,OOO
42|OOO
15,750
(21
(3)
(4)
(s)
(61
Direct labor ($lO2,OOO + 8,5OO| r 3,5OO|
Factory overhead (34.50 r 3,5OO|
Factory overhead costs applied to Job 52 during Decemben
$l . SOx2, O0O=$9, OOO
Total factory overhead costs applied during Decomben
$4. 5Ox8r 5OO=$. ?8r 25O
Actual December factory overhsad incured:
Suppl i es a a t a a a a a a a a a a a a a a a a a a a a a a t a a t a a
$156,750
$ 3,soo
15, 00o
6rOOO
3r5OO
6,OOO
5rOOO
Indirect labor lygftos....,...
Supervisory sa!ari|B3.........r....or..........oo......r......r......r.r.....rr......
Bui l di ng occupanqy cost s. . t . . . . . . . . . . . . . . . . . ' r, . . . ' . . . . r. . . . . . . . . . . . . . . o. . . . . . r
Factory equipment costs...o.....' ...........o.............................r.o...
Ot hgr f act ory cost s. . . r. . . . . . . . . . . r. . . . r. . . . . . . . . . . . . . . . . . r' r. . . . . . . . . . ' . r. . . r. . . . . .
$3e,999
An insignificant
amount of ovep or undsrapplied factory overhead woutd
be treated as a
period
cost.
Agt ual ovgr hgad. . . . r . . . . . r . . . r . . . r . . . . . . r r . . . r . r . . . . r . r r . . . . . r . . . r ' . . . . . . . r . . . . . . t r . .
$39,OOO
38,25O
Applied overhead
Underapplied
overhead
$ 75o
I
I
Clnpts 12
P724,
(11
Actual factory
overtread:
Indlrect materlalg
and supp1ies....................................o.,...,.r..
l ndl rggt 1abor....t....r........r...............r..o......r.o.r........................r.
Employec benefits.....................r...............r,.............r..............
Depreci atrol l
tttt.t............r.....r....r............t........1.............r...r......
Supgrvi si ol l "tttt...o.' ..r.o.r......................1..rrrr.t1..r.......r.....o.r.......
l2l
Ovep or undoriapplled
factory
ovrhead!
Totaf dlrect labor, 2o- r.r.............r........' ......r...........r.....rr......o
Factory oyerhead rato per
direct rabor dofrar o......,,.....,......r.,.
283
$ 18, O0o
53, 0Oo
23, 00O
{ 2, OOO
20. o00
fl?s'qaa
s 7o, 0oo
1600h
st 12, OO0
126. OOO
s 14. 000
$ 72,5OO
8,OOO
11,2OO
Applied factory
ovgrhgad .........o..........o..
Actua I factory oygrh ea d ..........o,.,.r,,.......
Underappti gd
factory overhe3d...........,.o,...........r.,........r.......,.
(31
Amount included in cost of goods
sold for Job 1376:
Begi nni ng ba1ance. . r . . . . . r . . . . . . r r . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . r . . . r . . . . . . . r r .
Matgri afs and l abor
r
20- ..r.Drr.....r.....r......................r.......r....,.
Appf i ed f act ory overhead, 2O-- (S7, OOO x l 6O%)
9_91,?og
(41
Gost assi gned
t o t he work i n process
account at t he end of 2o-z
$ 72,500
$ 43,ooo
7O,OOO
1l 2,ooo
225,OOO
$297,5OO
91, 7O0
s205,8OO
Begi nni ng
bal ance (Job i 376). . . , . . , . , . . . . . o. . . . . . . , . . . . . . r
Cost charged t o work i n process,
2O-:
Materi al g
..........rr...................r...................o..
Lbor a. . aaaaaar - . aaa. . o. a. a. a. a. - aa. . . . . . . . . aa. . . aa. aa. ar r a. . a. . a
Appfied'factory
ovgfi ead .....r,......................
Less cost of Job i376, wtrich was completed
and so| d. . . . . . . r . . . . r . . . . . o- . . - . r . o. . . . . r r r . . . . . . . . . . r . . . . . . r . . .
--
I
2U
Ctlpter 12
P12-5
(11 Predetermined factory overfisad rate based on nonnal capacitln
$29
t 25o
'
- r - r - r - - - r ! ^-
4sroooTF
=
S.65 variable portion
of rate for erpected actual and
normal capaclty
$18, OOO
6o,o00TH
=
=.19
fired portion
ol rate based on norrnal capacity
.-- $.95 total rate based on normal capaclty
(21
Predeterminad
factory overhead rate based on expected actual capacitr
s29t 25o
r - Lr - - ^ r ! - - -
4s,ooo MH
=
$ .65 variabte portion
of rate for erpected actuat and
normal capaclty
$18' OOO
A5^ooo itH
=
.4o
H:,rffon
of rate based on expected actual
9!.Og
total rate based on erpested actual capacity
(31
Amount
of-factory
overhead charged to production
if the company used
the normal
capacity rate:
47,OOO
MH r $.9S
=
$44,650
(4)
Amount
of factory
overhead charged to production
if the company used
the expeeted
actual capacity ratel
47,OO0
MH r $1.05
=
$4g,3SO
(5)
Actual
factory
ovgrhgad .........o..................,..r..r...o....r....,.........
$42,1 oo
Applied
oyerhead (from (3)
normal capacity ratel r......,...........
44.650
Underappligd
overhgad ' ............' ......................rr.o....roo...r....r...
$ 2.4so
(61
Actual
factory
ovgrhgad ....o..' ..r........o.o..........D..r....r................,
$42,1 oo
Applied
overhead (fmm (4f erpected
actuat capacity;i;t..,..
4e.3so
Overappligd
ovgrhgad
...' ..............' ...r.........,.i........r......o,.o..,...r
$(?gA)
I
I
Chapter 12
Pl2-q
(11 Work in Process:
a a a a a t t a a a a a a a Da a t a a a a a
285
$1O, OOO
4O, OOO
l 8,0oo
s68,OOO
s t 7, 5OO
29,050
23,goo
zqpp
4,00o
sOoo
6,5.O0
8,250
7r5OO
9,goo
9r.z,oog
$l l 7,ooo
115, 200
9_1999
Dfrect materialg ....,..
Dlrect 1abor..............
Factory overhead
(2'OOO x $3.601.....
Total .........,..r....
$
g,ooo
161000
7r2OO
Flnished Goods:
Dlreet materials r.....,...
Dltuct labor,........,.......
Factory overhead
(5r0OO
r $3.601 r.....r.
b
\-
(21
s32,2OO Total
Heat, light, and
power
Depreciatlon-fa
ctonr b u ll dlngs
Depreciation-factory
eguipment ...
Miscellaneous
fastory overhead ..
Total actual factory ovgrhgad r.,............................r!.,r..,...
(3)
Agtual ovgrhgad ........r..........................
Appl l ed ovgrhEad r. . . o. . . . . . . . . . . . . . . . . r. o. . . . . r. . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . r. .
Underappl i ed
overhead
i-
2ffi
P12-O
(Concluded)
(41
ChWter 12
COLUMBUS COMPA}|Y
Cogt of Goodg Sold Statsment
For January
Materialc:
Inventory January I
Purchasar
lnventory Janualy 3l
Dlract labor
Applied factory
January man ufacturlng cost..,........,............r
Add work in procesr,
Janualt 1...................
Lgss work in process, January 3l ,........,...,..
Cost of
goods
manufactured
Add finished
goods,
Januaql I
Gost of
goods
availablg for
galc.......,.,.........
Less finishgd
goodq
January 3l ......,......!....
Cost of
goods
sold
gt
normal ...r...r...............
Add underapplled factory overhead .......D..o..
Cost ol
goods
gold
at 8ctua|........................r
$ 2l,ooo
$1O8,OOO
Lggt tlturng to rupplleJ''t!,..........r...........
61050 lO2r95O
Matgrials ava11ab1c................................. $123r95O
9' OOO $114,950
25O,OOO
115, 2OO
$488r15O
s
32r50O
$5l8,6lio
32r20O
-
9080,450
l8,ooo
$so4,lso
o8,ooo
s436,45O
'
-
l rSoo
$438,25O
I
Cluptcr 12
CASES
Dlres{ l.abor
Hours
217601000
hours
2rl 60' 000
287
Factory
Overhead
Gosts
334r5OO,OOO
2grggo,000
$ 4,620,000
- '
Low
s29rgg0,0oo
l or632,000
$13,249,0oo
. -
Sl T, zl orooo
l 3,24g,ooo
s3O,g5g,ooo
- -
cl2-1
(tl
High..aa.......r....................a.1...........r......a,
!ow
Differsnce
Total OOSt ......r...r....rrr' xl r.aarar..l raal .r....l rr..............
Variable cost
$!Z.ZO
per
dlrcct labor hourl.........
Fi rgd el em
gnt
......1.....1.......r.r...r..-.....r...............r.
Total factory
oygrhead,................,...,..........
600,000
hours
Estlmated total fagtory
oyerhead for next yoan
Total
yariable
factory overhead (zr3o0;o00
r $7.70).....,........
Total firgd fagtory ovgrhgad .........,.,.......r....o.r..,..D.......r..r......
varlabfc rate =
${ro2orooo +
30oroo0 hours =
$7.7O
per
dlrect labor hour
High
$34r599r999
2lr252rOOO
$l 3,24g.ooo
-
(21
Utility ol cost behavior Informailon:
(al
EYalustlon
ot
product pricing
decisions-Tha
calculation
of the fac.
tory overhead rate requfred the company
to esUmate the variable
fagtory
overhaad cost. tn short-term-priie-cutting
srtuations,
the
price get
should cover at least the varlable materials,
labor, facto'/
ovarhead,
and nonmanufacturing
cost8. For
the longer
toil, tfr"
total cost asslgned
to the various products
may pnovide
some basis
for price
dlfferentials
among the ltems.
(bl
cost control eYaluation-Tho
calculauon
of the factory
overhead
rate rcqulrsd the company to estimate tho
fired t*b;y-;;rhead
cost and thc varlable lactory overhead eost per
direct labor hour.
The amounts
arc esumatesbt
what ttro cost shoufd or witl be during
t" let!
yoar.
Thc amounts can be used aJtnr uasis roi prsparagon
of a budget
alforvance lor actual activity to
U" compared
to actual
cost incunrd.
Any drftenanco
between ine
ruoget amounts
ano
actral
cogt woufd be I moasuno of the ereaivJness
or ractory ovor-
head
cost contlol.
(c)
Development
of budgets-The
estimates
of fixad factory overhead
cost and the.variable
factoryov_erhead
"o"t p"l'
direct tabor hour aro
usefur
In budget deveropment.
They p.rriith"
"o,np"nito
carbu_
late thc estlmated
factory
overheal
iost roioirerent
activity levels
that arc berng consrdered
as the budget tsteveroped.
t
e l
CHAPTER 13
DISCUSSION QUESTIONS
01},1. Departmental ovefiead ralot aro prcfrrrrd to a
.
sirgle talc becausc they irprovr tre cmlrcl of
orcfiead by deparlnenl headr rosponrbb for
csrtrollablr ovrrtrrad, and lhry incroar lhr
'
accuracy ol product and
job
corting whcn
productr or
iobt
rovo througfi variql prduc-
h9 depsdmonb.
01$2. Deparl mrnl al i zi ng facl ory ovrrhrad i r an
exlension of mclhodt used in ralablishing a
single ralc becausr (a) an application baso
musl be selected and crtimaled; (b) ovefiead
estlnales musl bo rnadc; and (c) adual wer-
head musl be accwnubl.d sd cqnparod with
applied overhead. Thcsc rteps an reguired for
each producing deparimenl, whereas wilh a
single rale, mly tolal factory dale ere neccr-
sary.
Ot3-3. The surn cil departnatal over- or underapglied
ovefiead would be diflerent. Every direct labor
hour *ouH havc thc sarno arnount of applied
overhead whcn a planl-wiJr
ovrfiead rato b
used, assuming lhal thr applicatbn base ir
direcl labor hours. However, tho usc crf depart-
menlal ralec resulls in ditlcrcnt amounts ol
appl i ed ovorhoad, dependi ng on thr l abor
houn in cach dcparlmcnl and tho indivirJual
departmenlal ovcrhead ratos. For cxarnple, a
fi rm wi l h an ovoral l ratc ol $2 woul d have
S20,0@ ol applierJ ovefiead la 10,000 hours;
the seme firm wilh departmcntal rates ol 9l
and $3 lor its twe produchg
dopartnents could
have more or lcss applied orerheed, depcnd-
ing an the breakdown c, labor houn receivhg
lhe S't ard 33 overhead charge.
Thc lotsl cet cf gmdr lold ard tdsl hvcnto-
ry
rtould also be differerd, becausr departmen-
tal rate! coul d cauro di ffrrcnt uni l cogts.
Thereforc, invenlory and cost of gods sold
would be hfluenced by products
s<ld
q
still
qr
hard. This hpuH not be thc case il a blanket
ralc were uced.
Q13{. A prodrrcing
department b dhestly csrcomed
with manufrturhg prodrctr or dc*rg ucrk
qr
vari ous j obr.
A servi ce department renden
servi co to vari our deparl menl s and i g not
directly asrociated
with manuf acturing opcra-
tbns" Tho naturc cl tho nprt dono by a Otp.rf-
ment dclcrmhca
rrhrther I b a rcrvicr or ptr
ducing deprrlmont.
Exemplcr ol producing
depa.,tm.nl!
arr cuilhg, fhirhing, m*hining.
mi r i ng, and r cf i ni ng. Exampl er of scr vi sc
dgpartmontr
arc mainlenancc, medbal, power-
houso, pur chasi ng,
r ecci vi ng, and cost
accoonting
Q13-5. The kinds o{ deparlments ertablishod to con-
trol snd chargo ets depend on (a) simibrity
of a company' s operal i ons, processes,
and
machinery; (b) locatbn of operatbns. process-
es, and machhery; (c) responsibilities lor pro-
duclion and cosls; (d) rclalionship ol opcra.
l i ons l o l l ow of product; and (e) number ol
deparlments or work centers. Thc number of
depar l menl s esl abl i shed depends on l ho
emphasis placed on cosl control and on the
develognenl of overhead rates.
Qt}. Physbally different segrnents of a department
or clst pools for ditferent kjrds ol costs wilhin
a deparlment rnay be driven by activity baser
that are guite dillerenl, lhur callhg for lhc usr
ol subdepartmnF tor taclory overhead accu-
mulalion, application, and analysis for each
physical segmenl or cest pool.
Q1$7. No. A more correcl method is the use of thc
planl assel records lo cmpute deparlmental
depreciation, property tax, and fire hsurancc
charges, provided the recordg arr sufficienlly
detailed lor this pufpos. and thc rvork hvolve'd
is nol too complex. Swh a rnethod wouH give
proper recognition lo lhe various depreciation
rales used and fire insurance premiums paid
because ol varying tlpea of equipmenl
0198. Factors involved in selecting the mosl egui-
table rale lor applyhg factory overhead include
consideralion of the nature of a department's
operalions, the relationship ol overhead ele-
ments to operalians involved, and any clerical
difticuties arising through the use of a particu-
lar rate.
0139. The sever al sl eps f ol l owed i n esl abl i shi ng
deparlmenlal factory overhead rales ar6:
(a) Estimating direct overhoad ol producing
departments and lhe direcl costs of ser-
vice departments.
(b) Preparing a lactory survy for the pur-
pose of distributing indirect departmental
cosb and servics deparlment costs.
(c) Estirnating and allocating indirect deparl-
mental cosls.
(d) Dislribuling service deparlment coste.
(e) Compul i ng deparl mental factory over-
head rates.
Ol$10. The questlcnr
lhgt musl be resolved in allocal-
i ng servi ce deparl ment cosl ! to benefi ti ng
'
departmonts include:
(a) Determhing which departments are bon-
elited.
(b) Selecting an allocatiqr base.
( c) Choosi ng t he al l ocat i on met hod, i . e. ,
direcl, slep, or simultaneous.
Ql 3-11. (a) Di rect-No servi ce departmenl costs are
allocated to other service deparlments.
(b) Step-Service department costs are allo-
288
I
1
I
I
t
b
t:
I
b
b
l
lr
I
Chapter 13
celcd in thr order of th. d.partmonlr
, !.rying tho grcatest number of depart-
mentr and rrcri vi ng tcrvi c. l rom tho
arnallesl numbor, or in thc ordcr of thc
brgesl rorvb. deportmont st allcatod
lo oth.r cervict dcparlmrnts. Onco a
r.rvicr dcpartmenlie cortr havr bcen
rl l ocal od, no cortr of othrr r.i vi co
dcpadmontr an a.lteatrd to it.
(c) Simullanoour-Tho full rcciprcal inter-
relalio'rshipe ol bcnolitr amo.tg servico
d.partrnontr an csrs idcrcd.
Tho rinultanoour method b thr mat accu
ralt lor prduci coclhg ard for iJerdifying tcfal
c6lt tor ogeraling particulnr geryice
depart-
mmtc. Howevcr, thir mrthod b atao thc nrod
difficull to conrput..
01$12. Contrcl of crtrtrhead ia achieved by oornparhg
acl ual r csul l a wi t h pt anned
or est i mat od
rreullr. To makr arrh cornpericcrr, both tlgor
of orrcrhead must br aocumubled and rcport-
od in lho sarn. rE.tnor. Sincr thc ernputdbn
c{ overhead rater with required ovcrhead osti-
rndcs procodec
lho ircun.ncc and accumuh-
lbo of astual o\rcrhcad, th. cqnputatiort prc>
duro dolermho tho accounling lq aslual wcr-
head.
01313. Oepartmental over- or underapplied ovefiead
it determhed by curqrsring astual and appliod
ovcrhced.
01$14. ll a cornpfer product
lhe is produced
in a nqr.
deparlrnentalized
factory or in a single depart-
289
monl of r taelory, onc appnoach lo accuratt
producl cosling is to use muhiple overhead
cosl p@lr and mulliplo bases wilhin a sirgb
rospcrbility c.nlcr.
Nqrmanufacturing businorses (lrch
ar rrtail
ltdcr, fluncbl iuilildilu, irsuranc. cdnps-
niot, oducalionrl i,nttitutirnr,
tnd horpitela)
rhouH b. divu.d into dopartrrrnb to brrdgrt
and control stl. For oranlpb, a rrtail rtoo
mighl br dcprrUn nlalhed as folkrp* a*ninir-
lralirr, occllplrlc)r, ralc prwnclin
and advcr-
tirhg,, purc{rarhg,
relfing, and dclivcry. Ar h
mmulrturhg butirosser,
departmcntal
cootf
afr prorel ed
l o ?ov3nuc-produci ng
ral or
dopadrncnts by urhg a cfrarging or billi.rg ratc.
Departnentalizatinn
ir partic
ub rty n""J""rry
lor hcpitab and cducatioral
hstitutbnr, whbi
must budgel l hei r costr on a deparl menl al
berb fo ccrtrol costs and to chargc adcquatr
rut rccorcring feee,
Govomrnent agencies employ targc numbcn
of people,
and as they spend brgei and targer
surnt ol lax money for varbus seruicer, lax-
payor!
arr domending
more otficient urr of
lhd nrmey. Thercfore, rervices CrouH bo ren-
dered al thc l*ost coct with thc
Arrdcst
cffl.
cioncy. Govcmmcntal activilier stpuU b. hrd.
gnlod and lheir csts controlled on a reaponsi-
bility accounting baeis. The efficioncy of ter-
vicer ahouH bc mcasurcd by ushg stch unit3
of measurement as per capita, per
milo,
q
por
loi1.
01$r 5.
or$16.
\
i
290
Et 3-1
Work In Proceer
EXERCISES
33, 31O
Chagter 13
151130
18, 19O
3,OOO,OO
I , O()0. 00
1,0oo.oo
850. 00
750.0O
1, 8OO. OO
4, 6OO. OO
Applied F8story
Qverhead--Department
A
(1 TtOOO r
$89
J
-.......................,...
j..,...,(
Applled Fac,tory Orerhead-Department B
(1 SIOOO I $l rOl
--f
...............o..r...........rr.......r.r.r.....
'
$l7'8OO
+
2O'OOO = ti89
*$2or2oo
+
2o'ooo =
$l.ol
El3-2
Dcprrtmcntal Ovcrh cad Column r Gencral trdgcr
Crcdlt
(al
trl
Factory Oncrhcrd
Control ....,.,D...-.-F
Accumulltcd
DoprrSulldhg[
Frctory Ovrrtrod
Con trol ...,..--ro....-
Accumuhtrd
Depr.-filechhrry
Fectory Ovcrhcrd
Control ......ro........-
Accrucd Proprr$
Trr Pryrblo--.-
Fectory (hrrrhrld
Control -,....8h-
Accr. Wortorrr
CompmteUon...
Factory Ovrrhod
Controt-...
Accrucd
Powor
Peyebb...,...*..
Frctory
Ovrrhod
Control ..........,F...,.
Accountr
peyebtr
Ftctory
Ovrrhred
Control
360.00 360.00 18O. 0O 1, 800. 00
5OO. OO 4, 60O. OO
Mecfilnlng
Genenl
Factory
Pelntlng Arrccmbly Cogt Pool
l ' 5OO.OOO 600.00 300.00 3,ooo.0o
or00o.o0
aooo.oo 1,2oo.oo 4OO. O0 0, 800. 00
550.00 20i t.33 170.00 74. 67 1, 000. 00
450,00 180. 00 100. 00 850.00
ooo,oo
60.00 90.00 750.oo
(cl
{d)
(e)
tr)
900. 00
1, 8OO. OO
bl
Mstrrbb
2, 3OO. OO
t_
1
E
I
b
Chapter
13
Et3-3
I
( 1)
Budgeted
factory ovorhoad
""' t""
Oepiltment
Sl distribuUon
(g o/3OO,
2l o/3o01 ..-u..D-.....""""
bepartment
52 distrlbuUon -
(64/8Ot I 6180l """"""""o"t"""""r
Budgeted
factory
overhead
"D"o"t'
Machl ne
hoUrl B tt""""t"""o""""' ro'
Prgdetgrmlned
rstc ........' r""""o"'
Diroct lsbor houfE' ."""""' r"' o"""'
Prgdgtormlned
rate ......ro,o"""""D'
Job,437 ovorhead cost:
Department
Pl
( 3 x
$6. 5O) . . . . . . . . . . " " " " t " " t " " t '
Department
P2
(2 x $4. 48)"""""""' t """"
"""'
P2
$346, O0O
$368, OOO
3O, OOO
7O, OOO
40,0oo
$416, O00
+ 64. 000
---_$6.5q
I O,OOO
$aae,ooo
-
l 0q0m
$4. 48
$19. 50
8. 96
$?glg
291
s2
$I OO, OOO
SSO, OOO
(l OO, OOO)
(5O,O0O)
sl
P1
I
S
(21 Plantwide
predetermined factory overhead rate:
, ,T1lo1o. ' .
=
$6.40 Per
DLH
i 35,OOO DLH
Job 437 ovgr head cost
( 2 x
$4. 48)
"""""""""""""""""""""
Sl 9' 2O
cGA. Ganada( adapt ed} ' Hepr i nt wi t hper mi ssi on.
292
E134
(11
(21
I
$4O, OOO
+$25' OOO
+ $361' 956 +$420' OOO $846, 956
Chaptor t3
=
s. 83
Budgeted factory
overhead r.........rr.,..
Distribution of:
Bui l di ng and
gnounds .........!..
Factory
admi ni strati on..
Total
Base:
Machi ne hours
Di rect l abor
ho ur s, . . . . . . . . . . . . . . ,
Rat e. . . . . . . . . . . . . . . . o. . . . . , r
452rgOO + 567125O 1r O19, 25O
Building Factory
and Admi n-
Total Machining Assembly Groundg istration
$846, 956 5361, 956 $42O, OOO S4O, OOO 325, OOO
18,OOO 2O,OOO (4OrOOOl ' 2,OOO
13, 2OO 13r 8OO
l3zgg)"
$846. 956 $393. 156 s453, 800
:
195, 60O
567r25O
$2.01 $,80
t-
gl2o,
1ol2o, ltZo to Machining, Assembly, and Factory Administration,
respectively.
n
44l gor 46190 to Machi ni ng and Assembl y, respecti vety.
CGA-Canada (adaptedf. Reprint with permission.
E13- 5
Mai n- Admi n-
Total Gutting Assembly tonanco istration
over head budget . .
Si , 29o, ooo S52O, OOO $42o, ooo S2OO, O0O Si 5o, oo0
Distribution
of:
Mai ntenance
12113O,9/g0l ,.. 14O,OOO 60,000 (2oO,OOOl
Administration
l l sl zs, l ol zsl .
9o,ooo 60,000 (15o,oool
overhead
budset..
gl,ZrrJAA S*ggg
fr_4JlQg
:
:
Machi ne
hour s. . . . . .
2STOOO
2O, OO0
overhead
rat e. . . . . . .
3o, oo $27. oo
CGA-Canada
(adapted). Repri nt wi th permi ssi on.
--1
dlaptcr 13
'
E13- C'
293
Produci ng Servi ce
Departments Departments
Product
Total Mi xi ng Fi ni shi ng Cafeteri a Desi gn
$364, 000 $1O4, O0O $2OO, OOO sl O, OOO S5O, OOO
3,250 6,500
(1O,O0O) 25O
16,750 33,500 (50,250)
Budgeted factory
overhead before
distribution of
sorvict
mentr
depart-
DistribuUon of
' sorviee
department
costg:
Cafeteri a
($1o,000
-r
2OO employees
=
$5O) ....' .' ......' ....
P;oduct Design
G!SO'250
+ 3OO
product orderc
=
$167.50| ..,,.,.....
E
.
g364. 000
S124. OOO
S24O, OOO
Bases: machi ne hours
4O' OOO
6OTOOO
Rates r............,. $3.1O $4.OO
GGA-Ganada
(adapted). Repri nt wi th permi ssi on.
E13- 7
(f
)
Produci ng Servi ce
Departnients Departments
Total Pi P2 Si 52
Budgeted overhead ...
$5s2,75o $2o8,ooo $300,000 $1o,ooo S34r750
Distribution of:
Department Sl ....
Department S2....
4, 500 5, 250 ( l O, OOOr 250
20, 000 15, 000
Total fastory overhead ,$EEZJSO
$Z3ZO_q
S3?999
'
t8O/4OO to Pi ,27O|4OO to P2, 10/4OO to 52
i'
{,OOO/7,OOO to Pl, 3,OOO lT
.OOO
to P2
Pl :
$232, 500 + 4, OOO machi ne hour s
=
$58. { 25 r at e per
machi ne hour
P2: 3320, 250 + 10, 000 di r ect l abor hour s =
532. 025 r at e per di r ect l abor hour
(35,OOolfi
Elg-l
(Conctuded)
l 2l
pl ant-wl de rate: $544r75O
r- l 5rOOO di rect l abor hours = 336.317
pl ant-
wide
rato Por
direct labor hour
(31 Individual fobs
lnal
rsquiro relauvely different amounts of time in each
departmenl
ll Pl is machine-intehsive and P2 is labor-intensive, then
ssparate
departmental
rates would
provide a-fairer allocation of costs to
i obs.
CGA-Canada
(adapted). Reprint with permission.
El 3- 8
( 1)
Mai n-
Total tenance Personnel Machi ni ng Assembl y
Budgeted factorY
overhead....,.......... $27O,OOO s3OrOOO sl 5,OOO SI5O' OOO $75' OOO
Allocate Maintensnce
(S3O' OOO + 4OTOOO
sq. ft. =
$75
Per
sq. ft.) r..!......o..
Allocate Personnel
(S18' OOO + 12O
empl oyees =
$15O
per empl oyee| .
(30,0001 3,ooo 14,250 12,750
( l B, ooo) 6, 000 12, OOO
$27O,OP
Di vi ded by machi ne
hours ..............
Di vi ded by di rect l abor
hourS. . . r. r. . . ' . . . .
Factory overhead rate
(21 Job No, 37522
Materials
Di rect l abor
Factory
overhead:
1o machi ne hours O $7.5o.....................
75
11 di rect l abor hours O 36.00
Chapter t3
s170, 250 $99, 750
,
22,700
16, 625
s7.50 s6.oo
Machi ni ng Assembl y Total
s 6 0 s 7 $ o z
24 99 123
66 141
sl se s172 $331
: :
CGA-63nada (adapted). Repri nt wi th
permi ssi on.
lL
-
Chapter 13
s
Er 3- g'
(21
Dcpartmcnt
_
oycr|t eed
!
bcforr db-
295
(11
Equati on 1: E
=
$2O,0OO +.2OF
Equati on 2: F =
$2O' OOO +.2OE
Equat i on 3: G
=
$1O, OOO +. 3OE + . i OF
SubstituUng Equatlon 2|nto EquaUon l:
E
=
$2OrOOO +.2.O($2O,OOO + .2OE)
E
=
$2orooo + $4,ooo + .o4E
.96E
=
$24rO0O
E
=
$25'00O
SubstituUng E =
$25,OOO into Equation 2:
F
=
$2OIOOO +.2O($25,OOOI
F
=
$25' 0O0
Substi tuti ng E
=
$25,OOO and F
=
$25,OOO i nto Equati on 3:
G
=
$1O, 0OO +. 30($25, OOOI +. 1o($25, o0o1
G =
$2O,OOO
ProduclnE
Dcptrtmcntt
Mrrlcgng
licrvlcc Dcpartrncntr
Dcprrt- Ocncnl
S T m c n t O f f l c o E F O T o t a l
trlbuUon
of rcMcr
>
dcpertmrntt
iEoroOO igo,Ooo
Dlrtrlbutbn
ol!
Dcprrt-
nrnt E.....
Dcprrt-
12, 50O
mlnt F-...,
7r5OO 1O,OOO
Dcprrt-
ment O.....
g,o0o
O,ooo i4,ooo iz,ooo
Total.....
