Solutions Manual for

COST ACCOUNTING
Creating Value for Management
Fifth Edition

MICHAEL MAHER
University of California, Davis

Table of Contents
Chapter 1
Cost Accounting: How Managers User Cost Accounting Information

Chapter 15
Using Differential Analysis for Production Decisions

Chapter 2
Cost Concepts and Behaviour

Chapter 16
Managing Quality and Time

Chapter 3
Cost System Design: An Overview

Chapter 17
Planning and Budgeting

Chapter 4
Job Costing

Chapter 18
Flexible Budgeting and Performance Evaluation

Chapter 5
Process Costing

Chapter 19
Performance Evaluation: Cost Variances

Chapter 6
Spoilage and Quality Management

Chapter 20 Chapter 7
Allocating Costs to Departments Performance Evaluation in Decentralized Organizations

Chapter 8
Activity-Based Costing

Chapter 21
Transfer Pricing

Chapter 9
Activity-Based Management

Chapter 22
Nonfinancial Performance Measures

Chapter 10
Allocating Joint Costs

Chapter 23
Capital Investmenet Decisions

Chapter 11
Variable Costing

Chapter 24
Inventory Management

Chapter 12
Cost Estimation

Chapter 25
Management Ethics and Financial Fraud

Chapter 13
Cost-Volume-Profit Analysis

Chapter 26
Revenue, Mix and ield Variances

Chapter 14
Differential Cost and Revenue Analysis

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Chapter 1
Cost Accounting: How Managers Use Cost Accounting Information

Solutions to Review Questions
1–1. C Analysis of divisional performance A Costing for income tax purposes B Determining how many units to produce in the coming week 1–2. Descriptions of the six business functions in the value chain are as follows: 1. Research and development: the creation and development of ideas related to new products, services, or processes. 2. Design: the detailed development and engineering of products, services, or processes. 3. Production: the collection and assembly of resources to produce a product or deliver a service. 4. Marketing: the process that informs potential customers about the attributes of products or services, and leads to the sale of those products or services. 5. Distribution: the process established to deliver products or services to customers. 6. Customer Service: product or service support activities provided to customers. 1–3. Value-added activities are activities that customers perceive as adding utility to the goods or services they purchase. Nonvalue-added activities do not add value to the goods or services. 1–4. Differential costs are important for managerial decision making, but other cost data can provide management with additional important information. For example, inventory values and costs of goods sold are important for income tax and financial reporting purposes as well as for most bonus and cost-plus contracting purposes. Costs for performance evaluation are not necessarily differential costs. Companies try to recover all costs, hence some estimate of total costs is needed. (This could be an opportunity to discuss short-run and long-run costs with students, noting that in the long run, all costs must be covered.)

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 1

1–5. Costs that could be shared among housemates might include a share of the rent, food, utilities, and other related costs. Costs that would differ with the addition of another person are the differential costs. These differential costs might include food. It would be necessary to negotiate an agreement between you and the other person considering all factors. For example, should you split the total costs or charge only the differential costs of the additional person. Businesses are often faced with similar decisions on finding the appropriate cost base for splitting costs. There are no generally accepted accounting rules for determining appropriate shared costs in either situation. Hence, it is important to specify arrangements about costs precisely when agreements are made. 1–6. Performance evaluation systems are designed for a specific company’s needs. The systems should be flexible to adapt to the circumstances which exist in that company. A common set of accounting principles would tend to reduce flexibility and usefulness of these systems. As long as all parties know the accounting basis used by the system, the exact rules can be designed in whatever manner the parties deem appropriate. 1–7. Most utilities are characterized by the need to install a substantial amount of equipment to meet peak loads. The peak load for the telephone company is during business hours, particularly in the mid-morning. At other times this equipment is operating at less than capacity. That is, there are lines available for use. By encouraging users to shift their usage from the peak times to such off-peak hours as evenings, nights and weekends, less equipment is required and the existing equipment is utilized more heavily. The considerations in the decision would include: (a) the savings from not having to purchase more equipment; (b) the revenues that could be generated on off-peak hours when existing equipment would be sufficient; (c) the revenues that could be generated from telephone calls that would not be made at all at the higher prices; and (d) the costs of operating the telephone system in off-peak hours. Offsetting these benefits would be the reduction in revenues from calls that would be made during off-peak hours even if full rates were in effect. Apparently the telephone company has found that the benefits outweigh the loss in revenues from using off-peak rates. 1–8. While a manager, and not the controller, has the business expertise to make management decisions, the decisions will not be good ones if the manager does not understand the data used to make them. For example, the manager may be working with the costs of a product, and not realize which costs are fixed and which are variable. The controller understands the types of data that are available, the rules used to accumulate the data, and the limitations that exist on the data. Therefore, the manager and the controller need to interact in the decision-making process. The controller can provide the manager with the relevant data, and an explanation of its suitable uses. The manager then can make better decisions.

© The McGraw-Hill Companies, Inc., 1997 2 Cost Accounting, 5/e

1–9. In decision making, managers or supervisors may wish to take actions that are not economically justifiable. In most cases, upon receipt of a well-developed cost analysis, a production manager is satisfied whether an action is feasible. If the action is not economically justifiable, the matter is dropped without conflict. In a few cases, however, managers may wish to pursue a project because of personal reasons, and hope to have an economic analysis to support it. In these situations, care must be taken to ascertain the economic merits of the plan, and, if the plan cannot be justified on economic grounds, the manager must make the case for the project on another basis. The final responsibility for the decision rests with the manager. Therefore, plans that cannot be justified on a cost analysis basis may still be adopted at the discretion of management. In the control area, the accountant is charged with the responsibility of making certain that plans are executed in an optimal and efficient manner. In some cases this may be viewed as placing restrictions on management actions. Under these circumstances the manager may view the accounting function as placing too great a constraint on the manager while the accountant may view the manager as attempting to circumvent the rules. 1–10. The marketing people at Lever Bros. rely on accounting information for decisions. For example, accounting provides information about distribution costs, and helps marketing people determine the cost of materials and packaging if management decides to change a product. 1–11. The nonvalue-added activity—the amount of time employees are idle during normal trash pickups as a result of their trucks breaking down—occurred because workers did not inspect their trucks at the end of shifts for maintenance and repairs needs. So trucks broke down during normal trash pickups. The threat of privatization created incentives probably because workers thought they would not be hired by private trash collectors (or their working conditions would be worse or their wages would be lower). 1–12. The answer is simple—you get what you motivate.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 3

Solutions to Exercises
1–13. (20 min.) Cost data for managerial purposes.

a. Differential costs are costs that would change; that is, the materials costs in this situation. Other costs would presumably not be affected by the change in materials. Other issues include the quality and availability of the new materials. Differential costs next year are $.90 (= $6.00 – $5.10) calculated as follows: Cost New Materials $5.10 (85% x $6.00)

Next year

Old Materials $6.00

b. Management would use the information to help decide whether to use the new materials. Management would also want to know the quality of materials and the reliability of the vendor.

1–14.

(20 min.)

Cost data for managerial purposes: Technology, Inc.

This exercise demonstrates the importance of determining what is differential, and not being misled by the “bottom line.” All costs except corporate administration would be differential. Here is the calculation of the lost contribution: Revenue lost ...................................................... $430,000 Costs saved (excluding corporate admin.) ......... 393,000 Contribution lost, before taxes ........................... 37,000 Taxes saved (40% of the lost contribution) ........ 14,800 Net contribution lost ........................................... $ 22,200 Management must decide whether the contribution toward corporate administrative costs and profits is sufficient to justify continuing operations, or whether it should seek a more profitable line of business. Unless there is a better alternative use of corporate resources, the division should not be closed in the short run, despite the reported loss on the financial statement.

© The McGraw-Hill Companies, Inc., 1997 4 Cost Accounting, 5/e

1–15.

Cost Transportation Utilities Salaries Visits to customer Packaging design Advertising

Value Chain Classification distribution production research and development customer service design marketing

1–16.

Cost Redesign Promotion materials Equipment Sales people bonuses Postage Labor

Value Chain Classification design marketing research and development marketing distribution production

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 5

1–17.

(20 min.) Ethics and altering the books: Amos & Associates

a. The unofficial CMA answer comments specifically on competence, confidentiality, integrity, and objectivity with respect to the Standards of Ethical Conduct for Management Accountants. Basically, Elizabeth has a responsibility to perform professional duties in accordance with relevant laws, standards, and GAAP. Elizabeth must communicate both favorable as well as unfavorable information fairly and objectively. She must disclose all relevant information that could influence the users’ understanding of the reports. b. Elizabeth should first follow Amos & Associates’ established policy on the resolution of ethical conflict. (Assuming there is one!) If there isn’t an established policy Elizabeth should confront the next higher level of management that she believes is not involved in the altering of figures. This could be the Chairman of the Board of Directors. If the matter remains unresolved she should take the issue to the Audit Committee and the Board of Directors. Perhaps Elizabeth should seek confidential discussion with an objective advisor. When all levels of internal review have been exhausted without satisfactory results, Elizabeth should resign and submit an informative memorandum to the chairman of the Board of Directors.

© The McGraw-Hill Companies, Inc., 1997 6 Cost Accounting, 5/e

Solutions to Problems
1–18. (30 min.) Responsibility for ethical action: Toxic, Inc.

a. As a management accountant Paul has a responsibility to perform his professional duties with competence in accordance with relevant laws and regulations. Clearly, dumping toxic waste is a violation of the law. As such, Paul might have a legal responsibility to take some action. As a professional, he must communicate both favorable and unfavorable information in an objective and fair manner. Thus, he cannot simply ignore the fact that Toxic, Inc. is involved in illegal toxic dumping. b. The first possible course of action was to discuss the situation with the controller. This is an appropriate approach to the problem. Always take a problem to your immediate supervisor first. If the controller indicates that he is aware of the situation and that you should not worry about it, then take the matter up with your controller’s superior. Move up the layers of management until someone is concerned and will deal with the problem. As for the second course of action, the proper authorities should be notified by someone in the company. The local newspaper, however, is not the proper authority. Paul should discuss the matter with the Board of Directors only after exhausting possibilities of discussing the matter with internal management.

1–19.

(30 min.) Ethics and inventory obsolescence: Angioplasty Corporation.

a. The controller has a responsibility to perform his duties in a competent manner, one that is in accordance with relevant laws, regulations, technical standards, and generally accepted accounting principles. The controller's lack of action regarding the overstatement of inventory is a violation of professional responsibilities. b. Linda should first follow Angioplasty’s established policy on the resolution of ethical conflict. (Assuming there is one!) If there isn’t an established policy, Linda might want to mention to the controller the fact that she believes both the CFO and the external auditors are unaware of the inventory overvaluation. If she is uncomfortable mentioning this to the controller, she should talk directly to the CFO instead. If the situation is still unresolved then Linda should bring it to the attention of the Audit Committee and the Board of Directors. Perhaps Linda should seek confidential discussion with an objective advisor to clarify the issues and possible courses of action. When all levels of internal review have been exhausted without satisfactory results, Linda should resign and submit an informative memorandum to the chairman of the Board of Directors. Except where legally prescribed, the disclosure of such information to outsiders (the media, regulatory bodies, external auditors, etc.) is considered inappropriate.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 7

1–20.

(30 min.) Cost data for managerial purposes: Wegrow Fruits, Inc.

This problem demonstrates the ambiguity of cost-based contracting and, indeed, the measurement of “cost.” Recommended prices may range from the $42.90 suggested by NASA to the $53.35 charged by Wegrow Fruits, Inc. The key is to negotiate the cost-based price prior to the signing of the contract. Considerations which affect the base costs are reflected in the following options: Options: A. Only the differential costs could be considered as the cost basis. B. The total cost per case for normal production of 80,000 cases could be used as the cost basis. C. The total cost per case for production of 120,000 cases, excluding marketing costs, could be used as the cost basis. D. The total cost per case for production of 120,000 cases, including marketing costs, could be used as the cost basis.

Costs
A

Unit Cost Options (One Unit = One Case of Fang)
B C D

Materials (var.) Labor (var.) Supplies (var.) Indirect costs (fixed) Marketing (var) Administrative (fixed) Per case cost basis Per case price (Cost + 10%)

$12 19 8 440,000 2 160,000

$12 19 8 N/A N/A N/A $39 $42.90

$12 19 8 5.50 2 2 $48.50 $53.35

$12 19 8 3.67 N/A 1.33 $44 $48.40

$12 19 8 3.67 2 1.33 $46 $50.60

We believe the most justifiable options exclude marketing costs and reflect the actual production level of 120,000 cases. These are Options A and C. (As stockholders in Wegrow Fruits, Inc., we would prefer Option C.)

© The McGraw-Hill Companies, Inc., 1997 8 Cost Accounting, 5/e

1–21.

(30 min.) Cost data for managerial purposes: Ante Division.

This problem demonstrates the ambiguity in measuring “costs.” Ante Division’s controller included the “per unit” fixed costs, calculated for allocation purposes under normal production volume, when it calculated the per unit cost of the additional production. The controller charged Beta Division on that basis, ignoring the differential costs as a basis for inter-division sales. Possible options available are as follows: A. Use the full per unit cost for normal production of 25,000 units. B. Use only differential costs as the cost basis. C. Use differential costs plus a share of fixed costs, based on actual production volume (with Beta’s order) of 37,500 units.

Costs
Direct materials (var.) Direct Labor (var.) Other variable costs Fixed costs Per unit cost Cost plus 20% Total price (5,000 units) $.80 4.00 .40 90,000.00

Unit Cost Options: A B C $.80 $.80 $.80 4.00 4.00 4.00 .40 .40 .40 3.60 N/A 3.00 $8.80 $5.20 $ 8.20 10.56 6.24 9.84 $52,800 $31,200 $49,200

If fixed costs are not differential and Ante has no alternative uses of the excess capacity (between 37,500 units available capacity and 25,000 units used), then Option B is the most defensible. Options A and C overstate the differential cost of production which could inappropriately affect Beta’s decisions about buying internally or externally, or about pricing its product, among other decisions.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 9

1–22.

(20 min.) Cost data for managerial purposes: Amanda's Coffee, Inc.

a.

(1)

Baseline Sales revenue............ $38,000 Costs: Food....................... $15,000 Labor...................... 12,000 Utilities ................... 2,000 Rent ....................... 4,000 Other costs............. 2,000 Manager’s salary.... 6,000 Total costs .......... 41,000 Operating profit.......... $ (3,000) aFifty percent higher than baseline. bTwenty percent higher than baseline

(2) Alternative with Ice Cream $78,000
$35,000 18,000a 3,000a 4,800b 2,400b 6,000 69,200 $ 8,800

(3) Differential Revenues and Costs $40,000
$20,000 6,000 1,000 800 400 –0– 28,200 $11,800

b. The decision to expand and offer ice cream results in differential profits of $11,800, so it is profitable to expand. Note that only differential costs and revenues figured in the decision. The supervisor's salary did not change, so it was not included.

© The McGraw-Hill Companies, Inc., 1997 10 Cost Accounting, 5/e

1–23.

(25 min.) Cost data for managerial purposes: Change Management Corporation.

a. The following differential costs would be incurred: Consultant Labor ....... $134,000 Equipment Lease....... 4,200 Supplies..................... 5,400 Other Costs ............... 5,700 Total Costs ................ $149,300 Given 5% of $84,000 10% of $54,000 15% of $38,000

b. Technically, since acceptance of the contract would add $700 to operating profits, it would seem that acceptance of the contract is called for. Of course, as a practical matter the amount is so small that it would probably not be worth the effort. c. Other factors would include (1) whether this will enable the company to get into a new, profitable line of business; (2) what other opportunities the company has for expanding; and (3) whether the contract will provide for more revenues in the future. In short, the company must consider the long run as well as the first year’s results.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 1 11

.

The determination of product costs varies depending on the approach used: full absorption. Sometimes this is considered as the labor which is actually responsible for converting the materials into finished product. supervisory costs. These costs include the indirect labor and materials. or managerial costing. Both accounts represent the cost of the goods acquired from an outside supplier. Yes. therefore. materials are so immaterial in amount that they are considered part of overhead.. The costs associated with goods sold in a period are not expected to result in future benefits. they are expensed for financial accounting purposes. 2–2. Assembly workers. which include all costs necessary to ready the goods for sale (in merchandising) or production (in manufacturing). Cost is a more general term that refers to a sacrifice of resources and may be either an opportunity cost or an outlay cost. Direct materials: Materials in their raw or unconverted form which become an integral part of the finished product are considered direct materials. Inc. costs related to the facilities and equipment required to carry out manufacturing operations. finishers and similar “hands on” personnel are classified as direct labor. while period costs are those costs that are more easily attributed to time periods. Product costs are those costs that can be more easily attributed to products. See page 44 for definitions of product cost using each approach. In some cases. The manufacturer transforms the purchased materials into finished goods and charges these costs. These costs are expensed when the finished goods are sold. Direct labor: Manufacturing overhead: © The McGraw-Hill Companies.Chapter 2 Cost Concepts and Behavior Solutions to Review Questions 2–1. Chapter 2 13 . along with conversion costs to production (work in process inventory). as no additional costs are incurred. and all other direct support activities. They provided revenues for the period in which the goods were sold. 2–5. variable. cutters. All other costs directly related to product manufacture. 2–4. The merchandiser expenses these costs as the product is sold. Costs associated with labor engaged in manufacturing activities. An expense is the write-off of an outlay cost against revenues in a particular accounting period and usually pertains only to external financial reports. 1997 Solutions Manual. 2–3.

lease on building. i. to determine the incremental (or differential) cost per unit one must look at the change in total costs because of a change in production activity and divide by the total number of units. such as the occupancy costs of the manufacturing plant. the average (fixed costs divided by number of units) will change as production changes within those ranges. they may have insisted on a share of revenues or a flat fee instead of profit sharing. Examples: labor—instructors’ salaries. overhead—maintenance.g. Mixed costs have elements of both fixed and variable costs. Inc. utilities. fixed costs. the relevant range.2–6. 1997 14 Cost Accounting. Unit costs are averages only at a given level of production. Direct materials and direct labor are by their very nature directly related to the product. 2–8. Thus. Had they understood how costs of Forrest Gump were to be defined. Some overhead costs are treated as indirect for practical reasons—while they might be directly associated with the product (e. 2–12. 2–10. Answer will depend on the restaurant studied. within certain production ranges.e. such as when supervisors are added. 2–11. overhead—departmental office staff’s salaries. incidental materials). Step costs change with volume in steps. they are too small in value to be separately measured. 5/e .) 2–13. Provocative questions include the following: Are napkins and condiments direct or indirect materials? Is the restaurant manager direct or indirect labor? Then ask if the way one categorizes these costs affects managerial decisions. (Probably not. Other overhead costs. 2–7. Knowing which costs would be assigned to the film was important for people who were paid based on a percentage of the film’s net profits. © The McGraw-Hill Companies. 2–9. Utilities and maintenance are often mixed costs. Total fixed costs do not change as volume changes (within the relevant range of activity). Examples are: materials—food. Total variable costs change in direct proportion to a change in volume (within the relevant range of activity). Since some costs do not change.. Prime costs are direct.. labor—meal preparers. Marketing and administrative costs are treated as period costs and expensed for financial accounting purposes in both manufacturing and merchandising organizations. are clearly indirect.

............. .. a. e................. g. Indirect materials.. Factory heating and air conditioning...... ................ F P Overtime pay for assembly workers.... V R Assembly line workers wages .... F P Controller’s office rental .......... Inc...... V R Sales commissions ....... ................ i......... d........... V R Property taxes on office buildings for administrative staff .... F P 2–15... (10 min......... F P Salaries of top executives in the company......... Production supervisor’s salary. e................... C C P B P C © The McGraw-Hill Companies.... c............... c........ Transportation-in costs on materials purchased.......... h. F P Sales supervisory salaries ...Solutions to Exercises 2–14............................................................. Assembly line worker’s salary........................ (15 min........................) Basic concepts.............. a........................... Chapter 2 15 .......................... j....................... b................................................. f....... Fixed (F) Period (P) Cost Item Variable (V) Product (R) Transportation-in costs on materials purchased ...........) Basic concepts....... ............. f. Raw materials used in production process..................................... 1997 Solutions Manual... ................................................................................................. d.............. F P Administrative office heat and air conditioning. V P Sales personnel office rent............ b...........

Costs that do not vary with the volume of activity. 3. Costs that cannot be directly related to a cost object. A sacrifice of resources. Costs that are part of inventory..2–16. Past. Costs that can be directly related to a cost object. 8. Indirect costs Fixed costs Opportunity costs Outlay costs Direct costs Expense 9. Inc. 10. 11. Costs that can be more easily attributed to time intervals. The lost benefit from the best forgone alternative. 1. © The McGraw-Hill Companies. 6. 4. 5/e .) Basic concepts. The cost charged against revenue in a particular accounting period. present or near-future cash flow. Cost Variable costs Full-absorption cost Product costs 2. Costs that vary with the volume of activity. Concept Definition Period costs 5. Costs used to compute inventory value according to GAAP. 1997 16 Cost Accounting. 7. (15 min.

......................... Utilities in controller’s office...........000 3..................) Prepare statements for a merchandising company: PC.................... Cost of Goods Sold Statement For the Year Ended December 31........000......000 Transportation-in ...... $5... Operating profit ....... Factory security personnel ...................... Cost of goods sold (see statement below) .......... e........ Ending inventory ........... Inc........060............................ (15 min................................................ Inc....860........ Power to operate factory equipment ..........000 Total cost of goods purchased .............................000 1................ Depreciation on furniture for company executives ................600....360.................. This Year Beginning inventory.000 2... This Year Revenue ................................000 $ 500... Cost Item a................................... d....... Purchases ................... Marketing and administrative costs ... Cost of goods sold ...............000 3...2–17.940........ PC... PC.................... 260.............. (15 min..........................................000 © The McGraw-Hill Companies.. Inc...................................600.................000 $ 340..060.................000 $3.................... Cost of goods available for sale .................. Factory heat and air conditioning .... 1997 Solutions Manual.......000 1............ c..... Income Statement For the Year Ended December 31................................... Inc....... Fixed (F) Variable (V) F F F V F Period (P) Product (R) R P R R P 2–18......... Gross margin................................) Basic concepts.....000 300......... Chapter 2 17 ........................................ b. $2.

850 + $13.150 X = $27.250 X = $29.250 X = $25. Inventory 2.250 + X = $23.150 x 29.000 3. 5/e . a. Work in Process Beginning work Total Cost of Ending work Inventory in process + manufacturing = goods + in process inventory cost manufactured inventory 16.850 + $13.000 * 14.000 + $14. © The McGraw-Hill Companies.150 + X = $29.250 – $2.250 x 23.850 13.000 c. (30 min. Materials Inv.250 X = $28.000 + $3.600 – $12.600 Beginning Direct Direct Ending direct direct materials + materials = materials + materials inventory purchased used inventory 12.500 16.350 *From solution to part b.500 – $16.250 x 28.500 X = $29.200 Finished Goods b.2–19. 1997 18 Cost Accounting..000* + $14.600 X = $23.250 Beginning Cost of Cost of Ending finished goods + goods = goods + finished goods inventory manufactured sold inventory 2.) Prepare statements for a manufacturing company. Inc.250 + X = $28. We recommend setting up either T-accounts or equations to solve for the missing data. 12.000 + $3.

Less ending finished goods inventory .250 Purchases ...... 3...450 Less ending inventory ............ and (c) refer to amounts found for requirements a...000(b) 2..... $16......250 3...600 Direct materials used.. (continued) Sebastian Company Cost of Goods Sold Statement For the Year Ended December 31 Beginning work in process inventory Manufacturing costs: Direct materials: Beginning inventory....... Chapter 2 19 .............. $23....... Less ending work in process inv.....500* Total manufacturing costs . *Difference between total manufacturing costs and direct materials used: $3.....200(a) Materials available.... $12..........500 29.... Cost of goods sold .................................850.150 27.....350(c) 14.................................... (b).... © The McGraw-Hill Companies......350 – $23.....250 31......................... Cost of goods manufactured.......................500 = $27.2–19......000 Letters (a).. Beginning finished goods inventory..... 25........250 $28........ 37.... Finished goods available for sale .................... b........ Inc. and c................ 1997 Solutions Manual..........850 Other manufacturing costs ..... 13......

400 + $35.600 – $32.2–20.400 X = $600.600 Beginning direct Direct Direct Ending direct materials + materials = materials + materials inventory purchases used inventory $32. © The McGraw-Hill Companies. Work in Process Beginning work Total Cost of Ending work Inventory in process + manufacturing = goods + in process inventory costs manufactured inventory 36.200 X = $599.400 + $35. Inventory 14..400 c.200 + $36.600 X = $173.000 Finished Goods b.000 – $14.) Prepare statements for a manufacturing company: Nishimoto Machine Tools Company We recommend setting up T-accounts or equations to solve for the missing data.000 Beginning Cost of Cost of Ending finished goods + goods = goods + finished goods inventory manufactured sold inventory $14.400 $36.600 X = $600.800 X = $177.800 x 173. 1997 20 Cost Accounting. Inc. (30 min.400 – $36.600 *From part b.200 36.000 15.000 X = $600.600 x 600.200 x 600. Direct Materials a. 5/e .000 + $15.200 + $36.400 * 35.800 + X = $173.200 + X = $600.600 + X = $600.000 + $15. Inventory 32.

........................... 36.. Beginning finished goods inventory...600 Direct materials used.......... (continued) Nishimoto Machine Tools Company Cost of Goods Sold Statement For the Year Ended December 31 Beginning work in process inventory Manufacturing costs: Direct materials: Beginning inventory.... *Difference between total manufacturing costs and direct materials used. and c..... b................................................ (b).......................................000 Letters (a)........2–20. Inc.... and (c) refer to amounts found in solutions to requirements a.............................................400(b) 14. Cost of goods sold . Cost of goods manufactured.....800 Less ending inventory . Ending finished goods inventory ...$ 32........400 600......................... 426...................... 1997 Solutions Manual....800 Purchases .. Less ending work in process ...... Chapter 2 21 ..............600 615....600(c) 635.....................800 35........000(a) Materials available............400* Total manufacturing costs ... $173....... © The McGraw-Hill Companies........... $ 36................. Finished goods available for sale ................ 209.......000 $600......... Total costs of work in process......200 Other manufacturing costs ........200 599........000 15.... 177.

.............400 71..... Dec............... 1 ....... Dec......... Alexis Company Income Statement For the Year Ended December 31 Sales revenue .....600 Plant utilities and power............ 28...........................400 Less ending inventory........... Jan...........200 273. Gross margin ....000 Direct materials used ..................2–21............................ Total manufacturing costs .... 47..... Inc............... Alexis Company Statement of Cost of Goods Sold For the Year Ended December 31 Work in process...................... 16...200 18...............................800 Indirect materials and supplies .............800 Add material purchases .......................................................................... 12... Total marketing and administrative costs .000 $ 19.... $ 30.800 300...800 Total manufacturing overhead ........................ Administrative costs ........ Total cost of work in process during the year ..... Beginning finished goods...... 44...................200 $420.200 138...000 Manufacturing building depreciation .....................000 $282................. Operating profit ........................... Marketing costs (sales commissions) ............400 21..................................... 38... 1997 22 Cost Accounting......... 54....................600 30........ Cost of goods sold .... Manufacturing overhead: Supervisory and indirect labor ...000 Property taxes..... (30 min.......... Finished goods inventory available for sale ............. 1 ..... $ 36.....200 278....... Less: Cost of goods sold ... Manufacturing costs: Direct materials: Beginning inventory.) Prepare statements for a manufacturing company: Alexis Company. 31 . Dec... Less work in process........ Costs of goods manufactured during the year..................600 $88..................... 31 ....600 26.........................200 159............. Less ending finished goods inventory........... Jan................. manufacturing plant .......800 $ 43.400 119................ Jan..............800 304...............................600 Direct materials available.......... 1 .............................................600 © The McGraw-Hill Companies.......... 81...... 5/e ........ Direct labor .. 31 ...800 282.........................................................

...... $ 8................................. Total cost of work in process during the year.........................300 60. 9....................2–22...... December 31... 7.......300 35...... Gross margin....................... Tots’ Toy Factory Income Statement For the Year Ended December 31 Sales revenue ............................450 66.... Inc...........................400 $97..........150 © The McGraw-Hill Companies........................ Jan.800 28....400 34........ 6.....350 Less ending inventory...................100 Total marketing and administrative costs ............ Total manufacturing costs .......... $21......... 1997 Solutions Manual............................ 3...................... Chapter 2 23 ....... 1........950 67.........750 Manufacturing building depreciation ......450 4.................................. $ 6............... Operating profit ............200 62.... Less work in process.................000 4................ (30 min...................... 18........... 2......150 Plant utilities and power .....................600 $ 9................200 Add purchases ................ Beginning finished goods...... January 1 ........... Direct labor ... Costs of goods manufactured during the year .......550 62..650 $ 6............... Manufacturing overhead: Supervisory and indirect labor........700 Total manufacturing overhead ..150 Direct materials available ............200 Indirect materials and supplies.............) Prepare statements for a manufacturing company: Tots’ Toy Factory.................................................................... 10...................... Less: Cost of goods sold (per statement) .... Manufacturing costs: Direct materials: Beginning inventory............... Cost of goods sold .......550 Sales commissions.................. 10... December 31.... manufacturing plant ....350 16.................. Finished goods inventory available for sale .............050 62........ Administrative costs ................... December 31................ Less ending finished goods inventory................000 Direct materials put into process ....... Tots’ Toy Factory Statement of Cost of Goods Sold For the Year Ended December 31 Beginning work in process.................................................550 5........................ 12...... January 1.500 Property taxes............................................

..................210 71. 10........ 1997 24 Cost Accounting..................... 5/e .............. 21... Inc....................700 Depreciation—manufacturing (80% of total)... Total cost of work in process during the year . light and power—plant (77.... Jan..................... 31 . 1 ........... Manufacturing costs: Direct materials: Beginning inventory......560 6............ Less work in process.. Jan......250 69....... 3..900 4. 1................... Dec........................310 Less ending inventory... 12......... Costs of goods manufactured during the year.......... 11......... Carey’s Cakes Statement of Cost of Goods Sold For the Year Ended December 31 Beginning work in process....... 1...........................260 19.........................860 77...............000 Property taxes—plant (80% of total).......2–23.............................................. Total manufacturing costs ......950 Supplies and indirect materials..........350 37...350 3. 31 .........560 Transportation-in ......................................150 Total manufacturing overhead ..... $ 7........... $ 8..........600 Add: Purchases ...6% of total) ..... 1 ... 1 .................................950 $ 69................... Cost of goods sold .......................700 $13.................. Dec... 9............. Jan............... 31 .... Direct labor .. 8.........550 74...................050 Direct materials used ...............450 Heat....... Beginning finished goods.150 Direct materials available ........950 © The McGraw-Hill Companies.......... Less ending finished goods... Manufacturing overhead: Supervisory and indirect labor . Finished goods available for sale .. Dec.. (30 min.) Prepare statements for a manufacturing company: Carey’s Cakes.

...................... $3.. 1997 Solutions Manual...................... 4.......................................550 $ 15...200 45.......800 Property taxes (25% of total) .... 2...000 Heat.. 18.650 © The McGraw-Hill Companies........................950 61............. (continued) Carey’s Cakes Income Statement For the Year Ended December 31 Sales revenue ...... Chapter 2 25 ....... 1......2–23........................000 Other administrative costs ....................... Gross profit.....................150 69..... $131........ Inc...050 Administrative salaries.......350 Total marketing and administrative costs ........... Marketing and administrative costs: Depreciation (20% of total) ..........4% of total) .. Less: Cost of goods sold (per statement) ................................ 16............... light and power (22....350 Marketing costs ............. Operating profit ...................................

........80 at 1.....................500 x 1....... 11....4).......800 = $116............................ 9......100 x 1............ 93.800 Property taxes on building . Variable costs: Direct materials used ($35....600 Depreciation on plant and equipment....... $215.............................000 + $7..000 units 1.... $163.........94 Unit variable cost = $163..520 1..................500 + $8...200 + $66.4) .....4)................. 5/e ..............000 x 1.......940 Total variable costs......80 1.....100 Plant utilities (other than power to run plant equipment) ...200 x 1.............100 Indirect materials and supplies ($8........280 Direct labor ($66.. 52...... $ 49........ 1997 26 Cost Accounting...500 Total fixed costs............. 9....520 Fixed costs: Supervisory salaries .000 1.........................000 Total costs for 1......................000 © The McGraw-Hill Companies...........400 units ..400 units = $153....520 Unit cost = $215... 4.......2–24...........) Cost behavior for decision making: Excalabur Company.. Inc..4) ...400 units as at 1.................................000 units: Unit variable cost = $35...100 = $116.. 6..............................400 units Check to see if variable cost per unit is the same at 1.............. 31.......................200 Power to run plant equipment ($7.........520 = $116.. (20 min........

800 ÷ 1. (20 min.2–25.000 = $31.100 + $9.000 units) $ Variable Costs 163.500 Fixed cost = $52.80 per unit = ($163. Fixed costs = $52.520 116.520 ÷ 1.000 = $31.500 $ 52.400 units) or ($116. 1997 Solutions Manual.800 + $6. Chapter 2 27 .800 1000 1400 2000 Volume © The McGraw-Hill Companies.) Cost behavior: Excalabur Company. Inc.800 + $6.100 + $9..600 + $4.000 Fixed costs Volume Variable costs = $116.600 + $4.

(30 min.000 ÷ 1. d. 1997 28 Cost Accounting. Variable manufacturing cost: $120 + $70 + $18 = $208 Variable cost: $120 + $70 + $18 + $16 = $224 Full absorption cost: $120 + $70 + $18 + ($72.000 ÷ 1.200 units) a.200 units) = $268 Full cost: $120 + $70 + $18 + $16 + ($72.200 units) = $324 © The McGraw-Hill Companies.2–26.000/1. 5/e .000/1.000/1. Direct materials = $120 Full-absorption cost = $268 Direct labor = $70 Variable manufacturing costs = $208 Full cost of making and selling the product = $324 Variable manufacturing overhead = $18 Fixed manufacturing overhead = $60 ($72.200 units) + ($48.200 units) Variable marketing and administrative = $16 Unit variable cost = $224 Variable marketing and administrative = $16 Fixed marketing and administrative = $40 ($48. c. Inc.. b.) Components of full costs.

(15 min.2–27. Inc. Period costs for the period: $48. 1997 Solutions Manual.200 units) = $268 b. Product cost per unit: $120 + $70 + $18 + ($72.) Components of full costs.000/1.200 units) = $67.200 © The McGraw-Hill Companies.. Chapter 2 29 . a.000 + ($16 x 1.

Variable cost: $175 + $150 + $100 + $40 = $465 3.000 units) Unit variable cost = $465 Variable marketing and administrative = $40 Variable marketing and administrative = $40 Fixed marketing and administrative = $65 ($65.000/1.000 ÷ 1.000 units) + $40 = $605 © The McGraw-Hill Companies. 1997 30 Cost Accounting.000 units) + ($65. (30 min. a. Variable manufacturing cost: $175 + $150 + $100 = $425 2. Full-absorption cost: $175 + $150 + $100 + ($75. Direct materials = $175 Full-absorption cost = $500 Direct labor = $150 Variable manufacturing costs = $425 Full cost of making and selling the product = $605 Variable manufacturing overhead = $100 Fixed manufacturing overhead = $75 ($75.2–28.000/1. Full cost: $175 + $150 + $100 + ($75.) Components of full cost: Young Company. 5/e .000 units) = $500 4. Inc.000 ÷ 1.000 units) 1..000/1.

2–28.000 units): Variable Manufacturing Cost Variable Marketing & Administrative Cost Fixed Manufacturing Cost Contribution Margin = $185 Profit Margin = $45 Fixed Marketing & Administrative Cost Excess of Price Over Unit Full Cost $425 $40 $75 $65 $45 Sales Price = $650 Variable Cost Per Unit = $465 © The McGraw-Hill Companies. Inc. Chapter 2 31 .000 units): Variable Manufacturing Cost Fixed Manufacturing Cost Variable Marketing & Administrative Cost Gross Margin = $150 Profit Margin = $45 Fixed Marketing & Administrative Cost Excess of Price Over Unit Full Cost $425 $75 $40 $65 $45 Full Cost = $605 Full Manufacturing Cost Per Unit = $500 Sales Price = $650 Profit margin and contribution margin (per unit at 1. Profit margin and gross margin (per unit at 1.. 1997 Solutions Manual. (continued) b.

Variable costs for month + (Fixed costs for the month/hours) = Cost per unit (a unit is an hour billed. Inc.) Components of full costs: Service organizations: Joe’s Tax Service a.) $20 + ($55. Price per hour – Variable costs per hour = Contribution margin $35 – $20 = $15 © The McGraw-Hill Companies.000/20. Price per hour – Cost per unit = Profit margin $35 – $22. 5/e .75 b. 1997 32 Cost Accounting. (20 min.000 hours) = $22.75 = $12.2–29. 1..25 2.

(30 min.000 2.2–30.000 $ 10.000 110. b. utilities.000 $ 10.000 80.000 8.000 20.000 10.000 8.000 $ 30. In addition.000 (10. The store manager can implement quality control procedures to identify defective goods as they reach the store rather than waiting for customers to complain or return the defective goods.000 *A portion of these costs might be nonvalue-added if they can be reduced by reducing nonvalue-added activities.000 $(20.000 40. the store manager can contact the studios that produce the videos and ask for improved quality (the studios may have the upper hand if they are the only ones distributing the videos—especially the popular videos!) © The McGraw-Hill Companies.000 10.000) 90. and other store costs* Operating income/(loss) Valueadded activities $200. Inc. Chapter 2 33 .) Value income statement: Top Videos a. 1997 Solutions Manual.000 110.000) 32.000 20..000 Total $200. Top Videos Value Income Statement For the month ending August 31 Nonvalueadded activities Sales Revenue Cost of merchandise: Cost of goods sold Defective goods destroyed Gross margin Operating expenses: Employee salaries and wages Supervisory salaries Rent.

utilities.000 $ 3. 1997 34 Cost Accounting. The restaurant manager can buy better quality goods from suppliers to prevent food waste in the kitchen.000 9.000 $ 3.000 34. (30 min. The chef can also inspect the prepared food before taking it to the customer to reduce the number of returned meals. b.000 *A portion of these costs might be nonvalue-added if they can be reduced by reducing nonvalue-added activities.000) 96..000 (5.800 $(15.000 12.000 2.000 34. and other store costs* Operating income/(loss) $130.2–31.800) 51.000 Total $130.) Value income statement: Atul’s Restaurant a.000 3.000 91. Inc.200 16.000 10. Atul’s Restaurant Value Income Statement For the month ending November 30 NonvalueValueadded added activities activities Sales Revenue Cost of food and beverages Food and beverages Food returned by patrons Food rejected in the kitchen Gross margin Operating expenses: Employee salaries and wages Supervisory salaries Rent.000 1.000 16.800 60. 5/e .000 $ 18. © The McGraw-Hill Companies.000 2.

1997 Solutions Manual. Chapter 2 35 .000 12.400 8.000 9.000 2.000 38.000 *A portion of these costs might be nonvalue-added if they can be reduced by reducing nonvalue-added activities.400) 6.000 $ 9.000 9.000 $(9. and other store costs* Operating income/(loss) 4..000 9.400 (4. b. © The McGraw-Hill Companies. The ice cream shop manager should consider purchasing a backup generator for future power outages—especially if these outages are common.000 22. (30 min.000 3.400) Valueadded activities $60. utilities.2–32.600 42.000 17.400 Total $60. Tastee Ice Cream Shop Value Income Statement For the month ending July 31 Nonvalueadded activities Sales Revenue Cost of ice cream Gross margin Operating expenses: Employee salaries and wages Supervisory salaries Rent. Inc.000 $18.) Value income statement: Tastee Ice Cream Shop a.

Prime costs = direct materials + direct labor Direct materials = beginning inventory + purchases – ending inventory = $9.500 Direct labor is given as $15.500 + $15.000 (from d above) + $13. Inc.000 = $4.500 d.500 + $15.000 c.000 = $59.000 + $20.500 + $57.500 b. 1997 36 Cost Accounting.000 – $7. The answer is (4).000 = $37.. The answer is (3).500 – $18.000 = $57. The answer is (1).000 = $54.000 e.Solutions to Problems 2–33.) Cost concepts: Multiple choice.500 © The McGraw-Hill Companies. Cost of Cost of Beginning Ending finished goods = goods + finished goods – goods sold manufactured inventory inventory = $59. The answer is (2). a. Cost of goods manufactured = beginning WIP + total manufacturing costs – ending WIP = beginning WIP + direct materials + direct labor + manufacturing overhead – ending WIP = $4. Conversion costs = direct labor + manufacturing overhead Conversion costs = $15.000 + $20. (30 min.000 + $21.500 = $22.500 + $22.500 (from a above) + $15.000 Prime costs = $22.000 – $3.000 +$20. The answer is (1). Total manufacturing costs = direct materials + direct labor + manufacturing overhead = $22. 5/e .500 (from c above) – $3.000 = $35.

The answer is (1) full absorption cost = fixed and variable manufacturing overhead + direct labor + direct materials = $15 + $30 + $10 + $40 = $95 e. The answer is (2) variable cost = all variable unit costs = $5 + $30 + $10 + $40 = $85 d. The answer is (4) full unit cost = all unit fixed costs + all unit variable costs = $20 + $15 + $5 + $30 + $10 + $40 = $120 c. Inc.2–34. 1997 Solutions Manual.. a. Chapter 2 37 . Prime cost = direct labor + direct materials = $10 + $40 = $50 © The McGraw-Hill Companies. (30 minutes) Cost Concepts: multiple choice. The answer is (3) variable manufacturing cost = manufacturing overhead + direct labor + direct materials = $30 + $10 + $40 = $80 b. The answer is (2).

gross margin = sales price – full absorption cost = $160 – $95 = $65 j. 5/e . As the number of units increases (reflected in the denominator). fixed manufacturing cost per unit decreases. Inc. The answer is (4). The answer is (1).. profit margin = sales price – full cost = $160 – $120 = $40 h. The answer is (2).2–34. © The McGraw-Hill Companies. conversion cost = direct labor + manufacturing overhead = $10 + ($30 + $15) = $55 g. contribution margin = sales price – variable costs = $160 – $85 = $75 i. The answer is (2). The answer is (4). (continued) f. 1997 38 Cost Accounting.

Finished goods Cost of goods Cost of Finished goods + – = beginning inventory manufactured goods sold ending inventory $254.) Find the unknown account balances.600 © The McGraw-Hill Companies.000) d.000 = Finished goods ending inventory $173.400 (= $12.400 – $8.. a. Direct materials used = $266.000 = $12.2–35. Direct Direct Total + + Manufacturing = materials used labor overhead manufacturing costs Direct + $173.000 + $248.000 + Direct materials used. (40 min. Materials beginning + Purchases – Materials = Materials inventory used ending inventory $45.400 Purchases = $19.000 = $679.200 – $760.000) materials used c.400 – $234.600a (= $679. Inc.000 + $240.600 materials used Direct = $266. 1997 Solutions Manual.000 – $240. Materials Materials Materials + Purchases – = beginning inventory used ending inventory $8.600 – $173. Chapter 2 39 .200 = Materials ending inventory aAlso can be found from the Direct Materials Inventory account: $24.600 + $262.400 = Finished goods ending inventory b.200 = Materials ending inventory $ 59.000 + Purchases – $15.200 + $679.000 + $15.000 = $20.

Direct materials Direct Manufacturing Total + + = used labor overhead manufacturing costs $234.200 – $1.200 beginning inventory Work in process = $76.600 = $1.526.874.518.874. 5/e .526. Work in process Total manufacturing Cost of goods Work in process + – = beginning inventory costs manufactured ending inventory Work in process + $1.600) g.485.300 (= $3.518.600 Cost of goods sold = $1. Inc..620 (= $85.526.800 labor Direct = $862. Revenue – Cost of goods sold = Gross margin $3.359.526.220) beginning inventory f.2–35.600) labor © The McGraw-Hill Companies.900 – $1.800 – $234.220 = $85.900 – Cost of goods sold = $1.800 + $1.200 + Direct + $430.800 – $1.200 – $430.359.000 (= $1. 1997 40 Cost Accounting. (continued) e.

.....600 Company 2 $12...... Manufacturing costs: Direct materials: Direct materials inventory..........000 679....... $ 11........200 Note: Superscript letters cross-reference to missing amounts in the problem.............. (continued) (Extra items.560 12.... 286......600 $56. Direct labor ........ December 31 .400(c) 27........... 1997 ........................... Total costs of work in process during the year ..... December 31 ........800 60.....) Some instructors require Statements of Cost of Goods Sold which we include here: Company 1 Work in process.................000 240....400 12...................800 4.... Cost of goods available for sale .. Less finished goods.....000 23...200 12.......000 $15....600 Less materials inventory..... 262..600 Direct materials purchased ...... January 1................... $ 24........ Total manufacturing costs.............400 173..400(a) $760.......000 Direct materials available for use ...2–35..................560 58.................... Add finished goods.. Cost of goods sold...600(b) 173...200 19....200 254.......................... Less work in process......600 691..................... January 1 ..................... December 31.... Inc.......000 Materials used .........200 933... January 1................. Cost of goods manufactured this year ......... Manufacturing overhead ..800 58...........400 $266........560 $ 8....000 2... 20.....000 679...000 70..........................000 19................... 41 © The McGraw-Hill Companies..

400 Less materials inventory..........................420 Less work in process......000(g) Manufacturing overhead ......... 1... December 31 ... 59..480 Cost of goods available for sale ................................200 Cost of goods manufactured this year ..... (concluded) (Extra items...220 Add finished goods................. 293.. $ 45............620 (e) Manufacturing costs: Direct materials: Direct materials inventory.........603.....400 Cost of goods sold......400 Direct materials available for use .. 248.852......800 Total costs of work in process during the year .............000 Direct materials purchased .) Company 3 Work in process.............. $ 76............................. Inc.....518..........526................485. 367............ 1.............200 Direct labor .........300 (f) © The McGraw-Hill Companies. $1....700 Less finished goods.......... 85......... $234........................ 430.......... 1997 42 ... January 1 ........ December 31 ......... 1......................600 Total manufacturing costs.................200(d) Materials used ........................ 1. January 1........................................ January 1... 862.............. 334............... December 31............2–35...

450 manufactured (= $2.200 = $4. Sales revenues – Cost of goods sold = Gross margin $103.220 – $27.600 – $16.550 – = $ 3.400 – $27..2–36.380 (= $4.300) beginning inventory b.100 + $15.600 beginning inventory Materials = $ 2. Finished goods Cost of goods Cost of Finished goods + – = beginning inventory manufactured goods sold ending inventory Finished goods + $27. Inc.800 (= $3.100 – $15.700 + $55.250 = Gross margin d. 1997 Solutions Manual. Chapter 2 43 .400 beginning inventory Finished goods = $ 4.050 = Gross margin $47. Work in progress + Total Work in – Cost of goods = beginning inventory manufacturing manufactured process ending costs inventory Cost of goods $2.300 = $3.700 + $55.300 – $56.) Find the unknown account balances. (40 min. Materials + Purchases – Materials = Materials beginning inventory used ending inventory Materials + $16.800) c. a.220 + $27.800 manufactured Cost of goods = $54.200) beginning inventory © The McGraw-Hill Companies.550 – $3.

Used + End.200) materials used f.600 – $3. used = $12. Bal.100 overhead Manufacturing = $117.700 + Manufacturing = $308.600 © The McGraw-Hill Companies..800 – $7. Bal. Sales revenue – Cost of goods sold = Gross margin Sales revenue – $27. e.400 + $27. $3. Inc. (continued) Direct labor Total + Manufacturing = manufacturing overhead costs Direct + materials used Direct + $ 3.200 = $23.300 overhead Direct labor aAlso found from Direct Materials Inventory account: Beg. + Purchases = Mat.200) g.000 = Mat.800a + $7. used + $2. 1997 .600 (= $16. Direct + materials used $66.2–36.100 Total + Manufacturing = overhead manufacturing costs + $124.900 Mat.600 materials used Direct = $12.500 + $12.600a (= $23.400 Sales revenue = $43.200 = $16.

......... Cost of goods sold.... 13......... 3.900 $12........ Manufacturing costs: Direct materials: Direct materials inventory............ December 31 ............. 18..... (continued) (Extra items..........................600 Materials used ...700 Company 2 $ 6.. 1997 .................. Cost of goods available for sale .. Inc........ Less work in process................... $ 2............ 16..............720 $ 3. Total costs of work in process during the year ................... January 1.100 Direct materials available for use ... Add finished goods..2–36.............800 54........220 4....320 3.....000 15..250 3.300 Direct labor .......100 27......600 4....... January 1.900 56....600(e) 3....450(b) 1.. December 31...... Here they are: Company 1 Work in process............ 15...............................500 2.....800(a) Direct materials purchased ..200 45 © The McGraw-Hill Companies..........900 Less materials inventory........050 23.200 55.550 58....450 Manufacturing overhead ... 26....380(d) 31... January 1 .800 7..) Some instructors assign the Cost of Goods Sold Statements............. $ 2.........600 30. Cost of goods manufactured this year .......500 12...800 Total manufacturing costs............ December 31 ........ Less finished goods.350 300 $56........400 $27......

..... Less materials inventory.100 124.......... December 31.................................. Manufacturing costs: Direct materials: Direct materials inventory.................. December 31 .. Total manufacturing costs........ Cost of goods manufactured this year . 1997 ........700 117.........730 313.......400 $302...100 $ 66..... Direct materials purchased .300(g) 308..............000 64.............. Inc.200 14........ Materials used . (concluded) (Extra item.................... January 1...............................................570 © The McGraw-Hill Companies... Add finished goods........ Less work in process.. December 31 ............ Manufacturing overhead .... Less finished goods.100 390..... $ 82. Direct materials available for use ..........970 28.................................... January 1 ......................200 80...... Cost of goods sold......) Company 3 Work in process............................................200 330................... Direct labor .......500 76.......400 $16........... Total costs of work in process during the year ...... Cost of goods available for sale ............... January 1................770 17..................2–36....................

.2–37....... Cost of goods sold (to income statement).. (30 min...........300 495....950 $191........ 18......... Used + End.............. Cost of goods manufactured this year ...... 16........... Add finished goods.....950 Maintenance on factory machines ....550 = $191.......... December 31 . January 1 .000 104....... Bal.............. 15............. January 1.... Bal....... 31...... Chapter 2 47 . Used + End.......... December 31 ............. 180..... = Mat.......... To obtain it...... Bal.................... Garcia Mesa Company Statement of Cost of Goods Sold For the Year Ended December 31 Work in process. Total cost of work in process during the year...) Reconstruct financial statements: Garcia Mesa Company................ Beg. aMaterials $ 12....500 = 7/9 times $40.000 535............. + Purchases = Mat............... but this number is not.....850 45. Total manufacturing costs...... 9.......... Manufacturing overhead: Indirect labor .... 42............ light and power..... – Purchases $53.....850 40.....200 508.....050 + 42............050 200.....500 © The McGraw-Hill Companies.. $ 53........................... Cost of goods available for sale ..... 6........ 1997 Solutions Manual.. Inc.........500 – $180.. Less work in process.. Less finished goods........... Direct labor.. Bal...........000 Direct materials available for use .......... 6....................500b Miscellaneous factory expenses ...................850 used is given.000 b $31...... Beg...........000 $490.050 Insurance on factory equipment......550a Direct materials purchased ....... Manufacturing costs: Direct materials: Direct materials inventory.150 495... January 1..600 Building depreciation.150 12............... 233.............. December 31.......550 Total overhead ...500 Materials used ....000 Plant heat..........500 Taxes on manufacturing property ..550 Less materials inventory...........

...............................................................500 © The McGraw-Hill Companies......... $ 9...550 times $40.....500 Distribution costs ........... a2/9 $812...................................000a Administrative salaries ...... Gross margin .... 4................ 5/e ................500 490... 800 Legal fees...........................................850 321...................................................100 Total operating costs .........................2–37................100 $263....650 58.... Less: Cost of goods sold (per statement) .. 18...... (continued) Garcia Mesa Company Income Statement For the Year Ended December 31 Sales revenue .......700 Marketing costs ..... Inc......................... Building depreciation ............................. 1997 48 Cost Accounting............................................... 25...... Operating profit ..........................

. © The McGraw-Hill Companies....000) Equipment depreciation .... Inc..............000 higher 230..........2–38.000) Fixed cash expenditures...000) 0 (125....000) 0 a $850..600....000) Loss from equipment write-off ...500) does not cover cash outflow for equipment rental........ (150. (750......000) 0 (750..... (150..000 Rent Equipment $1. $375.000 accumulated depreciation for one year (equipment was purchased on January 1 of the year)...........000) 0 (150... b..... $1............. Next year’s income statement: Baseline (Status Quo) Revenue .500) 0 (125. (30 min................ (125..........000) $492......000) (200.. $1....... the company should not rent the new machine because net cash inflow as a result of installing the new machine ($160...500 lower 150...000 aEquipment Rent Equipment $1...000) (712.... (125..000) Fixed (cash expenditures) ......000 Operating costs: Variable ........... This year’s income statement: Baseline (Status Quo) Revenue .............. 0 Operating profit (before taxes) ..... Inc.000 lower 0 117..................... 0 Variable ..............................000) Equipment depreciation .. (200...........600............000) Other depreciation ......... (750...000 Operating costs: Equipment rental ..000 Difference 0 (200.......500 Difference $160.. 1997 Solutions Manual..760..000) Other depreciation . $ 375. Despite the effect on next year’s income statement....500 higher c....................000) $ (475.......... Chapter 2 49 ..600........................000 (230.....) Analyze the impact of a decision on income statements: Micro..........000) $850..000) Operating profit ... (200............000 lower write-off = $1 million cost – $150..........000 + $37......................000 lower (850... a....000 higher 0 37...................

.

. Transfers out are goods transferred from one department to another (for example. Inventory levels are kept to a minimum. Continuous flow processing is used when a single product is mass produced in a continuing process. A process costing accounting system is used when identical units are produced through a series of uniform production steps. or any others that are mass produced in a continuing process. The basic cost flow model appears as follows: Beginning balance + Transfers in – Transfers out = Ending balance Beginning balance is the balance of inventory at the beginning of the period. costs are assigned (backflushed) to any remaining inventory on hand. raw materials would be goods transferred in to work in process) for the period. 3–6. gasoline.Chapter 3 Cost System Design: An Overview Solutions to Review Questions 3–1. © The McGraw-Hill Companies. 3–2. paper. The perpetual method of inventory accounting requires an ongoing record of transfers-in and transfers-out for all inventory accounts. Management is able to determine inventory amounts at any point in time. Inc. Chapter 3 51 . 3–4. Backflush costing is typically used in companies that use just-in-time production processes. Operation costing is used when goods have some common characteristics (process costing) and some individual characteristics (job costing). Transfers in represent inventory purchased or transferred in from another department (for example. Ending balance represents the amount of inventory in a department at the end of the accounting period. 1997 Solutions Manual. 3–5. A job costing accounting system traces costs to individual units or to specific jobs (typically custom products). See Panel A of illustration 3–3 for a detailed description of the flow of costs through T-accounts using a traditional costing system. 3–3. Production costs are recorded directly in costs of goods sold when incurred. work in process would be transferred out to finished goods). The physical method of inventory accounting requires that a physical count of inventory be performed to determine inventory amounts. Examples would include products such as paint. At the end of the accounting period. Traditional costing systems attach costs to the product at each step of the production process.

3–7. The perpetual method of inventory accounting requires an ongoing record of transfers-in and transfers-out for all inventory accounts. The costs of implementing the system should be less than the benefits derived from the system (i. The production process is improved as quality becomes increasingly important. An example of finding one unknown is if the beginning balance is known (from the previous period ending balance). better decisions). © The McGraw-Hill Companies. It is not clear which category a new sporting goods store falls under.e. The basic cost flow model is as follows: Beginning balance + Transfers in – Transfers out = Ending balance This model is used for finding one unknown or for comparing perpetual inventory system output to a physical inventory count. Conversely. Different cost information is used for different purposes. The time to produce a product is reduced—allowing for more flexibility in meeting customers’ demands. transfers in are known. The cost system should meet the needs of the users (the decision makers). 2. 3–10. The memo should include a description of the two methods. 3–9. Inventory levels are reduced (thus reducing carrying costs). However. 5/e . The three important characteristics of a JIT system are as follows: 1. physical inventory systems are more appropriate for low volume retailers. There are three important points to consider: 1. 1997 52 Cost Accounting. The cost system must provide the appropriate data for its intended purpose. 2. Inc. 3–11. 3. Cost information for managerial purposes must meet the cost-benefit test. The memo should also include a recommendation with reasoning to back up the recommendation. Solutions to Critical Analysis and Discussion Questions 3–8. Customer costing compares the costs of serving a customer to the revenues generated from that customer.. 3. a perpetual inventory system may be appropriate. if high growth is anticipated. Management is able to determine inventory amounts at any point in time. and ending inventory is counted physically—and we are asked to find the cost of goods sold for the period (transfers out). The physical method of inventory accounting requires that a physical count of inventory be performed to determine inventory amounts. Marketing managers are able to use this information to assess the profitability of each customer. Perpetual inventory systems are more appropriate for high volume retailers and are more costly to maintain than physical inventory systems.

with minimal setup time. JIT is effective only if the company has a backlog of orders. Ending inventory can be determined two ways. JIT production can work well with companies that have very efficient purchasing and production processes. If fraud occurs in the physical count process. Inc. Reasons to agree with approach: If the customers are not contributing to company profits. Once the inflow of brake parts stopped at most of GM’s plants. If this company has any consistent problems in these areas. then the cutomers should be eliminated. if customers are accustomed to receiving products immediately upon being ordered. with JIT it must correct the problem before the products are transferred to the next department. As a result. John may be offering discounts on his products or providing increased customer service. Also. This will increase overall company profits. 1997 Solutions Manual. © The McGraw-Hill Companies. JIT will likely increase the waiting period since no finished goods inventory is maintained. JIT will not work. Flexible manufacturing enables companies to change from production of product A to product B quickly. Just-in-time eliminates inventory where spoiled goods and defects can be stored. Second. If a department is making defective products. these plants were forced to shut down. you can physically count the inventory and determine total cost based on the count. Thus. To entice these customers to do business with the company. you can use the basic cost flow model (BB + TI – TO = EB) to verify the results of costing out the physical count of inventory. 3–15. 3–16. Reasons not to agree with approach: The marketing manager may be building a relationship with new customers hoping for a long-term payoff as these customers grow. If production is shut down for long periods while awaiting orders. JIT could be a disaster. First. This reduces the need for inventories. 3–13. there might be strategic considerations that outweigh the financial considerations. GM was trying to minimize inventories while inplementing JIT.3–12. brake parts were in short supply at most of GM’s plants before the strike began. Chapter 3 53 . 3–17. In addition. 3–14. it should be detected using the basic cost flow approach..

$150.4 million = .4 million = EB EB = $157.) Basic cost flow model: Boeing Company a. Inc.000 3–19. $435. $394 million = $104 million + $164 million + (.000 (see items 2 & 3) c. BB + TI – TO = EB 0 + $394 million – $236.7 x $180 million) b. $410. (20 min. (20 min.000 – $125.Solutions to Exercises 3–18. $125.) Basic cost flow model: Singh Company a.000 (see item 5) b. 5/e .000 (see item 5) d. $236.6 million © The McGraw-Hill Companies..000 + $410.000 X = $150.000 + $410.000 + $10.000 = $400.000 – X = $125.000 BB + TI – TO = EB $150.6 x $394 million c. 1997 54 Cost Accounting.000 X = $435.