ST5,SOo 311g,5oo S4,ooo S2,ooo
320, 000 t 20, 000 $1o, ooo 32oo, ooo
(25,O0O)
5,OOO 7,5OO
5,000 (25,oo0)
2,5oo
{2O,OO0}
s2oo,ooo
Chapter 13 :
-
296
il
9rr
$ll
A
l o o
l o o
u-|
o- o-
t o o
l q' c ,
r a Y
t s
gt
*
l3 3ll
ltBiF'tr
o o t l
o o l l
o o l l
l l
o o t l
Nr r
l l
3 l l
o o to
I toi l
o o N t N i l
O O I
l r l l
- t d l
N O @ t O l t
= r t r l l 0l l
F
t $l l
to
tl
t\ ll
o t l
ot l
ol l
F t l
gl l l
o o l o l
o o F l
o o c0
l
- l
n l o o l
N - l
I
i o o o
l o o o
r ul o-
o_ o-
l | o
Qo co
t ?
t g +
r o o A
l o o o
^ 1 9 0 0
- l d
d u t
l l o l O
l g +
Y
o
tr
o
tr
L
TE
CL
o
o
o
o
.E
o
o
fl
o
E
o
E
t-
(g
CL
qt
o
o
.9
t
o
o
o ' o o t o u
o o
( ot ( oi l
o \ t cvl l r . l l
- l - { l
F ( I l
- l O l l
rstl
l o
l o
' 13
l F
I g ,
l o
l o
- l Q
- l d
l F
t g +
o
E
O E
5 f
F 3
a 3
o o o
o o o
o- q q
C\|
6
qu
ot l
8il
a l l
ifil
o o
o o
o ( o
q,
@
"l
l o
l o
o l o - - t o
l N
@
o I
8Jl
!t
ll
- l l
tn.tl
t o o
l o o
" 13
s
l F
, 9,
El'lF
t'l"l
F
q
l o r o r l
= l o l o l l
f l 3
i o r l
r r o
l al l
' S
a
i 8l l
q
;gsir:*
j
EEES$$Fg
E
i EEEgF; s;
5 3 , . o
o u r
E
{ O s
I
(1'
ul
t 8i l
I
oJl
lsll
tr
El;
P
? -
6 9
. - F
! b
a + ,
5 h
'tr
o.
'li
o
3 Ei 3
" i o
tlt
o o o l o t l
o o l ; l \ i l |
@- q 0_16l l l
r r Nl o l l
t g ' i l
t { f ^t l
Chapter 13
Et 3- 12
Lot Sl =
$2O,OOO +.2OS2
52
-
317, 600 +. 1OSl
SubsUtutl ng: Sl
=
$2O' OOO + .2O ($i Z,600
+ .1OSt)
Solving: Sl
=
$2O,OOO +
$3,52O + .O2Sl
.9gSl =
$23,520
Si =
$24,OOO
SubsUtuti ng:
52 =
$17,600 + .1O ($2C,OOO;
=
$17, 600 + $2, 4OO
=
$2o,ooo
Total Pl overhead =
$94,OOO +.4O (Stl + .5O (S2l
=
$94r00O +,40 ($Z0,OOO)
+.5O (S2O,OOO}
=
$94r0OO +
$9,6OO + $1O,OOO
=
$113, 600
Ef 3- 13
(11
The dual predetermi ned
overhead rates are:
S4OO,OOO
l O, OOO
ffi
=
$25
per di rect l abor hour
$3OO, 000
and
=
S75
per
machi ne hour
Job f 345
4,OOO machi ne hours
297
l2l
$1, OOO
300
1. 500
s2. BOO
2ln
E13- t 4
I
(11 The dual predetermined
overhead rates are:
$9OO,0OO
Chagter t3
(21
3,600 machi ne hours
s6oo,0oo
30O tonr
=
$250
per machi ne hour
and
=
$2' 00O
per t on
Job f l o3
Parts and matsrials
Applied overhead:
7Or $250
=
$17, 5OO
4
x
$2r OOO
=
9r 0OO . . r . . . . . . . . . . . . . . . . . . . . r . r . . . . r . . .
TOt al . . . . . . . . r . . . . . . . r . . . . . r . . aa. . r . . . aaaaaa. r a. . . r r . . . . . . . . r . r . . . . . . . . . r .
$22,OOO
25. 500
$47. 500
b
i
L
I
I
L
Chapter t3
Pl 3- l
(r)
Overhead
before
distribution
ot
sorvicrg
depart-
mOntS
....r............r
DistrlbuUon
of
Mai ntenanco..,...,..
Gentl
Factory..r.....
Total factory
OVefhgad.r.,........
Machi ne
houtg..,..,
Direct
labor
hour:.
Overhead
ratos:
per
machi ne
hr..,
per
direct
l abor
hr . . . , . . , . . . .
PROBLEMS
Producing
Total
cringl1g
s-ooutilg
Sorvics
Departments
-_
f,lain-
Gener
tenance
Fector
DigtrlbuUon
of Sorulcc
Department
Overhead
Using the Dirsst
Method
$68l ,ooo
$l 7s,ooo
$23o,ooo
$76,000
Szoo,o
f 2,667
83,333
(76,000I'
133,333
06,667
___
s32t,ooo
$soo,ooo
+
4' OOO
l3gg,o
s681, O0o
-
$ 80.25
-r
3OTOOO
$ 7 2
-
i19:{t,98.o
tg Grind-ins,
eoo/l,o8o
to smoothins
6/9 to Grinding,
3/9 t; Smootiiing
b
go
P13-l
(Conti nued)'
l2l
First, the simultaneous equations ane solved:
Let M
=$76, 000+( l / l Ol G
G
=
$2OO,OOO +
l72Oll,8OO)M
Substi tuti ng; M
=
$76,00o +.1($Zoo,ooo +.4oM)
Solving: M
=,
$76,0OO +
$2O,OOO + .04M
.96M
=
$96rO0O
M
=
$1OO, O0O
Substi tuti ng: G
=
$2OO,O0O +.4O ($1OO,OOO1
=
$2OO,OOO +
$4O,OOO
=
$24OIO0O
Distribution of Service Department Overhead
Usi ng the Si mul taneous Method
Chaoter t3
Produci ng Service
Departments Departments
Mai n- General
Total Grinding Smoothing tenance Factory
Overhead before
di stri buti on of
servi ce depart-
ment s
$681, 000 S175, OOO S230, OOO S 76, 000 $200, 0OO
Di stri buti on of
Mai nt enance. . . . . . . . .
Gen' l Factory
1O, OOO 5O, OOO ( 1OO, OOO) 4O, OOO
: -
144, 000 72rOOO 24, OOO (24O, OOO)
--
Total factory
overhead
S681,OOO $S29,OOO S352,OOO
Machi ne hour s. . . . . ,
Di rect l abor hours
Overhead rates:
per
machi ne hr...
per
direct
l abor hr . . . . . . . . . . .
+ 4, OOO
+ 3O, O0O
s 82.25
s 11. 73
180/1
' 8OO to Gri ndi ng, 9OO/1,8OO to Smoothi ng, and 72011
,8OO
to General
.*
Factory
6/ 1O t o Gr i ndi ng, 3/ 1O t o Smoot hi ng, and 1/ 1O t o Mai nt enance
Chagter 13
JOi
Pl 3- l ( Concl uded)
(3)
Distribution ot Service Department
Overhead
Usi ng the Step Method
Producing
Service
Departments
Departments
Mai n- General
Total qin!!ry Sr*!!gg tenance Factory
Overhead before
distribution of
service depart-
ments ..r.......,...r.,.
$6911000 $175rooo $23orOOO 576,000
S2oorooo
Distribution of:
Mai ntenance.....,
Gen' l Factory.....
153,600 76,800
s 84.05
s 11. 49
7, 600 38, OOO (76, 000)
3O, 4OO'
(23O, 4OO)"
Total factory
overhead.,........,.
$691,ooo s336,2oo s344,gOO
Machi ne hours. . . . . .
Direct labor hours
Overhead rates:
per
machi ne hr..,
per
direct
l abor hr. . . . . . . . . , .
+ 4r 0OO
+ 3O,OOO
'
18o17' 8oo
to Gri ndi ng, 9oo/1,Boo to smoothi ng,
and z2otl ,Boo to Generat
Factory
' *6/9
to Gri ndi ng, 3/9 to Smoothi ng
w2
P13-2
(1)
Predetermined lactory
OVgfhgad ft1t9...................""' .
Actual activity base amount...
Applied tactory overhead ...,...
(21
s25,920
s92,oo9
Chaptor l3
Fi ni shi ng
Department
$ 1. 60/ DL$
ry
g!_os,60o
Cutting
Department
Assembly
Department
s 2.40lMH
x 10, 800 MH
s s.oo/DLH
r 12, 4OO DLH
/Actual
overhead for
\
first six months
f /Proiected
overhead for
1
/
-
|. second sir months
)
Revised factory
overhead rate
/Actual
activity base
\ . /Proiected
activity base
\
(
for fi rst si r months
/
-
\
for second si x months
/
Cutti ng Department (machi ne hours):
szSro-o-9 + $-z?t'1oo
-
ry-
-
s2.3o
per machine hour
1O, 8OO + 9, 2OO 2O, OOO
Assembl y Department (di rect l abor hours):
$56, 80O + S57, 5O0
_
$l 14, 3C-
12, 4oo + rg, of o:
'
f f i
-
s4' 5o
per di rect l abor hour
Fi ni shi ng Depaftment (di rect l abor dol l ars):
s98
' 5oo
+ $96
' 5oo
-
$1 95
' 0o0
-
sl . 5o
per
di rect l abor dol l ar
566, 0OO +
$64, 000 S13O, O0O
Chapter 13
Pl 3-2 (Concl udedf
(3)
The applied overhead accounts should be adjusted by the differsnce in
the factory overhead rates (revised
rate less original rate) ilmes the actu-
al activity for the first sir monthg.
GuttingDelartment (9?.3o-$2.4O)
r tO,BOOl
$
(i,O8Ol
Assembly_Department (f.!o -
$s.oo)
x t z,looi
is,zooi
Finlshing Department ($|.SO:-$1,60)
r $gO,ooOi
iO,oooi
'
Dgct8ase in applied factory overhead..............,......... gFa*t,
The applied overhead adiustment is altocated to the inventory
accounts
and cost of goods
sold on the basis of the unadjusted
overhead
compo-
nent i n each accounL
Workl n Procgss. . . . . . ' r. . . r. . ' . . . . . . . . , . . . . . . . . . , . . o, . . . , . . . . . . . . D. . .
$ t 2rOOO
Fi ni shgd Good8.......r' .r..............r.oo..' ..r...........o.......ro
4BTOOO
Gost of Goods So1d. . . . . . . . r. . . . . . . . . . . . r. . . . . . . . . . , . . . . . . . r. . . o. . . o.
f BO; OOO
50h
20
75
Applied
Factory ovgrhgad-cutting
..r......,........,..,.r
fnntieO
Factory
OverheachAssembty...,,......,.......,.
Appf
ig9
Factory Overh ead-Finishin g r..........,...,..,..
Work In Process Inventory (Sf
grggO
x.05).....,
Fi ni shed
Goods ($l 3rgg0
r .20| ...............j .,.,,..
Cost of Goods Sotd
fi ti 3rggo r .ZS)........,......r.
$24O,OOO
looo/o
Debit
Credit
1, 09o
6r2OO
616OO
694
21776
l 0, 4l o
n4
P13-3
Chapter t3
Dlrcct departrncntrl
overherd:
3u
pc rvlr lotl'....-.....'..
tndlrcct bbor **
Indlrcct ruppllrl.*
Labor frlngc bcncfltr
Equipmcnt
deprccleUon......--
Property ter'
.
deprecbtlon ol
bul l dl ngr, ctc..-....
Total ..........' .......6,..-..o
ProraUon of llght end
pOWCf ...-.......n.' -.--.
Dlrtrlbutlon of rcMcr
departmenta:
General Factory Cort
Pool ..'........-......F..
Sto rcroo m ...,...ro-F....
Repaln end Mebi-
tenancc...
Total--produclng
departmontr .............
Maci l nc houn.....-.......
Ovcrhead ratc pcr
mech lnc hr.....,....,-.,,
' General
Factory Gost Pool can be distributed either on the basis of S.8O
per
squaro loot ($67p2OO + 84' OOO sq, ftl or on the basis of the following
pencent-
ages: 25ohr 3goh,35oh, 4oh, and 6oh tor the first five departments. The
per-
centages aro determi ned by di vi di ng the squans footage i n each department
by the total sguano footage.
-
Storeroom can be distributed either on the basis of $.07
per requisition
($18,900 +
2TO' OOO requi si ti ons) or on the basi s of the tol l owi ng
percent'
sgos: 4gohr 30ohr TSo1r' and 9% for the three
producing and one service
departments.
The
percontages aro determi ned by di vi di ng the number of
requi si ti ons i n each department by the total rsqui si ti ons.
*Repai r s
and mai nt enance can bs di st r i but ed ei t her on t ho basi s of 31. 88
per
mai nt enance hour
( S28' 2OO
+
l 5' OOO hour sl or on t he basi s of per cent ages:
32ohr Zgoh, and 4Ooh to the throe
produci ng departments. The percentages
ar e det er mi ned by di vi di ng t he mai nt enance hour s i n each depar t ment by t he
total mai ntenanco hours'
Sorvlcc Dcpertrncntr Produclng Departmentr
Gcnarel
Frctory
Cort Pool
:!8,000
7 j2OO
3r6tt1
700
1r74O
324,000
18, 00o
I , O7O
2, 100
1 1 1 0 0
31{,ooo
8r0oo
5/a3O
10,14!t
10, 000
37r2OO
orlgl
rraoo
640
500
32or3OO
5r.4OO
'lr85O
ap72
!rooo
316rooo
G,0oo
5,OOO
0,349
8, 000
367,200
167,2OOl'
31O, 212
2,688
32i2,467
3{5,482
16B00
81894
'47,271
20, 160
51670
35O,38lt
23,52O
2,83!t
11,2,O
!
CluptxtS
Pt3-4
I
(tt
Department costs,.....................
Allocation ol service department
costr:
Repalr
ll
19, 8191.......,....,,,,..
Power
F
18, 7 l8l ......'.r.r.....r
Total ovgrhgad Gost....,,r.....,......
Dirsct labor hour:
Overhead rate per
direct labor
h O Ur . a. . . a. aa aaor . . r . r a r l a ar r a a. a. o. . . . . .
(21
Algebralc
calcutations:
R
=
Repair Department
P
=
Power Department
Substituting:
Sofvlng:
SubsUtuUng:
Departments
Repai r
s48,OOO
Power
Mol di ng Assembl y
s2o4,ooo s32o,o0o
5,333
218.750
s42soa3
4O, OOO
$r o. 70
42,667
3l r 25O
s3s3,e1Z
l 60, o0o
s2.46
R
=
$48, O0O+. 2OP
P
=
$2501000 +. 10R
R
=
$48, 000 +. 2O ( SZ5O, OOO
+. 1OR)
R
=
948,000 + $5O,O00 + .O2R
.98R =
$98rOO0
R
=
$IOO,OOO
|
=
$250, 000 +. i O ( S1OO, OOOI
P
=
$260,000
Departments
Heparr
power
Mol di ng Assembl v
s ;a,"ro
sffio
$zo4poo
s3zo^ooo
Depa rtment
costs...............,......
Allocation
of seruice department
costs:
Repai r
l l l l 0,
i t7O,
g/l O1.....
Power
l2y'lO, 7 l7O, l/l 0i ..,,.
Total overhead
cbst,...,.......r......
Dirgct
labor hours .......,,.......r.,,.
Overhead
rate per
direct tabor hour
(1O0,ooo)
_92,ggg
1O, OOO
(26O,OO0l
l O, OOO
182, OOO
$396. OOO
4O, OOO
s9. 90
SOTOOO
28,OOO
$426,oo9
1O0, 000
s2.68
(3)
Altocating
service department
costs to producing
departments
onty
ignoras
any service rendered by one ""fuil" department
to another,
whl l e the si mul taneous
method t""ogni ."s
servi ce departments'
support
to one another through the use of si mul taneous
equati ons.
The l atter
method i s more compl ete and shoutd
l ead to resul ts of greater
use to
managemenL
fis
s25O,OOO
(48,000)
(25O,OOO)
ffi
Pl 3-5
(rt
Distribution of Sl (4/9' 5/91.'..
Distribution of 32lUAr 4l8l....
Total Pl P2 Si 52
Chagter 13
Before distributioJt........,.,...... $65,000 $25,ooo $23r8OO $ TrZOO S9TOOO
3r2OO 4,OOO
ftr2ool
3'OOO 6,000
tzl
Aftgr distributioJl-,.........o........ $65.ooo 53i.20o
$33r8OO
Total Pt P2 Sl 32
Before diStributiott................. $65' 000 $25' OOO $23r8OO $7r2OO $9rOOO
DistribuUon of 52 (21O, 4l70l
4/ 1 Ol . . . . . . r. . . . . r. . . . . . . . ro. . . r. . . . . r. t
Distribution of Sl (4/9, 5/91,...
l,8oo 3,ooo 3rooo (9,oool
4,8OO O,OOO (lO,8OOl
Af t erdi st ri but i ol t . , . . . . . , , . . o. r. . . o. .
S65. ooo $3{. 6oo
$t gr{OO
(31 Let
3l
=
33:333 l:133?
Substi tuti ng: Si
=
37,200 +.40($9r0OO +,10Sl l
Sol vi ng: .9651
=
$i O,8OO
Sl
=
$11r 25O
Subst i t ut i ng: 52
=
S9, OOO +. 10( S11, 250)
52
=
$10, 125
Total Pl P2 Sl 52
Before distributioJt.................
$65,000 $2s,ooo $231800 $7r2oo I 9rooo
Di st ri buUon of Sl (4/ t O,
i l l O
I /1 O1 t..........r..................r..r.
Di stri buti on
of 32 (U7Or 4l 7O,
4,500 5,625 (l l ,25ol 11125
411ol 2p25 4,O5O 4, O5O
( l O, t 25)
: -
Afterdi stri buti ol l ..........,r...,,.,.
$65.ooo i Cr.szs
$33r{75
: :
(9,OOOl
\
Chapter 13
Pl 3-O
(11 Let r= Powerhouse;
y=
Perconnel ; z= General Factory
Equati on l : r = $ 1 6 1 0 0 0 + . f o y + . 2 0 2
x
-
.f oy
-
.2o2
=
$161000
Equat i on2:
y =
$29r 5oo +. 1or +. 152
- . l o r + y - . 1 5 2 = $ 2 9 r 5 o o
Equation3: z
=
$42rOoO + .2ox + .OSy
- . 2Ot - . Osy+z =
30aOOO
Mufti pl y Equati on 2by 1O and add to EquaUon l :
r - . l O . y - . 2 O 2 = $ 1 6 1 0 0 O
-x
+ 1o.o0y
-
1.502
=
295r0OO
9 . 9 Oy - l . 7 Oz = S3 t l r OOO
Mul ti pl y Equati on 3 by 5 and add to EquaUon l :
r
-
.l $y
-
.2Oz
=
$ 16,000
-x -.25y
+ 5.Oot
=
2l orooo
-
.35y + 4.802
=
S228' OOO
Then eliminate
y between the resulting equations:
9 . 9 0 y - 1 . 7 0 2 = $ 3 l t r OOO
- . 3 5 y + 4 . 8 O2 = $ 2 2 8 ' OOO
(.351 (9.9Oy) (.35)(l.7oz) = (.35X$3tl,OOOl
(9.90X-,35y1 + (9,90)(4.802) = (9.90)GB226,Oo0l
3. 465y- . 5952
=
$ 1O8, 85O
-3.465y
+ 47.5202
=
s2r237,40o
46.9252
=
$2,346
1250
z
=
g
5O,OOO
From the last equation, z =
$5O,oOo;
putting
z =
$SOrooO in any one of the
eguations in which r has been eliminated enables one to find
f
9, 9Oy - 7. 7O2
=$3l l , O0O
9.9Oy
-
l .7O ($5O,OOO) =
$31i ,OOO
9-9OY =
$398' OOO
y =
$
4O,OOO
Then putting y =
$4O' 0OO and z =
$5O,OOO In any one of the original egua-
ti ons enabl es one to fi nd r
r - . l o y
- . 2 O2
= $ 1 O, OOO
x
-
.i O($4O,OOO}
-
.2O($5O,OOO} =
$16,000
x
=
$3O,OOO
Hence the sol uti on i s:
I
=
$SOI OOO
Y
=
$40' ooo
z
=
S5OTOOO
g7
w
Pf3-6 (Concfuded)
(2t
Mhtng
Rcftnlng
^-:-
irzcsrooo
t 0o,ooo
Powrn
Ftnlattng
ilil:
Porrm-
ocncnf
t r d" ooof f i ##
Chagter
t3
!,ggo
(3o,ooo,
3,OOO
:':::
'-i"-9;'dffi
i:333 2rooo
Prlmaty
@!t........
DbtrfbuUon:
Powcrhouro.....
Pcltonncl
...._.
Ocncref
Fectory
Totel
-_
$g2,goo
3482^3OO
-
T'SOO
lfrooo
12|SOO
- -
Ttoo
t2rOOO
l O, OOO
srs.,ooo
fr.gg 3*r"6
torooo
ro,ooo
r
-vtvYv'
z.t;,go
#
' -' -vv
?' 5oo
tso@l
P73-7
(1)
Annuaf
normat
cost
center
overhead
ratesl
(21
Departmont
1O:
Gost
Centgr
!!-f
...............o..,.......
cost
center
I o-2
;:;::::::::........
Department
2O:
lost
Centgr
?9-!
.....r................r...
Gost
center
2o-2::::::::::.::::::.:.......
Factory
overhead
applied
to:
Department
1O:
.
Gost
Center
l9_1,
7,220
machine
hours
x
$e.eO cost
center
to-2:
tboo
rnlinin"
hours
x $l.oo
Department
20:
Cost
Center
2o-1:
?r??O
l abor
hours
r 31.15 cost
Center
20_22
t;6s;
ffi; t'ours
r S1.25
Jolat
Fixed
Variabte
Rato
Rate
Rate
s2.40
3.OO
$l . f s
7. 25
I .go
f . f 5
s .32
.30
$f . 50
1. 95
$ .83
.95
(3)
Cost
enters Depts.
=
S2,928
=
6100O
Sg,g2g
=
$2rsgz.so
=
2,O62.5O
$4,650
Dept.
2O
s4r005.oo
4,65O.oo
-
$
(ocs.oor
- - . - - ,
3-T:lfactory
overhead........,.....
qe&lq
r'actory
ovgrh ga
d "fi
;;:;!!'!'t""'t""""'.r....
$9, 430. oo
Underapplied
(overapptied)
...r..,._..,....:.:_:.;
ffi
Chapter 13
&
Pt3-8
! i
1
(11
The dual prodetermined
overhead ratas art:
- $4oorooo
_ . ra! ___ r! -
lorooo
ffi
=
$25
Par
direct tabor hour
#
=
S3o
Per machi nehour
(21
Job 1564
(31
Direct rnateriaf ......
.......................
$2rOOO
l i regtl abor(3or$101............r.................r,......,...
--t;;;
Applied
overhead:
3Or $25 =
$75O
1O X $3O
=
3OO...........,.,......r............,.......
IIOSO
?al al
t l ' Lt 1 "r """""' r ". . . . . t . ar . . . . . . r . . . r . . . . oa. . . . r . . . r . . . . . . . . . . . . . . . . .
$3r 3so
Job l6il2
:i::l :i:gTl.::::.:........r...,...............................
S2TOOO
Dirgct fabor (3O
x
$i 01.......r,o.r..r.r..
300
Appfied
overhead:
3Or S25 =
$ ZSO
60 r
$3o
=
l r8oo .....................r..r....
zrsso
Total .........,.r.......,;;.....,...............r.......
$4rg5o
(41 (a)
A single predetermined
overhead
rate based on direct tabor hours would
be:
S4OO,O00 +
$600,00O
l 6,000
Oi rCAl aOor
trours
=
362.50 per
di rect l abor hour
310
Chapter 13
Pl3-8
(Conctudedf
(bl
Job 1564
Dirsct materlal
Dirgct labor (3O r $1 O1................'.........."o.D...................t.........
Applied overhgad (3O r $62.501....j..................r...........oo.'........
Total
Job f6il2
$2,OOO
300
1, 875
9!' 1?9
(cl
Direct materlal
Dirgct labor (3O r $l O1..............r......o.........................' ....' ........
Applied ovgrhgad (3O r $82.501............' ....................,...D.o......r
Total
$2,OOO
300
1, 975
(51
$4,175
The competitive lmpllcatlons of a single overhead rate are that on
jobs
requiring much labor and littfe machine time (e,9., Job l5gdl, Mn will
compute lts cosB at too high a level and will thsrefore quote
too high a
price to the customer. These
iobs
will probably be lost to competitors
who know their costs betten on
fobs
requlring much machine time and
little labor (o.9,,
Job 16321, MTI will calcufate its costs at too fow a level
and will, therafore, quote
too low a price, These
jobs
will probably be
won by MTI because of the low price,
but will generate less profit than
erpected, or perhaps
eygn a loss.
CItWter 13
c13- l
3 1 1
( 1)
CASES
Empco Inc. is currently using a plant-wide
overhead rate that is apptied
on ths basis of direst labor dollats. In general,
a ptant-wide
manufactur-
ing overhead rate is acceptable only if a similar relationship
between
overhead and direct labor erists in all departments,
or the company man-
ufacturcs produc-ts which receive proportional
services from each
-
department"
'
In most casesr departmental overhead rates are preferabte
to ptant-
wide overhead rates because plant-wide
overhead rates do not provide:
t
a framework for reviewing overhead costs on a departmental
basis,
identifying departmental cost overruns, or taking corrective action
to improve departmental cost control.
'
sufficient information about product profitability,
thus, increasing
the difficulties associated with management decision-making.
Because Empco uses a
plant-wide
overhead rate applied on the basis of
direct labor dollars, the etimination of direct tabor in the Driiling
Department through the introduction
of robots may appear to reduce the
overhead cost ol the Drilling Department to zeno. However, this change
will not reduce fired manufacturing
expenses such as depreciation, p-lant
superuision, etc. In reality, the use of robots is likely to increase fired
expenses because of i ncreased depreci ati on
expense. Under Empco' s
currcnt method of allocating overhead costs, these costs wi1 merely be
absorbed by the remai ni ng departments.
(a)
In order to improve the allocation of overhead costs in the Gutting
and Gri ndi ng Departments, Empco shoul d:
o
establish separate overhead accounts and rates for each of
these departments;
'
sel ect an appl i cati on basi s for each of these departments that
best reflects the relationship
of the departmental activity to
the overhead costs i ncurred (e.g.,
di rect l abor hours, machi ne
hours, etc.);
'
identify, if possible,
fixed and variable overhead costs and
establish fired and variable overhead rates.
(bl
In order to accommodate the automati on
of the Dri tti ng Department
i n i ts overhead accounti ng
system, Empco shoutd:
o
establish separate overhead accounts
and rates for the
Drilling Department;
'
identify' if possible,
fixed and variabte overhead costs and
establish fixed and variable
overhead
rates;
'
appl y overhead costs to the Dri tl i ng
Department
on the basi s
of robot or machi ne hours.
(21
(31
: * i
(21
312
cl3-2
( 11
cl 3-3
Chapter 13
I
The company should use departmental ovorhead ratos since the two
departments
ano
producing heterogeneous
producta. The added accura'
cy is requlred for
pricing decisions and for better cost control informa-
tion.
The fixed cost of both seruice departments should be allocated based on
long-range facitiUes utilization. Variable cost of
purchasing would be bet-
ter lllocated using a cost driver, such as
purchase orders, because there
is a stronger explained relaUonship than by use ol volume of materials
ordered. Allocation of variabte cleaning cost basod on square footage
soems reasonable; however, the variable cost of maintaining equipment
should be isolated and charged to departments based on the cost of ser-
vices
provided.
A futler consideration of the interactive benefits of departments
woutd be achieved by use of thE step or simultaneous methods' and
preferably the simultaneous method. Such consideration is desirable
because the ssrvice departments
provide services to each other.
A letter to the president of Summerville InC:
Dear Si n
From a study of the manufacturi ng operati ons of Summervi l l e l nc.' i t
is recommended that in distributing its factory overhead, the company
use predetermined overhead rates applied as
percentages of the direct
l abor cost. Tho company shoul d use
predetermi ned rates based on nor'
mal capacity rather than actual overhead rates because of the wide
cyclical flustuations in its business. Using actual rates would, due to
targe frxed overhead costs, make the per unit overhead cost high in the
l ow producti on peri ods and l ow i n the hi gh
producti on peri ods. Usi ng
predetermined
rates, the per unit overhead cost would be level the
year
round. For quoting prices
and
pricing inventories
per unit, costs which
are neither Inflated nor deflated by the cost of factory facilities are best.
The company shoutd use departmental overhead rates because the
rateg obviously
yary
so markedly between departments. An overall rate
would not be correct for any department. Summerville lnc.ts overhead
is
a large part
ol factory cost, and any inaccuracy in the per unit cost
caused by the use of an overall rate would be material. lf all the
products
made used all departments
proportionately, an overall rate would result
i n a substanti al l y accurate
total
(but not departmental ) uni t overhead
cost. Howeve6 i n Summervi l l e
l nc. the products do not use al l the
departments proporti onatel y.
Furthermoner
use of de partmental rates
ai ds i n pi npoi nti ng cost control
responsi bi l i ty'
( 1)
Chapter 13
C1'3.3 (Concludedl
(21 Wage rates are substantially uniform within the separate depart-
ments, and departmental labor costs ara closely proportlonata
to labor
time. Therefore, distributing the factory overhead on the basis of direct
labor cost would in this caso effest about as accurate a distribution as
would the direct labor hours baso. The clerical erpense of the dirsct
labor cost base would be low because the method does not requiro accu
mulaUon of the number of direct labor. hours applicable to each
job.
Applying overhead on the basis of prime
cost is not recommended
because of the wide differences in the costs of the materials used to
make a given lamp or fixture. Factory overhead is the cost of factory
facilities. The factory facilities used to make a lamp of silver are not
morc'than those used to make the same lamp of copper. For this nsason,
the use of
prime
cost (since it includes materials cost) would rasult in an
ercessive charge to lamps using erpensive materials.
Sincerely,
cl 3-4
(1) The ten cost items can be categorized into four basic gnoups
for purpos-
es of discussion:
Item
Al l ocati on
Method Justification
All ltems in this
category shoul d be
distributed.
(a)
Salaries and
benefi ts .....,.,,..,,.,
(bl
Suppl i es ..,......,,.,....
The costs of these two items
are directly incurred by the
activity centers and can be
controlled by the supervisor.
A part
of the salaries and
benefits might be ercluded
from a variable cost charging
rate.
3t
l.
Direct
Di rect
l l .
311
Cl3-4
(ConUnued|
Item
All ltemr In thlr
category rhosld be
dlstributed becauge a
dlrast caussl baslr
erlstr, but theY
ghould
be crcluded
from a variable cost
charging
18t8.
(cl EqulPment
malntenallclg
.......
(dl lnsurance......-.....
(gl Equipment and
furniture
dePreclatloll ........
(el Heat and alr
conditlonill! ..'..'.
(hl Buildlng
lmprovements
depreciatig ll ........
lll. This item should be
distributed because a
reasonable measure
for estlmatlng the
caugal relaUonshiP
eristg.
m
ElgctricitY.........'..
Chapter'13
Justification
The costs of these items are
directlY Incurred bY the activitY
conters but are controlled bY
corporate PollcY'
TheY would be
included in a lull cost charging
rate and excluded from a
variable cost charging rate'
The costs of these items are
diroctly incurred bY the activitY
centers. TheY are not
controllabte
bY the centerc
in
the usual sense. TheY would be
inctuded in a lull cost rate and
excluded from a variable cost
charging tate.
Allocation
Method
Direct
Direct
Direct
Direct
(onc eenter onM
Direct
(one center on$
Equi pment
and
wattage
ratings
A reasonable
estimate can
be made of the electrical
charges
that can be controlled
by effieient use of equiPment.
The cost should be included
in a full cost and a variable
cost charging rate.
g
Chapter t3
Ct3-4 (Conctuded)
Itam
fv. Tlrc roJi6Gis
ftems
thould be dlstributed
lf r fufl cost charging
rato lg required.
m
Buitdins
3 t 5
There is no cost controt
benefit
from allocation
of these
costs.
The only reason
to ailocate
is
for a futl cost charging
rate.
other generaf
basis
Thc number
of hours serected
for.determining
the charging
rate depends
upon
the purpo:"
9f
estabfishing
the rati.
ii tie ouiectiie
is-to "i"rg"
utor departments
for all the coslts-of
computer-operations,
the actual
hours
that can ba identified
wittr ur?
$;e;p"ir"nt"
wiil be incruded
In thc base hours.
This amounG-to
3r5oo hour:,
determined
as fogows:
Actual User Time
Tesung
and debuggi ngffi
Setup
of
j obs
.......,.....,.
Procgssi ng j obs
...r......,...................
Total hout....
r a a a a a a a a a a a r a a a . o . a t a a a a a . r a r a a a a a a a a a a a a a a
To promote
cost contror, the company
might
consider
a duar charging
rate,
whereby
the variabre
costs wouid uJ crrirg"d
or",. actuar user time
(31600
hoursl
and fired costs over avairabfe
timl (cre42
hours).
occupancy
and
security...............
Squaro
ol
Gorporate
feet
admlnlstrative
chargesr..............
i l umbgrof
employees
or some
Allocation
Method
Justification
250
500
2,750
3,5OO
250
500
2,750
742
4,242
(21
Chapter 13
316
cl 3-5
(rl
I
Actual
factory overh
gad
"""""""""t""""
Applied
factory overhgad
.....""""""""""
Underapplied
tactoly overhe3d
""""""""
$85,OOO
60,000
(15' O0O hrs. x S4l
l2l
(al The too overtime
hours resulted
in $4oo
additional
applied tactory
overhead.
The overtime
premium increased
ttre astual factory over-
head of the department 3525
(StO.5O
+ 2l r lOO hoursl' The extent
to which these items ifect the underapplied
factoryoverhead
depends on whether or not they weno included
In esumates
used in
compuUng
the $4
factory
overhead-rato'
(bl Wagi l;cia""" to direJ laborers do not affect lactory overhead
directly, However, such incteases
will cause an increase in numer-
ous lringe benefii costs such as FlcA tar, unemployment
taxes'
worter{ compensation,
and
pensions. lt the incttase
wers also
granted to indirect
worierc of all categories,
the increase in factory
overhead might be substantiat,
causing
a largor underapplied
over-
head amouni, or a smaller overapplied
amount'
(cl The Fabricatlng
Departmentb
share of the loss would be sll2'5O
and would be a tactoi in causing a targer, underaPPlied
overhead
"roun{ * a smalter overapplieO
amount'
Slnce the distribution
was
mosi tlkely a management
decision,
the reason(sl
should
be
given in
an erplanatory note in the cost reports
and the superuisor
relieved
of the responsibility.
Clppter 13
cl 3-O
(tl Allocation basis:
3t 7
October November
Hours
% Hours %
f,lachine hours:
Fast lood f urniturg .....r........
Gustom fu rnitur9.......r...r.....
Direct labor hours:
Fast food furniturg .........o....
Gustom fu rniturg.,........,......
Cost reallocation: October November
Dollars
% Dolfarc %
1r32O
18r48O
19,8OO
IO' OOO
30,OOO
40,o99
6.67
93.33
l_9o,oo
25.OO
75.OO
100.oo
17r 5OO
28)25O
43r75O
13. 06
86.94
100.oo
40.0o
60.oo
100, oo
21560
17,O4O
_1_Uoo
Machi ne hour base:
Mai ntonaDCg.................,.....
$ 5orooo
Depreciatioll ,..,......r.r..,....... 42tAgO
Property tgx .....,.......,....,r..., IrOOO
All othgrr........,.....,............,. 32rOOO
Total to bg allocatgd .,,...,............@f99
Fast lood furnitur9.,....,.......
$ 8r8OO
Custom furniture,,..r.......r..., 123r2OO
s132,OOO
6.67
93,33
$ 48,OOO
42,OOO
IrOOO
24,5OO
_grzpeg
$ 16, 000
l 06,500
13. 06
86.94
1oo.oo S!_egoo 1_gg.oo
October Novomber
Doflars % Dol l ars %
$ 13, 0OO
1O9, 5OO
$122, 5OO
Fagt food furn|ture..............ffi
25.oo
Fffi
rasf rgog rurn1run9..............
$ zTrogo z5.oo
$ 49IOOO 4O,OO
Gustom furni ture..r..t,.....,.... 81' OOO 75.OO Z3' 5OO 60.00
_$log,ogg l_oo.oo _$123,s99 !-oo.o0
Whon gross profit
is recalculated, with the factory overhead reallocated
on the base necommended by the controller, as shown in the fotlowing
Schedulo, the figures tend to support the controllerb conclusion. Also,
the al l ocati on bases suggested appear to have a neasonabl e rel ati onshi p
to the costs bei ng al l ocated.
Labor hour base:
Supervi si o| l .........,...r,..r,......
$ 13rO0O
Empl oyee benefi ts...,.,........
gS,OOO
Totst to be attocated ..................,5io6, oE
(21
318
I
Cl 3-O
(Concl udedl
AEiler 13
AOUA FURNISHINGS COMPANY
Revlsed Statement of Gross Prolit
(ln thousandsl
October November
Fast Food Custom Fast Food Custom
Furnituru Furniturc Fumituro Furniture
Gross sa1os...........,......r............. $400.0 $900.0 S8O0.0 $
800.0
Dirgct matgriats.................r....... $rOO.o $225J $4OO"O $ ,OO.o
Direct labon
,FOrming...o.............,.......r..... 17.O 82.O 31.O 72.O
Finish|ng.............,............... 4O.O 142.0 7O,O 125.0
Assemb1y.....r....,...D...r.......... 33.O 8O,O 58.O 53.O
Factory ovsrhoad allocation:
Machi ne hour base...,........, 8.8 123.2 16.0 106.5
labOf hOUf bi!1O.................. 27.A 8l.O {9' 0 73.5
Cost of
goods
gotd....,.........r.....,
$gzs.g $713.2 $624.0 $ 830.0
Gross
profit
s 74. 2 s180. 8 $176. 0 s 170. 0
Gross
profit percentaffo............ 18.6oh 20.f|oh 22.Ooh 21.?lt1,:h
Ql.t-1. C.;qnpared to tradticnal coeting, ABC b I rpro
l horough appl i cal i on of cost traceabi l i ty.
Tnditioal corthg traccr crly dirccl matcrial
rrd dirrsl labor to odput; ABC ncogni:er that
rnany cther cosils aro traceabb, it'ncl to ouput,
Uten looftercod obieEtr called activitiec.
Q1+2. The rcle ol aciiviilbs h assigrrhg cctr to prod,
ucl r , ur i ng ABC, i r t o r cr vo ar t hc l i nk
b.l wcon products
and cogl s; acti vi ti ec arc
nquired to producr cr.rtput, and it b hc activi-
l i cr l hat consumo rcaourccg, thur causi ng
codr to be hcuned This dtten lrorn traditbn-
el cooting h whicfi output ir ossurnod !o cause
cod!.
Q14.3. Examples of rignificant, costly activities in
manuf acl ur i ng ef r r ct t i ng up, changi ng
dcri gns, recci vi ng matori al s, regui si ti oni ng
mal eri al s, movi ng materi al s and products,
oderhg lrorn
yendo6,
and inspecting.
014-4. Thc two circumgtancer that mugt be presenl
for a traditbna, cocthg ryrtcm to repod distort-
ed prodwt
cst! arc a oqnplax cosi strusture
and a diverss prodrrt
line.
Q1+5. A conrplex sl Elrusture is presenl if a signifi-
cant parl o{ overhead cocl b not related to the
volume ol ouput
Q146. A dversc prdwt
lhe is me h sfibh diflerent
producls
consumr different mixes s{ volume-
relcled and nonnolume-relaled
ccts.
Q1+7. Thr four leveb cil cqb and drivers in ABC are
tho tnit level, the batch level, the product level,
and the plant level.
O1+8. l l a product
conrumer l 0% of al l uni t.l evel
astivities and 3ogl of all batch.level activities,
lradilbnal costing will under-report its cost by
assi gni ng 10% of al l overhead costs l o tho
product,
including l096 of batch-level costs,
whon 3096 of batch-l evel costs shoul d be
assigned
to tho produc{.
Q14-9. When both bw-vdume and higft-rolume prod.
uctr arc produced
h a cornpany using tradi-
li<mal cethg, lht lorutolume prodrrt is likely
to havr ils coet distorted by a hrger percont-
agr than lhe high-volume product.
The low-
CHAPTER '4
DlscusstoN
ouEsTtoNs
volumr product'r cost b gencrally distortcd
downwad by tradilinal ctinq and thr high-
volurnc prcdrrfr cct b diCodod rpwerd
01+10. In assigning pbntdvol coil! to prcclrtr,
ABC
offen little or no advantagt ovor traditbnat
clh9.
01+11. Thr dillercncc bctwecn CM and ABC tr pri-
rnarily rrplahed by thc fact thd AgC b a bng
run decicion-making technique, while CM ic
ahql-run analysis.
Ot+12. lf a procl.rct
b dirqrthued, lhe cocir reported
lor that producl by ABC will rpt necessarily bo
rvoided, bocaucr ABC only measuns how
rasource3 arc cgrsumed by products,
not how
spending will be affecled by discontinuing a
prdusl. AvoHhg a cosl requircs ttrat lesr br
spstl
ql
sorrp rosqtnoo(s), and ABC docc,pt
predbl
changos h spending
Cfhis
it also lrur
of Iraditboal absorption costhg.)
01+13. The relstbnship between ABCand ABM b hat
ABM uses inlormation obtainod fronr ABC to
rnake improvornents h thc finrr
Q1+14. The area ol ABM that l ol l ows di rectl y from
ABC's revisbn of product
ccts b the strategic
realigrnment of thc tirm,r prbhg
rtructuro and
product
line, permitting
thr firm to retain or
regnh high-volume business h spitc of prbhg
pressur,
and pronrpling
managoment lo reex-
amine lhe roles ol sorne lorv-volume prcducts.
Q1+15. The high costs ol eqne activitiea, especially
non-value-added act ivit ies, can f ocus aientirr
m lhe need to reduce or elimirate them.
014-16. ABC can lead to improved dociriona h design-
ing a producl becauco ABC tella thr coot c{
each activity required h prcduchg
thc product
Thi s i nformati on permi ts
desi gnen l o makc
design decisionr more acsuralely, eo that the
npsl cosl-ettsctive design can bc selecled
Q1+17. The link between ABC and TeM is that ABG
reveals the cosls ol each activily, including
lhose that do not add value, and TeM aeeks to
reduce or elimhalo non-value-added asliviliec.
Thus, ABC can focus attenticn h a TOM ollort
and can prbritize TOM's imprwernentl.
3 1 9
l2l
Chapter 14
Pl 4-4
(Conti nued)
329
SHAUTON COMPANY
Product Costs from ActiviW Eased Costing System
overhead rates:
tl3ttrooo
aetup-related costs divided by 90 aetups = 81' 5oo
per setup
S24O,OOO design-related costs divided by 8,OOO design hourr = 33O
per design hour
S825,OOO ou:er overtread divided by 3O,OOO direct labor hours = 327.50
per direct labor hour
Fancy Plain Total
Di rect materi al .....,.....r......... S 60,000 $ 160' 000 S 22O,OOO
Di rgct fabor......,..............' ..' .............' ..
28r0OO 272rOOO 3OOTOOO
Overhead:
Sl r 5OOx45set ups, . . . . , . . . . . . . ' . ' . . . . . . . . . . .
67r 5OO
$1r 5OO
x 45 set ups, . . . . . , . . . . . . . . r . . . . . . . . . . .
$3O x 3rOO0 desi gn hrs......' ........,.....
9OTOOO
S3O x S' OOO desi gn hr s. . . . . . . . . . . . , . . . . . . . .
S27. 5Ox2, 800DLH, . . . , . . . . . . . . . . . . . . , . . ' . , ,
77' OOO
S27.50 x 27
r2OO
DLH ,.......,,........r.,...
67, 500 135, OOO
15O, OOO 24O, OOO
szoO, 0OO sl , OOO. OO
122, 5OO 612. 5O
993?,s99
q,6l3.59
748,OOO 825,000
(3) Because the exi sti ng system used di rect l abor hours as the onl y al l oca-
ti on base and Fancy consumed 2,8OO| 3O' OOO = I
rrcoh
of di rect l abor
hours, the existing system allocated 9
lrcoh
of all overhead to Fancy. The
acti vi ty i nformati on i ndi cates Fancy consumed 45/90 = SOoh of setup-
related activity and 3,OOO/8,00O = 37.ioh of design' -related activity, so the
reconci l i ati on i s as fol l ows:
per
Total Uni t
Cost of Fancy from tradi ti onal system,
cal cul at ed i n r equi r ement ( 1) . . . . . . . . . .
Adjustments fon
Understatement of setup costs,
$135, 000x( 5O%
- gt r cohl
$54, 900
Understatement of desi gn costs,
S240,OOO x (37.Soh
- g t,coh| ..,...,..
67,600
Total adj ustme nts.........
Cost of Fancy from ABC system, as
cal cul at ed i n r equi r ement ( 2) . . . . . . . . . .
Chagter 14
321
El 4-5 The exi sti ng system al l ocated onl y 5O/5O,OOO = O.l
oh
of al l overhead to
'
Product RK last
yean but Product RK accounted for 120161000 = 2oh ot
design change activity last year. Therefore, with respect to design
change costs only the existing system understated RKb cost last
year by
a total of:
(2%
-
O.1%l r S2,ooO,0Oo
=
S38' 0OO understatement
E14-6 The existing system allocated $40' OOO/S2OO,OOa
= 2Ooh of all overhead
' to
Product BB last
yea6 but BB accounted for only 2I2OO = 17o of the
activity of maintaining supplies of purchased subassemblies last year.
Therefore, with respect to the cost of maintaining supplies of purchased
subassemblies only, the existing system overstated BBts cost last year by
a total of:
l 2o%
-
1%l x S5o,ooo
=
$9,5oo overstatement
El4-7
(11
$126 of overhead cost wi l l be al l ocated to a uni t of f456, cal cul ated as
follours:
sl , 4OO, OOo
x 9O machi ne hour s =
$12
,
600;
l O, OOO machi ne hour s
$1 2, 600
=
Si eo
per uni t
1OO uni ts of Product f 456
9554 of overhead cost wi l l be al l ocated to a uni t of #456, cal cul ated as
fol l ows:
##
x 6 setups =
$15, boo of batch
-l evel
cost;
$5O0, 000
x 2BO desisn hours =
,r"ot"T:[t"t",olo",,
l2l
x 90 machi ne hours =
s5' 4oo of uni t-
l o, ooo machi ne hour s
" ' r ' v " v. ' s -
and pl ant - l evel cost .
4, OOO desi gn hour s
Therefore, the overhead al l ocated to a uni t of Product #456 i s:
(S15,OOO + $35,OOO + $5,4O0) l l OO uni ts =
S55,4OO/1OO uni ts = 5554
per
uni t
ChWter t4
El4' 8 Because itt" toCiti:ltlsJstem
uses machine hours as the onty alloca-
tion bas-e' Product f456 is allocated 9o/1o,Ooo = O.9079 of all overhead.
The actlvlty data indlcate f456 shoutd be assign ed 6112o = 5oh of batch-
level costs, 28ol4ro00 = 7Vo of product-level
costs, and o.g7o of all other
overhead. The reconciliation
is:
Per
Total Unit
Cost of #456 from traditional system, as
eafculated
in part (f
l
of El4-7,.........,..,.
Adiustments
for:
Understatement
of bateh-tevel
costs,
$3OO,OOO r (Soh -
O.g%1............
Understatement
of product-level
costs,
S5OO,OOO r (Zoh -
O.9%) .....,..,...
Total adj ustments
.......,............,rr..r...,.' .
Cost of f456 from ABC system, as
cafcul ated i n part (21
of E14-l ,..,....t......
$12, 600
$t eO
$12, 300
30. 500
$4z,goo
s55,4OO
428
s554
E14- 9
( 1)
5140 of overhead
cost wi tl be al l ocated to a uni t of #456, cal cul ated as
fol l ows:
sl , 4OO, OOO
20, OOO DL hour s
r 2QO DL hour s =
Sl 4, OOO;
sl 4, O00
=
$140
per
uni t
1OO uni ts of Product # 456
S74o of overhead
cost wi l l be al focated to a uni t of #456, catcul ated as
fol l ows:
$soo, ooo
5OO setup hours
x 3O setup hours =
$i B,OOO of batch-tevel cost;
ssOO, OOO
4O desi gn
changes
S2O0, 0OO
+
S4OO, 0OO
2O,OOO DL hours
(21
x 4 desi gn changes
-
S5o' ooo of product-tevet
cost;
2OO direct labor
S6,000 of unit-
X . =
houni and pl ant-l evel
cost.
Therefore,
the overhead al l ocated to a uni t of
product
#4s6 i s:
( S18, OOO
+ 35O, OOO + 56, OOO) l l OO uni t s =
S74, OOO/ 1 OO uni t s =
SZCO
per
uni t
Chapter 14
E14- l O
323
Because the tradi ti onal system uses di rect l abor hours as the onl y al to-
cati on base, Product f456 i s al l ocated 2ool 2o,ooo = 1oh of al l over-
head. The acti vi ty data i ndi cats f456 shoul d be assi gned 3O/5OO = 6oh
of batch-level costs, 4l4o = looh of
product-level
costs, and 1
oh
of all
other overhead. The reconciliation is:
per
Total Unit
Cost of #456 from traditional slstem, as
cal cul ated i n part (1) of El 4-9...,,....
Adjustments fon
Understatement of batch-level
costs,
$SO0,OOO x (O%
-
1oh1.........
Understatement
of product-level
costs,
Ssoo,ooo x (1o%
-
1oh1.......
Total adj ustments ...,...,.
Cost of #456 from ABC system, as
cal cul ated i n part (21
of El 4-9 ......
sl 4, OOO 5140
$15, 000
45, OOO
s6O,OOO
s74, OOO
600
s740
E14' 11 Acti vi ti as gr
u, y,
and dd are the onl y ones that defi ni tety add val ue.
Activity k is questionable,
because a single deburring aiter drilling
. would be sufficient to remove all burrs. The first deburring, k, is proba-
bly performed
to make it easier and safer for workers to handle the
product
i n the i nteri m. l f the need for so much handl i ng can be el i mi -
nated (perh-aps
through automated material-handling
eguipment), k
coul d be el i mi nated wi th no toss of vatue to the custbmer
i and
perhaps
at a net savi ngs to the company), so i t i s real l y a non-val ue-added
activity.
Chaoter 1n
PROBLEMS
P14- l
(f
l
The overhead rates in the eristing costing system are S20
per machine
hour, and 31 4
per direct labor hour, calculated as follows:
SSO,OOO of machi ne
-rel ated
overhead
S28O,OOO of remai ni ng overhead costs
2O, OOO DLH
(21 Maki ng onl y the changes suggested by the study, the structure of the
ABC system woul d be:
Pool Dri ver
machi ne operat i on. . . . . . . . . . . r. . . . . . , . . . machi ne hours
setup and materi al handl i ng ....... setups
*
other materi al s-re|ated.,.,..,........
purchase
orders
al l remai ni ng overhead.....,.. di rect l abor hours
. !
The study di d not suggest any change for machi ne operati on cost, nor
for the
"other
overheadtt category.
, _
(31 The ABC slEtem's overhead rates (driver rates) are S16.25
per machine
hour, $45
per
setup, $5o
per purchase order, and $1o.ZS
per di rect l abor
hour, calculated as follorlrs: -
565, OOO of machi ne oper at i on over head
=
Sl o. 25
per machi ne hour
4, OOO machi ne hour s
515, OOO of machi ne- set up over head
pl us
S3O, OO0 of materi al s handl i ng overhead
=
$45
per
set up
1, 00O set ups
SgS,ooo of other materi al s
-rel ated
cost
=
S5o
per purchase order
7OO purchase
orders
S215
, 0OO of
t r
ot her over head
t l
ZAf f i
=
Sl O. 75
Per
di rect l abor hour
=
S2O
per machi ne. hour
=
S14
per
di r ect l abor hour
I
I
Chagter 14
P14' 2
-
'
11)
The three overhead rates i n the edsti ng costi ng system are S17.5O
per
l r
machi ne hour, S.8O
per di rect materi al
dol l ar, and $1 .25
per. di rect l abor
s
dol l ar, cal cul ated as fol l ows:
S8OO,
OOO of materi al s
-
refated overhead Sooh of direct material cost or
@
-
S.8o
per di rect materi al dol l ar I
material cost
$2, 5OO, OOO
of ot her
overhead cost 125% of direct labor cost or
m
=
$1.25
per di rect l abor dol tar
di rect l abor cost
l1l
Making only the changes suggested by the study, the structure of the
ABG system would be:
Pool
Dri ver
maChi ng Opgfati On.......r.....,...,...,
maChi ng hOUfS
setup and materi al handl i o$ ,...... setups
materi al s admi ni strati on..........r..
purchase orders
f f ei ght -i n r. . . r. . . . r. . . . . . . r. , r. r. . . . . . . . . . , . . .
mat gf i al
pOUndS
al l remai ni ng overhad.......,..."...
di rect l abor cost
The study di d not suggest any change l or machi ne operati on cost, nor
for the
"all
remaining overhead" categoly.
(3) The ABG system' s overhead rates are $12.5O
per machi ne hour, 51' OOO
per setup, $35
per purchase order, $.75
per pound ol materi al s, and
$1.25
per di rect l abor dol l ar, cal cul ated as fol l ows:
$700,O0O
of machi ne
-rel ated
overhead
=
$12.5o
per machi ne hour
4O' O0O machi ne hours
$5OO, OOO of machi ne
-
operat i on overhead
=
$12. 50
per machi ne hour
40, OOO machi ne hours
b
$2oo, ooo of machi ne
-set up
overhead pl us
$3OO,OOO of materi al s handl i ng overhead
5OO setups
S35O, OOO of mat eri al s
administration overhead
=
$1, Ooo
per set uP
I O' OOO
pur chase or der s
=
$95
per purchase
order
326
I
P14-2
(Concl uded)
$150, 0OO
of f rei ght
-i n
=
$.75
per pound
of materi al s
2OO,0O0
pounds of materi al s
S2,5OOr00O
of other
overhead cost 125oh ol direct labor cost or
m
=
$1.25
per di rect tabor dottar
direct labor cost
Pt 4- 3
tl)
DRAPER COMPANY
Product Costs from Eristing Costing System
Chaptar 14
Overhead rate: 94,5O0,0OO of overhead di vi ded by $3,OOO,OOO
of direct labor cost = 150oh of direct labor cost
Standard Custom Total
Di rect mat eri a1. . . . . . . . . . . . . . , . . . . . . . . . . , . . . . . . , . . , $ 882rOOO S 1215OO $ 894r5OO
Di rgct l ?bor' . . . . . . ' . . . r. . . . . . . . . . . . . . . . . . . . . . . . r. . . . 219t 0rO0O 9OrO0O 3rO0Or0OO
Overhead:
150ohr $2r910rOOO........,..r,r..,.....,.... 41365rO0O
1 SOoh x 59OrO0O. . . . . . , . . . . . . . . . . . . . . . . t . r. . . , . . 135,OOO 4,5OO,OOO
Tot al cost . . . . . . . , . -. . . . . . . , . . r. . . . , . . . . . . . . . . . . . . . . .
$8r157rOOO $23715OO
Uni t s pr oduced. . . . . . . . . , . . . . . - . . . . . . r i . . . . . . . . . .
+ 731500 + 125
Cost per uni t . . . . . . . . . . . . . o, . r . . . , . . . . . . . r . . i . . . t . . .
$ 1l O. r B S l r r OO
gg,3eds09
I
I
E
v
Chapter 14
P14-3 (Conti nued)
l2'l
Product Costs
.v
DRAPER COMPANY
from Activity Based Costing System
Overhead rates:
Si:IOOTOOO aetup-related
costs divlded by 6O retupr =
$STOOO per
aetup
s9oo' o00 deslgn-related costq divlded by 15rooo deolgn hourr =
$oo
per
design hour
$il' 300,000 other overhead divided
@
1' loo/o of direct labor cost
Standard
Custom
Totat
Direct material
Di rgct 1abor. . . . . . . . . . , . . r. r. r. . . . . . . . . . . r. . . . . . . . . . .
Overhead:
S5TOOO r 3O setups .....................r,....
35r0oo x 3o setups .......................,...
$60 x 12rO0O desi gn hl s.........,........,
$6O x 3,OOO desi gn hrs,........,.,....r....
I fi oh x $2,91 Or000.........r....,r...........
1 1 O% x S90r00o.......,....,..r,..,.,.,.,...r..
Tot al
cost . . . . . . . o. . . . . . . . . . . . . . . . . ! . , . . . . . r. . r. . . . . . .
s 882,OOO
2, g1Or 0Oo
150, OOO
720,OOO
3, 20l , OOO
s?effipoo
##
s 12, 5OO
9O, OOO
15O, O0O
180, OOO
s 8r4FOO
3, OOO, OOO
3OO, O0O
9OO, OO0
3, 3OO, OO0
2r352
s4E2
s8,394,599
125
_L _1,252
Because
the eri sti ng system used di rect l abor cost as the onty al l ocati on
base and custom consumed
$9o,ooo/s3,ooo,ooo = JTo of di rect l abor
cos.tr-the
existing system allocated 3oh of ail overhead to custom. The
activity
information
indicates custom consumed 30/6o = sooh of setup-
refated
acti vi ty and 3,ooo/15,ooo = zooh of desi gn-rerated
acti vi ty,
so the
reconci l i ati on
i s as fol l ows:
Per
Total
Unit
(3)
Cost of Custom trom tradi ti onal
system,
as cal cul ated
i n regui rement (1)..,..,..
Adjustments
for:
Understatement
of setup-rel ated
. _
costs,
$3oo,ooo x (So% - g%1........
51 4 i
,ooo
Understatement
of desi gn-rel ated
cost s,
$9oo, ooo x (Zo% - g%1. . . . . . . .
1s3, ooo
Total
adj ustments.........
Cost of Gustom from ABC system, as
cal cul ated i n requi rement
(2) ............
$237, 5OO
s1, goo
294,OOO
s531, 5OO
\
* \
Chapter t4
P14-3
(Concl uded)
(41 The only costs handled differently by the two costing systems were the
S3OO,OO0 of setup-related costs and S9OO,0OO of design-related costs,
for a total of $l,200r00O; this nepresents only 27% of the total overhead
of $4' 500' 00O.
The change in the costing system caused the reported cost of Custom to
change from $237,500 to 9531,50O, whi ch i s' an i ncrease of 124oh.
P74-4
(rl
SHAUTON COMPAI{Y
Product Gosts from Eristing Costing System
-
Overhead rate: $l ,2OO,OOO of overhead di vi ded by $SO,OOO
di rect l abor hours =
$4O
per
di rect l abor hour
Fancy Plain Total
Di rect mat eri a| . . . . . . . . . . . . . . . . . . . . . ro. . . . . . . . . . . . .
S 601000 $ 160, 000
$ 22O' , OOO
Di rgct f abor. . . . . . . . , . . . . . . . . . . . . . . . . r. , . . . . . . . . . . r. . 28' OOO 272. OOO 3OOTOOO
Overhead:
S4O x 2r8OO DLH . . . . . . . . . . . . . . . , . o. . . . . . . . . -. r l l Z, OOO
S4O r 27r2OO DLH . . . . . . . . . r. . . . . , . . . . . . . . . . , . . l rOBSrOOO i r2OOrOOO
Total cost ...........................o..,.,.......,...
Srooi l ooo $1FzO^ooo $1r?ro^0oo
Uni ts produced..........r......,................,
+ 2OO + l 6' 000
Cost per
uni t,.....,.....,.....r....................
S l ^OOO S 95
l2l
Chapter 14
Pl 4-4
(Conti nued)
329
SHAUTON COMPANY
Product Costs from ActiviW Eased Costing System
overhead rates:
tl3ttrooo
aetup-related costs divided by 90 aetups = 81' 5oo
per setup
S24O,OOO design-related costs divided by 8,OOO design hourr = 33O
per design hour
S825,OOO ou:er overtread divided by 3O,OOO direct labor hours = 327.50
per direct labor hour
Fancy Plain Total
Di rect materi al .....,.....r......... S 60,000 $ 160' 000 S 22O,OOO
Di rgct fabor......,..............' ..' .............' ..
28r0OO 272rOOO 3OOTOOO
Overhead:
Sl r 5OOx45set ups, . . . . , . . . . . . . ' . ' . . . . . . . . . . .
67r 5OO
$1r 5OO
x 45 set ups, . . . . . , . . . . . . . . r . . . . . . . . . . .
$3O x 3rOO0 desi gn hrs......' ........,.....
9OTOOO
S3O x S' OOO desi gn hr s. . . . . . . . . . . . , . . . . . . . .
S27. 5Ox2, 800DLH, . . . , . . . . . . . . . . . . . . , . . ' . , ,
77' OOO
S27.50 x 27
r2OO
DLH ,.......,,........r.,...
67, 500 135, OOO
15O, OOO 24O, OOO
szoO, 0OO sl , OOO. OO
122, 5OO 612. 5O
993?,s99
q,6l3.59
748,OOO 825,000
(3) Because the exi sti ng system used di rect l abor hours as the onl y al l oca-
ti on base and Fancy consumed 2,8OO| 3O' OOO = I
rrcoh
of di rect l abor
hours, the existing system allocated 9
lrcoh
of all overhead to Fancy. The
acti vi ty i nformati on i ndi cates Fancy consumed 45/90 = SOoh of setup-
related activity and 3,OOO/8,00O = 37.ioh of design' -related activity, so the
reconci l i ati on i s as fol l ows:
per
Total Uni t
Cost of Fancy from tradi ti onal system,
cal cul at ed i n r equi r ement ( 1) . . . . . . . . . .