000 X = $168.000 = $770.000 = $312.600 X = $49.400 – $14. (20 min. (20 min.000 – $71.200 + $44.000 + $560.000 = $12.000 – $64. $78. $390.000 X = $42.000 X = $62.000 + $700.000 – © The McGraw-Hill Companies. $71.000 + $700.) Basic cost flow model.200 X X X = $64.) Basic cost flow model. $312.000 + $160.800 X X X = $256. Based on the basic formula: BB + TI – TO = EB a.400 X = $12.000 b.000 + $128.3–20. Based on the basic formula: BB + TI – TO = EB a.000 – $190.000 = X X = $140.000 – 3–21. $56.000 + $140. $14.600 – $56.000 = $616. $34.000 = $78. Inc.000 + $140.000 – $38.) Basic cost flow model.000 c.000 + $220.000 – $152.000 – 3–22.000 = $62.800 + X – $176.000 = $49.000 = $390. Chapter 3 55 . Based on the basic formula: BB + TI – TO = EB a.000 + X – $220.000 c..000 + $32.000 = X X = $112.000 X = $211.200 + X – $44.000 = $154. (20 min.000 + $560. $136.000 b.000 = X X = $28.000 – $256.000 – $320.800 + $176.000 c.000 b. $170. 1997 Solutions Manual.000 X X X = $320.

000 $ 5.500 + $3.300 d.) Basic cost flow model: Tower Designs.000 – $10.850 – $3.200 + $29.300 – $41. BB + TI – TO = EB $23.500 + $8. Cost of goods charged to Cost of Goods Sold comes from Finished Goods: $41. Materials are transferred from Direct Materials Inventory to Work in Process Inventory: $10.500 + $29.750 $10.500 + TIOverhead – $29. BB + TI – TO BB + $9.250 a. Inc.750 – $9.500 © The McGraw-Hill Companies. c.000 e.500 – $8.850 TIOverhead + $4.000 = EB EB = $11.300 = $4. 5/e .500. Goods are transferred from Work in Process to Finished Goods: $29.150 f.000 BB BB b. BB + TIMat’ls + TI Labor + TIOverhead – TO = EB $3.. = – = = EB $10.300 TIOverhead = $12.3–23.500 = $3.000 + $10. 1997 56 Cost Accounting. (20 min.

250 – $27.550 TIOverhead = $14.550 – $9.500 + $25.500 – $25.600 + $87. Materials are transferred from Direct Materials Inventory to Work in Process Inventory: $31. Goods are transferred from Work in Process to Finished Goods: $87. Chapter 3 57 . BB + TI – TO = EB BB + $27.900 d..) Basic cost flow model: Bridal Wear Corp.900 TIOverhead = $36. 1997 Solutions Manual. a. BB + TIMat’ls + TILabor + TIOverhead – TO = EB $9.500 + $87.500 + $11. BB + TI – TO = EB $69. c.900 – $123.000 e.500. Cost of goods charged to Cost of Goods Sold comes from Finished Goods: $123.000 – $31.500 = $11.250 BB = $31.3–24.450 f.000 + $31.750 b.000 = EB EB = $34.500 + TIOverhead – $87.900 = $14. Inc.000 BB = $15. (20 min.000 – $31.500 © The McGraw-Hill Companies.

0002 6....000 = $120... 234.............. Trail Rite Sales revenue ......000) M&A costs...000 = $360...250 = $200..000 x 70% 4$48.....250 1$360.7509 $ 58....7507 Operating profit ....0006 120..000 15..$360.000 10.0006 74.000 x 60% = $600...........0001 Cost of goods sold .000 = $360.5008 $(16.000 = $200........ $(16.................0004 Gross margin . 1997 58 Cost Accounting....000 = $120.....000 x 5% 3$210...000 x 40% 5$6........ (20 minutes) Customer Costing: Powertools.. Inc...000 Trail Ways $30.000 2$20.......000 = $600....000 x 10% 6$90..000 x 10% 3$140...... Larry Sales revenue .000 x 55% 7$8. $ 47..000 = $360.000 x 65% 5$36..........000 x 20% = $200.000 Curly $20....000 15.0005 14....000 x 25% 8$10.... 48... 78..............250 = $600.......000 x 25% 7$78.7509 $104.. (20 minutes) Customer Costing: Custom Trailers Inc. 126...500 = $105.000 x 75% 8$10. 8............0002 36..000 x 45% 3–26.........750 = $35. 5/e ..0004 Gross margin ....0001 Cost of goods sold ..000) 10.000 2$30.....500 = $35...000 x 35% 4$234.....000 x 5% 6$66.500 Moe $140.000 x 10% 9$15....$ 40......000 = $120..3–25.......7507 Operating profit ...000 M&A costs........................750 = $105..0003 90...0003 66....0005 (6..750 = $35....750) 1$40.500) UTrail $210. (8...000 x 15% © The McGraw-Hill Companies.000 x 30% 9$15..5008 $ 3.750 = $105. Inc............

..............) Backflush costing: Carson Biotech................ Cost of Goods Sold ..) Backflush costing: Interplay Systems............................... Journal entries: Cost of Goods Sold ...................... Work in Process Inventory .200 © The McGraw-Hill Companies..........000 16........ (20 min..............................................................160 14. Journal entries: Cost of Goods Sold .......... Cost of Goods Sold................... 25....... Chapter 3 59 ................000 Accounts Payable ... (20 min................ Cost of Goods Sold ....3–27.................000 Accounts Payable .....................................................200 25...............................................000 50..........000 Accounts Payable .. 1997 Solutions Manual......160 3–28.................. 48.......... 94.......................... Manufacturing Overhead Applied ..................000 Cash ..............000 3..000 12............................................. 14.... Inc............................................. 8......000 20. Inc..... Wages Payable.........000 44................... 3.............................. Work in Process Inventory ........ Cost of Goods Sold.................. Wages Payable....................000 8....... Inc....................

840 Cash 16.160 © The McGraw-Hill Companies. O.160 3. Inc.) Comparing backflush and traditional costing: Carson Biotech.160 Work in Process Inventory 3.000 Mfg.000 Backflush Costing Accounts Payable 14. Applied 20.000 Mfg. 1997 60 Cost Accounting..000 Cost of Goods Sold 62.H.160 58.H. Inc.000 Wages Payable 12.000 3.000 Materials Inventory 14.000 48. (30 min. O.000 Work in Process Inventory 14.3–29. Traditional Sequential Costing Accounts Payable 14.840 Cost of Goods Sold 58.000 14.840 58.840 Finished Goods Inventory 58.000 Cash 16.000 3. Applied 20.000 Wages Payable 12. 5/e .

000 Wages Payable 44.200 Finished Goods Inventory 110.200 © The McGraw-Hill Companies.3–30.) Comparing backflush and traditional costing: Interplay Systems.800 Cost of Goods Sold 110. (30 min. Inc.200 8.800 Backflush Costing Accounts Payable 25.200 Cost of Goods Sold 119.000 Work in Process Inventory 8.800 50.000 44. 1997 Solutions Manual.800 110. Traditional Sequential Costing Accounts Payable 25.000 Materials Inventory 25.000 110.000 Wages Payable 44. Inc. Chapter 3 61 .000 25.000 50.000 8..000 Work in Process Inventory 25.000 8.000 50.

5%) is well below Moe’s profit margin percentage (41. will they be profitable in the future? Is the company growing?).e. The marketing manager for Custom Trailers Inc. Although Trail Rite and UTrail are both profitable. 5/e . should look at Larry carefully given that Larry is not a profitable customer.e.. The first question should be “are there any strategic implications if we drop Trail Ways as a customer?” (i. 3–32. Inc. Although Curly and Moe are both profitable. Trail Ways’ profit margin percentage (13.6%). should look at Trail Ways carefully given that Trail Ways is not a profitable customer. 1997 62 Cost Accounting. Curly’s profit margin percentage (17. The marketing manager for Powertools Inc.1%) is well below UTrail’s profit margin percentage (49. Then. will he be profitable in the future? Is his company growing?). Custom Trailers Inc.Solutions to Problems 3–31. may decide to focus on increasing sales to UTrail given their relatively high profit margin. © The McGraw-Hill Companies. the marketing manager should consider whether revenues can be increased and/or cost decreased to make this customer profitable. Then.6%). the marketing manager should consider whether revenues can be increased and/or costs decreased to make this customer profitable. The first question should be “are there any strategic implications if we drop Larry as a customer?” (i. Powertools may decide to focus on increasing sales to Moe given his relatively high profit margin percentage.

.......................... Wages Payable........ 100.......... Inc.................... 1997 Solutions Manual.......... Inc.... 50............................................................... Chapter 3 63 ....000 Finished Goods Inventory ........000 75..... 250..000 Accounts Payable ....................................) Backflush costing: Creative Designers.000 © The McGraw-Hill Companies.....000 Cost of Goods Sold.......000 150...... Journal entries: Cost of Goods Sold ... 25.............. Work in Process Inventory ............3–33..................... (20 min..........

3–34. Inc.000 25.000 50.000 Backflush Costing Accounts Payable 100.000 © The McGraw-Hill Companies. 5/e .000 50.000 Finished Goods Inventory 225. 1997 64 Cost Accounting.) Comparing backflush and traditional costing: Creative Designers.000 Cost of Goods Sold 175.000 175.000 25. Inc.000 Wages Payable 150.000 Work in Process Inventory 25.000 Wages Payable 150.000 Work in Process Inventory 250. Traditional Costing Accounts Payable 100.000 Finished Goods Inventory 50.000 Cost of Goods Sold 250..000 75.000 225. (30 min.

Inc. but should recognize the difference between keeping a stock of items that are replenished as customers order them (perpetual approach) compared to looking at inventory from time to time to see what needs to be ordered (the supply cabinet approach). © The McGraw-Hill Companies. 1997 Solutions Manual.. Chapter 3 65 .3–35. Students should not assume a retail store uses justin-time in a literal sense. Answers will vary. Companies with computerized inventory systems are more likely to log in an order at the point of sale.

000 b from Meter 1.591.000 $260.000 To: Meter Ass y 210.000 x $1.000 WIP Testing materials 10.000 c from Meter 1.000 Case Ass y 350.731.000 200.000 83.000 overhead 160.000 = x $1.000 Case Ass y 40.731. e$95% of WIP Case Assembly costs were transferred out.591. Inc.000 materials labor overhead WIP Meter Assembly 210.000 c $210.125.250 Overhead Applied Meter Ass y 840. T-accounts a.000 = 66 © The McGraw-Hill Companies.000 $260. Traditional cost system: Accounts Payable Materials 260.250 e from Testing to Case Assembly 1.000 a$840.250 $0 to Finished Goods 1.250 $0 Wages Payable Meter Ass y 200.731.731.000 d$90% of WIP Meter Assembly costs were transferred out. c$40.040.000 840.) Compare backflush and traditional cost flows: River City Quality Instruments. 1997 .000 a $125.000 labor 350.040.000 b$160.040.125.000 Testing 90.250 $0 to Cost of Goods Sold 1.000 = $10.000 overhead 40.750 Cost of Goods Sold from Finished Goods 1.000 a Case Ass y 160..250 to Testing 1.000 $40.000 Materials Inventory purchase 260.000 labor 90.000 b Testing 40.000 d Finished Goods 1.000 Testing 10.3–36.000 x $1.000 $260. (45 min.000 WIP Case Assembly materials 40.

040.000 1.3–36.000 Overhead WIP Meter Assembly from COGS 125.750 b Wages Payable to COGS 640. (continued) T-accounts b..000 Materials 640.750 83.000 Labor Overhead 1. © The McGraw-Hill Companies.750 a10% b5% of Meter s costs are still in inventory.000 Cost of Goods Sold 260.000 Applied to COGS WIP Case Assembly from COGS 83. Inc.000 125.000 to Meter to Case 125.040. of Case s costs are still in inventory. 1997 Solutions Manual. Chapter 3 67 .000 a $83. Backflush system: Accounts Payable Materials to COGS 260.

80 + $.3–37.80) = 1.000 x ($1.200 WIP: Packaging 2.600 2.30 + $.600 Conversion Costs 21. a.20 + $.200 a (Culturing) 2.30 + $. (30 min. 1997 68 Cost Accounting.200 b $2.) Compare backflush and traditional cost flows: Davis Agriproducts Inc.600 = 2.200 4.000 4.600 b (Packaging) a $4.30) © The McGraw-Hill Companies.400 WIP: Culturing 4.600 Cost of Goods Sold 51. 5/e . Inc..000 x ($1. Backflush costing Accounts Payable or Cash 29.

80 for conversion costs). Traditional costing Accounts Payable or Cash 29.000 d 4.000 units.30 for conversion costs x 18.400 = $. (continued) b.400 Finished Goods Inventory 44.200 Materials Inventory 29. 69 © The McGraw-Hill Companies.000 units x ($1.800 Materials 3.200 a $37.80 + $.800 b $44.600 WIP: Culturing WIP: Packaging 37. c $26.600 44.600 29.000 = $.600 Materials 26.400 f 2. e $3. 1997 .30 + $. Costs 16.000 units. Inc.600 = $.80 for conversion costs x 20. = 17. f $5.200 0 44.000 units x ($1.200 = 18.3–37.200 b Conversion Costs 21.30 for materials x 20.600 e Conv.20 for materials x 18. d $16.800 a Conv.000 units.20 + $.000 c 37.30)..200 Cost of Goods Sold 44.30 for materials + $. Costs 5.000 = $1.000 units.

Given Brown and Associates’ significant loss.. 1997 70 Cost Accounting.000)........... Totals ..... 5/e ....................000) 3... if salaried supervisors’ costs are allocated to each client......000 (2...... 3..... Davis Agriproducts Inc.000 Sierra University .......... Brown is not expected to grow or provide references for other significant profitable business)..500 Operating Income $39.. there is the potential for arbitrary allocations.......000 37.............. and thus....500 $484.. American River Restaurant .. The company should look closely at three customers—Davis Agriproducts (loss of $2....000) 71.... American River Restaurant (negligible income of $3...000 186...........000 54..... .000)..000 115..000 92. Inc....000 (16............. Brown and Associates ........ 2.....3–38... and Brown and Associates (loss of $18.......000).........000 38..500 $389............ © The McGraw-Hill Companies........... Revenues $130..... Customer Costing: Quality Lawn Care Inc.. inaccurate labor costs for each customer..... The labor costs allocated to each client is straightforward assuming these labor costs are strictly variable costs within the relevant range... Quality Lawn Care should seriously consider raising rates for Brown and/or reducing expenses by cutting back on the work force working on this project or finding lower paid labor..000 $95........... Quality Lawn Care should also consider dropping Brown and Associates as a client.... Ott Investment Advisers .. 1....000 90. If no other strategic factors are involved (for example..000 40......500 Costs $91... It is also difficult to allocate equipment costs to each project given the difficulty of tracking equipment use by each customer. However..............

The applied account is used to facilitate recordkeeping during the period. © The McGraw-Hill Companies. 4–3. except that service firms use less direct materials. and use a cost of services billed account rather than Cost of Goods Sold. 1997 Solutions Manual. This is probably the result of a close linkage between labor worked and indirect costs. Inc. Also. The job costing procedure is basically the same in both types of organizations. 4–2. As a result of allocating improper indirect expenses to research projects funded by the Office of Naval Research.. manufacturers of special equipment. The costs of a product using normal costing are: • • • Actual direct materials cost Actual direct labor cost Predetermined overhead rate x actual allocation base 4–7. 4–6. service firms typically do not show inventories on their balance sheets.Chapter 4 Job Costing Solutions to Review Questions 4–1. 4–4. The most common allocation bases in the US are direct labor hours and direct labor dollars. attorneys. CPA firms. Construction contractors. with the current shift away from labor to increased automation. However. 4–5. The Manufacturing Overhead account is used to accumulate the actual manufacturing overhead costs as they are incurred. Companies using a job order cost system are likely to be performing services or manufacturing products according to specific customer orders and product specifications. aircraft manufacturers. Indirect costs are reimbursed based on a negotiated percentage of direct costs using historical data as a guide. Stanford University’s indirect cost reimbursement rate decreased from 70% of direct costs to 58% (as requested by the Office of Naval Research). this may no longer hold true. and hospitals all employ job order cost systems. Manufacturing Overhead Applied represents the estimate of overhead that is used as a basis for computing work in process and other inventory costs. Chapter 4 71 . A materials requisition is used to document the authorization for issuances of materials from the storeroom while the source document (or receiving slip) is used to indicate quantities and descriptions of materials received.

for example. 5/e . In addition. such seasonal costs should be allocated across all production during the year. If the company prepares bids on jobs. 4–10. many actual costs are not known until after the period is over. O. thus overstating assets and understating cost write-offs. 4–13. Orion assigned the cost of “flops” to good jobs. It may not be logical. 4–12. Yes.Solutions to Critical Analysis and Discussion Questions 4–8. management may later be mislead in estimating the actual costs to complete future. 4–14. Answers will vary. A more accurate approach would be to assign costs only to jobs (movies) they relate to. Thus. the bids may be in error if they are based on the wrong costs. 4–9. regardless of the movie’s profitability. not a formal model. to charge costs of heating the factory only to those jobs produced in the winter months. Profitable jobs may be rejected because errors in cost assignments have made the jobs look unprofitable or less profitable. Inc. 4–11.J. Expect the managers in small construction firms to base their estimates on their own experience. 1997 Cost Accounting. The problem with this recommendation is the actual overhead costs often consist of many different line items. If materials costs are not properly assigned to jobs. Further.’s trial was a job for costing purposes. similar jobs. Rather. 72 © The McGraw-Hill Companies. profit planning may be in error. some of which cannot be easily assigned to jobs. overhead costs are affected by seasons. They would most likely use job costing since their jobs are typically easily identifiable and relatively unique. Answers will vary..

......... 9. Materials Inventory ....... (20 min...... 5...500 12.................... Manufacturing Overhead Applied............................ Materials Inventory ..................................... Chapter 4 73 . 8...............000 8...................................... 10...................................250 13......................... Manufacturing Overhead ........... Accounts Payable..........625 15..........................500 8....................... 1.....................625 6...000 7....................................... 6......................................................... Work-in-Process—Direct Materials........... Work-in-Process—Direct Labor ..............................Solutions to Exercises 4–15.......................000 10....... Work-In-Process—Overhead Applied (12.................500 x 125%) .............250 15......................................... 7........................................ Manufacturing Overhead ... Accounts Payable .000 10................... 2.....) Assigning costs to jobs: Apex..........................500 12........................................... 1997 Solutions Manual............................ Plant and Equipment..... Payroll Payable . Inc...................... 4.000 500 500 7.............................. 3......... Accumulated Depreciation— Property..................................250 6.........................500 13...... Inc.000 10...................................... Manufacturing Overhead . Materials Inventory ................250 © The McGraw-Hill Companies......................... Cash ........ Accounts Payable....................... Cash ... Materials Inventory ......................

9.500 Per Finished Goods 12. Accounts Payable 10. 1997 Cost Accounting.625 10..) Assigning costs to jobs: Apex.525* Balance 1/1 1. 3.000 + $7. 3. 7.525 + $10. 7. Overhead applied Balance 1/31 2. Materials Inventory 18.625 4.000 7.000 13.125 8.4–16.675 Balance 1/1 5. Payroll Payable 6.250 12.000 1. Balance 1/31 500 8. 10. materials 10.000 – $500 – $8. Cash 4.000 5.500 *$26. Inc.250 6.525 = $18.075 15. 5/e . Ind.500 Work in Process 4.525 2. Actual Manufacturing Overhead 500 13. Direct labor 8. (15 min.500 T-account 30.500 74 © The McGraw-Hill Companies. 15. Direct materials 7.000 10. Direct materials 6.250 Manufacturing Overhead Applied 8..000 26. Inc.

.900 – $20.075 = $32. Plant.750 Transfer to Cost of Goods Sold 30.750 Cost of Goods Sold 32.250 Balance 1/1 Goods completed Balance 1/31 32.925 + $17. 1997 Solutions Manual. (continued) Accumulated Depreciation— Property.4–16. and Equipment 9.925 Balance 1/31 © The McGraw-Hill Companies. Chapter 4 75 . Inc.075* 17. Finished Goods 20.900 6.925 *$30.

. COGS ...000 11..... Inc....... 250 x $20= $5.000 Underapplied OH..............600 76 © The McGraw-Hill Companies. Direct labor ..200 Operating profit................... $5... the debit addition to the Finished Goods Inventory account.. 1997 Cost Accounting............... 200 S&A costs .. 5/e ...... $8.....200 – $5..... d..... Sales ....400 $ 6............. $6...............000) – $12..... BB + TI – TO = EB EB = $4... the credit side of the Materials Inventory account.....) Assigning costs to jobs: Avian Company.000 EB = $9......000 = $200 (variance) f..... $6............ $24 per hour Direct labor hours ........ b.400 e............ $6.000 + ($6..4–17................. a. $18............. 3....... (25 min.............000........400 + $6..000 + $5....... $12.000 Labor rate ........000 ÷ $24 = 250 hours Manufacturing overhead applied .....400..000 c......

....000 Supporting Computations aManufacturing overhead applied: $165.. (10 min..000 (= $165...... 500..000 ÷ 75%) material used equals total manufacturing cost less direct labor and manufacturing overhead applied [$500..................000a Total manufacturing cost during the year ...... 165.4–18........ Inc. $115..000 + $165..................................... bDirect cDirect © The McGraw-Hill Companies.....000 – ($220...... Direct material used ...000) labor: 75% of direct labor equals $165.. Chapter 4 77 ..000) = $115.............. Inc....000]...000c Direct labor ............. so direct labor was $220.000b Manufacturing overhead applied ......... 1997 Solutions Manual...000 = 33% x total manufacturing cost (33% x $500.............. 220..000........) Predetermined overhead rates: Kustom-Kraft.....

000) –60.500 and that overhead is applied at a rate of 80% of direct labor cost.000 EB = $11.500 = $2. Factory overhead = 80% x $2.000 – $49.000 $11.000 x . Application rate: Job 1: $20.000 – $2. 75 is $2.500 b. Total cost $11.000 x $.000 a. So.000 + $16. $44..000 Direct materials Direct materials = = = = direct materials + direct labor + factory overhead direct materials + $2.000 We are told that direct labor for Job No.) Predetermined overhead rates: Xavier Corp.500 = $2. (20 min. the ending balance of the account must equal the total cost of the job. 1997 Cost Accounting.000 $6.500 – $2.55 = 22.500 manufacturing overhead variance 4–20. (15 min.000 = $.000 + $20.55 = $11. Since Job No.500 Job 3: 40.500 + $2.000 Job 2: 30.000 To solve for direct materials we set up the cost equation.000 x .) Applying overhead using a predetermined rate: Paige Printing The answer is (3).55 = 16. 5/e .4–19.500 78 © The McGraw-Hill Companies.55 per dollar of direct labor $80.000 $49. We can find the account’s ending balance using the basic cost equation: BB + TI – TO = EB EB = $ 5.000 + ($30. $52. 75 is the only job in the account. Inc.

.... 1997 Solutions Manual.....000 Manufacturing overhead variance .) Calculating overhead variance: Owings Co. Inc.500 underapplied Proration of manufacturing overhead variance: Work in Process Inventory.................500 x 65% © The McGraw-Hill Companies........... 625b Cost of Goods Sold. 2...... 250a Finished Goods Inventory.4–21.....000 = $10...000 hours = $660.. 52... Predetermined overhead rate = estimated overhead/estimated allocation base = $600.000 – $650.500 x 25% c$1......000 hours = $6 per hour Applied overhead = predetermined overhead rate x actual allocation base = $6 per hour x 110....... The answer is (1)...... Chapter 4 79 ..... $49...........625 = $2.625c Manufacturing Overhead Variance ...000/100. (15 min..) Prorate under........... 1. 2.... (15 min..500 x 10% 625 = $2......000 Overhead variance = applied overhead – actual overhead = $660..000 overapplied 4–22.......500 Manufacturing overhead actual ...500 a$ b$ 250 = $2. Calculation of manufacturing overhead variance: Manufacturing overhead applied .or overapplied overhead: Xavier Corp.....

Overhead applied during month: X-10 .260 *$2. 80 © The McGraw-Hill Companies... $1.920 $1.000 Z-14 ..840* $1... 1997 Cost Accounting... Beginning of month Direct Applied Labor Overhead X-10 . 5/e .840 = $8..4–23...400 $4.000 c.000 actual = $120 overapplied.420 Total .120 Variance = $4. 2.000 Total $4.. 1..260 Direct Applied Labor Overhead Total Z-14 .000 Additional Applied Overhead $700 $2... Inc.....280 $640 Y-12 ..........260 b. $840 Each month $420 Total $1....920 Y-12 ....260 Beginning Total X-10 .. $1.) Compute job costs for a service organization: Terne Corporation a. $4.120 applied – $4..420 $4..020 $7.. Additional Direct Labor $1... $2.400 – $4.. $ 700 Y-12 . $1....240 – $1. (25 min...

..... 120...000 hours x $140 © The McGraw-Hill Companies..............000c Wages Payable 140...000 Gross margin .... Applied 24..............000a Cost of services billed ..000 20..000 = 2... cSum of work done during September.... (30 min..000a Work in Process 140..............000 Operating profit .400 hours for Client B.. and $12 per hour x 1..........000 actual) b..... a.. Income Statement For the Month Ended September 30 Sales revenue ....000 a$280.000 applied – $20.......000 Add: Overapplied service overhead.. Chapter 4 81 .000c 24........H. dClosing entry to record overapplied overhead of $4.400 hours for Client B.......... $ 36..) Job costing in a service organization: Ernest Peat & Co.. and $70 per hour x 1. per hour x 600 hours for Client A.000d 24............ Variance 4................000 Marketing and administration........... Ernest Peat & Co. 1997 Solutions Manual. Cost of Services Billed 164....... 164.000a 164.000b Service Overhead 20. all billed to clients. 4...000b Service O... $280.. 84..000d per hour x 600 hours for Client A.......000d a$70 b$12 Service O..4–24.........000 (= $24.H... Inc......

) Estimate hours worked from overhead data: Grault Co.000) direct labor hours were worked.000 (= 30.000 hours worked..000/$4 = 31.00 per direct labor hour. Inc.000 direct labor hours were worked ($4. 5/e . 82 © The McGraw-Hill Companies. 1997 Cost Accounting.000 + 1.000 in fixed costs expected and 30. 31.000 (= $4 x Actual hours worked) From these accounts. Consequently. then an extra 1. If the overapplied overhead. see T accounts below: Manufacturing Overhead 120.000 direct labor hours expected. (25 min. we solve for actual hours worked: Actual hours worked = $124.Solutions to Problems 4–25. 31.000 (given as actual = expected) Manufacturing Overhead Applied 124. is $4.000.000/$4 per hour). Also. the application rate for the fixed costs was $4. With $120. all due to production volume.000 direct labor hours were worked.

400 = $188.000 – $35.200 (charged to Manufacturing Overhead) = $471.000 + $200. the charge to Work in Process that is not due to direct materials or direct labor.000 + $242. Inc.600 (from f).400 (charged to Manufacturing Overhead) = $48.400. (e) $800.000 + $239.. the other side of the credit to the Accounts Payable— Materials Suppliers account.000 = $28.000. $16.000 = $324.000. (b) $188. (h) $63.000 – $8.400 – $408.600 – $19.000 (c) $242. 1997 Solutions Manual. Chapter 4 83 . (40 min. (a) $200.000 – $248. (i) $6. © The McGraw-Hill Companies.400 + $800.600 – $72. From the Materials Inventory account.600 – $42.200.600 from the Cost of Goods account. (d) $361.4–26.) Assigning costs—missing data.000.200.200 = $44.400.200 (from e) – $805. (g) $23. (f) $805.000 + $188.600 + $361.

000 24.524 (Actual) Manufacturing Overhead 8.700 (a) 43.200 Balance 9/1 Purchases Balance 9/30 Direct materials Indirect materials Work-in-Process Inventory Balance 9/1 16.135 Balance 9/30 95.200 (b) Overhead applied 132..335 Finished Goods Inventory 64.4–27.300 (a) Direct materials 43.500 50. Inc.200 13. 1997 Cost Accounting.500 1.100 99. (50 min.881 52.800 (a) 8.) Assigning costs—missing data.100 56.800 187.200 (c) 201.240 Manufacturing Overhead Applied (b) 132.000 187.000 (h) 12. 5/e .000 (d) Balance 9/30 92.200 (h) Proration 3. Materials Inventory 22.381 Cost of Goods Sold 201.100 (b) Direct labor 88.540 Balance 9/1 (d) Balance 9/30 (h) Proration Balance 9/30 (c) (h) Proration (a) (e) (f) (g) 84 © The McGraw-Hill Companies.500 7.200 28.

1997 Solutions Manual.200 = $92.000 = 150% X X = $88.500 equals $22. (continued) Wages Payable (b) 88.4–27. Chapter 4 85 .500 Cost of goods manufactured = Finished goods EB + Cost of goods sold – Finished Goods BB = $50.200 Work in process EB = $16.000 Sales Revenue (c) 362.100 (debit to work in process) = $8. The beginning balance equals the ending balance of $28.300 EB = $50.500 + $201.700 + $56.800 = $187. The unaccounted balance represents indirect materials and is determined as: $22.800 = EB + $14.800 – $28. Inc.000 (e) 13.500 (d) Finished goods BB = Finished Goods EB + $14.200 minus the increase of $5.100 in direct materials issued..200 © The McGraw-Hill Companies.700.300 $64.000 – $187.200 – $43.000 + $132.100 + $88.700 (a) From the work in process account we obtain the $43.500 – $64.200 (b) Let X = direct labor costs Overhead applied = 150% X $132.300 + $43.000 (c) Let X = Cost of goods sold Sales = 180% X $362.700 = 180% X X = $201.

540) Finished goods (15% x $12..540 86 © The McGraw-Hill Companies. Inc.135 1.524 $12.540) $ 3. (h) Proration to: Work-in-process (25% x $12.540) Cost of goods sold (60% x $12.000 (f) Charge factory depreciation to manufacturing overhead. (g) Charge overhead to manufacturing overhead. (continued) (e) Indirect labor = Payroll – Direct labor = $101. 1997 Cost Accounting.4–27.000 – $88. 5/e .000 = $13.881 7.

.500** $158.500 Factory equipment costs ..1% of cost of goods sold).... c...500 a.00 x 3. 8.4–28.500 direct labor hours).500 e.00 x 8.. $636...500 $9.000 Direct materials .000 $43. 45..... 1997 Solutions Manual..... 17...... (2) $43..500 *The wage rate for direct labor is $8. finished goods inventory. then the proper answer would be (2)..000* Overhead applied .. (40 min.000 $9. The amount is clearly not material (0..) Analysis of overhead using a predetermined rate (multiple choice): Sparkle Corp.....000 Supervisory salaries .. (3) $158..000 direct labor hours = $18... and cost of goods sold.500 f...000 = $10....... If it were material.00 x 3....00 = $68..000 d..... Chapter 4 87 ...500 direct labor hours = $76. © The McGraw-Hill Companies........60 per DLH 60.....00 per hour..........000 Indirect labor wages .. ($8.000. 6.000 Factory facilities. $ 6... $ 54. 28. $8... **$9.. 31....000 Beginning balance.....00 x 2. 6. Inc.. (2) $76...60 per DLH b... (5) Credit it to cost of goods sold..000 in direct labor wages divided by 8..500 Supplies.500 direct labor hours.000 Direct labor ..... (1) $18.500 hours = $28.. (4) $10....... prorate it between work in process inventory... so it is not worth the effort involved in prorating.......

500 – $4.875 + EB $775 = Ending Direct Materials Inventory 88 © The McGraw-Hill Companies. Dunce. + Direct Materials + Direct Labor + Used Incurred Overhead Cost of Goods Ending Work = + Manufactured in Process $1.000 – $1.875 (5) Ending Direct Materials Inventory: BB + Purchases = Direct Materials Used + EB $1.000 (2) Cost of Goods Sold: Total Revenue – Gross Margin = Cost of Goods Sold $13.000 + $2. a.000 = $9. 5/e .500 + Direct Materials Used + (375 x $5) + $750 = $8.000 BB = $4.000 Direct Materials Used = $5.500 (4) Direct Materials Used: Actual Beg. 1997 Cost Accounting. M.) Basic cost flow model: I.500 (3) Beginning Finished Goods Inventory: Cost of Goods BB + = Cost of Goods Sold + EB Manufactured BB + $8.500 + $3.4–29.000 = $9. WIP. Inc.400 + $5.000 = $3.250 = $5. T-accounts follow these answers: (1) Marketing and Administrative Costs: Gross Margin – Operating Profit = Marketing and Administrative Costs $4. (40 min..

500 8.400 5.000 Goods Overhead 750 Manufactured EB 2.000 Cost of Goods Sold 9.S.G.875 8.875 Cost of Direct labor 1.4–29. 3.500 Marketing and Administrative Costs 3.250 5.500 Direct matl. Manufacturing Overhead 750 750 5.500 C. 1997 89 . 5. Overhead Direct Labor Marketing and Admin. EB BB EB Wages and Accounts Payable Purch.000 9.875 Used 775 Work in Process Inventory BB 1. Inc.000 89 © The McGraw-Hill Companies.000 Finished Goods Inventory 4.875 3.250 750 1. (continued) Direct Materials Inventory 1..000 BB Purch.

...... 1997 90 Cost Accounting............... (continued) b..........................500 Cost of goods sold..... Income Statement Revenue ..............000 Operating profit................................. 4.. 3......000 © The McGraw-Hill Companies........500 Gross margin .......... 9......... Inc...........000 Marketing and administrative costs ...... 5/e ..........4–29... $13.... $ 1.

..........000 Transfers In = $90.. per hour x 300 hours) 1. a........600 b.000 c. the month’s purchases can be determined from analyzing the accounts payable account: Beginning Balance + Transfers In – Transfers Out $12...000 – $ 22....000 Goods Sold $224................ (30 min.............800 ($6 Total Cost of Ending Work in Process Inventory .......) Basic cost flow model: Czech Co.............. April 30..............000 © The McGraw-Hill Companies.000 = Cost of Goods Sold $192...600 ($12 Manufacturing Overhead .200 total direct labor hours = $31..200 d.4–30.......200 Direct Labor ............. Actual manufacturing overhead incurred during April: $6 per hour x 5..... Inc....000 = Cost of Goods Sold = Ending Balance = $18...000 + Transfers In – $84.... 1997 Solutions Manual.... Chapter 4 91 ................. per hour x 300 hours) 3.......... Direct Materials ... Cost of goods sold during April: Beginning Finished + Cost of Goods – Cost of = Ending Finished Goods Inventory Manufactured Goods Sold Goods Inventory Cost of $ 36...000 + $188..... Direct materials purchased during April: Since the accounts payable account is used only for direct material purchases..... $10.........000 – = $22.......... Ending Work in Process Inventory: —only one job is remaining in ending Work in Process Inventory.. $5.......

590 Coin Washing and Drying Direct Overhead Cost 250 200 625 500 Special Cleaning Direct Overhead Cost 400 175 100 90 Repairs Direct Overhead Cost 140 25 10 Coin Washing and Drying Direct Labor Cost 640 (= $8 x 80) Special Cleaning Direct Labor Cost 1.560 Dry Cleaning Direct Overhead Cost 500 125 250 200 3. 1997 .000 (= $8 x 125) Repairs Direct Labor Cost 720 (= $8 x 90) Unassigned Labor Cost 200 (= $8 x 25) 92 © The McGraw-Hill Companies.4–31. Salaries and Accounts Payable Dry Cleaning Direct Labor Cost 2. Inc..) Cost accumulation.560 (= $8 x 320) 2. service: White and Brite Dry Cleaners. (30 min. T-accounts (Not required—see next page for income statement) Wages.

.................000 $1...................................500 9..........................560a $640a Direct Overhead.....................80 per hour..................................... Operating profit ...........80 x 320 hours = $256...... etc.. $734 $2.................................. Marketing and administrative costs ..4–31...279 Department margin ...000a 765b 100c $1............................625 $5..........................) equal the sum of direct overhead items given in the problem...............002 $ 3.......... Inc...... (continued) Income Statement White and Brite Dry Cleaners Income Statement for Month Ending November 30 Coin Dry Washing Cleaning and Drying Revenue ................ 1997 93 .. etc... Total hours 640 hours worked (including idle time) d$200 = $8 x 25 hours e$20 = $512 – $256 – $64 – $100 – $72 fSum of marketing and administrative costs ($2......... $4...500 + $400 + $150) © The McGraw-Hill Companies............... aAmounts bAmounts Special Cleaning $2.......... $8 x 320 hours........................... Unassigned overhead indirect costs................. ........................ 1......000 + $1..075b 1......891 $2...498 200d 20e 4....... $3.. $2...... cRate = Total cost = $512 = $.............................575b Indirect Overhead ..........050f $ (772) equal $8 per hour times direct labor hours according to the problem (dry cleaning....971 Less other costs: Unassigned labor costs (idle time).......... For dry cleaning...............250 Cost of Services: Labor ..... 256c 64c Total costs of services.....865 135 Repairs $625 $720a 175b 72c $967 $(342) Total $12................................

and the margins of the other departments are low. perhaps dropping Repairs and raising prices on Dry Cleaning and Special Cleaning. considering the amount of salary for Hexter and the assistant (plus other costs) that must be covered.. 1997 94 Cost Accounting. “Repairs” is losing money. (continued) Only Coin Washing and Drying is clearly profitable. The company could also find ways to be more efficient.4–31. 5/e . perhaps eliminating the need for Hexter’s assistant or one of the other four employees. Inc. The company should reconsider its full-product-line strategy. © The McGraw-Hill Companies.

Labor . 95 © The McGraw-Hill Companies..500 a Original John’s $40.. Overhead.000 = 1....000 (= 500 x $80) $15.000.... a$15.000..500 = 300/2..... service: Wehelp Consultants....000 $80.000 x $80) $30....... Nocando Revenue...000 a $6... etc.000 (= 500 x $30) $ 7.. Margin ..500 a Unassigned Costs (not required) Total $144...4–32....500 $10....... 1997 ..000 x $30) $15....000 x $30.000 (= 1.000 30.000 (= 200 x $30) 3.000 (= 300 x $80) $ 9..000 $35...000 a $ 60..000 Sails Inc..500 $17.. (25 min..000/2....000 x $30.. a. $24.) Job costs....000 (= 1.. Inc. $4.000 (= 300 x $30) $ 4....

..................................... Gross margin ....000 Total other costs..000 Overhead ... 6........................... Income Statement Revenue from clients.........................................000 Total cost of services to clients ...................... and adm.................................... Less other costs: Labor........................................................... $144.....................000 81............. $54.............. Less cost of services to clients: Labor.000 29.... 20...000 Overhead .................000 $ 34.........4–32........... 5/e ............................. 1997 96 Cost Accounting.. Inc..........000 Mktg.............. costs............... 3...... 27........000 63.......000 © The McGraw-Hill Companies......... (continued) b....... Operating profit......................

1997 Solutions Manual. c. Transfer to Finished Goods: Job A-15 Beginning Inventory Cost + Current Cost = $174 + $64 + 150%($64) + $170 = $504 . b.. © The McGraw-Hill Companies.354 a. Direct Materials + Direct Labor + Applied Overhead = $174 + $32 + $64 + $84 + [150% + ($64 + $84)] = $576 .4–33.) Job costs in a service company: McHale Painters Inc. (50 min. Chapter 4 97 . Materials Inventory 920 16 Indirect Materials 116 314 Requisition 706 Work-in-Process Inventory 576 504 Job A-15 170 850 Job A-38 608 556 556 Balance 1/1 (given) Purchases (given) Balance 1/31 (a) Balance 1/1 (b) Job A-15 (d) Job A-38 (f) New Job A-40 Balance 1/31 (c) (e) Finished Goods Inventory Balance 1/1 ($392 + $158) 550 (c) Job A-15 504 550 Sold (e) Job A-38 850 Balance 1/31 1. To complete Job A-15: $68 Direct Labor + ($68 x 150%) Applied Overhead = $170 . Inc.

Inc. 5/e . e. Transfer of Job A-38: Beginning Inventory Cost + Current Cost [$16 + $42 + 150%($42)] + [$54 + $100 + 150%($100)] = [$32 + $84 + 150%($84)] + [$108 + $200 + 150%($200)] = $850 . To complete Job A-38: $108 Materials + $200 Direct Labor + (150% x $200) Applied Overhead = $108 + $200 + $300 = $608 . 1997 98 Cost Accounting.4–33. *These letters refer to solution parts b and d above. New Job Cost = Current Charges to WIP less Current Charges for Jobs A-15 and A-38: = Current Materials + Direct Labor + Overhead – Job A-15 Current Cost – Job A-38 Current Cost = $314 + $408 + $150%($408) – $170(b)* – $608(d)* = $556 .. © The McGraw-Hill Companies. (continued) d. f.

............. 21......................... 71.. Inc..............400 Manufacturing Overhead (30% x $84..............200 Overhead Applied.............. Accounts Payable ............000 Payroll Taxes Payable.......600 2........... Plant.... Work in Process (60 Percent x $84....... Payroll .000).. a............................................................. 71...................................000) ... 71.. 25.............600 34.......................................................................................400 x 175 percent) ......................................... 21........... and Equipment...............200 Administrative and Marketing Costs (10% x $84......................200 (10) Manufacturing Overhead ................... Cash .. 34........... 43.... 50.........200 Cash .........000) .................................... Chapter 4 99 ................. Work in Process—Direct Materials ............................................................ Work in Process—Overhead Applied ($50..................................4–34........................000 Materials Inventory ................ Inc................. 1997 Solutions Manual............................................600 Cash ............) Tracing costs in a job company..............................000 38...............400 Payroll ($56.................................... Payroll ..................000 © The McGraw-Hill Companies....000 + $28........000 18.............. 88.......... 28...................................000 71.000 (6) (7) 84...............000 Fringe Benefits Payable ............................... (1) (2) (3) (4) (5) (55 min....................................................................600 Accounts Payable........000 Materials Inventory ..000 Accumulated Depreciation— Property........................ Arrow Space.................000) ..........................................................200 (8) (9) 88.......000 28..................................................................................... Manufacturing Overhead ............ 8........................................... Manufacturing Overhead .................. 2.............................................000 43.......... 56......................... Materials Inventory..............

000.200 – $115.600 (2) (7) (8) (10) (9) (3) (1) © The McGraw-Hill Companies.000 109.000 T-account (7) Direct Labor 50.500 + $34.500 115. Actual Manufacturing Overhead 2.000 – $34.100 Per Finished Goods (4) Direct Materials 34.100 2.600 34.600 71.700a (2) (4) = $74.100 + $40.200 Accounts Payable 71.400 + $88..000 + $31. Balance 1/1 (1) Balance 1/31 a$109.200 43.600 – $2. 5/e .000 25.000b b$74.200 21.700 Materials Inventory 74. Inc.000 + $50.400 (9) Overhead Applied 88. (continued) b.000 = $16.000 Manufacturing Overhead Applied 88.4–34. Work-in-Process Inventory Balance 1/1 16.200 Balance 1/31 74. 1997 100 Cost Accounting.100.000 71.

400 (3) (5) (8) (5) (6) (7) (5) (6) (7) Accumulated Depreciation—Property. (continued) Cash 71.100a 131.000 28. and Equipment 21.000 Administrative and Marketing Costs 8.000 28.4–34.700 66.600 38.. Cost of Goods Sold 131.400 – $83.100 Cost of Goods Sold = $131.200 Payroll 56. 1997 Solutions Manual. Chapter 4 101 .000 43.400 Balance 1/1 Goods Completed Balance 1/31 a$115.000 115. Inc.700 + $66.000. Plant.000 Payroll Liabilities (Including Taxes) 18.000 (10) Finished Goods 83.700 Balance 1/31 © The McGraw-Hill Companies.000 84.

1997 102 Cost Accounting.820 (4b) 1.110 128.990 2. T accounts.300 + $31.920 76.750 + $8.000 (2a) 31. Inc.000 + $2.110 b$52.110 52.700 (4c) a$76.) Cost flows through accounts: Leevies Pants Inc.420 (2) 100.300 (1b) 9.400 (1c) Work-In-Process (1) 32..4–35.110 b Finished Goods Inventory 76.760 (2c) Variable Manufacturing Overhead 2.220 Wages Payable 49.750 460 (3a) (3b) (3c) Cost of Goods Sold 128.240 + $2.200 (4) 20.990 + $10.110 = 13.720 (1a) 9.110 a 52.000 (3) 6.820 © The McGraw-Hill Companies.720 + $49. Direct Materials Inventory 13.240 (2b) 19. 5/e .400 = $9.400 (4a) 8. a. (50 min.220 Fixed Manufacturing Overhead* 10.

$5 per Hour Variable Manufacturing Overhead = 0. b.200 Predetermined Variable Overhead Rate = $31.70 x $104.39 per Direct Labor Hour.800 80.4–35.000.000. © The McGraw-Hill Companies. Chapter 4 103 . Inc. Fixed Manufacturing Overhead = 0.000 = $72. Total Direct Labor Hours = $400.200 80.800 Predetermined Fixed Overhead Rate = $72.30 x $104.000 = $0. (continued) Total Direct Labor Costs = $400. 1997 Solutions Manual.000 = $31.000 = 80.000 = $0..91 per Direct Labor Hour.

400 (1c) Work-In-Process (1) 32.or OverApplied Overhead 2.4–35.920 (Applied) 8.240 (2b) 19.800 (4) 18. © The McGraw-Hill Companies.000 (2a) 31.663 124.686 (4b) 3. one for “actual” and one for “applied. 1997 104 Cost Accounting.460 48.541 (3c) (b) Cost of Goods Sold 124.420 (2) 100.300 (1b) 9.460 48.822 (3a) 2.663 Finished Goods Inventory 75.437 (3b) 1.720 1. Inc.720 (b) *These can be divided into two accounts. 5/e .123 Under.600 (a) Fixed Manufacturing Overhead* (Actual) 20.596 (4c) 2.200 (a) 1.760 (2c) Variable Manufacturing Overhead* (Actual) 6. T accounts Direct Materials Inventory 13.600 (Applied) 3.918 (4a) 5.720 (1a) 9.123 Wages Payable 49. (continued) c.200 75.000 (3) 7.” We put them in one account to save space..

..... d............ Inc..000 Less Cost of Goods Sold ...... (128.... (11.......200) Operating Profit (Loss)..........557 © The McGraw-Hill Companies............................................ $ 11....200) $ 3..120) (11......4–35...... $ 580 Normal $140................... (continued) Actual Full Absorption Costing Sales Revenue.......000 (124........... — Marketing and Administrative Costs ....877 (1....780 Less: (Under-) Overapplied Overhead ....... $140......220) Gross Margin ..123) $ 15......... Chapter 4 105 . 1997 Solutions Manual.........

.............................. Cash................ 5/e ............ Inventory purchase Materials and equipment inventory .......000 100.................. 1997 106 Cost Accounting................................... a................................. 100... 1........... Selling costs—Advertising.... 3....................................... 6.................350 + $640 + $400 + $650 + $900]....... 25...................................................................................340 900 © The McGraw-Hill Companies.......................700 175....................................................300 1............. Billing Accounts receivable ...... Wages payable............ 25.........................) Show flow of costs to jobs: Bright Equipment Co....000 Accounts receivable .......... (60 min........................040 1......... 5.................100 + $1.................. 2.......000 Sales revenue............... Cash .......................................................................................... Materials and equipment inventory.........000 18........... Payment received on account Cash..... Inc...........200 5......................... Overhead and advertising Overhead [$1............................ Accumulated Depreciation......................................................4–36............................. Indirect labor Manufacturing overhead—Indirect labor .. 175...............300 310 310 5.................. 18..............700 Accounts payable .........................000 1........ Indirect materials issued Overhead ........................................................................ 4...........................000 Accounts receivable .................................

........... Note: No finished goods inventory account is required...............4–36........ b..........650 $ 560 © The McGraw-Hill Companies..... Transfer of Job 51 Cost of installations completed and sold ...................... 5.......200] ..600 Work in process—direct labor [$1....000 6................... 40..200 + $17....090 Materials inventory... 136...............200 10....090 6. (continued) 7............... Chapter 4 107 .............200] ...............200 + $3.300 Entry 5 . 310 Entry 6 .............. 1997 Solutions Manual..........600 7....... 6... Incurred Entry 4 ... Work in process—overhead applied [15% x $109...900 16. Overhead applied.....................700 + $1............ Inc..........040 Underapplied .380 $6......090 109............ 8...200 + $14.............. Work in process—direct labor [$9....................................................................... Wages payable ...........200]................... 40.....480 Work in process—materials and equipment [$95.............. Charges to Work in Process Work in process—materials and equipment [$3........................... $1.....000 + $6..................................000 Work in process—overhead applied [15% x $40. (continued) a........... Overhead analysis: Applied (Entry 7).........800 + $1....000 + $14.............100 + $900]......................... 7....600].......200]....

690 Job 51 Balance 9/30 79.480 560 137.700 (5) Balance 9/30 25..040 40.790 Work in Process Inventory Balance 9/1 162. 5/e . 1997 108 Cost Accounting.000 (7) (2) 18. © The McGraw-Hill Companies.480 (8) Underapplied overhead Balance 9/30 *Job 46 + Job 51 = $43.460 Cost of Goods Sold** 136.250* Current charges (7) 53. (continued) c.4–36. Inventory balances Materials and Equipment Inventory Balance 9/1 48.950 **Not required.300 + $118.600 310 (8) 136. Inc.

) Reconstruct missing data: Badomen Equipment Inc.400* – $43.014 (f) The calculations are shown below. (70 min.4–37. (a) Given (b) Direct materials = Beginning inventory + Purchases – Ending inventory – Indirect materials = $49.900a – $21.400a – $14. ending 53.314 finished goods 67.700a = $67." then solve for each item in the account as follows: Work-in-Process 86.700 ( c) Direct labor © The McGraw-Hill Companies.. beginning = $50.300 –0– (a) Balance.600a = $66.000a + $66.500 (d) 204.100a + $37. 1997 Solutions Manual.. Chapter 4 109 .200 Transferred to 70.700 Disaster loss 33. We put the work in process account on the board for the "big picture.086b = $70. Inc. beginning (b) Direct materials (c) Direct labor (e) Overhead applied Balance.000a – $2.314 *Purchases = Accounts payable. This is a challenging problem. ending + Cash payments – Accounts payable.400 = Payroll – Indirect labor = $82. We usually present these using both T-accounts and the following formulas.

200a + $70. aGiven bGiven in problem in paper fragments © The McGraw-Hill Companies. ending + Cost of goods sold – Finished goods.500a + ($396.4–37.500 = $204.900a + $1.700 + $33.600a – $348..014 Note: The insurance company may dispute paying the $1.200 overapplied overhead.000a = $53. 1997 110 Cost Accounting. Inc. 5/e .600a) – $32.200a = $33.300 – $53. beginning = $37. (continued) (d) Cost transferred to finished goods = Finished goods.314 + $67.500 (e) Overhead applied = Ending manufacturing overhead – beginning manufacturing overhead + overapplied overhead = $217.300 (f) Loss = $86.000a – $184.

..........248. We like to use it here to motivate overhead cost assignment for decision making and performance evaluation..150.000 = $15.. Fixed overhead rate = $26....150..620.............958.....52.........52..........40 = $11.4–38. $30.150.. 1....000 1....40) .....710..... Inc.... as well as here... Calculate the cost and volume differentials to determine the variable overhead rate: $34....000 300..000 hrs......248.....) Deriving overhead rates: Premier Pasta Company..248....... $34. It could be assigned in later chapters on decision making or budgeting.....000 Total overhead costs at 1..................... 13....000 = $4. Also.500. (60 min.000 – $29..40) ....380.... fixed overhead rate = $13.....40 per direct labor hour Total overhead (Year 1)......000 Total overhead rate = $30..92....... $17..000 direct labor hours Total variable overhead (1.000) Total fixed overhead .000 x $15.000 Total fixed overhead .000 = $26.. $13..252..000 = $11..500... (21..000 Total variable overhead (1.000 hours The information above should be incorporated into a report to management..150..........958.... © The McGraw-Hill Companies.. 1......080... Chapter 4 111 .000 – 1.880.000 x $15...............380.92 – $15..... 1997 Solutions Manual....000 Total overhead. This problem relates overhead allocation to decision making...

Inc. – 1.958.080 hrs) x $15.958* 29.4–38.080 1.880 + [(1. we find it helpful to present the following graph of these relationships: (000 omitted) $34.380 *$29. 5/e .40 30.500 ~$15.150 Direct labor hours 1.880 1.150 hrs.40] = $30. (continued) For presentation to students. 1997 112 Cost Accounting. © The McGraw-Hill Companies..

200 3. 101 2. 102 3.000 12.000 12.200 9.4–39.000 19.000 6. (45 min.000 12.800 16.800* Note: See footnotes on next page.00010 2. 103 1.600 M* L O2 Cost of Goods Sold Job No.) Incomplete data—job costing: Paige Printing Inc..200 17.000 9.000* 16. © The McGraw-Hill Companies.600 4.0009 M* L* O8 4/30 Job No. 1997 Solutions Manual.200 9.000* M5 L6 O7 Job No.400 9.000 0 Overhead Actual Applied 20.000 6.600 4.600 30. 102 3.600 10.400 5. 101 2.000 M L O Job No.800 0 Wages Payable 32.000 21. Work-in-Process Cash 4.600* M* L* O3 4/1 L1 O4 Job No. Inc.000 Overhead Variance 4. The following information should be included (in summary) in a report to management.000 19.000 6. Chapter 4 113 .

200 = $9. 103 = $4.600 = $4.000 + $5.800 applied in April = 0. Inc. 103 = $32..600 = $3. (continued) M refers to direct materials L refers to direct labor O refers to manufacturing overhead *Numbers given in the problem 1Labor to complete job is $9.200 9Applied Overhead = $4. 102 = 0.000 © The McGraw-Hill Companies.000 10Underapplied overhead = Actual – Applied = $20.200 $0.50 x $12.800 4Overhead 5Materials for Job No.50 x $10.000 – $16.600 – $1.000 = $4.50 x $9.400 = $12.000 = $6.400 = $5.600 = $4.50 x $9.600 since the beginning inventory was 50% complete 2Applied overhead = $30. 1997 114 Cost Accounting.000 7Overhead 8Overhead for Job No. 103 = 0. 102 = Purchases – materials for Job No. 101 – Labor for Job No.000 6Labor for Job No.000 for Job No.800 + $6.4–39.800 – $2.600 $19.600 – $10.200 = $16. 102 = Total direct labor costs – Labor for Job No. 5/e .000 – $19.000 – $9.600 = = $9.50 per labor dollar ∴Applied overhead 3Overhead in beginning inventory = 0.

b. interest and punitive damages. a. It would be unethical for Suzie to falsify job cost reports by improperly assigning costs to the U. Suzie and her boss could be held responsible for civil and criminal penalties. government job which were actually part of the cost of the Arrow Space job. Inc. (25 min. Given the potential illegality and other possible negative ramifications of this problem (such as lost reputation). it may be an illegal action for the company to misrepresent costs charged to this project. she should approach higher levels of management with her problem. However.S.4–40. The fact that Suzie’s company is reimbursed on the U. 1997 Solutions Manual. If this action is discovered and proven in court. not to mention the loss of their jobs and their reputations. it is likely that management will decide to write off the cost overruns instead of falsely reporting them. Chapter 4 115 .S.. Since Suzie’s boss suggested this course of action. government contract is based on costs. © The McGraw-Hill Companies.) Job Costing and Ethics. government contract makes it particularly enticing to charge the excess costs to this project. the company could be liable for the excess charges. since the U.S.

.

5–2. They are treated separately because they represent the accumulation of costs from previous departments rather than the receipt of materials from the stores area.e. These beginning inventory units carry with them the costs incurred in a previous period plus the costs incurred this period to complete the beginning inventory. 5–4. Under weighted–average. Inc. including costs from prior periods that are in beginning inventory). From BB + TI – TO = EB. Units started and completed during the period are charged out using all current period costs. 1997 Solutions Manual. the equivalent units represent the work associated with all of the costs charged to work in process regardless of the period in which those costs were incurred (i. The equivalent units concept equates units at various stages of completion to a common measurement unit. TO = BB + TI – EB © The McGraw-Hill Companies. Prior department costs behave the same as direct materials which are typically added at the start of production. the prior department costs are not useful for evaluating the performance of the manager of the department receiving the units. Using the basic cost flow equation.Chapter 5 Process Costing Solutions to Review Questions 5–1. From BB + TI – TO = EB. It is helpful to separate prior department costs from other costs because the manager of the department receiving the transferred units has no control over the costs incurred in prior departments.. 5–6. Under FIFO costing.. the units in the beginning inventory are transferred out first. rearrange the terms to solve for the unknown beginning inventory. Rearranging yields: Beginning Inventory = Transferred Out + Ending Inventory – Current Work 5–3. Thus. the department receiving the units usually ignores the distinction in costs incurred in the prior department. The calculation is necessary because products are partially incomplete. 5–5. While such a distinction is made by the department transferring the units out. the equivalent units represent only the work done in the current period. With FIFO costing. we have: Beginning Inventory + Current Work – Transferred Out = Ending Inventory. Chapter 5 117 .

This is an example of the idea of “different costs for different purposes” which was discussed in earlier chapters. The correct answer is (2). However. For example. The correct answer is (2). The correct answer is (1). 5/e . A company may use LIFO for tax purposes and some other method for internal accounting purposes. To assign costs to specific lots of cereal or similarly mass–produced items requires a lot of record-keeping. None of these answers are correct. but 50% is assigned to 100 units in ending inventory. not work necessary to complete the items. 1997 118 Cost Accounting. 5–8. Answer (3) is incorrect because the ending inventory should be multiplied by the amount of work done this period. When there is no beginning WIP there is no difference between the two costing methods. This error results in higher (overstated) costs per equivalent unit and higher (overstated) costs assigned to goods transferred out. Recordkeeping is simplified since all costs in a given month are accumulated in one account and assigned at the end of the period. Finally. The weighted-average method of process costing combines the costs of work done in the previous period and the current period. 5–9. Answers (1) and (2) are incorrect because (1) ignores stages of completion and (2) double counts units started that are still in ending inventory. Empty cans are filled in the second stage. This is a fairly common problem. Assuming products are all the same. Carbonated water and cola syrup are combined in the first stage. The LIFO estimate is usually done on a highly aggregated basis and employs some form of “dollar value” LIFO estimation. companies usually maintain their internal accounting records on a FIFO or weighted-average basis and then make an estimate of the LIFO cost of inventories. LIFO is usually beneficial for tax purposes when prices are rising and inventory levels are steady or rising. and it has the same error as answer (3). the difference between the weighted-average and FIFO methods of process costing is how they handle beginning WIP. If the percentage of completion assigned is lower than actually attained. 5–13. Inc.Solutions to Critical Analysis and Discussion Questions 5–7.. 5–10. When cost of goods manufactured is the same under FIFO and weightedaverage. Answer (4) is incorrect because it defines weighted-average EU produced. a process costing system provides sufficient information for control purposes. To avoid the problem. if the correct percentage should be 75%. the cans are packaged and prepared for shipping. © The McGraw-Hill Companies. (5). EU will be 50 instead of 75. maintaining internal records on a LIFO basis is often quite burdensome. 5–12. equivalent units will be understated. 5–11. Tops are placed on the cans in the third stage.

U....500 units........ 9.) Compute equivalent units—weighted average method..U. 1997 Solutions Manual..... © The McGraw-Hill Companies.........000 975 E. Inc.....975 E.......500 b.....000 units transferred out............000 units started this period – 9.......... (20 min. 650 E. units in ending inventory = 3.... Total equivalent units for all work done to date .. a6.... Conversion Costs 9.500 units in beginning inventory + 12.. 9........000 Equivalent units in ending inventory: Materials: 10% x 6.Solutions to Exercises 5–14... Conversion costs: 15% x 6......... Computation of Equivalent Units Produced—Weighted Average a. Materials Units transferred out..500a units . Chapter 5 119 .....650 E.. 9......U........U......

.. 5.... E.. © The McGraw-Hill Companies.....500 units started and completed = 9..U....U. Materials Compute Equivalent Units—FIFO To complete beginning inventory: Materials: 80%a x 3......000 units transferred out.......950 E..500 E.000 units started this period – 9. Materials: 8. units of work = transferred + ending – beginning done this period out inventory inventory a...U.) Compute equivalent units—FIFO method..U.U. b..U. 2.500 E. = 100% – 20% already done at the beginning of the period. = 9.....975 E.... C5. a80% b. = 9....U.5–15. 8.. b85% = 100% – 15% already done at the beginning of the period.000 units + 975 E... c Units still in ending inentory: Materials: 10% x 6.. 5......U....000 units transferred out less 3...000 units + 650 E. Alternative Method Equivalent Units E......450 E... d6.... 9.450 E... 5/e ...500 units .......U....500 units.. 1997 120 Cost Accounting..500 ending inventory = 3.U. (20 min...U.500 units from beginning inventory... Conversion Costs: 9.. Inc.U.....950 E.800 E. – 700 E. 975 E... a. Conversion Costs 2...500 units.....500 units beginning inventory + 12... – 525 E.U.U..U. Started and completed during the period. 650 E...U..500d units............... Conversion costs: 15% x 6. Conversion costs: 85%b x 3..

Chapter 5 121 ........... 32.......500 Conversion costs: 15% x 10...... 30.........000 units...000 units. Materials Units transferred out... Total equivalent units for all work done to date .... 1997 Solutions Manual....... a.) Compute equivalent units—weighted average method.... (15 min.....000 Equivalent units in ending inventory: Materials: 25% x 10..500 b......500 31.. Inc...000 1.. 2.....5–16.... Conversion Costs 30.........500 © The McGraw-Hill Companies......

. Conversion Costs: 28.... – units of work transferred ending done this period out inventory a. a...U..000 units in ending inventory – 35. = 30..000 units in beginning inventory = 30..000 units from beginning inventory..000d units..U........500 E....000 units + 2.. 2... a5. 25. b45% = 100% – 55% already done at the beginning of the period.500 E...U.. Materials To complete beginning inventory: Materials: 45%b x 5.000d units..500 E......000 units started and completed = 30..000 units + 1.000 E. d25..000 E... – E..500 E.. 28. 1997 122 Cost Accounting. 1..750 E.250 E. 29...U. 5/e . Conversion costs: 30%c x 5..500 E.U..000 units.U...000a units . beginning inventory 2.000 units transferred out + 10.. © The McGraw-Hill Companies.750 E. Materials: 29.000 E......U. (20 min.. c30% = 100% – 70% already done at the beginning of the period. Alternative Method Equivalent = Units + E.. 25. 3.. d b. Inc.U. Started and completed during the period.5–17.. Conversion Costs 1.... – b.000 E.U. Conversion costs: 15% x 10.000 units transferred out less 5.U.. 2... = 30.U.U..000 units started this period...U..750 E.) Compute equivalent units—FIFO method.U..U..... Units still in ending inentory: Materials: 25% x 10..500 E....U.

........... Conversion Costs Eq. out—250 beg............... Started and completed during the period (1................ 40. Chapter 5 123 ............................... 12........... Invent. 0 150 800 200 1. Inc................. (20 min..) ..000 5–19 (20 min........... 52.... units To complete beginning inventory: Materials: all complete ......... The answer is (a)............... Conv. 1997 Solutions Manual.... units Materials Eq....5–18...000 50 1. costs (200 x 25%)........000 800 © The McGraw-Hill Companies.....................000 Equivalent units in ending inventory (16... Equivalent units of production ..........) The answer is (d) Compute equivalent units—FIFO method: Alyssa Co........................) Compute equivalent units—weighted average method: Keanu Co....... Units in ending inventory: Materials (200 x 100%)......... costs: 250 units x (1–40%) ..........000 units x 75%) ................... Conversion Costs: Units transferred out ........ Conv...050 units trans.......000 Total equivalent units for conversion costs.........................

....000 160.......000 220............. Units 60....000 x 100%).....000 35..............000 units) ....... $11.............. The answer is (9).................................200/220.. Units started this period ........ 1997 124 Cost Accounting.. Materials Eq. Inc.............. 170..........000 Units accounted for: Completed and transferred out Materials (170.......200 $ 0.....000 Direct Materials Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory ..................000 50..5–20........... © The McGraw-Hill Companies...........000 x 100%). Current period costs ......000 220............... 5/e ...200 $46....... Units in ending inventory: Materials (50... Total units to account for .............................................21 Cost per equivalent unit Materials ($46......000 50..000 220...........) Compute cost per equivalent unit—weighted average method: Alexis Co...............000 170......... (20 min.................. Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ... Total units accounted for.................. Total costs to be accounted for ...

.. Inc. (20 min..... The answer is (b).. Chapter 5 125 .......... Equiv.........................000 32...........000 16.. costs 80.....000 720..................5–21.........000 80...................000 648......000 x (1–60%) .. Units started this period ...... Total units accounted for .... Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ..........000 720..... units Conversion Costs 40.......... costs 40..000 680............. 1997 Solutions Manual.... Units in ending WIP inventory: Conv.............000 600....... Total units to account for............) Compute equivalent units—FIFO method: Juan Co...............000 Units accounted for: Completed and transferred out From beginning WIP inventory: Conv...000 © The McGraw-Hill Companies....000 600.... 40........ Started and completed currently .000 x 40% ........

.000 1.............666 Cost per equivalent unit Materials ($6.... 1997 126 Cost Accounting.............. Units started this period .......150 850 120 970 850 60 910 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory ......042 Total costs to be accounted for ............208 $ 136 3.........208/970 units) ..... Conv...40 $ 3... Total units accounted for .................... units Eq............720 $6. $9........ 1..... Physical Units Equivalent Units Materials Conversion Costs Eq..............5–22.322 $3....... 150 1.....) Compute cost per equivalent unit—weighted average method....... Inc.... 850 Units in ending inventory ............ (35 min.... Conv. $ 624 Current period costs . Direct Materials Conversion Costs $ 488 5.............150 Units accounted for: Completed and transferred out ........ 5/e ....... Total units to account for ........ costs ($3.. units Flow of units: Units to be accounted for: Beginning WIP inventory ..458 $ 6. costs (300 x 20%).. 300 Materials (300 x 40%)........... 9..80 © The McGraw-Hill Companies.........458/910) ......

.. Conv... © The McGraw-Hill Companies.........230 228 $3..... Inc...000 1.. Units in ending inventory ...................... Total units accounted for...... (20 min.208 $3...458 Costs transferred out total $8................................. Units started this period ......... Materials (300 x 40%) . units Flow of units: Units to be accounted for: Beginning WIP inventory ............458/910) .... $ 624 Current period costs . Conv.... Costs accounted for: Costs assigned to units transferred out $8......................720 $6... costs (300 x 20%) ...150 970 60 910 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory........ Total units to account for. costs ($3..... 850 300 850 120 850 1....322 $3.. $9........ 150 1....80 $5...150 Units accounted for: Completed and transferred out ...670........ Physical Units Equivalent Units Materials Conversion Costs Eq............ 1997 Solutions Manual..........40 $ 3......440 768 $6....... and costs in ending inventory total $996....666 Direct Materials Conversion Costs $ 488 5......5–23..........) Assign costs to goods transferred out and ending inventory— weighted average method........208 $ 136 3....042 Total costs to be accounted for .........666 Cost per equivalent unit Materials ($6........ Chapter 5 127 ..... 996 Total costs accounted for ........... $9.... units Eq...458 $ 6........670 Cost of ending WIP inventory .... 9......208/970 units) ........

.... Total units to account for ..........720 $6.......720/880 units) ..... 150 Materials 150 x (1–60%) .. 1... Conv..........50 $ 3................ units Flow of units: Units to be accounted for: Beginning WIP inventory ...... $9............ (35 min.... $ 624 Current period costs .150 60 700 120 880 60 865 105 700 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory .......042 Total costs to be accounted for . Conv...............150 Units accounted for: Completed and transferred out From beginning WIP inventory .208 $ 136 3...............458 $ 6....... Direct Materials Conversion Costs $ 488 5...... Started and completed currently..000 1.. costs 150 x (1–30%) .. 1997 128 Cost Accounting. costs (300 x 20%).................... Total units accounted for... Conv. Inc.... Physical Units Equivalent Units Materials Conversion Costs Eq.......322 $3.... 9.. costs ($3........666 Cost per equivalent unit Materials ($5. 150 1. 700 Units in ending WIP inventory 300 Materials (300 x 40%).5–24.........) Compute cost per equivalent unit—FIFO method..... Units started this period ..................322/865 units) ... 5/e ................. units Eq.84 © The McGraw-Hill Companies.

.. Started and completed currently .................. Chapter 5 129 ......... Units started this period ... Materials (300 x 40%) .... Inc....... Materials 150 x (1–60%)... units Eq......... units Flow of units: Units to be accounted for: Beginning WIP inventory .150 Units accounted for: Completed and transferred out From beginning WIP inventory.......... Physical Units Equivalent Units Materials Conversion Costs Eq........ Total units accounted for .......... 150 1..5–25....) Assign costs to goods transferred out and ending inventory— FIFO method...................... (20 min............. Total units to account for. Conv... Conv....... costs (300 x 20%) ............. Units in ending WIP inventory. costs 150 x (1–30%) ..150 880 60 865 105 700 © The McGraw-Hill Companies.....000 1........... 150 60 700 300 700 120 1..... 1997 Solutions Manual.

$9......50 $ 3................................. 1.................50 x 700) ........688 $3.................010.322 $3.... Inc............322/865 units) .. Conv...................042 Total costs to be accounted for ........010 Materials ($6... Total costs accounted for .. 5/e .238 Materials ($6.................. 794 Materials ($6................... costs ($3....84 x 60) .. Costs accounted for: Costs assigned to units transferred out Costs from beginning WIP inventory ... Total costs transferred out .... Current costs of units started and completed......... $ 624 Current period costs ..50 x 60 units) ..208 230 $3...458 $ 6... Conv............... $8..... and costs in ending inventory total $1.428 780 $6..........656 Cost of ending WIP inventory ... © The McGraw-Hill Companies.... $9......656.... Costs transferred out total $8.................... costs ($3.............5–25.....720/880 units) .... costs ($3......208 $ 136 3......550 $5........720 $6....... Conv............. costs ($3...... 1997 130 Cost Accounting.666 Cost per equivalent unit Materials ($5........ $ 624 Current costs added to complete beginning WIP inventory ........ 7. Conv........84 x 700) ....................228 *Includes $1 rounding error. (continued) Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory ...................666 Direct Materials Conversion Costs $ 488 5........458 2....84 x 105 units) ..84 $ 488 $ 136 390 404* 4............ 9....................................50 x 120) ........

..... $ 124...980 $ 21...000 units) .....980/19. Inc.02 $ 30...640 $577.000 5.... Total units to account for.... Units in ending WIP inventory.........240 Total costs to be accounted for . 8...000 14.. Conv.000 Units accounted for: Completed and transferred out .) Compute cost per equivalent unit—weighted average method.000 4.... (35 min.... 17..000 17.....820 390........... Direct Materials Conversion Costs $ 50.......000 x 80%) .000 21.....160 Current period costs .000 19...420/21.... Materials (5....600 $441... $1. Conv.. units Eq....000 x 40%) . costs ($577.....420 $ 73...........400 Cost per equivalent unit Materials ($441.. 1997 Solutions Manual..5–26.000 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory... Total units accounted for .340 504.... 895.......000 17......................019... Units started this period . units Flow of units: Units to be accounted for: Beginning WIP inventory .......000 22.......... costs (5....42 © The McGraw-Hill Companies....... Physical Units Equivalent Units Materials Conversion Costs Eq... Chapter 5 131 ...000 22...000 units) ..000 2......

........000 x 40%)................340 504......... units Flow of units: Units to be accounted for: Beginning WIP inventory ...............02 $ 30.. 8...019................480....000 22....420/21. Conv........000 19....140 60....000 4........920 Total costs accounted for .......... Inc.5–27........ Total units accounted for.....160 Current period costs .000 Materials (5..... 5...........400 Direct Materials Conversion Costs $ 50..... 1997 132 Cost Accounting... 17......640 $577.340 84.000 17. 22. Physical Units Equivalent Units Materials Conversion Costs Eq... and costs in ending inventory total $144... 895........ © The McGraw-Hill Companies.420 $517..........000 2............. $1...................840 $577.240 Total costs to be accounted for ...420 $ 73...019...000 17........... $ 874.. costs (5...600 $441....... 5/e .. $ 124.980 $ 21....000 21.. 144........ costs ($577.........42 $357. units Eq......000 Units in ending inventory .........820 390...000 14........000 units) . Total units to account for ..) Assign costs to goods transferred out and ending inventory— weighted average method...... (20 min....... Costs accounted for: Costs assigned to units transferred out..000 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory .000 x 80%)..400 Cost per equivalent unit Materials ($441..920..... Conv................. Units started this period . $1....080 $441.980/19......000 Units accounted for: Completed and transferred out ...000 units) .980 Costs transferred out total $874.480 Costs of ending WIP inventory ..

..160 Current period costs ... Conv.....000 22.. Chapter 5 133 .......000 14.40 The unit costs are slightly higher under weighted-average than under FIFO....400 Cost per equivalent unit Materials ($390........ Total units accounted for .......000 22..) Compute cost per equivalent unit—FIFO method.600 5...000 18...640 $577.....000 4. Units started this period .............. © The McGraw-Hill Companies..420 $ 73.... units Eq. Conv......000 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory.000 9....... Materials (5....600 2.......019.. Materials 8.... $ 124. $1.000 x 80%) .......000 x 40%) ...600 units) .......... Inc. (35 min....980 $ 21.. 8.....820 390..600 9. Started and completed currently ..600 units) ..... which increases weighted-average unit cost.... 895... Conv......240 Total costs to be accounted for ..........600/18.....00 $ 30.000 5.. Total units to account for..... Direct Materials Conversion Costs $ 50.....340 504.......000 x (1–30%) ...... 1997 Solutions Manual... costs 8. The costs per unit in beginning inventory were slightly higher than the cost per unit incurred this period...000 Units accounted for: Completed and transferred out From beginning WIP inventory...000 5...000 x (1–30%).... costs (5.....000 16.600 9... Physical Units Equivalent Units Materials Conversion Costs Eq..5–28. costs ($504..600 $441... 8... Units in ending WIP inventory ... units Flow of units: Units to be accounted for: Beginning WIP inventory ...640/16.

.000 x 40%)...000 © The McGraw-Hill Companies.... (20 min........) Assign costs to goods transferred out and ending inventory— FIFO method..000 Materials 8....000 4.........000 Units started this period .000 Units in ending WIP inventory.000 Total units to account for .000 x (1–30%) .. Inc..600 9.. Total units accounted for...............000 18................ 14.......600 9....... 5... Started and completed currently...........000 x 80%). units Eq.. 8.. units Flow of units: Units to be accounted for: Beginning WIP inventory .........5–29....... 22.000 16.. Physical Units Equivalent Units Materials Conversion Costs Eq........... 22... 8........ Conv..000 5......600 2.... Conv....... costs (5.....000 Units accounted for: Completed and transferred out From beginning WIP inventory . 1997 134 Cost Accounting... costs 8.....000 Materials (5. 9.600 5..000 x (1–30%) ... 5/e ...

. Inc.....019............ $1..............420 $ 73...... Under weighted-average.................42 for conversion costs..980 $ 21...240 462............ Total costs accounted for .....600 $357..340 504..600 $517.......160 287...000) ... 895....640 $577............600) ...160 Current period costs ........800 $577............019......... costs ($30.............180 Cost of ending WIP inventory.5–29.....640/16...00 $ 30... Conv.420 60..........400 Cost per equivalent unit Materials ($390........ costs ($504......240 Total costs to be accounted for .. Chapter 5 135 ................... the unit costs are $21.... Total costs transferred out ............820 $ 73....40 x 9............ Materials ($21 x 5....820 390.600 170...000) ... 1997 Solutions Manual.......840 $ 50...... Current costs of units started and completed: Materials ($21 x 9........600 units) ..... 144.000 874........... © The McGraw-Hill Companies..980 273.40 for conversion costs.............340 117........ costs ($30.600/18...........000) .... The reason for the difference in unit cost is explained in Exercise 5–28..000) .... $ 124.... Under FIFO... Conv..........000 $441............600 $441...600 189.40 x 5...........600) ................ the unit costs are $21 for materials and $30........ $ Direct Materials Conversion Costs $ 50....40 x 2.... Costs accounted for: Costs assigned to units transferred out: Costs from beginning WIP inventory. $1...................400 Ending inventory is slightly higher under the weighted-average method because the unit costs are higher under weighted-average.....40 124... (continued) Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory..... costs ($30..............420 84.02 for materials and $30...800 Materials ($21 x 4.... Conv.....600 units) ... $ Current costs added to complete beginning WIP inventory .... Conv....

000 450 8........ 10. Started and completed currently........ 1997 136 Cost Accounting...000 units x 45%) ....000 © The McGraw-Hill Companies..............000 Prior department ............ 3......000 Units started this period ..... 2 Department Flow of units: Units to be accounted for: Beginning WIP inventory ...... 2 (1...) Production Cost Report: Overland Co..................................................................000 Units in ending WIP inventory..000 0 6.... Total units accounted for.....850 2......000 Prior department ... 10.. (50 min. 5/e ................. Physical Units Equivalent Units Prior Department No.............. Inc........... Department No...—FIFO method........................400 6. 2 [3...............000 units x (1–20%)].. 3.............. Department No... 6...............000 Total units to account for .......5–30..000 1.......... 7..........000 7.000 Units accounted for: Completed and transferred out From beginning WIP inventory ....... 1..........

.....406 Current period costs .............. 78.70 $ 8............ $117.. 2 ($74............240 Total costs to be accounted for ...166 Cost of ending WIP inventory...5–30. 2 ($8... Current costs of units started and completed: ....... 1997 Solutions Manual...... 107.000) .......... No. Dept.40 x 450) .....................646 Prior Department Department No.160 28.600 Prior department ($4.246 $ 4.......40 x 2.....906 0 20.906 74.... Total costs accounted for .. 8.. Inc..........246 50..70 x 1.....480 Prior department ($4. $ 18....... Dept......40 $14......400 3...... Dept.......646 Cost per equivalent unit Prior department ($32....... No.... No........340/8..400 $74...900 $47.......................200 $42....406 Current costs added to complete beginning WIP inventory ......... Dept...... $125........ $ 18...400 $ 3...000) ........... No............500 $ 3................................. (continued) Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory.....000 units) ...... 20.............. 2 ($8. 2 ($8....... Total costs transferred out .500 32...340 $78.........................000) .....780 $78.466 © The McGraw-Hill Companies........ Costs accounted for: Costs assigned to units transferred out: Costs from beginning WIP inventory.......400 units) ......70 x 6... Chapter 5 137 .............700 4........... 2 $14......160 Prior department ...700 $47...40 x 6......850 units) . $125......900/7.....

........... Department No.. Physical Units Equivalent Units Prior Department Department No.646 Direct Materials Conversion Costs $14........660 4... Under weighted-average....240 Total costs to be accounted for ... 1997 138 Cost Accounting......) Production cost report—weighted average method: Overland Co....000 450 9... Department No.000 units x 100%) .000 9.....................480. $125. (50 min.......... which is $8...900 $47.............000 units). 2 (1.......000 1.........450 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory ......... 107....400 $ 3...........000 9... 5/e ..........246 $ 4..... Total units accounted for. The difference is due to the differences in costs per equivalent unit between FIFO and weighted-average........... Units in ending inventory .......406 Current period costs ......... 2 Flow of units: Units to be accounted for: Beginning WIP inventory ..000 10..............500 32. © The McGraw-Hill Companies.400 $74.......... Prior department (1........................000 10..906 74......... $125.646 Cost per equivalent unit Prior departments ($47....000 units x 45%) ...... 3. the ending inventory is $8....................740 $47..................466.................74 $ 8.......... This is $14 less than FIFO..... Units started this period .000 Units accounted for: Completed and transferred out .......5–31....... 9.180 Costs of ending WIP inventory ........ 2 ($78.. $ 18....246/9......000 10....... $117.340 78.. Costs accounted for: Costs assigned to units transferred out..726 $78...... Inc..450) .....466 Total costs accounted for .........28 $42....520 3..246 The ending inventory is lower under the weighted-average method than under the FIFO method. Total units to account for . 8.000 1........................400/10...............000 7.

..U.U.... 40.......000 – 12.. Chapter 5 139 . inv........... The answer is (4).. transferred out = units started + beg............. © The McGraw-Hill Companies...U. 145....000 in beg...000 E.... Conversion costs 90% x 40. produced this period........U.500 = 132.000a E...500a 5.. a..000a –0– E. = 330.. a320.Solutions to Problems 5–32. Prior Department Costs Units transferred out.000 Materials 330.500 E..........500 E....) Compute equivalent units—multiple choice...000 E.. – 40..000 E..... produced this period.000 units.U...U...... (45 min.. E.U...U.. 330..000 E.. E..000 E.. aUnits Conversion Costs 132..U..000 in ending inv......000a Conversion Costs 330... Inc. Conversion costs 40% x 12...... 12.......500 b.. 366..U... 137.. 370.000 E.. are added at the end of the process.000 + 25.... Materials Units transferred out.... in ending inventory: Materials 100% x 12.......U. The answer is (2).. 1997 Solutions Manual.....000 E... 132.... 330....000 transferred out..500 units... in ending inventory: Prior department costs ......... bMaterials started + 50.500 units............. inventory – ending inventory = 120. Materialsb....500a E....... 36...U.U...U...

....000 E............ 259...... done this period ................ 43.....U.... in ending inventory 40% x 32....... Conversion costs: 30% Started and completed during the period ..... 6....U......000 units. Units still in ending inventory: Materials: 100% x 8..... The answer is (2).....U.........U........... Inc..200 a40% E. 42.......U........... 0 b x 10.000 units = 256.......... = 100% – 100% already done at the beginning of the period.000 E......000 units...... c35...U..... Materials To complete beginning inventory: Materials: 0%a x 10....U...000 transferred out – 16.....U.U................ 8.000c E.........000 E.000 from beginning inventory..U.000 E...000 units... E.... 35... E. The answer is (1).000 E.. a0% Conversion Costs 3......... 35.. d.U..000 E.................. = 100% – 60% already done at the beginning of the period...000 E... 4... E....000 units . b30% © The McGraw-Hill Companies.000 units....... E.. 12.U....U........... 1997 140 Cost Accounting...000 from beginning inventory...... to complete beginning inventory 40%a x 16............... Conversion costs: 50% x 8..000 units .......000 = 45.U.....800 E..... 5/e ......... (continued) c..000 transferred out – 10. = 100% – 70% already done at the beginning of the period.... b240..400 Started and completedb ..5–32. 240... Work done in current period .......

000 60.... Units in ending WIP inventory......000 Units accounted for: Completed and transferred out From beginning WIP inventory........000 x 50%) ............. The answer is (3) Physical Units Equivalent Units Conversion Costs Flow of units Units to be accounted for: Beginning WIP inventory .................000 320...... 50.... (120..... Inc...000 120....... 320...000 © The McGraw-Hill Companies.5–33.....000 Units started this period . Started and completed currently . 270...000 150........ (30 min) Production report to find conversion costs in ending WIP inventory— FIFO method a. Total units accounted for............000 10..... 1997 Solutions Manual......... (50.....000 150.........000 Total units to account for ..000 x 20%) .. Chapter 5 141 ........000 220....... 50..........

...... units x 80%)] Cost per unit for the current period is $2...............20 x 10..... costs ($2......000) ......000 equiv.... 5/e . costs ($2............ (continued) Conversion Costs Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory ...... Cost per unit for the previous period is $2........ $438... © The McGraw-Hill Companies..5–33............15 [= $86..... costs ($2...........000/220...000/(50..000 Total costs to be accounted for .....20 x 60...000 (Answer) Total costs accounted for ..........000) ......000 Current period costs ......20 Costs accounted for: Costs assigned to units transferred out: Costs from beginning WIP inventory ..... 1997 142 Cost Accounting..20 x 150....... 484....000 Cost per equivalent unit ($484..000 b...........000 Total costs transferred out ........000) .000 Current costs added to complete beginning WIP inventory: Conv. 22.................. 132.000) ..... Inc.. $570....000 Cost of ending WIP inventory: Conv.... 330... $ 86..........................000 Current costs of units started and completed: Conv.... $ 2...... $ 86.20 as calculated in (a) above. The answer is (2).. $570....

...000 6..... Units in ending WIP inventory........ a.. Baja Corporation Assembly Department Production Cost Report—Weighted Average FLOW OF PRODUCTION UNITS (Section 1) Physical units Units to be accounted for: Beginning WIP inventory ..000 6. Started and completed currently ......400 (70%) 5.....000 4.......000 4.000 1..800 4....700 143 © The McGraw-Hill Companies..........5–34.000 1....... (50 min.. 1997 ... Total units to be accounted for ........) Prepare a production cost report—weighted average method: Baja Corporation... Total transferred out.. Units started this period ........000 6.. Inc... Total units accounted for ..000 2....000 700 (35%) 4..............400 4.. 1.....000 2....000 3.....000 4.800 (90%) 5.................. Materials Labor Manufacturing overhead 1....000 (Section 2) COMPUTE EQUIVALENT UNITS Prior department costs Units accounted for: Units completed and transferred out: From beginning inventory..........000 5..

..........................00 $8. a.000 $20..........000 $23..... 3............000 Labor $ 7.000).. 1997 ........... 11............000 ÷ 5........200 ÷ 5.. 64......000 $116..........000 64....000 Labor ($8 x 4.000 36.....700 Current period costs ...00 $128. Materials ($116.........200 36...700)..000 Labor ($8 x 1...700 Total costs accounted for . Inc..000 160.....000 $ 80...........200 Manufacturing overhead ($5 x 700) .... $128....800) ....000)....000 $43............000 96....000 $32.......500 144 © The McGraw-Hill Companies. (continued) DETAILS Total costs Costs to be accounted for: (Section 3) Costs in beginning WIP inventory.....000 Materials ($20 x 1............... Labor ($43.........000 $192...000 Manufacturing overhead ($5 x 4...... Manufacturing overhead ($23......000 $43........00 $5...400)..... 32.....500 ÷ 4................. 80.200 Manufacturing overhead $ 5..000 $116....000)......... $114.....5–34....700 Cost per equivalent unit: (Section 4) Prior department costs ($192................400) ....... 36....000) ....000 Materials ($20 x 4...........000 11.........000 Costs assigned to ending WIP inventory: Prior department costs ($32 x 2.....500 18... Costs accounted for: (Section 5) Costs assigned to units transferred out: Prior department costs ($32 x 4.............000 Total costs to be accounted for .000 $32.........................000) .200 $23.500 $192.000 Total costs of units transferred out .. 20..700 Prior department costs $ 32....... $374..000 ÷ 6..500 $20...500 Total ending WIP inventory.........00 Materials $ 20.... $ 64. $374.............000) .. 310........200 3.....800).......... 260.

.........................000 36.. 145 © The McGraw-Hill Companies..........800) . $374.................000 64...000 Costs assigned to ending WIP inventory: Prior department costs ($32 x 2.. 64..........000) .........000)...... 80... • Labor: Equivalent unit labor costs per unit ($8) is below management’s goal of $10.....50......00 x 700) ......000 Manufacturing overhead ($5 x 4...700 Materials Labor Manufacturing Overhead $128..200 3...000 Materials ($20 x 1... (continued) Prior Department Costs Costs accounted for: (Section 5) Costs assigned to units transferred out: Prior department costs ($32 x 4.............. 260. 20.000 $116..000)........ 11.000 $32.......000) .......................400)............ 3.....000 Labor ($8 x 1.5–34. $128....200 Manufacturing overhead ($5...500 Total ending WIP inventory.................... Inc. 36...... The report to management should include the following items: • Materials: The $20 per unit goal set by management is currently being achieved by the Assembly Dept.000 Labor ($8 x 4.000 $20......000 $ 80.....000 Total costs of units transferred out .200 $23... 1997 .... • Manufacturing overhead: overhead costs per unit ($5) is slightly higher than management’s goal of $4.... $114........000 11..... a..500 b.........000 $43......500 $192.. 32.....000) ..000 Materials ($20 x 4..700 Total costs accounted for ..........

........ a...000 6. 146 © The McGraw-Hill Companies.................... Started and completed currently ........000 5............000 3......) Prepare a production cost report—FIFO method: Baja Corporation.....000 1........... b50% = 100% – 50% already done at the beginning of the period..000 –0– 3.000 6..000 2..800 (90%) 4..................000 2...........000 5....5–35................800 400 (40)%a 500 (50%)b 3. 1997 ..400 (70%) 700 (35%) 4...... Units started this period .. Inc..... 1.............. Total units accounted for .000 (Section 2) COMPUTE EQUIVALENT UNITS Prior department costs Manufacturing overhead Materials Labor 1.. Total units to be accounted for .... Units accounted for: Units completed and transferred out: From beginning inventory.... Units in ending WIP inventory. (50 min..........800 4......000 –0– 3.......000 1... Baja Corporation Assembly Department Production Cost Report—FIFO FLOW OF PRODUCTION UNITS (Section 1) Physical units Units to be accounted for: Beginning WIP inventory .200 a40% = 100% – 60% already done at the beginning of the period....................000 3.

...............000 Total costs to be accounted for .000 ÷ 4..5–35........000 ÷ 4.. 1997 .................................500 18...50 $4.2857 Materials $ 20......00 $20. $ 64..............800) .........................000 $192......... 147 © The McGraw-Hill Companies..000 $23....200 Manufacturing overhead $ 5.......... Manufacturing overhead ($18..700 Current period costs ...200).....000 96............000 160...000 $43......... $374... a..000 ÷ 4...000 ÷ 5..........................800)....... Inc............000 $116.700 Cost per equivalent unit: (Section 4) Prior department costs ($160. Labor ($36.....000 Labor $ 7....... 310...........200 36..00 $7...000) ........ (continued) COSTS DETAILS Total Costs Prior department costs $ 32....................000 $32..500 Costs to be accounted for: (Section 3) Costs in beginning WIP inventory........ Materials ($96......

............843 Current costs of units started and completed: Prior department costs ($32.......... 96....................... (continued) Details Total Costs Costs accounted for: (Section 5) Costs assigned to units transferred out: Costs from beginning WIP inventory....... 60............. $ 64..000)..143 96.... 3.............857 Total costs of units started and completed . 69.700 Current costs added to complete beginning WIP inventory: Prior department costs ........2857 x 500). –0– Materials ......50 x 3...2857 x 3....000 60...............500 Manufacturing overhead ($4............ Inc........... 191.........................500 –0– 3...................................... 1997 .857 148 © The McGraw-Hill Companies........5–35.............357 Total costs of units transferred out ............... –0– Labor ($7...50 x 400) .......200 $ 5..... a..00 x 3.000)..00 x 3.................................000) .................... 22........000) ..........000 Materials ($20...................000 22.........000 –0– $ 20.....500 12.000 2..........000 Labor ($7............... 2..........000 $ 7..200 Prior department costs Materials Labor Manufacturing overhead $ 32................ 12..........143 Total costs from beginning inventory ............ 261..........000 Manufacturing overhead ($4.....

.000 10........... $113.....500 Total costs accounted for .. 36.2857 x 700)......................50... 149 © The McGraw-Hill Companies.................. Labor: Equivalent unit labor costs per unit ($7..... The report to management should include the following items: • • • Materials: The equivalent unit materials costs per unit ($20) is the same as management’s goal of $20.................. (continued) Details Total Costs Costs assigned to ending WIP inventory: Prior department costs ($32.50) is below management’s goal of $10.........000 Total ending WIP inventory .200 $23... a............000 Materials Labor Manufacturing overhead 36...00 x 2.000) .000 Labor ($7.....000 $43.....................500 Manufacturing overhead ($4....500 3......000 Materials ($20...... 10..... $64........ 3...700 Prior department costs 64......50 x 1..500 b......000 $192.............800) ..........400) .....000 $116.....................5–35.00 x 1.................29) is below management’s goal of $4.... Inc. Manufacturing overhead: Overhead costs per unit ($4............ $374......... 1997 ...

. 300.........000 Units in ending WIP inventory......200............200.000 300.........000 1.....000 150...000.......................000 Total units accounted for .......... 1..000 900...000 150 © The McGraw-Hill Companies... FLOW OF PRODUCTION UNITS (Section 1) Physical units Units to be accounted for: Beginning WIP inventory .000 Total units to be accounted for ... Lakeview Corporation Production Cost Report—Weighted Average a..050................ 1997 .000 900....000 (Section 2) COMPUTE EQUIVALENT UNITS Materials Labor Overhead Units accounted for: Units completed and transferred out: From beginning inventory....050.................... 900...............000 900.... 700... 200.. 1..000 (50%) 1....... Inc.) Prepare a production cost report and adjust inventory balances—weighted average method: Lakeview Corporation. (60 min.000 (50%) 1..... 1....000 Started and completed currently ....... 200........................000 150......................5–36.....200.000 Units started this period .000 Total transferred out.......................

........... 4..32 x 900.20 x 900....000 $1.500.........386....500....... COSTS (continued) Total costs Costs to be accounted for: (Section 3) Costs in beginning WIP inventory. 330.......000 Total ending WIP inventory.....386..000 1.......000 375.............196.....000 $1.... 1..000 Overhead ($1.........000 Labor ($2........000 $1... $5......32 $1... 4......000 $2.........000 $1.........000 $1.. 1.... Labor ($2.000 $1....000 $2..........32 x 150......000 Overhead $ 189.188....20 x 150...000) .310........492........188..000).......25 DETAILS Labor $ 315...000 $2....20 $1........ $ 704..........000 Materials $ 200...000 Total costs of units transferred out ....125....050.050.. 198...000) ....000 ÷ 1... Overhead ($1....000 198..310.........980....5–36....500.. Costs accounted for: (Section 5) Costs assigned to units transferred out: Materials ($1......000 Costs assigned to ending WIP inventory: Materials ($1..000 Labor ($2.000 Cost per equivalent unit: (Section 4) Materials ($1...386..........000) .300.995..000)..125.....000 Overhead ($1...000 330... $5..000) ...000 Total costs to be accounted for .000)................196. $1............ 1997 ........000 1.....980..310....000 1.197.... Inc...293.......000 $1.....000 151 © The McGraw-Hill Companies.........000 ÷ 1.....000).000 Current period costs ..25 x 900.000) .....000 Total costs accounted for .........000 ÷ 1... 375.200............25 x 300........... 903.

...... Finished Goods .....960 Correct . ($242.....040) Journal entry: Work in Process ........ 5/e .....800 186.040 55.5–36..20 + 1.. Finished goods would have been overstated. $660..................009...240 Additional computations: a200.. 903... Inc... Adjustment required: Work in Process Per problem statement ....25 + 2..000 c.. Work in process would have been understated....800 242.. Income would have been understated...000a $ 55. Cost of Goods Sold..000 ($1....000 Difference .800 954.................. (continued) b....32) = $954.... © The McGraw-Hill Companies........ 1997 152 Cost Accounting......... Finished Goods $1.

. for conversion costs) (20.000 in ending inventory) Finished Goods 895.. $162......500 Cost of goods sold...000 E. Therefore..000a 120.000 in ending inventory) b$416. 27.U. Inc.160 = 20.. 27.500 materials conversion costs 256..L... $357.L..148a To Cost of Goods Sold 268.250 E.552 Beginning Balance Current work: materials (given) conversion (given) Ending Balance 358..U. Chapter 5 153 .000.U.. (70 min.. transferred out x ($643.000c Transferred out: From beginning inventory 150. + D. Work in Process 358.160a 416.500/$130. for materials) (20.U..544 Transferred in Balance aFrom 626..e...500 – $330...... the ratio of applied overhead to total conversion costs found in the beginning inventory should also hold for conversion costs this period.250 – 11.500 (i.5–37..500 $286. 2......U.000 E.500 – $286.604 (70%) total credits in Work in Process.L. actual overhead is $330.L.250 E.....500 $643..500 Based on the balance in the manufacturing overhead account.. transferred x ($150.000 $357. overhead is overapplied by $27.25 D. = 31.25 D.000).000).000 E...200/25.... Cost of Goods Sold $626.500 Overhead applied in beginning WIP inventory is 125% of direct labor costs (i.988 = 20... 1997 Solutions Manual..604 Overapplied overhead (See explanation below) From Finished Goods 27..250 E... $643..988b Additional computations: a$120.U..... Since the application rate has not changed. 1.500 © The McGraw-Hill Companies.. For this period..000 – 5.) Show cost flows—FIFO method: Bran-U-Flake Co.....200 From current work 643.....000 = = = = $643.. D..e....500/31. The journal entry to assign the overapplied overhead to cost of goods sold is: Overapplied overhead ..... = 25.

.... a60% (Section 2) Compute Equivalent Units Conversion costs 1.........000 1.......000 8............500 100 (20%) 9............000 9.... Malcolm Corporation Production Cost Report—FIFO a.......... 5/e . Total units to be accounted for .......... Total units accounted for ... (40 min.........200 a = 100% – 40% already done at the beginning of the period......... © The McGraw-Hill Companies....... Units started this period ..500 500 10............. Started and completed currently. Units in ending WIP inventory ..................................000 10......... FLOW OF PRODUCTION UNITS (Section 1) Physical units Units to be accounted for: Beginning WIP inventory .............) Prepare a production cost report and show cost flows through accounts—FIFO method: Malcolm Corporation. 1997 154 Cost Accounting................... Units accounted for: Units completed and transferred out: From beginning inventory . Inc...........000 600 (60%) 8...5–38.

....... $36.........200).............840 Cost per equivalent unit: (Section 4) Conversion costs ($36.............. $ 3................... $ 840 Current costs added to complete beginning WIP inventory: Conversion costs ($3..448 = $2..840 840a 35....... Production costs total $3............ 392 Total ending WIP inventory..........260............................................................................................. 33.................348 Total costs from beginning inventory ..608a All costs have been accounted for.......913 per unit....188 Current costs of units started and completed: Conversion costs ($3...................... 2........... c...... 1997 Solutions Manual......260 Total costs of units started and completed ................000 a$35..................... 36..... less than management’s target of $4..... Inc.......... Chapter 5 155 ...... © The McGraw-Hill Companies................ $36.....................260 Total costs of units transferred out ...........348 + $33.........913 Costs to be accounted for: (Section 3) Costs in beginning WIP inventory........... (continued) COSTS Total costs Conversion costs $ 840 36.840 b.000 392 From this period's costs $ 840 2........................ $ 392 Total costs accounted for .....608 Finished Goods Inventory 36. $33........000 Total costs to be accounted for .................................260 392 $36......5–38........913 x 8.............. $ 840 Current period costs ....................... The company’s target has been achieved....................... Costs accounted for: (Section 5) Costs assigned to units transferred out: Costs from beginning inventory.......000 $36.840 $3.......500) ...... Beginning inventory: Conversion costs This period's costs: Conversion costs Ending inventory Work in Process To Finished Goods Inventory 840 From beginning inventory: 36.348 33..........913 x 100) ......................913 x 600).................... Various Payables 36........000 ÷ 9......... $36.........448 Costs assigned to ending WIP inventory: Conversion costs ($3........................

1997 156 Cost Accounting. a..700 – 500 = –500X 400 = 500X X = 80% Also. Inc. for the problem are: 4.) Solving for unknowns—FIFO method.200 The total costs incurred are the cost per equivalent unit times the equivalent units worked this period.700 = $8.70 = $97.000 = 11.70 per E.5–39. 1. Then. Equivalent units worked this period are the sum of the equivalent units to: (a) complete the beginning inventory (b) start and complete some units. (40 min. Equivalent units = Beginning inventory x (1 – percentage of completion of beginning inventory) + 100% of units started and completed + ending inventory times its percentage of completion = 2.250 + (1.800 equivalent units Let X be the unknown percentage of completion.440 © The McGraw-Hill Companies.800 = 500 – 500X + 2.500 x 30%) 2.000 + 1.200 + 6. using BB = = = 400 = X = TO + EB – TI (2. 2. The cost per equivalent unit is obtained by dividing the ending inventory costs by the equivalent units in ending inventory.200 x $8. 5/e . and (c) to start the ending inventory Which.800 = 500 (1 – X) + 2.800 400 units 500X 80% b.250 + 500) + 450 – 2.800 – 2. $8.U.000 E. That is 11.U.700 collecting terms: 2.

d.5–39. (continued) c. Units started and completed equals the units transferred out (units completed this period) less the units started in a previous period (beginning inventory): 8.000 units © The McGraw-Hill Companies.000 = 17.000 units transferred out –1. Inc.. in equation form: Current Starts = TO – BB + EB = 19. Chapter 5 157 . Current units started equals units transferred out minus beginning inventory plus ending inventory or.000 units started and completed.000 + 6.000 – 8. 1997 Solutions Manual.000 units in beginning inventory 7.

100 + 3. The cost per equivalent unit is $3.) Solving for unknowns—weighted-average method. 4. 250 units were started and completed.200 E.200 + TI = $67.200 (6.100 were from the beginning inventory. 4. (50 min.5–40.350 units transferred out.75 (or $4.500 and solving for TI: TI = $67.350 Of the 4. The inventory equation yields: BB + TI = TO + EB Given the information in the problem.000 x 20%) equivalent units in ending inventory at a cost of $4.350 completed this period less 4.500 and the beginning inventory cost of $14. The right hand side of the equation is the total equivalent units represented by all costs in the account (18. Inc.). a.200 are entered in the equation: $14. we can compute the right hand side.U..75). Units transferred out equals beginning inventory plus current work minus ending inventory.500. That is.000 E.200 = $53. There are 1.300 © The McGraw-Hill Companies. 5/e .250 = 4.500 ÷ 1.U. The resulting $67. In equation form: TO = BB + TI (current work) – EB = 4.500 – 3.500 – $14. b.) times the cost per equivalent unit ($3. Therefore. 1997 158 Cost Accounting.100 started in a prior period equals the 250 started and completed this period.

10 equivalent units or 300 equivalent units.U.200/4.100 = EB = = TO + EB $19. First.800 units = $4 per E. Inc. 1997 Solutions Manual.200 transferred out costs divided by the units transferred out: $19. in EB times $4.U.360/1. Therefore.200 + EB $20..25 = 1.U.200 $800 Equivalent units in ending inventory equals $800 divided by the cost per equivalent unit. (continued) c. The cost per equivalent unit is: $3. Chapter 5 159 . we compute the cost of ending inventory: BB + TI (current work) = $1.25 (units in EB) Then units in EB = 300/. then these 300 equivalent units represent 25% of the physical count of units in the ending inventory.U. in EB E.200 © The McGraw-Hill Companies. Costs per equivalent unit is the $19.900 + $18.U.U.00 and solving for E.10 per E.5–40. since 300 E.000 – $19. it must contain $630/$2.600 units transferred out = $2. Since ending inventory contains direct materials cost of $630. If the inventory is 25% complete with respect to direct materials costs. d. = .U. Cost assigned to ending inventory is based on the relationship: $800 = E. in EB = $800/$4 = 200 E.

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.000 WIP Inventory .. The two approaches are 1) spreading spoilage costs over all jobs by establishing a provision for spoilage in the overhead rate. Normal spoilage is defined as goods that do not pass quality inspections as a result of normal or typical problems in the production process.. 3.. 6–3. and 2) assigning spoilage costs to a specific job or set of jobs.. 4.. Compute costs per equivalent unit for direct materials and conversion costs by dividing total costs to be accounted for from step three by equivalent units from step two. 1997 Solutions Manual........ The entry is as follows: Abnormal Spoilage ..Chapter 6 Spoilage and Quality Management Solutions to Review Questions 6–1.... 5. © The McGraw-Hill Companies..... The five steps are: 1... Inc.. Chapter 6 161 .. 6–2.. Summarize the flow of physical units: this is derived from the basic cost flow model (beginning inventory + transfers in – transfers out = ending inventory).. Abnormal spoilage is defined as goods that do not pass quality inspections as a result of unusual or infrequent problems with the production process..... and for units started during the period. The first approach is used when spoilage is a result of the production process and not one particular job......000 Abnormal spoilage is a loss for the period and would appear in the income statement.... The second approach is used when spoilage is a result of a particular production process used for a specific job.......... Assign costs to goods transferred out and ending WIP inventory using the cost per equivalent unit from step four and the flow of units from step one. 6–4... 2..... Compute the equivalent units produced taking into account the level of completion for direct materials and conversion costs. Summarize the total costs to be accounted for including in beginning WIP inventory. 5..... 5....

companies are able to minimize the costs of labor and materials used on defective goods after spoilage occurs. costs of spoilage are spread evenly across all products through an overhead rate.. costs of spoilage are assigned to that particular job and no provision in the overhead rate is necessary. Answers will vary. 1997 162 Cost Accounting. 5/e . advocates of total quality management would likely consider all spoilage to be abnormal spoilage. 6–10. 6–8. the disadvantage of moving the inspection point upstream on the value chain is that spoilage may occur further into the production process than anticipated and thus. using total quality management there should be no defects in production. Solutions to Critical Analysis and Discussion Questions 6–7. Answers will vary. 6–9. However. By moving the inspection point as far upstream on the value chain as possible. If spoilage is not detected during production and defective goods are sent to customers. or spread evenly across all products through an increased overhead rate (called the overhead method). © The McGraw-Hill Companies. So. 6–12. products would pass the initial inspection but become spoilage after the inspection point. Answers will vary. The costs of rework can be assigned to specific products (called the product identification method). Normal spoilage assumes that defects are a result of the regular operation of the production process. When spoilage results from the production process. Inc. If spoilage is attributed to a specific job. 6–11. However. 6–6. the company may lose future sales to the customer and perhaps other customers due to lost customer goodwill.6–5. Rework is performed on products that did not pass inspection and must be reworked to take care of quality problems discovered in the inspection process. Companies generally prefer to identify spoilage as early in the production process as possible.

....... (Step 2) Equivalent Units –0– 2.............................................. Total units to account for .. Total costs accounted for.......... Cost per equivalent unit (step 4): ($20....................... Current period costs .. Chapter 6 163 ... Sierra Company.................... (Step 1) Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ...........................000 1.....000 –0– $20...................... Cost of ending WIP inventory.600 400 2.000 1.................................................. $ –0– 20........000 $ 10...... Total units accounted for ...........000) .......600 400 2.......... 1997 Solutions Manual...... (40 minutes) Normal spoilage...............................................Solutions to Exercises 6–13............................... Total costs to be accounted for........... Costs accounted for (step 5): Costs assigned to good units transferred out.................. Total Costs Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory ....................................... a......... Inc.....000 © The McGraw-Hill Companies........... Units started this period................ Costs assigned to spoiled units........00 $16.............000 $20....................000 4...........000/2.......... Spoiled units....000 2..........000 Units accounted for: Good units completed and transferred out ........

000 units sold x $10 bAllocate based on good units: $1.000 a 1.500 b = 1.000 Finished Goods Inventory 16.600 x $10 $10.000 = 1..500 b 7.500 Spoilage adjustment a$16. 1997 164 Cost Accounting.000 a 10.600) x $4.500 = (600/1. (continued) b.6–13.000 16.000 © The McGraw-Hill Companies.000 $2.600) x $4.000 Cost of Goods Sold 10. Inc.000 2.000/1. Work in Process Inventory 20.500 = (1. 5/e .000 a 4.

............................................000 4.......................................... Total costs accounted for ............. Chapter 6 165 .... Costs accounted for (step 5): Costs assigned to good units transferred out .6–14.............000 $ 20................ Current period costs ........000 800 200 1.........000 Units accounted for: Good units completed and transferred out ............................................00 $16..000 $20....................................... Cost per equivalent unit (step 4): ($20.........................000) ........ Costs assigned to spoiled units .... Appalachian Enterprises............. 1997 Solutions Manual........000 © The McGraw-Hill Companies.................... (Step 2) Equivalent Units –0– 1................................... Spoiled units ....................................... Total Costs Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory............... (40 minutes) Normal spoilage..... Total units to account for.................. Inc........ Units started this period ................................000 1.....000 800 200 1...... Total units accounted for............ (Step 1) Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ...... Total costs to be accounted for .....000/1............. $ –0– 20......... Cost of ending WIP inventory ........000 –0– $20.........

. (Step 1) Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ...600 400 2.........778 2............................. (30 minutes) Spoilage during the process............... Cost per equivalent unit (step 4): ($20....... Units started this period .........000 2.......................................... Cost of ending WIP inventory.............000 $20..........000/1.....800 Units accounted for: Good units completed and transferred out .........................000 1... Total units accounted for ............... Costs assigned to spoiled units......... 1997 166 Cost Accounting...........222 –0– $20.......... (Step 2) Equivalent Units –0– 2...000 1........800) ........... Total costs accounted for ............ Total costs to be accounted for ... $ –0– 20........ Current period costs ................................000 $ 11.....11 $17........................ Total units to account for . 5/e ................... Inc........................600 200 1........................... Costs accounted for (step 5): Costs assigned to good units transferred out......... Spoiled units (400 x 50%) ...................6–15................................. Sierra Company.................... Total Costs Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory .000 © The McGraw-Hill Companies......................................

...............................818 –0– $20...............000 $ 22. Units started this period .............000 © The McGraw-Hill Companies..................... (Step 1) Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ............... Costs accounted for (step 5): Costs assigned to good units transferred out .......... Cost of ending WIP inventory .................. $ –0– 20.. Total units accounted for..000 1...............................000 $20... Spoiled units (200 x 40%)........73 $18.... 1997 Solutions Manual.............182 (rounded) 1............................000 800 80 880 Units accounted for: Good units completed and transferred out ................. Total costs to be accounted for .............. Current period costs .................................000 800 200 1............................ (Step 2) Equivalent Units –0– 1...............................................................................000/880) ....................... Total units to account for...... Chapter 6 167 ......... Total costs accounted for .. Total Costs Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory.... Cost per equivalent unit (step 4): ($20...... (30 minutes) Normal spoilage.......6–16...................... Inc.......................................... Appalachian Enterprises.. Costs assigned to spoiled units ..........

.. Units started this period ............800 © The McGraw-Hill Companies......................... Total costs accounted for ..................... Spoiled units..........720 1.......................................... Costs assigned to spoiled units....... Vail Company................... Inc..................000) ....................40 $ 9....800 200 2...........................................000 Units accounted for: Good units completed and transferred out ................................................ $ –0– 10....800 200 2...000 2...... Cost of ending WIP inventory................................................. Current period costs ........... 5/e ............... –0– 2. Cost per equivalent unit (step 4): ($10.... Total costs to be accounted for ............. (40 minutes) Normal spoilage.. 1997 168 Cost Accounting...... a.800 $ 5............ (Step 1) Physical Units (Step 2) Equivalent Units Flow of units: Units to be accounted for: Beginning WIP inventory .................800 $10..........................800/2. Costs accounted for (step 5): Costs assigned to good units transferred out.......... Total units accounted for ....................... Total Costs Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory .....6–17.................. Total units to account for ............000 1..080 –0– $10..000 1.....................

800 units produced] + $180 c$8.500/1.720 x 300 in ending inv. Chapter 6 169 .100 900 a aSpoilage of $1.800 units produced] © The McGraw-Hill Companies.6–17.800 to Cost of Goods Sold.080 a Finished Goods Inventory 9.720 x 1. Inc.100 = [($9. b$1.720 180 a 1.. (continued) b.800 = [($9.800 to Finished Goods Inventory and 1. Work in Process Inventory 10.100 c Cost of Goods Sold 8.800 9.800 b Spoilage adjustment 8.500 units sold)/1.080 allocated 300/1.)/1.720 1. 1997 Solutions Manual.

....800 © The McGraw-Hill Companies.... Total costs accounted for ............000 1...........125 675 –0– $10........ Vail Company.800 200 2...........800/1............ Total units accounted for .............. Inc........ 1997 170 Cost Accounting..... Units started this period ...... Current period costs .................920 Units accounted for: Good units completed and transferred out ......................... Total costs to be accounted for .......920) .........................800 $ 5..................... Costs assigned to spoiled units. Cost per equivalent unit (step 4): ($10................................. Total Costs Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory .............000 1..............................................................000 2.. $ –0– 10.. (30 minutes) Spoilage during the process.......... Total units to account for .800 10.............................6–18......................................... (Step 2) Equivalent Units –0– 2............................ (Step 1) Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ... 5/e ..... Costs accounted for (step 5): Costs assigned to good units transferred out. Spoiled units (200 x 60%) ...................................625 $10..................................... Cost of ending WIP inventory.................800 120 1.

...........) Normal versus abnormal spoilage: multiple choice..000 6–20. Normal spoilage is usually treated as an inventoriable cost. (10 min. Inc..... 120.000 6–21........ 120. (10 min.000 Work in Process Inventory.................... Abnormal Spoilage Expense .) Normal versus abnormal spoilage: Tree Co.... Abnormal spoilage is treated as a period expense and appears in the income statement........ © The McGraw-Hill Companies.... (10 min........000 Work in Process Inventory..6–19.... Chapter 6 171 ... The answer is (2)... Abnormal Spoilage Expense .. 100...) Normal versus abnormal spoilage: Park City Co.......... 100. 1997 Solutions Manual....

.000 Cost per equivalent unit (step 4): Materials ($27..........000 $ –0– 27...000 5................ 1997 172 Cost Accounting............... 72....................................000 300 5.....000 aRounded......000 Units accounted for: Good units completed and transferred out .. 6............. 5...000 x 30%)......000 600 5.... $72................ Conv..... $66.000 $ 8.... Davis Company (step 1) Physical Units (step 2) Equivalent Units Materials Conversion Costs Eq.................................. 5/e . 1.... units) ........ Units Flow of units: Units to be accounted for: Beginning WIP inventory . 6......... $ –0– Current period costs ........893 $27...............600 eq....6–22.....000 $45.....000 x 60%)......000 Materials (1........................ Costs accounted for (step 5): Costs assigned to good units transferred out.............000 $42.. costs (1..000 $ 4.......000/5. © The McGraw-Hill Companies......... costs ($45.. $72..600 Direct Materials 5. Units Eq.....300 Conversion Costs Total Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory . 5......000 $27....453a 2..........107a 2.. Inc..000 Spoiled units transferred out: ...491 $24.............300 eq........ (45 minutes) Spoilage During the Process........ units) .547 $45.........821 $ –0– 45........440 Total costs accounted for ... –0– Units started this period .......000 Total costs to be accounted for ...560 Costs assigned to spoiled units.... 6... Total units accounted for ..... Conv....000/5......000 Total units to account for ..........

.......................... –0– Units started this period . units) .. 1997 Solutions Manual.............................500 eq.. Conv.....462a 1....... 60....000/5...........$ –0– Current period costs ......000 200 5...000 x 50%) . units) ..... 6........000 Materials (1...000 Costs per unit are lower in exercise 23 because the inspection point was moved to a point earlier in the production process.538 $40....200 Conversion Costs Total Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory..... Units Eq.......000 $ 3....................000/5....692 $18.357 Total costs accounted for .000 x 20%) ... Chapter 6 173 ....6–23.. 6. costs ($40............ © The McGraw-Hill Companies............... 3. $ –0– 20....... Davis Company (step 1) Physical Units (step 2) Equivalent Units Materials Conversion Costs Eq................818 $20.500 Direct Materials 5.. Inc. costs (1...........200 eq....000 aRounded........................... $60.000 Units accounted for: Good units completed and transferred out ..... 5... $60. Units Flow of units: Units to be accounted for: Beginning WIP inventory . 6..182a 1..............636 $ –0– 40..... (30 minutes) Moving the Inspection Point.... Total units accounted for. Conv...................000 500 5....000 $20...........643 Costs assigned to spoiled units ... $56..........000 $40................. Costs accounted for (step 5): Costs assigned to good units transferred out .......000 $ 7.......... 1........000 Cost per equivalent unit (step 4): Materials ($20........000 Total units to account for....000 5................................000 $38..........000 Spoiled units transferred out: ........000 Total costs to be accounted for ........

. 1.511).000 Cost per equivalent unit (step 4): Materials ($300.025 Direct Materials 18.... –0– Units started this period ......000 $430................721a 8..... © The McGraw-Hill Companies...8% = $27. 1997 174 Cost Accounting......... $ –0– $ –0– Current period costs ..........000 18. 20.025 eq......500 825 19. 18.................... Conv. (45 minutes) Spoilage During the Process.789a 19. Units Eq..Solutions to Problems 6–24........... Conv.500 Spoiled units transferred out: .... 20..500 x 55%)................................... Units Flow of units: Units to be accounted for: Beginning WIP inventory ...........500 Materials (1.000 300.......511 Costs assigned to spoiled units..000/19..500 x 35%)...........279 $300........ 27.....000 $ 15...000 Total units to account for .....................000 $450.............000/19....... $722.......000 Units accounted for: Good units completed and transferred out ...000 $300...............286 $291........... Woodland Company a...325 Conversion Costs Total Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory ....... Thus............ (step 1) Physical Units (step 2) Equivalent Units Materials Conversion Costs Eq............500 525 19....000 b...... $750.................. units) .000 Total costs to be accounted for ......... 5/e ... $ –0– 450. 750..489/$722..... Costs accounted for (step 5): Costs assigned to good units transferred out..769 $ 23...211 $450.......... units) ... Total units accounted for . Inc..... 20..........000 aRounded....325 eq. costs (1................... costs ($450.. management should bring in the special team. Spoilage is greater than 1% (3....489 Total costs accounted for ........... $750...

..992 $ 6............. a...250 Materials (2.. 11.....000 875 11........856 $76........... Units in ending inventory: 2... 1997 Solutions Manual. Thus... Inc..000 70..000 $ 1....000 $25.......000 11.000 $ 6..000/12.......912 1.......... 3. Spoilage is greater than 2% (5.... Chapter 6 175 .975 units) .......000 Units accounted for: Good units completed and transferred out ..........000 Total costs to be accounted for .. 1.. Units Flow of units: Units to be accounted for: Beginning WIP inventory ............. Units Eq. (45 minutes) Spoilage During the Proces—weighted average: Orth & Kids Company....5% = $5.$ 11.......................724 Costs assigned to spoiled goods ....000 $69..550 units) ................812a 3...........345 $25............ 15........724)....................000 $76........................332 2......... Physical Units Equivalent Units Materials Conversion Costs Eq......$ 91... 90......... costs (2. Costs accounted for: Costs assigned to good units transferred out .075 Cost of ending WIP inventory ..750 x 50%) ..............743 1........000 b.... Conv...... 12.... © The McGraw-Hill Companies...6–25.....000 Current period costs .... Conv...................975 Conversion Costs Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory......... 15...347 $21......... 5....250 x 30%) .....750 Materials (1........$101... 4............075/$91............. management should bring in the special team..201 Total costs accounted for .................000 Units started this period ..000 20.... costs (1..........750 x 30%) ....000 aRounded.550 Direct Materials 450 11.........250 x 20%) ................. Total units accounted for.........000 Spoiled units transferred out: ... Conv. costs ($76....000 Total units to account for................000 Cost per equivalent unit: Materials ($25....$101...................000/11...000 525 675 12.. $ 5.......