Adjustments fon
Understatement of setup costs,
$135, 000x( 5O%
- gt r cohl
$54, 900
Understatement of desi gn costs,
S240,OOO x (37.Soh
- g t,coh| ..,...,..
67,600
Total adj ustme nts.........
Cost of Fancy from ABC system, as
cal cul at ed i n r equi r ement ( 2) . . . . . . . . . .
t - \
330
Chapter tl
P14-4
(Concl udedl
(4) The only costs handled differently by the two costing slrstems were the
$135' OOO
of setup-related costs and S24O,OOO of design-related costs,
for a total ol $375,00O;
this repnesents only 31.25oh oI the total overhead
of $1r20OrOOO.
-
The change in the costing system caused the reported cost of Fancy to
change from S20O,OOO
to $322,500,
which is an increase of 6l .25oh.
P14-s
( 11 TUNNry COMPANY
Product Costs from Etisting Costing System
Overhead rate: $1,OOO,O0O of overhead di vi ded by 5O' OOO di rect
l abor hours =
$2o
per di rect l abor hour
lrlormal Enhanced Super Total
Di rect mat eri a| . . . . . . . . . . . o. . . . . . . . . . . $
6OTOOO S
2OTOOO S S' OOO S 85rOOO
Di rect t abor, . . . . . . . o. . . . . . . . . r. . . . , . . . o 30O, OO0 35' OOO 5rO0O 34O' 0OO
Overhead:
S2O r 45rOOO DLH. . . . . . . . . . . . . . . . . 9OOTOOO
S2O r 4r5OO DLH. . . . . , . . . r, . . . . . . D,
S2O r 50O DLH. . . . . . . . . . . , . . . . . . . . ' .
9O, OOO
1O, 0O0 1, 0OO, OOO
91,425,oO9
Tot al cost . . . . . . . . . . . . . . . . . . . . . . . , . . , . Sl r 26Or OOO $145100O S2OTOOO
Uni t s pr oduced. . , . . . . . . . . . , . + 30, OOO + I ' OOO
+ 5O
Gost per
uni t . , . . . r. . . . . . , . . . . . , o. . . . . . $
CZ $
.
t AS $ 409
Chapter ll
P14-S (Concl uded)
(21 TUNNEY COMPANY
Product Costs from Activity Based Costing System'
331
Overhead rates:
3400,000 batch-level overhead dhvlded by 500 rcgulslUona = 38oo
pcr requlsltion
$800,000 other overhead dividedby 5O,0OO direct labor houn = 312
per direct labor hour
Normal Enhanced Super Total
Di rect materi a1....,............... s 60,000
$ zorooo s 5,ooo s 85,ooo
Di rect 1abor,......,...... 3OOTOOO 35,OOO 5' OOO 34O' OOO
Overhead:
$8OO x 150 t ' ee. . , . . . . . . . . . , . . . . , 120r 00O
$8OO x 2OO | 1ee..............,..,
$8OO x 15O Fee..........,.......
$12 x 45r 0OO DLH. . . . . . , . . . , , . . 54O' OOO
$12 x 41500 DLH . . . . . . . . . . . . . . .
$12 x 5oo DLH
12O, OOO 4OO, OOO
6, 000 600, 000
160, OOO
54, OOO
Tot a| cost . . . . . . . , , . r . . . r . , . . . . . . . . ! . .
Sl r o2or o0O S269' 000 $136r ooo
Uni ts produced.....,...r........r. + 3OTOOO + I' OOO + 50
s1, 425, 099
Cost per uni t , , . . . . , . . . . . . . . . , . . . . , . S 34 S 269 $ 2r 72O
(31
Because the existing system used direct labor hours as the only alloca-
ti on base and Super consumed 5OO/5O,OOO = Ioh of di rect l abor hours,
the existing system allocated 1o/o of all overhead to Super. The activity
i nformati on i ndi cates Super consumed 15O/5OO = 3O7o of batch-l evel
acti vi ty, so the reconci l i ati on i s as fol l ows:
Per
Total Uni t
Gost of Super from traditional system,
as cal cul ated i n requi rement (1).....,.........
$
2O,OOO $ 4OO
Adiustment for understatement of batch-
fevel costs, S4O0,O0O x (3O%
-
1%1..,,..., 116,000 2,32A
Cost of Super from ABC system, as
cal cul ated i n requi rement (21..........
S136,000 $2,720
(4)
The onl y costs handl ed di fferentl y by the two costi ng systems were the
$4oO' oOO of batch-l evel costs, whi ch represents onty 4}oh of the totat
over head of $1, OOO, OOO.
The change i n the costi ng system caused the reported cost of Super to
change f r om S2O, OOO t o $136, 000, whi ch i s an i ncr ease of Sa}oh.
3g2
Pl 4-6
(rl
Chapter tl
TEKSIZE COMPANY
Product Gosts from Eristing Costing System
Overhead rate: $1,500,00O of overhead divided by 5O,OOO direct
labor hours =
$gO
per
direct labor hour
Regular Large Total
S 4o,ooo
48O, OOO
l
r20OrOOO
$43O,00O 91,72O,OOO
+ | OTOOO + I O' OOO
I 1o,ooo
120,OOO
3OO,OOO
s 5O,OOO
6OO,OOO
I , 50O, OOO
s2d90,999
(21
4 3 $ 172
TEKSIZE GOMPANY
Product Costs from Activity Based Costing System
Overhead rates:
S515,OOO setup-rel ated costs di vi ded by 1O3 setups =
SS,OOO
per setup
S985,OOO other overhead di vi ded by 5O,OOO di rect l abor hours =
319.7O
per DLH
Regul ar Total
$582, O0O $1, 568, OOO 52, 15O, OOO
+ l O, 00O + 1O, 00O
I l O,OOO
120,OOO
255,000
197, 00O
Large
$ 4o,ooo
48O,OOO
26O,OOO
788,OOO
s 5O,OOO
6OO,OOO
5l 5, OOO
985, OOO
s 58. 20 s 156. 80
Chapler 14
33?
Pl 4- g ( Concl uded)
(31 Because the exi sti ng system used di rect l abor hours as the onl y al l oca-
ti on base and Regul ar consumed 1O,O0O/50,00O = 20oh of di rect l abor
hours, the existing system allocated zooh of all overhead to Regular. The
acti vi ty i nformati on i ndi cates Regul ar consumed 51/103 = 49,51456oh ot
setup-related activity' so the reconciliation is as follows:
Gost of Regular from traditional
system, as cal cul ated i n requi rement
(11 ......' .... S43o,0oo S43.oo
Adiustment for understatement of setup-
Per
Total Unit
refated costs, $515,O0O
r (49.51456%
-
2oo/o1...
Cost of Regular from ABC system' as
cal cul ated i n requi rement
(2).".........,......' .,.' .....
9582' OOq 998.20
Yes, Teksi ze Company does have a di verse product l i ne i n the sense i n
which the term is used in ABG. The fact that the two products have the
same annual unit volumes does not matter, because the existing cost
system does not use units as the atlocation base. Regular represents
only 2Ooh of direct labor hours but nearly SOoh of setup-related costs,
whi l e Large has a very di fferent mi x, so a di verse
product l i ne i s present
i n Teksi ze Company.
152, 0O0 15.20
(4)
334
c14-1
( 1)
Chaoter t4
CASES
DALI-AS DIVISION
Product Costs from Existing Costing System
Overhead rate: SSOO,OOO of overhead divided by 2OTOOO direct
l abor hours = S{Qper di reg! l abor hour
1327
s 6,000
3O,0OO
288, OOO
s324,OOO
+ 2r4OO
s 13s
#333
S l so
600
4, 80O
s5, 55O
+ 6
s 92s
(21
DALI-AS DIVISION
Product Costs from Activity Based Costing System
Overhead rates:
S24O, OOO bat ch-l evel cost s di vi ded by 1, BOO eet upe =
Si 5O
per
set up
S2OO, OOO product -l evel
cost s di vi ded by 2, OOO desi gn hours =
Sl OO per desi gn hour
s36o' ooo ot her overhead
di vi ded
by 20, 0oo di rect l abor hours =
si g
per
DLH
#327 #333
$ 6, 000
S
30, 000
6, OOO
32, 00O
12g, 600
1 5 0
600
600
2O, OOO
2, 160
$2O3, 6OO
+ 2r4OO
s
84. 83
s 23,510
+ 6
gegeeg
Chaptor l1
Cl 4- 1
( Cont i nued)
( 3) Usual sel l i ng
pr i ce. . . . . . . . . . . . . o.
Pf OdUCt COSt . " . . . . . . . . . . , . . . ' . . . . . . r . ' . . . ' . . . . . . . . . . . . r . . . . . . . . o.
Usual sel l i ng
pri ce ...............,.' .,................' .......
Product cost . . . . . . . . . r. . . . . . ". . r. . r. . . ' . . . . r. . . . . . . . . . . ' r. . . r. . . .
Gross margi n
0oss)
......................r..........!.........
Pgrcent of sal gs r. . . . . . . . . rr' . . . r. . . , . ' r. . . . . . ' . ' . . . . t . r"t . . . . .
(4)
#321
sl so
135
9_!s
10%
#321
sl so.oo
84.83
s 6s. 17
430h
3a5
f 333
s1, 50o
925
s 575
3goh
f333
s 1, 5OO. OO
3, 918. 33
(s)
s(2, 418. 331
The ABC system shows that the relative prolitabilities of the two prod-
ucts are the reverse of what is shown by the edsting system: the existing
system shows a very modest
gnoss margi n of l Ooh on f321r whi ch i s
probably not enough to cover its marketing and administrative costs,
whi l e showi ng a respectabl e 38% gross margi n on f333. l n contrast, the
ABC system shows a 43oh
gross margi n on #321 and a substanti al l oss
on f333. The l ow-vol ume
product appeans to be the more profi tabl e of
the two under the exi sti ng system, but appears to be a money l oser
under ABC; the hi gh-vol ume
product appears weak under the exi sti ng
system, but hi ghl y profi tabl e under ABC.
Based on the resul ts of the ABG study, Dal l as di vi si on management
shoul d consi der meet i ng t he compet i t or ' s
pr i ces on f l 321; t hi s pr i ci ng
strategy can be profi tabl e i n the l ong run and shoul d avoi d l oss of market
share. The strategy for f 333 i s not as cl ear. Gustomers are not l i kel y to
accept the 20O% pri ce i ncrease needed to make #333 reasonabl y prof-
i tabl e, and Dal l as coul d l ose some customers who al so buy l arge
amounts of #321, i f management di sconti nues #333 or i ncreases i ts
pr i ce
t oo much. Management shoul d consi der sever al
possi bi l i t i es f or
l ow-vol ume products
such as f333:
(a)
Reduce batch- and product-l evel costs enough to become an effi -
ci ent producer of l ow-vol ume products. Thi s may requi re creati on of
a smal l
j ob-shop
envi ronment i n a porti on of the pl ant (or i n another
faci l i ty) where l ow-vol ume products
coul d be made more effi ci entl y.
The case i ndi cates the exi sti ng pl ant
was desi gned to
produce
l ong
runs effi ci entl y, whi ch may expl ai n the hi gh batch- and product-l evel
costs.
(6)
Chaoter l4
336
I
C14- t
( Concl uded)
cl 4- 2
( 1)
(b) Reduce the number of
products by desi gnl ng " new one that can be
substi tuted for several l ow-vol ume,
unprofi tabl e
products that can
then be di sconti nued; thi s essenti al l y erchanges several l ow-vol -
ume
products for one of much hi gher vol ume, wi th substanti al
batch- and
product-l evel savl ngs'
(c) Convince one of the current buyers of the low-volume
products to
become a di stri butor of several such
products; buyi ng them from
Dal l as i n l arger
quanti ti es, mai ntai ni ng smal l i nventori es, and sel l i ng
them to othJr customers.
Thi s can reduce
Dal l ast batch-l evel costs
and marketi ng costs, but i t ri sks the l oss of customers who l i ke to
buy the ful l l i ne from one suppl i er.
(d) nai se
pri ces gradual ty unti l al l
products ane neasonabl y
pri ced. Thi s
does not mean al l
products must show
profi ts. (l t i s acceptabl e for a
good customer to occasi onal l y buy a money' l osi ng
product.) Rather'
i t means that the company shoul d not conti nue maki ng a money-
tosi ng product wi thout a
good reason. l t i s not acceptabl e to have a
customer who buys onl y the money-l osi ng
products, nor for the
company to conti nue maki ng a money-l osi ng
product that no
"good
customerstt are buying.
(e) In addi ti on to the usual
penuni t pri ces, charge a l ump-sum amount
per order for any smal l order of a l ow-vol ume
product. Thi s charge
. coutd be set at a l evel to cover esti mated batch- and product-l evel
costs.
WARRENTON DIVISION
Product Costs from OPICS
Over head r at e: s1, 930, 000
l abor hours
of overhead di vi ded by 25' ooO di rect
= 577.2O
per
DLH
fl 33 #44
sl 5, ooo
s120, ooo
6, 000 60, 000
341740
463, 20O
s643,2OO
+ 2'OOO
s55,74O
+ 1 OO
s5s7. 40 s 321. 60
:
J) /
Chapter 14
Cl 4-2
(Conti nued)
(21
WARRENTON
DIVISION
Product Costs
from TPTCS
Overhead rates:
$gCOTOOO
machine-related
costs divided by 2O,OOO machine hours
=
S17
per MH
iigO,OOO
materials-related
gosts divided by $1'32O,OOO
direct material cost
=
25% of direct material cost
S360,000
+ $9OO,OOO
of remai ni ngcosts di vi ded by 25' Ooo di rect l abor hours
=
S5O.4O
per
di rect l abor hour
#33 r 44
Di f gCt mat gf i a1 . . i r . r . r . . . . . . . . . . r . . r . . . . r , . r . . . . r . . . . . . . . . . t . . . . . . . . . t t . . t . . . .
Di r gCt 1abOf . . . . . . . . . . . r . . . . . . . . . . . r . r . . . . . . . . . . . . . r . . . r . . . . r . r . r . . . . . . . . . . r . r . . .
Overhead:
$17 X 300 MH . . , . . . . . o. . . . . . . . . . . ' r. . . . . . . . . . . . , . . . . . . . . . . . . . . . t . . . . . . . . . . . . .
$17 f 3rOOO MH . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . t . . . . . . . . r. . . . . . . . . ' . . . . . . .
25oh x $l 5rOOO
r. . . . . . . . "r' . . . . . . . . . . . . , . ' . . . . -. . . . . -. -. . r' . . , ' . . . r. . . . . ' . . .
25oh x $12Or OOO
. . . . . . . . . . . . . , . . , . . . . ' . . . . '
55O. 4O X 45O DLH. . . . . . . , . . . . ' . . . . o. . . . r, . . . ' . . . . . . . . . . . . . . . . . . . . . . ' . . . . . . .
S5O. 4O X 6rOOO DLH. . . . . . . . . . . . , . . . . . r. . . . , . . . . . . . . . i . , . . . . . . . r. . . . o. . . . . .
TOt al COSI . , . . . . , . . . . . . . . . . . . . . . , . . . . . . . . . . . . . , . . . . . . . . . . . . r. . . . , . . . . . , . . . . . . . . . . . .
Uni t s
pr oduced. . . r . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . r ' . . . ' . . . , . r . - .
COSt
pef Uni t . . . . . . . . . . . . . . . ' r . . . . . . . . , . r ' . . . . . . ' . . . . . . . . . . . . . . . . . . . . r .
s15, OOO
6,0o0
5, 1O0
3, 750
2216fjo
s12O, OOO
60, 000
51, OOO
3O, OOO
302, 4OO
s52,530
+ 1OO
s563,4OO
+ 2,OOO
I
s525. 30 s 281. 70
(3) TPICS i s not an ABG system because al l the al l ocati on bases are at the
uni t l evel . The changes management made do show many of the attri but-
es typi cal ty associ ated wi th a change to ABC: the i ncrease i n the number
of overhead cost
pool s, the attempt to create homogeneous cost
pool s'
and the use of three di sti nct al l ocati on bases. These changes show an
attempt was made to capture di fferences among the demands
pl aced on
resources by the different
products. But because there are no batch- or
product-tevel
dri vers used, the system cannot capture the demands
pl aced
on batch- and
product-l evel acti vi ti es, i .e., i t i s not an ABC sys-
tem.
3g
Cl 4-2
(Conti nued)
WARRENTON DIVISION
Product Costs from Proposed New Gosting System
Overhead rates:
SI OO,OOO troubleshooting costs + $140,000
machine setup costs divided by
3,OOO setup hours =
$8O
per setup hour
S135,OoO materi al handl i ng costs di vi ded by 15,000 l oads =
39
per l oad
S195,Ooo
materi al i admi ni strati on costs di vi ded by IO' OOO vendor orders =
919.5O
per
vendor order
3260,000 engi neeri ng desi gn costs di vi ded by 4,000 desi gn hours =
$65
per
desi gn hour
$2OO,OOO
machi ne operati on costs + S90O,O0O other overhead di vi ded by
2O,OOO machi ne hours =
$55
per machi ne hour
f 33
(
Chapter tl
(41
sl 5, OOO
6, OOO
24|OOO
180
1, 755
18, 2O0
16, 5OO
s81, 635
+ I OO
#44.
sl 20, OOO
6O,OOO
32,0OO
540
2,925
19, 5OO
165, OOO
$399, 965
+ 2' OOO
s816. 35 S 199. 98
(5) The proposed
new costi ng system i s an ABC system because i t uses cost
dri vers that i ncl ude non-uni t-l evel dri vers. The uni t-l evel dri ver i s
machi ne hours, the batch-l evel dri vers are setup hours and l oads han-
dl ed' and the product-l evel
dri ver i s desi gn hours. Vendor orders coul d
be ei ther a batch- or product-l evel dri ver, dependi ng on whether orders
are pl aced
for each batch; the case does not tel l whether thi s i s so.
(6)
For the l ow-vol ume product, #33, the proposed ABC system shows a sub-
stanti al l y
hi gher cost than di d ei ther of the other two systems. Thi s i s the
general
resul t when ABC i mpl emented and compared wi th tradi ti onal
systems. At the usual sel l i ng
pri ce of S8OO, the ABC system says thi s
product
i s a money l oser. Equal l y, or
perhaps more i mportantl y, the pro-
posed
ABG syst em shows t hat t he hi gh- vol ume pr oduct
can be
pr i ced
very competi ti vel y.
Chapter 11
.t r:t
C14- 2 ( Concl uded)
f/)
Based on the resul ts of the ABC study, Warrentonb management shoul d
consi der meeti ng the competi torb
pri ces
on #44; thi s
pri ci ng strategy
can be profi tabl e i n the tong run and shoul d avoi d l oss of market shat.
The strategy for #33 is not as ctear. Some customers may not accept the
price increase needed to make il33 reasonably
profitable, and Warrenton
could lose some customers who also buy large amoqnts of #44 if
management di sconti nues
i l 33 or hi kes i ts pri ce too much. Management
shoul d consi der several
possi bi l i ti es for l ow-vol ume
products such as
f 33:
(a) Reduce batch- and
product-l evel costs enough to become an effi -
cient
producer of low-volume
products. This may reguire creation of
a smal l
j ob-shop
envi ronment i n a
porti on of the pl ant
{or
i n another
faci l i ty), where l ow-vol ume
products coul d be made more effi ci entl y.
(b) Reduce the number of
products, by desi gni ng a new product that
can be substi tuted for several l ow-vol ume, unprofi tabl e
products
that can then be di sconti nued; thi s essenti al l y exchanges several
l ow-vol ume
products for one of much hi gher vol ume, wi th substan-
ti al batch- and
product' l evel savi ngs.
(c) Convince one of the current buyers of the low-volume
products to
become a di stri butor of several such
products; buyi ng them from
Warrenton i n targer
quanti ti es, mai ntai ni ng smal l i nventori es, and
selling them to other customers. This can reduce Warrenton' s
batch-l evel and marketi ng costs, but i t ri sks the l oss of customers
who l i ke to buy the ful l l i ne from one suppl i er.
(d) Rai se pri ces gradual l y unti l al l
products are neasonabl y
pri ced. Thi s
does not mean al l
products must show
profi ts. (l t i s acceptabl e for a
good customer to occasi onal l y buy a money-l osi ng
product.) Rather'
i t means that the company shoul d not conti nue maki ng a money-
l osi ng product wi thout a
good reason, l t i s not acceptabl e to have a
customer who buys onl y the money-l osi ng
products, nor for the
company to conti nue maki ng a money-l osi ng
product that no
' i good
customers" are buyi ng.
(e) l n addi ti on to the usual sal es pri ce, charge a l ump-sum amount
per
order for any smal l order of a l ow-vol ume product. Thi s charge
coul d be set at a l evel to cover esti mated batch- and
product-l evel
costs.
d l
01$t. Profil plarning oncompasses (a) sales estirnat-
hg and sales plannhg prograrns; (b) budgeting
progra,nr lor contol cf all costs, both rnanufac-
turhg lnd nqrrnanufacturing; (c) planning and
programming addilions to or deletions lrom
working capilal an'd plant hveslmenl; and, (d) a
review of all laclors that have an impacl m
retum on inveslmcnt, both from a shorl.lerm
viewpoinl of one year and longer periods of
lime. Thr profil-planning function must not be
merely financial in scope. ll must disckrse the
melhodg and programs by which the financial
groals are to be achieved.
O1$2. A budgel is the oxpcted targt that manage-
mont strives lo achieve, whereas a lorecasl is
a level of revenue or cosl that an organizalion
predicts will occur.
Olt3. The three approaches lor setling profit objec.
lives are:
(a) A oriori. Management specifies a given
ratc of rolum to be achieved in the long
run ard then draws up plans lor achieving
that rale.
(b) A msteriori. lr/lanagemenl draws up plans
and.then sels lhe rate resulting frorn the
plans.
(c) Praomal i c. Managemenl uses a target
pr of i t st andar d t hat has been t est ed
empirically and sanctioned by experierrce.
Qt$4. Long-range phnning deals wilh specilic areas
of the cornpany's plans, such as future sales,
long.lerm c-f ilal expenditures, research and
developmenl astivilies, financial requiremenls,
and the proti l goal . Short-range budgeti ng
plrces the plannhg
and particulariy
control into
perirds of three. 3ix, or twlvo mstths.
Ql $' 5. A budget i s a detai l ed fi nanci al stal ement of
the organizalion's
strategy. lt converts generEll
st r at egy st al ement s i nt o speci f i c pl ans ol
acti on, measured fi nanci al l y. l t i s rel ated to
control, because it is the fundamental guideline
for whal the organization should do. Thus, it is
l he benchmark
agai nst whi ch acl ual perfor.
manco is cornpared. This process
of ccnpari-
son is a vital gart
ol the conirol function in lhe
organizaticr.
Ql S. I n car r yi ng
out managoment ' s l unct i ons of
phnnhg,
organizing, and control lor lhe deveF
opmenl
ol a budgetary conlrol program, il is
neco3sary
to:
(a)
organize the budget commiilee
(b) organize the entire budgtary control pro-
gra!71
(c) plan sales wilh the sales manager
(d) determine the linished.gods inventory
CHAPTER 15
DlscusstoN ouEsTtoNs
requi rement i n harmony wi t h t he sal es
budget
(e) plan production with the production
man-
ager based on the sales budget
(f)
-meel with heads of all dopartments-toth
producing and service-relative to direct
rnalerials, direcl labor, and lactory over-
head cosl r requi red f or t he product i on
budgeted
( S) est abl i sh mat er i al s pur chase r equi r e-
menls based on production planning, a
doparlment' s malerials raquiremenls, or
tho produclbn budgel
(h) esl abl i sh xpsnso budgel s wi l h market -
ing, administrative, and financial division
heads
(i ) budget capi l al expendi t ures and prepare
a researeh and development budgt.
0)
develop a cash budget
(k) coodinate and surnnrarize ccrnpany.wide
budgets into a masler budget..+umma-
rized in the budgeled incorne stalEmont
and balance sheel
O1$7. Thc periodic budget ropresents a formal com-
munication channel within a company for the
lollowing rasons:
( a) The per i odi c budget i nvol ves a l or mal
comrnitment on lhe parl of management
l o l ake posi l i ve act i ons t o make act ual
events conespond to the formal budgel.
(b) The peri odi c budget i s usual l y ravi ewed
and approved by a higher authority and,
qrco
approvod, is changed only in unusu-
a.l specif ied circumslances.
( c) The per i odi c bucj get conl ai ns expl i ci t
slaiemonts of the imolementation of man-
agomenl objectives for a period ol time,
publ i shed t o al l par l i es wi l h conl r ol
responsibility.
( d) Compar i son ol act ual r esul t s wi t h t he
periodic budgel forms lhe basis tor man-
agoment control, motivation, and pedor-
rrance evaluaticn.
Q15-8. Budgels are required for planning, moniloring,
and molivating, and because they include esli-
mat 6s, t hey al ways i nvol ve uncert ai nt y. The
procass ol budget preparation forces idenlifica-
l i on ol vari abl es and at t smpt s at esl i mat i on.
Rei t eral i on shoul d i mprove t he process, and
the process should cause a positive atlhude to
at l ai n goal s. Of cour se, a poor l y est i mal ed
budget can causs dysf unct i onal behavi or.
I n t hi s si t uat i on, t he budgst shoul d pr ovi de
incentive lor going after bids. The inclusion of
budgst ed and act ual conl ri bul i on margi n dat a
I
t-
[ ;
a0
Chaptor l5
h periodic roporb c{fers an early hdkxtion c/
'
bobtf,
par ccrlributbn, or the pesible noed lo
reduce bid prices,
or olher corroctive action
thst rnay be reguire'd.
CGA-Canada (adantcd). Beprinl with permis'
airr.
Q15-9. All omployeec (including txoculivr manago'
rncnt) must accoPt fir inportancr of budgeting
and bo wi l l i ng to parl i ci pal r ful l y i n budgol
prcparatbn and irnpbmentatirxr, or hc budgnt
. will nst rtork.
a1$10. (a) Etlective ur cl budgrthg rholH rocult in
botter perlorrrlinc. by the organizatbn
because ol betlcr pe rformance by the
rnanagonr. Tho behavirral bonefit lies h
the ability crf thr budget and he btdgeling
proqgss to rnolivalc tnatragtB to accorn'
plish thc orgranizatbn objec'lives. This is
done by ushg the budget ss a vehble for
communi cat i ng company obj ect i ves,
etablishhg subobjectivee in accord with
rnanager objectives, and providing a thq-
qrghly
undcrctood ccrrvno.r bssie for por-
fonnenco rrreuuilTlont ard fcedbck.
(b) The budgeting procoss has been sublect
to criticism by behavioral scienlislr and
clhers on sevcral counls:
(1) The mosl scrbus charge is that the
budgeling proer faib to recognhc thal
i ndi vi dual s may not accopt company
objective as their own. The resull is hck
cl eflort to achieve these objectives.
(2) The l evel of obj ecti ves sel may be
eslablished without regard lo how this will
mot i val c l hc manager l o achi cve l he
obj ect i ves. Tho r esul l s may i ncl ude
underachievcment ol polenlially obtein-
abl e l evel s ol per f or mance and/ or
dostruclbn of employee nrorale.
( 3) The budget i e used as a pr essur e
device lo force conlormity lo and accop-
tance of lhe objectives eslablished in the
budgel. This often resuhs in employees
finding ways lo beat' the budget rather
than actually impoving pedormancc.
(a) The budget b adrnhbtercd by hdivU-
uals noi direclly hvolved in the operaling
elivrty ol thc organizatbn and not partic-
ubrty skillful h dealing wiih people.
(c) Thc rnosl coriour problem lhat must be
overcome h
qdor
to rclve the problems
i denl i fi ed by tho cri l i ci sms i n (b) i s the
u 1
bck o{ understanding of the lorccs that
cause ma Bgcrs to 8cl as they do. ll musl
bc recognrized that the tradilbnal assumP
tims undedying thc budget and budgel
Pr oces!
at c nol . nt i r . l y val i d. Such
agsurnPliats includo:
(l) Managcn tulqnaticslly acc.Pt cqn'
pany obiecfivee as lhcir
qwn.
(2) Tighl
gtandards
ate best bocaur they
ropr.rent hard-to-reach goal s, whi ch
rrwt pcople strivc lo achicvc.
(3) Uppor levolc of managcment an bol
equFped lo ostablish operathg subobirc-
tives.
ll is necesssry to rccognize thc bchav-
brsl influence (psychobgi=l and rcb
bgbal) 6r tho rrprk ol menagers.
The rnost corr[Tron specific neoorrvrpn-
dali'on is thc use cd parlbipative budgel-
hg, sinco il prwide lor an opportuniiy lo
identify objeclivos of thc managcr and
ccrrrpany, hcreaseg the ability of both to
develop opcralhg activitier to reach thr
objcclive, and onhances iho likolihood ol
setting objectives at levels elfcctive in
mol i val i ng managors l oward company
goals.
01tl1. Conrnercbl xponsos are grouped into lunc-
tions by their actions or operalhg units. Thesc
functisrs are boked upon ae departmenls end
should br
gel
along organizalional lincg in
order to identify lhe expente with an autho'
rized and responsible individual. Grouphg by
prcducls and by lenitqies may be desirabL al
wel l .
015.12. The budgeled incorne stalement summarizer
in one stalernent the result! of lhe complelo
plan of aclion. lt expresses in financial lerms
the erd resuhs of proposed plans. ll can also
be used lo lesl the adequrcy or inadeguacy of
those phns.
Ql F13. The budgel ed bal ance sheet r eveal r l hc
expected l i nanci al condi ti on ai the end of I
particubr perird. One ol the measurec of tho
adequary ol propoeed operaling and linancbl
planr is the etfed ol the cxecution of thcro
pbns on the linancial condilbn of the buainesr.
lf the budgeied balance
gheel
shoflg a polen-
lial unsatisfactory condilion, propooed plant
csn be reviewed end perhapo revised lo ptc.
ducs sallsf aclory resulls.
Chapter 15
342
Ei 5- 1
E)GRCISES
BROWI.I BROTHERSi
Budget of Sales Revenue 8nd Grcss Profit
For t he Year 2OB
Rer-Z
Sip-X
Tok-Y
2O,OOO
12, 000
7r5OO
Sal er In
Produst Poundsr
Averagc
Saler
Pricc
per
Poundr
$34.50 $25,00
24.15 18.00
18. 90 14. 30
20a.oooh
140.OAoh
1OO.O07o
lncrease
115, 00%
I O5.OO%
l O5.O07o
I 9A GP
Cost of GrosE
Goods Pttlit
Sold
per por
Poundffi Pound
s9.50
6. 15
4.60
198 Sal es
Salec
Revenue
$
690'000
304,29O
141,750
s1, r36, O4O
Grcgs
Profit
sl 90, OOO
77r49O
34,5OO
$3O1, 990
' Product
Rer-Z
SiP-X
Tok-Y
"Product
Rer-Z
Sip-X
Tok-Y
*'!'od*!
Rer-Z
Sip-X
Tok-Y
E15- 2
l9A Sales lncrease
l O,OOO
9,00o
7,50O
l 9A Pri ce
s30.00
23.00
18. OO
19A Pri ce
20,OOO
l 2, 600
7,50O
198 Pri ce
s34.50
24.15
18. 90
19A Cost
$20.oo
l 5. oo
l 3.oo
l ncrease
125.OOoh
12A.OAoh
t l O. OOTo
198 Cost
s25,OO
18. OO
14. 30
s30.oo
23.OO
18. OO
$l o.oo
8,OO
5.OO
FINEFLEX CORPORATION
Producti on Budget'
For t he Second Quart er Endi ng June 30, 20-
Units ol
Fl op
21, O0O
6, OOO
27,OOO
(s,5oo)
21, 5OO
Units of
Ol ap
37, 50O
I o,5oo
Uni ts of
Ryke
Sal gs forgcast..........,... ...,.........r,
Add desi red endi ng i nventory (June 3O1,...
Quanti ty requi red for tho quarter.............,
Less begi nni ng i nvent or y ( Apr i l 11. . . , . . . . . . . . .
Requi r ed pr oduct i on f or t he quar t er . . . . . . . . .
54, O0O
13. OOO
48, OOO 67, 000
qf_,o99) (14,soo)
9Z99 l-z'seq
Chagter l5
E15- ?
'
u3
MAGIC EHTERPRISES
Production Budget
For t he Quart er Endi ng March 31r 20-
Moon Gl ow Enchanti ng Day Dream
Units required for sa|9s..............o...,..
Add ending lnvontory of finished
Uni t g . . i . . . . . . . . . . . . rr. . . . . r. . . . . . . . . . rr. . . . . . o. . . . . t
Total units roguinad ..o.,o,................
Less beginning Inventory of finished
Uni t S r ar aaa. . . . t or . . r . . . . . . . . r ! r . r . . a. aa. . . . . . . . . r r . .
Units to be transfered to finished
gOOds o. . . . . . . . . . r r . . . a. . . . . a. . r . . . . . . . oo. . . r . . . . r aa.
Add endlng work in process
i nvent Or y . . . r . . . . r o. . . . . . . . r . . r . . or . . . . . . . . . . r . . . .
Less beginning work in
process
i nventOry ...............r..........r....o.........
Equi vafent uni ts to be
ptl duced.......
E15-4
( 11
25O,OOO
t 5rooo
265,OOO
1O, OO0
249,0OO
4r2OO
253r2OO
2rOOO
251,2OO
Mi d Hi gh
Band Band
300
30
175rOOO
I O, OOO
185, OOO
12, OOO
173, OOO
2,OOO
175, OOO
1, 8OO
173,2OO
Low
and
Mi d
Band
250
50
3OO, OOO
2O, OOO
32O,OO0
25,00O
295,0OO
6,OOO
301, OOO
5. 600
?p5Jp9.
Mi d
and
High Three
Band Band
350
50
Units reguired to meet sales
budget . r. . . . . . . . . . . . . o. . . . . . , . . . . . . . . . r. . . .
Add desi red endi ng Inyentoty....
Total units required during
peri od
. , . . . . . . . . . , . r. . . . . . . . . . r. . . .
Less
begi nni ng
i nventory ..........
Requi red
producti on
quanti ty....
Low
Band
200
40
200
30
400
50
240
(sol
190
330
(30)
_999
450
(701
_380
300
eal
280
400 230
(3ol (201
370 210
344
El 5-4
(Concl udedl
(21 Materialg
purchases'req uirements:
Mrtrl
Tublng
1O f eet
7
5
1 7
Mctrl
Tublng
l
r9OO
leet
2r1OO
l , 9oo
4r780
4,44O
41620
lnduc-
tort
Chapter 15
Fccd-
llnc
Con-
ncctorr
190
300
380
280
370
z'ro
l r 73O
500
2'23O
1. 500
730
Pcr Unlt Matcrbb Rcqulrrmcntr
Total Metcrlrlr Fcqulrcmcntr
Produc'
fbn
Requlri-
Modcl mcnt
190
300
380
280
Fccd'
llnr
Con'
Inducton nccton
Low band......
Mi d band,......
Hi gh band......
Low and
mi d band. . . .
Mi d and
hi gh band. . . 37O
Three band.... 21O
Quantity rsquired to meet
production budget....
Add desired ending materials lnventory.....'.......
Total
quantity of materials required for the
peri od
1
I
I
791720
7,0oo
261720
6. OOO
z,SJ20.
190
300
380
560
740
630
2r8OO
800
3,6OO
I , OOO
-2'609
I
I
I
1
I
1 2
22
2
3
Deduct matori al s on hand at the begi nni ng of
t he per i od . . . . . . . . . . . . . . . . . . . . . . . t . t . ' . . . . . . . . . . . . . . . t . . . t . . . . . t . . .
Matgrials punchases
rgqui re m e nts .......'.......'.'...
E15- 5
(1) Sal es budget for fourth
quarten
Unit
QuanUty
Price Product
x 4,5OO
Y 2,OOO
z 3,0oo
Budget ed sal es i n uni t s. .
Desi red endi ng i nventory
Quanti ty requi red ..............
Begi nni ng i nventory
R e q u i red p
ro d u cti ort..,.,..................
$12. OO
25.OO
20. o0
Sal es
Revenue
$
54,OOO
5O,OOO
6O,000
s184, OoO
_
Product
(2)
Total budgeted sa1es...............,...t....
Producti on budget for fourth
quarten
x
4, 5OO
900
5, 4OO
600
2, OOO
400
2AOO
500
1, 900
3, OOO
500
3, 5OO
400
Y
lf99
3, 100
Chapter 15
E15-5 (Concl uded|
(31 Materials usage budget for fourtfr
quarten
Product
Pl anned
Pro-
dustion
-
4,8OO
l , 9oo
3rl oo
(41 Materials purchase
budget for fourth
guailen
Material
345
Materials Required Per Unit Total Materials Required
A
3
2
I
c B A c
2
4
2
I
2
3
x
Y
z
l 4r4OO
3r8OO
3, l oo
4r8OO
3, 8OO
9, 3OO
9, 6OO
Trgoo
o,2oo
23,4OO
Total
s83, O5O
21, 3OO 17, 9O0
c B A
Productlon requiremgnt r.......,...
Desired ending inventory .....o....
Quantity required ..................r...
Beginning inventof' ' lf .......,..........
Quantity to be purchased
..,..,....
Uni t COSI . . . r. ' . . . . r. . . , . rr. r. . . . r. . . . . r, . r, .
Purchasg req uiremoot....,..........
E15- 6
( 1)
Units required to meet sales budget
Add onding inventory
Total units 1equirad.......,.............
Less beginning inventory ..,,..............
Pl anned producti on............
21, 3OO
2,5OO
23,8OO
2,0oo
21, 8OO
s
,50
17, 9OO
2rOOO
19, 9OO
{ . 000
18, 9OO
3 z. oo
63z.goo
23t4O4
2,AOA
25,4OO
2, 5O0
22,gOO
3 1. 5o
slo,9oo $34,359
Tribolita Polycal Powder X
8O,OOO
6r0oo
86,OOO
5,OOO
81, OOO
4O,OOO
2,OOO
42,OOO
4rOOO
38, OOO
l OO,OOO
SrOOO
l OSrOOO
I O,OOO
98, OOO
a6
Et 5-6
(Concl uded)
tzl
Tri bOl i t g r. . . . . . . . . r. . . . . . . . r.
Pol ycal .......................
Powder X ............,,.....
Add endi ng i nventory
Less begi nni ng
i nvgntorY...........' ......
Uni ts to be
Purchased
Cost
per ki l ogt' ar[ ......
Total cost ot
pU nC h aSgS . . . . . . . . . . . . . . . .
(31
Material A
8 1 , 0 0 0 1 1 = 8 l O 0 0 k g
38, OOO 12 =
76 ooo
Chapter t5
Materi al B
8i , OOO 12
= 162 OOO kg
g 8 r OOOr l
= 9 8 O;
260 00o kg
15 000
275 ooo kg
1 1 0 0 0
264 OOO kg
x
$ . 1 0
$ZOrlaIl
Total
I
16, 200
l 5, 2OO
16, 20O
9, 8OO
s 57, 4OO
s 32, 4OO
38, OOO
9, 8OO
s 80,2oo
Materi al s:
A:
gt ' OOO
x I x S. 2O r . . . . . . . . . . ' .
38r OOO x 2 xS. 2O . . ' . . . . . . . . . .
B: 81r OOO x2xS. 1O. . . . . . . . , . . . '
98, OOO x I x S. 1O, . . . . . . . . . . . .
Di rect Labon
8t r 5O I 38 . . . . . . ' ! . . . ' . . . . t . . . . . . . . .
38 r 125 r $8 ...,...............r....
98 x 12. 5 x58, . . . . . . . . . . . . . . . . . . . . . .
Factory overhead-vari abl e:
81 X 50 X 56. . . . . . . . . . . . . . . . . r . . . . r . . r
39 r 125 r 56. . . . . . . . . . , . . , . . . . . . . . . .
98 x 12. 5 r S6 . . . . . . . . . .
157 Ooo kg
12 000
169 oOO kg
I 500
{ 59 5oo kg
x
s.20
s3{. 900
Tribolite Pol ycal Power X
$16, 2OO
s15' 2OO
16, 20o
s 9, 8OO
$32,4OO 915,2OO
s 9, 8OO
s32,4OO
s38,OOO
s 9, 8OO
s
9,800
$32,40O
s38,ooo
s24,3oO
$24,3OO
Total vari abl e manufacturi ng
cost . . . . . . . . S89, 1OO
s28,5OO $ 7, 350 s 60, 150
99l , 7oo
S26, e59 s1e7' 75O
s28,50O
s 24, 300
28, 50O
7, 35O
$ 7, 350
Fi xed manuf act ur i ng cost
( not at t ocat ed
t o
pr oduct s) . . . . . . . . . .
4O' OOO
Tot al manuf act ur i ng cos1. . . . . . . , . . . . . . . . . . , . . .
' g?%t t g
Chaptor l5
El 5- 7
u7
wt(z lNc.
Budgeted Gost of Goods Manul actured and Sol d Statement
For the
Year
20-
Materi al s:
Begi nni ng i nventory....
PUr ChaSgS. . . . . . . . . . . . . . . . . . r . . . . . . . . o. . . . . . . . . . . . . . . . i . . . . . . . . . t . t . .
Matgri ats avai tabl g for usb .........o..........r......r.....
Ending invgntory' ...........' ..' ........o...o...-..............' ..
Cost of matgrials usgd....................................t' t.
L3 bO1. . . . . . . . . . . . . . . o. . . . o. . o. . . . . . . . . . . . . . . . . . . . . . o. o. . . r . r . . . . . . . . . . . t t . .
FactOry ovgrh
gad
.........r........r.........r.t....................
Total manufacturi ng CoSt .,......................' ..............
Add begi nni ng work i n
process i nventotl f........' .....
Deduct endi ng work i n
process i nventory.......,..,..
Cost of
goods
manuf act ungd r. . . r, . . . . . . . . . . ' . r. . . r. . . . . ' . . . .
Add begi nni ng fi ni shed
goods i nventory.....' .."......
Cost of
goods
avai l abl g for sa|e.......,' ...,.....r.' .r.' ....
Deduct endi ng fi ni shed
goods i nventory .,...,..,...,.r
GoSt Of
gOOdS
SOl d . . . . . . . . . . . . . ' . . . . . . o. . . o". . . . . . . . . . . o. . . . . ' . . . .
tEarnfngr
l E
h of S2O,OOO,00O
= tl r200,OO0l
Marketi ng, admi ni strati ve, and fi nanci al erpense3
Cost of goods
sol d (Sa, 280, 00O). . , . .
$ 5OO, OOO.
2. 600. 0oot
$3, 1OO, OOO
600.ooo
l ooh ol sal es
21
31ah of sal es
69
lOOc/c of sales
s2,5OO,000
4, 34O, OOO
1' 840' 000e
S8' 68O' 0000
1O0, 000
s8,780,OOO
3OO, OOO
S8r 48O, OOOz
SOO, OOO
s9, 280, 00O
1, 000, 000
s8, 28O, 000r
zCost
of goods
rol d
s8, 290, 000
rCost
of gooda
manufactured
88,480,000
.Total
manufac-
turl ng
cost
88,gg0,ooo
o
Cost
ol
mat erl al s
used
s2, 500, 000
Endi ng l i ni shcd
goods i nventory
81, oO0, ooo
Endi ng work In
process i nventory
q3o0, 000
Labor
lSOc/o
ol
manutacturi ng cost)
94,340,000
Endi ng
mat eri al s
Inventory
s600. ooo
Beginning finished
goods inventory
s8oo,00o
Beginning work in
process inventory
sl oo,ooo
Cost ol materi al g
used
32,5oo,ooo
Begi nni ng
mat eri al s
i nventory
s500, ooo
Cost of
goods
= manufactured
s8, 48O, OoO
Total manul acturi ng cost
(materi al s, l abor' and
= l actory overhead)
s8, 680, OO0
= Factory overhead
s1, 84O, 000
= Mat er i al s
purchases
s2, 6OO, OOO
-----7
ChaDter 15
348
E15- 8
PATZ COMPANY
Budgeted Income Statement
Second Quarter, 20-
Sales (S500r000 first
quartgr sales r 2) '..'..,......r...'.."...
cost of
goods sol d
($1' ooo,ooo sal es x
(1o0%
-
4o%l l
Gross
profit (9 t
rOOOrO0O
sal
gs
x 4Ao/o1,..............,......!o...
Commerci al erpenses:
Uncotl ecti bl e accounts
($l ,o0o,ooo sal es r2%1.' .' .. $
2OrOo0
Depreci ati on
(($8OO,OOO + 2O yearsl r 114
year! ..-' ... 1O' OOO
Marketing:
Vafi abl e ($l
rOO0rO0O
Sal eS X l O%1,..,......r...D..,......
{OOr000
Fi Xed. r . . . . . . . . . r . . r . . . . . . . . . . . . . . . . . r . r r o. . . . . t r . . . . . . . . . . . t . . . . . . . ' . o. . .
SOt OOO
Admi ni strati on
(al l fi xed).....or..,,...
.............' .
3o.ooo
l nCOmg bgfOfg i nCOmg tax ..,.....,..,.............' .,..,..............
sl rooo,ooo
6O0,0oo
$
4OO,OOO
2{ O. OOO
3 l 90. ooo
El s- 9
GGA-Canada
(adapted). Repri nt wi th
permi ssi on'
ME)OA CORPORATION
Budgeted Income Statement
For t he Year Endi ng December 3' l r 2OB
Sal es (S9,OOO,OOO i n l 9A x 1.O5
quanti ty i ncrease x
1 . 1 0 pr i ce i ncr ease) . . . , . . . . . . . . . . . . D' . . . . ' . r . . . . , ' . . . . . . . . . . .
Less cost of
goods
sol d
(56,000,0OO r 1.O5
quanti ty i ncrease x
I .O6 cOSt i nCfeaSe!...,............,...,..' .,..' ...............
Gr OSS pf ot i t . . . r . . r . . . . . . . . r . . . . . . . . . r . . . . . . . . r . . r . . . . r . . r r . . . . . . . r . . . t . . . . .
Less commerci al expenses:
Marketi ng expenses
(S78O,OOO + S42O,OOO
i ncrease i n adverti si ng).
Admi ni strati vg
gxpens gs,......,...' ...............r............
Operati ng i ncome before taxes and i nterest.........-....
sl ,20o,0oo
9OO, O0O
$1O, 395, 000
6, 578, OOO
s 3, 717, 000
2, 1OO, OOO
Less i nterest expense
($14O, OOO + ($4OO, O0O asset i ncrease
x
1oo/ o rat e))
l n com
g
bgf org i ncome I EI X. . . . . . . . , . . . . . , . . . . . . . , . . . . . . . . . . . . . . . . ' . .
Less i ncome
t ax expense ($l
, 447 . OOO
x . 4O t ax rat e)
Net l ncome. . . . . . . . . . . ,
. . , . . . . . . . . . . . , . . , , . . . . . .
s 1, 617, O0O
180. OOO
$1, 437, 00O
574. 800
s a62.200
-
anpbr 15
349
Pt 5-1
( 11
PROBLEMS
Sales Budget
Unit Price Total
b
Thi ngonc .....................!......oi r..oo....oor.....r..............
OO' OOO S 70 34t2OOtOOO
Thingtwo......
. . . . . . . r. . . . . . . . . . 4Ot 0OO l OO 4t OOO; OOO
PfOi eCted 881OS.r..r........oo...o...........rr..r.............
Produstlon Budget
f f i f f i
Oej i red i nventori osr Decamber 3l ' 2O8..
25' OOO I' OOO
85,OOO 49,OOO
Less elpected inventories, Januar! 1, 208...' ..... 2O' OO! 8t0!9
99,ooo
41, OOO
Raw Materials Purchases Budget
l2'l
(31
Raw Mrtcrlrlr
C Total
Thlngoor (O5'OO0 unltr
prolcctcd to bc produccd) 260,OoO lbr 130'OoO lbr"
Thlngtwo (41,OOO unltr
prol ectcd to bc producr' d) 2O5,OOO
123' OOO 41' 000 unl tr
Produc,t|on
rrqulnmrnt..........- 485rOOO br. 5it'Oog br. {1'OOO unltr
Add dcllnd lnvcntorlcr,
Dccrmbrr 31, lg8*...- 3E,ooO
32'OOO 7'OOo
Totel nqulrrmcntr..* 5OI,OOO br, 285'000 lbr. 48'OOO unltr
L.cr rrpcctcd brvcn-
-
torl cr, Jrnuary 1, 198.--. 32,000 20' OOO
5.ooo
h,rrchar roqulrcmcntt....- 469'OOO lbr. 256'0OO lbr. 43'000 unttl
Cort pcr pound
or unlt.* $8 35
'sr
Totel coct of purchaeGr......
33,252,000 3i,2go,!o9
'g13gggg
sl,rclpoo
Chaoter l5
3fi
I
Pt5-l
(Concl uded)
(41
Dlrect Labor Budget
Prolected
Hourr
Productlon Per
Unit
Total
Ratc
Total
Thi ngonc
. . . . . . . o. ot t t t "r"t "t "t t '
Thi n
gt wo . . . . . . . . . . . . r. ot "t "t "t t t t '
(Unltsl
g5rooo
4t , ooo
t3o,ooo
l 23,OOO
$l,o4orooo
Irl oTrooo
s2,147' OOO
$8
9
2
3
(sl Flnlghcd Goods Inventory
Budgc!
Deccmber
3l' 2OB
Thingone:
Raw materials:
A-4
pOUndA O $8 ...r.....r....r...r..' .' .........' ."""'
b2
pOUndS O $5 ...............r..............r...r.......
Direct fabor-2 hourg O $8 o.r............r.......'.."""
Factory overhead-2 hours O $2
per direct labor
h o l l l a. . . . . . ar . . . a. . t aa. . . a. . a. . . aa" t t r ' ! " " " t " t t t t " " t t " t
$82 r 25tOOO unl ts r...........o..' ........"t"""tt"ot"
Thingtwo:
Raw materials:
A-5 poundS O $8.......................r.' ..r......r......
B-3 pounds O $5 ..........o..o......o.""""""""""
C- l uni t O $3 . . . t . . . . . . . . . . . . . . t . . t t ' r "t ' o' o""t "t t "t t t '
Dirgct laborq? hours O $9 r.....................'..""""
Factory oyorhoad-.? houra O 32
per direct labor
hour . . . . . . . . t t . . . . . . o. . . t 1. . . t . . . . . . . t . . t . " " t " t " t " t " t " "
591 r I rOOO uni t 8. . . . . ' . . ' . . . . . . . . . r. . . . . . . . . . . . ' . . ' . o. . . . .
Budgeted finished goods inventory,
December 31, 2OB
$gz
l o 9,42
1 6
4
s62
:
$l , 55O, OOO
$co
1 5
3 $ss
27
6
rlel
8l 9, OOO
I34w
Clwptor 15
P15-2
,
( 11
35t
ROLETTER COMPAT.JY
Budget for Produetlon and Direct Labor
For the Quarter Ending March 31r 2OB
Month
January February March Quarter
Salgs (uhitsl .....................' ............
IOTOOO l2rOOO I' OOO 3OTOOO
Add ending inventOt' .........,...,....
l6' 000 12r5OO 13r5OO 13r5OO
TOtal UnltS feqUifed ....,,..o,....,..,....
26' 000 24r5OO 21r5OO 43r5OO
Less begi nni ng Inventoryr...o......... l O' OOO.. l 6' 000 12r5OO 1or00o
Unlts to be
producod.................... IO,OOO 8r5OO 9' OOO 27r5OO
Di rect l abor hours per uni t.........' . r 2.O r 2,O r 1.5
Total hours of diract labor time
n
ggd
ed ........o...........r....... 20,0OO t 7, ooo 13, 5oo 5o, 5oo
Direct labor costs:
Wages
1$8.00
per DLHI ........r... $l oO,OOO $136'000 $1 O8,OOO S4O4,OOO
Pension contrlbutlons
($.25 pef
DL10...........r..r.,..... 5' OOO 4t25O 31375 121625
Workergt componsatlon
Insurance ($.1O psr DLH)..... 2' OOO 1r7OO 1r35O 5' O5O
Employee medlcal Insurancc
(3.4O per DLI[.'.......r............ S'OOO 61800 5r4OO 2O'2OO
Employerb social security and
unemployment tares
(ss. oo r. 1o =
g8o
per DLH| 16, 000 13, 600 1O' 8OO 4O' 4OO
Total direct labor G(tst......... $191rooo $182,350 s128,925 s482,275
: : -
rl OOc6
of the fi rst fol towi ng monthb sal es
pl us 5O% of the second fol l owi ng
monthb sales.
- - -
Chagter l5
P75-2
(Concludei!)
(2) (al Gomponents of the perlodic
budgot, other than thc
producUon budget
and the direct labor budget, that would algo use tte saler data include:
(1) the sal eg budget
l2l
the cost of
goods manufastured and sold budget
igl
the markating and administraiivc oxponsos budget
(4) the budgeted Income statement
(b) Gomponents of the periodic budget other than the production budget
and the direct labor budget, that would also use the
production
data
i ncl ude:
(11 tho dlroct materiab budget
l2l
tho tactory overhead budget
(3) the cost of goods manulactured and sold budget
(cl Gomponents of the periodic
budget, other than the
production budget
and the direct labor budget, that would also use ttro direct labor hour
data i ncl ude:
(1) the tactory overhead budget (for determining the overhead applica-
tion rate il based on direct labor hours!
(d) Components of the periodic budget, othcr than thc production budget
and the direct labor budget, that would elso use the dirsct labor cost
data include:
(11 the lactory overhead budget
(for determining the overhead applica-
tion rate il based on direct labor dollars and for dstermining the cost of
employee benefits attributable to wages earned by direct labor)
t2)
the cost of goods manufactured and sold budget
(3) the cash budget
(4) the budgeted i ncome statement
Chagtor 15
P15-3
'
(1) EsUmated cales lor third
guarter (July-Septemberf .........r.,.....
Add ending Inventory
p' OOO
r 8O96)....,.r.o.....,..........o..o.,............
Lgss bgginning lnventoly ..................r....' .....
313
18, OOO
5, 600
23,6OO
5.600
18. OOO
t2l
Material
Unl ts to bo producgd' .' .........r.o...............
Matgrials I' irto ...,.......,...o,.,.
Unltg of matgrials required ...,.......,...o..,..
Add ending Inventory:
5t 60O I 6 . . . . . . . . . . . . . . r . . . . . . . . . . . . t . . . . . . . . . . . . . . . .
5t6OO I 4 ...............t.' rr...t................o.t.
5t0OO I 2 .........r............r..........r..i .......
1 0 1
l 8r OOO
I 6
211
l Srooo
t 4
242
18, OOO
x 2
36, OOO
1 1, 2OO
l OS' OOO
33,600
72,OOO
22r4OO
141, 600
Less beginning inventory.,.....,.,......,.r..o.. 35rOOO
PUrChaSgS......r...........r............................ f OO"gOO
Hours
por
Production Unit
94,400 47,2OO
3OTOOO
13. OOO
34r2OO
x$1. 20
$4'to4Q
Total
Labor
Gost Process
FOrmi ng .o.........tr...rr...
ASSem b ly ....r..............
Fi ni shi ng . o. . . . . . . . , . . . . . . . . ,
Cost per
unit r s2.40
64,4O0
x $3.60
Total cost of purchasoS.............,.............
9255r84O $231,84O
{31
Total
Hours
Total
Labor
Rate
18, OOO
18,000
18, O0O
,80
2.OO
.25
l 4,4OO $8,OO
36,000 5.5O
4.500 6.00
54,9OO
$115, 2OO
198, OOO
27
|OOO
9940'299
(41
Erpectedannual producti oJl .............r........
60,000 uni ts
27,OOO
Astual producUon
through June 30
:
,
Erpocted production
during last six months of 20A...,.. 33pOO units
Variable
factory oyerhead per unit ($i
gZ,Ooo
+
27,0ool x $6.00
Budgeted
vari abl e factory oyerhead...........,.r.,,..o....,..... $l gBrOoo
Budgeted
fi red factory overhead 93,OOO
Total budgeted factory overhead
3gt
Pl 5-4
(tl
Chagter 15
Revlsed Salea Budget in Unlts Bagod on tho Inder
Terrltorles
1
-lb. pack3ff o......."'
2-lb.
packago...o.---.-
Total ....' ....' .........
t l O, OOO
r . 9 = I ' OOO
212' OOO
r . 9 = l O' 8OO
(21 Sal es Budget i n Dol l ars
I
IrO00
t
1O, 8OO
r
llf99
. i l
l 3,5OO
l o,2oo
29'-7OO
l l l
torSOO
l o,8oo
21, 600
:-
Other
551r7OO
704,7OO
1, 256, 4OO
6-Month
Total
585,OOO
7{2,5OO
tl327,5OO
Territories
I
l l
$2,ZSO'
$
gPZS
5,4OOr
I,l OO
E?rsso
9!Jr475
lll
Other
$2,7OO $137,925
5,4OO
352,350
$8.roo
$2,25o
s5,4OO
s490,275
$glJ.soo
6-Month
Total
$146, 250
371,25O
l
-lb. pack?ff o..........
2' lb.
package..........
Tota 1................
|
9,9oo revised estimate r i25
(per packago! =
,1o;8oo
revised estimate x $.5o
(per package) =
Materials Purchases
(3)
Grain R
Grain S
Total
January. . o. . r. . . . . . . . . . .
February ........o..r...
Mal t h. . . . . . o. . . . . . ' . . ' . . r
Apri l ,...,.................
May . . . . . . . . . . . . . . . . . . . . . o.
June,............,...,..,.
2,OOO $
2,4OO
I , 0oo 1, 2OO
3, OOO 3, 750
.,:o .,ojo
4,OOO 4,OOO
13. OOO sl 4, 350
: :
Bu.
5rOOO
t,oro
I,OOO
3,OOO
4,OOO
4,OOO.
@t
$ 6,5oo
''rjo
l 2, ooo
4,5OO
614OO
$32,200
Bu. Gost Bu.
7,OOO
3,0o0
3,00o
11, OOO
3,OOO
8,0oo
35doo
@t
$ 8,9oo
4,OOO
3, 75O
15, OOO
4r5OO
1O, 4OO
E4Or5s9
Chapter t5
Pl 5- 4
( Concl uded)
(4) Materi al s Requi rements for Producti on
a q E
Producti on of 585rOOO 1-l b.
packages..' .....-..........................r.....
Producti o n ol 7 4215OO 2' l b. packages ...r....-............-......
Total materi al s requi rements for si x months ...............' ...............
585, OOO l bs.
1, 485, 00O
2,O70,0OO l bs,
Three bushel s of
grai n i n the
proporti ons of 2R:1S
produce 198 l bs. of fi ni shed
producl R wei ghs 7O l bs.
per bushel and S wei ghs 80 l bs.
per bushel .
Wei ght
per
Grai n Bushel s Bushel Lbs.
R 2 7O l bs. 14O
S 1 8O l bs. 80
220
1O7o l oss
22
Wei ght of f i ni shed
Pr oduct . . ' 198
Si nce each 198 l bs. of product cal l s tor 22O l bs' of
grai n, the total wei ght of
grain required tor 2.O7O,O0O lbs. is:
at t at
t#
r 2,070,O0O = 2,3OO,OOO l bs., to be apporti oned as fol l ows:
l Y o
Gr ai n R = x 2, 3OO, OO0
= 1, 463, 636 l bs. = 20' 909 bushel s @ 70 l bs. each
1 4 0
220
Grai n S =
#
x 2, 3OO, Ooo
= 836, 364 l bs. = 10, 455 bushel s @ 8o l bs. each
Materi al s Account
(Fi fo Basi s) (5)
Grai n R Grai n S
Bu. Cost Bu, Cost
1O, OOO
22,OOO
32, OOO
1O, O0O
5, OOO
2, OOO
3, 909
sl 2, OOO
32,2O4
s44,2OO
$12, ooo
6, 5O0
2, 8OO
5, 864
3,OOO
2,OOO
1, OOO
3r OOO
11455
$
3, 000
2r4OO
1r2OO
3r750
11455
3,0oo s 3,ooo
13, 0OO 14, 350
16, OOO sl 7, 350
2O, 9Og s27, 164
1 1, O91 Sl 7, 036
1 0, 455 sl 1, 8o5
5, 545 s 5, 545
, r
I
Chaotar 15
356
P15- 5
( 1)
Budgeted Incomc Statoment
(Ooos omittadl
Quarter
Sales:
CommglciSl
.........."""""t"
GovgrnmgJlt.' ..........t"""""
t ot a t . r . . . . . . . t . . . . . . . t t t t o"t t " "
Cost of
goods 8old ..".,....' ..' ...
Grosg
profit .........r.....' .......".t.
Other oprating arponses:
Advertising ..' .............-----.--
Sgl l i ng . . . . . . . . r. . . . . . . . . . . . . . t """'
Admi n istrativg ............' ...r..