...... 15......025 1..000 Materials 3. costs (2.. 12.............. 3....... Conv..................... costs 3..... 15...750 x 30%)........000 x (1–65%) .....250 x 30%)....... Units Flow of units: Units to be accounted for: Beginning WIP inventory .... Conv............6–26. Units Eq.........750 x 50%)... 2.......750 Materials (1................. (45 minutes) Spoilage During the Process—FIFO: Orth & Kids Company....250 x 20%)................ 8........... Physical Units Equivalent Units Materials Conversion Costs Eq........................................... Total units accounted for .................000 x (1–75%) .... Started and completed currently........................ Units in ending WIP inventory ....000 Units started this period ..................300 450 10. costs (1... Conv.......000 Spoiled units transferred out .............000 Total units to account for . a. Inc............................. 1......... 1997 176 Cost Accounting........... 5/e .050 8..000 Units accounted for: Good units completed and transferred out From beginning WIP inventory .............000 © The McGraw-Hill Companies. 3...000 750 8.250 Materials (2..........000 875 525 675 10....

management should bring in the special team...............000 Current period costs ......365/[$11.......... 71.....000) ........000/10..000 Total costs to be accounted for ... Conv..942 x 8........000 $1............983 $ 5. Conv. Costs of spoilage.............. Conv..942 x 675) ....000 20.....000 aYour $ 5....... 90..........$101..000 $6...860a 1.......... Current costs of units started and completed.365 Materials ($1........ Chapter 6 177 ......................... Conv.025 units) ..983 x 1........983 x 8..... costs ($6...534a 55.300 units) ....666 $72....942 x 875) ..........983 x 450) ... Total costs accounted for .000 + $8. Costs accounted for: Costs assigned to units transferred out: Costs from beginning WIP inventory.............142 $76.788 Materials ($1..9% = $5....000 1....000 $ 6...... Conv.........$ 11................ © The McGraw-Hill Companies....$ 11.......$101..........000 3..858 answers may vary slightly due to rounding...394 Materials ($1. costs ($6....456a 7.000 Current costs added to complete beginning WIP inventory: 8.547 Cost of ending WIP inventory: 4......... costs ($70........... Thus...........000 $25.6–26...689 1...$ 96...699 $23... 5. costs ($6.............000) ...000/10......... Inc........ (continued) Total Direct Materials Conversion Costs Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory........000 3..000 70.. Total costs transferred out ...... b..453 Materials ($1..332 15...000 $76.........050 units) . costs ($6..... 1997 Solutions Manual....................394])..................311 $25. Spoilage is greater than 2% (5.788 + $71.942 x 750 units) ......942 $ 6..........983 x 525) ..................000 Cost per equivalent unit: Materials ($20........................

Inc.........000 Spoiled units transferred out: 4............... Units Units accounted for: Good units completed and transferred out .......000 Total units to account for ......000...................000 x 100%) ............ Units in ending inventory: 30............................000 Conv...... 20. 80.. 1997 178 Cost Accounting. Total units accounted for 100... 66.....000 Conversion Costs Eq....................000 © The McGraw-Hill Companies....000 x 60%).000 66............... 5/e .... Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ....000 Conv.....6–27......000 4.... costs (30. cost (4..000 88.. The answer is (2)–total equivalent units for conversion costs = 88. 100.000 18..... (15 minutes) Equivalent units—multiple choice: Mesa Verde Co..000 Units started this period .....

the dollar amounts would probably be considered immaterial. 1997 Solutions Manual.. The most accurate approach is to assign the costs associated with rework and spoiled goods to the reworked and spoiled units (50 units and 100 units.6–28. whether defective or not. However. the $250 would be debited to Manufacturing Overhead and applied to all units produced. the $250 would be assigned to the 50 defective units and carried through inventory accounts and cost of goods sold. the $750 would be recorded as revenue when the company made the sale. Spoiled Units: The cost of spoiled units could be treated as normal spoilage and tracked separately. respectively). Using the overhead method. the accountants should match the costs of the spoiled units against their revenue of $750. © The McGraw-Hill Companies. If kept separate. Rework: The cost of rework may be accounted for using the product identification method or the overhead method. The cost of the spoiled units could also be treated as abnormal spoilage and written off as a period expense.) Spoilage with rework: Orlando Company. In any case. Using product identification. (20 min. Chapter 6 179 . Recommendation: Answers will vary. and these costs would likely be recorded as a period expense. Inc.

000 x 100%)........000/$324........ further action should be taken to reduce the cost of spoilage....000 40........00 $180.800 5...........600 200 4..... costs ($200.........000 Current period costs ..000 $200... $400........ 1997 180 Cost Accounting.. Conv...000 Report to management: $ 10....000 Direct Materials Units accounted for: Good units completed and transferred out ............. 3...000 units) .......000 Cost per equivalent unit: Materials ($200... $400............... Materials (1....000 x 20%)..... Inc.......... 200 4.................000/4......... Costs (400 x 50%).......4% = $50... Spoiled units transferred out: ..000)...... $ 14..000 3........ Thus.......... Physical Units Equivalent Units Materials Conversion Costs Eq....000 $ $ $144.. 50...00 4...000 16..............000/5..... Total units to account for .......000 Total costs to be accounted for ............ 5/e ..000 10.....600 1...000 $200.......000 $ 40..........................000 Cost of ending WIP inventory...... 386... (45 minutes) Spoilage During the Process—weighted average: Oregonian...........000 Conversion Costs Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory ...... Costs accounted for: Costs assigned to good units transferred out...000 190...................000 Spoilage is greater than 10% (15............ Units in ending inventory: Materials (400 x 100%) Conv...000 196........000 3......... © The McGraw-Hill Companies.....6–29......000 10...... Costs (1....... Units Flow of units: Units to be accounted for: Beginning WIP inventory ......... Inc...........................000 $200. Total units accounted for ..000 5........000 Costs assigned to spoiled goods.....000 $200. Units started this period .......600 1... Conv..000 50... 26...... Units Eq......... $324...................000 200 400 400 5....000 Total costs accounted for ...000 units) .

............ 6........ Chapter 6 181 ..300 100 2... 21....720 $43........ costs Eq...... Units Conversion Costs Eq....080 6...505 46 949 $2.000 units) . (45 minutes) Spoilage During the Process.300 100 3.. Costs 5. 6.........600 3...... 1997 Solutions Manual... Materials ($2...456 $1... Total units accounted for...................676 141 1... Physical Units Prior Dept..........600 Prior dept...200 $43.........941 Costs assigned to spoiled goods .....200 $ 7....570 Conversion Costs Total Materials Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory..... $ –0– Current period costs .500 $2.....6–30...300 Spoiled units .....000 Units accounted for: Good units completed and transferred out. ($43....175 Cost per equivalent unit: Prior dept. Materials (2..600 x 100%)..170 4...500 $ –0– 6....327 Total costs accounted for ..............475/4.....475 $6. Inc.... a. 2... Units Equivalent Units Materials Eq.... Conversion costs ($6..500/5..............175 Total costs to be accounted for .......... $52....200/6.....760 720 18.... Inc........300 100 2.000 Total units to account for......480 units) . $29.. Conv.... Units Flow of units: Units to be accounted for: Beginning WIP inventory .......500 $4........417 $23...475 $0...........600 x 80%) . 3.......... Racquet Products..000 3. costs (2....175 $ –0– 43...... 52...000 Prior Dept........... costs (2.658 $6.. 100 Units in ending inventory: ................ $52.............570 units) Costs accounted for: Costs assigned to units transferred out.... 907 Cost of ending WIP inventory ....600 x 45%) .......200 $1....480 1.......... –0– Units started this period (transferred in) . 6......475 © The McGraw-Hill Companies...200 $ –0– 2...

. ............. spoilage of $907 is relatively immaterial........... Abnormal Spoilage Expense .... Cost of Goods Sold ............... Work in Process Inv..... 605 302 907 c. ......... it would be easier (and more efficient) to record this spoilage as abnormal rather than tracking the cost through inventory in future periods.... 1997 182 Cost Accounting.. Given total costs accounted for of $52....... Journal entry.. Depending on company guidelines regarding spoilage....... 5/e ............ Spoilage is 3% of good units produced.175. this may be cause for management to pursue reductions in spoilage... © The McGraw-Hill Companies.. Thus...................... (continued) b.. .... Inc. Abnormal spoilage................ 907 907 d........6–30. Finished Goods Inv....... Work in Process Inv......

.000a 3..000 (Section 2) COMPUTE EQUIVALENT UNITS (Weighted Average) Materials Labor Overhead Units accounted for: Units transferred out .... 15...000 16........000 15................000 3....000 15.) Process costing with spoilage: Stateside Corp... 4..6–31......000 20.. Total units to be accounted for .......... Units started this period ..000 2...000 Note: See footnotes at end of production cost report....000 (33%) 16...........000 -01...... Stateside Corp. Units in ending WIP inventory....000 20... Spoiled units ........000 2. Total units accounted for ..000 20.................... 183 © The McGraw-Hill Companies. (70 min. 1997 ..000 (33%) 16............. Westcoast Division Production Cost Report—November FLOW OF PRODUCTION UNITS (Section 1) Physical units Units to be accounted for: Beginning WIP inventory ......000 -01..........000 15.... Inc.

.. Inc...22 x 15.......600b $104..........400 ÷ 20. Costs accounted for: (Section 5) Costs assigned to good units transferred out: Materials ($5.....310 Current period costs .. 1997 ..000 Note: See footnotes at end of production cost report............ 278..............300 $120...20 x 15. $ 78.. 184 © The McGraw-Hill Companies....20 $ 78.......000)................ COSTS (continued) DETAILS Total Costs Costs to be accounted for: (Section 3) Costs in beginning WIP inventory.000) .....000 ÷ 16.......000)..........290 Total costs to be accounted for .800 81. 306..860d 93.....000 $108........00 $7..200 $8......... Overhead ($115.. Labor ($128.......................340c $115....000 Overhead $ 21..... 108......600 Cost per equivalent unit: (Section 4) Materials ($104...........650 103. $ 69. $347...........400 $5................000) .......300 Materials $ 22....000 Total costs of good units transferred out..22 Labor $ 24................300 Labor ($8.........6–31....350 $128.......000)....00 x 15.000 Overhead ($7. 120.200 ÷ 16.......000)................

.6–31..200 + TI = TO + EB + spoilage 4.. 10......... 30....200 10.........440 –0– –0– $104.............. –0– Overhead.000 7...000 $115....... Overhead) b.......660 Labor Overhead 8............000 units b$81..500/10......... 1997 ................000 + 16....... 7..........000 + 3......22 x 2.000) .......300)...... overhead) + $9...4% of the cost of good units transferred out (3...000 + $51....... –0– Total costs assigned to spoiled units.....000 pounds) c$93......000 Overhead ($7...440 Labor .....22 x 3...... Report to Management: Spoilage is 3.............000 pounds x $51..... 185 © The McGraw-Hill Companies...440 Total costs accounted for ....000 + [$2 per hour x ($103.......400 $128..... 8........ 10.. management should call in a special team to investigate and fix the problem.....860 (Div....................000).... Inc...000 + (4...600 aBB Materials 15.350/$5)] d$21.20 x 1...600 = $10..200 Total ending WIP inventory.........860 Costs assigned to spoiled units: Materials ($5....660 Labor ($8. (continued) DETAILS Total Costs Costs assigned to ending WIP inventory: Materials ($5.....000 = 15...340 = $52..........000)..000)...........4% = $10....00 x 1.......440/$306..........000 + spoilage Spoilage = 2..... 15............000 (Dept........... Thus. $347..860 = $12.

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an activity (e.. 7–4. and costs of making the wrong decision if the allocations provide misleading information. 7–3. Some of the benefits of cost allocation include: (1) (2) (3) instilling responsibility for all costs of the company in the division managers. relating indirect costs to contracts. Inc. production) must recover all of its costs (both direct and indirect). additional bookkeeping.Chapter 7 Allocating Costs to Departments Solutions to Review Questions 7–1. jobs and products.. Some of the costs include: (1) (2) (3) 7–2. That is. Aside from regulatory requirements. costs are allocated if the benefits of cost allocation exceed the costs incurred to allocate. additional management costs in selecting allocation methods and allocation bases.g. 1997 Solutions Manual. in the long run. and constructing performance measures (“net profit”) for a division that may be more meaningful to management than contribution margins. Management often uses this type of information for performance evaluation and to assess long-run decisions. Chapter 7 187 . © The McGraw-Hill Companies.

) © The McGraw-Hill Companies. or that services the greatest number of other service departments.. Inc. 5/e . Allocations usually begin from the service department that has provided the greatest proportion of its services to other departments. This criterion is used to minimize the unrecognized portion of reciprocal service department costs. The essential difference is the allocation of costs among service departments. (Recall that the amount of service received by the first department to allocate in the step allocation sequence is ignored. The direct method makes no inter-service-department allocation. 1997 188 Cost Accounting.7–5. Cost Category Labor-related common costs Machine-related common costs Space-related common costs Service-related common costs Allocation Bases number of employees labor hours wages paid some other labor-related base machine hours current value of machinery number of machines some other machine-related base area occupied volume occupied some other space-related base computer time service hours some other service-related base 7–6. the step method makes a partial inter-service-department allocation. 7–7. while the simultaneous solution method fully recognizes inter-service-department activities.

its widespread usage by management would indicate the information is beneficial. Allocating zero costs is another allocation method. It is preferred (assuming cost-effectiveness) since it results in an allocation scheme that reflects the total cost of the use of each service. 7–12. Allocated costs were higher because high cost lab space. 7–10. This principle can be extended to even more factors. nor to a specific manufacturing department. Costs allocated to word processing were high. an advantage of not allocating costs is that the time saved reduces the expenses of cost allocation. thus word processing’s charges for typing was high. Many of the exact reasons for the continued use of information based on allocated costs are still unknown. © The McGraw-Hill Companies. The fixed portion is allocated on the basis of capacity demanded and the variable portion on the basis of services used. the costs can be traced directly to the office performing the payroll accounting function and then allocated to other departments on some rational basis that is expected to reflect a cause and effect relationship between the costs of the service and some activity. Costs which have a significant fixed component and a variable component as well are often allocated using dual rates. It too is an arbitrary method. Cost allocation may make managers more aware of common costs affecting long-run profitability. 1997 Solutions Manual. the costs of the payroll accounting function which represents a service used by many different departments cannot be traced directly to a product. Chapter 7 189 .Solutions to Critical Analysis and Discussion Questions 7–8. library costs and travel support costs were allocated to Word Processing. 7–11. management may want to make division managers aware of common costs of divisions that must be covered by division margins before the company as a whole earns a profit. Inc.. However. For example. When a cost has two or more different relationships between it and the cost object. An awareness of total costs may influence managerial behavior and decision making. Thus. 7–9. A disadvantage is that common costs must be covered before the company as a whole earns a profit. However. The reciprocal method takes into account all of the services rendered among the service departments. Costs that can be attributed to a cost object and can in both a physical and practical sense be related to the cost object with no intermediate allocations are considered direct. However. the costs of materials that become an integral part of the final product may be directly identified with the product and with the department which requisitioned the materials and used them in production. more than one factor may be used to relate the cost to the cost objects. Allocated costs are also used for contractual and regulatory purposes. The concepts of direct and indirect are related to a specific cost object within the organization. This created incentives for technical people to type their own work. Management may believe there are benefits to the use of allocated costs. However. 7–13.

some of the costs were incurred to provide capacity. 7–16. Inc. The addition of an employee in one department will increase the allocation base and. Dual rates might be established so that the capacity costs would be allocated on the basis of the capacity requested by each of the departments while the use costs would be allocated on the current basis. If no service department performs services for any other service department (or if all service departments render services to producing departments in the same proportions) then the direct method will give the same answer as any other allocation method. it may not be possible to obtain correlation between a cost and the allocation base. in fact. In practice. If each producing department has one employee and service department costs total $12. if a number of employees were an appropriate allocation base. though. 5/e . then the allocation would be: To P1: 1 employee x ($12.7–14. 1997 190 Cost Accounting. © The McGraw-Hill Companies. Thus. one would not expect the total cost to remain fixed when the number of employees increases. This problem of the “economies of scale” results in a need to find a basis for allocating the cost savings arising from such economies.000. Now if P1 adds an employee. the allocation would be: P1 P2 2 employees x ($12..000 cost reduction even though the manager of P2 took no action which would warrant such a reduction in costs.000 1 employee x ($12. reduce the allocation to the department which does not add the employee. 7–15. No entirely satisfactory and unique solution is readily determinable.000 and the manager in P2 has a $2. The service costs are being allocated on the basis of use when.000 ÷ 3 employees) = $4.000 ÷ 3 employees) = $8. An interesting problem arises when the joint capacity may be less than the capacity that would be required by each department individually. therefore. This would be the same as the allocation to P2.000 ÷ 2 employees) = $6. The manager of the department which does not add the employee benefits from the actions of the other department.000. One of the problems that may give rise to this situation is that the costs allocated do not bear a relationship to the allocation base. An example may serve to highlight the point.

they are entitled to 3/4 of the purchase price.000 acres to accommodate the intrusion of the oil developer.) Why costs are allocated: Barfield and McAllister.) Alternative allocation bases.. (10 min. oil producers use method (a) for allocating costs and revenues from common oil deposits which underlie separately owned tracts of land. It doesn’t matter to the McAllisters what the underground deposit looks like. the acre feet). 1997 Solutions Manual. (20 min. What is important is the impact it will have on their enjoyment of the surface.e. the proceeds should be split equally.. The Barfields would prefer costs to be allocated based on the relative volume of the underground oil reservoir (i. NOTE: By agreement. 7–18. They would hold that they must give up their use of the whole 4. a. Inc. Chapter 7 191 . not the use of the surface. Common Cost Building utilities Payroll accounting Property taxes on inventories Equipment repair Quality control inspection Allocation Base Space occupied Number of employees Value of inventories Number of service calls Number of units produced © The McGraw-Hill Companies. b.Solutions to Exercises 7–17. They would argue that since 3/4 of the oil-bearing rock is under their land. Surface areas are irrelevant because the asset being assigned is the rights to the underground minerals. The McAllisters would argue that since each party has one-half of the land.

000 = $60. it receives the greater cost allocation. TV Station 450 x $100. Wire service hours basis.) Alternative allocation bases: Cytotech Company.7–19. it receives a greater portion of common costs.000 450 + 300 Check: $100. Inc. 5/e . Use of hours of news broadcast as a basis allocates more costs to the radio station.000 = $40. a. The radio station uses a greater portion of hours of news broadcasts than the TV station and when hours of news broadcasts is the allocation base.000 + $40.000 = $17. © The McGraw-Hill Companies.000 b. (15 min.000 = $60.000 = $17. The TV station uses relatively more wire service hours than the radio station and when wire service hours is the allocation base..858 + $82.858 Radio Station 460 x $100. Allocation by wire service hours results in an allocation of more costs to the TV station.142 c.142 100 + 460 Check: $100. 1997 192 Cost Accounting. Hours of news broadcasts TV Station 100 100 + 460 x $100.000 = $82.000 450 + 300 Radio Station 300 x $100.

.000 $ 12.......... Operating profit before building occupancy costs Building occupancy costs: 10..........7–20....000 30................ © The McGraw-Hill Companies................ a.... An allocation scheme based on traffic count or profits before cost allocation might be considered more reasonable............. 33...000 Dry Goods $112..... 120.........000 x $400.000 Operating profit (loss) ..) Alternative allocation bases: WARP Enterprises.....667 Meat $85. Chapter 7 193 .... (20 min.500 b.000 x $400.500 100.................... “Meat” should be allocated more per square foot than “Dry Goods....000...... $51........ The front of the store may be more valuable space........... If so.....000.. 1997 Solutions Manual..... Inc........” There is little question that store areas with a greater customer traffic count are considered more valuable........333 120........

.000 = $42.40 per hour of direct labor 100. 5/e .00 per standard jacket 80.000 x $3.000 Direct labor hours: 1.000 3.000 2.00 per standard jacket 80.000 x $6. Standard: $640. Materials used: 1.000 Rate = = $3. Multiply the rate times the materials used per product: Standard: $300.20 = $640.000 = $12.000 Deluxe: $640. Divide the total overhead allocated to each product line by the units produced: Standard: $960.000 + $200. Standard: 100.) Alternative allocation bases: The Quality Jacket Company.20 = $960.20 per dollar of materials used $300.000 3.00 per deluxe jacket 15.000 x $6.67 per deluxe jacket 15.600.000 Deluxe: 150.000 © The McGraw-Hill Companies. Rate = $1.000 = $64.600. (25 min. 1997 194 Cost Accounting.000 = $8. Inc.000 2.000 = $6.000 Deluxe: $200.7–21.40 = $960.40 = $640. Compute rate per dollar of materials used: $1.000 Deluxe: $960.000 x $3.000 + 150.

Standard: 40.280. 1997 Solutions Manual.00 per standard jacket 80.000 = $16.84 per jacket 80.000 x $32.000 Deluxe: 10.000 = $16. © The McGraw-Hill Companies.000 = $32. Rate = $1. (continued) Machine hours: 1. Chapter 7 195 .7–21.000 2.000 + 10. Standard: Deluxe: $1.000 $320. Rate = $1.280..000 With units of output as the allocation base.00 = $320.000 3.000 + 15. Inc.000 x $32.00 per machine hour 40.600.00 = $1. the rate will be the same for both types of jackets.600.000 Output: 1.33 per deluxe jacket 15.000 = $21.

000)/80. B.............00 $21.. $42....... B. only the costs assigned to each product............ 16........75/jacket Direct labor = ($8 x 100...59 Allocation (Mat)..000/80............ a.75 10... $ 3.....00 21.........00 Allocated Overhead . Inc...... 21..... 8.. © The McGraw-Hill Companies...75 10.33/jacket Direct labor = ($8 x 150..... $136.. Allocation base options: (Allocations taken from Exercise 7–21) Standard Jackets A.....000)/15..75 MH $ 3...00 (DLH) ..000 = $13. 80..000 = $3..33 Direct Labor ...00 8..00 (MH) ..67 (DLH) ..... 1997 196 Cost Accounting.........00 (MH).. $ 13....17 b...000 = $80/jacket Options: Mat Direct Materials .84 $110.00 DLH $ 13.00 Total .00/jacket Options: Mat Direct Materials . 16....00 16..66 Output $ 13..........00 16.....75 Deluxe Jackets A.... D.......75 10. Materials used Direct labor hours Machine hours Output DLH $ 3...84 Per unit variable cost calculations: Direct materials = $300.........75 Output $ 3...00 Allocated Overhead ..... 10... Four different cost numbers per jacket are reflected in the available selection of four different allocation bases... $12....00 64.....33 80..33 80. 64.... The allocation method chosen does not affect The Quality Jacket Company’s total manufacturing costs....33 (Output). 5/e ... 16.75 Direct Labor .....000/15.......7–22.....33 $114....... Alternative allocation bases: The Quality Jacket Company....84 $30..33 MH $ 13.... C...000 = $10...... C..00 (Output).............00 16...84 Per unit variable cost calculations: Direct materials = $200.... Management should evaluate the cause and effect relationship comprising overhead costs to determine the most appropriate allocation base......33 80...... $25. 42. Materials used Direct labor hours Machine hours Output Allocation (Mat) ....00 $157....00 $29...... 12.67 Total ............... D..

500b $77.500 . $102.000a 37. 62...30) (..7–23.50 + ...000 = b $62..10 x $80. $37...80 of service department 1’s costs used by S2 .500 a P2 $40..000 (Since . Inc......) $40..000.500b Total Costs .500 = x $100..500 + (.....20 used by P1 and P2... (20 min. Direct Method: To From P1 S1......50 ..10 + ...000a S2.50 + .500 = $100.30) $37. 1997 Solutions Manual.. the allocation basis is the . and $62..) Cost allocations—direct method: Acme Corporation.. $40..500 = ...10 are ignored. Chapter 7 197 .000..30 x $100.000 © The McGraw-Hill Companies..

........202 $ 11.... Job 11: Labor hours: Machine hours: Total ..55 = $63............... (30 min.... $77............ Job 11: Labor hours......) Allocating service department costs first to production departments.799 Note: The total costs allocated to jobs equals $180..................... Machine hours ................091 $105.55/M.500 80 –0– 10 –0– 90 P2 $77.......................... then to jobs: Acme Corporation......001).500 110 mach...389 90 x $704........................138...............111 14..89 = 11...............................389 63.091 10 x $1...500 90 labor hours = $1.... 80 x $1... Total .....000 after allowing for rounding ($105.410 $ 91. 5/e ..H..H............................500 –0– 20 –0– 90 110 Total $180. Machine hours ....202 + $74.410 $74....... Inc... hours = $704....................... P1 Costs allocated to each department (from Exercise 7–23) .....000 Department rates: P1 ............. $102.....799 = $180........89/L.7–24.............55 = $14...... © The McGraw-Hill Companies............... Costs assigned to jobs: Job 10: Labor hours Machine hours: Total ..... 1997 198 Cost Accounting.111 20 x $704....138....... Allocation bases: Job 10: Labor hours.. $102... P2 ...138.........89 = $91.........

000 + 3.... Inc. Total costs allocated ..... (20. $20... Chapter 7 199 ...000 $36..000a 12....7–25. (25 min. GFA Service department costs. a Maintenance $48...000 + 3.........000 = x $48.000) Cutting NA $4.000 = b © The McGraw-Hill Companies..000 NA (48.000) 3... Inc.000 100 x $20..) Cost allocations–direct method: Custom Tailors.000 = x $20. 1997 Solutions Manual..000a 36..000 = 1....000 Assembly NA $16..000 (1...000) $12.000 GFA allocation..000 (100 + 400) $ 4.000) Maintenance allocation ..000 (100 + 400) 400 $16..000b $16.000b $52..000 x $48..000 (1...

10 $50. To From Amount S2 P1 P2 a a S1 ...500c 61..000 direct costs + $64.000c $80..000 S1 $20.000 = 10% x $80. a$64.000a (20......000a 50. Inc.$ 80.. 5/e .000 $64........500 = 80% x $80. (25 min.... $50.000 (.....000.. S1 should be allocated first.. a....... $100.....000a S2 ...000...000 b....000 (...500 = x $164...000 from S1 c ...000 = $100...10) © The McGraw-Hill Companies.50 + ..000 and $30.30) (.000 = 50% x $100..50 + .. Step Method—recommended order: S1 provides 80% of its services to other service departments while S2 provides 20%.000 = 30% x $100.10 + .....) Cost allocations–step method: Acme Corporation.... 1997 200 Cost Accounting. a$20..500 $69.. $8.....30) $102.500 = x $164..000 $110..000 P2 $30...000) To P1 $50.500c Total Costs ....000 direct costs + $20.000 $ 8....50 ..000 from S2 c .000a 50.000 = x $100...30 $102.500 + $61...... $100.000 S1 ..000...000c $100.000) 102.000 = $80...000b (64.......000 b$100. Therefore.....000 = 20% x $100......500 = $164.$164..000 b$164.000b Total Costs .. Step Method—reverse order: From Amount S2 . $61.7–26.000 $ 8..

........600a GFA allocation.000) $28.) Cost allocation—step method: Custom Tailors.600 (100 + 400) 400 x $29..680 = © The McGraw-Hill Companies.....000) 3....000 x $48.000 Maintenance allocation .480 Using this method... (15 min..600 = 1.000 + 1....... 1997 Solutions Manual. 9...000 (1.....520 Assembly NA $28. Maintenance $48.....680b $52.. $ 20...000 (48......800 = b $5. a $9.800a 23....000 (1. GFA Service department costs.600a 5..... Inc..000 + 1.......920b $15..000 x $48. Inc.000 + 3....920 = 100 x $29......... Chapter 7 201 .... more costs are allocated to the Assembly Department than by using the direct method.7–27.600) Total costs allocated . $(29..000 + 3...600 (100 + 400) $23..000) Cutting NA $ 9.

000 + .3S2 = . 1997 202 Cost Accounting. Inc.524 P2 = .000 + .1S1 + .238) = $109.048 S2 = $100.000 + . 5/e .2($100.8($119.048) = $195.476 © The McGraw-Hill Companies.000 + .8S1) = $80.16S1 S1 = $100.5($195.238) = $70.048) + .1($119.5S2 = . (45 min.000 + $20.8S1 S1 = $80.84 S1 = $119.1S1 + .238 Allocating to P1 and P2: P1 = ..000 + .1($119. Set up the equations: S1 = $80.2S2 S2 = $100.048) + .3($195.) Cost allocations—reciprocal method: Acme Corporation.000 .000 + .7–28.

182 total – $312.000 $59.000 $312. Inc. (15 min.15S2 .500 + .182 P3 = $390. Chapter 7 203 .2($89. 1997 Solutions Manual.990) + .7–29.042 total – $390.950 = $75.4($75.10S2 0S2 Computations: S1 = $67.000 + .96S1 = $72.000 $67.04S1 .500 direct = $28.55($89.950 S1 = $72.20S1 .000 + .15($89.950 + .. P2 and P3: P1: $160.500 + .776 P2 = $312.40S1 + + + + + .990) + .500 + + + + + .2($75.500 $390.776 allocated P2: $341.000 direct = $40.30S1 .896) = $160.1($75.) Cost allocations—reciprocal method: two service departments.3($75.896 Next solve for P departments: P1 = $120.990 .500 + .682 allocated P3: $447.776 total – $120.20S2 .96 So S2 = $59.896) = $447.896) = $341.000 + $5. P1 P2 P3 S1 S2 = = = = = $120.1($59.4S1) S1 = $67.990) = $89.000 direct = $57.042 allocated © The McGraw-Hill Companies.990) + .000 + .10S1 0S1 .042 Not required—Costs allocated to P1.55S2 .

(35 min.621 Total costs allocated ..104b 10..000 + 1/5 ($48..000 + $9.104 (1.....621 = c NOTE: Minor discrepancies in the solution are a result of rounding....7–30.000 $31...621 (100 + 100 + 400) 400 $20...000 + 3. Inc...862 = x $53.104 (1..414b 31.725 Assembly NA $20.....104 b 100 x $30..000 + 1..600 + 1/30 (G) $29...000 + 1/5(M) Maintenance costs = $48.621 (100 + 100 + 400) 1....000 + 1/6(G)) $20.621) c Maintenance allocationa..104b (53. Maintenance $48..104 = = = = = = = = = = GFA costs = $20....000 + 1/6(G) $20.000 + 1... GFA Service department costs .000 5.000) 3.$20. Inc.. 5/e .600 (30/29) = $30.000 + 3.621 $48. 1997 204 Cost Accounting........621c $15. 10.000) $10..) Cost allocation—reciprocal method: Custom Tailors.414 = x $30.600 + 1/30 (G) $29........621) $53..862c $52.000 GFA allocationa ...104) Cutting NA $5....276 a G M G G G 29/30 (G) G M M $5.. (30.600 $29.000 x $53. © The McGraw-Hill Companies.000 + 1/6 ($30...

) Evaluate cost allocation methods: Custom Tailors. The value of any particular method depends on how the numbers will be used. Inc. there is a gain of increasing cross-department cost monitoring. If the allocations are used only to compute inventory values and cost of goods sold in external financial statements. Inc. If the numbers are to be used for managerial decision making. The answer to this question depends on the cost and benefits of each method.7–31.. © The McGraw-Hill Companies. While the difference in costs is small. then it usually makes sense to use the easiest method. then the increased precision of the more complex methods may justify the additional cost. 1997 Solutions Manual. (15 min. Chapter 7 205 . The reciprocal method takes into account the fact that each service department uses the services of the other.

000) = $19. TV Station Fixed Costs: Variable Costs: 100 x $52. Inc.086 + $61.200 450 + 300 Total of fixed and variable costs $61.714 300 x ($100. 1997 206 Cost Accounting.000 – $52. (15 min.000) = $28.086 Radio Station Fixed Costs: Variable Costs: 460 x $52.000 100 + 460 = $ 9.000 = $38. 5/e .. dual rates: Cytotech Company.800 450 + 300 Total of fixed and variable costs $38.) Single vs.914 Check: $100.7–32.000 100 + 460 = $42.286 450 x ($100.000 – $52.914 © The McGraw-Hill Companies.

000 = $105.000 + 12.000 x $200.737 1.000 x $200. a.000 Check: $200. (20 min.000 Check: $200. Bankruptcy 1.7–33.000 Personal Injury 900.000.000.000 x $200.000 = $50.000 + 900.737 © The McGraw-Hill Companies.000 4.263 + $94. Inc.000 = $94.000 = $105.000 x $200.000 + 12.000 = $150.000 4.000 + 900. Bankruptcy 4.000 b.000 Personal Injury 12. 1997 Solutions Manual..) Single versus dual rates: Law firm. Chapter 7 207 .263 1.000 = $50.000.000 + $150.

632 Personal Injury Fixed Costs: 900.000.000 = $52.000 4.000 = $77.632 + $122.000 x $100. Bankruptcy Fixed Costs: 1.000 = 75.000 x $100.000 Variable Costs: 4.632 1. 5/e . 1997 208 Cost Accounting. Inc..000 x $100.368 1.000 = $ 47.000 = 25.000 Total $122.000 4. (20 min.000 Variable Costs: 12.000 Total $77.368 Check: $200.) Single versus dual rates: Law firm.000.000 + 12.000.000 + 900.368 © The McGraw-Hill Companies.7–34.000 + 12.000 + 900.000 x $100.

7–35.3% 22.0% Assets $240.000 $210.0% 100.000 $250.0% 30.000 $1.0% + 17.0% + 30.0% 24.000.93% 22.0% + 27.000 x 23.000 x 24.57% = $ 85.000 $35..00% Allocation of headquarters’ costs A $300.5% 17.000 © The McGraw-Hill Companies.57% 100.000 $250.000 $900.5% 100.000.57% 23.8% 23.000 $60.93% 24.000 $900.000 $250.93% = $ 71. Store A B C D Payroll $85.000 = = = = 25.0% 27.100.0% 14.) Multiple factor allocation: Edee Bower Clothing.790 C $300.000 $1.000 $70.0% + 26. (20 min.000 = = = = 26.000 $700.000.000 $900.710 B $300. Chapter 7 209 .7% 27.93% = $ 74.000 $900.710 $300.000 = = = = 34.000 $250.000 $200.200. 1997 Solutions Manual.5% + 22.000 x 28.0% + 27.3%) 3 (28.0% 28.000 x 22.0% + 25.000 $4.000.8%) 3 (24.5% + 23.0% Allocation percentage A B C D (34.790 D $300.000 $4.2% 100.000.57% = $ 67.7%) 3 (14. Inc.0% Percentage factors Sales $1.2%) 3 = = = = 28.000 $250.000 $4.000 $4.

000 x 7% 3 $2.4286 + .8 $.3 + $.6 + $.3 + $. 1997 210 Cost Accounting..6 $1.3 x $400.000 x 5% + + 3 $2.8 $2.5 [ ] = 1 [.2 + .15] x $400.000 x 7% 3 = $7.6 + $. Mo: –0– since there is no income tax Ill.) Determine state income tax allocations: Multi-State.4 + $1.150 + .4 + $1.8 $.5 + + x $400.4 $. Inc.6 $. 5/e .250] x $400.734 Tax Liability = Note: Dollar amounts in millions of dollars © The McGraw-Hill Companies.6 $1. (25 min.8 + $.8 + $.2 + $. 1 $2.5714 + .2 + $.143 Tax Liability 1 $1. Inc.5 Cal: [ ] 1 [.7–36.000 x 5% 3 = $6.8 $2.

.....400.400.840 = $1.000 RAM-B 1.... units produced likely provides a better allocation base. Costs per unit......149 $29..000 $25.600/32.304b $3.840 = 200. Costs per unit..000/$625....205 = $41....000 3. Overhead ..000... ROM-A 200.. © The McGraw-Hill Companies.955 $3. Since labor costs represent a low proportion of total costs for both products. Inc...000 c......600 $ 224 600 2......600 a b $3.. Direct labor ...400... Units produced. ROM-A 200.......000a $41....... Direct materials .000 x $2..000 15........600 $224 600 120b $944 $..000.........128 $1. (25 min. one can argue that RAM-B is a specialized product.000 x $2....000 1.128 = 1.....000 $25. However..000 x $2...840a $29. 1997 Solutions Manual.Solutions to Problems 7–37.840 $...000 b.600 a$15. and thus should cost more than ROM-A... Direct labor ....000 = 1.400.. Total costs ..... Units produced.000 200.59 = $944 1.000 RAM-B 1..000 1.000 $2. Overhead ... a....000 b$120 = 200. Chapter 7 211 ... Different per unit costs result from using two different allocation bases (direct labor costs and units produced)........ Total costs .000 x $2..000 $..... Direct materials .) Choosing an appropriate allocation base in a high-tech environment: Chips Corp.000/32.304 = $600/$625.

. $5........... Since materials costs and time to produce are approximately the same for both units. $5.....480 = 900 a$2.000 x $550. 1997 212 Cost Accounting.. Posts 30 $180 500 3........ 900 Direct materials . 5/e . $8.. 900 Direct materials ..........422 $8..980 = 900/250......500 Total costs ...... 1.. Posts 30 $180 500 66b $746 $24. $7... they do not seem to reflect the cause-and-effect criterion for allocating costs to units.833 $3. They are related to the number of production runs...7–38... $8.5:1 which seems excessive for production run differences alone.500 = $400/$88.000 a..844 = $7.125 = $500/$88....805 $126.8:1. Rails Units produced ...000 b$ 66 = 30/250. Hence.000 x $550.. 400 Overhead. $9. but not to units produced..) Choosing an appropriate allocation base in an automated environment: Fences Plus Corp.. the relative cost is about 2...580 Direct labor . In a.125b $3.. 400 a Overhead.......960 Costs per unit .980a Total costs ...000 x $550.. Inc.805 = 30 Rails Units produced ....480 Costs per unit . is that labor costs are not closely related to production. the relative cost of posts-to-rails is 13..000 b$3...... The second method appears to relate overhead with the costs of units produced in a more reasonable manner... In b.......000 b.... (25 min.867 = $746 30 c.. The additional problem with a.. it would seem that the only difference is the length of the production run..... 2.....000 x $550...... which seems more reasonable..580 Direct labor ......960 900 a$1. © The McGraw-Hill Companies.......

which ignores Equipment Maintenance: ..27 is ignored bBasis is 250. — a Employees . ... 1997 Solutions Manual.7–39.01 = $12 ÷ $1. © The McGraw-Hill Companies. etc. cBasis is 100 employees.35 .06 = 6 ÷ 100..09 c Equipment Value ..50 .. a.01 d aSelf-usage Proportion Used By Payroll Equipment Accounting Maintenance Painting b b ...200.20 = $240 ÷ $1.200..52 = $624 ÷ $1. ...) Step method with three service departments: Crash Test Corporation.. ... dBasis is $1.52 d Polishing . . Building Occupancy Building Area .06 .06 = 15. which ignores Building Occupancy: ....20 d — a ...09 = 9 ÷ 100. etc. Inc.72 a c — . To facilitate solution...000....04 = 10.. (50 min.. etc.200.....000 ÷ 250.. Chapter 7 213 .000 ÷ 250...06 .04 . which ignores Payroll Accounting: . reduce the different allocation bases to proportions used by departments other than the same department. .000..18 .000 square feet...200... ...

27) b .72 + .01 $2.000 which is the total of the direct costs for all service and producing departments.. (continued) Rank for allocation: Equipment Maintenance Payroll Accounting Building Occupancy Crash Test Corp..20 + .928b (415.000.. Totals .280 205.01 + .568 (..280 294..800.000 FROM Equipment Maintenance.18 $83.568) 137. etc.042 83.568.025.7–39.. (.. (continued) a.350.09 + .564 + 1....800) 2.52 + .. (...09 x $552..52 + .000 To Building Occupancy $360..436 = $3...35 + ..436 $2. Step Method Equipment Maintenance Direct Costs .564 71.27) .830b 332.413.025.. Payroll Accounting $500.800 = .413.114 = x $415.830 = x $552..800.20 x $264.640 = x $264.000 (264.72 + .439.35 + .18) c © The McGraw-Hill Companies. 5/e .20 + ..454c $2...640a 52.18) ... Inc.72 x $415. $264. (. a $52. (. Building Occupancy .50) .000) 52... etc. Payroll Accounting .928 = $332.09 + .50) $52.01 + .114c $1.000.800a (552.454 = .000 Painting $1.. 1997 214 Cost Accounting.35 $205..000 Polishing $965. (.

... (continued) Painting Direct materials ..564/1...000 Overhead (allocated) ........000 units = $1.025........... $2..564/1.....000 Direct labor ... 675..000 145......000 448... b...413.. 225..7–39........413..000 units = $675.....436/1...... Unit cost of allocated service department costs: Painting: $675..436 Unit cost: Painting: $2. 1997 Solutions Manual..564 Totals .......026 Polishing: $1............. Chapter 7 215 ............44 Painting did not meet management’s standard of keeping service department costs below $500....439 c...436/1.. Inc. 650..413 Total ......... $475.... but Polishing did meet the standard..564 Polishing –0– $820..... $3....436 $1...000 units = $448...56 Polishing: $448......000 units = $2..... © The McGraw-Hill Companies..000 Overhead (direct) ..025......

1997 216 Cost Accounting.) Solve for unknowns: Pete’s Delicious Foods.....375 To find the cost of S1’s services: S1 = Total – S2 S1 = $100. Total allocated to P2 = $22.500 To P2 –0– $22.3 x $60..3 $22.. Since the direct method is used. a... 5/e .3 x (S2) .500 c.. (40 min.000 Since $40.. nothing is allocated from S1 to P2.000 ) + From P1 S1 .$37.000 from S1 is allocated to P1..$40..000 – $60. not to S1.500 = .000 S2 .5 .. S2’s costs are allocated only to P1 and P2.5 ....000 S1 = $40.375 x (S2) $22. Inc.. b..500 from S2 to P2 = .500 (= $22.. All of S1’s costs were allocated to P1 and none were allocated to P2.000 ..500 S2 = = $60. © The McGraw-Hill Companies.500 ( .7–40...500 + 0). To find the cost of S2’s services: $22...... Amount allocated from S2 to P1 = $37...5 + .

$39. 111 S4 $48 S3 P1 P2 $ 80 $600..000 internal cost to $160. It did not include the costs of natural gas received to power the electric plant or other indirect costs....18d $722. $3 = . $7 = $70 x ... aS1 allocation: $28 = $70 x .50) (.. (S3) .30 $71.30 + .. $ 70 Equip.—fixed (S2) .68 S2 $30 Costs allocated from the electric department S2 + S3 = $36 + $111 = $147 If electricity generation causes the costs allocated to it. $35 = $70 x .00 9.15 .55 .7–41.10 S4 allocation: $6 = x $48.30 + ..32 $545.00 28a 7.30 .. 48 Elec.40.00 $440.50 = x $36 (.82d 39.55 + .5 = x $36.50) d S3 allocation: .. $22. a..10...05 + .. etc..50 b . Maint.00a b (48) 6 3b 30.80 cS2 allocation: .) Cost allocation—step method with analysis and decision making: Elektrik Corp. (60 min.50 $13... 2 Allocation: To Amount to From: be allocated Natural gas (S1) ..10 + .000 from the outside utility. (S4) . Inc. 36 Elec. Chapter 7 217 .00 c (36) 0 13.82 = x $111. 1 P2 = Production Department—No. then the company would compare $147... Let: S1 = Natural gas production S2 = Electric generating—fixed S3 = Electric generating—variable S4 = Equipment maintenance P1 = Production Department—No..00a 35. b..50c (111) 71.18 = x $111 (.—var.55 + .. 1997 Solutions Manual.30) (. .50 22.30) © The McGraw-Hill Companies. The company considered only the direct costs of the electric generating plant.50 + .05 x $48..

. (continued) c.. $58.... b .. of course.. If Elektrik produces its own electricity.80 [ ] © The McGraw-Hill Companies..........000 $177. 1997 218 Cost Accounting.000 from the sale of natural gas is an opportunity cost...................000 equipment maintenance x ....10 + ........000a Equipment maintenance......000 in potential sales of natural gas.000 from the sale of the natural gas. then the relevant costs would be: Natural gas ... aThe $58....... Management may... Inc............ want to consider other factors when making this decision...05 $9......000 electric company rates...... If the company could realize $58....... 9.000 = $48... 110....000b Direct costs................7–41.. 5/e ..000 which is greater than the proposed $160... it loses $58..

..0% –5..883) (83..374) (1..0% $30.........0% 20.....0% 36......0% P2 .0% 50.....3% S4 –22..0% 0. (1...0% 0.. 45.0% 100.... –100...0% 0.........823) S2 ..278 P1 $– – – – – – P2 $– – – – – – Total Allocated to Production $116....000 P1 0...7% 38...........3% Cost Allocation S2 –12. (30 min.......115) P1 ..............0% Costs to be allocated: $70..000 $80. 34...........7% 64...0% S2 .249) $ (3.....0% S4 .0% 0....816) (4..722 30............2% –14..8% –10.0% 0.. 10..0% 0..0% 0.2% S3 .5% –104.. 50...000 $48..) (Appendix) Cost allocations—reciprocal method (computer required): Elektrik Co....0% P2 0..1% P1 ......0% 100.3% 61...267 11....... 0..0% P1 0..0% 15..0% 0....6% –0......6% –10......$(73. 40...... Services Used By: S1 S1 .0% 50. 24.....925) (6..........312) S3 . 65.......4% 39.0% 0.0% 10.....0% To: S1 S2 S1 .1% S3 –11....000 Inverse Matrix Performed By: S2 S3 S4 10.0% 10......0% 30..0% 0.0% P2 0.0% 10....0% 0.....685) S4 ....733 18..9% 60.......................936) (424) (4........7% P2 .... Inc..040 From: S3 S4 $ (9....0% 0.... –2......239) (48.......... 0.0% 5.333 30. Chapter 7 219 .6% S2 ..0% –100..0% 0.667 17..0% S3 ..0% 0...........283) $(10....–104... (29...0% 0...... (148) (30..0% –100...282 $111.0% S1 S1 ...0% 100....0% P1 ....9% -5..0% 0.....2% –101.....0% 30.... 1997 Solutions Manual.0% –100........... –42...829) 49..7% –101.......0% 100.718 $228..... –0.....484) (3.0% 0.....960 P2 ....0% 5.0% 0..7–42.0% S4 ......0% 55...000 © The McGraw-Hill Companies.

) Cost allocations and decision making*: Parker Co. In addition to the costs factors. To be useful. qualitative factors should be considered: Can an outside firm maintain the necessary degree of confidentiality? Can the outside firm match the quality of work performed? *CMA adapted. but rather reallocated to other departments.. the detail of the costs should be analyzed to make sure all the costs are differential and could be eliminated. Inc. Direct department costs would normally be differential. For instance. additional detail should be requested and analyzed prior to making decisions to insure that all costs can and will be eliminated. however. however. certain administrative functions within the promotion department may have to be continued even if an outside agency is employed. © The McGraw-Hill Companies. Administrative overhead costs allocated to the department would not be useful because these costs would not be eliminated. 5/e . (20 min. cost information must be presented so that the differential costs are readily identified.7–43. Charges from other departments may be useful in making the decision. 1997 220 Cost Accounting.

000 = 437. Chapter 7 221 . The amount allocated to the assembly department is $70.200. a. Factory maintenance is allocated based on square footage occupied.7–44. General factory administration is allocated based on direct labor hours. 1997 Solutions Manual.500 x $160.840 = 8 x $240. The direct method is used.000 (8 + 12 + 280 + 200) d. The amount allocated to the fabrication department is $111. The direct method is used.000) b. Inc.000. Factory cafeteria costs have already been allocated from it to other departments. The answer is 2. There is no allocation of costs back to the department after costs have been allocated from it.016 x $240.) Allocate service department costs— direct and step methods: Doxolby Manufacturing.760 = 88. The answer is 1. © The McGraw-Hill Companies.. (35 min.000 + 72. (88.500) c.000 = . $3. The answer is 3.500 + 437. (562.000 x $203. The answer is 3.

. Maintenance had the highest time usage (and thus.110 Maintenance .. $1.500 .....406.323 afrom (2) (3) Allocated Proportion Time Cost of Capacity b $1. b$1..050. If a single rate (time usage) is used. Dual rates should be used..161 Scheduling . .050 1..700 ÷ 15.000.. 2 + 4 $4. etc..000 380. © The McGraw-Hill Companies.325. but had a relatively low storage capacity requirement.. Allocations based on time usage: Proportion of Department Total Time a Reservations .000) = 2. $775.000d 1......... $3.050.700 + 6..277..000..500 3.600 = 1.050. 1997 222 Cost Accounting... $1...406 = 6.657..150 $12.500 ÷ (2..000 part (a) = $7. ..050..892..110.277.940. .000 = .500 = . Inc.300 .. $2...050... Dual allocations (1) Proportion of Time Usage Reservations .000.000.000) = $1.406 Accounting . ..000 (5) Total Allocated Cols.892.892.323 x $12. $2..500 = .000. was allocated a large share of total costs using a single rate). .110 = 1.150 = ..000 x .600 x $5.325.000 420.500 ÷ 2.000 x ..500 ÷ 15..000.000 a2........940..300 3... For example.862.. Using dual rates..000 b.050. a.. ..161 x ($7..110 Maintenance ..150 $12.500 + 1.161a Scheduling .135.500.076 = 190 ÷ 2.050... ...300 = ..500 = $7.300 + 5.. .135.150 = $7... .300 ÷ 15....135.000.. ....323 Allocated Cost b $1..084 = 210 ÷ 2... .. (40 min..282..000 + $5.300 2.500 4. .323 c.240 = 600 ÷ 2..000 ÷ 15.500.406 x $12..110 x $12.500.000 = ......) Cost allocations—comparison of dual and single rates: Sky Blue Airlines.150 .000 x ...200.500 b...000 x .862.200.240 2.050...161. .406 Accounting .000...600 c 775.975. ..500..076 (4) Allocated Capacity Cost $3.892..161.. $4..240 x $5. there may not be a causal relationship between time usage and storage-related costs.500 d$3.500 + 600 + 210 + 190) = 1.084 2.323 = 5.050..050 c..050 1...500 ÷ (1.500.000..7–45. 5/e .050..050 ....050.. Maintenance would receive a fairer share of costs.300 = $7.

..5 10% charged to investment income Sales commissions.. 125 Administrative................... $ 15 Administrative costs ............................. $ 11.................. 188...................5 Profit ................... $ 200 Operating costs: Claims .. a.. 1997 Solutions Manual.... Chapter 7 223 . The argument usually given is that the administrative and sales costs are incurred to operate the insurance activities..... $ 11....5 million + $3... These costs would not change regardless of investment activity..5 Sales commissions . 32 20% charged to investment income Total operating cost . Consumer Group Presentation: Insurance income Remarks Premium revenue ....) Cost allocation for rate-making purposes: Worryfree Insurance Co...... © The McGraw-Hill Companies..... 31..... 8 Total operating cost..5 Profit ................................................... Inc.......7–46.....5 million b.....5 Check: $15 million = $11.................................... $ 3.... (40 min...... The investment income is separate and incidental to the primary underwriting business............................ 3........5 Investment income Investment income...

78 or 78% of the total fare. the employee would request the full $2. The minimum cost to the company would be $1..e. b. c. Depending on policy some amount between $2.400. (30 min. A reasonable alternative could be computed as follows: The round trip-business portion of the trip was 3. 1997 224 Cost Accounting.78 x $2.839 + 1.717 miles equals . The maximum reimbursement would be $2. Inc.800) is greater than the cost of the excursion ticket.) Cost allocation for travel reimbursement. a.059.640.059 (i. 5/e . Since the trip was primarily for business it would seem appropriate to reimburse a minimum of $2. This alternative would result in a reimbursement of $2.839).400 = $2.678 miles (= 1. © The McGraw-Hill Companies.7–47.640 would usually be suggested as a basis for reimbursement. .059 and $2. Since the round-trip cost of the Salt Lake City portion (2 x $1.640).640. This problem demonstrates the need for ex ante policy when there are arbitrary and potentially contentious allocations.. Dividing by the total mileage of 4.

. Central supply 225 © The McGraw-Hill Companies. (50 min. Inc. Step method solution: Order of allocation: 1. Maintenance of personnel 5. Employee health & welfare 3.) Cost allocation—step method: Wecare Hospital Case.7–48. Buildings depreciation and maintenance 2. 1997 . Laundry & linen 4.

05 .82b) Radiology ..04 ...03 –0– ..036 (....049 (.30/..82 = sum of the proportions allocated to departments after central supply in the allocation order = ..10 .82b) Laboratory ..e...470 (..09 + .118 (..10 + ..) 226 © The McGraw-Hill Companies. Maintenance of personnel. the proportion allocated to each department equals the proportional usage of the total ∑ Xi service allocation base.10 .66.....02 .05 –0– — — Central Supply –0– .......05/.02 .7–48..03/.85a) .470) equals 1.82b) Patient Rooms ...09/..85a) .353 (.... The sum of the allocation percentages (i..059 + .34 .05 + ..71 .40/....40....03 + . .805 (... Therefore.15 — — — Maintenance of Personnel ... Laundry & Linen ..85a) .82b) Since the services of Buildings Depreciation and Maintenance.04 + .000. Inc..353 + .118 + ..10/. Employee Health & Welfare and Maintenance of Personnel are not used by departments ahead of these departments in the allocation order. 1997 . Central supply .10 .25 . Additional computations: a..08 ..85 = sum of proportions allocated to departments after laundry & linen in the allocation order = ..05 .110 (..43 ..85a) ..36 ....04/.059 (. Laundry & linen . (The last term was rounded down so the four would sum to one..30 + .. the denominator of the allocation equation Xi is equal to one. (The third term was rounded down so the four would sum to one.) b..66/. (continued) TO (Department) Employee Health & Welfare –0– — — — — FROM (Department) Buildings Depreciation and Maintenance....12 — Operating Rooms .. Employee Health & Welfare .

... Central supply ........600 15. Maintenance of personnel . Totals .000 83....750 137..71 x $830....612.........388 36% $1.500 = .346 20% $ 62......889 $311...7–48...410b (793.....000 16.000) Laundry & Linen $250.922.000 22....896 $4..250) Maintenance of Personnel $210.. Employee Health & Welfare .450....947 105..300 = ..300 161...000 (830. $16.......547 Radiology $160....175 38..750) Central Supply $745..000 These allocations are computed by multiplying the proportions on the previous page times the amount to be allocated.750 –0–b (311... 227 © The McGraw-Hill Companies..000 = ......05 x $830...10 x $830.000 83..405 112....... a b $830.....000 16.940 28.230 87....000 41.......000 –0– (375..250 –0– 37.500 93...188 25% $ 480.....250 182...220 Direct costs....600 18.... Medicare reimbursement claim....000) $83...660) Operating Rooms $1..........269 Laboratory $125...478....966 24..572 $233...000 589..262 Patient Rooms $2.000 18...... $589......750 45. $41...800..995 638..932 31...250b (389....000.303b $1. Medicare portion..02 x $830. Inc.000.000a 56. (continued) Buildings Depreciation and Maintenance Employee Health & Welfare $375......600 = ...000.......078 28% $ 65. Laundry & Linen .000 –0– 11........ 1997 .... Buildings Depreciation and Maintenance.....

.

Inc. Compute a cost rate per activity unit (e. by providing marketing with more accurate product costs. It can be anything from machine hours. (See Illustration 8–2) 8–4. machine hours. Department allocation is more complex. 8–2. 1997 Solutions Manual. A cost driver is a term used in activity-based costing. or the number of parts in a product. marketing can make better decisions about pricing. labor hours. Once known. direct labor dollars. 8–5.. This allows labor intensive departments to use labor hours as an allocation base and machine intensive departments to use machine hours as an allocation base. 4. Chapter 8 229 . volume of activity. 1. It simply refers to any activity that causes a cost. Activity-based costing identifies cost drivers (activities that cause costs) that were not previously accounted for by the costing system. Furthermore. or material costs. 2. rate per setup. Allocate costs to products by multiplying the activity rate times the volume of activity consumed by the product. A cost pool is established for each department and a separate overhead allocation rate is computed for each department.. regardless of the type of product or activities that caused the costs. the production managers can control costs by managing these cost drivers.Chapter 8 Activity-Based Costing Solutions to Review Questions 8–1. number of machine setups. rate per part. 8–3. Companies using a single plantwide rate for their allocation of indirect costs usually select a volume based allocation factor such as direct labor hours. 3. rate per machine hour).g. Plantwide allocation is the simplest method and refers to the allocation of indirect costs to products using a single rate. Identify activities that consume resources. Identify the cost driver associated with each activity. © The McGraw-Hill Companies.

Reasonableness—Some costs cannot be linked to products based on either causality or benefits received. Solutions to Critical Analysis and Discussion Questions 8–9. 1997 230 Cost Accounting. Thus. As companies have become more automated and less labor intensive. © The McGraw-Hill Companies. Is there a causal relation? Allocate costs to the product that causes the cost. Uncertain—While omitting the allocation of service department costs to production departments is definitely simpler. Low volume products often require more machine setups and purchase orders for a given level of production output. it is also incorrect. Direct costs such as direct labor and direct materials are traceable directly to a specific product and. Low volume products may be more specialized requiring more drawings and specifications. or a service such as an X-ray examination in the hospital. can result in erroneous product costs. While it is true that there is really only one correct cost for a product. 1. These companies should use activity-based costing to determine the real activities that cause the costs. so they must be allocated on the basis of fairness or reasonableness. when overhead is applied based on the volume of output. 3.8–6. no cost system can measure these costs perfectly. False—this chapter deals with the problem of allocating indirect costs to products. the allocation of overhead costs will probably vary according to the cost system and allocation base you use. Products can be goods such as an automobile. therefore. If this step is omitted the production department costs will be understated. While direct material and direct labor costs may be the same under different cost systems. Furthermore. Inc. the allocation of these service costs to production departments enables management to assign responsibility for service costs to the people in the production department who requested the services. 8–11. Further.. and ultimately the product costs will be as well. the low volume product adds complexity to the operation by disrupting the production flow of the high volume items. 8–7. it is easy to see how high volume products are allocated relatively more overhead than low volume products. Are benefits received? Allocate costs to the product that receives the most benefit. and more inspections. are not a problem to allocate. 8–10. it is not surprising that this allocation of overhead to products. Indirect costs can be the overhead costs incurred in manufacturing a good or providing a service. based on direct labor. 8–12. because they are produced in smaller batches. False—activity-based costing provides an alternative method of allocating indirect costs for both service and manufacturing products. 8–8. Traditionally many companies have allocated overhead to products based on the volume of direct labor. 5/e . 2.

This is because department allocation usually allocates overhead to products based on either direct labor hours or machine hours. The message is simple. A complex multi-product operation will cost more than a simple single product operation. This can be a complex task involving the teamwork of management. but also of other factors such as complexity. accounting. 8–14. While several departments may have the same cost drivers. It would be wise to know these costs before making distribution decisions. while activity based costing uses multiple activities to allocate the overhead to the products. © The McGraw-Hill Companies. 8–16. for example.. the size of the shipments. Marketing departments. production. False—The lesson learned from activity-based costing is that costs are a function not only of output volume. 1997 Solutions Manual. A company should implement ABC only if it thinks the benefit from improved management decisions will outweigh the cost of establishing and maintaining the new cost system. is the amount allocated to each product. 8–17. for example. The estimated amount of total overhead should be the same under both department allocation and activity-based costing. and the number of products in a shipment. 8–18. Chapter 8 231 . must concern themselves with the cost of distribution. it must pass a cost benefit test before being implemented. False—activity-based costing breaks down the costs into cost pools according to the activities that cause the costs. 8–15. By allocating overhead based on direct labor hours the management at Hitachi is sending a signal to the department managers. Reduce your direct labor or be charged with a large share of the overhead. What will differ. This incentive will drive the department managers to do exactly what upper management believes will keep Hitachi competitive. Several activities that cause distribution costs include the number of shipments per period. While activity-based costing may yield more detailed product cost estimates. The basic principles of activity-based costing can work for any department. however. Activity-based costing requires a much more detailed breakdown of costs into activities that cause costs. each department should individually determine which activities cause their costs. mainly becoming more automated.8–13. Disagree. marketing and many others. Inc. purchasing.

..000 hours x $40 per hour b$600....000a Profit ......000 600..600... 400.. $3... Harry was wrong....000 Hardbacks $2..... Paperbacks were more profitable.....000a Profit ..000. we see that Department P is allocated a smaller share of the overhead..000 Hardbacks $2. 1.... (30 min. It assumes that overhead in both departments has the same rate..000 800.......000 Direct Labor ....000 b$750.. x $50 per hour c.....600.. 360. $1..000 Overhead.. 1997 232 Cost Accounting......... 600.. it is usually not very accurate...000 = 15.000 750...000 = 10....... When overhead costs are broken down into department cost pools..000 400... $1....000 a$400. Each department should try to assess what causes its overhead.000 = 10.000b $ 550.600. Paperbacks Revenue . The plantwide allocation method allocates overhead at $40 per machine hour for both types of books.....600.. 1.... Inc.....000 Overhead... Inc. Paperbacks a.... hrs..040.500..500.....000 400......) Plantwide versus department allocation: Comprehensive Publishers..000 800.000b $ 700. 600.000 Direct Materials . $3.....000 a$360..000 Direct Materials ...000 Direct Labor ........ While this is the simplest method.000 mach.. and use that as its allocation base.000 mach. x $36 per hour = 15. © The McGraw-Hill Companies.Solutions to Exercises 8–19.......000 hours x $40 per hour b.. 5/e ... hrs..... Revenue ........

......... Department C has an overhead allocation rate of $7. Raw Materials (per case) ...... Inc. a$50 b$55 Chewynutta Bar $110 80 55b $245 Marsh Bar $150 60 75c $285 $100 50 50a $200 = 10 hours x $5 per hour = 11 hours x $5 per hour c$75 = 15 hours x $5 per hour b.) Plantwide versus department allocation: Specialty Sweets.... it simply uses one allocation rate for all products in all departments.. Chocco Bar a.. © The McGraw-Hill Companies...00 per machine hour ($17.20 per labor hour ($3......... Monica was correct in her belief that she was being allocated some of Department C’s overhead.. Once the overhead was reallocated into department cost pools.... Department M has an overhead allocation rate of $2. Overhead ... Although it requires more time and skill to collect and process the information.......960/1.... Inc.. Chapter 8 233 ... Direct Labor (per case) ...00 per case....... a$70 Chewynutta Bar $110 80 77b $267 Marsh Bar $150 60 33c $243 $100 50 70a $220 = 10 machine-hours x $7 per machine b$77 = 11 machine-hours x $7 per machine c$33 = 15 labor-hours x $2.... a case of Marsh Bars cost $285..... Raw Materials (per case) ..800 labor hours)..640/2.. Total cost (per case) ... 1997 Solutions Manual..20 per labor-hour d.... the cost of the Marsh Bar fell to $243.........8–20..00 per case. Under plantwide allocation. department allocation generally yields more accurate product cost information. Total cost (per case) . Overhead ..520 machine hours)........ Direct Labor (per case) ... Chocco Bar c..... Plantwide allocation does not correctly allocate the overhead by department........ (35 min.

they should try to incorporate some of the design features of the PC BB Special into Type 67A. However. 5/e .00 $118.50 to produce while Type 67A costs only $118. (30 min.00 $121.50 85. Inc.00 Cost of Type 67A from Illustration 8–4 $ 9.00 per board $70.20 per insertion $3.50 43. 1997 234 Cost Accounting..15 hours 10.00 to produce.00 16.00 b.00 Total overhead per printed circuit board Cost of direct materials Total cost of manufacturing each board 36.50 14. a.00 per hour x 1 raw board x 60 insertions x 1 board 1.00 3.10 per part PC BB Special # of Cost Cost per Drivers per Circuit Board Board x 100 parts $ 10. Activity Purchasing materials Starting the product Inserting the components Soldering Cost Driver Number of parts in each circuit board Number of boards in the product Number of insertions per board Number of boards soldered Number of hours board is in testing Rate per Cost Driver $.00 12.00 Quality testing x .00 $1. Hewlett Packard should continue producing Type 67A. The PC BB Special costs $121. Specifically.8–21. those that allow for less quality inspection time and less insertions per board.) Activity-based costing: Hewlett-Packard.00 1.00 75. © The McGraw-Hill Companies.00 per board $.00 3.

Ned would have had a much harder time reducing costs.000 $73. Chapter 8 235 .000 pounds 15 setups 200 hours 500 hours Cost Allocated to Unique Product $ 8.8–22.000 30.000 15.000 $87. 1997 Solutions Manual.500 hours Cost Allocated to Standard Product $12. © The McGraw-Hill Companies. These activities can then be changed to reduce costs.000 Cost Driver 4. He would not have known which activities were causing the costs or in what amount.000 20.000 pounds 5 setups 200 hours 1. An advantage of activity-based costing is that overhead costs are broken down into activities that cause the costs.000 20. If SU Company had been using machine hours to allocate its overhead to the Standard and Unique products. Activity Purchasing materials Machine setups Inspections Running machines Rate $2 per pound $2. Inc.000 45. (30 min.000 per setup $100 per inspection hour $30 per hour Cost Driver 6. a. The disadvantage of activity-based costing is that it requires a more detailed breakdown of costs.) Activity-based costing: SU Company.000 Total allocated to each product b. The additional cost required to attain and maintain this detailed information must be less than the benefits received from having such information to justify activity-based costing..000 10.

... 2..872/24 paying customers).. 3.......$ 430 Permit to use the river .. 60 320 [= $40 + ($10 x 28 people)] 150 528 [= $80 + ($16 x 28 people)] 254 3. & b.720/24 paying customers).. (30 min.360 (= $120 x 28 people) $7.... 5/e ......360 (= $120 x 28 people) Total..720 c. a. and $328 per customer for the 3 day white water trip ($7................ Activities Advertise trips .400 ($600 x 4 guides) Food. Inc.. If the manager wants to cover her costs she should charge $280 per customer for the 3 day float trip ($6..... © The McGraw-Hill Companies........ $6.. Equipment use.... Inc.. 1997 236 Cost Accounting...... Insurance .200 ($800 x 4 guides) 3....872 Float Trip (3 day) $ 430 100 White Water Trip (3 day) Paying guides ....) Activity-based costing in a nonmanufacturing environment: River Rafting.8–23..

64j Total $240..$2.... $1.36 = $435......36i High-Grade $ 66..64 per High-Grade cassette.. Direct materialsb ....000 = $200 per order shipped x 100 orders shipped i$1.000 30...000 per run = $100..000 $1....000 80.. Rate Direct labora ....000 220..000 and $84. Inc..000 100.........000 54...000 for Standard and High-Grade...36 per Standard cassette and $2.....000 114....000 per test = $90......... 1997 Solutions Manual..000 10. 3..000 $2..8–24.000 given in the first table of the exercise in the text given in the first table of the exercise in the text c$2...000 per production run x 40 runs for Standard g$36.... © The McGraw-Hill Companies....000 125.000 units produced Reading from the table above......000 = $2......000g 20.000 84. Total unit cost......000 in production costs/50 total runs d$3. Chapter 8 237 .. a... aData bData Standard $174.000c Qual.000f 36.000 20...000 = $3. The total cost per unit is the total cost per product divided by the total units produced....000 total costs for Standard/320...) ABC versus traditional costing: Audio Corporation. runs .000 in shipping costs/150 processed orders f$80.000 units produced j$2. 200e Total overhead........000 239.000h 136.000 $435..... we can see that the total overhead assigned is $136.000 $699......000/100.000 per quality test x 12 tests for Standard h$20. Total costs.64 = $264.000 90...... respectively... (35 min.. orders ...... Overhead costs Prod.........000 $264..000 in quality costs/30 total tests e$200 per order = $30..000d Ship.. tests .

500/320.8–24......000 60..000 220.............500 $240.......000 e$1.000 114........500 $1. Total unit cost ..... Direct materialsb ...917 per direct labor dollar x $174... © The McGraw-Hill Companies...000 total overhead/$240....917 Total costs .. aData bData Standard $174... Inc. Audio has been understating the cost to manufacture High-Grade cassettes and overstating High-Grade’s profits..43e High-Grade $ 66. total overhead allocated to Standard and High-Grade is $159.500 = $.000 Standard units produced From the table above.41 Total $240. c Total overhead.... The unit cost for Standard and High-Grade is $1.917 = $220..43 = $458.000 total direct labor d$159......... 5/e .... $.. 1997 238 Cost Accounting.. (continued) b.. c..000 159.43 and $2...000 239..500d $458..41 respectively..000 125. Rate Direct labora .000 given in the first table in the exercise given in the first table in the exercise c$. By allocating overhead on the basis of direct-labor......500 respectively...000 $699.500 and $60.500 $2.

000 hours x $19 per hour = 7..33 per client = $8..000 $177....650 Total $419..000 = 7.000 square yards f$2...18 x 130..18 per square yard = $36....000/20..000 62........000/60 clients served d$3...750 12...600 equipment hours e$0. Overhead Transport ...300 $128.000 8....600 25..000 180...... Direct Labor ...400h 36.. (30 min.. a$133.....000f 11..000 18.250 = $3....18e Total Overhead ...33 x 15 commercial clients g$11...000 36..700 = ($62......000 hours x $9 per hour c$21. 3.....000 hours b.... Profit ......650 $ 33.. From the table in part b of the solution...8–25.000 = 7..214 per hour = $18...000 6.... Rate Revenue .......700 Total $419......... Overhead .....000/5......000 hours x $9 per hour c$133..300 Residential $286... We can explain the differences in profits under the two cost methods by showing Ms... while the residential business has a profit margin of 50%.... Profit .000a 63..214d Supplies..000a 63....000b 21.....000 $177.214 x 3....000 hours) x 7......000b 2..000 hours x $19 per hour b$63...... a$133...000/200.....000 b$63.000 117......... Chapter 8 239 ..... 1997 Solutions Manual.000 6... © The McGraw-Hill Companies............... The recommendation to Ms......250g 23.. Greenthumb that commercial work has a profit margin of 25%.700c $ 48...350 Residential $286...350 $143....400 = $0... we can show Ms..000 117... Direct Labor .000 Commercial $133.......... $133c Equipment .. 0...... Inc... Greenthumb is that she reconsider dropping residential services in favor of the commercial business.000 = $133......000 square yards c.000 = 7.000 Commercial $133.......000 40. Inc..000 62... a. Revenue .....000 180....500 equipment-hours h$23.. Greenthumb that there is little correlation in costs between direct labor and the overhead costs.....) Activity-based costing in a service environment: Green Garden Care.......

...000 hours = 0..000 hours c. Cost Driver Rate Travel Clocks $20..250 Watches $30...000/120..000/54 parts c$0..000 units shipped d$20....000a $23..8–26. 0......000d 5...78 x 18 parts f$11... a$2..000 Travel Clocks 30.... $2... 1997 240 Cost Accounting...000 $71... Not necessarily.... 277.25 x 45..000e 11.78 per part = $15.. Note: Your answer may vary slightly due to rounding........000 = $2.750 $58... 5/e . (35 min. a..... However...250f $36......25c Total Overhead......000 clocks produced b$23. Inc... © The McGraw-Hill Companies......5 hours per clock x 60..... a30.. The ABC system should be adopted if the benefits from improved information exceed the additional costs required to obtain the information...000 = $277... Handling .000/25 setups b$277.....000 x 10 setups e$5.25 per unit shipped = $30.750 Production Setup .) ABC versus traditional costing: Travel Gadgets Corporation...000 10.... Activity-based costing provides a more accurate allocation of overhead costs..250 = $0..750 = ($95...000 OH/120...... Overhead .....000 units shipped b..000a Mat. the more accurate method is also more expensive...78b Packaging and Shipping...........000 per setup = $50.....000 hours) x 30.. Direct Labor Hours.250 Total 120....750b Watches 90.....000 18..000 $ 95.

.) ABC versus traditional costing in a service company: Jack Chapman & Associates...000 48...000/500 transactions c$25 per computer hour = $40.. Chapter 8 241 .600 hours d$48...8–27.000 hours of labor $48 per labor hour = $192.........000 62.000 = $666. If Jack’s three cost drivers were each also distributed 32.. (35 min...000 Revenue.. and may lead Jack to concentrate more heavily in tax work....67 per client x 72 clients e$28.......000/1. Expenses: Sec.... Account Rate Tax $130.... a$666... tax work appears relatively more profitable than under ABC........000 192..000 40.... 144b Computer Deprec... $666. $48a Profit.. Expenses .000 revenue/$100 per hour = 4...400 Total $400.. a$400..000 of expenses/4..000d 28.. Inc...000 $208....000 80..000 32... In this case...000 $208....... 1997 Solutions Manual..000 Revenue ...5% to Tax and 67.5% to Consulting..400 = $48 per labor hour x 1..800e 25.. labor hours were distributed 32...600 $140.. ......800 Total $400......... 25c Profit ...67 b$144 per client = $80........ Salary .000 = $25 per computer hour x 1............. Account Rate Tax $130....67a Supplies...000 hours b. ABC and traditional costing systems generally yield comparable product-line profits when overhead is a small portion of costs....200 15.000 72....000f $ 28...300 hours of labor c... or when cost drivers are highly correlated with the volume-related allocation base.800 = $144 per hour x 200 transactions f$25....000/120 clients per transaction = $72. a.200 Consulting $270. © The McGraw-Hill Companies.....600 Consulting $270......400b $ 67..000 $179.... Under labor-based costing.000 129...... d.000 hours b$62........5% to Consulting..5% to Tax and 67. the labor-hour allocation and ABC would have been identical.000 43.........

) ABC: Cost flows through T-accounts: Moss Manufacturing..00 per pound = $30.000 hours x $15 per hour = $150.000 Mat. Inc. 5/e .000 to WIP Finished Goods Inventory 600. Inspect. Inc.000 to WIP Work in Process (WIP) Inventory Department F Direct Materials 200.000 Direct Labor 100.000 600. (30 min. Materials Inventory $200.800 per setup = $45.000 Overhead Applied: Materials Handling 2.000 Running Machines OH 150. Handling OH 30.500 pounds x $12.000 Machine Setup OH 45.000 to WIP © The McGraw-Hill Companies.000 Wages Payable $100.000 600.000 to WIP Overhead Applied: Running Machines 10.8–28.000 Overhead Applied: Quality Inspections 500 inspections x $150 per inspection = $75.000 Qual.000 Overhead Applied: Machine Setups 25 setups x $1. 1997 242 Cost Accounting. OH 75.

Inspect. Handling 10.000 to WIP Wages Payable $50.000 Machine Setup 20. 20.000 250.000 hours x $5 per hour = $50.000 Running Machines 50.000 yards x $.000 Mat. Inc. Inc.000 to WIP Overhead Applied: Running Machines 10.000 250. Materials Inventory $100.000 to WIP Work in Process (WIP) Inventory Department B Direct Materials 100. (30 min. Chapter 8 243 .000 Direct Labor 50.000 Overhead Applied: Quality Inspections 400 inspections x $50 per inspection = $20.000 Qual.000 to WIP Finished Goods Inventory 250.) ABC: Cost flows through T-accounts: Fleetfoot.000 to WIP Overhead Applied: Materials Handling 20.8–29.50 per yard = $10.000 to WIP © The McGraw-Hill Companies..000 Overhead Applied: Machine Setups 50 setups x $400 per setup = $20. 1997 Solutions Manual.

.. Inc.....500 $ 14... 0.000 30.000 13.500 b....) Comparative income statements and management analysis: Nykee. 5/e .000 19.500 Revenue ........ thereby reducing setup costs... Direct Materials ..Solutions to Problems 8–30. management may be able to operate with fewer but larger production runs......000 99...... For example....000 $ 45. a..000 = $0...000 60. Operating Profit . 375c Sales & Marketing.000 15..000 = $1.....000 of Sales and Marketing costs/60 advertisements e$13..000 per advertisement x 12 advertisements b$1........ Direct Labor ..... Income Statement Account Rate B-Ball $195... Nykee.000 6..000 50..... Focusing on activities can identify non-value adding activities that can be eliminated without reducing the product’s value.... Activity-based costing highlights the activities that cause costs..000e 15. Inc...000g 12.325 = $19. 1.500b Quality Control .. © The McGraw-Hill Companies...000 of Quality control costs/80 inspections d$1.000 of Production setup costs/30 production runs c$375 = $30. and provides insight into which costs could be reduced.000 of direct labor costs = $45... 1997 244 Cost Accounting.500 Total $379..000 105.. (40 min. a0...000 Marathon $184.000 = $1......000 48..000 154...000 40...000h 55....500 per setup x 10 production runs g$15.000 = $60...... 1..000f 15. Indirect Costs: Administration .000 60.000 = $375 per inspection x 40 inspections h$12...000d Total Indirect Costs .500 $ 59.. Inc.500 of Administrative costs/$60..325a Production Setup ...500 45..500 30...000 direct labor costs f$15.......325 x $40..000 55.000 20...

Direct Labor ...500 of Overhead Costs/$60.500 Total $379... Under the more accurate method of activity-based costing....8–30...500 $ 62.000 105. the BBall product line is not profitable (losses of $3.. such as reducing the number of setups required... Dear Members of the Management Board: The purpose of this report is to explain the differences between the profits of our B-Ball and Marathon product lines using activity-based costing versus our traditional laborbased overhead allocation methods. 1997 Solutions Manual... Under the labor-based approach..500 $ 59. Overhead Costs . more than three-times the profits of the Marathon product line. Income Statement Account Rate B-Ball $195.... 2... all overhead costs are pooled together and allocated to our products on the basis of direct-labor costs. Traditional labor-based allocation is less accurate than activity-based allocations because many overhead costs are not well correlated with labor costs....000b $ (3...000) Marathon $184....... Our findings suggest that management might make sub-optimal decisions if it were to continue to use labor-based overhead allocations.575a Operating Profit.000 = $154... The two costing methods differ in their results because of the way overhead costs are allocated between our products....500 Revenue ...000)... our B-Ball product receives twice as much overhead under our traditional approach than does our Marathon product because it uses twice as much labor. direct costs do not differ under the two methods. Inc..000 51.... Under our traditional method.000 20.575 b$103.000 Direct Labor Costs = 2......575 Overhead Rate x $40.. However. (continued) c....000 Direct Labor Costs d.... cost drivers. For instance.. Direct Materials . we find that the B-Ball line should receive only about half as much overhead as the Marathon product.000 60..000 154... are identified and their costs are applied to the products in relation to usage. such as inspections and set-ups. instead we should pursue ways to reduce our costs..000 40. and management might wish to eliminate the B-Ball product.. Under activity-based costing.... Management should not drop the B-Ball line.000 103.000 towards profits..000 50..... Nykee. after analyzing the factors driving the overhead and applying these costs to our products........ Inc.. © The McGraw-Hill Companies. a2.000 55.. the B-Ball product is shown to contribute $45.. Chapter 8 245 .

© The McGraw-Hill Companies..000 administrative costs/$600......000 125..: Income Statement a..000 200.000 240..000e 75.....000 100.000 40......000 0....... Activity-based costing highlights the activities that cause costs....... 5/e .... Direct Materials ... Filmworks......000 40...000 100.....000 237. the effort of making a one unit reduction in an activity should be directed at setups.......8–31.) Comparative income statements and management analysis: Filmworks...... Operating Profit (loss) .. and advertising... Indirect Costs: Administration .000h 243. (40 min. as the savings would be greater than the ‘same’ effort would produce if directed at inspections...... For instance. a0.....000 $ 17.000 = $100.....000 = $800 per advertisement x 60 advertisements b...000 direct labor costs f$75...000 480. and provides insight into which costs may be reduced. Inc.. Production Setup ... Account Revenue .... Inc.. quality control inspections. Direct Labor .......520.000 Standard $800... Total Indirect Costs ... Sales & Marketing. Filmworks’ management has identified three cost driving activities..000 600...000 $ 240...000 $223.000 sales and marketing costs/100 advertisements e$60..000 = $200 per inspection x 300 inspections h$48..000f 60...167a $500b $200c $800d 60..........000 100.000 of direct labor costs = $200...000 production setup costs/400 photo sessions c$200 = $100...000 Total $1..000 32. Inc.000 = 0.. which is a separate issue......... Therefore. Setups cost $500 each and inspections cost $200 each...1667 b$500 Rate Deluxe $720. 1997 246 Cost Accounting. between setups and inspections.....000 quality control costs/500 inspections d$800 = $80. The advertising activity is examined in conjunction with the benefits provided in the form of future sales...000g 48...000 = $500 per session x 150 sessions g$60..........000 80.1667 x $360.000 100.... production setups..000 200..000 360.. Quality Control .......

such as inspections and set-ups.. Direct Labor .... For instance....000 of Overhead Costs/$600.. the Deluxe Portrait is not profitable (losses of $28.... Under the labor-based approach....000 192.....80 Operating Profit (loss) ... However....... the Deluxe Portrait line earns $17.000) Standard $800.. a difference of $45. 0. Traditional labor-based allocation is less accurate than activity-based allocations because many overhead costs are not well correlated with labor costs. Under the more accurate activitybased costing...000 = $480....000 360.. 1997 Solutions Manual..000 240.. a0. after analyzing the factors driving the overhead and applying these costs to our products.8–31... direct costs...000)... a Overhead Costs . c..... Chapter 8 247 .. Dear Members of the Management Board: The purpose of this report is to explain the differences between the profits in our Deluxe and Standard product lines using activity-based costing versus our traditional labor-based overhead allocation method.... Under activity-based costing...000 600..000 $ 240.. © The McGraw-Hill Companies...000. (continued) Filmworks.000 Direct Labor Costs = $0....... Under our traditional method. we find that the Deluxe line should only receive $243..000 Revenue . are identified and their costs are applied to the products in relation to usage...... all overhead costs are pooled together and allocated to our products on the basis of direct-labor costs.....520....000 Total $1....000 Direct Labor Costs d.... The two costing methods differ in their results because of the way overhead costs are allocated between our products.000 $ (28.....80 b$288. cost drivers. Our findings suggest that management might make sub-optimal decisions if it were to continue to use labor-based overhead allocations......000 in overhead.80 Overhead rate x $360..... such as Materials and Labor do not differ under the two methods.. Direct Materials ..000 200.....000 $268.000 100.. Inc.000 100......000 b 288. Inc: Income Statement Account Rate Deluxe $720.000 in profits. our Deluxe portraits receives one-and-a-half as much overhead under our traditional approach as does our Standard portrait because it uses one-and-a-half as much labor.000 480.

. Costs $ 15..........700 High-Lead $ 5..67 0.....125 Order Proc..000 60.. # units Total est...250 b ...............000 Driver Units 100 50 80......25 10 666....700 aNumber of labor hours x $15 per hour.. .-hrs. overhead.......... Dep..000 2...000 hours = $63 per hour b.000 12... Predetermined rate = estimated activity/estimated allocation base for direct labor hour = $315... © The McGraw-Hill Companies..600 $20.... 5/e . Qual....000 80. # runs Mat. mat..............000 $315...... $13.450 $19....500 31... .. Cntl....000 8... Packing.250 9......200 1.. . Indirect Costs 9. bNumber of labor hours x $63 per hour.) ABC and predetermined overhead allocation rates: Import Glass & Crystal Co...450 Total Cost ....8–32........000 Allocation Rate $ 150 1.000 20.500 $65..000 Direct Labora ......000 40.. Setup .. Inc.... Computing overhead allocation rates Activity Cost Driver Est...600 Total $26...000 30 320..... mach.. .. Production Costs using Direct Labor-Hours Account Unleaded Low-Lead $ 8. $24.........000 Direct Materials ..... (50 min.. a.000 100. 2.... # insp..000/5........ Hdlg..........000 7.. # orders Prod. 1997 248 Cost Accounting..000 3. lbs....... Mach....

..000 3.267 aRounded across the row.000 Direct Labor .. Internal Memorandum The discrepancy between our product costs using direct-labor hours as the allocation base versus activity-based costing is found in the way overhead costs are allocated.. Cntl. Setup ..500 1...... It allocates the individual components of our overhead to our products based upon the product’s use of that overhead component.....000 8.250 800 667 375 $13..000 $17....8–32.. With the more accurate product costs. 1.792 Total $26..467 High-Lead $ 5. 6..... .800 10....350 4.... $13........... 2.....000 7. ....200 2.. Production Costs using ABC Account Unleaded Low-Lead $ 8.. d.....250 Mach. ..000 300 2..400 1. As seen in the activitybased costing report...250 Indirect Costs Order Proc.....500 1............. $32. Activity-based overhead is more accurate...000a 3......400 667 1. Inc....875 $63. . 5... 2. Dep.....525a Direct Materials .. (continued) c. © The McGraw-Hill Companies.... we should begin to concentrate our efforts upon reducing the costs of our more expensive overhead operations.250 450 1.500 Total Cost .000 2.... Chapter 8 249 .... Hdlng.. We recommend assessing the cost of using an activity-based system in our company.....800 Qual.. Our existing direct-labor cost method distorts our product costs because there is little correlation between our direct-labor costs and overhead.. 1997 Solutions Manual......200 Mat. We will proceed with activity-based costing if we find the cost of the new system is less than the benefits of the more accurate information we will receive... 667 Packing.. a large share of our total overhead is comprised of materials handling and maintenance costs—costs which were not visible under the direct-labor approach. 600 Prod. Reducing our materials handling and machine depreciation and maintenance costs should be a new priority..000 2.

2......000 lbs... $31...000/40 insp..000/2..000 units) $250 per hour ($500...000 Direct Labora ... a..... $ 4..000 2.. 1997 250 Cost Accounting..000 $34..) $4 per unit ($80..000/200 orders) $5 per lb...200 27. Nerds Direct Materials .. 5/e .....200 of hours x $20 per hour of hours x $250 per hour © The McGraw-Hill Companies. Activity Production Setup Order Processing Materials Handling Equipment Maintenance Quality Management Packing & Shipping Direct labor hour rate Recommended Base # of production runs # of Orders Lbs......000 aNumber bNumber Stars $ 2...... 25.....000/8. Inc......000 Total Costs .000 Overheadb .000 $31..000/10..000 hrs.....) $2. ($100. (50 min.000/20.000/100 runs) $500 per order ($100.) ABC and predetermined overhead rates: Shades Co.500 2..8–33.) b.500 per insp....400 30.... of material Machine hours # of inspections Units shipped Allocation Rate $600 per run ($60.900 Fashions $ 2.. ($40....000 hrs.) $12 per hour ($120..

000 d$12 per hour x 500 hours = $6..000 1..000d Quality Management.. Inc.. With the more accurate product costs.... 6.... 1997 Solutions Manual........000f Total Cost ....... (continued) Nerds Direct Materials . Internal Memorandum Re: Product-Cost Discrepancy The discrepancy between our product costs using direct-labor hours as the allocation base versus activity-based costing is found in the way overhead costs are allocated...900 Fashions $ 2.000 per run x 2 runs = $1. Our existing direct-labor cost method distorts our product costs because there is little correlation between our direct-labor costs per product and overhead........ 2. 2...400 4..600 5..... quality management.....000c Equip... © The McGraw-Hill Companies.000 2. 4.000 Order Processing .000 3.. we should begin to concentrate our efforts upon reducing the costs of our more expensive overhead operations.... Maintenance .000 Direct Labor ...500 per inspection x 2 inspections = $5..200b Mat.400 1... Chapter 8 251 .000 3........ Handling.200 a$500 b$600 Stars $ 2..000 f$4 per unit x 1..... We should use activity-based costing if we find the benefits from the new system exceed its costs...200 2...500 2........ $ 4.8–33....000 2.... c.... $28...200 $21.. 5.. a large share of our total overhead is comprised of order processing..000a Production Setup ..200 c$5 per lb.. As seen in the activitybased costing report. Activity-based overhead is more accurate..... x 400 lbs..000 2... It allocates the individual components of our overhead to our products based upon the products use of that overhead component. equipment maintenance and shipping costs—costs that were not visible under the direct-labor approach.... 4......000 units = $4........800 per order x 8 orders = $4..600 5. 1...000e Shipping .000 e$2..000 $22..000 d.. = $2.. Reducing these overhead costs should be a top priority.000 4..800 1..

.000 46........000 240.000 $ 94.000 471....400 Var.280 $ 95..........000 24.000 42...........440 9.. OHa .......520 $212........160 24.....000 24.............. $163..600 © The McGraw-Hill Companies..600 $216...870 Spinner $475.. 8.....000 64..000 Direct Lab.....................000 240......400 Cont.000 590....830 Fixed OH Plant Admin.000 54.......000 200.000 Warehousing...400 26.... $380...600 88...8–34....000 54.......400 Var...........000 total var........ 5..........000 8.. . 150...720 Total $1..........000 $ 243..250 Depreciation.440 24. Gross profit ............840 24.. 14....000 140.. Other ...........000 Direct Lab...... Summit $560. ....000 11..000 Direct Costs: Direct Mat............600 hours/Total machine hours) x $261.000 36.... . 16... Gross Profit ...000 23. Inc.. $159......... (40 min. 2. Mrg..000 471. Cannonball Corporation Income Statement Aerolight Sales .... 23. OH: Mach....... Mrg.400 Shipping ...250 13...000 590......... 5/e ..... ....) Choosing an ABC system: Cannonball Corp..000 125....... Other ..900 Total $1... 14....... 1997 252 Cost Accounting.200 Cont........ 52...000 83...500 20.................720 Order Proc. Setups ... $380....000 Direct Costs: Direct Mat....600 88...415..000 92.. 150.... Cannonball Corporation Income Statement Aerolight Sales.............. ......480 Spinner $475.....000 92.000 93..............000 $ 243... Overhead b....... a.415...000 200..400 261..000 140.......400 Fixed OH Plant Admin.. a(Machine Summit $560......

Some costs may have no relationship to any volume or activity base. To artificially allocate these costs would distort the accounting information used for pricing. the company will probably have more accurate product cost information for pricing and other decisions. A preferable method of handling such costs might be to require a “contribution margin” from each product that must cover a portion of these costs. d.. This additional information should enable Cannonball management to make better decisions. Also. if Cannonball wants to reduce costs then activity-based costing will list the activities on which management should focus its cost reducing efforts. The activity-based costing method provides a more detailed breakdown of the costs.8–34. (continued) c. Inc. For example. evaluation. etc. Chapter 8 253 . © The McGraw-Hill Companies. 1997 Solutions Manual.

or redesigning the plant layout.) (CMA adapted) © The McGraw-Hill Companies. If management implemented an activity based costing system it should be provided with a more thorough understanding of product costs. Inc.) Benefits of activity-based costing. those activities that drive the costs. By breaking down costs into cost drivers.8–35. (15 min.. Management should also be able to streamline the production process by reducing those non-value adding activities such as setups and travel time between activity centers or departments. i.e. 1997 254 Cost Accounting. 5/e . This would be vital information for pricing decisions and profitability strategies. product volume and product cost. (Management might consider running larger batches. management should be able to see the relationship between product complexity..

.000 in overhead costs come from the additional depreciation and maintenance for the new equipment. most companies that become more capital intensive see overhead increase and labor decrease. Chapter 8 255 . Inc. Further. she might find that the additional $200.8–36. For instance. 1997 Solutions Manual.) Benefits of activity-based costing: Sparkle Manufacturing Activity-based costing would help to clear her confusion by identifying the activities that drive overhead costs. © The McGraw-Hill Companies. (15 min.

000 2....750...) Choosing an ABC system: Home Manufacturers...000..312.. .200.000 640.000 800..000 600... a.... Direct Costs: Direct Mat. OH: Mach.......000 Direct Costs: Direct Mat.........000 Direct Labor ..800.000 2.000 Home Value $10.000 2.000 280.. 400.. .000 © The McGraw-Hill Companies.000 $ 5.200... 320.000... Income Statement Basic Sales ..000 Plant Admin.280..000 288...200.........000...792... Cont....000 7...000..000 Castle $9.......800.....000 400..000 1..000 Cont.200......600. Gross Profit ...000 $ 5....... Inc.. Direct Labor ....000 4.000........000 2..........200. ........800.. Margin ...... 5/e .088...000 Total $25..000 2.258............ 400......000 $9.200. 270.000 600.. Plant Admin....000 1......000..000 Machine operation .....320.. Income Statement Basic Sales ..... Home Manufacturers... $6......000 $2..000 330..800.392.000 320.208.200......800.000 $3...000.....000 1.... Gross Profit ....000 800.000 160..000 1.000...... b..000 Warehousing...000. 2.000 4.000 7...... Inc.600.000 $ 9..... Setup..... Inc....000 3...... 160...000 $4... 1997 256 Cost Accounting....000 Var...000 2....000.....000 Castle $9..000 1.. Var...........000 Total $25. (40 min..000 Home Manufacturers......000. $2....000 1.......000 3....000 $3.000 $ 3.. $6.....000.000 Order Proc.200....000... Inc..000 400...000.. OH .000 Shipping .200........... Home Value $10.. Margin ......000 5..000 640..000 2.........000 600........... 192.8–37.000 600..

the costs should be allocated in some manner that bears a relationship to the benefits received by the products. Further. If the costs are mainly personnel costs. Inc. if HMI wants to reduce costs then activity based costing will list the activities on which management should focus its cost reducing efforts. This additional information should enable Home Manufacturers.g. Chapter 8 257 . (HMI) management to make better decisions. the activity-based costing method provides a more detailed breakdown of the costs.. we could allocate the costs based upon direct labor hours..8–37. (continued) c. such as the costs of a training program or of a plant cafeteria. pricing. If plant administration costs were to be allocated to products. © The McGraw-Hill Companies. make-or-buy decision). For example. d. In this case. which would help decision making (e. Inc. Although both methods yield similar product costs. 1997 Solutions Manual. we would want to know more about the contents of the plant administration costs. for example. activity-based costing should increase the accuracy of product costs.

............................000 6...........000 hrs......... 500 Component ..........................................................200 Estimated direct labor hours (DLH) Molding ..500 Total estimated direct labor hours ....................................... Molding Manufacturing Departments: Variable overhead......600 Total $30.....500 Total manufacturing department overhead .....200 4......... 2................................. Amounts (000 omitted) Component Assembly $10...................000 Service Departments: Power...........................200 $16................ 1997 258 Cost Accounting................500 6...........500 Fixed overhead ............................Solutions to Integrative Cases 8–38..... $ 3.......... Inc.............. Total estimated overhead.. $21...............................................400 4..... = $20. 1................100 $22......55 per direct labor hour © The McGraw-Hill Companies....... (40 min..........) Plant-wide versus departmental overhead allocation: Carryall Corp......000 29.....800 18...................000 $82.... 17............000 Assembly ........... Maintenance ................................... 5/e .......800 $59...000 Plant-wide overhead rate = Estimated overhead Estimated DLH = $82. a............ 4....200 $16.....

.....44/MH 4.....500 DLH $17......... b..000b...000) Variable: ($5.400 Allocation of maintenance costs (direct) 4.400 = 5...... (6... Inc..8–38.. 350/1......12/DLH 0 = 90 + 25 + 10 = 500 + 350 + 150 c800 = 360 + 320 + 120 d6.000 x each of: 500/1.... (12..760 2.200 2...000 2...88/DLH 1...........000 259 © The McGraw-Hill Companies.880 $16................... 150/1............ 320/800c...000 x each of: 90/125a............400 b1.. Allocation of fixed power costs (direct) Fixed: $12............000) $21..400) x each of: 360/800c.........560 $23...000b... a125 $4.. 1997 ...000 DLH $11................ 120/800c ..... 25/125a..000 2.600 320 6.......... Rate (Departmental overhead ÷ Base) .....000b ........ (continued) Departments (000 omitted) Service Manufacturing Power Maintenance Molding Component Assembly Departmental overhead costs .... 10/125a .200 800 $22.400)d Total allocated departmental overhead costs.... $ Base .760 875 MH $37............680 1...000 + 1. $18......................880 $ 0 $32.....000 + 1..000 (4.........800 960 $25.....

1997 260 Cost Accounting. or the company is not interested in cost refinement by departments.8–38. The ideal criterion for choosing an allocation base is a cause-and-effect relationship. (continued) c. © The McGraw-Hill Companies. A plant-wide rate is appropriate when all products pass through the same processes. 5/e . Departmental rates are appropriate when the converse is true. Inc. Carryall Corporation should use departmental rates to assign overhead to its products. all departments are similar.. This relationship exists with different bases in Carryall’s different departments. necessitating the use of departmental rates. Carryall’s departments are dissimilar in that the Molding Department is machine intensive while the other two departments are labor intensive.

..00 Direct labor cost per unit . 44... we can see that the overhead allocation system used by CBI would lead them to drop Almond Dream and keep the remaining two bars......32 $21.. Product Costs: Labor-hours per unit ..............000 Krispy Krackle 3 1.... $94..00 Allocated overhead per unit.00 Gross profit margin ..00 Allocation rate per labor-hour = $6.....24 Selling price ..00 29... Direct labor cost per unit .. Yes $ 2.........00 $6...........000 Total overhead = $69....... (60 min......00 6..... Material cost per unit ........96 $38...09% No From the table above. 42...) Distortions caused by inappropriate overhead allocation bases: Chocolate Bars.000 $9..00 1............... 1997 Solutions Manual..........00 6..000 $2..00 39........24 Product cost .... $85..........................32 per labor-hour Costs of products: Material cost per unit ....00 18......00 18........8–39...00 $42... b........16% No $ 9.. Labor-hours per product....000 $8..96 $55.....00 3.......... Inc. so Almond Dream is allocated a greater share of the overhead costs...000 Creamy Crunch 1 1.....000 Direct labor costs per hour = $6.......................500 Total labor-hours = 11......00 $18... a.. Krispy Krackle and Creamy Crunch....... Inc.... $ 8............ Almond Dream 7 1.87 % Drop product? . Total units produced...........32 $35. Chapter 8 261 ....00 7. –10.............. © The McGraw-Hill Companies.............. Almond Dream has a much higher proportion of direct labor hours than Krispy Krackle or Creamy Crunch......

..............00 13....000 3.. ($6..............000 Creamy Crunch $6.......00 –28................70 $ (6..00 3 1....... 5/e ...........2) % The recommendation to management is to drop Krispy Krackle and increase production of Creamy Crunch... 1997 262 Cost Accounting..4% Profit margin percentage ............500/5.. Direct labor cost per unit .90 $ 6........................90 per labor hour) .....8–39..............................00 = 17......000 Allocation rate per labor hour = Total overhead/Total labor hours = $69.......00 41.. Allocated overhead per unit ($13... Product cost—direct labor allocation base .......70)/$55....00 18........... Inc.......10 $6.......... Labor hours per product .........000 = $13......000 $6.....00 1 2... Product cost ............. (continued) Krispy Krackle Direct labor cost per hour ...........70 $61................ Total units produced . Direct labor hours per unit .........10/$35...90 $28...... Total labor hours: 5..90 per labor hour Allocated Production Costs: Material cost per unit ............70 Creamy Crunch $ 9. © The McGraw-Hill Companies. $55..00 6..000 2........00 = (12... c...... Krispy Krackle $ 2..........70) $35...00 –61..............90 Gross profit margins: Selling price ...

.............................00 6.... and misallocation of overhead can lead management to make unprofitable decisions...........000 3.......000 = $23........ © The McGraw-Hill Companies................1)% The recommendation to management is to drop Creamy Crunch and sell out! e...............17 $ (3....... The direct labor hours are inappropriate as an allocation base and give misleading information.........................17 $38............ Labor hours per product ...000 $6. Direct labor cost per unit ..00 –38........ CBI is a profitable firm..500/3.............. (continued) Creamy Crunch Direct labor cost per hour ...........17 per labor hour Allocated Production Costs: Material cost per unit ... Creamy Crunch $ 9... Allocated overhead per unit .......... Total units produced ..... Product cost—direct labor allocation base......................... Total labor hours: 3..000 Allocation rate per labor hour = Total overhead/Total labor hours = $69.00 = (9......... Profit margin percentage .... The allocation method and policy to drop products with gross profit margins less than 10 percent could lead to the systematic elimination of all products..................00 23...8–39... Chapter 8 263 ............... d.....17 $35..00 1 3.17)/$35...... Inc. ($3..17) Gross profit margins: Selling price .............. 1997 Solutions Manual.................................... The policies and allocation method employed by CBI encourage poor decision making.................................... Product cost .... Direct labor hours per unit .......... in total.

...0 Factory space (%) 10% 40% 50% Allocated Costs: Total Per Unit $21......3% x $30.....6 27...07 $85.000 per month $24...70 $ 8....000 (46...6% x $24.1%) 6..7%) 4.....3%) Factory space (sq.... Production cost per unit......07 $13..3 9....00 42.000) 3.... 5/e .500 – $15..500) + (40% x $30...07 26..7 40.)..4% Krispy Krackle $ 2.....73 Almond Dream (63...73 $36..000) + (10% x $15...........730 Allocated production costs: Material cost . 7........ Selling price . Direct labor ........000 (13.....000) + (50% x $15.....00 –36......... Inc....... = 21...00 18...000) ...500) + (46..000) + (40% x $15......... Allocated OH .........072 Krispy Krackle (27.000 (100%) $15........000 (27..500) + (13..... ft...........3%) 7............... 1.... (90 min.....................07 $71....500 per month (= $69.....3% x $24..000 (100%) 15..73 $35..........000 5....000 (100%) 10.........73 $ (1. Profit (loss) .......7% x $30..699 Creamy Crunch (9..000) .........70 21........000 – $30.................................9)% equal hours per unit times 1...... 63.............. © The McGraw-Hill Companies...... Profit margin ratio . 2......... Product cost .... = $21........30 15....00 –46.8–40............ Creamy Crunch .000) ..1% Creamy Crunch $ 9...000 units Product allocation base: Fraction: Labor (%) Almond Dream .... Inc..000 (63...93 16.. = 26.....000 (40%) Creamy Crunch 1...6%) Total machine hoursa ........00 21... 1997 264 Cost Accounting...............3 46.. Krispy Krackle.................00 26.000 units........ Almond Dream Total direct labor hoursa .........................00 6... a...73) (4.......00 21..000 (9... aTotals Almond Dream $ 8..........70 $46..70 $55.....000 (10%) Total rent for factory space: Total machine operating costs: Total other overhead: Total units produced/month: Krispy Krackle 3.........) Multiple allocation bases: Chocolate Bars.1 Machine hours (%) 13.........00 –71............1% x $24..............000 per month $30....000 (40%) (50%) Total 11.....

..... ft....000 per month $24........ © The McGraw-Hill Companies...000 hours Product allocation base: Fraction: Labor (%) Almond Dream .. c.)a.4%) Krispy Krackle 3 7 4... Two characteristics of Creamy Crunch appear to make it appear relatively unprofitable: one...6%) 7...6%) $15. Based upon the table above and the gross profit margin rule..000 14....7 (rounded) 82. Chapter 8 265 ..500 per month 17...000 square feet of space available..000 per month $30.4%) 4.. Labor hours required ..000 3...... Machine hours required . (continued) b. Krispy Krackle .6 Factory space (%) 33.....000 3.. Creamy Crunch uses 50% of the factory space and thus is allocated half of the rent costs...3 (rounded) 66.... two.000(36. Machine hours per unit ...... Unit of output per month . aThis Machine hours (%) 36. Direct labor hours per unit . management would recommend dropping Creamy Crunch.000(66.000(33...4 63.....4 17. Total rent for factory space: Total machine operating costs: Total other overhead: Total labor hours/month: Total units produced/month: Total machine hours Almond Dream 7 2 2.... Factory space (sq........7%) 1...... Inc.6 product mix leaves 4..... the selling price is comparatively low as compared to the other two products....8–40.000(63. 1997 Solutions Manual.3%) 2.000(17.000 units 11...000(82.

...... Almond Dream $ 8..................... Direct labor .....................17 $85.. Direct labor ...17 $11.....17 Allocated production costs: Material cost .95 19....17 $73..........................61 2............39 $ 1............8–40.......05 $85......000 = $23........05 $68.........00 42................. Product cost ....392 Allocated production costs: Material cost .....6% x $24..83 13....00 42...500) + (63..500) + (36............ Almond Dream $ 8.. 5/e ... Allocated OH ...............500/3.. = 33....... In fact.............. computed as follows: Units Produced = 3..000) + (33..... Inc......00 –68........9% Krispy Krackle $ 2........... Product cost ..........7 x $15........6% x $30..9% © The McGraw-Hill Companies...........00 18..9% Based on the gross profit margins of Almond Dream and Krispy Krackle. Production cost per unit.......3% x $15.. Production cost per unit....00 33............39 $55......9%..108 Krispy Krackle (17.....00 18.................. = $36...05 33...........00 –53... Profit margin ratio: Ratio = Gross Margin/Price ...4% x $24............. Selling price .....000) ........39 $53......00 –73. Almond Dream appears to be the most profitable product............ Allocated OH ........ (continued) Allocated Cost: Total Per Unit $18..39 Almond Dream (82.............................000) + (66................ Profit margin ratio: Ratio = Gross Margin/Price .......000) . its margin ratio is only 13...................00 23. Selling price .................... management should drop Krispy Krackle and continue to produce Almond Dream........... 1997 266 Cost Accounting.....000 Overhead Allocation = $69....4% x $30.05 $16.....

...500 $219...000 $105. 1997 Solutions Manual...500 $ (9.......000 Costs Materials .500 $ 35....000 3................ © The McGraw-Hill Companies.. + 69........ (continued) c.. $ 24..500 Revenue . Chapter 8 267 ...000 $ 6...500 – 114.....500 + 69... Inc..8–40..........000 18..500 – 129...500 $114......000 $165...... we find Almond Dream and Krispy Krackle to be equally profitable...500) Moral: Don’t make too much of allocated cost numbers in decision making..000 Labor ...... computed as follows: Almond or Krispy or Creamy Dream Krackle Crunch Units ...000 Overhead ........... – 219.....500 Gross Margin ...... $ 35..... $255...000 – Total Costs ........... (continued) If we compute the gross margin for the three products at maximum production..... 3.......000 54..000 $ 27.500 + 69... 126..500 $129....000 3..

.

from start to finish. 9–2. Chapter 9 269 . 2) Record by charting. since the focus of activity-based management is on those activities that cause the most costs. Activity-based costing provides management with detailed costing information. Activity-based management helps to reduce customer response time by identifying activities that consume the most resources—both in dollars and time. Value-added activities add value to the product or service whereas nonvalue-added activities do not add value. 1) Identify the process objectives defined by what the customer wants or expects from the process. This time is broken down into four categories: order receipt time. Customer response time is the time it takes the company to provide the product or service starting from the time the customer places the order. and by identifying nonvalue-added activities. Inc. 9–6. Activity-based management is based on activity analysis and finding ways to be more efficient with activities within the organization. activity-based costing provides data useful to the implementation of activity-based management. Activity-based management can be implemented without an activity-based costing system. order waiting time. order manufacturing time. management is able to focus on eliminating or reducing nonvalue-added activities. Many other items in the production process are also often found to be nonvalue-added.Chapter 9 Activity-Based Management Solutions to Review Questions 9–1. Activity-based management focuses on the use of activity-based costing information to make decisions. 9–5. and waiting for work. and order delivery time. © The McGraw-Hill Companies. 9–3. However. 1997 Solutions Manual. 9–4. Common nonvalue-added activities include movement of inventory. By identifying value-added activities. 4) Continuously improve the efficiency of all value-added activities and develop plans to eliminate or reduce nonvalue-added activities. the activities used to complete the product or service. storage of inventory. 3) Classify all activities as value-added or nonvalue-added.. By identifying activities that do not add value. management knows which activities to retain and make more efficient.

Capacity-sustaining costs are fixed by management’s decisions to have a particular size of store. 3) Batch-related costs: Costs related to producing products in batches. Inc.and customer-level costs: Costs that support customer requests and product specifications. 1) Capacity-related costs: Costs that are fixed by management’s decisions to have a particular size of store. 2) Furniture: Inventory storage and repair of defective products. 1) University: Litter pickup and equipment storage. 9–12. 9–10. Answers will vary.. 1) Hospital: Storage of supplies and on-duty nurses without patients. 9–8. hospital. 1) Lumber: Inventory movement and scrap lumber materials. or other facility. © The McGraw-Hill Companies. Solutions to Critical Analysis and Discussion Questions 9–9. or other facility. Answers will vary. Answers will vary. factory. Answers will vary. Unit-level costs are associated with specific units. 2) Restaurant: Throwing out spoiled food and turnover of personnel. 1997 270 Cost Accounting. 9–11. 4) Unit-level costs: Costs that can be associated with specific units. hospital.9–7. 1) Automobiles: Rework on cars in the production process and warranty claims. 2) Computers: Inventory storage costs and materials scrap. factory. 5/e . 2) Product. 2) Bicycle repair shop: Sending incorrect part back to supplier and customer returns resulting from faulty assembly. Managers can use the hierarchy of costs to better understand which activities (and the costs the activities cause) can be manipulated in the short-run and which activities can be manipulated only in the long-run (capacity-sustaining costs).

9–18. 9–16. 9–17. Inc. 2) Record store: Shrinkage (inventory theft) and inventory storage. batch. Chrysler could mitigate the resistance of employees by showing them the benefits of activity-based management and providing the proper incentives (for example. Used resources are found by taking the cost driver rate and multiplying it by the cost driver volume. 1) Clothing retail store: Returning defective product to suppliers and customer returns. 9–14. Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity. Activity-based management looked at activities within Chrysler that likely had never been scrutinized before. Nurses are employed in shifts of several hours.9–13. inefficient processes were identified which may have been hidden by the previous cost accounting system. Chapter 9 271 . It also includes the type of cost (unit. © The McGraw-Hill Companies. 1997 Solutions Manual. This is the equivalent of “changing the rules of the game” which can cause employees to resist implementing activity-based management. 9–19. A reduction of a few minutes for a patient did not eliminate a few minutes of nurse time. giving bonuses for efficiency improvement ideas and providing profit sharing to employees thereby telling employees “if the company benefits. not in increments of minutes.. product & customer sustaining. The activity-based income statement provides management with resources supplied information (as does the traditional income statement) and includes resources used and unused resource capacity. Unused resource capacity is measured by subtracting resources used from resources supplied. and capacity sustaining) which allows management to assess its flexibility in controlling costs. This represents the cost of idle capacity within different activities of the business. Unused resources are typically found in capacity-sustaining activities because they are the least changeable in the short-run. As a result. Answers will vary. 9–15. the employees benefit”). A traditional income statement only shows management resources supplied but gives no indication of the resources used and unused resource capacity.

300 – $3...) Resources used vs.000 ($0....300 (given) Unused Resource Capacity $175 ($8........ Inc..300 (given) $6.300 – $6. resources supplied: Steamboat Industries...750) $300 ($6...6 × 5. 5/e ..000) $1....925 (given) $6.... (15 min....Solutions to Exercises 9–20.. Resources Used Setups.000 ($6....000) Resources Supplied $3.. (15 min...750 ($175 × 50) $6...000 ($1..... Clerical ... resources supplied: Great Lakes Corp.925 – $8.... Repairs ...00 × 5....... $8..000 – $5.... Inc..000 ($30 × 200) Resources Supplied $8. $3..) Resources used vs...000) $5........000) © The McGraw-Hill Companies. 1997 272 Cost Accounting..000 (given) Unused Resource Capacity $300 ($3... Resources Used Energy ..000) 9–21..

. $48......) Resources used vs... Inc. Energy .... Long-term labor.. At the other end of the cost spectrum are capacity-related costs which typically have unused resources (unless the company is operating at full capacity) since these costs are long-term costs and cannot be changed quickly in the short-term...9–22..120 (given) $12.........600 ($120 × 80) $4...800 ($40 × 320) $12.. resources supplied: Eagle Products.... Administrative.. Customer service ............000 ($150 × 80) $9.... Unit-related costs typically have little or no unused resources since they vary directly with output...600 ($30 × 420) Resources Supplied $48..500 (given) Unused Resource Capacity $ — $ 960 $ 600 $1..000 ($80 × 50) $12.. Chapter 9 273 .... Resources Used Materials.000 (given) $ 9. (40 min.. 1997 Solutions Manual... © The McGraw-Hill Companies........ Corp.......250 (given) $13.600 (given) $11..160 ($24 × 340) $12.... Setups ..800 (given) $13....000 ($6 × 8.000 (given) $ 4......000) $8. Purchasing ..400 $ 800 $ 450 $ 900 Unused resource capacity is the difference between resources supplied and resources used.

.... 11............. Operating profit.600 4...........000 9.....270 112.......................... Corp.... Unused Resource Capacity Resources Supplied $ 48........800 Long-term labor ...........120 Setups.600 25...................270 $ 37.....) Resources used vs. 5/e ......... 12......................600 21...... Capacity sustaining Long-term labor...............160 $ — 960 960 600 1.500 26............... $150.250 Administrative ......120 12....120 57...000 a..............110 $ 48............. $48.. 1997 274 Cost Accounting. Sales ....730 © The McGraw-Hill Companies.000 Energy ..................600 11......270 $ 37.000 9...................................800 12..... Energy...............................000 Resources Used Costs Unit Materials...500 Total costs ...000 8..730 $150.............400 107......... 13... 112..... Total costs ..........600 4... 4... Materials .......000 800 450 900 1............. resources supplied: Eagle Products. Sales ...........400 2..000 Customer service ...750 112...................... Purchasing ... 13.000 23.... Administrative..600 Purchasing .......... (45 min.... Product and customer sustaining Customer service ...................... Inc...... Operating profit..........000 12........ Batch Setups ....160 56. b..350 5...160 12..................800 13.......250 13........... 9.......9–23.......

Three costs have relatively high unused capacity resources—purchasing. unit costs are typically easier to control in the short-run than capacity-sustaining costs. and capacity-sustaining) and how it allows management to assess the affect management’s decisions have on these costs. energy. Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity. and capacity sustaining) which allows management to assess its flexibility in controlling costs.) Resources used vs. For example. It also includes the type of cost (unit. resources supplied: Eagle Products. a. © The McGraw-Hill Companies. 1997 Solutions Manual. A traditional income statement only shows management resources supplied but gives no indication of the resources used and unused resource capacity.. resources supplied. The memo should also explain the cost hierarchy (unit. Management should look at these areas carefully and decide whether this unused capacity is necessary. batch. Chapter 9 275 . The memo to management should include the points outlined in (a) above and perhaps expand on the definitions of resources used. batch. product & customer sustaining. Corp. product & customer-sustaining. The activity-based income statement provides management with resources supplied information (as does the traditional income statement) and includes resources used and unused resource capacity. b. and administration. (30 min. and unused resource capacity.9–24. Inc.

1997 276 Cost Accounting......500 $ 1........250 Unused resources capacity is the difference between resources supplied and resources used.............. Resources Used Materials .........500 ($22 × 750) $3..... Energy .250 (given) Unused Resource Capacity $ $ — 575 $ 1.... Long-term labor ... © The McGraw-Hill Companies....900 $14.... resources supplied: Inntell...... Setups... $16........150 $ 4.....................150 $5.......... At the other end of the cost hierarchy spectrum are capacity-related costs which typically have unused resources (unless the company is operating at full capacity) since these costs are long-term costs and cannot be changed quickly in the short-term..9–25......... (30 min....... $ 3..............500 (given) $ 4..................600 ($80 × 220) $12. 5/e ...650 (given) $26....................250) $21.400 (given) $18........ Unit-related costs typically have little or no unused resources since they vary directly with output..........750 (given) $16..........) Resources used vs....600 ($30 × 120) $37.. Inc..........000 ($50 × 420) Resources Supplied $16.......825 ($15 × 255) $17....... Corp......500 (given) $ 5... Purchasing .........000 ($75 × 160) Customer service ..........500 (given) $51. Administrative ..500 ($30 × 1.

250 5...500 21............... Materials..... Operating profit ......................750 Purchasing .550 $ 75...... 51............................825 20................ resources supplied: Inntell....500 4.900 139. 4.....550 14........... Sales . Batch Setups.000 58.......................600 27...........................925 139......000 139.... 16..450 © The McGraw-Hill Companies...................250 Total costs ................. 18..550 $ 75..........250 19................................... $16........... Operating profit ........... $215.....050 1..............900 $16........650 Administrative.. Administrative ..325 17.000 Resources Used Costs Unit Materials ...) Resources used vs..............................600 37...750 16.......................150 6..... Unused Resource Capacity Resources Supplied $16... 5.........400 Setups ....500 Customer service . b.. a.............................................................................500 Energy .......150 5.....625 $ — 575 575 1.............. Corp...9–26. Inc. 1997 Solutions Manual... Purchasing...500 51. 26.500 35............500 3.....400 20................. Product and customer sustaining Customer service..........................400 29..................500 109.... Total costs ..650 26..............................900 18.................450 $215..............900 8...... Chapter 9 277 ............ Energy ..200 3...500 Long-term labor ............ Sales ..........600 9.. Capacity sustaining Long-term labor ....250 77..... (45 min...

product & customer sustaining. 1997 278 Cost Accounting. Corp. 5/e . and capacity sustaining) and how it allows management to assess the affect management’s decisions have on these costs. The memo to management should include the points outlined in (a) above and perhaps expand on the definitions of resources used. purchasing. The memo should also explain the cost hierarchy (unit. It also includes the type of cost (unit. a. b. and capacity sustaining) which allows management to assess its flexibility in controlling costs. A traditional income statement only shows management resources supplied but gives no indication of the resources used and unused resource capacity. Three costs have relatively high unused capacity resources—long-term labor. (30 min. and administration.9–27. © The McGraw-Hill Companies.) Resources used vs. product & customer sustaining. For example. and unused resource capacity. batch. resources supplied: Inntell. resources supplied. unit costs are typically easier to control in the short-run than capacity sustaining costs. The activity-based income statement provides management with resources supplied information (as does the traditional income statement) and includes resources used and unused resource capacity. Inc.. Management should look at these areas carefully and decide whether this unused capacity is necessary. Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity. batch.

...) Resources used vs........980 $ 10..420) $ 30.....000) $ 21.. Inc...500 (given) $ 40.....750 Unused resource capacity is the difference between resources supplied and resources used.. At the other end of the cost hierarchy spectrum are capacity-related costs which typically have unused resources (unless the company is operating at full capacity) since these costs are long-term costs and cannot be changed quickly in the short-term...750 (given) Unused Resource Capacity $ 2. Customer service .000 $ 1...000 ($1... Chapter 9 279 .000 (given) $9.. Long-term labor....520 ($6 × 5.......800 (given) $560. © The McGraw-Hill Companies.000 (given) $ 22.300 $110.000 ($50 × 420) Resources Supplied $ 35......000 × 30) $ 5... resources supplied: Arther Consultants Resources Used Energy ... (30 min...000 $ 4. 1997 Solutions Manual. Administrative.. Human resources ..... Unit-related costs typically have little or no unused resources since they vary directly with output.000 ($90 × 5.....9–28... $ 32.........500 ($20 × 275) $450....