Gengral ofti cg ...........r.' ....-.
TOI Sl . . . . . . . . . . . r. . . . . . . . . . t r. . . . t .
lncome before income t?r..' ...
Incomg t3I.....' .................""...
Ngt i ncomo .............................
ft$
s250
l oo
33sO
t ot
$l 05
Sl 03
41
$ 5 6
' $ 6 2
Second Third
3268 3275
120 l t o
Fourth Total
$goo sl ,o91
115 445
9{1s
l 9l
$113
s 41e
$r r r s
410
44 163
$1 8e
$ o
35
32
23
$ g o
s e 3
37
s1, 536
707
$ ezg
$ 2 4
155
140
100
b
- i
s386 s38lt
178 177
$208 3208
$ 6
39
35
25
$ 6
39
35
25
$,224
9 o
42
38
27
$l os
31 03
41
s 6 2 $ 6 7 s 247_
j
I
-
357
Chapter 15
P15-6
(Goncl uded)
(21 Budgeted Income
Statement
with 5% Incrtaso In Gommercial Sales
(OOOs omitted)
Quarter
Fi$
$zsg
l oo
$36s
1A7
$1
e6
$ 8
$27e
120
s390
184
s2l 5
$ 6
$l 08
$1 07
43
9_g!
Second Third Fourth Total
Sales:
Comm
grci8l
................trt' ttr
. GovgrnmOrlt...........t' .....' ."'
Tot al . . . . t . . . . . . . . . . o. . . . . "t rt "t '
Gogt of
goods Eold ............-....
Gross
protit ............o......' ...t...'
Other operating expensos:
Advertising
Selling .............................t'
AdministraUvc ...................
Ggneral oftico .........t....t.r...
TOt Sl . . . t . . . . . . . t . . t . . . . t . . . . . . . . . '
lncome befora income tir"....
lncOmg t3L.....r.....-................
Ngt i nCOm| Et t.....r...............tr.....
$zss
l l o
$3e9
184
$31s
1 1 5
$21
5
$ 6
9f30
198
s232
$ 6
43
39
2a
$108
sl
07
43
S s e s 7 0
s| , 146
445
s1r 591
733
36
33
24
40
36
2g
40
36
26
s 858
$ 2 4
159
144
1o' 4
$ e g
$ e 7
39
sl 16
$1
r s
46
s 431
9
427
171
s
256
3 5 8
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Clapter 15
o
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Chaptar
15
w
P15-6
(Concl uded)
(3)
JOHNSON
AI*ID SMITH,
CERTIFIED
PUBLIC ACCOUNTANTS
Budgeted Income Statement
For Year Endi ng June 3Or zON
Revenue
from
chargoabl e
Ume:
Emplovee
Johnson
Smi t h
t . r . . t ' t t t t t t t ' r ' r t t o" t " " " " t t " r " " t "
Vi ckg r 3. . . . .
t t t t ' l " t r " t " " " " t t ot " t t t " " " '
Lowe
Blllable
Hourr
700
l , l oo
1, 5OO
l , 600
1re25
11625
500
I , l oo
1, 0o0
si l i i ng
Rate
$90.oo
70.oo
52.OO
39.OO
32.OO
32.OO
17. 50
l 5. oo
15. OO
Gross
Fees
$
gg,ooo
77,OOO
78,O0O
02,4OO
52rOOO
52,OOO
8, 75O
l 61500
15. OOO s424, 650
stoo,ooo
97r76O
39r520
35,OOO
02'37o
334,650
s-lgpoo
- a a a a a a a a a a a a a t a a a a r a "
KennedY. . . . ""'
a a a t a a a a a a a a a a r r r r r o o o o r t r r r r o
Qui nn
' ...
Gar Ci a . . . ot t . t " " " t ' l t t " t t t t t " t t " " " t ' l " t '
Hammond
' .
LyOnS . . . . . . . t t oo" t t " " t ' t t " t " t " t t t " " " " "
Erpenses
of
Producing
revenue:
Salaries:
Partner:8....
Profgssi onal staff ....,r.r."""'
Sgcrgta ri
g3""""tt
"r" "t "" " "
Frin
ge bgn
gfits""""""' o"""""'
Other oporating
erpenseg
.o.."'
Gross
prcfi t.......o.."t' o"t"tt""tt"""'
Chapter 15
P15- 7
l
36t
Schedul e 1
Sal oc Budget
Areas
Model l 5O
Uni ts ...r..r.....t..ot.
Unit
prico
Tot al . . r r . . . . . . . . . . . . . . . t . . . . . o. t . t t . r . o. . t .
Model l OO
Unitg
Uni t
pr i ce
. . t . . . . . . . . . r . . . . . . . r r . . . . . . r . . r . r . .
TOt al . . . . . . r . . . . . . . . . . . r . r r . . . . . ' . r . . . ' . r . . .
Model 50
Units ..............
Unit price ...............
TOtal r..' .....r....
TOt al a. aa. ar . . . . r t r r a. r . . . . r . . r . r . a. aaaa aa aa a. . o. r r t
South
3' OOO 4' OOO
9__!-75 9_l_Zg
t__92599
g_7ooeg
Southwest Total
TrOOO
775
g!,?ailoo
5rOOO
q__!
20
9_eoop.99
7,OOO
t_eo
9-_e9999
fllTsE.OOO
I,OOO
s___99
gl20{99
$3fgg,ooo
15, OOO
90
il-egpoo
s{ptlpgg
7,OOO l 2rOOO
$ r zo
$_139
E__glgpoo 91,41!.ooo
s
Schedule 2
Production Budget
Model
Units required to meet sales budget (Schedule
l)
Add
gndi ng
i nvent o}y. , . . , . . , . . . . . . . . r. . r. o. , r, r. . . . . . . . . . . . . . . r. .
Total units requirad..............r..........................r,.....
Lgss begi nni ng i nventory.,....,...,...o..,..............r....,.
Pl anned producUon
tor thc year........r...............-..
7, OOO 12. 100 14. gOO
t-s
TrOOO
200
7
r2OO
200
1_99 99
12, OOO 15, OOO
400 300
12,4OO 15,3OO
300 400
Chapter 15
fi2
P15-7
(Continued)
Schedule
3
Direct Materials
Budget in Units
Units
tq Be
Lumber
ln Board
Finish
l n
Pints
Model
15O
Utits to be manufacturod
(schgdulg 2! ""t""""""""""
Matgri al s
l Ste """""t""""t"tt"
Units of materials
rcquired
"""
Model l oO
-Units
to be manufactured
(schgdul g 2| """"""' t """""'
Matgri al s
l Sto "tttt"t"t""to""t"'
Units of materials
requlred """
Model 5O
-Units
to be manufactured
(schedule 2) ......"""""""""'
Matgrials lSto ....."""-""""""'
Units ol materials required...."
Total units of materials requirad
"
Manuiactured
Feet
9Peakers
7,O0o
1 2
84.OOO
35.000
14.OOO
l 2, l oo
I
96, 800
36. 300 12, 100
l 4, 9OO
29, 800
14' 900
lE-loo
91poo
89.400
270.200
Schedul e
4
Purchases
Budget
Materials -. - .
@
Finish
Total
27O,2AO
30,ooo
3OO,2OO
40.ooo
26O,20O
$
, 75
$_esJlg
Units required for
Production
(Sch edul e 3)..............-.......
Add
gndi ng
i nventofl .........-..
Less begi nni ng i nventol Y...' ..
Uni ts to be
Punchasod
..........
Estimated unit cost ..............
Total cost of purchaseS........
l ot , l oo
8.OOO
1O9r 10O
I O.OOO
99, 1oo
s
r5.oo
@
41, 00O
2.OOO
43,OOO
1. 500
41r 5OO
$
z.oo
$83. OOO
s1. 764, 650
Chaptor 15
P15-7 (Gonti nuedf
Schedule 5
Cost of Materiala Reguired lor Production
3&3
Materials
Lumber Speakerg Fi ni sh Total
Model l 5O
Unitr of materialr roquired
lor producUon
(schedul e 3|.........,.........
g4rOOO
35' OOO i 4rOOO
Unit cost..,..........,,.........r...
t__
.25
f_l!E.og
$ 2.oo
Total ....,....,....,................
t-lgrg0O U2SOgg $28.OOO $ 6i O'OOO
Model 1OO
Units of materials reguired
tor producUon
(Schedulc
3f .......,..r..r.,,..
Uni t coSt . . . . . . r. . . . . . . . . . . . . . r. i . . . .
Total
Model 5O
Units of materials raquirod
for production
(Schedul c
3) . . . . . . . . . . . r. . r. . . .
Uni t COSt r. . . . r. . . . . , . . . . . . . . . . . . . . . o
TOtal ...... r......r............r....
TOta1...........r.....r..r..r........r..
90r8OO 3gr3OO 12,1OO
t _-
. 75
L- 19: oo $ z. oo
L72oo $__gg{,5OO $24,2OO 641, 3OO
89,4OO
t---75
r_o7ggg
gg?.s5o
2grgoo
9__--1-g.og
$lrJse
e!E!
!,soo
l 4, 9OO
$ 2.OO
$29,800
$82.OOO
543.850
$1. 801. 150
f
url
P15-7
(Continued)
'
Schedul e O
Dirsct Labor Budget
Chapter l5
Cuttfns Assombll$ Finishinq Total
Model l 50
Hourg
per unlt ' .................. .375' 2.OOO .375
Unitg to be manulactured
(schedul g 2)..........o.....o.. 7.OO0 7.OOO 7.OOO
Hourg of labor lquiJd..... 21625 l4rOOO 21625
Labor cost
per holtt.' ."..' ... 3 6.00 3 5.oo
$
4.oo
Total l abor CoEt..,..........., S15.750 i 7O.OOO $1O.5OO $ e6' 25O
Model 1OO
Hci urs
per uni t................... .375 l ' 5OO -25,O
Units to be manufactured
( schedul e 2) . . , . . . . . . . 12. l OO l 2. l OO 12. 1OO
Hours of l abor rcqui rcd..... 41537.5 18rl 50 3' 025
l-abor cost
per ho1tt........... $ 0.oo 3 5.oo $
4.oo
TOtal l abOr COSI..........!.... 527,225 $ 9O.75O $12.l OO
13OrO75
Model 5O
Hours per uni t...' ...r' .......... .375 l ' 5OO ' 25O
Units to be manufactured
(Schedul e 2) ...................
.l
4.900 14.900 l 4.9OO
Hours of l abor rl qui red..... 51587.5 22.35A 3t725
L:bor cost per hour........,.. S 6.00 $
5.oo $
O.oO
Tot al l abor cost . . . . . . . . . . . . . , . 333, 525 Sl I 1. 75O $14, 9OO
160' 175
Total .......
376,500 $272.5OO $37,5OO 3386,500
----------T\
Chapter 15
P15-7 (Continuedf
Schedul e
7
Factory Overhoad
Budget
(Applied Overhead|
Cutting
ASSqrnb[lg
Finishins Total
Model 15O
Unlts to be manufactured"
(Schedul e 21 ..................r TrOOO TrOOO 7rO0O
Estlmated departmsnt
factory overhead.,,or......, $ {' OO $ Z.OO $ .ZS
Total cost..................,..... $ 7,OOO $l 4.oOO S 5.250 S 261250
Model tOO
Units to be manufactured
(Schedule 2f .....,,,.,......... 12r7OO 12r1OO 12r1OO
Estimated department
factory overhgad ..r......... $ 1.OO $ 1.5O $ .5o
Total cost........................ 912.1OO S18,150 $ 6,050 36,300
Model 5O
Units to be manufactured
(Schedul e.2| ...................
14r9OO
' l 4r9OO
14r9OO
EsUmated department
factory overhead r........... $ Irog $ 1.51 $_' l!!
Totaf cost........................
$14.9OO S22.35O $ 7,450 44,7OO
Total factory overhead.......... $34,OOO S54,5OO Sl8,750 SlO7.25O
365
\-
I
- \
\
366
P15-7
(Gontinued)
'
Chapter 15
Schedul e 8
Begi nni ng and Endi ng l nventori es
Materials:
Lu mb
g
r.............
Speakers ..........
Finish .r.....t.......
Total
Work in
process: None
Fi ni shed
goods:
Model 150. . . . . . . '
Modgl l OO ......' .
Modgl 50. . . . . . . . . .
Total r...........
Total
Uni ts
4OrO0O
l O, OOO
1, 50O
Cost
9
.75
15. O0
2.00
ry
$ 3O,OOO
150, 000
3,OOO
s183. OOO
Beqinning Invenlo_ry-
Endi nq l nventorv
Units Gost Total
3OTOOO $ . 75 $22, 5OO
8, OOO 15. OO l 2O, OOO
2,0oo 2.oo 4,0oo
$146. 500
200
400
300
200
300
400
se8.oo
62. OO
47.OO
s 19, 600
18, 600
18. 800
s 57,OOO
s240,ooo
sl os.50
66.75
50.25
s 21, 1OO
2617OO
15, O75
$ 62. 875
s209.375
Schedul e 9
Budgeted Cost of Goods Manufactured and Sold Staternent
Materi al s:
Begi nni ng i nventory (Schedul e 8)...............' ......,"
Add purchasgs (Schedul e 4!...........r............r.,......
Total goods avai l abl e for use............,r.......,..........
Less endi ng i nventory (Schedul e 8) .....' ..' ............
Cost of materi al s used (Schedul e 5l .............' ......
Di rect l abor (Schedul e 6) ....................t.....,.,.........,...
Factory overhead (Schedul e 7)..............' ......' .oo..' .,..' .
Total man ufacturi ng cost .,....,....r..........r.......r...........
Add begi nni ng i nventory of fi ni shed
goods
(Schedul e 8| ............,..r..........................' r....' ....
Gost of
goods
avai l abl e for sal e.. ....,.......,...
Less endi ng i nventory of fi ni shed goods
( Schedul e
8) . . . . . . . . . . . . . . . . . . . . . . , . .
Cost of
goods
sol d . . . . . . . r . . . . . . . . . . . . . . , . . . . . . . . . . . .
$ 183, OOO
1. 764, 650
$1, 947, 650
146, 500
$1, 8O1, 150
386,5OO
107, 250
$2, 294, 90O
57. 000
s2, 351, 9OO
62,875
3;!9,939
%7
Chapter
15
P15-7
(Concl uded)
Schedul e
Budget ed l ncome
1 0
Statement
Sal es-al l model s
(schedul e 1) ...."""""""""""""
Cost of
goods sol d
(Schgdul g 9) , . . ' . . . . . . . . ""oro"""' t '
Gross
profi t.......,......,.........,.,................,....
Markgi i ng'
erpgnsS ....--..' ..............' ..
$5o0rooo
Admi ni sti ati ve
expenses ........r.o...r..
3O0' OOo
l nCOmg bgf Of g i nCOme t aX, . . . . . , . . r. . . . . . . r. . . . . . . . . . . . , . . . . . .
Pf OVi Si On t Of i nCOmg t ax i . r. . . . . . ' . . . . . . . . . . r. . . . o. ' . . o. . . . . . . . .
Ngt i nCOm) . . . . . . . r r . . . , . . o. . . . . . . . . . . o. ' . . . . . . . . . . . . . . . . . . . o. . . . , . . . r r
P15- 8
Amount
s4,o15,ooo.oo
2,289,O25.OO
s1, 725, 975. OO
800.ooo.oo
s 925,975.OO
462.987,50
9192gZ.so
Schedul e 1- Sal es Budget
Economv Model
Western
US EuroPe
Asia Total
Uni t s. . . , . . .
-oqooo
5O, OOO 75, 000
25, 0oo 210' 000
Unit
price
S so S
so
A------5o
$ so S
so
Tota1...,.... s3sooJoo s2,soo.ooo I 3,?lo,o0o sl,25o.ooo
9J9r999rOOO
St andar d Model
Uni t s . , . . . . , 4OTOOO 45, OOO 6OTOOO 35r 0OO 18O' OOO
Unit price
S 70 S 70 S---7o S
zO
S_-7o
Tota1........ Si .AOO,OOO $3,15O,OOO SIT2OOP.OO
S2.45O.oOO Sl 3f99pOO
Del uxe Model
uni t s . . . . . . . 2o, ooo 25, oOO 35, OOO 3O, OOO I 10' OOO
Unit price
S 90 S
go
S---9o
$
90
9---9o
Totat........ 51.8OO.OOo
-S2.25o.OOo
q--9rl -99roo0 S2.7oo.ooo S--$99o.ooo
Total ........,... 57.600.000 S7,9OO.OO0 S11rl0op99
9499p99
q93-ro00p99
Chapter t5
368
Pl 5
(Conti nued)
Schedule 2-Produstion Budget
Units required to meet salec budget
Economy Standard Delure
Model Model Model
2lorooo lSorooo l lorooo
(from Schedule
1! ............o..o."'
lAi Ogslrod endlng Inventory.................o.........
20.OOO l5.OOO IO.OOO
Total units ruquircd lor
Year
zto,ooo 105rooo t 2o,ooo
l5.ooo ls.o(xt l5.ooo
Less beginning Inventory..........-.
Productlon required for the
year..........,....rorriror 2f 5p99
!-8OPOO 1O5P99
Schedule 3-Direct Materials Budget in Units
Economv Modcl
Unltr to bc msrutrcUrcd
Tranr Dlodc
Wlrc
Bor formcrr Rcstlflcrr Fltten Rcrleton 0n
tcet!
(Schcdufu 2)..*......,..*. 2151OOO 215' OOO 215' O0O 2l SrOOO 215' OOO 215' OOO
Met crl el rquen0Uporunl t
1 2 2 5 5
Total quanU$ o,f
mttcrl eb
pqul rcd..,..,.-.
215,OOO 2I5,OOO 43O.O0O 43O.OOO i .O75.OOO 1.075' OOO
Standard Model
Unltr to bc manufectrrcd
(schcdutc 2)...-.............. 18O,OOO 18O,OOO 180' OOO 18O' OOO l 8O' OO0 18O' OOO
Mat erl al rqut ndt Yperunl t t 2
3 8 o
Totel quentlty of
metcrl abruqul rcd.......... ISO,OOO 360.000 72O,OOO 54O,OOO 1.44q.OOO l ' 08O.OOO
Dcl urc Modcl
Unttr to bt manufecbrcd
(schcdufu
2],.-....-.-...... !O5,OOO lOtt,OOO 1O5,OOO 105'0OO 105'000 105'0OO
Matcrlstr quanflV pcr
unlt .3
5 6 10 8
Totel quanU$
ot
mstorl rl r rrqul rod.......... 1O5,OOO 3i 5,OOO 525.OOO 630.000
LOSO' OOO
840' OOO
Total unltr of matorlalr
rcqul redforproductl on.. SOO,OOO 89O.OOO 1.675,000 1,OOO,0OO 3.585!OOO
?f9EOOO
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Chaptor 15
371
P15-8, (Continued)
Schedule S-Dlrect Labor Budget
Economy Standard Delure
Assemblv Department Model Model Model Total
Units to be
produced
(schedul e 2|......,........' 215rOOO l SO' OOO l O5rOOO
Hou.rs reguired
per unit.. '5O .75 l.OO
Hours required...o...r....... 7O7'5OO 135rOOO lO5rOOO 347r5O0
Labor rate por ho1tr,.,.....
t__
los
t____l_o.oo
$ lo.oo $ lo.oo
Total departmental labor
cost for pnoduct.........
$!ro751Q99 t1gg'1Q99 $!ro5ooo 93.{75'1|oo
Testing Department
Units to be produced
(Schedul e 2!,.........,..., 215' OOO l SO' OOO l O5' OOO
Hours required per unit.. ,O5 ,O5 .O5
Hours requi red...D.....r..... 10r75O I' OOO 5r25O 25rOO0
Labor rate per hour...,....
A-___l3.oo E__13.o9 S__U.og S__!3,oo
Total departmental labor
cost for pioduGt......,..
t-_Izsoo s-l-9999 t__qg.ooo so.ooo
Total labor cost for the
period.............or.r.....,.
9!r?9!r00o $rlggfoo $!rl-!3rooo aJzjpgg
Schedule 7-Budgeted Machine Hourc in Testing Department
Economy Standard Deluxe
units to bo produced
Model Model rotal
(Schodul e
21 .......... 215' OOO l SO' OOO l O5' OOO
b Hours ol machi ne Ume
requi red to test ufl i t....... .15 .25 .35
b Total machine hours
requi red................,.....r...
g2r2so
45rooo 36rzso tl 4rooo
Chapter 15
372
Pl 5-8
(Conti nuedl
schedule
g-Budgeted
Factory overhead and Departmental
Rates
Variable
Budgeted
Variable
Fixed Coit Rate Hours
Gost
Assemblv
DePartment
lndirect materials and
suPPlies o..........."""'
lndirect labor.....-.'......r
Payroll t?ros'........-......
Empl oyee fri nge
bgngf i t s. . . . . . . . . -. . r. . . . . . .
Equi pment dePreci ati on
Repai rs and
maintgnar|c(t
............
Allocated building cost
Allocated
general
factorycosts............
241t125
TOtal depaftmental bUdggtgd OVefhead..' ...' .....o..,..........."""""o"'
BUdgeted OVerhead attOCati On baSe
(di reCt l abOr hOUrS),......""""
Predetermined departmental factory overhead
lElt ............o...r....
Testing Department
l ndi rect materi al s and
suppl i es. . . . . . . . . . . . . . . . . . . $157, OOO $ . gS 114, OOO S
39' 9OO S
196' 900
Indi rect 1abor..............t 25O;OOO l .OO t l 4' OOO 1 l 4,OOO
3641000
Payr ol l t axes. . . . . . . . . . . . . . . . 55, OOO . t O l l 4, OOO
l 1r 4O0
66' 400
Empl oyee fri nge
benef i t s. . . . . . . . . . . . . . r ' . . . .
l l 4r OOO
I l 4t OOO
Equi pment depr eci at i on 215' ooo
215' ooo
Repai rs and
mai nt enanco . . . . . . . . . . . . 35, OOO l . 5o I l 4, OOO l 71r O0O
2061000
Al l ocated bui l di ng cost I' OOO
9' OOO
Al l ocated
general
tactory costsr.........., |ftzr7}O
f32' 70o
Totat departmentat budgeted overhead r.....' ............' .....""""""' D"'
91t254tOoo
Budgeted overhead al tocati on base
(machi ne hours) .........!.t.........
114.OOO
Predetermined departmental tactory overhead rate...' ....
$158, O0O
$r. so
347, 5OO $521' 25O
35O' OOO
.5O 347r5OO
773r75O
382;5OO .05 347,500
17,375
347,5OO
65,000
25,OOO .4O 347' 5OO
139,OOO
l 2,ooo
Budgeted
Depart-
mental
Overhead
$
679, 250
5231750
399,875
347, 5OO
65, OOO
164, 000
12, OOO
241,125
$2,432,5oo
347, 500
$-_7.09
s3,9ggE99-
Assembly Department budget factory
Testi ng Department budgeted factory
Total budgeted factory overhead
..........j ....
s73
F c , l t o o o
F
r - N t o o o n | r )
F ( )
r F N N U } I D O I f )
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ol u? q
e
c! q ql r l q ql r l q
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ql cl l
gl
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o o
q q
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- e l o o o o o o t o t o o t o t o n l r o l r o l
( , l
ul ul
1
q q ' ql l l q ql el u? ql r l r l
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Chapter 15
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Chapter 15
371
Pl5
(conclud?n"or,e
io--Beginning
and Ending Inventories
Beolnnlng lnvtntety
Endlng Inventory
Matarlrlr:
Trrnrtorm crr ...--..-...--.
Dlodc rccttllen -..6-....
Fllten ........-.....-.H--.-x
S/lra ........-r....D,.'............
Totel mated8lt.--*...-
Worlr ln Prpcccr: llonc
Finlghed Ooodr:
Economy Modcl
Standard Modcl x............
Dg lurc Model..-..............
Total flnlrhcd
goodr .......
Total InvcntotY .....'.-.
I O, OOO 3 r . 5O
' t
l5,ooo 4.5o
zt,ooo .70
*t,ooo 1.75
to,0o0 .2o
l5,ooo 5,ooo
g7r3OO
-
IOTOOO
l7'5OO 2!',OOO
r75O 2O,OOO
2,000 5OTOOO
chranutv unlt cort Total cot Quanutv Unlt colt Tstalsost
I t.5o t 7"5OO
aso alt,ooo
.7O 17"5OO
1.75 3li,ooo
.2O IO,OOO
50 20,ooo
Ll3r0oo
3OiOOO .5O 15'000 4O'OOO
t l oo.750
15,OOO ti 2s.oo 3 375,000
15,OOO 38,50 7Tf
FOO
15,OOO 35.25 828'750
tL78'!-e!!9
91,942f0o
2O,OO0 325.15 3 5O3,OOO
15,000 30,25 588,750
10,000 58,4!t 564,500
tL,050,25O
$J9125o
Schedul e 1l -Budgeted Gost of Goods Manufactungd and Sol d
Materials:
Begi nni ng i nVentOfy (SChedUl e 10| ........................' or..............' .
Add pUf ChaSgS (SChedUl e 4). . . . ' . ' . . . . . . . . . . . o. . ' . . . . . . ' . . rr. . . . . . . . . r. . . . . r. . . .
Mat gf i al s avai l abl O f Of USe. ' . . r. . . ' . . . r. ' . . . r. r". ' . . . . . . ' . . r. . . ' . . . . . . . . . . . . . . . . .
Lgss endi ng i nvent Ory
(SChgdUl e i 0! . . . . . . . . ' . . r. . . . . . . . . r. . . . . r. . . . . ' . . . . r.
Cost of materials used in
production (Schedule 5) '..'..........-....
Di rgCt l abOr (SChgdUl e 6| . . . . . . . . . . . ' . . . ' . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . , . . . . . . . . . ".
FaCtOry Overhead (SChgdUle 8)....' ..' ..' .....' r............r......' ...............
COSI Of gOOdS manUfaCtUf8d dUfing the
pefiOd...........,.....,.........
Add finished goods
beginning invntory
(schedule l0) ...'.-......-..
GOst Of goOdS avai l abl e fof 3a1e..........................' .r.' .............r.r.r..
Less fi ni shed goods
endi ng i nventory
(Schedul e I Ol .--.' .--.---.-.-' ..
GOSI Of gOOdS
SO1d. . . . r . . . . . . . . . . . . . . . . . r . . o. . . . . . . . . . . . . . . r . . . . . . . . r . . . . . . r r r . . . . . . . r . . .
Schedule I 2-Eudgeted Incomo Statemont
$ l 60, 750
10, 912, 250
$11, 073, O0O
135, OOO
$1O, 938, OOO
3,775rOOO
3.686.500
$18, 399, 5OO
1. 781. 250
$2O, 18Or 75O
1. 656. 250
s18. 524, 500
Sal es (from
Schgdul e l l .,.......................,...............
Less cost of goods
sol d (Schedul e 11!....,............o.
Gross pl l ti t...............................r.r.o...rr..rr......r........
Less commercial
expenses:
MarkeUn g exponsgs . . . . . . . . o. . . . r. , . . . . . . . . . . . . . . . . . . . . . . . . r. .
AdministraUve
erponse3 .r............oor-.ri-r..r
l ncomg
bgf org t axgs . . ' . . . . . . . . . . . . o. . . . . t . . . ' . ' . . . . . . . . . . . . . . . . . .
Less income tar (4O% tar rate).
Net i ncomo. . . . . . . . . . . .
s6, 145, OOO
2. 330. 500
$33, OOO, OOO
18. 524, 500
$14, 475, 5OO
8. 475. 500
s
6,000,000
2. 400. ooo
s 3. 600. 000
: -
Clppler 15
Pl 5-o
'
( 1)
375
CL CORPORATION
ProspccUvo Ststoment of Incomc and Retained Earnings
For Year Endi ng December 31r 2OB
(OOos omitted!
Revonuc:
Sal ef aa. aa. . r . . . a. a. a4. . . . . . . r . . . . . . t . . . . t . . r . . o. . a. . r . . . . . . . a
Oth
gr'
l ncorl l C ..r..........r.....r...r...r...............t
Erpenrcr:
Cost of
goods
manutacturad and sold:
Materlglc
Dlrect labor
Variable fagtort ove rh ead ..'.......r...........
Firgd factory ovorh
gad
......o....' -' ...........
Boginning inventol]f ...' ...............o..........o...
Endi ng l nventory r.r.r...i .......r..................' ..'
MarkeUng:
Sal ari
gr
r.r..............r......r..,,..
Gommi ss1on3............r.rt.......r' t......r............
PromoUon and advgrtisln$ ........................
General and administration:
Sal arl es ....o..' .r' ...r.............
Thavel
S600,OOO
I,OOO S609,OOO
s5O7,OOO
81, OOO
$213,OOO
218,OOO
130,OOO
12,750
$573,75O
4g,ooo
$621,75O
_!l-t!J!o'
$ to,ooo
2OrO0O
45.O00
$ l g, ooo
2r5OO
Office cost3......
Incomc
flossl
bglorc Incomo t8r......'..o..'....'.
In comc tar rgfun d (4O%1............r,..............r.
llet InCOmO (IOSS|....r........................' .' ......' .' .
Beginning rctaingd earningS ..' .........r..rr..,....
Subtotal
Less dividends
Endi ng rgtai n
gd
earni ngs ..,........r.......o.........
t
t segi nnl ng
I nvcnt of l . . . . . o. . . r. . . rr. . . . . . . o. . . . . . . . . . . . . . r. r. . . . . . . . . . . . . oo. . . ror. . .
Addi ng
t o I nvgnt ory (45OrOO0
-
4OOrO0Ol r. . . . . . . . . r. , , . r. . . . . . . r. . . o. . , .
Endi ng I nvent ol y. . . . r . . oo. . . . . . c' . ' . . o. . . o. . r . o. . . . r o. r ' . . . . r . . . . . . ' . . . . . . ' . r r . . . . . . .
198 cost per uni t ($573175O + 45OrOOOl ...............,..,,..rr..,...,..
Gost of ending lnventory .......i......
9.000 27.500 015.500
$
(6,500l
2,60,0
$
(3,e001
108.200
$l o4,3oo
. 5.OOO
4O,0OO units
50.ooo
9OTOOO units
x s1. 275
s1 14, 750
Chaptar l5
376
P15-9
(Gontinuedl
CL CORPORATTO}I
Balance Sheet
Prospective
as of December 31' 20B
(0o0s omittedl
Current asseta:
GaSh r..............
Assets
a a o a a t a a a a r t a a a a a a a a a a a a a a t " t t o t t " t "
Accounts receivable
l nVent Of y . . . . . . . . . aa. . a. . . . . . . . r. . a. . . . . aarr. . . . . . . . . . . rr. . . . ar. . . . . . t . . . . . . -a
l nCOmg taf fgCel vabl A ...............' ....o...........D...o...r.....o...