...... 30....... 40.000 a........750 622...000 Unused Resource Capacity Resources Supplied $ 2....050 $156........020 Operating profit . Sales ... (45 min...000 Long-term labor ....800 Long-term labor ............... 668...750 Total costs .030 $ 35.................... Human resources ...000 22.........................000 Administrative ............................950 b........000 110....... 5/e .......................000 1......... 22.750 121........ 450...........9–29..300 10.............500 Human resources ....520 Product and customer sustaining Customer service .........000 Customer service ...... Sales Energy . Inc............. 9.........500 9. 5............750 129.050 668.... resources supplied: Arther Consultants $825.... $825..) Resources used vs......................... $ 32....... 21.. 560. 35........980 4......950 © The McGraw-Hill Companies..........750 668.050 $156.. Operating profit........ 539.....000 Administrative .000 560.. Resources Used Costs Unit Energy ............000 Total costs ...........500 Capacity sustaining ........000 501...... 1997 280 Cost Accounting.....................800 40.

a. Chapter 9 281 . resources supplied. resources supplied: Inntell. The activity-based income statement provides management with resources supplied information (as does the traditional income statement) and includes resources used and unused resource capacity. For example. product & customer sustaining. b. A traditional income statement only shows management resources supplied but gives no indication of the resources used and unused resource capacity. the largest unused resource capacity is in the area of long-term labor. The memo to management should include the points outlined in (a) above and perhaps expand on the definitions of resources used. and capacity sustaining) and how it allows management to assess the affect management’s decisions have on these costs. batch. (30 min.. Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity. The memo should also explain the cost hierarchy (unit. Inc. It also includes the type of cost (unit. unit costs are typically easier to control in the short-run than capacity sustaining costs. © The McGraw-Hill Companies.) Resources used vs.9–30. Management should look at this area carefully and decide whether this amount of unused resource capacity is necessary. and unused resource capacity. 1997 Solutions Manual. product & customer sustaining. and capacity sustaining) which allows management to assess its flexibility in controlling costs. As one might expect with a service organization. batch. Corp.

....000 76...................... Long-term labor . Sales ......400 $ 8.................. Setups .....................000 15......Solutions to Problems 9–31.. $85..... Parts management ..........000 2....... Total costs ....... Operating profit............... 1997 282 Cost Accounting... Depreciation ..000 7.........500 5.........600 © The McGraw-Hill Companies....000 3..... Marketing.......000 10...........400 10..............500 3........................ Energy ................ Customer service .......000 5..............) Beam Corporation a............................. Materials ................. Quality inspections .. 5/e . (50 min.. Short-term labor ................................................. Engineering changes.500 2.500 2.......................000 7. Inc. Administrative .............. Outside contracts ....000 3.......

....... 15...... batch.....500 Capacity sustaining Long-term labor...................... 63......900)................000 28.....900 5.000 15.................000 13................500 10........... It also includes the type of cost (unit......000.... A traditional income statement shows only management resources supplied but gives no indication of the resources used and unused resource capacity..500 Product and customer sustaining Marketing ....000 Outside contracts .....000 Administrative .500 5.............000 0 1........ Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity ($12..... 1..500 500 1...000 4..400 1....000 and $3...000 3..... and capacity sustaining) which allows management to assess its flexibility in controlling costs.500 10.500 Total costs ... 1997 Solutions Manual...000 b.. The activity-based income statement provides management with resources supplied information (as does the traditional income statement) and includes resources used and unused resource capacity.. 2.... 7..500 12...500 Setups........ 7....... $ 3..... Chapter 9 283 ... Unused Resource Capacity Resources Supplied $ 500 0 400 0 0 900 500 3..000 3.... 4.000 20...........000 2.. 6.. This is useful for managers in that it indicates what actions might be taken to reduce costs (for example.000 2.....000 3...........000 Batch Quality inspections............. 3....... 5..................000 10... 5...400 15..9–31......000 Materials ...... 2...500 Depreciation....... we can see that depreciation and setups provide the majority of unused resource capacity ($4..... Based on the information in (a) and (b).................. 2.500 $ 3.. respectively).......500 Operating profit .500 2....000 7..000 12..900 76. Sales Resources Used Costs Unit Parts management....000 2. Inc......000 7........000 Customer service..................500 76............ (continued) $85...................400 $ 8..000 Energy.....000 28........000 11............ product & customer sustaining. reduce excess machine capacity by eliminating any unneeded machinery)...600 c....000 7.....000 Short-term labor ........ © The McGraw-Hill Companies....000 Engineering changes ..

... Customer service .. Engineering changes.000 12....... Materials ......................... Parts management ............................................000 40.........000 20............................................... Administrative ................. Sales ...000 12.....................000 $87..... Inc.................000 7..............000 8.........) Almay Corporation $375.............000 60................ © The McGraw-Hill Companies.......................... Marketing....000 30.. 5/e ........9–32........... Setups . 1997 284 Cost Accounting................. (50 min......... Depreciation ................000 22........ Long-term labor ..............................000 a........... Short-term labor ......... Total costs ...000 26.......................................................... Outside Contracts........000 21..000 14...000 288... Quality inspections .....000 16........... Operating profit.. Energy .............

............ 10....9–32.....000 2..000 12......................000 20.000 60....000 14..........000 0 1......000 34.....000 1..........000 288....000 7.... 24.000 © The McGraw-Hill Companies......... 10.....000 8..000 4............... 20.......000 Capacity sustaining Depreciation...000 Batch Setups. Sales Resources Used Costs Unit Outside contracts .............000 Operating profit ...000 2.... 1997 Solutions Manual......000 26...000 $ 87.000 16...000 Parts management..............000 21..000 59........... 15.000 Long-term labor......000 42.....000 Materials ..........000 6... 20.... Unused Resource Capacity Resources Supplied $ — 0 1.............. 60.......000 6.... 6....................000 288....000 $ 12......000 Quality inspections..000 100... (continued) $375........ 246....000 22....................... 28............ Chapter 9 285 .......... $ 12.......000 80.000 Product and customer sustaining Marketing ..........000 42.....000 Total costs ..000 Engineering......000 66.............000 40...000 8.................. Inc...000 2........000 2.... 20.............000 99.000 Administrative .000 Customer service ................................000 Short-term labor ....000 Energy.. 14.000 30...000 7..000 b........000 16...000 26...000 54....... 7..

000. It also includes the type of cost (unit. and capacity sustaining) which allows management to assess its flexibility in controlling costs. A traditional income statement shows only management resources supplied but gives no indication of the resources used and unused resource capacity. batch.000).9–32. The activity-based income statement provides management with resources supplied information (as does the traditional income statement) and includes resources used and unused resource capacity. setups and administration provide the majority of unused resource capacity ($16. Based on the information in (a) and (b). Inc. 1997 286 Cost Accounting. Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity ($42. product & customer sustaining. 5/e .000. This is useful for managers in that it indicates what actions might be taken to reduce costs (for example. we can see that depreciation. © The McGraw-Hill Companies. and $6. (continued) c. $6. reduce excess machine capacity by eliminating unneeded machinery).. respectively).000.

... 52.... 10.... Operating profit ........) Allbrite Corporation a.......... (50 min.......000 568...................000 Total costs ..000 Administrative .................... $650...........000 Short-term labor ............... 16......250 Materials ..............................750 © The McGraw-Hill Companies.................. Marketing ...250 $ 81...000 Quality inspections....... 35.............................000 Energy .........000 Long-term labor ............................. 145...000 Customer service .... 14...........000 Depreciation... 70......... Sales .000 Setups... Chapter 9 287 . 52............... 42.....................................9–33... 1997 Solutions Manual........000 Parts management ..... Inc...... 44........ 88......................

.................... 15....000 199.....000 192............000 Parts management ....750 1............... A traditional income statement shows only management resources supplied but gives no indication of the resources used and unused resource capacity... product & customer sustaining..................000 201.000 Administrative . 1997 288 Cost Accounting.........000 Product and customer sustaining Marketing........750 8......000 35............000..250 79...........000 7...750 c.....000 b.250 $ 81..000 10.000 Customer service.750 Operating profit... 8..... we can see that marketing and administration provide the majority of unused resource capacity ($14....9–33. 40.. 000 12.500 Long-term labor .500 Total costs ........000 4......000 1.000 42....250 88....000 96.000 11.. Based on the information in (a) and (b)........... batch...... $145. Inc.000 68...000 79....000 52..........000 Short-term labor.750 51. (continued) $650..000 70....000 and $12..000 44.......000 Batch Setups ......... respectively)... 28.........000 14............ 14...250 568.......000 0 2.... and capacity sustaining) which allows management to assess its flexibility in controlling costs.......... 5/e .....500).250 Capacity sustaining Depreciation .... reduce excess marketing capacity by eliminating salespeople with overlapping sales territories)..........000 21. Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity ($51. 80........ 40..........000 52..........000 Energy ........000 170....... 516.250 568..000 14....750 16. Unused Resource Capacity Resources Supplied $ — 2..... It also includes the type of cost (unit........000 Quality inspections .... © The McGraw-Hill Companies..........000 1.....000 16.... The activity-based income statement provides management with resources supplied information (as does the traditional income statement) and includes resources used and unused resource capacity... 56...............500 $145. This is useful for managers in that it indicates what actions might be taken to reduce costs (for example..... 50................ Sales Resources Used Costs Unit Materials ... 40...

000 89.000 425.) Freefall Engineering Corporation $1.000 120.000 79. (50 min.. Inc. Sales Marketing Depreciation Training personnel Energy Short-term labor Long-term labor Administrative Quality inspections Total costs Operating profit © The McGraw-Hill Companies.000 85.000 42.000 1.500 54.205.000 $ 145.000 a. Chapter 9 289 .9–34.350.500 310. 1997 Solutions Manual.

........500 10................ Product and customer sustaining Marketing.. (continued) $1....000 395............000 42............500 310...........000 45.. Short-term labor.. and capacity sustaining) which allows management to assess its flexibility in controlling costs..500 85.......500 42.. 5/e .....000 157.205.500 37..000 415...... Batch Quality inspections ..000 1...... Long-term labor ........ Based on the information in (a) and (b)...... A traditional income statement shows only management resources supplied but gives no indication of the resources used and unused resource capacity....9–34........ Administrative .000 21....000 572.........000 593..000 Total costs ......000 5.... This is useful for managers in that it indicates what actions might be taken to reduce costs (for example.000 120....... we can see that short-term labor provides much of the unused resource capacity ($65.......... Capacity sustaining Depreciation .. © The McGraw-Hill Companies. Unused Resource Capacity Resources Supplied 80....000 70.000).. batch...... It also includes the type of cost (unit.... Inc.500 112....000 9......000 $ 145...........000 70....500 4.... c...500 425... product & customer sustaining......000 9......000 174......000 245. Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity ($113..000 79... 1997 290 Cost Accounting....000 89.. by reducing the short-term labor force).....500 65......500 Operating profit........... Training personnel...............500 1.000 325.350.......500 4... 1.500 113.500)......000 b...500 8..000 17....091..000 54..205..000 37..000 2....... The activity-based income statement provides management with resources supplied information (as does the traditional income statement) and includes resources used and unused resource capacity..000 87........ Sales Resources Used Costs Unit Energy ...

.....................000 Customer service .. 19............ (50 min..........000 Energy ..................9–35.... 5....... Operating profit .............. 16...... $345.000 © The McGraw-Hill Companies.......500 Short-term labor .. Inc....................000 Depreciation.......... 107...000 Administrative ..) Investment Advisory Services...000 Long-term labor .......... 1997 Solutions Manual....000 243...... 36........... Chapter 9 291 .... Marketing ...... Inc..... 22.......000 $102.. Sales ........500 Training ... 9..000 Total costs .. a................... 28...

...... © The McGraw-Hill Companies.. 5/e .875 15..........................000 b.. Capacity sustaining Depreciation ........500 36... and capacity sustaining) which allows management to assess its flexibility in controlling costs. Sales Resources Used Costs Unit Energy ...500 243.....000 1...000 32.....000 94..000 19.....500 107.....875 2.....000 25... Training... A traditional income statement shows only management resources supplied but gives no indication of the resources used and unused resource capacity..500 5..........000 52........... Unused Resource Capacity Resources Supplied 14.000 42.000 243...000 c.. Based on the information in (a) and (b)........ Inc.....000 6.000 128.......9–35....000).........000 19.000 22....000 7. This is useful for managers in that it indicates what actions might be taken to reduce costs (for example.. we can see that long-term labor provides much of the unused resource capacity ($13....... Administrative .....125)..500 4...500 13... Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity ($31.........000 $102...000 28. Customer service....... Long-term labor ............. product & customer sustaining........000 9...... (continued) $345....... 1997 292 Cost Accounting.......125 4. The activity-based income statement provides management with resources supplied information (as does the traditional income statement) and includes resources used and unused resource capacity......000 211.. Operating profit....... Total costs . by reducing the long-term labor force)...................000 5.000 46...500 31. batch................. Product and customer sustaining Marketing.......000 148..000 3..500 0 3.875 37..125 16..125 4........................... It also includes the type of cost (unit....000 20.... Short-term labor...............

1997 Solutions Manual.. Take call-in orders from on-site salespeople throughout the day rather than at the end of each day. Answers will vary. The following items are examples of actions that can be taken to reduce customer response time: • • • Ship orders immediately upon completion rather than queuing orders for shipment. Send orders to the production department immediately upon receipt of the order rather than at the end of the day. (45 minutes) Kurt Corporation Customer places order Order ready for setup Order receipt time 1 2 8 13 17 Order waiting time Order is set up Product completed Order delivery time 3 6 15 16 18 Customer receives product Order manufacturing time 1 7 4 9 5 12 10 11 14 Total customer response time b.9–36. a. Inc. © The McGraw-Hill Companies. Chapter 9 293 .

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Because net realizable values of the output product provide a measure of the economic benefit received from each output from the production process. In all of these cases it is not possible to use the relative sales value method. 10–4. Of course. ounces of lead should not be added to ounces of silver for joint cost allocation purposes. 10–6. or rate-making purposes or to satisfy contract requirements. 10–2. Net realizable value method can be used if a measure of net realizable value is readily available. The two common methods of allocation are: net realizable value method and physical quantities method. An output from a joint production process should be treated as a by-product if it has a relatively low value and/or is not the primary product the company intended to produce. Rather. Physical quantities method can be used when it is difficult to arrive at a fair measure of net realizable value. tax.. Because the joint costs are common to the outputs. Joint cost allocations are usually made to assign a cost to a product after the split-off point. new market setting. the physical quantity measure used must make sense. © The McGraw-Hill Companies. Chapter 10 295 . Inc. 10–3. and new product price setting. this method is usually preferred when it can be implemented. particularly if there is no objective selling price for joint products. For joint products.Chapter 10 Allocating Joint Costs Solutions to Review Questions 10–1. Some examples include public utility rate setting. It may be preferable to use a physical quantities measure if it reflects the economic benefit ultimately obtainable from the production process. This is usually done for external reporting. Thus. energy price regulation. the costs are related to economic benefits on the basis of some measure of relative outputs. 10–5. it is not possible to find a direct way of relating the costs. 1997 Solutions Manual. Costs prior to split-off are not allocated to by-products. costs of the inputs up to the split-off point are allocated to each of the products.

Some people use fully allocated cost numbers for long-run pricing and other long-run decisions.. Solutions to Critical Analysis and Discussion Questions 10–9. Also. therefore. and many other processing industries. Inc. The resulting allocated costs must be used with care. In fact. The two situations are similar in that the conceptual treatment of the allocation problem is the same: the costs cannot be separately identified for each department or product. Byproducts represent a minor part of the value of the output. The costs of disposing of scrap can be reduced or eliminated. Examples include timber. 10–10. one could use the example in the text and try alternative allocations to Grade AA Lumber or Grade B Lumber. The joint costs are the same regardless of whether one sells or processes further. and always have positive net realizable values. petroleum. 1997 296 Cost Accounting. an allocation method must be chosen which reflects to the best possible extent a matching of the costs incurred with the benefits received. railroad (many cars on the same train). real estate development (produces lots). It may take on a negative net realizable value. the image of the company being sensitive to the environment will likely add value to the company’s reputation. Scrap is also a minor part of the output. 10–8. Even if one of these products is charged with all $180. if at all.000 of joint costs. such as when there are costs of disposal. 10–11. Joint products represent a major part of the relative value of the output from the production process. © The McGraw-Hill Companies. in any decision-making context. the sell or process further decision is unchanged. no matter how the costs are allocated. livestock. 10–12. wood scrap may provide incremental revenue for the company. 5/e . they will cancel out in the sell or process further decision. To test this. Thus.10–7.

000 (based on the $50.000 x $150.000 – $200.Solutions to Exercises 10–13.000 = $30. (15 min.000 x $150. 1997 Solutions Manual.) Net realizable value method.000 materials plus $100. These costs are allocated as follows: To Output L: $200.. Chapter 10 297 .000 = $120.000 $250. Inc.000 To Output T: $250.000 © The McGraw-Hill Companies.000 $250. Total joint costs are $150.000 conversion).

....000 $140.....000 % of total sales values at split-off...000 + $50..000 100% $50.. Copper $80........000 $140. $20..000) $42.000 $140...000 (18..000) $60.. 30% x $100. 50% = $70... 5/e ...000 + $30... Although not required........ 20%a Cost Allocation: 20% x $100. $28.....000 (40.000 ..........000 = $20.... 30% = $42.) Net realizable value method: Durango Corporation.......000 $30... the process may be diagrammed as follows: $40...000 Additional processing...000 50% x $100.... 1997 298 Cost Accounting.10–14........000 ........000) $100...000 ...000 Ore ($10....000 a 20% = $28......000 (10.000 Copper ($18.000 ..000) $140.....000 Check: Total allocated = $100.... Inc....000) Approximate sales value at split-off ....000) $70.....000 Manganese The diagram can be used to help organize the solution which follows: Lead Selling price ...000 Lead ($12... (12............. (20 min......000) $80.....000 50%a Manganese $60........000 ...........000 30%a Total $180....... $40.000 © The McGraw-Hill Companies...

10–15.500 times X = $6. The allocation of $6.500 X = $10.000 © The McGraw-Hill Companies. Inc.500 (which is $10. 1997 Solutions Manual.000). solving for X. Inc. Chapter 10 299 ..000 17.000 $10.) Net realizable value method to solve for unknowns: Green Products. Since the sales value of each product at the split-off point is available.500 + $7.000 So.000 to leprechauns must have been the result of the allocation equation: $10.500 + $7.500 X = $6. Let X equal the unknown total costs. (20 min. we obtain: 10. the appropriate basis for allocation using the net realizable value method is $17.

b.) a. The net realizable value method produces the same gross margin ratio. The answer is 2. d. The answer is 1. If further processing is needed. For joint products saleable at the split-off point. it is sometimes necessary to work backwards from the point of sale. The costs beyond the split-off point can be identified and thus assigned to each product. To determine the net realizable value at split-off. The answer is 3.10–16. the net realizable value is approximated by subtracting the additional processing costs from the final sales value. (20 min. Net realizable value method: multiple choice. If further processing is needed. The net realizable value for each product is used to allocate joint costs. the net realizable value is approximated by subtracting additional processing costs from the final sales value. The answer is 4. Therefore. Inc. For joint products saleable at the split-off point. 1997 300 Cost Accounting. no allocation is needed. © The McGraw-Hill Companies. 5/e . Net realizable value at split-off is used to allocate joint costs to joint products. the net realizable value is the selling price at split-off. net realizable value is the selling price at split-off.. c.

000 30.000/225. the calculation is: 140/200 x $120.000 b. The net realizable value method allocates joint costs in proportion to the net realizable value of the individual products. The net realizable value method is a cost allocation method that allocates joint costs in proportion to the net realizable value of the individual products. Given total joint costs of $120.000 60/200 x 80.000 40/200 x 80.000 product A + $100.000 Note: The costs incurred after split-off are not joint costs and are therefore not included. The answer is 3.000 30/200 x 80.000 x $117.000 Joint Costs Allocated $28.000 = $84.) a. Inc.000 16. The answer is 4. (30 min.000 ($140. The net realizable value method allocates joint costs in proportion to the net realizable value of the individual products..000 and the total sales value at split-off for main products of $225.000 60. The answer is 3. Given total joint costs of $117. © The McGraw-Hill Companies.000 c.000 product B).000 product R).10–17.000 ($125. Chapter 10 301 .000 product C + $60.000 12. Net realizable value method: multiple choice.000 = $52.000 40. the calculation is: 100.000 $80.000 and total sales value at split-off of $200.000 24. The calculation is: W X Y Z Net Realizable Value at Split-Off $ 70. 1997 Solutions Manual.000 $200.000 Allocation 70/200 x $80.

.000 Total costs allocated to Y ... Inc. $36... 5/e . 14.... 18.000 = $22. (20 min.500 28.050 © The McGraw-Hill Companies. The answer is 4.000 Joint product costs = $ 63.. Net realizable value of Y at split-off = $ 70... Physical quantities method: The Rote Co.050 $200.000 units $63. Total units of X = Total units produced = Joint product costs = 14.000 x $63..000 Total costs of Product X ..000 Amount allocated from joint costs: 14.000 x $63.500 b..000 = $31.000 units 28... The answer is 2....000 Additional processing costs ...000 Total net realizable value at split-off = $200...10–18...000 Amount allocated from joint costs: 70.. $49.......) a. 1997 302 Cost Accounting....000 Additional processing costs .

) Physical quantities method with by-product: Friendly Fertilizer Corporation.000 = $52. 1997 Solutions Manual. (20 min.000 = $35.000 units + 75.000 units + 75.000 units © The McGraw-Hill Companies.000 units x $88. Inc.800 50.10–19. The allocation computations are: To Nitro: 50.000 units and to Phospho: 75.000) is deducted from the total processing costs ($90.000) to obtain the net processing costs to be allocated ($88..000 units x $88. Chapter 10 303 .000). The net realizable value of the methane ($2.200 50.

................ Inc............ © The McGraw-Hill Companies....) a........................... $70... $400.000 Cost of goods sold: Unadjusted .......) By-products: Leather Products..........600 409................. 5/e ............... 9.............. Method 2 $70.. By-products: multiple choice: Seinfeld Corp.... $34.. The answer is 1.175 10–21.. 36.000 – $9.......000 Less: By-product net realizable value ........400 Gross margin = $400.... Net amount from by-product = $9.......000 Other income ...000 – $190..000 Gross margin . Sales ........400 = $209. $209. Gross margin would not be affected.. $35................. (175) Adjusted cost of goods sold ......175 Method 1 Sales revenue .... (40 min............ The answer is 3.............................. 200.............. There would be no effect on the company’s profits..600 = $190..600 COGS .825 Gross margin ........175 36..... (25 min............600 [= 2..000 $34.....000 $36.......... The answer is 1..600 c.......000 Other income ..10–20. 1997 304 Cost Accounting..... -0Total revenue ...................000 175 ($225 – $50) $70. $70..400 units x ($5 – $1)] Cost of goods sold = $200....................600 b. Inc.............

... We recommend processing further.) Constant Gross Margin Method: Durango Corp...000 ccf x 30% x $32/ccf = $720..222 10... 10–23.000 This contribution is compared to the foregone bark sales of $900..000 hundred cubic feet (ccf) Second... 8.000 13...........470. $ 950..000 17.222% Sales value.222% © The McGraw-Hill Companies..000 100.....000....000 40...........470.333 22.000 ccf x 10% x $ 4/ccf = $ 30........... 19......000 75.......10–22......000 + $30... Lead Copper $80. determine the normal volume of bark chips: $900. $1..........111 Additional process costs.. 22.000 40...000 28..667 18. (35 min......000 Incremental processing costs ..000 22.000 Joint costs ..778 22........... 1997 Solutions Manual......222% Total $180....000 + $720...889 Gross margin percentage.. 520......000)...000 which results in total revenue of $1....222% Manganese $60...... (30 min.. $40.....000/$12 per hundred cubic feet = 75....... The contribution from additional processing equals: Revenue ..000 Gross margin....... Chapter 10 305 . First..000 Contribution from additional processing.000 ($720...) Sell or process further: Yuba Sawmill.... Inc.000 ccf x 60% x $16/ccf = $720. 12..000 75.000 52. compute the revenue from sales of horticultural bark: Large Medium Mulch 75...... Inc........

.. a... The joint costs to be allocated are all costs up to split-off.000 Total .000 units sold Units produced = 25......000 = $4... Since there is no further processing for argon after split-off.$192.. Inc...000 in ending inventory = 25.... (45 min...000 (= 25... Cost of zeon .000 units x $4.000 Overhead... The answer is 3...$280.....000 sold + 10..000 © The McGraw-Hill Companies. 1997 306 Cost Accounting.....Solutions to Problems 10–24.. all costs in Department 1.... 48...000 units b.000 Direct labor ... The answer is 2...... 5/e .. Price per unit = $60. that is.00) a15. 40. the net realizable value is simply the sales value of all units produced.) Net realizable value of joint products—multiple choice: Bryce Manufacturing Company..00 15.000a units Total net realizable value = $100.

..000 + $48......000c Total .....733 = $37....000 = $140............000d = $ 56...000 units © The McGraw-Hill Companies..000 = $93. 42...333 $300........... the allocation to argon is: $100...10–24...000 c $283.000 units b$192...... 60.........500 x 60................000 units – $130...000 a $60.... Using information from c above..000 Cost per unit = $93.. 140........ The answer is 2.000 units x $3......................000 ( ) d... (continued) c.....333 = $3......000 units = $100.........000 – $90...000 in ending inventory = 25....000a Net realizable value of xon......000 Overhead ...000 = $60.....000 Allocation of joint costs to xon: $60...000 15.................333 a15..000 – $42.000 sold + 10.......000 = $280...000 – $108.....000 Additional processing costs: Direct labor .000 $300...... Net realizable value of argon . Chapter 10 307 . $300......... $100. The answer is 1..... 1997 Solutions Manual.000b Net realizable value of neon ..000 x 25...000 x $280..000 45.000 + $40.....000 units d$192..... $188... Inc.000 Total cost of xon .... 90..000 x $280..........733/unit 25..000a units produced Cost of ending inventory: 10....

..000 Total. 48......000 split-off point *$..000 A diagram of the problem follows: X..000 Y.000 lbs...000 — 191..........75 = $245. 220.900 21.50 a pound* Z.Net realizable value and effects of processing further: Miller Manufacturing Co...000/118.000 Joint Cost of $180............000 lbs.000 Manufacturing overhead .......000 Direct labor .....) Raw materials . $1.75 = $30.......... 118.250 $265. Production Costs A B C 10–25...000/140...50 = $177.75 a pound* — 80.... Departments a. (40 min..... Inc...75 a pound* Separable costs = $265.....000 pounds at $...... $1..000/40.750 73......000 Separable costs = $102... 140..100 $102... $180... $112.........000 lbs......000 pounds at $1...... 20... 1997 308 Cost Accounting..000 pounds at $1.. © The McGraw-Hill Companies. 5/e ........

...... — Estimated net realizable values at split-off point .000 + $48........000 $177...75 Z: $245....000 x 110........000 = $63.000 ÷ 40...000 Z: 40% x $180................ Inc............ 1997 Solutions Manual......000 Percentage of total..000 © The McGraw-Hill Companies.....000 + $20. — Y: $80.000 = $180. Chapter 10 309 ... Gross sales values. (continued) Product X 1..................10–25............ — Z: $191..000 — $ 75.000 Z: 140...... $...000 ÷ 140...000 + 80.....000 25% — — 265...000 + 100....... Total joint costs: $112..................................000....900 + $21....000 = $385... Multiply by pounds produced: X: 40................000 $120................. * Given **Or: $245....75 220..........000 70...250 ..000 ** — 102.........100...000 35% Product Y Product Z Total $1....000 ....000 100% 2...000 Less costs of separate processing: X: — .... $105. $105................ Selling price per pound: X: $30................000 .000 ..... 140.....000 = 72..000* $385.........000 = 45.000 40% $300...........750 + $73.000 Y: 25% x $180..000 Allocation: X: 35% x $180.........

........... Incremental revenue of further processing X: ($4....000 214......................... 1997 310 Cost Accounting........000 $ 45............... Total.....10–25...... Sold: (140... 20..545 147...000 265................................................545 $167..000 $ 72.............000 102....... Product Y: Joint costs allocated............................000 Direct labor cost—A ................................................30 – $........ 5/e ........... $547............. Inc. profit will increase $217.. 48......... Inventory ....000 $379......000 Manufacturing overhead—B.000 ÷ 220............. A ..... Separate processing costs............000 .......000..............750 Manufacturing overhead—A.....000) x $337..000..... 21............000 $337............000 Incremental income from further processing X........000 ÷ 140. Total costs of Z ................... © The McGraw-Hill Companies.........000 $ 45. Product X: Joint costs allocated........... Product Z: Joint costs allocated...... The memo should recommend that Miller process product X further.....000 b. Sold: (40.......... 73.900 Direct labor cost—C............... 280......455 122.... Separate processing costs..455 $547.........000 Direct labor cost—B ......000 $147..... and 4.................. all sold ..........000) x $63............100 Manufacturing overhead—C ....................................... By doing so...... 191... Inventory .............250 Total costs accounted for ..............................000 c.....000 0 Proof of total: Raw material cost Dept.................. $217..... $497..000.... 80...................... (continued) 3...............000 Incremental costs of further processing X: $2......... Totals....000...... $112... Total Costs $ 63................00 x 140.....000 Cost of Goods Sold Ending Inventory $ 18.75 forgone) x 140...

000 to hydrogen = $21. 1.000 joint costs = $9.000 = $35. Chapter 10 311 . Joint costs allocated to oxygen: $60. Inc. Allocate joint costs to hydrogen: $15.) Find missing data: Net realizable value: Air Extracts.000) x $100.000/$60.000 total – $30. (35 min.000 (answer to a) 3.000 (answer to c) Oxygen: ($21.000 (answer to d) © The McGraw-Hill Companies.000 x $60.000 = $50.000 hydrogen net realizable value/$100. The ratio of sales value at split-off for each product to total sales value at split-off equals the joint cost ratio: Nitrogen: ($30.000) x $100.000 to nitrogen – $9.000 (answer to b) 2.10–26. 1997 Solutions Manual.. Inc. Air Extracts must use net realizable value method because the ratio of nitrogen’s joint costs to the total does not equal the ratio of nitrogen’s physical units to the total.000/$60.

.000 Additional Processing Cost .000 = $445..000 $2...000 Romance $2.000b 308.000 Calculation of Net Realizable Value at Split-off: Seduction Revenue .680.000 = 55...3% $3.000 x $63........000 180.. — Net Realizable Value at Split-off .......3% x $800..000 $224.800......646.. 44....000 80. $1. 55.. Inc.000 Splitoff Seduction Romance Second Pressing Additional Costs $ 44.....400 Romance .800. 5/e . 1997 312 Cost Accounting.000 = $354.00 b$2..... 45 min......000a Packaging Costs ....... $1....7% x $800....... 120.600 100% $800. Joint Reduction Process $400.000 = 42..... a...........794..000 Romance $2.646..10–27.....000 © The McGraw-Hill Companies.000 = 44....000 a$1.) Joint cost allocations: Exotic Aroma Company.000 220.000 100.........7% $3...000 224.794..000 Total $3.00 Percent of Net Realizable Value at Split-off Seduction $1....000 Joint Costs: $800.......000 Allocation of Joint Costs Incurred in July: Seduction .......680.....000 = 10..794.000 x $180.114.....114.

10–27.... 18..............000 = 19.........8% = 631..... 1997 Solutions Manual.574 100% $782..000 x 44.........000 Less Net Realizable Value from Squeezed Petals (12... $800.................000 © The McGraw-Hill Companies...7% = 435....... has a much lower sales price but has a large volume............000 x 80..........2% = $153................ Percent of Total Units Completed Seduction 10...8% = 646... Therefore......... Romance. Inc..............000 Physical Quantities Method: Seduction .......3% = $346.426 Romance ..... on the other hand...8% 52. Thus......... its sales price is significantly higher than Romance.....400 100% $800........ $800......... Romance is allocated a large portion of the joint costs and looks relatively less profitable.............................000 c.....000 Seduction ..... $782..... $782....... Physical quantities method: Seduction.......2% = $150.... incurred very little of the joint cost because so few ounces are produced................. d.000 Romance 42......000 lbs..000 Cost to Allocate ................. Physical quantities method..000 = 80. which has a high sales price..........000 Allocation of Joint Costs: Seduction .000 x 55........600 Romance .... $782...856 100% $782..144 Romance ...... Seduction is allocated a greater share of joint costs if the allocation is based on sales value................000 x 80.......... these results are merely from the joint allocation method and have no sound economic basis....................50) ............... Net Realizable Value Method: Total Costs in Joint Reduction Process.............2% 52..000 x 19...... $782. Chapter 10 313 ........... However...............................000 x 19...... Estimated net realizable value method: Even though Seduction has relatively few ounces produced.. $782.................. (continued) b............ x $1. $800................................

314 © The McGraw-Hill Companies.000 Work in Process Inventory (Packaging) 120. Work in Process Inventory (Second Pressing) 435.574 1. bEntry made to credit by-product revenue to work-in-process inventory.000 Work in Process Inventory (Reduction) 800. 1997 . 18.000b Cash or Accts.574 224.000 aEntry made when by-product was sold.000a Cost of Goods Sold 1..000 308.000 Finished Goods Inventory 659.) Cost flows through T-accounts: Exotic Aroma Co. Inc.000a 18.426 (Seduction) 18.434. Rec.000 428.000 By-Product Revenue 18.574 659. (30 min.574 (Romance) 346.000 435.426 428.000 346.434.10–28.

...000 x $290..... $420. Joint costing in a process costing context: Estimated net realizable value method: It is helpful to diagram the flow of units before attempting to solve the problem...800 Beta 40....000 units Rho (Dept.......) Ninja Turtle Company...000 Gamma $960...000 x $290.200 @ $10) Separate processing costs: Department II....000 Cost allocation: To Alpha: $420...960) Sales revenue from Beta........ 83..000/110% The next step is to determine the net realizable values of Alpha and Gamma at the first split-off... (32.200) Approximate net realizable values.. (16.000 Gamma.....000 60% 40% 66.800 @ $4..... Department IV ......000 $420.000 = $174.. Alpha Sales value after completion.000 (Dept III) good output = 44.......... II) 44. 70% 30% 46...000 + $630..10–29...... 1997 Solutions Manual.000 $420.000) $630...000) Department III....000 © The McGraw-Hill Companies.. (50 min..... $462..000 (Dept..000 + $630.000 (= 46.20) Additional processing cost for Beta..160 (= 19... I) a40..000 To Gamma: $630........000 = $116.... $ (76........000 (= 40. Chapter 10 315 ...000 @ $24) (330.200 Alpha (Dept IV) 19. good outputa 110....... Inc........

..075 joint costs Product M $56.750 estimated net realizable value ($332.....000 units of Product J). Inc.000 – $56. (114....000 units of Product M and 8.075) Balance (maximum materials cost) .000 Joint conversion costs . See calculations in (a) for further detail.. 1997 316 Cost Accounting..........750 Sales value of M at split-off ..250 Additional Processing costs $332. Harrison should pay no more than $13. If the materials price exceeds this amount...... Given the current product mix (30.728 (= $521.....675 Max materials price per unit = $13. A diagram of the operation appears as follows: Product J $114. © The McGraw-Hill Companies.728 per unit of material.) Find maximum input price: Net realizable value method: Harrison Corporation.....000 units).......250) $360..000 units @ $12) The total allowable materials costs would then be: Sales value of J at split-off....... (35 min.000 net realizable value (= 30.. b.000 units @ $41......675/38. $275...10–30.... 5/e . the company will incur an operating loss..000 (= 8. $521..50) $275.. 360....

The net realizable value of the by-product (Donatello) reduces the joint costs of the other two products. 1997 Solutions Manual..900a = $109.600 net realizable value of Donatello.900 60% x $327. there is no need to allocate joint costs to the by-product.500 = $ 36. © The McGraw-Hill Companies.300 60% + 30% No joint cost is allocated to Donatello. Thus. Allocation: Michaelangelo: 60% x $365.900a = $218. Chapter 10 317 . (30 min.500 – $37. a.300 Raphael: Donatello: 30% x $365.550 (2) Allocated for as a by-product. Inc.650 10% x $365. b. (1) Accounted for as a joint product.500 = $109. = $365.600 60% + 30% 30% x $327.) Effect of by-product versus joint cost accounting: Rambling Rose Corporation.10–31. Allocation: Michaelangelo: Raphael: Donatello: a$327.500 = $219.

600 = $85. (64.200 45.000 x $85.. It is not possible to determine which product is more profitable.000 + $25. This loss would be calculated as: Revenue from purified wafers. This illustrates the potentially misleading effects of cost allocations.000 + 15.000 + $140.600 = $64..600 a. Use of the physical quantities measured in Part (a) would suggest that there is a loss on purified wafers..600 = $10.000 revenue would be lost but total costs would be unchanged.000 Total $85. (30 min. $ 20. if purified wafers were not sold.400 45.. Inc. Inc..600 = $74.. Total cost = $60. Allocation on the basis of market value Purified wafers $20...000 x $85.000 + 15...) Joint cost allocations and product profitability: Silicon Materials.. net income would fall if this “losing” product were discontinued..000 + $140.200) Loss on purified wafers.700 $20. © The McGraw-Hill Companies.600 c..600 b. 5/e . $(44..600 = $21...000 Chips 15.......000 x $85.000 Total $85...10–32.. One cannot be produced without the other—hence only the profitability of the total output is relevant. Hence. the $20.000 Chips $140.200) However.. Allocation on the basis of units of output Purified wafers 45..900 $20.. 1997 318 Cost Accounting...000 Allocated cost of purified wafers.000 x $85..

(60 min. and Winterizer...000 Maximum processing: 750...... Feedstock cost...... 1997 Solutions Manual........ Input 1..25 per lb....10–33... 30 Winterizer..75 per lb.. $4. Chapter 10 319 .000 = $3..$81.... = $4.... 1...75 for Greenup... 50 Maintane ...600 600 800 3.......) Effect of cost allocation on pricing and make versus buy decisions: Ag-Coop... = 25..000 kwh 3...000 lbs. Allocated cost per lb.. 20 Kwh/lb. a.......... Output: Output Mix Greenup .... © The McGraw-Hill Companies. of input Fixed cost allocation ..50 Joint costs . Inc.250 ÷ 25..000 kwh/100 lbs.... 32 20 40 Kwh/100 lbs.. Maintane.................

....97 [ [ [ ] ] ] ÷ 12..... of Maintane $54.08 NRV/lb.......2 = 5...... Greenup . Allocated cost/lb..500 Winterizer .000 25. 25.. 12....600 = $4. (continued) b.500 lbs...600 Allocated cost/lb....5 = 12.50) = $118.000 Sales Price/lb.750 Quantities of each product produced: Greenup ...000 x .40 Selling Cost/lb.000 x $1... 25. (20% of Sales Price) $2.. 5/e ....80 2.000 Total NRV $105.600 = $4...000 lbs.. Total joint cost incurred in processing 30....750 x $200.50 Maintane...000 54.26 Allocated cost/lb.250 + (25...93 ÷ 7.500 Maintane.000 x .000 x .10 1....32 Number of Lbs.000 $200..40 7.3 = 7...500 5.. 1997 320 Cost Accounting...600 = $118.. $8. of Greenup = $118..600 $200.600 = $4..500 7.500 lbs..000 lbs.00 Winterizer . $10. © The McGraw-Hill Companies... 25.20 8..10–33.000 41.. ÷ 5..000 = $118.. Inc.750 x $105. of Winterizer $41. 10.. 9....750 x $200... of input = $81.

(continued) c.6 = 13.777) – ($1.554) + ($7.920 200 1.3 = 6.04 ∴Current production schedule A yields a higher operating profit of $81.60 + $16. The decision would not be different.250 = $71.50 x 22.590) – $81. © The McGraw-Hill Companies.590 x .20 x 2. because the joint costs are the same for either production schedule.10–33.590 The margin under alternate production schedule B is: ($8.320 kwh per hundred pounds Amount of Greenup produced = 22.750 $ 81. d.590 pounds 3.320 Pounds of input processed = 750.64 – $33.777 22. 1997 Solutions Manual.850 Outputs under alternative production schedule B: Product Greenup Maintane Winterize Output Mix 60 10 30 Unit kwh Usage 32 20 40 Usage/100 Lbs.600 (from b above) Less joint costs incurred 118.250 = $113.80 + $56.000 kwh = 22.32 x 6.. even if joint costs are allocated based on the net realizable value method.590 x .40 x 13. Inc.590 x .850 versus $71.200 3.264.368. The profit under current production schedule A is: Total net realizable value = $200. of Input 1.885 – $81.259 Amount of Winterizer produced = 22.368.259) + ($8. Chapter 10 321 .853.384.554 Amount of Maintane produced = 22.04 for schedule B.1 = 2.

.

The main criticisms of variable costing are: 1. (If the unit cost of inventory differs from period to period. Variable costing appears to penalize those companies that increase inventory in anticipation of higher future sales. Variable costing is valuable as an aid in managerial decisions. it defers the expensing of its fixed manufacturing costs because they are carried in inventory. 11–3. Variable costing profits are larger when sales exceed production. The emphasis on variable costs may cause managers to ignore fixed costs. 11–2. When a company produces more than it sells. Inc. Under both full-absorption and variable costing. under variable costing only variable manufacturing costs are assigned to units produced. 1997 Solutions Manual. by increasing production. It focuses attention on variable costs as unit costs and fixed costs as period costs. 2. Chapter 11 323 . variable costing tends to fit managerial decision making better than full-absorption costing. increasing the likelihood of better control of those costs. but also the same units must be produced and sold in a particular period. then not only must production volume equal sales volume. © The McGraw-Hill Companies.Chapter 11 Variable Costing Solutions to Review Questions 11–1. In general. (2) profits are more directly correlated with sales. 11–4. (1) actual fixed costs are reported. Variable costing profits equal full-absorption profits when units produced equal units sold. However. reported profits can increase without a corresponding increase in sales.) Variable costing profits are smaller when production exceeds sales. all manufacturing costs—fixed and variable—are assigned to units produced. Hence. all marketing and administrative costs are treated as period costs.. fixed costs are treated as period costs. 11–5. Under full-absorption costing. for example.

Full-absorption costing is no more or less ethical than variable costing (although it can allow more manipulation of profits).. Therefore. the decrease in inventory is larger under full-absorption costing. when production exceeds sales. direct labor. However. The answer is 2. Variable costing includes all variable manufacturing costs: direct materials. Full-absorption costing is required for external reporting under GAAP. b. Variable costing requires that fixed costs be separated from variable costs. some of the processing costs included depreciation and other costs that would not be a cash saving if the service was discontinued. 11–11. Inventory variations are larger under full-absorption costing. When sales exceed production. 11–9. 11–7. a. they are a period cost. © The McGraw-Hill Companies. 11–10. variable costing is more appropriate for internal reporting since it is consistent with the cost-behavior assumptions used in managerial decision making. Furthermore. Under variable costing. The manager's decision to increase production to increase profits in the current period was unethical because he intended to deceive his superiors and did not fully disclose how profits were increased. and variable factory overhead. Inc. the analysis indicated that the bank could lose several million dollars in contribution margin if the service was dropped. Increasing ending inventory could hurt the company if the cost of storing or insuring inventory is high. However. b. of the indirect costs allocated to the product lines would be saved if the check processing service was dropped. The answer is 1. All variable manufacturing costs are considered product costs under variable costing. 5/e .11–6. 1997 324 Cost Accounting. Variable marketing costs are not considered product costs. Multiple Choice a. An analysis at American National Bank revealed that few. Finally. fixed manufacturing costs are expensed during the period in which they are incurred. if any. These costs include prime costs (direct material and direct labor) and also variable overhead. increasing ending inventory could also help the company if the costs of production are expected to increase dramatically in the following period. The answer is 2. a. the increase in inventory is smaller under variable costing. The answer is 4. Conversely. 11–8. b.

........000 + $180......236....... Variable manufacturing overhead ...... 858.............50 x 104............ 260..000f Gross margin ....... Direct materials ..........75 = $780.......000d Less: Variable cost of goods sold ...... 1.......... $574...............................000 units = $450....000 Less: Cost of goods sold... Sales revenue ....... 1.236.......000 units fCost of goods sold = 104....................000/120...................000 units sold x $780..000 Less: Marketing and administrative costs ..............000 units c$1...... $598..000 Fixed marketing and administrative .000 = $11.........000 = $21....000 units e$1.. Inc.....236...000 a$6...... $2..000 units d$2...............000 Operating profit ......75 x 104.....000/120........000 c.. 120......50 b$3..... 874......000 units produced = $1..50c $11...... 180....... Unit Cost $ 6. 1997 Solutions Manual...222............75b 1........... (30 min....000e Variable marketing and administrative...........000/120.....000 Operating profit ......000 Contribution margin .000 120........000 ( ) © The McGraw-Hill Companies............................ Total variable unit cost ...............Solutions to Exercises 11–12..... Inc......................................... $2..................................................000 + $180..................... 140......... Direct labor .........................50a 3.378..000 + $450...............000 Less: Fixed manufacturing costs ....... Chapter 11 325 ........378.....................................75 a.........50 = $180.222... Sales revenue ...) Variable costing versus full-absorption costing: Comparison of operating profit: Jarrard...................... b...

.. 2......000 384.....40 = $240.60 Variable overhead.. Inc.............000 © The McGraw-Hill Companies.......... Raw materials ...... ..............80 $4. $2.000 units x $12..000 $144..20 a$2..........) Comparison of variable and full-absorption costing—multiple choice: Larue Corporation...... Under variable costing............000 units x $4... The answer is 3...... Variable costs: Cost of goods sold (80......... a......60 Variable overhead............ The answer is 3.............. 1..80 c....... $2......... Fixed costs: Manufacturing ....000 512..... only variable costs are.000 units produced b.. Contribution margin .....000 Operating profit................... $960.........40 Direct labor ....000 Marketing and admin.... $240....... (25 min.......... 5/e ....40a $7..........000 units x $............. The answer is 1.....00) ......... 128........11–13...... (80..........40 Direct labor ...80) ..... Raw materials .. fixed factory overhead is not included in inventory. ..80 Fixed overhead ...000 368.. 1997 326 Cost Accounting.......000 100........000 64...... Revenue (80......................... 1......... .80) ...... Marketing and admin..

............20 x 20........80.....000 Fixed .000 384..000 192....000 ($7......000 576..000 units in ending inventory.... Inc........ Gross margin ..80 x 20...... Unit cost under full-absorption costing is $7. The value of ending inventory is $96....................... 128.............. There are 20.......000 units).................. $960.. Marketing and admin: Variable ..............000 x $12... Cost of goods sold (80......000 © The McGraw-Hill Companies... The value of ending inventory is $144. e....... The answer is 2.000 units)...................20.... Revenue (80..... f.000 Operating profit ......11–13....... Unit cost under variable costing is $4. Chapter 11 327 .. The answer is 2..............000 x $7.00) . $ 64........ There are 20.....000 $192.....000 ($4... (continued) d.... The answer is 4...... 1997 Solutions Manual.............................20) .000 units in ending inventory.

. $1..000.000 Less cost of goods sold .. .000c 3.000 units produced ]) x 250.000a Gross margin ..700.000 Operating profit... $ 1....000 ( [ $24 variable + $24 + [ $860.000 $1..........000 e$235.......625... all of the fixed costs are expensed during the period. They have merely shifted part of their fixed costs into inventory....000 Operating profit.375........000 Less: Variable cost of goods sold.000 difference in profits in Year 2 occurs because $235.... 3. .........400...000 units sold = $24 x 250.. Inc...000 $10....000 600..400....) Comparison of variable and full-absorption costing: Analyzing profit performance: Tammari Enterprises..000 units sold ( $860.... (20 min.000d 600.000 b.000 e in fixed costs are included in inventory under full-costing whereas under variable costing.......000 = = b$6.000 6..000 Less: Fixed manufacturing . a$6......000............000..........000 c$600...860..... 840..140... $10..700.....000 6.000 860..........000 units produced d$6......000 units sold = $2......000 units sold $860..000....000 Fixed marketing and admin.. 6.....625...40 x 250... a... 5/e ...000 = © The McGraw-Hill Companies............ 600....... 6........000 344... Full-Absorption Year 1 Sales revenue .000 fixed x 94.860... 600... The $235..000.. Variable Costing Sales revenue .... 860......000 c...000. they were no more profitable in Year 2 than they were in Year 1.....000 fixed 250... 840......935.. 3........ $10......000c Fixed marketing and admin... 1997 328 Cost Accounting......11–14.......000..... Despite the appearance of higher profit on Tammari's full-absorption income statement. ........000 $ 1...000 Less: Variable marketing and admin...000 Year 2 $10.000 840..000 units in ending inventory 344.............000b 3..000d Variable marketing and admin......000c Contribution margin ..000c 840.........700.000 )] x 250..

500 510.500 Variable O.H. Inc. Chapter 11 329 .500 Cost of Goods Sold 642. Full-Absorption Costing Direct Materials 300.000 other mfg = $85.000 = $637. (25 min. 75.000 units sold 100.000 75.000 Work in Process 300.000 c 165.000 a$510.500 160.000 Wages Payable 262.H.000 165.000 b$75.500 x 80.000 262.000 262. Variable Costing Direct Materials 300. 1997 Solutions Manual.000 + $20. 165.000 b 75.000 © The McGraw-Hill Companies.500 637.000 b 75.000 units sold 100.) Comparison of cost flows under full-absorption and variable costing: H2O Products.000 75.H.000 637.000 fixed manufacturing costs from problem = $802.000 supplies + $20.500 127.000 repairs + $15.000 802.500 Work in Process 300.500 Variable O.000 d Fixed O.500 x 80.000 d$642.000 Wages Payable 262.000 units produced = $40.000 units produced c$165..500 Finished Goods 802.000 a Finished Goods Variable Cost of Goods Sold 510.500 642.000c b.000 + $60. a.11–15. 75.000 Fixed Overhead c $165.

a.000 a 8.000 448.496 = entry cClosing © The McGraw-Hill Companies.11–16.000 c Fixed Manufacturing Overhead (Actual) 116.000 x 50. 1997 330 Cost Accounting.000 Direct Labor 252.000 units 47..000 Work in Process Inventory 100.496 Under/Over Applied Overhead 8.000 (Applied) 96.000 Variable Manufacturing Overhead (Actual) 104.000 252. 5/e .600 units $426.000/$8.000 b = $3.000 448.20 x 30.40 per hour).000 c 96.504 426.000 hours = $252.000 Note: The company used 30. (25 min.000 labor hours $448.) Comparison of full-absorption and variable cost flows using normal costing: Jumpin’ Jimminy Products. Variable costing Direct Materials 100.000 21. a$96.496 b Finished Goods Variable Cost of Goods Sold 426.000 labor hours (30. Inc.

000 c Fixed Manufacturing Overhead (Actual) 116.000 27. (continued) b.000 = $4.000 252.. 1997 Solutions Manual.000 labor hours = $568.000 Direct Labor 252.000 c 4.736 cClosing Work in Process Inventory 100.000 x 47.00 x 30.000 a 4. Inc.000 c a$120.000 Variable Manufacturing Overhead (Actual) 104.600 units 50.736 Under/Over Applied Overhead 8.264 540.000 a 120.000 Cost of Goods Sold 540.000 Finished Goods 568.000 568.000 a 8.000 c 96.000 units entry © The McGraw-Hill Companies.000 (Applied) 96. Full absorption costing Direct Materials 100.736 b 120.11–16.000 b$540. Chapter 11 331 .

.........000 Less: Cost of goods sold ..................000 Fixed marketing and administrative .504 b..... $4...... 426..................504 Less: Fixed manufacturing costs ......000 Fixed marketing and administrative .................... 5/e . 90......... 116... Sales Revenue ...000 Less: Variable cost of goods sold................736 Under/over applied overhead............... a. 56...000 Contribution margin .................. $255...000 Operating profit.......000* Variable marketing and administrative.....................000 overapplied fixed) © The McGraw-Hill Companies.................................. Inc........................ Sales Revenue $952..000 underapplied variable............... 56...............000** Gross margin . 1997 332 Cost Accounting......... 540..............) Comparison of full-absorption and variable costing income statements using normal costing: Jumpin’ Jimminy Products...........11–17..... 407....264 Less: Variable marketing and administrative....... 427........................... 4....000 Operating profit. (20 min....264 *Underapplied **Net underapplied ($8.......... 8.. $261.........496 Under/over applied overhead............... $952.... 90....................

............................................. 137....................... $150 $450 Variable cost of goods sold: Beginning inventory ...5 50 Nonmanufacturing costs ...................5 –0– Variable cost of goods sold ... Variable costing: Contribution margin format (000 omitted) Year 1 Year 2 Sales .......5 Current period manufacturing costs ...5 337... (25 min.5) $ 12......... 275 275 550 Less ending inventory...... $150 $450 $600 Full cost of goods sold: Beginning inventory .... 137......11–18...................5 37.....................5 $–0– aBeginning bEnd of Year 1 of Year 2 © The McGraw-Hill Companies........ $(37..5 Total contribution margin......5 550 Gross margin...5) $ 37......................5 Fixed manufacturing costs ....... 112..........5 112......... 225 225 Less ending inventory................... –0– 112...... 112...... 50 50 Nonmanufacturing costs ...... Inc..........) Comparison of full-absorption and variable costing—income statement formats............................5 Total $600 –0–a 450 –0–b 450 150 100 50 $–0– Full-absorption costing: Traditional income statement format (000 omitted) Year 1 Year 2 Total Sales ............................................................... 1997 Solutions Manual.......................................................................................5 412...... 25 25 50 Operating profits. Chapter 11 333 .. 37..... 5 –0–a Current period manufacturing costs ....... 25 25 Operating profits (Loss).................................. 12............................................. $ (12........5 –0– –0–b Full-absorption cost of goods sold ....... –0– 137...........

. $ 504...911....000 = = d$91....20 + $28).000 Less: Variable cost of goods sold. 1.....000d Operating profit.. (40 min.......000a Variable marketing and admin..000e Gross margin ... 91.500 units x $20.000d Operating profit.......... $ 462....200b Contribution margin ..500 units x ($164 + $70......... as shown by comparing the variable costing results in a with the following fullabsorption results.........500 units x $266 = 6.... 135..........000 (= 1....800 Less: Fixed manufacturing overhead ......600.......911... .500 units x ($164 + $70.....80 + $31...200 c$140.000c Fixed marketing and admin... 5/e . 140......... 135...80 5...729................500 units from beginning inventory..............500 units x $14) in this period from prior period’s production that variable costing already expensed in the prior period... a.) Compare income statement amounts using actual costing: Barrett........................ profits reported under variable costing will be greater....... $2...... 1997 334 Cost Accounting............... ..... Inc.729.......... including 1.........500 units x $14 6. a$1........... © The McGraw-Hill Companies....000 Less: Cost of goods sold ........200b Fixed marketing and admin...........11–19..........000= 6.. 91..........500 units from beginning inventory....000 Less: Variable marketing and admin......000 units x $28 6........20)....600.........500 units x $294 = 6............000= b$135...........800 Note: Full-absorption costing expenses $21... 1...... 689.. Sales revenue .......80 + $31.................... Inc... Sales revenue . $2.... 735.. including 1. 6... Since sales exceed production.000 = e$1...800 b........

.................000 times $36.................11–20.......................000 Operating profit ..............000b Gross margin ..... Cost of goods sold (20......... + = b$44.................. Inc....000 764.................................... 1997 Solutions Manual............... Variable cost of goods sold (20..................................000 + $36....000 Contribution margin .....000 = $36...000 Underapplied fixed and variable manufacturing overhead... Inventory increased 4... Chapter 11 335 .....000 = [ ( $180....................000 (30..... Less selling and administrative costs.200..........000 Selling and administrative . Sales .00 in fixed overhead............................... 8.................... or a total of $24.... (40 min......000 units – 24........000 $180.................000 200...............000 a.. b............................000 units..................... Operating profit .......................00).... © The McGraw-Hill Companies. Sales .........000 units $8.. a$36 380....................................................................... $600............ 180................ Each added unit absorbs $6....000 436...000 fixed....... 200..........000 $1.000 units x $6 per unit............... 30...000 )] 6......) Conversion of variable to full-absorption costing: Hathaway Company.. c.... $1....000 Underapplied variable manufacturing overhead ..........000.............000 608...........200........000 30..........000 592............. Less period costs: Production ..000 $ 212.................... 44........... $720..........000 times $30......000 = $30 variable mfg.........000 units) x $36......000 $ 236............00)a..

.........800) Operating profit before tax—variable costing................................ $ 9.....500 16.....000 x 30%) .............................) Variable costing operating profit and reconciliation with full-absorption: Emerson Corporation..........920 158........................... Inc............500 Ending inventory ($86. $ 17.500 (2) Operating profit using full-absorption costing is high (relative to variable costing) because fixed manufacturing costs are assigned both to goods sold and goods in inventory at the end of the period........................... (1) Reconciliation of full-absorption operating profit to variable costing operating profit.11–21..... b................ Operating profit before tax (variable costing)........000 x 80%)... 12..800 x 40%)....... Operating profit before tax—full-absorption costing.200 Add fixed costs in beginning inventory ($22......................100 Deduct fixed costs in ending inventory ($86......000 x 70%). Fixed manufacturing costs ($315. (25.... They can also be derived from knowing what percent of manufacturing costs are variable last year and this year..... Emerson Corporation a......... aAmounts $415......000 x 30%) .600 29........200 66.000 x 20%) ............ (60 min.............................. Fixed administrative costs ($49.....480 94... Fixed marketing costs ($83.. (60................................... $ 31.........................000 170...................000 x 45%) .400 19....................000 x 55%) .............. 1997 336 Cost Accounting.... Variable admin... Revenues . 220.............000 x 70%) ...880 $ 17........ Although some of the fixed manufacturing costs are deferred on the income statement.. costs ($49...800 x 60%).............................. © The McGraw-Hill Companies..............500 given in footnote to annual income statement... Cost of goods sold: Beginning inventory ($22........ Contribution margin ...900a Cost of goods manufactured ($315... they are likely paid for with cash in the current period... 5/e ................................200)a Variable marketing costs ($83.

. $ 95... $460.000 c....................... Chapter 11 337 ............................... –0– Less fixed costs in ending inventory ..000 160.. $170...... costs .................000 225.....000 x $46)...........000 $190......................... 225................000 140...... Inc..000 © The McGraw-Hill Companies....000 470............) Full-absorption versus variable costing: Korona Company.000 225.... –0– Contribution margin ..000 $190...............000 x $46)..000 75.............000 Add fixed costs in beginning inventory.............. $ 95.......... 225.........000 –0– 450........000 Year 2 $ 20..000 75................000 –0– 300..... 140.........000 –0– 460.................... 150..000 Variable costing operating profit ......000 Marketing and admin....................000 Fixed manufacturing costs ..000) Cost of goods sold ........................000 280. $460.. 1997 Solutions Manual.........000 140.................... 75... 140.....000 Fixed marketing and admin.............................000 –0– 920.................000 $ 20.............................................. (40 min........000 450.......000 $ 95.....000 Year 1 Sales revenue (10........ –0– Current production ....000 Cost of goods sold: Beginning inventory...........................11–22......... Variable costing operating profit: Year 2 $460. 460... Full-absorption operating profit: Year 1 Sales revenue (10......... costs .......000 2 year Total $920.....000 Year 1 Full-absorption operating profit .......... (75... a.........000 –0– 450.......000 Operating profit .............. $170................ Reconciliation: Year 2 $460...............000 –0– $ 95......000 Variable costs ...........000 Ending inventory............000 Gross margin ...........................000 2 year Total $920...............................................000 b..000 Operating profit .......000 280.. 310..................

...000) 1..000... 1997 338 Cost Accounting... Inc.000....000..... as shown below....... a..... (40 min..000 $(19..000...000 20..000...000......000.........000) Bonus ........000) Ending inventory value at end of Year 2 = 20........ Operating profit (loss) after bonus .....000 (18...000.................000...............000 Fixed manufacturing costs . This may not be the most appropriate income statement to use for internal performance evaluation because two-thirds of the current fixed manufacturing costs are deferred in ending inventory.............000 48.........000... the president is not entitled to a bonus..000....000 loss..11–23. Year 1 Sales .... 10....... This is a classic problem in full-absorption costing that is based on actual practice in a large manufacturing company....000 40..............400...........000) Year 2 $ 60.................) Effect of changes in production and costing method on operating profit (“I Enjoy Challenges”): Brassinni Company...............000 Contribution margin ........000. Under these circumstances.... these would be period costs and the Year 2 operating profit would be an $18..400........000. Under variable costing............ The fixed costs deferred in inventory amount to $32............ The Year 2 income statement is based on the accounting convention of full-absorption costing. A variable costing income statement would be a better measure of performance....................000..000........ costs ............. 48.. 20...000 units not sold x $2 variable manufacturing cost per unit = $40...000........000 © The McGraw-Hill Companies. b.......000 10... 5/e . 40.....000 Marketing and admin.000....... $(18..000 Operating profit (loss) before bonus .................. (18......... $ 60..000...........000 Variable cost of goods sold .....

.................. Here is how the president could have really made money (for himself)! Year 2 Sales .....000..000 Marketing and administrative ..........) ”I Enjoy Challenges” normal costing: Brassinni Company.......000 units = $68...000....... Full-absorption—normal costing..000 Be careful.............000....00 Applied fixed manufacturing cost per unit = $4...80 $6... Chapter 11 339 ... © The McGraw-Hill Companies..... 68....000................000...............000...............80 Cost per unit of production = $6..........000 cost of goods sold bApplied fixed manufacturing overhead ($4........000 Adjusted gross margin ............................. This works to the president’s advantage only if overapplied overhead is not prorated to inventory and to cost of goods sold..000 a Variable cost per unit = $2......80 x 10................000 Total overapplied fixed manufacturing overhead = $ 96.....................000............ (25 min......000...... 88.11–24.....000.......000..................000 Gross margin.....................000............... 1997 Solutions Manual.000...........000....... (8...000) = $144........... $60.. Inc..80 x 30.....000 Operating profit ......000) Adjustment for overapplied fixed manufacturing costsb .......................000 Actual fixed manufacturing overhead = 48....................................... $78.... 10.000 Cost of goods solda ... 96........................

000c crefers to closing entry 340 © The McGraw-Hill Companies.000 144.000 96.000 144.11–24.000.000.000 144.000. (continued) Diagram of Cost Flows Work in Process Inventory 60.000.000.000.000c Under/Over Applied Overhead 96..000 Cost of Goods Sold 68. 1997 .000 144.000 68.000.000 60.000 Variable Fixed overhead Fixed Manufacturing Overhead Actual Applied 48.000 136.000. Inc.000.000.000 Finished Goods Inventory 60.000.000.000.

.000 (12/31) 30....000 341 © The McGraw-Hill Companies.........000 x ..000 Equivalent units ...........000 Less Ending inventory ..000 Cost of Goods Sold 90....4) ...000 x (1 – . Note: This problem requires an elementary knowledge of process costing..000 Finished Goods Inventory (1/1) 10...000 Started and completed: Started ..000: Completed: 10....000 115......000 Equivalent units of Direct Materials = 115.... 1997 ...000 = same as units transferred from Materials Inventory Equivalent units of Conversion Costs = 109.... Inc.000 100..000 120.000 (12/31) 15... (65 min..000 (0...........115..000 90.. 109.......000 110.... 15.....000 Work in Process Conversion Costs (1/1) 10.. a...000 Ending inventory: 15.000 (12/31) 15....000 115...2) 110..2 .000 (12/31) 10.000 Work in Process Direct Materials (1/1) 10........000 (0.4) 115. 3.. Flow of units Direct Materials Inventory (1/1) 5.) Comparison of full-absorption and variable normal costing in a process operation: Devonelli Company. 6.....11–25..000 110......

000 aEquivalent bEquivalent Applied 218..000 for materials and 4. Direct Materials Inventory (1/1) 20.000 a 218.000 c 220.000 b 12. 115. (continued) b.000 Work in Process Inventory M L VOH FOH 40.000 c (1/1) Finished Goods 110.000 b 8.000 (a) 8.000 460.000 480.000 a 81.210. Inc.000 for other costs.000 1. 342 © The McGraw-Hill Companies.000 (12/31) 40. units.000 990. 10.000 3.000 330.000 (b) Direct Labor Costs 218.000 units.000 for other costs.000 c 330.000 units transferred out times unit cost given in the problem.000 Variable Manufacturing Overhead Actual 330.000 440.000 for materials and 109. times unit costs given in the problem.000 (a) Fixed Manufacturing Overhead Actual 210. times unit costs given in the problem.000 c 220.000 Cost of Goods Sold 990.000 (b) 8. c110.000 218.000 460.000 Under/over Applied Overhead 3. 1997 .11–25.000 327. Flow of dollars.000 b b 8.000 Applied 327.

........ 210...... 1997 Solutions Manual...000 Under/over applied overhead .................800.....000 Operating profit ... $1..................000 Under/over applied overhead .000 Less: Cost of goods sold................. $ 235..... 580........................... Inc..... 990..............800.................000 Marketing and administrative .... Full Absorption Costing Sales Revenue.000 Less marketing and administrative ........000 Contribution margin ....000 Less: Variable cost of goods sold ...... 580.000 Variable Costing Sales Revenue....................000) Gross margin ...........000 Operating profit ............... 3. 815.. $ 197........ 810....................... © The McGraw-Hill Companies. $1..................................................... Chapter 11 343 . (continued) c.........................................000 Note: Problem states that Finished Goods beginning inventory costs $11 per unit.................. 987............000 Less: Fixed manufacturing overhead....... (5.........11–25.............................

.....000 21.......................... Variable Costing $450........000 = $270.....11–26...000 Full-Absorption $450..... Fixed manufacturing costs ............ 5/e .000 b......................000 $ 60.......... a...000 21..000 bSales – gross margin = $450.... Fixed marketing and administrative costs .. Operating profit..000 – $180............... Comparative income statements.. Sales ..... Operating profit........000 270.. Calculations: aSales – contribution margin = $450..............000 369......... Variable cost of goods sold .... Variable marketing and administrative costs Contribution margin .000 – $81.. 1997 344 Cost Accounting.....................000 units © The McGraw-Hill Companies.................... Gross margin ................................. Fixed marketing and administrative costs .000 $ 93.................... Cost of goods sold........... Inc......................................................) Incomplete records: Solano Company..............000b 81......000 $3/unit = 90..... (1) Units sold = Variable cost of goods sold Variable manufacturing cost = $270......000 = $369.................000 Sales ................ (50 min....................000a –0– 180.000 66..........

000 66.000 higher than full-absorption costing.10 = From beginning inventory 30.000). 1997 Solutions Manual. sales must have exceeded production by 30. (continued) $369. Inc.000 – 30.10 – $3..10 = Fixed cost per unit = $1.000 $33. c.000 units = $1.000 units x $1. the cost per unit for last year for variable costs is $3.000 Units produced Units produced = 60.00 variable costs) Difference in income = $33. Since variable costing operating profit is $33.000 From current period's production 60. production was 60.000 units (3) Last year's costs were the same as this year's costs.10 = Fixed mfg.000 33. ( ) Also. See part (2) of b above.000 units (= 90. We also reconcile by asking students what fixed manufacturing costs are expensed under each method: Variable costing: Fixed manufacturing costs expensed Full-absorption: = $66.000.000 units (2) Full-absorption cost per unit = $4.000 90.000 $33.10 (= $4. and $4. costs Units produced $66.000 $99.10 per unit for fullabsorption.10 = Difference (excess of full-absorption costing expenses over variable costing) © The McGraw-Hill Companies. Therefore. Fixed manufacturing cost per unit = $1. Chapter 11 345 .10/units Therefore.00 per unit.000 units x $1.11–26.

............000 Cost of goods sold................... Variable selling. The $7...................... 50................... 5/e ........ The $2........000 $ 87...000 Total fixed costs ......500 units x $80)....... Contribution margin .......... general.....................000 442... 1997 346 Cost Accounting. a$55 $600....... 412...000 b.. but it is expensed under variable costing...................................................................... This is accounted for as the increase in inventory times the fixed manufacturing overhead application rate (1.000 58................... 30...... 28..........500 units x $5)........................... Gross margin ... Projected operating profit .......................000 Adjustment for underapplied overhead (“normal” production is 10........11–27...........500 x $55a).........000 units x $5) .500 78.......500 x $60a) ............... b$28..................................000 Fixed selling......... So 1..500 units x $4).500 Variable nonmanufacturing (7......) Comparative income statements: Tenna Company...................... Tenna Company Projected Income Statement For the Month of June (Variable Costing) Sales (7.....80) .....000 units x $2..............................500) equals $7.......000 = Direct materials + direct labor + variable overhead + fixed overhead = $30 + $19 + $6 + $5 is a fixed cost................... Variable cost of goods sold (7...000 units x $2......... 30............500 of fixed manufacturing overhead is included in ending inventory under full-absorption costing..... and administrative (7............................................ general.....000 units underapplied x $5 fixed manufacturing overhead)...000 units.......500 units x $80)..... Inc..................... (40 min....000 455.........................000 $ 79.. Tenna Company Projected Income Statement For the Month of June (Full-Absorption Costing) Sales (7.500 157...........................000 Fixed nonmanufacturing (10........000 Total variable costs ..................500 = Direct materials + direct labor + variable overhead = $30 + $19 + $6 Note (Not Required): The difference in the two projected profit figures ($87.............80 was derived for a volume of 10...... Fixed manufacturing overhead (10......000 – $79....... a$60 $600..................500.... 28.000 b Projected operating profit ....................... a..................... 450. and administrative (10.. Cost of goods sold before adjustment (7.....500 units x $4) .000 units but projected actual = 9.....000........ 5......80)............ © The McGraw-Hill Companies........000 145.................

........ 20...) Evaluate full-absorption and variable costing...000 units during November @ $4 fixed cost per unit = $200 $180 FullAbsorption Costing $380 Full-absorption costing attaches a $4 fixed manufacturing cost per unit to each unit produced in November.11–28............. • The contribution margin offers a useful tool for making decisions....... 1997 Solutions Manual.....000 units).......000a Underapplied overhead (5... (1) Lockard Co.....000 Sales (100.... Because the production during November (145... b......000 (45. manufacturing cost per unit does not change with a change in production levels.... Inc.000b units @ $4) . © The McGraw-Hill Companies.000/$12 = 100.............000 $ 380.000 in operating profit before taxes.......... (30 min................. the fixed cost assigned to the 45.000 units @ $4 fixed cost per unit) less fixed costs being charged to the income statement in November and the resultant increase of $180.... • Fixed manufacturing costs are charged against revenues in the period in which they were incurred...600... normal costing: Lockard Company.000 (2) Reconciliation of Variable and Full-Absorption Operating Profits ($000 omitted) Variable Costing Report operating profit before taxes Difference: Increase in inventory of 45.000 Gross margin .000 780.. including: • Variable costing income varies with units sold..600. a..000 units...... Chapter 11 347 ........... First find units sold.. Units sold = Variable cost of goods sold divided by Variable manufacturing cost per unit = $1... actual volume = 145...... consequently...000.000 400.......000 1..... Income Statement: Full-Absorption Cost Basis For the Month of November $2.. aCost bEstimated x volume = ($12 + $4) x 100...........000 volume = 150. The Vice President for Sales should find the variable costing approach to profit determination desirable for many reasons.400......000 = $1..620.........000 units @ $24 per unit) ... Operating profit ... not units produced...200. $1...000 units) exceeded sales of November (100... Cost of goods sold..... Less: Fixed nonmanufacturing costs ...........000 unit increase in the inventory balance results in $180..

aTo convert from 2 units of Harsh required to make one unit of Jink.000 (1/2 complete)* 110.000 units: Completed 10.000* 220.000* 115. and b.U. (90 min.000 units = 5. and full-absorption costing: Sega Corporation.Solutions to Integrated Cases 11–29.000* Cost of Goods Sold 115. The following flow of units and costs.000* x 1/2a = 115.000 110.) Comprehensive problem on process costing.. a.000 115.000 100.000* 230.000* 10. 1997 .000 110. and calculations answer requirements a and b.000 x 1/3 = 115.000 50.000 15. Note: This problem requires an elementary knowledge of process costing.000* Work in Process Inventory—Conversion 10. Units Materials Inventory Work in Process Inventory—Materials Finished Goods 17. *Units given in the problem.000 (1/3 complete)* Equivalent Production: Materials Processing = 110. Inc.000* 110.000 E.000* 12.000* 15. 348 © The McGraw-Hill Companies.000 x (1 – 1/2) Started and completed Ending inventory 15. variable costing.000 = 5.000* 40.

000* 770.000 120.000 1. 1997 Solutions Manual.276.276.500* Work in Process Inventory—Conversion (VC) 35.000* 345. Chapter 11 349 . (continued) Dollars Materials 75.200 Cost of Goods Sold (FA) 1.700 1.150.000* 345.000* 35.000 FA refers to full-absorption.000* Finished Goods (FA) 188.500 Finished Goods (VC) 170.221.000* 40.500* 891.000 1. VC refers to variable costing *Dollars given in the problem.000* 330.100. © The McGraw-Hill Companies.000* 60.150.000* 45..000 891.000* Work in Process Inventory—Materials 30.000* 330. Inc.000 133.500 1.000 Cost of Goods Sold (VC) 1.000* Work in Process Inventory—Conversion (FA) 40.11–29.000 770.

...000 145........................300...........................300. — — Under/over applied overhead ..... (continued) c..................... 1... Cost of sales: Manufacturing costs: Beginning work in process ........000) 1.................. 1...000) 1.....................000 121. (133............ –0– Gross margin.023.........200) Cost of goods sold........................................000 $ 65.....000 Net income ........236........ $1.029....000 (80...........700 Ending finished goods .500) Manufacturing costs.....000 Ending work in process ..........100.....500 Marketing & administrative ..............276................000 (120.... 1........150..............878...000 Beginning finished goods.................000 170.000 –0– 1..000 $ 884...221......... 1..... Inc.......000 $2................500 Comparative Income Statements Full-Absorption Variable Costing $2.................. 188...... $ 70...............11–29. (85.........500 Current period costs.............500 Fixed conversion costs.. 1997 ....000 — 350 © The McGraw-Hill Companies.. Sales ...................... 145.000 1........115...........

..500c a(WIP + FG) x $1...200 + FG) x $1....10 = (5..10 = $24......... (continued) d... $126..500 b(WIP c$1.......10 = (5...000 E.........000 = $126..200a Less current period fixed costs Retained in inventory under Full-Absorption .. 1997 Solutions Manual............ 18.. Assume FIFO flow.700 x 115.000 E..000) x $1...U.. Reconciliation of Variable and Full-Absorption Costing Fixed costs expensed this period under Variable Costing ..10 = $18.......... Chapter 11 351 .......10 © The McGraw-Hill Companies......) x $1...U. $121.000 Add previous period fixed costs Expensed under Full-Absorption . Inc........700b Fixed costs expensed under Full-Absorption. + 12.000 + 17.......11–29. 24.....

.... The key to this problem is to realize that the purchase and duty costs for the lot of 1.... 5/e .. 5.......000 2. (45 min...500 11........... $30..000 2... Inc...... neither fullabsorption nor variable costing gives a totally satisfactory answer. even though one might normally think that these costs are variable.......750 12....... Part d of the case calls for development of a method that will relate costs and revenues better than either fullabsorption or variable costing even though the method may not be suitable for external reporting purposes.. 1997 352 Cost Accounting.....000 $24. a.000 ÷ # of dresses...400 $ 7. $30 b...100 $11.... In this situation........ Revenues: Costs: Cost of goods sold Commissions Total costs Operating profits c.700 ($5.....000 units Cost per dress..) Full absorption and variable costing—Importing decisions: Cotierre.11–30.....000 Import duty ..250 $18. Revenues: Total revenues Costs: Cost of goods sold Commissions Disposal costs Inventory loss Total costs Operating loss 300 dresses @ $75 300 @ $30 300 @ $ 7 $22..800 900 9... the inventoriable cost of each dress is: Purchase price .000 Total cost...000 dresses are essentially fixed... $25... The reason the costs are fixed is that it is necessary to acquire the full 1.. Under full-absorption costing.. 1....500 9..950) 100 dresses @ $75 300 dresses @ $37..50 400 @ $30 400 @ $7 300 @ $3 300 @ $30 © The McGraw-Hill Companies..100 $11..000 dresses even though only a fraction of the lot will be sold..

700 $15.500 11.000 to the first period since it is a fixed cost.750 2.900 ÷ $41. an operating profit is computed as follows: Revenues: Total revenues Costs: Commissions Disposal costs Total costs Operating profit 100 dresses @ $75 300 dresses @ $37.250 © The McGraw-Hill Companies.100 $32. the company could consider that it incurred $30.50 $ 7. Thus.91% 400 @ $75 300 @ $37.50 $30.500 30.11–30. The inventory value would not be a standard one.250 = 74. 1997 Solutions Manual. but it would tend to match the expected dollars revenue with the costs of the lot of dresses. Chapter 11 353 .000 cost to the revenue expected from the dresses that are expected to be sold.250 $41. One alternative considers the inventoriable cost of the dresses to be zero and charges the full $30.000 11. Inc. This generates a loss in the first period as follows: Revenues: Costs: Fixed costs Commissions Total costs Operating loss 300 dresses @ $75 300 @ $7 $22.900 in costs to obtain the following revenues: Full price dresses Half price dresses Expected revenue $30. Provision could also be made for the expected disposal costs.600) In the second period.050 400 @ $7 300 @ $3 This solution is not much better than the previous one.250 $18.800 900 $ 3.000 2. An alternative would be to relate the $30.100 ($9.. (continued) d.

500 16. (continued) d.955 $ 3.750 14.545 100 dresses @ $75 300 dresses @ $37. (continued) For each dollar of revenue.800 $16.500 11. 1997 354 Cost Accounting.100 $18. 5/e .046 2.91% 300 @ $7 $22.250 $18.846 $ 1.91% 400 @ $7 © The McGraw-Hill Companies.904 $18..11–30. Each period’s operating profits would appear as follows: Revenues: Costs: Dress costs Commissions Total costs Operating profit Second period: Revenues: Total revenues Costs: Dress costs Commissions Total costs Operating profit 300 dresses @ $75 @ 74.750 x 74.91¢ would be deducted to cover the cost of the dresses and the disposal costs.50 $ 7. Inc. 74.855 2.

attempting to compare company operations with standards. © The McGraw-Hill Companies. 12–4. the order data may not be very representative of the operations expected over the period for which the estimate is made. b. On the other hand. new construction. prices and costs have changed. For example.. Engineering estimates are based on the operations in the company and industry standards.. 12–2.S. the easier it is to see a trend in the data when using the scattergraph method. A number of spurious correlation and regression studies have been presented in the literature. where it would be too costly to carry out the change and then see if it was cost-effective. 12–5. c. inflation rates might lead one to conclude that education causes inflation.S. 12–3. The relevant range may actually be smaller than the range of observations in the data set. 1997 Solutions Manual. at some point there is a break in the observed data–e. Engineering estimates are particularly helpful when: a. the more observations. the smaller the standard deviations and the tighter the resulting estimates. a simple run of correlations between average education levels in the U.g. When using any method.g. considering alternatives to present operations. the greater the likelihood of having the widest possible range of observations. This may result in a model that appears sound on a statistical basis. The biggest problem likely to be encountered from the indiscriminate use of regression methods is that the model may not have any logical foundation. the data set becomes nonlinear. Chapter 12 355 . When using statistical methods.. Thus. and U. but with no logical relationship between Y and X’s the model may not continue to provide good predictions. the more likely that operating conditions.Chapter 12 Cost Estimation Solutions to Review Questions 12–1. The longer the data series used in the analysis. such as assembly line reorganization and similar changes. technology. Inc. The relevant range may be limited to the range of observations included in the data set because extrapolation beyond the observed activity levels is a very hazardous undertaking. the longer the data series. for example. trying to estimate costs for projects that have not been undertaken in the past (e. This would occur if. the longer the data series. major special orders such as defense items).

use activity measures that are expressed in dollars that move with the price change effects in the cost to be estimated. One may: a. use a multiple regression approach with a suitable price index as one of the predictor variables. where b = coefficients of the independent variables. Supervisory salaries normally increase in steps. c.g. Accurate estimates improve decision making. b. c. In an application setting. 5/e . 1997 356 Cost Accounting. e. 12–11.. In periods of price instability or technological innovation. © The McGraw-Hill Companies. b. but if the range is wide enough so that several “steps” would fall within the range.12–6. select the desired confidence level (e. Utilities are variable above the minimum. Inc. but if the company’s usage falls to the minimum or below. Direct labor would be fixed if a union contract limited the company’s ability to lay off unneeded personnel or if management were contemplating a change in facilities but maintaining the same labor force. 12–7. A certain level of spoilage may be a fact of life in some operations. If the activity range is narrow. 12–10. A better alternative is to use the costs that are expected to be incurred during the period for which the cost estimate is prepared. Data in the historical accounting records should only be used insofar as they are likely to continue in the future. use the following formula: b ± t × SEb. the costs are fixed. then the costs would appear to be variable. Equipment depreciation would be a variable cost if computed on a unit-of-production basis. d. the best overall cost estimate may be derived by considering both account analysis results and statistical results. SEb = Standard error for b b t = SEb Recognize the confidence interval assumes normally distributed residuals and the greater the standard error of the estimate (SEY) the wider the confidence interval. Account analysis incorporates the judgment of the executive where experience would be quite helpful. Solutions to Critical Analysis and Discussion Questions 12–8. the costs would be fixed. 95 percent). (Appendix) First. 12–9. adjust the data to present all costs in some common dollar measure. use of the historical data without adjustment is likely to result in incorrect estimates. Then calculate the t value for the confidence level selected. As a result it may include factors that are not easily captured in statistical models. To find the upper and lower limits. a. Inaccurate estimates result in inefficiencies and increase nonvalue-added decisions..

Also. for example. If more than one factor is used. 12–15. Negative intercepts usually mean that there is some error in the specification of the cost estimate. It may be that the slope of the cost curve is particularly steep over the values used in the estimation process.12–12. Inc. then the assumption of a linear cost function may be in error—or may only be a reasonable approximation in the range of activity close to capacity. This would be particularly likely if the company were operating close to capacity. 1997 Solutions Manual. one can add that scattergraphs are often used to check for autocorrelation in residuals (using a diagram of the residuals) and trends in the variance around the regression line (heteroscedasticity). Chapter 12 357 . (Appendix) How well defined is the model? That is. 12–14. 12–13. The specific effect of one variable on the cost estimate cannot be determined independently. If the predictors are correlated (a common problem with accounting and cost data). does the one independent variable explain variation in the dependent variable? Are the residuals normally distributed? © The McGraw-Hill Companies. multicollinearity is a potential problem.. the scattergraph may point out changes in the data series that need to be considered when constructing the regression data base. The scattergraph can be useful in checking for outliers in the data—the regression model will not pick this up. then there are overlapping effects which are being explained by the correlated variables. If the appendix has been assigned. It is possible for empirical data to show a negative intercept even though fixed costs cannot be negative. If the company is operating close to capacity.

..... Inc.. $ 420..000 x 80.000) 516....000 ($308.000) 352.....000 Fixed overhead .) a..860..000) 364. $1. 308.000/70.000 x 80...000 $1.000) 416.692.... 350.558....000 516.000 Total costs..000 (1..000 Cost Item This Year’s Cost at This Year’s Volume $ 576.000/70.000 x 80.257 This year .. 480..000 (1. $22...000) 308.860.000 units) 358 © The McGraw-Hill Companies.... (15 min..000 units) ($1. Last Year’s Cost This Year’s Cost at Last Year’s Volume $ 504..... Methods of estimating costs—account analysis...075 x $480...2 x $420..000 b.000 ($364..000/80..000/70........000/70. 1997 .000) $1......000 Direct materials .000 ($504.04 x $350.000 (1.........000 Variable overhead. $23.......25 ($1..558. Costs per unit: Last year .Solutions to Exercises 12–16.000 Direct labor..

.... 1997 .053 ($275... $18....000/50.12–17.....15 x $239...000/50...000 units) Year 2 . Inc....000) 185........ Year 1 Cost Year 2 Cost at Year 1 Volume $338..000 units) 359 © The McGraw-Hill Companies....250 ($142.....500) 275...500 Fixed overhead .500 Direct labor... Costs per unit: Year 1 .54 ($927.. $18.000/50.....725 ($338. 239..500) 142.96 ($1.550 Cost Item Year 2 Cost at Year 2 Volume $439.500 x 65.500 Total costs.......375 (1... 142..232.000) 249.250 (1...425 (1...375 $1.403/65..250 x 65.05 x $237.. $927.000/50.. Methods of estimating costs—account analysis.403 Direct materials .... $307.500 Variable overhead..000) 358... (15 min.232..1 x $307...000 b.500 249.) a... 237.....005.425 x 65...500) $1....

800 miles $.25 x miles) = $550.800 miles x $31.000 + ($31.6 million – (33.800 = $31.2 million – (20.000 = $1.000 + ($31. © The McGraw-Hill Companies.600 x $31.600 miles – 20.000 b. 1997 360 Cost Accounting.25 x 32. so this estimate is subjective. (10 min.25) = $550.2 million 33.4 million 12. Inc.25) = $550. Variable costs Methods of estimating costs—High-low: Continental Company.25 per mile Fixed costs = Total costs – variable costs = $1.000 + ($31.550.12–18. Maintenance cost = $550. = = = Cost at highest activity – Cost at lowest activity Highest activity – Lowest activity $1.000 miles is outside the range of the cost observations.000 = $550. 5/e ..000 Note that 40.000 miles) = $1.000 miles) = $1.800.6 million – $1.25 x 40.) a.

290 Variable cost estimate = = = Overhead Costs $5.. High-low estimate Machine Hours (MH) Highest (month 9).500 130 MH = $11.013 © The McGraw-Hill Companies.538 x 290 MH) = $3.975 – ($11. Inc...975 – $3...475 – $4. (25 min...475 – $3..12–19. a...975 420 MH – 290 MH $1.....475 $3.846 = $629 = $3.975 Cost at highest activity – Cost at lowest activity Highest activity – Lowest activity $5.) Methods of estimating costs—High low: Nate Corporation.538 per MH x Machine hours) b. 420 Lowest (month 12) ..538 per MH Fixed costs = Total costs – Variable costs = $5. 1997 Solutions Manual. For 380 MH: Overhead costs = $629 + ($11.538 x 380 MH) = $5.538 x 420 MH) = $5..475 – ($11.346 = $629 The cost equation then is: Overhead costs = $629 + ($11.. Chapter 12 361 .

Inc.00 368.780.00 342.0 5.00 316.00 420.475.0 3.00 Machine Hours 394.0 4.0 290.00 © The McGraw-Hill Companies.0 4.. 1997 362 Cost Accounting.12–20.136.) Methods of estimating costs—Scattergraph: Nate Corporation.119.458.0 4. (15 min.797. SCATTERGRAPH $5. 5/e .

500 4.000 © The McGraw-Hill Companies.750 $3. 1997 Solutions Manual.650 4.800 6.900 3.200 4.) Scattergraph Methods of estimating costs—Scattergraph: Nate Corporation.400 5.950 4..800 4.12–21.000 5.600 5.800 4.100 $4.050 3. $5.250 5.350 4. Inc.400 Materials Costs ($) 5. Chapter 12 363 . (15 min.200 4.

149 x 380) $348. Estimating costs—Simple regression: Ginfee.) The answer is (1).00 $3.5920 x 380) + (. 5/e .149 x MH) $348.24 + ($4. Simple regression estimate Overhead = = = = $348. (20 min.17 + $4.) Estimating costs—Multiple regression: Nate Company. 1997 364 Cost Accounting.17 + ($12.79 12–23..616. Q = $6.2392 x MC) $694. Inc.96 + $1.196.250 12–24.744.635.24 + $1. Inc.2392 x $5.17 + ($12.24 + ($4.000) $694.) Estimating costs—Simple regression: Yamahonda Motors Company.5920 x MH) + (.250 = $11. Multiple regression estimate: Overhead = = = = $694. (10 min.25 x 1. (20 min.12–22.000 + $5.964.000 machine hours) = $6.20 © The McGraw-Hill Companies.62 $4.000 + ($5.

The equation resulting from this regression analysis is TC = = = = $110.000.40 x 10.000 ÷ 100..000 80. Chapter 12 365 .000 units] $2.40 x 20. *CMA adapted © The McGraw-Hill Companies. are $110. a.000 + $2.12–25.000 64.56.44 The regression analysis provides a figure of $6.) Interpreting regression results—Multiple choice: Pentag Company.000 units. (3) $2.000 + $128. It is expected that 10. (2) TC = $110.44.40 in variable overhead per direct labor hour.56 per unit d.64 overhead [($6.000 ÷ 100. e. (20 min.000.000 $238.000 units) .00 direct materials ($100. (1) $9. $956.000 units) . (4) $238. The variable costs per unit are: $1. b. The fixed costs.40 x 10. Inc.000) direct materials direct labor variable overhead ($6.000) contribution c.000) $110.40 x DLH) $110.000 $ 956. (1) R2 = .80 direct labor ($80.000 $1.000 direct labor hours will be needed to produce 100.000 + ($6.000 + ($6. given by the regression analysis.908. the explanation of variation in Y from the X regressor.44X.44.000 = $9. 1997 Solutions Manual.000 100.000 selling price ($12 x 100.000 ÷ 100. The variable costs from d above are $2.200.000 hours) ÷ 100.

) Interpreting regression results: Leonine Company. An inverse relationship often exists between salespersons’ travel expenses and sales because the salesperson spends more time traveling when the sales are more difficult to make.400 © The McGraw-Hill Companies.750 = $66.15 x $25. many companies increase their advertising when sales are declining and cut back on advertising when there is capacity business. 12–27. Similar problems exist for repair and maintenance costs since machines are usually given routine repairs and maintenance during slow periods. At $25. (15 min.650 + (1.650 + (1. This problem is frequently encountered when applying analytical techniques to certain costs.000) = $37. a.) Interpreting regression results—simple regression: Ben’s Big Burgers. 1997 366 Cost Accounting.12–26. Overhead = $37.650 + $28. In addition. (15 min. Inc.15 x food costs) b. 5/e . A better model might be developed by relating this month’s sales to last month’s advertising.000 in food costs: Overhead = $37.. Quite often the advertising expenditures result in sales being generated in the following month or so.

420 + ($492 x 4. Chapter 12 367 .200 employees.074 x $34.400 = $2. The confidence interval for the slope coefficient is: $492 ± (2.420 + $2. Inc.25) So the upper confidence limit is: $492 + (2.12–28.25) = $563 and the lower confidence limit is: $492 – (2.066.) Interpreting regression data: Comador Commercial Bank.074 x $34.074 x $34. (30 min. 1997 Solutions Manual. the cost estimate would be: Personnel costs = $8.25) = $421 © The McGraw-Hill Companies. At 4.. a.074.820 b.200 employees) = $8.

530 © The McGraw-Hill Companies......... (30 min...280 [($100 x 4) + ($3.. Average Manufacturing Costs per Unit $ 4..687....000 2.) Learning curves: Dianetics Manufacturing.. 3..........000 x 75%) 1....... (20 min.....000 [($100 x 2) + ($2..........) Learning curves: Paradigm Stainless Steel Company..... 1997 368 Cost Accounting....... $10.50 ($2..... $ 3.500 ($750 x 2) Direct labor ..322 = 80) 256 (Y = 100 x 4–... $5......950 Cost of 4 units Direct materials .75)] Total ..900 per unit . $ 2..... Overhead ..400 x ......... Total hours 100 160 (Y = 100 x 2–. 5/e ..500 20..50 x 75%) Total Manufacturing $ 4.... 2....000 ($750 x 4) Direct labor ........400 ($15 x 160) Var......840 x .....000 3. Overhead .62 ($1..............250 Cumulative Number of Units Produced...........120 per unit ....... X 1 2 4 8 16 12–30...........687...000 6.000 13.......250 ($3....265...... $1...... 2..840 ($15 x 256) Var...75)] Total ......... Inc.......... $2...12–29... 3..322 = 64) Units 1 2 4 Average per unit (Y) 100 80 64 Cost of 2 units Direct materials ...250 x 75%) 1.........000 9.

000 10...000 MH = $34..000 – $57..500 $41.000 MH = $2.30 per MH Fixed costs = = = = Total costs – Variable costs $99. a. and regression: Nilsine Company.500 + ($2..500 The cost equation.500 – $23.. 1997 Solutions Manual. High-low estimate Machine Overhead Hours (MH) Costs Highest (Month 2) .500 25.500 Check: Fixed costs = $64. scattergraph.000 64...000 = $41.000 – $64.500 ÷ 15.) Methods of estimating costs—high-low....30 x 10.. Inc.500 – ($2. Lowest (Month 8) .000 $99.30 x 25. then is: Overhead costs = $41.500 Cost at highest activity – Cost at lowest activity Highest activity – Lowest activity $99...000 MH) $99. Chapter 12 369 .... Variable cost estimate = = 25.000 MH) = $64.000 MH – 10.000 – ($2.30 x Machine hours) © The McGraw-Hill Companies..Solutions to Problems 12–31.. (40 min..

5/e .344 © The McGraw-Hill Companies. (continued) b.485 = $88.+ ---.12–31.+ ---. The regression results indicate an equation of the form: Overhead costs = $39.000 Machine Hours c.859 + $48.859 + ($2.200 * * * * * * * * * * * * 78..859 + ($2.1549 x 22.300 71.500 +* + ---. 1997 370 Cost Accounting.+ ---.000 16.500 hours would be: Overhead costs = $39.500) = $39.000 10.000 25.000 * * * 92.+ ---.+ ---.+ ---.000 22.400 * * * * * 64.+ ---.+ ---13.+ ---. Inc.100 ** * 85.1549 x Machine hours) Which for 22.000 19. Scattergraph N = 24 out of 24 $99.

459 per unit (rounded) Fixed costs = = = = Total costs – Variable costs $777..100 units = $1.420 Power..500 15.... 11.210 27..680 $113. 14..240 Cost equation: Overhead = $629..640 – $142........330 8.......653 (allowing rounding error) © The McGraw-Hill Companies.....640 – ($1....12–32.240/80.000 181...200 Building occupancy ... Inc.420 236......200 $171......210 Equipment depreciation ..750 Data processing .940 16.....750 Technical support ......... High-low method: (Note: Rounding affects the answers.000 23... Chapter 12 371 .........900) = $717. 236........ Account analysis approach: Cost Item Total = Fixed + Variable Indirect material ..000 units) = $629.... a.658 Check: Fixed costs = $717..940 Totals ..640 – $717.... 24. 194..830 Personal property taxes ..220 9.470 1..000 Equipment maintenance ......970 41... 27...........982 $634. $ 37.....017 = $634..............670 – ($1..............459 x 56........ (60 min..000) $777.900 units $59..670 – $83........) Variable cost estimate = = = Cost at highest activity – Cost at lowest activity Highest activity – Lowest activity $777..670 98..500 $ 37...000 units – 56.4155 per unit b.. 16.500 Indirect labor ..350 7..680 + $1....680 + ($113...........459 x 98..920 $629.) Methods of cost estimation—account analysis. $742...... simple and multiple regression: Dellila Undersea Gear Corporation.....100 6.. 181.. 1997 Solutions Manual.

867 d. Since the high-low method uses only two data points. The account analysis approach is based on considerations of future prices and costs.658 + ($1. The simple regression has a high correlation coefficient and seems to “make sense.000) = $634.720 = $751.504 x 80.067 x 113 index level) = $632.) c.” It would appear to offer the best estimate based on projections from past data.378 (Note: Your answer may differ somewhat because of rounding.320 $746.658 + $116.459 x 80.547 + ($1. Inc.547 + ($1. and interpretation costs.640 + ($1. Multiple regression estimate: Overhead = $632.080 – $6. analysis.000 units. (continued) b. its results are subject to some question. A combination of account analysis and either simple or multiple regression would probably provide the best estimated relation between costs and activity. 5/e . 1997 372 Cost Accounting. © The McGraw-Hill Companies.000 units) – ($59.640 + $120.547 + $120. Hence. The multiple regression does not improve the fit over the simple regression (R2 is virtually unchanged).504 x Production units) $626. Simple regression estimate: Overhead = = = = $626. (continued) For 80.501 x 80.000 units) $626.. multiple regression benefits may not justify data collection.045 e. estimated costs are: $634.675 = $746.12–32.

However. it would be helpful to see if the data meet the requirements of regression. 1997 Solutions Manual.12–33.8 * 5.0 * * * 6.80 463.4 * 4..67 (i.950.701.) Interpreting regression results—simple regression. (45 min. the results would be as Gearld reported them.366.82 implies that approximately 67% of the variation in overhead is explained by the equation. this is not a bad correlation for real data. the correlation coefficient of .82 squared).533..783. The unadjusted R-square is . If we were to run the regression with the data given. Inc.00 Units © The McGraw-Hill Companies.60 522.2 * * 5.117. Plotting the data on a scattergraph will show the following: $6.40 433.00 375. In the first place. Of course.0 * * * * 404. Chapter 12 373 .20 492.e. .6 * * 5.

.... 1997 374 Cost Accounting. 5/e .. © The McGraw-Hill Companies.25.........983 Standard error of the slope .12–33......... If this is done.. the following regression results would be obtained (not required): *****Regression Results***** Equation: Overhead = $326 + $11........ observation number five appears to be an outlier.... . (continued) As can be seen from an inspection of the scattergraph......077 This estimate is substantially different than the initial regression..... Inc..992 Adjusted R-square ..466 t-statistic for the slope . ...... Such an outlier has affected the regression results...686 per unit Statistical data: Correlation coefficient . It indicates the effect that one substantial outlier can have on the results of a regression. Your comment to Gearld should be that the regression could be recomputed excluding the outlier. .....

(2) Dependent variable c.50 = $1.470 – (520 hours x $7. (3) √.* a.99724 g.12–34. (30 min.2884 x 420 hours) f. (4) Variable cost coefficient b. Inc.650 $4.50) ( ) . (1) 99.470 – $2. Chapter 12 375 .820 = 220 hours 520 hours – 300 hours F = $570 = $4.65 + ($7. 1997 Solutions Manual. Inc. (4) $3.724% © The McGraw-Hill Companies. (1) Independent variable d.) Interpreting regression results—Multiple choice: Lerner.. (2) V = $7. e.746 = $684.

Assuming this learning rate up to a cumulative output of 32 units.12–35. a. i.85 = 289 hours per unit. but in most production processes the majority of cost savings associated with a learning phenomenon involve the use of human labor. lots of 8 units.200 + 2. the standard per unit becomes: 3.808 hours = 238 hours per unit. (45 min.248 – (3. The basic premise of the learning curve is that operating efficiency and/or productivity increases as experience is gained in the performance of repetitive tasks.200/8 400 average direct labor hours = 85% c. this quantity can be calculated as: (3. Inc.240)/16 340 average direct labor hours = 3. average direct labor hours used to produce these 32 units should equal 85% of the average direct labor hours used to produce the first 16 units.240) = 3. 16 units © The McGraw-Hill Companies. Various inputs to the production process may be used more efficiently as cumulative output increases. 1997 376 Cost Accounting... If the average hours per unit in this production batch is taken as the direct labor standard. or 9. b.) Learning curves: Jammin’ Corporation.248 hours used in the production of the first 32 units.e.200 + 2. In short. In the case of direct labor hours used in the production of Inexcess.808 hours used in the production of units 17 through 32. This implies a total of 289 x 32 = 9. 5/e . average hours employed for each unit when 32 units are completed should equal: 340 x .

.... Total bid price..... (continued) d.12–35. Chapter 12 377 ..856 Materials ......950 9........ Inc.. x 96 units ................................... the bid price for the additional 96 units can be calculated as follows: Input Quantity per Electrocal Unit Cost per Input Unit $30 25 40 Cost per Electrocal Unit $ 1...... e....... Markup (30%)................... scheduling labor requirements.117...................... feet Direct labor .... and determining performance evaluations in which periodic progress reports are compared with accomplishments expected under the curve...061 x 96 $2.........091 $ 22............... 1997 Solutions Manual..............................520 $ 16....... Some applications of the learning curve in the planning and controlling of business operations are preparing cost estimates in competitive bidding.......970 5....... 238 hours Total variable manufacturing cost .. 50 sq... © The McGraw-Hill Companies....500 5.... Bid price per unit ............... 238 hours Variable overhead................................. determining budget allowances for labor and labor-related costs....................................... Given the direct labor standard determined above and Jammin’s bid price formula...........

Variable factory overhead .) Learning curves: Krylon Company.... In the analysis below. Inc.12–36.. Assembly labor ... A differential cost analysis similar to the one shown below should have been prepared to determine whether the gauges should be purchased or manufactured... Therefore. Total incremental cost.... The analysis prepared by the engineering.. or supervision would be required if the gauges were manufactured.00 30..000 300...00 © The McGraw-Hill Companies...... 1997 378 Cost Accounting..000 $720.00 is less than the $72..000 $12. fixed factory overhead costs and general and administrative costs have not been included because they are not relevant..00 differential cost to manufacture them.. (40 min. if potential labor cost improvements are ignored..000 300...000 Unit Per Assembly Run Unit Purchased components..... manufacturing...... 5/e .. and accounting departments of Krylon Company was not correct unless the potential labor cost improvements are ignored.....00 30.. Differential Cost Analysis Cost of 10.... space. these costs would not increase because no additional equipment.....00 $72. Krylon Company should purchase the gauges because the purchase price of $68. $120.. a....

.....000 768...................36 1..........000 (= $68 x 80.... This results in a total savings of $2........ (A steady-state phase will probably occur after a time as the operations become more routine or the production life is sufficiently long.. 15.. 1997 Solutions Manual....000 40...000 480........ 15... Chapter 12 379 ..36(= 19..8) 15.2 x .........000 Cumulative 10...000 Savings if gauges are manufactured .....20(= 24 x ......400 or $25..000 1...... Quantity Per Lot 10..440.000 Cumulative Average Labor Cost per Unit $30....228....000 20.00 5.. The following labor cost and variable overhead cost behavior by lots would occur (assuming 80% learning curve).28 per gauge in the first year.......800 This means the average cumulative cost of the assembly labor for the first 80.... other learning patterns exist in practice...) © The McGraw-Hill Companies......8) Total Cumulative Labor Cost $ 300... Inc.36 1.8) 19.. (continued) b.... it probably should manufacture the gauges rather than purchase them...000 Assembly labor.022...... 68.......12–36..400 (Note: We use the 80% learning curve here only as an example... Krylon’s assembly labor and variable overhead costs should decrease by 20% every time there is a doubling of cumulative production...28 $2..228.......417. $42....000 gauges is $15.00 24. A revised analysis which considers an 80% learning factor is shown below: Cost per Unit Total Differential costs to manufacture 80......72 per gauge as compared to the purchase price of $68......000 gauges Purchased components.......00 $ 960....000 10.600 or $42..000 40.....000 20.228..00(= 30 x . With (say) an 80% learning curve by lot.. The total incremental cost to manufacture the gauges is $3...) If Krylon Company can experience a learning factor... $12.00 per unit or a total cost of $5..36 per gauge..022.. $25....417.....000)..600 Cost to purchase..800 Variable factory overhead ...440.800 Total incremental cost..........72 3....000 80.... The reduction is possible as the laborers become more efficient in performing the tasks...

.

Chapter 13
Cost-Volume-Profit Analysis

Solutions to Review Questions
13–1. π = TR – TC = PX – VX – F = (P – V)X – F π TR TC P V X F = = = = = = = operating profit, total revenue, total costs, average unit selling price, average unit variable cost, quantity of units, total fixed costs for the period.

where

13–2. Total costs = Total variable costs plus total fixed costs. 13–3. The total “contribution margin” is the excess of total revenue over total variable costs. The unit contribution margin is the excess of the unit price over the unit variable costs. 13–4. Total contribution margin: Total Selling price – variable manufacturing costs expensed – variable nonmanufacturing costs expensed = Total contribution margin. Gross margin: Total Selling price – variable manufacturing costs expensed – fixed manufacturing costs expensed = Gross margin. 13–5. Profit-volume analysis plots only the contribution margin line against volume, while cost-volume-profit analysis plots total revenue and total costs against volume. Profit-volume analysis is a simpler, but less complete, method of presentation. 13–6. Both unit prices and unit variable costs are expressed on a per product basis, as: π = (P1 – V1)X1 + (P2 – V2)X2 + ... + (Pn – Vn)Xn – F, for all products 1 to n. (The terms are defined in the solution to 13–1.)

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 13 381

13–7. A constant product mix is assumed to simplify the analysis. Otherwise, there may be no unique solution. 13–8. Contribution margin = Wi(Pi – Vi) for i = 1 ... n: that is, W1(P1 – V1) + W2(P2 – V2) + ... + Wn(Pn – Vn), where W refers to the weight assigned to each product. Usually this weight is each product’s percent of total volume. 13–9. The difference is: Economic profits = Accounting net income minus the opportunity cost of owner-invested capital. 13–10. Assumptions: 1. Revenues change proportionately with volume. 2. Variable costs change proportionately with volume. 3. Fixed costs do not change at all with volume. (Other assumptions may include constant product mix and/or all CVP costs are expensed.) 13–11. Costs that are “fixed in the short run” are usually not fixed in the long run. In fact few, if any, costs are fixed over a very long time horizon. 13–12. Step costs included advertising, instructor’s fees, room rent and audio-visual equipment rent. These costs would not be affected by the number of people attending the seminar (within the relevant range). If, however, more people than anticipated attend the seminar then these costs might increase, or step up, to a higher level. For example, at a certain point new instructors will have to be hired and new space and equipment will have to be rented.

Solutions to Critical Analysis and Discussion Questions
13–13. A company operating at “break-even” is probably not covering costs which are not recorded in the accounting records. An example of such a cost is the opportunity cost of owner-invested capital. In some small businesses, owner-managers may not take a salary as large as the opportunity cost of forgone alternative employment. Hence, the opportunity cost of owner labor may be excluded. 13–14. In the short run, without considering asset replacement, net operating cash flows would be expected to exceed net income, because the latter includes depreciation expense, while the former does not. Thus, the cash basis break-even would be lower than the accrual break-even if asset replacement is ignored. However, if asset replacement costs are taken into account, (i.e., on a “cradle to grave” basis), the long-run net cash flows equal long-run accrual net income, and the long-run break-even points are the same.

© The McGraw-Hill Companies, Inc., 1997 382 Cost Accounting, 5/e

13–15. If the relative proportions of products (i.e., the product “mix”) is not held constant, products may be substituted for each other. Thus, there may be almost an infinite number of ways to achieve a target operating profit. As shown from the multiple product profit equation, there are several unknowns for one equation: π = (P1 – V1)X1 + (P2 – V2)X2 + ... + (Pn – Vn)Xn – F, for all products 1 to n. 13–16. The sum of the break-even quantities would not be the break-even point for the company if there are common fixed costs which have not been allocated to the products. 13–17. A forecasted cost-volume-profit line can be used as the flexible budget. It would show expected costs and revenues for a range of volume levels. These expected costs could later be compared to actual results for performance evaluation. 13–18. There may be a difference between costs used in cost-volume-profit analysis and costs expensed in financial statements. A common example is fixed manufacturing costs. Cost-volume-profit analysis assumes fixed manufacturing costs are period costs, while they are treated as product costs for financial reporting. If part of current production is inventoried, some fixed manufacturing costs would not be expensed for financial reporting. On the other hand, if current sales include all of current production plus some from inventory, all fixed costs from this period plus some from previous periods would be expensed for financial reporting. 13–19. The accountant makes use of a linear representation to simplify the analysis of costs and revenues. These simplifying assumptions are generally reasonable within a relevant range of activity. Within this range, it is generally believed that the additional costs required to employ nonlinear analysis cannot be justified in terms of the benefits obtained. Thus, within this range, the linear model is considered the “best” in a cost-benefit sense. 13–20. As volume rises, it is likely that product markets will be saturated, leading to a need to cut prices to maintain or increase volume. This price cutting would result in a curvilinear revenue function. Moreover, as activity increases and approaches capacity constraints, costs tend to rise more than proportionately. Overtime premiums and shift pay differentials increase the unit labor costs. Similar costs may be incurred in terms of excess maintenance costs for running machines beyond their optimal performance levels, higher materials costs for any input commodity that is in short supply, and similar factors. These factors tend to cause costs to rise more than proportionately with an increase in activity. 13–21. CVP analysis is usually conducted on a short-term basis. In the short run, there is usually not much that can be done to change the level of fixed costs. For this reason, fixed costs are usually accepted as given in a CVP setting. However, when management wishes to see the effect of a change in a company’s cost structure (such as would arise from the purchase of labor-saving equipment), the fixed cost changes would become of interest to the analysis in conjunction with the changes in variable costs.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 13 383

13–22. Under certain circumstances, the use of very simple representations of complex processes may be both useful and necessary. Insights can be gained by viewing a profit-volume graph that are not readily obtained by looking at detailed income statements. The simplifications of CVP analysis are intentional so that the decision maker will not be lost in details. However, there are a number of simplifying assumptions that should be noted when employing CVP analysis. For example, extrapolation beyond the relevant range can result in erroneous conclusions about probable profit levels. Such errors should be avoided when using this method. Moreover, if a more complex analysis is called for, then CVP analysis should not be employed. 13–23. If the U.S. auto companies are unable to raise prices then they could decrease costs or change the product mix toward higher contribution margin cars in order to break even. For cost reduction, either reduce fixed costs, or reduce variable costs to increase the contribution margin.

© The McGraw-Hill Companies, Inc., 1997 384 Cost Accounting, 5/e

Solutions to Exercises
13–24. (15 min.)

Profit equation—Components.

Break-even point f

Slope = Variable cost per unit d

Total variable cost area. c Total fixed cost area. e Loss volume Profit volume

h

g

13–25. (15 min.)

Profit equations—Components.

a. Total fixed costs (loss at zero volume) b. Break-even point c. Slope = contribution margin per unit d. Profit line e. Profit area f. Net loss area g. Zero profit line

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 13 385

13–26. (20 min.)

Cost-volume-profit analysis: Galaxy Cinema.

a. $3,600,000 ÷ 800,000 tickets = $4.50 per ticket b. $2,400,000 ÷ 800,000 tickets = $3 per ticket c. $4.50 – $3 = $1.50 per ticket d. π = ($4.50 – $3)X – $750,000 Let π = 0 0 = ($4.50 – $3)X – $750,000 $750,000 X = = 500,000 tickets ($4.50 – $3) e. Let π = $2,000,000 $2,000,000 = ($4.50 – $3)X – $750,000 $2,750,000 X = = 1,833,333 tickets ($4.50 – $3)

13–27. (10 min.)

CVP analysis—Planning and decision making.

a. (1) Unit selling price must be increased. b. (2) Decrease by the same amount. c. (4) An increase in variable costs.

© The McGraw-Hill Companies, Inc., 1997 386 Cost Accounting, 5/e

13–28. (25 min.) a. 7,000 units:

CVP analysis—Planning and decision making: Airpower Corporation.
(7,000)($8,000) (7,000)($4,800) (7,000)($3,200) $56,000,000 PX 33,600,000 VX 22,400,000 (P – V)X 24,000,000 F π $(1,600,000) $80,000,000 48,000,000 32,000,000 24,000,000 $ 8,000,000 PX VX (P – V)X F π

10,000 units:

(10,000)($8,000) (10,000)($4,800) (10,000)($3,200)

b. Break-even point: π = (P – V)X – F $0 = ($3,200)X – $24,000,000 $3,200X = $24,000,000 X = $24,000,000 $3,200 X = 7,500 units

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 13 387

13–29. (25 min.) a.

CVP analysis—Planning and decision making: Esmark, Inc.

π = (P – V)X – F 0 = ($100 – $60)X – $150,000 X = $150,000 = 3,750 units ($100 – $60)

b. $100,000 = ($100 – $60)X – $150,000 X = $250,000 = 6,250 units ($100 – $60)

13–30. (15 min.) a.

CVP analysis—Planning and decision making: Plume, Inc.

π = ($100 – $60)8,000 – $150,000 = $170,000

b. 10% price decrease. Now P = $90 π = ($90 – $60)8,000 – $150,000 = $90,000 . π decreases by $80,000 20% price increase. Now P = $120 π = ($120 – $60)8,000 – $150,000 = $330,000. π increases by $160,000 c. 10% variable cost decrease. Now V = $54 π = ($100 – $54)8,000 – $150,000 = $218,000. π increases by $48,000 20% variable cost increase. Now V = $72 π = ($100 – $72)8,000 – $150,000 = $74,000 . π decreases by $96,000 d. π = ($100 – $66)8,000 – $135,000 = $137,000. π decreases by $33,000

© The McGraw-Hill Companies, Inc., 1997 388 Cost Accounting, 5/e

13–31. (20 min.) a. (2) b. (4)

CVP analysis—Planning and decision making.

c. (4) Cannot be determined without knowing variable cost per unit. (For example, if V = $.10, break-even increases; if V = $.90, break-even decreases; if V = $.50, breakeven is not changed.)

13–32. (20 min.)

Extensions of the basic model—Semifixed (step) costs: Luress Co.

a. Break-even points: X = F P–V

X(Level 1) = $84,000 = 14,000 units $15 – $9 X(Level 2) = $123,000 = 20,500 units $15 – $9 X(Level 3) = $162,000 = 27,000 units $15 – $9 The break-even for Level 3 is less than the minimum production for that level. Level 3 provides a profit for its entire range of activity; hence, there is no break-even point for Level 3. b. Optimal level of production. Level 1: π = ($15 – $9)16,000 – $84,000 = $12,000 Level 2: π = ($15 – $9)28,000 – $123,000 = $45,000 Level 3: π = ($15 – $9)38,000 – $162,000 = $66,000 Luress Company should operate at Level 3 and earn a maximum profit of $66,000 per month.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 13 389

13–33. (15 min.)

Extensions of the basic model—Taxes: Melborne Surfboard Shop.
$984,000 ($80.00 – $47.20)

a. (3) 30,000 units = b. (4) 55,000 units $492,000 $492,000 $32.80X (.6) $19.68X

[($80.00 – $47.20)X – $984,000](1 – .4) $32.80X (.6) – $984,000 (.6) $492,000 + $984,000 (.6) $492,000 + $590,400 X = $492,000 + $590,400 $19.68 $1,082,400 = $19.68 = 55,000 units

= = = =

© The McGraw-Hill Companies, Inc., 1997 390 Cost Accounting, 5/e

13–34. (20 min.)

Extensions of the basic model—Taxes: Luxurious Hair Products.
Sales Price: $8 per unit V: $2 per unit F: $216,000 per year

a.

π = (P – V)X – F 0 = ($8 – $2)X – $216,000 $216,000 = ($8 – $2)X X = $216,000 ($8 – $2)

= 36,000 units b. X = $216,000 + $60,000 ($8 – $2) = 46,000 units c. πa = [(P – V)X – F](1 – t) $60,000 = [($8 – $2)X – $216,000](1 – .40) $60,000 = ($6X – $216,000)(.60) $60,000 = $6X – $216,000 .60 $216,000 + $60,000 = $6X .60 $6X = $216,000 + $100,000 X = $316,000 $6

X = 52,667 units (rounded)

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 13 391

13–35. (30 min.)

Using CVP analysis to measure volume: Hose’s Herbal Remedies.

Break-even point in sales dollars: a. PX = PX = F CM ratio $56,000 1/3

1/3 PX = $56,000 PX = $168,000 b. PX = F CM ratio

PX = $56,000/(4/10) PX = $56,000 x (10/4) PX = $140,000 Note: CM ratio refers to contribution margin ratio.

© The McGraw-Hill Companies, Inc., 1997 392 Cost Accounting, 5/e

13-36. (30 min.) CVP analysis–multiple products: Lorocette’s Sandwich Shop. a.

6-Inch Sandwich

12-Inch Sandwich
PX VX (P – V)X F π

(10,000)($4) + (15,000)($6) = $130,000 (10,000)($2) + (15,000)($3.50) = 72,500 (10,000)($2) + (15,000)($2.50) $ 57,500 34,500 $ 23,000

b. Compute weight times contribution margins for each product.

(

10,000 10,000 + 15,000

)( ) (
$2 +

15,000 10,000 + 15,000

)(

$2.50

)

= (0.4)($2) + (0.6)($2.50) = $.80 + $1.50 Weighted average CM = $2.30 Compute break-even: π = (P – V)X – F $0 = $2.30X – $34,500 $2.30X = $34,500 X = $34,500 $2.30 X = 15,000 total units 6-inch: produce (0.4)(15,000) = 6,000 units 12-inch: produce (0.6)(15,000) = 9,000 units

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 13 393

13–36. (continued) c. New weights:

(

4 4+1

)( ) (
$2 +

1 4+1

)(

$2.50

)

= (0.8)($2) + (0.2)($2.50) = $1.60 + $.50 = $2.10 Break-even: π = (P – V)X – F $0 = $2.10X – $34,500 $2.10X = $34,500 X = $34,500 $2.10

X = 16,429 total units 6-inch: produce (0.8)(16,429) = 13,143 units 12-inch: produce (0.2)(16,429) = 3,286 units

© The McGraw-Hill Companies, Inc., 1997 394 Cost Accounting, 5/e

66 Break-even sales = $80.000/ = ( $9.13–37.633 © The McGraw-Hill Companies.) CVP analysis—Multiple products: Almay. find weighted-average price (P*) and variable costs (V*): P* = (1/2 x $6) + (1/3 x $10) + (1/6 x $16) = $9 V* = (1/2 x $4) + (1/3 x $6) + (1/6 x $10) = $5. Inc.00 ) $80.371 (rounded) = $215.66 $9. (30 min.00 – $5. Chapter 13 395 . To compute break-even sales dollars.000 . a.. 1997 Solutions Manual.

00 xa $80.000 + $5. Inc. costs = (50% x $4) = (33.633 Break even point Total cost line TC = $80.3% x $6) + (16.66 .00 © The McGraw-Hill Companies.66 xb Total revenue line TR = $9.000 Total fixed costs Volume aWeighted-average bWeighted-average c 23. Cost-Volume-Profit Graph $215. 1997 396 Cost Accounting. 23.3% x $10) + (16. (continued) b. 5/e .00 .959 = $215..13–37.7% x $16) = $9.7% x $10) = $5.633 $9.959c revenues = (50% x $6) + (33.