Pl ant and eqUi pm6l l t-...........,............r.o......' ............' .....t..
LaSS ACCUmUl atgd
depfgCi atl On r.r.' .......' ..........D..t..."' t'
TOtal aSSets.....r......r.......1..r..........r..' ...r' .r.....r..............t
i
l ,2oo
80,OOO
1l { , 75O
2.800
$l 3o,ooo
4l . ooo
$198, 550
89.OOO
s287.550
Llabilities and Shareholdsrs'
Equity
Current liabilitieg:
Accountg
pa1nb1e.......o...........o.....rr.....r................' ....' .'
945tOOO
lccruaO
paya0tes..r.....................rr....' ....o.........rt.........
. 23r2SO
Notgs
pty"ble .,................!.o.............t......r.........t..........
5O.OOO Sl
l8t25O
Shareholderg' equltf
Common stOCk....o....o.........................................r.........
$7Ot0OO
Rgtai ngd arni ngs ...........................r.........r.......r.....' ..r.
99t3OO 1O9t3OO
Total liabilities and shargholderst QUit!......,.....r...r..... :9?!l?:55O
l2l
(al The
profit performanco lor 2OB is forecast to be much
pooner than in
2oA.-A loss after Income tar of 3.?.9
milllon ls
prodicted, companod-to
a
profit aftor Income tar of $12.6
mitlion. Tlre company erperienced
the
loss despitc a
ggoh
Increase in unit sales Yolumo. The maior
problem
sosmE t6 Ue in the inabitity to raisa
prices and/or in cost contlol. Tho
costs noso In every anoa of activitp
(i l Vari abl e manufacturi ng costs
per uni t i ncreased 7.l oh
(from $1.16
to
sl . 2464.
(21
Fired manufacturing costs increased s750,000,
or
g.3oh.
(31
Marketi ng costs, erctudi ng commi ssi ons,
i ncreased 316
mi l l i on' or
36o/o.
(4)
General and admi ni strati ve costs i ncreased $3.5 mi l l i on' or 15oh.
Chapter 15
3n
P15-9 (Goncludedf
(bl All srsas will require spectal cost analysis because the costs in all aneas
Increased, but apecial attenUon should be paid to:
(ll Produstlon cost Incroaseg, because although relaUvely small in pen
centage, the dollar amount ls high due to the volume of units.
l2l
Selllng and
promotlon coat Increases, becauae the rate of these
cost Inc;gaset was
lraater
tlran the rate of sales increase.
Tho saleo
prlce wa8 not Increa3ed in spite of the increased cost. The
hlgh sale! volumo Inciaase may be the result of too low a
price. Further
Investigatlon Into markbt
prico and
price-volums relationship is needed.
A review of tho balancc
gheet
Indicateg a material deterioration in the
companyb working capltal
position. Inventory has more than doubled.
This increaso appears to have been financed by a significant incraase in
current l l abi l i ti es
(more than a three-fol d Increase| and a materi al
decllne In cash. The need for so large an Increase In Inventory and the
effeet of dectlning
profitability on tho cash and working capital
position
need to ba thoroughly lnvestigated.
(cl The following lmprovements should be considered by management:
(ft lmproved coordlnatlon
between
gales,
Inventory contlol' and
pro'
ductlon, an a no-Yaluatlon of the
product pricing policy'
l2l
Development of a standard cost system to monitor
product sosts.
(31 Development ol a line of credit for short-term liquidity
problems.
Chapter l5
CASES
ct5-1
(ll Businesg
plannlng and budgetlng acUviUes lor Maiton Company ane impon
tant because:
(al A long-run commitment
of resoirrceg to specialized assets is about to
be mide.,A one-time decision for major erpansion that could involve a
large amount of financial resounces ovor a long
period of time is about
to be undertaken. Thi s Investment wi l l be commi tted to speci al i zed
assetg and can be rccovercd only from the
production and sale of one
particular YalYe.
(bl Tfte daily operatlong of the company will becomo mono compler. Mai
has had no erperience wlth the day-to-day operaUong of a large busi-
ness. The business
ptanning and budgeUng
proceduras will provide Mai
the opportunity to review the company
performanco and will allow the
company to develop and evaluate atternative counses of aetion to satisfy
corporate objectives.
(cl They will asslst in obtainlng capital from erternal souncss. An erpansion
pnogram ol this magnitude, with a significant amount of initial funding'
will require the
generation
of additional capital either through borrowing
or issuing stock Obtaining nacoliliary funds can be enhancad bY and
may requlra an orderly
presentation of, the business
plan and budget
acUviUes.
(dl They wi l l hi ghl i ght
potenti al probl em si tuati ons. Di sci pl i ned busi ness
planning
and budgotary
procedures could emphasize a variety of
prob'
lem situations that might be encountered during the
period of the plan.
l2l
Listed below are the major
probtems that would most likely
be
disclosed
because Maiton Company is about to erperienco a significant
growth.
(a) The lack of adequate
production facilities to manufacture the valve at
the quanti ti es requi red. The company has served a smal l
part of the
markeL The new segment is much larger, thus calling for more
produc'
Uon facilities than
previously needed.
(bl The tack of adequate Internal capi tal
gources
to fi nance the asset
erpansion (both working capital and
plant and equipment). The company
is smalt and
probably generates modest amounts of capital. The amount
is not likety to be enough to meet the new requiremonts. Gonsequently'
the company wi tl need to seek capi tal from the outsi de, and
probabl y
has little erperience because it grew slowly and had no
previous need
for outside capital.
(c)
The lack of adequate management nesources
(people) to administer the
company as lt gFo\ rs. The company ls small and, thus, probably solely
run by George Mai. As lt grows, there will be the neod for more manage-
ri al peopl e. Thi s need probabl y cannot be met wi th current empl oyees.
Chaptor l5 379
Cl 5-1' (Concl uded)
(d) Lack of pl anni ng and budget ski l l s. The company
probabl y has had l i ttl e
need for
planning. Consequently, it may experience difticulty in organiz-
ing for and developing a five-year
plan.
Specific
problems
could occur
with regard to forecasting,
production, marketing, and cost of capital.
c15-2
(1) Factorc that Marval Products needs to consi der i n i ts peri odi c
revi ew ot
l ong-range
pl anni ng i ncl ude the fol l owi ng:
(al The curent state of the economy and its expected future statusl
(bl The current and future avai l abi l i ty of resources, such as personnel ,
pl ant
and equi pment, and capi tal ;
(cl Consumer atti tudes wi th regard to product appeal , changi ng travel
modes and
patterns, and changing life styles and affluence;
(d) The l evel of i ndustry sal es, Marval ' s current and proj ected market
share, and Marvalb degree of influence or dominance in the industry;
(el The product lines with respect to the naturs of the production pnocess,
l engt h of t i me t he
product has been est abl i shed, and ut i l i zat i on of
nesources and
plant capacity.
(21 Factors that Marval Products needs to consider when developing the sales
component of i ts annual budget i ncl ude the fol l owi ng:
(al The pricing
strategy;
(bl The si ze of Marval ' s market share and the rel ati onshi p to i ts competi -
tors;
(c) The sales mix of products so that contribution can be maximized;
(dl Available production
capacity;
(el
The effect of advertising on sales volume;
(f}
Nati onal and i nternati onal economi c condi ti ons.
g0
Chagter 15
cl 5-3
(r) Di vi si on and
pl ant personnel bi ases that may be i nctuded i n the submi ssi on
of budget estimates include the tollowing:
(al Budget sales estimates
probabfV w9.9lO, tend to be lower than actually
expected because of ths high volatility
in
product demand and the cur-
rent reward/ penal t ysyst emf ormi ssi ngt hebudget .
(bl Budget cost'estimates
n itt u" higher [han actually
expected
in order to
protect the divisions against thJ effects of down'side
risk of business
stumps and the
possibility ol increased
higher costs' The reward/penal-
ty system encourages this action.
(c) Plant and division management
can incorporate
slack and
padding into
the budget without the litetitrooo
that it will bE temoved,
because c9r-
porate i eadquarters does not appear
to
get acti vel y
i nvol ved i n the
actual budget
PreParation.
l2l
Sources of information that corporate management
can use to monitor divi-
si onal and
pl ant budget esti mates i ncl ude:
(a) Regional and naiional leading economic
indicators and trends in con-
sumer
preference and demand;
(bl Industry and trade association sales
proiections and
performance data;
i"i
prior
year performance by reporting units as measured by their finan-
cial,
production, and sales rePorts;
(d) Performance of similar divisions and
plants'
(31 Servi ces that coul d be offered by corporate
management
i n the devel op'
ment of budget estimates are as follows:
(a)
provi di ri g
economi c f orecast s wi t h regard t o expect ed i nf l at i onary
trends and overal l busi ness cycl es;
(b)
providing
national and regional industry sales forecasts for
products as
devel oped by corporate ri anagement
or obtai ned by management
from
other sources;
(c) Sponsori ng trai ni ng
pnograms for
ptant and di vi si onal
personnel on bud'
geti ng techni ques;
(d) l nformi ng di vi si ons of overal l corporate
goal s i n terms of sal es, market
share, and
profit.
(4)
Factors that corporate management shoul d consi der i n deci di ng whether or
not i t shoul d become more i nvol ved i n the budget
pnocess i ncl ude consi der'
ati on of costs and benefi ts and the resul ti ng behavi oral effects.
(a)
Costs to be eval uated i ncl ude:
(f
)
tncreased costs at the corporate level, because mone time and
per-
haps addi ti onat staff wi l l be requi red.
(2)
possi bl e
tower
profi ts, due to an unfavorabl e change i n di vi si on
and
pl ant management atti tudes and moti vati on'
ffi1
Chaptsr 15
Cl 5-3
(poncl uded)
(bl Benefits to be considered
inctude
possibte profit improvement
from:
(il More accurate
budget estimates
that might reduce lost sales and/or
reduce costs incurred;
l2l
More effective management
because of more realistic budgets;
igi
lmproved coordinatlon
and control ol the budget
pnocess'
(cl bin"rioral variables
to be considered
Include:
(f
l
Effect on
goal congruence;-
izi
Effect on lhe communication
channels between corporate manage-
ment and divisional
management;
(31 EfeJ of restricting
authority over the budget
process at the divi-
sional level;
iossible negative
effect on motivation and morale, due to loss of
authority and autonom$
Effect oh
pertormance due to a
potential reduction or increase
in
bonuses.
(4)
(sl
Chapter 15
cl5-4
Schaffer
Company appears to havc a wol l ' dovel oped
budgetary
3ystom'
Budgetg
for each of tlre important areas requiring attention'-ales,
production'
i nventory
l evel s, ol pense",
Ji i capl tal
i nvesi ments-are
Incl uded In thc
pnocoss. Insufliclbnt
detailg are
frovided
to
properly evaluate
the constntction
and uso ol the UuJg"t"
lor ssleq capltal lnvegtmentr
and
prcduction and Inven-
tory levels. Thug, t{re analyslr
li this caso must focus on the arponse side of
the budgeting
Pnoeac8.
Although an elaborate budget
pmcosr odsts' analysia- of the elponse
proca-
dures raveals a number of
gtroricJrJng" for
ptanning and contrcl
purpose3: Tho
basic Input to the oxpsnso nuOgoi fotift" comlng
yoar i9 the first slr months
ot
the current
yearb actuat
pedofrance' tfic oxponso
budget
(modified to rsflect
unconttollable eventsl, and the corporato
olponse
rcduction
porcontage' The
next erpanse budget ii basically tait
yeart actual costs reducod by the com-
puted orpense
percentage.
This approach does not capture the full
potential of the budget
lor
planning
purpo"."l--niln shoutd Ue torward-looklng.
Thc Schaffer budget ls based
pri-
marily on
past r""rft" and doeg not tpcognizs
any
planned changes in operating
activi$es,
The acrcss-the-board
corporata
olponso
reduction
target does not
consider the diffenencss among
ptantg in opportunities
for cost improvemonF'
The review ol division r"n"g"iJni
t"V
permit the
lrstrong'
managers
to build
slack into the budget And tho lacts Ao not make ctear whether the
proposed
budget is based upon the currsnt
yearb sales
volume or ttre
planned volume
lor
the budget
year. Witnout such an idiustment,
an additional
weakness
exists
in
the
procedurc.
The process atso falls short for contrcl
purpose":-Tl"
maior shortcoming
is
i t s f ai l ure t o I ncorporat e changes i n operat i ons
t hat occur subsequent
t o
August. Comparisons of
perforriancos that inctude
these late changes'
with
budgets that do not, will not
provide usEful information
for control' The inclu-
-
sion of allocat"O "orporatton
and division costs
in
plant budgets would t-afo
the erpense budgets less ettecUre for control
purposel-Pe9.ausa
they contain
irrelevant data iJr
ptant-level cost control'
The
possibility that some division
managens may be iUte to Introduce slack into their budgets
also reduces
the
effectiveness for cost control.
The budget process appeaF to omit the
plant managels
trom active
partici-
pation in budget preparation "nC revision. Their
participationvould
improve
tho
cost control and'ptanning benefitg of the budget
pnoce:s'--The use of acnoss-
the-board oxpensc cuts and Inclusion
of allocatld
costs in tho budgets
u19d-f9r
performanco
moasurpment lr further avidence
that tha connpanlf
has 'failed to
consider the effect of lts system on management
employees.
With its budgetary syst-em, the company
tries to plan and control its opera-
tions. To this end, tne company
ls be*er off for having developed its_
_tJt"r'
However,
tuttft"r benefi ts coul i be
gai ned by el i mi nati ng
the weaknesses
i n i ts
procedures.
g3
Ct;gtpter
15
c15-5
(rl
(21
Tho manstaeturing managert vievrg can bo ssparatod
into two argu-
monts-thc ugc oi ttre Eamc lmprovement
tsrgetr lor all
plants snd
lnconsistent appltcation of target ravisions. In both casesr the manufac-
turlng managefe argumontg 8rc valid.
i hc manufaci uri ng
manager cl ai ms that the use ol the aamo
lmprovement
targets'tor att
plants fails to racognize the different abllities
oi-pf"nt" to achiive targeta. His,criUcisrn
ig valid because
plants do have
ditierent opporhrnlues
ior lmprcvemenl
and thls should be recognized in
"gtaUtfnind mprovement
tailetr. Wrilo hlr arguments- ma-y be valid to
aupport trir vie* thet older
plantr havo lesc opportunity
for impmYement'
tn6re are Insufficlont dst8
presented to vorify his claim.
The manufaclgring
maneger obiects to the nowor
plants' obtaining
revised targets and th6n being able to
perform better than the ruvised
targel ThJ modification
of targets in light- of new information is an
apiropriate budgefrng
technique. Newer
plants may need such revisions
because their lnixpeience
makes it morc difiicutt to
get
parameters and
crercise contrpl. ilo*erer,
the manufacturing
managerb alSumant
is
valld becauge adlustmentr
iravc not been avallable to ell
plants' and' tur-
thermorc, Ute "Oiu*rn"nts
granted to new
plants appear to make lt easi-
r lorthem to achleve
target*
The rssultng
treatmint in establishing
end revising targets' when
coupled with e
pertotmanco sppnrisal
and rcrvard system' does sppear
to discriminate in fayor of the newsr
plants. This would apparently lead
to lower bonuses, appraisats, and morale among management
of the
older plants.
Both old and new
plants have the capability
of concealing
slack in their
budgets. The otderptants cannot introduce
budgetary slack t*rrough their
cost estimates because their costs havo ostablishod a
pattern over'the
yoars. HoweYer, the
ptant managoment
knows thoso aneas of operations
wtrere changer and' i mprovements
can bs i ni ti ated. These operatl ng
changes c8n be Initiated after tho budget
io adopted'
The newer
plants can incorporato
budgetary slack in other ways'
Their coSt estimates ang mgno uncertain
because the
plants an6 newar'
The
plant operafions havo not stabilized,
so ptant management
may be
able to intlate costg slightly above what can be realistically
erpected of
thom. There may be more o-pportunities
for improved operations
that may
not be recogniz6d at the ti;; the budget is adopted. In addition,
there is
aomo l ag l n l ncorporat i ng
I nt o t he budget t he cost savi ngs of t ho
IncreaseJ erperience of tho workerg and the efficiency
in functioning of
the equipmsnt and machinerF
g1
Chlptt 15
cl 5-6
(f
l
The budget
practlcg? d?:c4bed ln thc cas. err not llkely to
prcduca eftec'
r-'
tfuo budget?ontrol
In thc long runr'bccsusc
rcveral weaknesscr can bc
ldentified:
(al There 8ppoars
to be no partlclpaflon of
plant poFonnol In thc budget
develoPment.
Ol
Cii"n ttrit ttrere have been flvc manage6
In lour
yoarE' thc manags'
havo had nobpportunity
to assess whether
thc budget lr rcalistic'
(cl. lt app""rr
ihst adlugtmentr
to tho budget, oubsequent
to ltr adoption'
are not
permitted even In tho tlght of newlnformatlon.
(dl The budget la being uoed to
pressuts
Fc
plant menegoa
(21 ile lmmedlite effect wltl Ue a tnrstrated manager,
who wlll not meet thc
budget and who will bc reptaced a! 8 noault of belng unwllllng to cacrilfcc
the luture for the
present, or s frustratsd managorr
who meets the budget
by making decisions that raerlflco thc futurc for thc
preaent. ln elther
casor Drake Inc. ls unfavorably affected.
Ttre long-term eflect wllt be to rcducc thc management
affectivenes!
of
Drake Inc. imployeeg. The arbltrary method of budget developmelt'
lack of
partlcipaUon, in,i ttrc usc ol the birdget as t
pnossurc devlca wlll result In
loss of talenied managors, development of nonproduetlve
methods by man'
agors to
nbeat'
ttre Uudge! decisions taken to meet the budget but wttich
arc detrimental to the company
in the long nrn, and low moralc and motiva-
tion.
ll the
present methods of budget administratlon
continue'
Davld Green
may adopi nonptoductl ve
methods and becomo an Inefl ecti vo managsr.
However, it tre is talented and conUnuas
to raise such lssues as the
poor
condition of thc
plant and hls short tenuto, lt lg likely ho will rssign or be
fired.
r t
' -
Ol&1. A capibl olgcndituro b an upcrditure hlrtd'
od to bcnelil futun pcrio6. ll ia nornally asro-
cblrd wilh thr acquiritbn or imprwemrnl of
plant asrcte. Thr rral dislinclist betweln a
copital and rcvenul cxpendilure is not lhe
i mmedi ato chargi ng of the expendi l urc to
ilcotnc, as
gppood to ita gradual atrprtizatim,
but thr bngth cil limr required lor ils recovery
in castr. Bccovericr ol rvenur expenditurel,
rtrch ee product c6ll, aro expected to lako
placr in a matlor ol weeks or, at the mosl,
monthr. Thc ti nanci al rccovery of capi tal
e:gendilures b measured h lerms of years.
O1&2. Purpoces cil e reoearch and devebpmonl Pte
Itarn
are:
(a) A pl anned gearch
l or new knowl odgc
pertaining to the industry withoul reler'
ence lo a specific applicatict.
(b) Crealion of a new producl or improve'
ment of an exislhg ptoduct.
(c) lrwcnlkxr cf a new or impoved
procost
or machhery lo mEke a fhishe'd produci
orgnponenl
Bcs,rsrg fc a research and devclopmont
Pro-
grarn arg:
(a) To protcct thc cabc dolbr, that ic, to
meet csnpotitbn. lmproving lhe quality
of pedonnancr cl produds or achieving
cod savhgr in eilher openting or capilal
erpenditurer falb hlo this categpry.
(b) To do research to promole new saleg
dollars, eiiher by enterhg a new market
or by aignili:anlly expanding an existing
msrket.
(c) To invesligate problems with respecl lo
environmental protrtbn, saletv"-rvorking
cordilirns, elc.
Q1S3. Budgetary prccecbres for research and deveh
opment expendituro are designed to:
( a) l or ce management t o l hi nk aboul
phnncd elgendilures;
(b) coordinate rosearch and developmenl
plans with thr inmediste ard lang-range
pbns of the conpany
(c) l orcc l hs research and devel opmenl
st af l t o consi dcr maj or nonl i nanci al
aspects cil lhc prograrn, such as person-
nel , equi pmcnl . and faci l i l i es requi re-
rnenb.
Q1S4, A cash budgct involveo detailed estimates of
anticipaled cash rcceipls and dicbursemenlr
for a rpccified perird cil time. lt Lr designed to
assbl monagemenl h coordinaling cssh tlow
lrcrn operaticr3 an a basis lor financial plans
and conlrol. The cash budget provides a sys-
CHAPTEB 16
DtscussloN QuEsTloNs
temalic approach lo lhe synchronization ol
caglr regorlrce3 with needs. n a$bt! mansge-
rnent h rnakhg hlelligenl dccbionc corccrning
capilal expcnditures, dividend polbies, hvegl-
ment3, and other financial matler3, and often
exerls a caulionary influencc on any ol lhe
abovc phns. Porirdic roporb wnparhg aciual
with planned receipls and disbursemenl! per-
mil effeciivc ard cqrtinuous csrtrol ol cash by
signalhg signili:ant deviations fronr the firan-
cial planr for |he perird.
O1S5. (a) Nqrmanulasluring busiresses musl plan
la the tulure
jusl
as carelully as rrra lu-
faclurhg cqtcerns. Seasonal pattemr in
ngyonuqr and expenditurs must be po-
vi ded f or , and r equi r cd r qui pmcnt
repl acement and expansi ons musl be
budgeled.
(b) Not-for-profi t organi zati ons general l y
operale on relatively fired incomes lhal
are received at ono time. Such recoipl
patlernr aro common for organi:ations
that rely sr tax dollars lor support. These
funds must be allcaled throughout thc
year i n order to mai nl ai n operal i ons.
Careful budgel plans are a necessity for
such albcalbns.
Ql S' 6. PPBS
gt Ends
f or Pl anni ng, Pr ogr ammi ng,
Eudgeting Syslem, and is an analytical lool
focueed on lhe outPul ot final results ralher
than input or inilial dolbrs expended. The oul'
put i s di rectl y rel atabl e l o pl anned goal s or
objectives.
O1&7. Zerobase budgeting
[ZBB)
is a planning and
budgeting lool using cost.benefil analysis of
projects snd functbng to imprwc an orgraniza'
l i on' s regoutce al l ocati on. Budgel requecl s
consist of declsbn packages lhal are analy:ed,
evalualed, and ranked in a priority order based
on cost-benelil analysis. lvlanagernenl can then
evaluate pqssble astivitier for the corning peri'
od, selecting those that will best achieve orga'
nizalioal grels.
Traditional budgeling tends lo concontralo
on the differential change fmm the gdot yean,
assumhg hat existhg astivitiec arc essenlial,
must be cmtinued, are currently performed in
a et-officient and optimum tr16tr1er. and will
be cost-effectivo h the canhg yest Cost! arc
devebped monr on a line-ilem tather lhan atr
activity basis. ZBB orgranizer all budget cootr
h the lorm of activilies ancl/or operaliau (deci''
sion packages) and evalualec tho effeclivc'
ness of each decision package as if it were a
new aclivity.
85
ffi
I
cl16-8.
(!) Zcro'btsc budgcting
tcquirc! mlnlgcrg
tb
justity thclr Lntirc budgat rcQuast' lt
Plates
-thc
burdan d
Progl
on thc
mantgcr lo
i|J3tify
why any.moncy tt tll
chould bc budgctc'd'
ll docs thb bY
sttrting
wilh thc essumplion lhet zcro
will bc rpcnl on arch tctivity' to thc
budgating
plocctr bcainr with r brrc of
zafo.
(b) Thc two kinds of tllcrnrlivca contidcrcd
'
for cach rcrNiry erc (1) diflcronl wrp oil
pcrforming thc ectivity end (2) diflcrcnt
lcvcls d cftort In pcrlcming thc lciivity.
(c) A dccirion
prckegc include en enrlyris
d an sciivitYt cat rnd
Purpotc,
sltcmativa courlcl of rclion' mcltura3
ol
pcrlormencc d thc rctivitY'
consaquoncct
of not
Pcrfaming
Urc
activity, and thc tctivity'3 bcncfitr.
(d) A packegc idcntifico end dcscribsr onc
tctivity in ruffrcicnl dcteil eo thtt it crn
bc cvaluatcd rnd compercd with olhcr
acllviticc.
(c) Succesr in thc imPlemcntation of zcro
basc budgcting rcquirer thc following:
1. Unkagc d :aro-balc budgcting
wilh short-.snd long-rangc
planning
2- Susteincd 3upport end commitmcnl
from axocutivc mlnlgomcnl
3. Innovelion bY mtnsgcn in
dcvcloPing dccislon
Prclcrgcl
4. Acccpttncc ol zcro'besa budgcting
by
Pcnont
who murt
Pcrform
thc
budgcting work
O1e9. Prorprtivr hformrtbn lhouH br prwitod h
oxl ornrl fi nenci al l trl om.nl r whrn i l wi l l
enham thr rli:rbility cil tho ucor'r pndi:ticnr.
016-10. PERT b prttbulatty rpProprhto u e rchlduF
hg and ccntotlhg trd'rniquo fot
Ptoioctl
sl'
rirling of e lergl numbor of trskr, roorr ol
whidt cannol bl strytrd unlil otrrn rt. corY}'
Plclr,
and lsno of rttrbh can br undrriakon
cdrcurtontly.
Conceptually. lhr rllrrrncl ir to e nrtrrprl
of intordependcnt ectivities wtrijr. rr I group'
roquiro cocli.tabb tlm to ccrnpbto. Thrn b
usually subctsntbl srt.up linr (and cel) a$o-
ciated with enatyzing, defhhg, and onln8lhg
c6ch discrot. prcied sstivity; thur, lhl bonefii
is h proicctl rcquirhg a cstsUerablo sttpunl
ol limo and consbth! of r reblivcly ccnpler
netrrorlc
PEBT albw: thr ucrr to uPdal. erd rovisr
rchrdubd activilis rnd thoroby drtrmilr thr
rilrts ol changor st tho worall
pojrct. lt b
Pattbubrty apprgrbte whon thl timing cl irdi'
vdual aciivitbr and thr
Proi.ct
cotplolict dale
arc criibal lo lr,rccatt.
016-1 1. Slack is c6npd.'d by rubtracting thr rarlicsl
oxpocled timo lrsn thc latctt allowablo limo.
Chaptdr t6
Th.
.rtlbtl ap.cl.d linr L th. .arl'Ltt titn
l hrl
rn rcti vi ty cl n br orprcl rd l o ttrrt.
b.ctutt
cl'ltn roldbnrhip to pondng rtivitior.
Thr btort ellrrrrbb tino b tho blst llna thd
9rr ldh;ily mey brgin rtd nca doby catpblbn
of tho
Poioa.
Sbck ir drlorminrbb onty in
rrbtbn !o an ontirr path th ngh thr noilorlL
Ol&12.
PEBT/iort
ir rmtly rtr .xl'nlion of PERT'
Wih linoqtins evailabb, il sootnt sdvttsbb
to .ltign cat to llnr end eclivilior, thoroby
proviling load fiu rcbl pbnnhg rd cc'rttol by
I rnctistsl rcPonribilitY.
Ot&t3. CanrPulr lrpport olfon dbtirrl advanlagor lo
PEFIT urn. PEF|T'tr e rnethrnltrtbalty'orionl'
ed itdrniqur rnd is thlr.ld. U.rlV ruilod to
thr hi gh' rpo.d t.tpont. of compul rn for
drri vi ng l hr cri ti cal
path' l l ack l i mrr, end
elr, elrd tor storhg erd rrporting tttultt !o
tnanagom.nL Flovisbnr to all sch'dulo olo'
mtnlt' whothor during thr initiel retirnaling
phar or durirg tho seiiv.
Ptoiccl Phar'
can
br updatod and thr rlvircd rcluhs
PrqnPtly
reporlrd.
Cornputrr'ruPPorf
b hdpful in dosling with
largr, canplox nrtworkt cil intrrdepondencior
and whon proi rct conl rol rogui rol ti mrl y
progt.3r rrporting againrt th. uPdat.d
Platl'
Most
program ptcktgrt ofl rr e vari rl y of
rrporl i ng frel unl and tormrl !. i ncl udi ng
gtsphic notwork dirphy !t w.ll er prinlrd
r.Porlt el verioul summrty lovrlr. Curronl
rrpodhg
prwidrl inlonrulbn !o
Ptoj.cl
tnsn'
agon, rnabling
qubk t.|ctigr to dovietiqts'
Cl'ppter 16
Q1&14. Tho lrcditioal budget focurer on
qrc
rel cl
'aseunptirtr.
Thc probabilbtic budgel povbes
for tval uati ng rl voral
gets
of acsumpl i ons,
ircludhg the prcbability od each and a ccrnPc'
ilc oxpected value, range, ard standard devrs'
tiqr lor eaci budget elemenL
g7
w
EXERCISES
E16-1
Begi nni ng cash bal ance
Budgeted cash recaipts:
Gollect accounts rtceivable:
November cradlt sales:
(S60TOOO r 1 Oohl ..o.' .....,.........' ..t
December credit sales:
GiTO,OOO
r OO96) ...
Gl TO,ooo
x 1o%l
January credlt sales:
GGGGtsO,ooo
r 25%l
Glso'ooo
r 6O%l
(S5O,OOO x lOTo| ....
February credit sales:
(S6Ot OO0 r 25%l .........o..............
($60rOOO r
gO%l
.........D.' .r' ..r..o...
March credlt sales:
(llTOrOOO
r 25ohl .,..r......r.,...,..r...
Total cash receipts....................r.t.r........
Cash avai l abl e duri ng month..............,.........
Budgeted cash disbursements:
Pay accounts payable:
December purchases:
S!2OTOOO
r S0ohl ........................
January purchases:
Stf
5' OOO t2Oc/o1 ....
Gl l 5rOO0
r 8O%1,...........,.....,.....
February purchases:
G$E2S,OOO
r2Oohl ...
Chagter 16
January
@s
March
$ o,ooo s2o,5OO 326,500
$ 6,000
42,OOO
l 2, 5OO
$ 7,ooo
3OrOO0
$ 5,000
f 5,ooo
36,OOO
17, 50O
$srilooo $sB"soo
$72,5OO s85,OoO
$6O,5oO
$86,5OO
$16, OOO
3rOOO
$l 2,ooo
5,O0O
$2o,ooo
4,OOO
23,OOO
6,OOO
26,OOO
$46,000 $4g,ooo
$2O,5OO $26,5OO
21, 0OO
6,OOO
22,OOO
TrOOO
s79,OO0
$ 6,000
ChaPler 16
E16-2
Finlshed Goodg
g9
April May June
UnitS reqUirad tO meet SaleS bUd9et..........-. I'OOO IOTOOO l2rOOO
-
Add desired ending inventory
l2ooh
ot
fotlowing monthb sales|.....o..r...o...o......
_4tOO
2r4OO 2r2OO
-
Total units required.....i,..r......r.............r...
l lpOO I2AOO l{/rOO
Less estimated beginning Inventory
l2}oh
Of CUrrent mOnthb 8a1e31.............
1r8O9 2rOOO 2r4OO
Planngd
productlolt' ...........
9, 2OO l Or4OO l 1, 8OO
Materialg
Aprfl May June
Units reguired to meet planned pmduction
(planned productioll r 3|....-.................
27rgOO 31r2OO 35r4OO
u Add desired ending inventory
pO%
of follow-
ing month' s
production requirements)
12r48O 14' 160
Total matgrials requ|red.....,......,......o..r....
4O' O8O {51360
-
Less estimated beginning Inventory
(4ooh ot
current monthb requiremoJltsl..........-..
11rO4O 12r48O
Planngd
purchases...,........r,........o.....
-2grO4A -92r88O
Gash disbursements during May for
payment of accounts
payable for material
purchases:
113 r 29, 040 r $2O x. 98 =
$189' 728
a3 r 32,880 r $2O x.98 = 4291632
$619,369
CGA-g3nada
(adapted). Reprint with
permission'
3 n l
Et6-3 Par
produetion budgets
Chagter 16
June Jul y
Unlts regulred to meet sales budget............o....... 5Or0OO 3OrO00
Add desired endlng inventot"lf ......... 3' OOO 3,OOO
Total units req 53' OOO 33' OOO
Lass beglnnlng Inventory S' OOO 3,OOO
3O,OOO
\
June Jul L
48' OOO r 3 ......... 144, OOO
3O,OOO r 3 9OTOOO ,
Add dgsired endlng inventot! .....,..........,,..........r. l4' OOO I I,OOO
158^OOO f Ol
"OOO
Lass beginning Invento1yo.................r......r..o.......r 2OTOOO t4' OOO
,
Unlts to bg punchasod..............................r...o......r
138rOOO 87,OOO
Cash disbursements In July for purchasss
of Tee:
138, OOO r $5 r 113 r . 98=
$ZZ5, 4OO
87,0OO r 35 r 213 x .98= 284r2OO
$5O9,8OO
GGA-Canada (adapted!. Reprint with permission.
Planngd
prcductf oll ................'o..
Tee purchases
budgets
Units required for
producUon:
48,OOO
CMptcr 16
E16-4
(rl CROCKETT COMPAT$Y
Gash Budget
For July
Cash balance, July I
Cash receipts:
June salgs
Sl3OrO0O
r 4S%1.....o...............o.r........-.......
July sales (S4otOoo
r 5O%1,o...r............o..r..........o.........
Cash aYai l abl e r..r........................................r.r...r...' r.........
Cash dlsbursements:
Jung purchasas ($r orooo I 75%1.......'..r...........'........,
July purchasgs ($l 5rooo r 25o/o1...,r,o.r.............-..........
Other marketing and administrative expeflsoS............
Incomg t3Xt....r.................ro.....r................................o...
Di vi dgnds. . . . . . r . . . . . r . . . . . . . . . . . . o. . . . . r . . . o. . ' . . . . . . . . ' . . . o. r . ' . . r . ' . r . . . . r
Gash bal ance, Jul y 3t o..r..o........................o.........r.o...r...r.
tCalculation
of June income tar:
Sal es . . . . . . aa. . . a. a. a. t . . . . . . . . r . a. . . . . . . t . r t aar . r . . . . . t . r . . . . o.
aa. . . ar a. . r r . ar r . . . .
Cost of goods
so1d. . . . . . . . . o. . . r. , . ! . o. . , . , . . . . . . . . . . . . . , . . . . r. . . . r. . . r. . . . r
Gross prot i t
t . . . . . . . . . rri . rr. . . . ' . . . . . . o. r. . . . . . . r. . . . r. rr. . . r. . . . . . . . . . . r. . . . . .
Commercial
erpenses:
$14, 4OO
20,OOO
39t
s 5, OoO
34,4OO
$39,4OO
I 7,5OO
31750
l O,OOO
2r OOO*
15. OOO
DepreCiatiofl
....................r.............,..........
Other marketlng and administrative.........
38. 250
$ 1 . 1 5 0
$:o,ooo
l 2,ooo
$l 8,ooo
13. 000
sl,gag
$.2,99q
arrangements should
$4, OOO
9. OOO
Taxabl g i ncome................r.........' .r' ...r.r...........r....!,...r.....
I ncom
g
tar ($4
r
gg
O r 4Oo/o1............................
(21
Since the desired minimum cash batance ls $5,OOo,
be made t o borrow $3, 850 ($S, OOO -
$i , 1SO),
CGA-g3nada (adaptedl. Reprint with permission,
392
E16- 5
I
(f
)
PERT netutork:
Chapter 16
l2l
Alternate paths
and times and the critical path
and the erpected project
time:
1-2-6-7 = 11 weekg r- critical
path
l-2-3-5-8-7 = lO weeks
1-2-4-5-8-7 = l Oweeks
The two activities In question
ano 3-4 and +5. lf these activities weno
eliminated, thelt would be no effect on the critical path
or the expected
completion time because 3-4 and 4-5 are not on the critical path.
(3)
Clppter l8
E{ 6-6
(rl Astivlty (to
393
hl
3
9
6
t 8
I
5
6
I
2
t
2
4
3
4
_bl
2 + 1O.67
3 . 8 3 + 4 + 5
5 , 8 3 + 6 + 5
= Total
-F
6
6
o
6
0
o
6
Total t,
12.67
12.83
16.83 + critical
path
+ tm(41 +
2(41
6(41
4(41
1r ( 41
6(41
4(41
5(41
2.OO
5.83
3.83
10. 67
6.OO
{.oo
5.OO
t8
1-2
1-3
1-4
2-6
3-5
4-5
5-O
Path
l 2
35
23
u
30
24
30
l2l
1-2-6
t-4-5-6
1-5-6
CGA-63nada (adapted|. Reprint with permission,
Chwtert6
E16-7
t f )
6 + 11 + 5 + 4 + 3
=29
l . + 2 - - 5 - . O - r - f 7 - d 9
6 + r l + S + i + 2 = 2 5
I
2
- - {
5
- r
0 I
- r . . 9
6 + I + 9 + 4 + 3 =3Ocr i t i cal pat h
1 . . . . r 2 + 4 . - d O - - . 7 ' d g :
O +
g
+
g
+ | + 2
= 2 6
I
. . . +
2 . d 4 6 8 . . - - . I
6 + g + 1 3 + 2 = 2 9
I
-.+
2
--.)
4
..-.+
8
g
6 + O + 3 + I + 4 + 3 = 2 5
1 . + 2 - 3 . + 4 6 . - . + 7 - 4 9
I + O + 3 + I + I + 2 = 2 1
I
- 2
-
3
.r-
4
.r..4
0
--+
I
---|
I
6 + O + 3 + i 3 + 2 = 2 4
l - + 2 - . + 3 - + 4 - { 8 9
i O + 3 + 9 + 4 + 3 = 2 9
' l - + 3 - - + 4 - . d 6 . . d 7 . + 9
i O + 3 + 9 + 1 + 2
= 2 5
1 - + 3 - - r 4 O - - 8 - 9
i O + 3 + 1 3 + 2 = 2 9
1 - . 3 - . 4 - + 8 - - . . + 9
',21
Earliest Erpected Latest Allonrable Slack
Event Time fime Time
CGA-Ganada (adapted!. Reprint with
permission.
o o
6 0
t l 1
1 4 0
1 8 I
2 3 0
2 7 0
2 A 1
3 0 0
1 0
2 0
3 t o
4 1 4
5 1 7
6 2 3
7 2 7
8 2 7
9 3 0
Cluptcr 16
E1 6 - 8 '
(41
Cf l UCal pat ht l t l | O". . . . . . . . . . . . r' . . . . . . . . . . . . . . . . . . . ' . . . . . . . r. r. . . . . , . . . .
Less time rsquired after event 2:
Activlty 2.6
Agtivity tl-7 ..............
395
(11
(21
to =
$o
+ 4t,,, + ty'
+ 6 = (1 + (4 r 2l + 9l
' F
6' = 3days
(31
Path Time Reguired
O- 1- 2- e- - T =4+3+6+5
=l Sdays
0-1-4-6-7 = 4 +4 + 3 + 3 + 5 = 19 daYs
O- l - 3 - 4 - 7 = 4 + 4 + 3 + O
= l T d a Ys
0 - 1 - 5 - 7 = 4 + 4 + E+ 6
= 2 Od a y s
The critlcal
path is O-1-3-5-7, because lt requires the
greatest total time
(2O days|.
6 days
5 days
2O days
1l dayrs
9 days
Marimum time lO
gVent
2 ......................"....'..............
Estimated time to event 2:
Agti Vi ty O-l .t.tr...r.....r...D.............r.........................r..
Astivity l-2
. a a . a a r a a a a a t a a a a a a l a a a t
a o a a a a a a a a a a a a a a a a a l a a a a a a a l
4 days
3 days 7 daYs
2 daYs
:::
Sf ack t i mg at evsnt 2. . , . . o. . . . . . . . . o. . . . . . . . . . r. . r. . . . r. . . . . . ' . . . . . . . . .
I
396
PROBLEMS
P16-l
(11 Budgeted cash di sbursements
duri ng June:
Purchase of materials:
May
(1 1r25o1x $2o
r 460/;1...,.' r....""""""
Sl o3tsoo
Jung' (l i rl go' r $go
r54%l r.........."""""'
l 3l t544
Marketing'
general, and administrative
expenses:
rufay
tSSi rSSOa
xa6%1,.......t.o.r.......,..........
$23r713
June'($a6reOOl x 54%1..............................
261622
Waggs and sal adS . . . . . . . "t """""t ' r"""t """"'
Tot al . t . . . . . . . . . . ' . . . . . . . . ! . . r " " " " " " " ' t " o" " ' t " " " t " " '
$
g,goo
38,000
$41, 30O
3, 40O
Budgeted
cash col l ecti ons duri ng May:
March sal es ($354,OOO x 9%).,t...,.............-,..-...
Apri f sal es ($gogroo o r 97
oh
r 607o)......................-' ........' .-.
Apri l sal es ($SoS,OoO | 25ohl
.' -....-....-.--...
Total
1
May 3l endi ng i nventory
(11,4O0 x 130%) ..,..... l 4r82O uni ts
Mai
pf OdUCt i On . r. . . . . r. . . . . . . . . . . . . . . . . r. r. . . . . . . r. . . . . . r. . . . . .
I l
t 9OO
Mat gf i al Snggdgdi nMay, . . . . . r o. . . . . . . . . , . . . . . . . . r . . . . . . . .
16r ??oUni t S
Apri l 3O endi ng i nvent ory
($309, 4OO +
$2O1. . . . . .
l 5' 470
May
pUrchaSgS ..r......r....r............t.........r..r......... :!j!r25O
UnitS
2June
3O endi ng i nvent ory
(12I OOO x 13O7o). . . . . . '
151600 uni t s
JUng
pf OdUCt i Of t . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . . . . . r. . . . o. . . . . o. .
I l r4OO
Mat gr i al snggdedi nJung. . . . ' . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27' OOO uni t s
May3l endi ng i nvent oryo. . . . . . . . . . . . . . . . . . . . . r. . r. . . . . . . . .
14r82O
June
purchases.........,......,.......,.............-- !-2J!9
uni ts
3
(S357,OOO May sal es x t5%)
-
S2,OOO
depreci ati on
=
Sst' 55O
1 a - ^ - ^ ^ -
(S342' OOO June sal es x 15%l
-
$2,OOO
depreci ati on
=
$49' 3OO
5
Accrugd payroll on Jung
'l
.,.......'...
Payrol l earned duri ng June.......r...r
Accrued payrol l
on June 3O. . . . . . . . . . ,
Cash pai d
out for payro11................ 937,90O
Chaptar 16
$235,O44
5O,335
37r9OO
5
$323,279
$
31, 860
211,266
90, 75O
99s9dz9
(21
397
(3)
Clvpter 16
Pl 6-1
(Concl uded)
July
purchases
Budgeted units ol inventory
to be
purchtg-d during July
-
3ilv 3l ending invento
ry l12,2ob
x f
goohl
"" 15'860 units
JUii'
ptOOUCtiOn ..,..............r....'.............r....'...
| 2tOOO
Mat gf i al Snggdgdi nJUl y. . . . . . . . . . . . . . . . . . . o. . t . . . ' . o. .
2?rS60Uni t S
June 30 endi ng i nventory
(12' OOO I 13O7o!"'
l 5' 600
..........
12e6O units
. t
398
P16-2
Beglnnlng cash balancc
Cash recclPtr
durlng monthl
Cottecttonr
of accounts
recelvable:
February
sales:
($2rOOOrOO O I 4O' /c1""""' o"""t""t"""""""'
March aaler:
(Sl
18OO'O0O
r 60olo)..'.""""""""!""""""""
Glf rSOOrOO
O I 4Oohl.-....................ro......""""' ts"' d
Aprll rales:
(S2,200,O00 r E0%)..-'.'..-...-...r..
tS212oo'ooo
r 40%)-....,..o..-.o...--....-....................d
MaY sales:
(32,500,000 x E0%)................-.'- ......o.x.
Total cash collecUons
Cash avai l abl e
tor use duri ng
Cash di sbursements
duri ng month:
Accountc
payable lor
Purchascs:
FebruarY Purchasec:
(S2,OOOpOO February sales I SOoh r 4O'/o t 20ohl
(S1,8OO'OO0 March sales r SOch r 600/o | 2Oo/ol ...-
March
purchases:
(S1'8OO'0OO March sale3 r SOt/t r 4Ot/o I 8Oo/.) ...-
(S2,200,000 April sales r 30o/o t 60'/. t 8O%)......-
(St,8OO,OOO Mareh eales r SOoh r 4Oo/o | 2O'/cl .....
(S2,200'OOO Aprll sales r 50% x 600/o | 2Oo/o1........
Apri l
purchases:
{32,2OO' OO0
Apri t sal es I 5O' h t 4O1/o r 8O%).....-'
(S2,5OO,OOO May eales r 5Oo/t t 8O'/o t 80%)......-.
(92'2OO,OOO Aprit
galG3
r 5Oo/c t 4O'h z 2Ot/ol.*...-
(S2,5OO'OO0 May sales r 5O'h r 6o'h t 2O'/c1...-...,.
May
purchages:
(S2,5OO,OO0 itliy salcg z SOth x 4O'h r 80t41.........
(S2' 8OO' OOO Junc csl er r SO' h r E0% x 8O%)"---.
Wages
l2Oo/o
ol current sales):
April (92'ZOO'O00 t 2Oo/o1...... -.-..-....o.........
May
(S2' 5OO' 000 x2Oo/cl -*.. ...................,.
Jun e
(32'800'000
t 20041..........
General and administrative expenses:
Saf arles
11
11 2 r 3480,000).
PromoUon
11
112 x SS60, 000).
Property tar6
1114
r S24o,000)
f n
guranca
11
I 1 2 t 936o,oO0)
Uti l i Uea (1 I 1 2 z S30o,00O)
l ncomc tarer (St,o2Orooo l ncomc t 4ooh tar rate) .-..-
Total cash di sbureements............
Cash bal ance beforc borrowi ng or l nvestment.-...............
Cash to be borrowed
(or i nvested)...-.-.-...-
End i ng cash bal ance' ............
April
t l oo,ooo
3 SoO, OOO
1, 080, OOO
May
3 l oo,ooo
t 72O,OOO
l 132O, 0OO
Chapter 16
June
3 l OO, OOO
t 88O,O0O
l ,Soorooo
31, 88O, OOO
s1, 98O, OOO
i32,o4O,OOO
32r14O, OoO
32,38O,OOO
s2,48O,OOO
3
80, 000
108, OOO
2g8,OOO
528,OOO
44O, OOO
40, 000
55, OOO
o
3O, OOO
25,OOO
408,OOO
3 72, oOO
132, OOO
352,OOO
6O0, OOO
5OO, OOO
40, 000
55, 00o
o
3O, OOO
25,OOO
o
3 88,OOO
150, OOO
400,ooo
672,OOO
50o,ooo
40, ooo
55, O0O
50, ooo
30, o0o
25, OOO
o
s2,Oo2,Ooo
3
(22,OO0)
122,OOO
3 l OO, OOO
$1, 806, OOO s2. 07O. OOO
3 334, OOO S 4' O, OOO
(234' 0OO)
tgro.oool
3 loo,ooo
s__1!-qp_q_q
Chaptor 16
Pl 6- 3
TVIAY1I E II/!A1
gP'4"-
BIH G COM PA}IY
Ca*r Budget
For thr Ycan Ending March 31
399
208
20c
Balancc of cash at beglnnln! ..........-.-......
Caeh generated from operatlons:
CollecUonc from curtomerg-
Schedule A....,..........
Digburgcments:
Dlrect materla ls-Sch ed ulc B ...,.,...,.......
Dlrect 1abor..........a.-6....F....
Varlablc overhead
Total disburrementg
3750,00O
Excess of caeh collectlong over cash
di sbursements f rom operati ong
Carh avallable lrom opcraUonr
Cagh recelvcd from llquldaUon of erlsUng
aicountr rcceivablc end Inventorier -.-.
Total cash avallablc ....,...........,......,_.....r....
Payments
to generat
credl ton
fl l gul datl on
proceeds)
Bal ance
ol cash at end
3825,OoO
3220,000
300,000
100,ooo
$1, O65, 0oo
3 245,ooo
360,00o
120, O0O
l 3o, 00o
3 855,OOO
s 75,OOO
2l 0, ooo
s285,OOO
s285,O00
270,OOO2
t ts,ooo
3 75,Ooo
t 75,000
eo,0oo
tl 85,OOO
90, O00
$ 7S, OO91
i
Thlg amount could have bcen uaed to ply gcnoral
credlton or cerried forward to thc begln.
nlng of the next-year.
2
6ooo,ooo r Eoo/c|
-
sgo,ooo
. :
Pl 6-3
(Concl uded)
Schedule
A--Collections
from customets:
Sal oS
t t t t t t " t ' t " t t t t " t " t t o" t o" r " ot " " t " t t " t " " t " " " " " '
igginning
accounts
rgcgivablo
""""""""""r"
TOt ! l t t t t t t t t t o' i t t t t t t " ' ot " t ot t " t l " ' or r " " " t t " t ' o" " ' ot "
Less ending accounts
rccgivabllB
""""""""""
Col Iecti ons' romcustomen;........................| .' .
Direct materials
requined
for
production """"'
Requirgd
ending
inventory
o""""""' ot"""""' t"
Tot 3l t t t t t t " " " " t " " r " t " t t " " " " " " " " " " " " " t t t ' l t "
Lgss beginning
inventory"' t' Do"""""' t"""""""
PU f C h a S93. . r . . . . . . . . . . . . . . . . . . . . . r . t . . . . . . . . o
t "t "t t ' o "t ' r " "'
Begi nni ng
accounts
payab1e""""""""""""""
TOt al . . . t t t t t " " " " t " " " " " t " " " " " " t " " " t " " t " " t t t '
Less ending accounts
payab|9 ......t.........1....,..
Disbursgmgnts
for diract materials
""""""""'
3
12,Ooo units | 2112
= 2.AOO; 2'Ooo x S2O
pr unit
=
.
is,ooo units x 2112
= 2-r5oo7 2,5oo x S2o
per unit
=
208
sgOo,ooo
o
$9OO,OOO
75,0OO
Chapter 16
20c
sl , 08o, ooo
75,OOO
$t , 155r OOO
9OTOOO
s2oo,ooo
4O, OOO3
$240,OOO
o
$24O,OOO
0
$24o,ooo
20,OOO
s220.ooo
$4O,OOO
sso,ooo
s 24O,OOO
5O,OOO
'
S 29o,ooo
4O,OOO
$
25O,OOO
2O,OOO
$
eTo,ooo
25,OOO
s 245.OOO -
Pl 6-4
Producti on
Budget:
Required
to meet sales fotecast
January
($3601000 sal es
+
915O
per uni t}""""""""'
Feuruary
(Sas6rooo sales
+ S15o
per unit) ""t""""r'
March
(54-gorooo sales
+
$150
per unit """o"""""'o'
Desired finished
goods ending inventorlr:
-
((S600,000 A-pril sales
*
5f
So
per r-rnit) a l0ohl'r 1o0)
Total
quantity of
product to
prociuce ""-"""""""""""""
214OO
3, 0oo
3,2OO
8,600
500
9, 100
s182, ooo
2, OOO
sl B4, OOO
Di rect Materi al s Purchases
Budget:
Materi al s *qui i "J
i or
proOutti on
(9,1Oo uni ts r S2o)..' ..
Desi red materi al s
endi ng
i nventotY
"""""""'
Total di rect materi ats
pu rchases
duri ng fi rst
quarter """""""""
s829roo9 $o65poo
Schedute
B-Disbursements
lor direct
materials:
-
2oB
20c
Clpptor 16
Pl O?4 (Concluded)
Cash Budget for First Quarter Ending March 31, 2oA:
January l, cash balanco .............o..o.........r.' ..o...r....
Cash receipts:
InYestment by owner
Mortgage taken out
CoflecUons of sccounts receiyable:
January saleg:
(SS8O,OOO
r 3Ooh r Seoh r 98%o1.o..,..,..
(s360rOOO
I 3ooh x 2O%1..,...,.o,.......o...
(S360,
O0 I 3 O 7of ......o....r,o.,..........r...,...
St3
6 O, O 00 I 38 7o) ...,..............oo....o.,.....
February
sales:
Gt4sOrOOO
x 3Ooh x SOoh x
g$o/ol,,...,..,r
G|45O'OOO
x 3Ooh r 20%1,.....r........,ts...
(S4 S O, 0 0o x 30
ch1...oo..........r....r.......r...
March sales:
101
o s
f 98%1 ...' ......
s 5OTOOO
t5o,ooo
941672
21, 6OO
108ro0o
t36rgoo
105r84O
27',OAO
135,OOO
1121896
28rgOO
G!48O,OOO
x3Ooh xSooh
(S480,OOO
x3Ochx2O%l
Total cash availabte for use during quarter,r.......D.
Cash disbursements:
Accounts payable
a a a a a a a t a a a a a a a a a a
$184, OOO
265,5OO
1361500
t5orooo
68, 8OO
36rOOO
IrOOO
3O,OOO
l 50,ooo
96O,608
$ 960,608
$
(69,1821
8,4.16.2
$ t s. ooo
Dlrect labor (grlOO
r $3O)
-
$7r5OO1r.,.............
Varlablg
oyerhgad (grlOO
x $l5i .....-.........,.......
factory
rent (910
r S' OOO capacity x 3) .,.........
Sales commlsslons (gr60O
unlts x-$g;...........,.,
Office rgntals ($t ZrOOo r 3! .,..,...........,.....,.,.,.r
fnterest payment
($iSOTOOO
x 2oh r 3|.,....,,.....
Payment
of princlpal
on long-term note..........
Equipment pu
rchasos..........-.
March
cash balance
before currsnt financing,._...
Currgnt
financing
reguired ..,............r,r..................
Desired
March 3i cash balance .................r....r.r..r
I
I
I
Chapter l6
102
Pt 6- 5
('t
l
TRIPLE.F HEALTH CLUB
Budgeted Statement of Income (Cash Basis)
For t he Year Endi ng Oct ober 31r 2OC
(000s omi t t ed)
Cash nevenue!
Annual membershi p fees' $gSS
r 1.1 r l .O3
Lgsson and cfass fggs,
$234
r $234 ' ......r............o..o.............' .......
- s180
$,402.2
304.2
2.7
92' 0
Miscellaneous,
;i"
I $ 2 a . . . a . . . . . . . . . . . . . . . . a . a a . a . . a a a . t . . a . a a a . . a a . a . . a a r a r a t o ' r " '
TOtal CaSh fgVgnUe.......rr.............rr........rr..........r............o...........
Cash expenses:
Managefb Sal afy and bgngfi tSr $gg X 1.15..' .......................r...........
RegUtaf empl oyeest Wages and benefi tS, S19O
f 1.15' .' .' ....' ..........
Lesson and cl ass empl oyee wages and beneti tsr 3195 x 1.3 x 1.15
TOWeI S and SUppl i gS, $16 f 1. 25 . . . . . . . , . , . . . . . . r. . . . . . . . . . . r. . . . .
Utititigs
(heat and lightl
,
522 X 1.25...................o.r......' r............i..,..
Mort gagg i nt ereSt , $gOO X . 09. . . . r. . . o. . . . . , . . . . . . . . ' r. . . . . . . . ' r. . . . . . . . . . . . . . . r. . . . . .
MiSCgllangOUS, $2 I, 1.25 ..................r...r....................r..............r.....
$
s709.1
s 41. 4
218.5
291. 5
20.o
27.5
32.4
2.5
30.0
2.5
15. 0
25.O
Total cash expgnsgs.....rr.................ar........r.........o...........t.....r..t..
3633.8
Cash i ncome. . . . . . . . . . . . . . . . . . . . . . r. . ' . . . r. . . . . . . . . . . . r. . . . . . . . . . o. . . . . . . . . . . . r. . . . . . . r. . . . . . . . . . . . . . .
3 ?53
Cash payments:
Mort gage
paymgnt
. . . . o. . . . . . . r. r. . . . r. . . . . . . . . . . r
AccountS payablg balanCg at 10131 IB ....' ......".".......o...............' ....
Accounts payabl e
on equi pment at l 0l 31l B....
Pl anngd new
gqui pmgnt purchase.................r.
TOtal CaSh paymgnts..r................r.........................r...............t..to. s 72.s
Cash surp1us. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . o. . . . . r. . . . . . . r. . . . . . . . . . . . . . . . . . . . . . . . . r. . . . . . . . . . . . r. . o. .
$ 2. 8
Begi nni ng CaSh ba1anC8. . . . . . . . . . . . . . . . . . . r. . . . . . . . . . ' . . . . . . . . . . . . . . r. . . . . . . . . . . . . . . . . . . . . ' t . . .
8. 3
Cash available for working capital and to acquire
propetty.......o.......... LlQ-t
(21 Operati ng probl ems
that Tri pte-F Heal th Cl ub coul d experi ence i n 2OG
i ncl ude:
(a) The l essons and ctasses contri buti on to cash wi l l decrease because tho
proj ected
wage i ncrease for l esson and cl ass empl oyees i s not made up
by the i ncreased vol ume of l essons and cl asses,
(bl Operati ng expenses are i ncreasi ng faster than nevenues from member-
shi p fees.
(c) Tri pl e-F seems to have a cash management
probl em.
Al though there
appeani to be enough cash
generated for the cl ub to meet i ts obl i ga-
ti ons, past due amounts occur. Perhaps the cash bal ance may not be
l arge enough tor day-to' day operati ng
purposes.
Ctle,pta-
16
pto-s
(concrudedf
tog
(31
Jane
c
':'::'*fli^d*Tl#$,
fn ttre
c
annuaf
i
clubb
rr
mentpun^has-e:6ffi
;iir"irH:rr:r,if
rri:fi
}H"Tl"v."qui;_-'-
purchas
cant
incll"-:9r"!"ins
prope'ty,
lil"-g;'i;"otr""Tlilt
ln: !":F
o"li.5"
,o
sl,ipuonTil.l""nffi
":*i[**_.':l;;*"ff
:"","j1*;i1fu:"
P' O.E
(1)
Schedufe
of b.gdgeted
cash
n (ooos
omitted):
- -r"
'| eceipts
by
month
for
the
thtrd
guarter
of zoA
Billings
Receipts
Actuat/
Itfonth
|ut"t"o
Percentages
n'6;.-......
# *
Timins
slv Auou-sr .jip:
frli-::-...-
T;SSS-
?:"
ffi
s
ffi
August
L.d;'
.1.:::...........
SrOOd
;:
40
J,ne""'...'.1
srooo
;9
#
2oo
{.::"....-;;
s,ooo
nl i9,
"'333
rf1JDo...,.......
;r;;;
uo
20
i{g
i'iii
;s
#
I,o
$;ss
u"ry..-...]
:,::g
to
,o
uurv..-....._
:':99
90
#
45
.tuf!"....,...,..
:':::
iJ
;3
2'o2s
{u1r.,..."'.....
iffi l3
20
t8o
&ff"; :,,1?:
d;
:3
$
ffS
i,T$* :;fri
J3
'o
eoo
septembe,
f;:::
il
;3
so
septembe,
F,:9g
eo
23
2'2so
."j:#idTfrilfrfu","'.:
*: >
;3s
rota,
";;
;"J;,f::::::::::.--#
S
_C--
qF
....................91980
@
d
Chaptar
16
&1
Pt6-6
(Goncludedl
l2l
schedule
of budgeted
cash dlsbursements
by month
for the third
quarter ol
2OA
(OOOs omi t t ed):
Disbursements
July
August
SePtember
Salarier
Variable:
$4,500
t 2Ooh
$5,OOO
t2Aoh
$5,5Oo
x 20oh
3
900
$l , ooo
$1, 1oo
Fired
Total variabl
g
.o.' o"""""""""
t a a aa aa at a aaaaa t t t t t
"
'
$
9OO
l ,5oo
St rooo
l r 5OO
$2r5OO
':"
$t , l
oo
l r 5OO
$z,6oo
l r Soo
450
13, 67O
$t g, g7o
I l , 9OO
$
2,O7O
185
S
1, 885
(3.700)
$J915)
Total salarigs
"""""""""t' trt
Purchasgs
of
prvious month
"""""""'
l nt gl t St . . . . . . t . """"""t """"t """t t t o"t ""o'
Depreciation
(not relevant!
""'o""""""'
Total cash disbursgmllt3
""""""""""
$3,750
#
s4,55O
$
300
s2,4OO
' :"
$3,60O
::
(31 (ooo omitted|
Cash bal ance-.ful y
1,
20A...,.....
Cash receiPts in third
quarten
J U l ! t t t t t t t t " " t t ' r " " t " " " t " " t t ' o" t " t
t " " " t " " " ' ot t t t '
August t t t t t " " t t t " t " " " t t t ' t " " " " t " " " t t " t " " " " r t t t
Sept embgFt t t " t t t t t t t r t t " t ' t t t r " t " " t ' r " " " t " " " " " t '
Total cash availablg
.r.................'.....................,.."
Cash disbursemcnts
ln third