000. Forshiem Co.000.80 x ($1.60 500.) Analysis of Cost Structure.000 560.13–38.000 x .000 200.000 $2.000 $ 240. (30 min.000 300.10)]. (15 min. vs.000.000 800.. 1997 Solutions Manual.000 100 20 80 56 24 Sales Variable costs Contribution margin Fixed costs Operating profit $1. Chapter 13 397 .30 x ($1.000 [= . = Contribution margin Sales = $800. 13–39.000 700.000 = $1.000 $ 240.000 60. Contribution margin ratio b.000 © The McGraw-Hill Companies.000 = 40% a. Meribell Co. Meribell profits increase by $30.) Thyme Corporation. Amount Percentage Forshiem Amount Percentage $1.000 100 70 30 6 24 b. Contribution margin per unit = $800. Meribell Co.000.000 [= .000 x .10)] and Forshiem profits increase by $80.000. Inc.

520.000 publishing $15 promotion $6 administration $12 materials Sales Price: Fixed costs: Variable costs: Present units sold: 25.000 = ($90 – $33)X X = $1.Solutions to Problems 13–40.000 office and administration $720. $90 per unit $800. 1997 398 Cost Accounting. (35 min.520.000 per year a. margin Sales: $90 per unit 33 per unit $57 per unit π = (P – V)X – F 0 = ($90 – $33)X – $1.000 $1. costs Cont.. 5/e . Inc.000 $57 X = 26.) CVP and decisions: Schill Education Corporation. Break-even Price Var.520.667 units © The McGraw-Hill Companies.

..... Operating profit ...... Cont............ Fixed costs ...............000 x $ 6 40.....000 = 240........ c.................13–40....000 x $90 x 25% Promo... Improved profit performance by $455......000 = 375. 25.........000 = 420....... 25.000 x $40 = $2.... Inc..000 = 150.000 x $20 Sales com..000 over present profit (loss)........000 $ 200.. Chapter 13 399 ....000 = 225.......425......................... 35..000 x $90 = $2....000 = 600.............. Promo... (new).000 $ (95...... Contribution margin ............000 © The McGraw-Hill Companies. Fixed costs ..........150.... Profit effect at sales of 40.........000 = 210.000 x $ 6 25.. Pub....................... 35.....000 With Representative Sales ...........000) Profit improves (loss lessens) by $20....... Admin..........160... (old) ..........000....000 $ (75.............000 x $33 = 825....... ...... margin........................... Promo.....000 = 1.000 = 1....000 x $15 40....... Admin........ Profit effect at sales of 25...........................000 $ 360........................................................600..000 1... margin............000 x $90 40............................520...000 x $12 Cont................ Cont..............................720.... 1997 Solutions Manual...............................250.............000 = 375.000 1...000 x $90 25. .000 x $15 Admin................................ 35..000 x $15 25.......... 10...000 800.........000 800...000 1.......................000 1........ margin..000 1.................... Profit effect Present profit Sales ...000 25...000......... 25..........000 725............... Variable Costs .......520........600..... (continued) b....000....... Fixed costs ................................. Improved profit performance by $295..............................................000 x $ 6 Materials.... ................000 = 200........ 40............... 10...... Fixed costs ................. Operating profit ....250... cost ......... Operating profit ........000 units Sales ................. Operating profit (loss)...000 units Sales ...000 x $40 = $3..000 x $90 Promo..............000) = $3.... Publisher cost................

a.151)($16.000 P = $16.400 P = $296.142. Inc.000 = ($16.400 Profit target = $280. or sales of (197.000) – $1.142.3% increase © The McGraw-Hill Companies.400 X = $1.849)($16.10 (rounded) or a 7.120.156.90 = 194.90 = 197.142.20 – $8. 5/e .000 $16.20 – $8. 1997 400 Cost Accounting. Profit target = ($280.780.800 = ($16.13–41.142.20) = $3.800 $16.) CVP analysis and price changes: Knoll’s Manufacturing.849 units (rounded) or sales of (194.90 Price: Fixed costs: Sales: New price = (108%)($15) = $16.90)X – $1.000 + $1.. New variable cost per unit: Labor Materials Overhead (110%)(25%)($8) + (115%)(50%)($8) + (105%)(25%)($8) = $8.20 – $8.142.90)X – $1.90)(200. π = PX – VX – F $296.142.000) = $1.554 b.800 + $1.400 X = $1.20 New fixed costs = (102%)($1.400 200. Variable costs.193.20 – $8.800 π = (P – V)X – F $296.800 = P(200.000) – ($8.000 π = (P – V)X – F $280.846 c.400 + $296.151 units.000)(106%) = $296.142. (35 min.400 + $280.20) = $3.

© The McGraw-Hill Companies.20) = .13-42.20 .80) = .20 X = $20.) CVP analysis: Softcush Company. a.208 $25.208)X = $20.00 New sales price: (X – $20. Chapter 13 401 .00 – $20.51 $468. Inc. (1) $25.208 X X – $20.500 units = b. (20 min.20 = (.. (1) 97.792 = $25.000 ($25.00 – $19.20a) Current contribution-margin ratio: ($25.208)X (1 – . 1997 Solutions Manual.51 aReflects 8% increase in direct labor.

000)($4) = 1.000 units 175. costs Cont.50) = 787.500 550.50X X = $300.000 (175.000 $ 137.000)($3.000 (175.75) = 481.000 $ 200.000 (250.000 (250.000 (175.000 $4.000)($1.000 = $1.500.000)($3.000) Alt.75) = 687.13–43.000 $2.000 800.050.000)($2.000)($6) = $1.250 550.000 = $4.500 (175.75X X = $550.000 (250.000)($4.500) $1.000 units Sales Var.25) = 812.000 $ (68.000 (250. 2 $1. 3 $1.25) = 568.000 units (175.000 402 © The McGraw-Hill Companies.000 800.00X X = $800. margin Fixed costs Operating profit Fully Automatic Machine π = (P – V)X – F 0 = ($4. 1 (250.500.000 (250.50) = 375.000 units Present Facilities Break-even point: π = (P – V)X – F 0 = ($1.500. Inc.000 $ 75.050.000)($2) = 350. margin Fixed costs Operating profit 250.50)X – $300.00)X – $800.00 = 200.000)($6) = $1.000 $800.125.000.50) = 1. (35 min.000 = $2. costs Cont.000 units Sales Var.750 (175.000)($2.750) $1.000 $ (37.50) = 262.500 (250.050.75 = 200. 1997 .000 $ (100.000)($1.50 = 200.000 $300.000 300.500 300.000 Alt.75)X – $550.000)($4) = 700. Semiautomatic Machine π = (P – V)X – F 0 = ($2.000 (175.000 $550.000)($4.500 Alt.) CVP analysis with changes in cost structure: Pallamer Prefab.000)($2) = 500.000 $1..

Chapter 13 403 .000 $2.600 – $1. but it assumes 1 1/2 teachers are employed. but a loss at 13.400 = 11 1/3 students $300 That is. π = ($400 – $100)X – $1. but at 11 1/3 students it would just break even. This gives 9 students.) CVP analysis with semifixed costs: Le Muir Preschool. a. 14.000 – $7.200 – $1.) This part demonstrates the impact of step costs on cost-volume-profit analysis. π = $300X – $1.13–44. (Note: An incorrect but common method is to substitute the ratio X/6 for Q and solve for X. Inc.200Q – $1. 1997 Solutions Manual.000..200 = 7 1/3 students. then showing a profit again at 16 students.200 – $1.000 = $800 b.000 X = $2. the center would show a profit of $800 (i.000 $4.200 – $1. ($300 x 10) – $1.400 – $1.200 x 6 teachers] – $1. at 10 students.000 = $9. 0–10 students: π = $300X – $1. where X = the number of students and Q = the number of teachers..000. c.000 X = $3.e.400 = 11 1/3 students $300 13–18 students: π = $300X – $3. where X = number of students and Q = number of teachers.400 – $1. 0–6 students: π = $300X – $1. which is infeasible X = $300 7–12 students: π = $300X – $2. © The McGraw-Hill Companies. (35 min.000).000 X = $3. or 15 students. Operating profit = [($400 – $100)30 students] – [$1.600 = 15 1/3 students X = $300 The Center shows a profit at 12 students.200 = 7 1/3 students $300 11–20 students: π = 300X – $2.200 – $1.200Q – $1.

200 – $1. (From Part a) Status quo: π = ($300 x 36 students) – ($1. 1997 404 Cost Accounting. if the maximum 6:1 studentteacher ratio is to be maintained. © The McGraw-Hill Companies.000 = $2.800. another teacher would be hired at a cost of $1. No change in fixed or step costs.600 2) Differential method: Increase in total contribution = $300 x 6 = $1. (continued) d. Profit would decrease by $900. e.800. Yes.200 x 6 teachers) – $1. 5/e . The Center would increase profit by $1. Two methods are presented here: 1) Total method: π = $800..800 – $7. Inc.200. Although the total contribution would increase by $300.000 Alternative: = $10.13–44.

000 units πa = [(P – V)X – F](1 – t) πa = [($11.250](1 – .000 b.4) = $60.000 units (13.75X – $81. © The McGraw-Hill Companies.25)(22. Inc.6) = $6.) a. Chapter 13 405 . (40 min.000 $81.25)X – $135.75X $81.75)(20.75 = 12.000 – $11.000](1 – .25X – $135.000)($25) = $325.000 X = $6.4) 0 = $6. d.750 X = $87. c.000) – $135.000 – $11. Profit-targets: Maus and Company.13–45.750 $6.750 πa = [(P – V)X – F](1 – t) 0 = [($11.000](1 – .000) – $135.4) = $54.75X – $87.000 = $6.250](1 – . 1997 Solutions Manual.000](. πa = [(P – V)X – F](1 – t) πa = [($25 – $13.75 = 13.4) = [$11.000 πa = [(P – V)X – F](1 – t) 0 = [($25 – $13.75)X – $135..

500 available for advertising.750 $6.75X – $87.6 = $147.13–45.000 $60.6F = .6F $88.75 = 21..000 units (21. 1997 406 Cost Accounting.4) = $148. πa $54. [(P – V)X – F](1 – t) [($11.750 = = = = f. Note: Parts d and e can also be solved using the contribution margin ratio.000 πa $60. 5/e .000 $54.500 – .000) – F](1 – .500 = [(P – V)X – F](1 – t) = [($11.500 Subtracting fixed costs of $135.750 X = $6.000)($25) = $525.4) $6.500 F = .250](1 – .000 $88. Inc.500 leaves $12.25)(22. © The McGraw-Hill Companies. (continued) e.75X $141.000 from $147.25)X – $146.000 $141.

000 = ($50)(12.000 $159.333 units (rounded) P–V $50 – $35 b.00 per unit F = $200.000 = $35.875 units π = (P – V)X – F π = ($50 – $35)15.000 units) – (V)(12.000 + $264.000 = $25.000 $420.000 $120.000 – V(12.000 – $200.00 per unit a.000 V = 12.2)V = $50 – 1.000 units) – $200.000 units) – $200. Level 1: P – V = $50 – $35 = $15 per unit Level 2: P – (1.000 = $600.000 = 13.000 + ($50 – $42)10.) CVP analysis with semifixed costs and changing unit variable costs: Theloneous & Company. Inc. Level 1: X = Level 2: 0 = = $8X = $8X = X = c.000 – $264. © The McGraw-Hill Companies..000(level 1) –$20.000 units) + $8(X – 15.000 + $8X – $120.000) – $264.2($35) = $50 – $42 = $8. Level 1: Level 2: ($15)(15.000 $225.000 = $41. First find the variable cost last year: π = PX – VX – F –$20.000 π = ($50 – $35)15.000 19. 1997 Solutions Manual.000 – $264.000 units.000 – $225.13–46. Chapter 13 407 .000 The company is more profitable in Level 2 at 25. (40 min.

........ Manufacturing contribution margin ............ Direct operating costs Advertising . Total variable manufacturing costs......... Inc.........* Here is a version of the income statement using a contribution margin format................. Other variable costs Commissions ................................. Sales salaries & benefits.................................600 $ 590 150 45 785 815 110 705 100 85 185 520 135 60 100 295 $ 225 © The McGraw-Hill Companies.......................................... Factory overhead ............................ Operating profit before taxes ..........000 500 Revenue from sales ........................................ 1997 408 Cost Accounting.. Direct labor ............... Product contribution ...................... Licenses............... Variable manufacturing costs Direct materials . Factory overheada ...... 2............ a........ Total direct operating costs ..000 $1........ Year 4 (in thousands) Breakfast Cereals Bars Sales in pounds ........................................Solution to Integrative Case 13–47. CMA adapted aAssumes supervisory and plant occupancy costs are fixed....... 5/e ........................................................................................ (60 min.) Converting full-absorption costing income statements to CVP analysis: Crandell Products..... $1................. G & A salaries & benefits . Total fixed expenses .............. Crandell Products Income Statement For the Year Ended April 30.... Contribution margin ...................................................000 $ 330 90 27 447 553 50 503 50 50 100 $ 403 $400 $160 40 12 212 188 40 148 30 20 50 $ 98 Dog Food 500 $200 $100 20 6 126 74 20 54 20 15 35 $ 19 Total 3............ Fixed costs ..........

. Determining a constant sales mix within the relevant range. Identify products which can support heavy sales promotion expenditures. Inc. Accepting a special order at a discounted price. (continued) b. (1) Advantages which CVP analysis could provide would include: • Determining the marginal contribution of products which can assist management in planning sales volume and profitability including the calculation of a break-even point. (3) Crandell Products should be aware of the following dangers when using CVP analysis: • • • The use of inaccurate assumptions for the calculations. Assist in decisions relating to eliminating a product. CVP analysis tends to focus on the short term. 1997 Solutions Manual. Determining efficiency and productivity within the relevant range. • • • (2) Difficulties Crandell Products could expect to have on the CVP calculations include: • • • • Separating mixed costs into their fixed and variable components. CVP analysis tends to focus on incremental variable costs. © The McGraw-Hill Companies. Determining how to treat joint or common costs. Chapter 13 409 . but fixed costs must also be managed and controlled.13–47.

.

expansion of plant capacity). A differential cost is one that will change with a given decision. *CPA adapted 14–5. Inc. or if competitors are able to sell the product below a company's cost. The fixed costs of the additional bus would be differential. competitors. 14–4. For example. 14–7. The three major influences on pricing are customers. However. Long-run decisions affect operations for greater than one year (for example. fixed costs often remain unchanged from the status quo to the alternative).* a. (10 min. Strictly speaking. The disposal of a fixed asset may result in a tax based on the difference between the sales proceeds and the undepreciated sunk cost. © The McGraw-Hill Companies. (5) The differential cost of producing the order.) Multiple Choice. Fixed costs are differential if capacity is changed or in other cases when fixed costs can be eliminated. sunk costs can determine the amounts of certain differential costs. the decision to accept a special order). The full cost of a product is the sum of all fixed and variable costs of manufacturing and selling a unit. 14–6. Chapter 14 411 . A sunk cost has taken place in the past and cannot be changed. If customers are not willing to pay a price above the company's cost.. For example. Short-run decisions affect operations within one year (for example. Full cost is not always appropriate for making decisions—especially short-run decisions. and costs..Chapter 14 Differential Cost and Revenue Analysis Solutions to Review Questions 14–1. Many contracts are based on sunk costs as well. (2) Depreciation. federal income taxes are based on historical (sunk) costs. then using cost to set prices may result in low sales and unprofitable product lines. Decisions may have contract implications that arise with changes in plans. a transportation authority might decide that they need to add another bus to a heavily used route. 14–2. 1997 Solutions Manual. sunk costs can never be differential costs. b. 14–3.e. Fixed costs are often irrelevant for short-run decisions (i.

14–10. defense contracts. in the long-run all costs must be covered or management would not reinvest in the same type of assets.. 14–9. However. Cost-plus pricing is most likely to be used for unique products where no market price information exists— areas like construction jobs. 14–12. mileage-related maintenance. Solutions to Critical Analysis and Discussion Questions 14–11. For example. there are opportunity costs that may be differential for a certain decision. 1997 412 Cost Accounting. 14–13. lube and oil Parking and tolls. a “below cost” sale may result in a net increase in income so long as the revenues cover the differential costs. Target price is a price set by management based on customers’ perceived value for the product and the price competitors charge. Target cost is the target price minus some desired profit margin. Develop a product that satisfies the needs of potential customers. Derive a target cost by subtracting the desired profit margin from the target price. Variable costs are usually relevant when talking about changes in production volumes. In addition. Choose a target price based on consumers’ perceived value of the product and the prices competitors charge. if the change in production volume extends beyond the “relevant range. In some cases there may be no change in variable costs. There are four steps to developing target prices and target costs: 1. but the fixed costs of the equipment would approximately double. the number of copies produced would be unchanged. 4. In the short-run. Managers estimate revenues and costs throughout the product’s life cycle to make pricing decisions. from a short-run perspective so long as the sale does not affect other output prices or normal sales volume. However. The product life cycle covers the time from initial research and development to the time at which support to the customer is withdrawn.14–8. if a company were to add a second copier in the office workroom to expedite copying. 5/e . Inc. sales revenues need only cover the differential costs of production and sale. Perform value engineering to achieve target costs. if any Car wash if needed due to the trip Risk of casualties that vary with mileage Other costs that vary with mileage © The McGraw-Hill Companies. If the company must continually sell below the full cost of production then they will most likely get out of that particular business when it comes time to replace those facilities.” some fixed costs may also be differential. and custom orders. Variable costs: Fuel Wear and tear related to miles driven such as tires. 2. So. 3.

The costs that vary with the number of cars do not vary with mileage. salaries. other nonfinancial factors must be considered in deciding whether to drop these customers: Will the company’s reputation be tarnished? Will these customers be profitable in the future? © The McGraw-Hill Companies. Chapter 14 413 . etc. For example. it has the cost information necessary to use a cost-plus costing approach. Since market prices are typically not available for custom orders.. Activity-based costing may actually provide better cost information than costing systems that allocate indirect costs based on one volume-based cost driver. how will fixed costs (rent. The costs in 14-13 are those required to operate the car for an additional few miles.) If overall company profits do not increase by dropping these customers. Of course. First. 14–17. The costs in 14. insurance. there will be some level of arbitrariness to the allocation. 14–15. this project will be difficult to carry out.14–14. there is the possibility that if you buy a new car you will be asked to drive your friends around more often than otherwise. many companies use cost-plus pricing. Activity-based costing provides more detailed cost data that might lead to more informed decision making regarding prices. Inc. Differential costs: Cost of the car Forgone interest income on funds paid for the car Interest on debt on the car Insurance Maintenance that is time-related License and taxes These costs are different than the costs in 14-13. The most difficult part of this task will likely be assigning indirect costs to each customer. Since this company uses activity-based costing. if the customers are dropped will overall company profits increase? (The amount of indirect costs allocated to each customer that will not necessarily be eliminated by dropping these customers will be the primary factor in answering this question. 14–16. they should be retained.14 vary with the number of cars and not with the mileage driven. if the accounting system does not easily track revenues and direct costs by customer. Next. 1997 Solutions Manual. Also.) be allocated to each customer? Whatever the allocation base.

..Solutions to Exercises 14–18...500 1....500 2...500 2...... (15 min.000 original cost is sunk..000 Difference $3..... 1997 414 Cost Accounting...... Alternative presentation: Status Quo (Scrap Sale) Revenue ....... It is optimal to retool the binding machines...500 –0– $1........... Less: Cost to remachine............... Opportunity cost of scrap sale . Cost to remachine......................500 $ 500 Revenue ... 5/e . $1.... © The McGraw-Hill Companies... $4.............500 (higher) $ 500 (higher) The $10.........................) Using differential analysis: Peterson Publishing Machinery... Inc..........500 Alternative (Remachining) $4...500 $2.... Contribution from remachining...000 (higher) 2....... Contribution ..

050.400.. Operating profit ..400....200.000 © The McGraw-Hill Companies..400.000 3.000. a $8....000 (higher) –0– 200....14–19.....000............00 per unit x 50...............000 $1....000 = $9... (25 min.000 400.........200.. $13..000 $16 x $6..000 Units $650.......000 4...000 3...000 450.. Inc.000 – $2.000 Units $8...000..00 unit $6......00 50. bNo additional marketing costs according to the exercise....000 400.650.000 = 9.000.000 4....000 Difference $650.....000 4..000 = $450.800.000 – $2..000 Contribution to operating profit $4.00 Variable costs: Manufacturing costs: $16 x $6.000 $1.400.000 (higher) 450.000 $200...) Special orders: Torous Company..000 3.. Per Unit Revenues . Status Quo 400. 1997 Solutions Manual.800.000 additional cost. Variable costs: Manufacturinga ..... Fixed costs ...600.000........ Chapter 14 415 . Marketingb .000 Units Alternative 450...... Alternative presentation.000 (higher) Revenues ...... Contribution margin ..000 $9....000 (higher) –0– $200..00 $6....

....) Special orders: Pralina Products Company.000 units of output the fixed portion of factory overhead is $1.000 units of output the fixed portion of factory overhead is $2. $1... 1997 416 Cost Accounting....50 1..60 per unit.000 factory overhead – ($1. Cost per unit .....000) $96.000/100. In this instance the fixed component of factory overhead may be estimated using the following reasoning..000 units ...000 = Change in output (160.. the $..000 factory overhead – ($1..00 $7.000/100.00 $3. Thus.50 per unit ($240..000 units)...000 ÷ 160. (40 min...... The computations for costs per unit follow: Cost per Unit 100..60 x 100.000 ÷ 100.000 Units 160...000) 60.000/100.000 – 100.000 units ...10 $6.50 $1... $240... $240.10 The reason for the difference in average unit cost of factory overhead probably was because some of the overhead was fixed within the given levels of output.000 fixed factory overhead At 100..... Change in cost ($496.000/160. Inc...50 1.000 units . *CPA adapted © The McGraw-Hill Companies..000/160.000 units).60 If variable factory overhead is incurred at $1... 5/e ..000 Variable costs per unit = $1..* a.....000/160..000 – $400.14–20.90 per unit decrease in average unit cost apparently results from spreading the fixed costs over an increased number of units of production.. And at 160. Factory overhead: $400.000 fixed factory overhead or $496..60 x 160.000 units) variable overhead = $240... Direct labor: $150..000 units .000 Units of Output of Output Direct material: $150.....000 units .50 4..000 units) variable overhead = $240..000 units ...40 per unit ($240. the amount of fixed costs would be computed as follows: $400... $496.. The difference in unit cost was caused by the difference in average unit cost of factory overhead...

.000 Increase in profits .. Yes..... 90.... Variable manufacturing costs ... 1997 Solutions Manual.................50 20... (20 min. 96........000 © The McGraw-Hill Companies........ Variable marketing costs .................000 30....... Using differential analysis...14–20. Per Unit $1.......) Differential costs: Pricing decisions: Lucky Locks.. Inc......50 $4.. $ 84......000 40.........00 2....... Chapter 14 417 .000 Direct labor ........... Required revenue...... there will be an increase in profits as follows: Increase in revenue ......000 14–21..00 1.........000 $90.............................000 Increase in costs: Direct materials . Profit target...... the order should be accepted............. (continued) b.................... 90.....000 Units $20. $360......................000 Factory overhead (probably variable) .

..... © The McGraw-Hill Companies....000 5.......... Total variable cost .......00 per quart = (20..14–22..... 1997 418 Cost Accounting..... Less variable costs: Materials .....000 $ 5...000 25..000 quarts x $3...200 Difference $900 (higher) 400 200 100 700 200 –0– $200 (higher) (higher) (higher) (higher) (higher) (higher) (higher) Sales revenue .... (30 min..200 5..900 = 20.75 per quart.......) a........... $60...200 20. Operating profit. Inc.... which would just cover the variable costs of the ice cream.............900b 20......000 20..700 25.........400 10.000 10.............000 b$60.. Contribution margin . Variable overhead............... The lowest price the ice cream could be sold without reducing profits is $1.......400 quarts $60..... Pricing decisions: Ben & Jerry’s.....100 35....00 per quart) + (400 quarts x $2.....000 quarts x $3..25 per quart) b......000 Operating profits would be higher with the additional order by $200...................000 $ 5....... a$60. Labor..000a 20.000 35. Status Quo 20. Less fixed costs . 5/e .......000 quarts Alternative 20.......

...000 @ $19. (15 min. © The McGraw-Hill Companies. Salaries.... The total contribution is greater if the lower volume is accepted... $305... Inc........000 @ $50 .000 (higher) $ 30...... Operating costs Cost of services (variable) ....250...000 $275.......000..) Differential Customer Analysis: Hillson & Brady........... Variable costs 10.......000 @ $19...000 (lower) a$7......... b.14–23....... Total operating costs.. and general administration (fixed) ...........) Cost analysis pricing decisions: Easton.. (25 min.000 Alternative $25 Price Difference $1.......50a .. but the loss is less if Easton holds the price at $50 per case....50 + $10 + (..... rent.....000 $750... Contribution margin ..000 (higher) 975........ Status Quo $50 Price Sales revenue 10. $580 517 50 567 $ 13 H&B should not drop the Super 6 account in the short run as profits would drop by $18........000 780.... Inc. Operating profits.............. a......50 . $500. Both alternatives result in a net loss.000 @ $25 ... 195.......25 x $8) = $19....... 14–24.......000 50.. Chapter 14 419 .........50 per unit.............. Status Quo Total Alternative Drop Super 6 $350 305 50 355 $ (5) Difference $230 (lower) 212 (lower) 0 212 (lower) $ 18 (lower) Revenues (fees charged) . 1997 Solutions Manual.......000 50.....

....... Operating costs Cost of services (variable) ... rent.....320 2...... Status Quo Total Alternative Drop Hospital $1... 14–26...................................... 1997 420 Cost Accounting....068 200 2......14–25..... (15 min............ Total operating costs ........ $2.. Status Quo Total Alternative Drop Hospital $185 153 25 178 $7 Difference $105 (lower) 106 (lower) 0 106 (lower) $ 1 (higher) Revenues (fees charged) .. Salaries....... Operating profits ..............400 1.... rent............. Operating costs Cost of services (variable) ...000. and general administration (fixed) ....000..........268 $ 52 How Clean should not drop the Hospital account in the short run as profits would drop by $72.. $290 259 25 284 $ 6 Wee One’s should drop the Hospital account in the short run as profits would increase by $1.............. Inc..... Salaries........... (15 min.420 $ (20) Difference $920 (lower) 848 (lower) 0 848 (lower) $ 72 (lower) Revenues (fees charged) ......) Differential Customer Analysis: How Clean.......... 5/e ..................... Operating profits .. © The McGraw-Hill Companies......... and general administration (fixed) ...) Differential Customer Analysis: Wee One’s..............220 200 1........ Total operating costs ......

200 240 0 $ 240 (higher) (higher) (higher) (higher) Revenues .240 7......000b Variable Costs ... Inc... a$41...............00 a foot...000 Fixed costs .. (15 min.2 The highest acceptable manufacturing costs for which Brown’s would be willing to produce the wheels is $5... $40......440 b$40...000 Operating profit .000 c$31....000 = (2..200c 10.) Target Costing and Pricing: Brown’s Wheels.....00 1... Price = Highest acceptable costs Costs + 10% $11 = $10...00 1....00 = $5......14–27... 30.00 14–29................ 7.......000d Contribution Margin .....000 jerseys × $20) = (2.....000 jerseys × $20) + (80 jerseys × $18) = (2. $ 3.....440a 31..... Price = Highest acceptable costs Costs + 20% $6. (10 min.000 jerseys x ($12 + $3) 14–28..440 1...... Status Quo Alternative $41...) Special Order: Sam’s Sport Shop..1 The highest acceptable manufacturing costs for which Durham would be willing to produce the lines is $10...... (10 min.000 $ 3....... 1997 Solutions Manual... Chapter 14 421 ... © The McGraw-Hill Companies.....240 Difference $1........000 Sam’s should accept the order because it will increase profits by $240 for the period........200 d$30..000 jerseys + 80 jerseys) ($12 + $3) = 2.......... 10.......) Target Costing and Pricing: Durham Industries..

....... future growth in demand... 14-31..........000 Contribution margin .... 1997 422 Cost Accounting.000 600. Cost XII (1 + ...........40) + $1........000).. could change the decision if included.000 Alternative Solution: ($2..000 = (300. $1.... b..60) 300... No...000 $ (240.) Special order: Gilbert Company. so Marklee would not make an acceptable profit.. Price = $46 Price = $46 = $41..000b 360... $ (180. Status Quo Revenue .. 420. However other factors...) Target Costing and Pricing: Marklee Industries......10) = Cost-plus price $42(1.20 b... 780..920..560. 600..60) + $780..........000 tubes × $2....82.. (20 min.000 Operating profit. etc..000) Difference $720..... 5/e . a...920.000 tubes × $2.000 60.000 tubes = $(60..000 (higher) (higher) (lower) (lower) a$1........ Disagree....... a...560......000 b$1. The cost of $42 per unit is higher than the highest acceptable cost of $41.... Inc...........000 Variable costs ..200..000 = (300.82 Highest cost acceptable Cost + 10% 1... (20 min... therefore losses will be increased by $60...40 – $2.200...1 c.Solutions to Problems 14-30. © The McGraw-Hill Companies......000 Fixed costs .000a 1..000) Alternative $1..10) = $46..000 780.... The differential costs of the order are greater than the incremental revenues.000 0 $ 60....... such as excess capacity..000..

............. Special order hrs 2..........000a 528....250 hrs = Hours available to XBP400 production 9...000 = (180 units × $3.000 *Total variable costs per unit....000b 440..750 Current sales hrs / 37......000 hrs – BP041 Labor hrs ($600/$20 = 30 hrs each......000 0 $ 14..200 = 200 units × $2....250 hours to produce 60 units Capacity 21..... a$882.......000e 150..................000 Increase in profits .000 hrs....000 b$780....000 14.000 c$528.... Inc.... Direct labor = XBP400 Labor Hours per unit Wage Rate $750 = 37............500 hours to produce 40 units..5 Hours per unit = 180 units To accept the special order Marshall’s would have to cut back current sales of XBP400 to 180 units due to capacity constraints..... 1997 Solutions Manual....000) = 200 units × $3..000c 354.000 × 40 units) ... Capacity would not need to be expanded to accept the order..... 37..............000 XBP400 Alternative $882...5 hours per unit $20 37...900) + (60 units × $3.000 Difference $102.. Variable costs........000d 340..200 = $750 × 200 units © The McGraw-Hill Companies......000 hrs Hours available for current sales 6. b..200* × 40 units) ..000 150..) Special Order: Marshall’s Electronics.....14-32....900 = (180 units + 60 units) x $2... $ 32........ Incremental Revenues ($3... a...000 $204. Operating profits....5 hours × 40 units = 1.. XBP400 Status Quo Revenues .000 Differential costs ($2.000 e$150.. Inc...... $120..750 hrs XBP400 hrs – 9..000 hrs 6... Contribution margin .... Chapter 14 423 ....000 $190.5 hours × 60 units = 2..000 88.....000 (higher) (higher) (higher) (higher) $780.. Fixed costs ...... = 30 hrs × 400 units =) 12......000 d$440. (50 min..... 88.......

$78.500 If the special order is accepted and current sales maintained. Differential revenues = $3.. the differential costs for the 20 units would be: DLH = 20 units × 37..000 c. Inc.500 Total increase in operating profits for 20 units over capacity . (continued) b. (continued) Alternative Solution: Special order increase in profits = (60 units × $3.500 ($204.000 VO = 20 units × $900(1....... Therefore.200) Total increase in operating profits = $48..500 DM = 20 units × $550 = 11....5) = 27..500)..000 $14.. accepting the special order plus current production is 20 units over current capacity. $17....000 = $34.000 Differential revenues ...000 Differential costs .000 Total differential costs of 20 units over capacity $60.. So the 20 units over capacity would be sold at $3.. 60. © The McGraw-Hill Companies........ 5/e ...........900) – (20 units × $2... the total operating profit would be $221.000) – (60 units × $2.. 1997 424 Cost Accounting.........5 hrs × $30 = $22......200) Lost profits due to cutback of current sales (20 units × $3.500 In (b) we calculated the alternative based on accepting the special order and cutting back current sales at $3.... A total increase of $31..900 per unit..900 per unit..500 ($14.. As calculated in (b).000 + $17...14–32....900 × 20 units = $78.000 + $17.......500)....

... 640....................800 $ (9......00 b$27.000 $110.000 does not exceed the lost contribution margin (for 2.......... 360....000a) ...000 + $160... Golden Company should not take the special order because overall company profits would fall from $250. profits would decrease by $9..800 – $8...... Decrease in contribution from special order .........50 2....78 $ (... © The McGraw-Hill Companies...800 (= $17............75)(3.000)................ 1...000 Robes Sales revenue .......60) c$7.000 17....000).. ($360.000 to $240......000 units x ($25.. costs ..000 $ 240.50 – $3...000 – $25...98) x .000 –0– Operating profit .800.....200 $ 9..........000 Variable marketing costs............. a$3....000 units × $3..000 = 10.............800 Fixed costs ($350.......200 = 2.............200c) ....800 a$50.60)] .. Thus......000 ($1... Marketing ... Inc.........000 + $27.................000 units x (....... Contribution on lost sales [2.800 19......70a 1... Differential Costs 10..00 – $12...75 = $2...000 + $290.250.....000 100.......... The contribution margin from the special order of $8..500...........800) 12........ $ 250.......610. a..000 125. $2. Manufacturing ..... $2.70 Alternative presentation: Status Quo Alternative Difference (higher) (higher) (higher) Revenue .350....000 27. 1...60 Per Unit $16 $160...........000 units in lost sales) of $17........... 1997 Solutions Manual....500.14–33... Chapter 14 425 .......000 379................000 ($2........ (30 min...000 (lower) = 2..000 – $50..200.000 units x $25.) Special order costs: Golden Company..............250.000 b – $7...........000 + $125..........000 640..... Less: Variable costs: .....000) if the special order is accepted..........000 Variable mfg.........60 b..

.....200 d.. $15.000 – $90.000 Direct labor ...800 (= $5..... $ 1...........000 Direct materials . 5. (1) $13... 5/e ... (3) 10% = 25% x 40% (Total overhead application rate times variable percentage from a) c....... a.. (2) 40% = ($150.........14–34.000 Variable overhead . 8.. 800 (10% x direct labor) Impact on profit..) Pricing based on costs—multiple choice: Cruizers Unlimited... 1997 426 Cost Accounting..000 + $800) © The McGraw-Hill Companies.. (4) $1.000 + $8.........000 b...... (20 min..000) ÷ $150.... Inc.....200 Differential costs associated with accepting the order are: Sales price......

................................................ Power might be dependent upon the particular requirements of the special units. © The McGraw-Hill Companies............450 Other factors must be considered such as the long-run consequences of failing to satisfy standard parts customers... (40 min....60)....14–35........ $57.. It is assumed here that the same amount of power will be used in each case....... Ro.500 Differential revenue............. On the basis of the data in the question it would pay Jackson to accept the order......500 Other .. and the importance of this valued customer................................................... 1997 Solutions Manual.000 units × $3......) Special order: R........000 $58.. A.... the reliability of the cost estimates.................... $ 4....000 Costs reduced for standard products Material ....050 *Depreciation....500 49......050 $ 8....................... $70.950 Total Differential Costs .. 2... and heat and light are not affected by the order.... $49.. rent.......... 450 $ 8....000 Labor... 12.. 36.. 4.. $20.....000 Special overhead ..... aDifferential cost of the order is: Costs incurred to fill order* Material (10......000 Labor (10..000 units × $7) ... Inc......... Differential costsa ....... New sales (10....000 Less: standard sales ...... Net advantage to special units....................... Chapter 14 427 .000 units × $2) .....

25 2.000 units b.000 units Fixed costs per unit with the special order ($10. d.000 + $8.000 units Decrease as a result of special order $8.25 e.000 = $8 per unit × 1.000 (higher) 6.00 $0. (4) Decrease $0. Inc.000 = ($4 + $2) × 1.. (4) $8. (2) $6. Differential revenues (from (a)) Differential costs (from (b)) Increase in operating profit © The McGraw-Hill Companies.14–36.000 (higher) $2.000) ÷ 8. Fixed costs per unit without the special order ($10.000) ÷ 9. a.) Special order: Multiple choice—Aggie Enterprises.25. (1) $0 Total fixed costs do not change as a result of the special order. (40 min.000 (higher) $2. 1997 428 Cost Accounting.000 + $8. Inc. (1) Increase. 5/e .000 units c.

. and that this allocation procedure may make such costs appear to be variable.... many students treat the $120 per unit fixed manufacturing overhead and $140 per unit fixed marketing costs as though they were variable costs.... as can Question d if you postulate a scrap value for the obsolete hoists...... a. mfg.000 1... margin ..... costs . 420.. 360..220.000 Fixed mktg.....050.000 note equality © The McGraw-Hill Companies....000 25..14–37..... Chapter 14 429 ... (90 min. Indeed. It is worthwhile to emphasize to students that fixed costs may be “unitized” (i... 1... Other factors. costs .000 $ 270... Before After Price Price Reduction Reduction Impact Price ..000 175.000 1....000 $ 650 3..e..050..) Comprehensive differential costing problem: Garden Bay...........000 360.000 decrease Revenue ..... could also affect the decision. allocated to individual units of product) for certain purposes. Inc.... despite the fact that they are clearly labeled “fixed... $ 390...... 740 3.000 Cont.... Inc....000 150.000 decrease — — $120... $2.........000 Var....... 900. mktg.. costs ..” This problem can be used to introduce the concept of opportunity cost... 150......275.000 $2. such as the reduction of available capacity and the impact on market share.. Recommendation: Lowering prices reduces operating profit......000 Income .000 Fixed mfg... $ Quantity ........500 $ 55......170..... Question b can be used in this way. costs ..000 420...000 Var...000 120. This problem gives students a good understanding of the fixed/variable cost dichotomy. 1997 Solutions Manual...

000 1. or get no reimbursement for fixed manufacturing costs. Contract Revenue Var.000 $680.200.000 1.000 100.000 decrease decrease revenue 500 x $300 + 1/8($360. (continued) b.590.960.460.14–37.000 Impact $125. which would reduce revenue to $200.365.000 360. Mktg.000 1.000 — $95. Recommendation: Don’t accept contract. Costs Contribution Margin Fixed Mfg.560.000 = $245.000 — 25.000 420.000) + $50.000 units)..000a 150.050.000.200. Costs Fixed Mktg. Impact: Without Govt.000 175.000 175.000 1.000 $1.835. 1997 .000.000 1.000 — — $100. Alternatives are to get 1/6 x $360. which would increase revenue from $245.000 to $260. Costs Income aGovernment With Government Contract Regular Government Total $2. 430 © The McGraw-Hill Companies.000 420.000. Costs Var. Inc. assuming the government’s “share” of March fixed manufacturing costs is 12.000 $2.000 $2.000 $780.000 fixed manufacturing costs.5% (= 500 units ÷ 4.000 360. Mfg.000 200.000 $245.

....... the most general answer to this question is that the price should exceed the sum of 1) the differential marketing costs and 2) the potential scrap proceeds...000/1.. costs (1/8 x $360.. 1997 Solutions Manual........................ The manufacturing costs are sunk... $(100....000 gained Gain ......... 95..... At this price per unit. Minimum price = variable mfg.........000) c.... Some students solve for this price using the break-even formula: F = X P–V $4.......000) lost Profit from government contract: Fixed fee . those differential costs are apparently the $50 per unit variable marketing costs...000 gained Differential profit if contract accepted.....000 = $379.14–37.....000 $379 = 1..... 500 x $390 = $(195..000). since the hoists are to be sold through regular channels..... the $379.... therefore......000 of differential costs caused by the 1...... (continued) A shorter approach to Requirement b (but harder for some students to understand) is this: Forgone contribution (equals forgone income) on regular sales if government contract is accepted.000P = P d... Inc....... (If the instructor wishes to reinforce the concept of opportunity cost.. 45..000 P – $375 $4........ costs + shipping costs + order costs = $300 + $75 + $4......000 unit order will just be recovered. 50......000 gained Share of fixed mfg. In this case...................000 = 1......... Chapter 14 431 . thus the minimum price is $50....) © The McGraw-Hill Companies... any price in excess of the differential costs of selling the hoists will add to income... (continued) b...........000P – $375..................000 $379......000 units = 1. which are an opportunity cost of selling the hoists rather than scrapping them..

.

Corner points are important for analytical purposes because the optimal production schedule will be located at one or more of these corner points. This is also called a shadow price. Inc. when multiple products are manufactured. The three factors are: 1) Throughput contribution: Sales dollars minus direct materials and other variable costs. The opportunity cost of a constraint is the cost of not having additional availability of the constrained resources. The feasible production region is the area which contains all possible combinations of production outputs. in fact. Unitizing the fixed costs results in treating them as though they are variable costs when. 2) Investments: Inventories. Profit will be maximized if the company produces the output which gives the greatest contribution per unit of scarce resource. 15–2. 15–6. 1997 Solutions Manual. buildings. Unit gross margins are typically computed with an allocation of fixed costs. The production schedule which management chooses must come from the feasible production region. Total fixed costs generally will not change with a change in volume within the relevant range. © The McGraw-Hill Companies. 3) Operating costs: All operating costs other than direct materials and other variable costs. Chapter 15 433 . 15–4. and other assets used to generate throughput contribution. 15–5.. the relative contribution becomes the criterion for selecting the optimal product mix. they are not.Chapter 15 Using Differential Analysis for Production Decisions Solutions to Review Questions 15–1. equipment. Fixed costs allocations can distort the relative contributions and result in a suboptimal decision. This will necessitate analyzing the contribution per unit of scarce resource from each product which the company manufactures. Moreover. Management will want to maximize the profit obtainable from the scarce resource. It is bounded by the constraints imposed on production possibilities. 15–3.

Most who subscribe to the theory of constraints focus on increasing throughput contribution. and decreasing operating expenses. Otherwise management would want to maximize the contribution per unit of scarce resource. 15–10. 5/e . 15–8. 15–9. Profits can be increased by decreasing investments. Performance can be improved at the bottleneck by increasing capacity or shifting resources from nonbottleneck areas to the bottleneck. then those fixed costs might be relevant in a multi-product setting. Fixed costs are relevant anytime they change with the product-mix decision.Solutions to Critical Analysis and Discussion Questions 15–7. This approach will maximize profits only if there are no constraints on production or sales. For example. increasing throughput. Inc. © The McGraw-Hill Companies. or if both products use all scarce resources at an equal rate. 1997 434 Cost Accounting.. if there are fixed costs that can be eliminated with the elimination of one or more of the individual products. They would be relevant if the contribution from production of any one product was insufficient to cover the fixed costs that could be eliminated.

50 Direct labor . or $160.....000 on 20.000 = $60......................... 160....000 units........ Trice Company’s offer is more expensive than making the part.. 300..000/20.....000 savings could not be achieved.....000 = $60.. 6.......... 120..000 70..000 Labor . Differential costs to make: Direct materials ...Solutions to Exercises 15–11.000 – $100.. (20 min...000 Alternative presentation........00 (= $100...000 Difference $600.....000 Variable overhead ... 15...000b $660...... b($8 – $5) × 20. $ –0– Materials....... 5....000 Fixed overhead applied ...... $650.......) Make-or-buy decisions: Dabelles Company... 70.50 This is less than the $30 purchase price from Trice Company......000 aBased Alternative $600.... Status Quoa Trice’s offer ..000 100....000 120. 1997 Solutions Manual.....000 (higher) (lower) (lower) (lower) (lower) (higher) 60...00 Avoidable fixed overhead......... $ 3.....000 300...000 $ 10............000..................000 Total costs... Chapter 15 435 ....00 Variable overhead........ The $25.... © The McGraw-Hill Companies....000 units) $29.... Inc........... In fact.......

20.000 220..000 × $44) ....000 –0– $240.... Net mfg..000 $230. Inc....000b 40.000 200....) Make-or-buy decisions: Collins........................... Inc.000 units × $21 It costs $30......000 units × $4 40% × 20.) Make-or-buy decisions: Casio Company...... Fixed overhead ......50 20.000 $420. 1997 436 Cost Accounting.......000 b5.......000 Cost to buy.... 20... Total cost to make ......... direct labor and variable overhead [5.. Total manufacturing costs .000 $390....000a 240..........000 15–13...... a5.... Cost to purchase (5..000 40...... Differential Cost to Make Direct materials ......000 $ –0– 40..000 units × $10...000 230.....000 –0– 240. Variable overhead........... It is less costly to buy..000 (saved) (saved) (saved) (earned) (saved) (incurred) (net saved) x $12 = $60.. cost with cont’n ......000 20. Make Part # 10541 Direct materials.000 $180.... Fixed overhead ..... 5/e . Total.........000 Buy Part #10541 Difference $180..000 30......000 60.........000 x $12 x 2/3 = $40........000 units × $5 $ 60...000 220..000 units × $3 20. © The McGraw-Hill Companies. (20 min.. Contribution from RAC..................... Direct labor ....000 30....000 210...........000 less to make the part.......000 10.....000 × ($6 + $22 + $8)]......15–12.. (25 min..000 80...000 $ 10..............

... (10 min.....) Make or buy with opportunity costs: Columbus.....500 sails is $690..000 [($560 × 1... Status Quo (Buy) Cost to buy ....................................000 (= $460 × 1.......... $400 Cost of goods sold (variable) .......500 sails) – $160.. No. The cost of buying the sails and renting out the space is $680......... (20 min.... $560 –0– –0– –0– $560 Alternative (Make) $–0– 180 160 120 $460 Difference (Buy–Make) $560 180 160 120 $100 (higher) (lower) (lower) (lower) (higher) 15–15..........15–14. 18 Salaries... 36 $ 6 Best Alternative 1 $280 205 75 18 40 30 $(13) Worst Alternative 2 $435 325 110 32 40 34 $ 4 © The McGraw-Hill Companies........ The cost of making 1....500 sails).. 300 Contribution margin .......... 15–16.....000]......) Dropping product lines: Campus Bookstore..) Make or buy decisions: Columbus.. Direct material ....... Chapter 15 437 ..... increase book sales Status Quo Sales revenue . Campus Bookstore Comparison of Three Alternatives (in thousands) Alternative 1: Drop general merchandise Alternative 2: Drop general merchandise... 40 Marketing and administrative................. Variable OH. He should continue to buy the sails...... (15 min...... Sam could save $100 per sail by making the sails rather than buying them...... Direct labor .................. Inc......... 1997 Solutions Manual.......... 100 Less fixed costs Rent .

800 (35..140 Status Quo Revenue .....600 × .200 (201...400 (5.... Inc..340) $ 3.... 5/e .. Less Fixed Costs .. Drop CrossCountry Skis $167..200 Difference (all lower under the alternative) $85... Operating Profit. a$30....85 © The McGraw-Hill Companies..) Dropping product lines: Sierra Ski Company.. 1997 438 Cost Accounting.600 (124..400) $ 51... (30 min...260 = $35..200) $ 43.600) $ 16. $253..15–17..060 Sierra Ski Company should keep cross-country skis because the loss of its contribution margin is greater than the reduction in fixed costs..260) $ 13... Less Variable Costs .200) $ 8..400 a (30. Contribution Margin ..600 (77...

900.000 c $ 190.000 165..000 best a $1.000 + $350.. (20 min.000 + $300..... increase tax Status Quo Sales revenue ......2 × $60.000 + $ 80.....000 e $ 650....000 = (1...000 Alternative 1 $1..000) + $350.000d 650..000 + $500...45 × $500.000 + $600.... 500.000 f $ 165.000f $ 285.......000 – (50% × $50..000g 785..000 177...000b Contribution margin ..000) + $80. Chapter 15 439 .000 I $ 177.000 + $600.000e 450..000 + $350.400.....45 × $300. Status quo: Keep all three services...........000 = $250... tax. audit...000 worst Alternative 2 $1.....000) © The McGraw-Hill Companies.000h 540. 1997 Solutions Manual... $1.......000 + (.000 = $300..000 = (1.000a Variable costs. and consulting Alternative 1: Drop consulting Alternative 2: Drop consulting...000) g $1...325.400.5 × $50..000 = $500.15–18.000 Fixed costs .000) + $600..100......000 d $1..000i $ 363...000 = (1.. 190...325...000c Operating profit ...000 + $ 60.000 900. $ 310........000 = $ 50.) Dropping product lines: Cliff & Bassman.000 b$ = $300...000 = $190.100.. Inc.000 h $ 785..

...50 5.....50 $16..50 Direct labor .......00 0........ Inc. Inc. 0..... B $20 3.) The role of accounting data: Burnett.50 3. 2.50 1....... 2...50 Variable marketing . 1997 440 Cost Accounting.....25 Contribution ...... 1....... Compute the contribution from each product.25 $ 8.50 3...50 Total variable costs .50B + $8......50 Variable overhead .00 3...50 A Selling price ..$15 Manufacturing costs: Materials....00 3.50 $11...........15–19... 5/e ...75 Maximize C $25 3....75 Total Contribution Margin = $4...50 $ 8.75 0. 3. $10.75C © The McGraw-Hill Companies....25 Variable administrative ...75A + $8...... $ 4.... (15 min..

500 $ 4. Contribution per Unit of Machining Time Necklaces $20 = $40.3 Maximum Profit Obtainable Contribution Less fixed costs Profit Contribution Less fixed costs Profit Contribution Less fixed costs Profit $40 x 120 = $ 4.33 x 120 = $ 4.500 Bracelets Rings The maximum profit obtainable is $4. 1997 Solutions Manual./.200 2.) The role of accounting data: Quicksilver Corporation.700.25 $10 = $33. © The McGraw-Hill Companies.00 0.300 b.500 $ 1.300 $60 x 120 = $ 7. Chapter 15 441 .800 2.500 = $2. (30 min.000 2.. a.5 per hour = 240 units Profit = (240 units x $20/unit) – $2.15–20.500 $ 2.5 $15 = $60. Inc. Necklace production = 120 hrs.33 0. which is obtained by producing and selling bracelets exclusively.700 $33.00 0.

Operating profit would decrease by $50.000 (as shown below).000 (as shown below). Inc. Operating profit would increase by $10. Yes.000 (20. Differential revenues ($100 × 200 units) Differential costs: Fixed Variable ($40 × 200 units) Net differential operating profit $20..) Theory of constraints: Racketeer. 5/e . Inc.) Theory of constraints: Bud’s Bakery. (30 min. 1997 442 Cost Accounting. a. No.000 (10. Yes. No.000 b.000) (8.000) $ (8.000) (8. Differential revenues ($9 × 10) Differential costs: Fixed Variable ($4 × 10) Net differential operating profit $90 (40) (40) $ 10 © The McGraw-Hill Companies. Differential revenues ($100 × 200) Differential costs: Fixed Variable ($40 × 200) Net differential operating profit (loss) $20. a. Differential revenues ($9 × 10 units) Differential costs: Fixed Variable ($4 × 10 units) Net differential operating profit (loss) $90 (100) (40) $ (50) b.000) $ 2.000) 15–22. (30 min.15–21. Operating profit would decrease by $8. Operating profit would increase by $2.

15–23. (15 min.)

Linear programming: Classic Corporation.

Maximize: Total Contribution Margin = 3 Small + 4 Large Subject to: Machining-hours Polishing-hours = 1 Small + 4 Large ≤ 100 = 2 Small + 3 Large ≤ 90

15–24. (15 min.)

Linear programming: Snead Company.

a. The answer is (4). For process 1 the maximum available hours are 1,000. Therefore, the constraint is: 2 Zeta + 1 Beta ≤ 1,000 hours b. The answer is (3). For Beta, the labor constraint limits production to 400 units. Therefore, the constraint is: Beta ≤ 400 c. The answer is (2). Snead wants to maximize total contribution margin. Therefore, the objective function is: Maximize $4.00 Zeta + $5.25 Beta

15–25. (15 min.)

Sensitivity of cost data: Servo Company.

No, they didn’t make the right decision. They included fixed costs which do not differ in the short run. If they had used contribution margin instead of gross margin, they would have had $4 for G1 and $5.50 for G2, therefore they would have decided to produce G2 exclusively.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 15 443

15–26. (60 min.)

Decision whether to add or drop a product: Justa Corporation.

a. The regional market should not be dropped as this market not only covers all the variable costs and separable fixed costs but also gives net market contribution of $65,000 toward the common fixed costs. Sales = $300,000 Variable manufacturing costs = (.6 × $100,000) + (.7 × $100,000) + (.6 × $100,000) = $190,000 Marketing costs = $45,000 Net market contribution = $65,000 (= $300,000 – $190,000 – $45,000) b. Quarterly income statement (in thousands):

Product A
Sales revenue ..................................... Less variable costs: Manufacturing ................................. Marketing ........................................ Total variable cost ....................... Contribution margin ............................ Less fixed costs: Manufacturing ($1,010 – $820) ...... Marketing ($105 – $31) .................. Administrative.................................. Total fixed costs........................... Operating profit ................................... $500 300 15 315 185

Product B
$400 280 8 288 112

Product C
$400 240 8 248 152

Total
$1,300 820 31 851 449 190 74 52 316 $ 133

c. The new product must contribute at least $162,000 (= $152,000 + $10,000) per quarter so as not to leave the company worse off when product C is replaced.

© The McGraw-Hill Companies, Inc., 1997 444 Cost Accounting, 5/e

15–27. (60 min.)

Decision whether to make or buy a product: Hospital Supply, Inc.

a. What price is equivalent to in-house cost of production?

All Production In-house
Total revenue .................................... Total variable manufacturing costs ... Total variable marketing costs .......... Total contribution margin .................. Total fixed manufacturing costs ........ Total fixed marketing costs ............... Payment to contractor ................... Income ....................................... $2,220,000 900,000 150,000 1,170,000 360,000 420,000 — $ 390,000

1,000 Units Contracted
$2,220,000 600,000a 140,000b 1,480,000 252,000c 420,000 (X) $ 808,000– X

$808,000 – X = $390,000 X = $418,000 or $418 per unit maximum purchase price Therefore, a $425 purchase price is not acceptable; it would decrease income by $7,000 [= ($425 – $418) x 1,000 units]. A shorter (but more difficult) approach uses the concept of opportunity costs: Variable manufacturing cost .....................................$300 Variable marketing opportunity cost ($50 – $40) ..... 10 Fixed manufacturing opportunity cost ....................... 108d Equivalent in-house cost...........................................$418 = 2/3 × 3,000 units × $300/unit. = (2,000 units × $50 per unit) + (1,000 units × .8 × $50 per unit) c$252,000 = $360,000 – (.3 × $360,000) d$108 = ($360,000 – $252,000) ÷ 1,000 units
a$600,000 b$140,000

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 15 445

15–27. (continued) b. 3,000 Regular Hoists Produced In-house $2,220,000 900,000 150,000 1,170,000 360,000 420,000 — $ 390,000 Contract 1,000 Regular Hoists; Produce 800 Modified Hoists and 2,000 Regular Hoists Regular (In) Regular (Out) Modified Total $1,480,000 $740,000 $720,000 $2,940,000 600,000 — 440,000 1,040,000 100,000 40,000 80,000 220,000 $ 780,000 $700,000 $200,000 1,680,000 360,000 420,000 — (X) — (X) $ 900,000 – X

Revenue .......................... Var. mfg. costs ................ Mar. mktg. costs .............. Cont. margin ................ Fixed mfg. costs .............. Fixed mktg. costs ............ Payment to contractor ..... Income .....................

Maximum payment = $510,000, or $510 per unit. Now the proposal should be accepted at a price of $425.

446

© The McGraw-Hill Companies, Inc., 1997

15–28. (50 min.)

Analyze alternative products: Ocean Company.

Ocean Company Analysis of Effect of Alternative on Projected Total Operating Profit Alternative: Additional units of Zee (125,000 × 150%) ............. 187,500 Revenue, Zee ($575,000 × 150%) ........................ $862,500 Total variable costs ($150,000 + $80,000) × 150% ........................... 345,000 Contribution margin ............................................... 517,500 Total fixed costs (allocated) .................................. 245,000 Operating profit: Product Zee ....................................................... 272,500 Product Why ...................................................... 25,000 Rental income ....................................................... 157,500 Total ...................................................................... 455,000 Less unallocated total fixed costs, Ex. a ($430,000 – $30,000) ....................................... 400,000 Projected company operating profit ...................... $ 55,000
a

The $155,000 of allocated rent continues to be incurred and is therefore not relevant to the decision. The $30,000 of fixed costs are eliminated.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 15 447

15–29. (45 min.)

Differential costs and CVP analysis: Arcadia Corporation.

a.

Arcadia Corporation Computation of Estimated Profit from Operations after Expansion of Montana Factory Montana factory— Sales ..................................................................... $2,100,000 Fixed costs: Factory............................................................... $336,000 Administration .................................................... 121,000 a Variable costs ....................................................... 672,000 Allocated home office costs................................... 175,000 Total................................................................... 1,304,000 Estimated operating profit ..................................... 796,000 Texas factory—estimated operating profit ................ 540,000 Less home office exp. allocated to Maine factory ..... 100,000 Estimated operating profit ......................................... $1,236,000
a

$672,000 = $8 per unit x

$2,100,000 Revenue $25 Sales price per unit

Arcadia Corporation Computation of Estimated Profit from Operations after Negotiation of Royalty Contract Estimated operating profit: Texas factory................................................................... $ 540,000 Montana factory .............................................................. 410,000 Estimated royalties to be received (30,000 × $4) ............ 120,000 1,070,000 Less home office expense allocated to Maine factory ........ 100,000 Estimated operating profit ................................................... $ 970,000 c. Arcadia Corporation Computation of Estimated Profit from Operations after Shutdown of Maine Factory Estimated operating profit: Texas factory................................................................ $540,000 Montana factory ........................................................... 410,000 950,000 Less home office expense allocated to Maine factory ..... 100,000 Estimated operating profit ................................................ $850,000
© The McGraw-Hill Companies, Inc., 1997 448 Cost Accounting, 5/e

b.

Solutions to Problems
15–30. (40 min.)
7,000

Product Mix–graphic analysis.

6,000

5,000

4,000

3,000

b

c d

2,000

1,000

a

e
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,00012,000 Units − Office Chairs

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 15 449

15–30. (continued)

a b c d e

Kitchen –0– 3,000 3,000b 2,500c –0–

Office –0– –0– 3,000b 4,500c 7,000

Contributiona Margin –0– 24,000 $39,000 $42,500* $35,000

*Optimal Solution
aContribution bSolve

margin = $8 kitchen + $5 office

simultaneously: 3 kitchen + 1 office = 12,000 kitchen = 3,000 3(3,000) + office = 12,000 office = 3,000 units = 7,000 = 12,000 = 12,000 = 5,000 = 2,500 units 7,000 4,500 units

cSolve

simultaneously: kitchen + office 3 kitchen + office 3 kitchen + 7,000 – kitchen 2 kitchen kitchen

2,500 + office = office =

© The McGraw-Hill Companies, Inc., 1997 450 Cost Accounting, 5/e

15–31. (60 min.) a.

Determining optimum product mix: Jackson Enterprises. Bears Cows Dogs
$2,850,000

Total revenuea ...................................................$320,000 $300,000 Less variable manufacturing costs: Direct materialsb ............................................. 30,000 100,000 c.................................................... 160,000 Direct labor 112,000 d ......................................... 40,000 Variable overhead 28,000 e ........................................ 32,000 Variable marketing 30,000 Total costs .................................................. 262,000 270,000 Contribution margin ........................................... $ 58,000 $ 30,000 Total contribution marginf................................... $373,000 g ............................................... Total fixed costs 37,000 Total operating profit .......................................... $336,000
aRevenue:

180,000 1,680,000 420,000 285,000 2,565,000 $ 285,000

Bears $ 300,000 = $15 x 20,000 units Cows $ 320,000 = $32 x 10,000 units Dogs $2,850,000 = $95 x 30,000 units bDirect materials: Bears $ 100,000 = $10 x .5 yards x 20,000 units Cows $ 30,000 = $10 x .3 yards x 10,000 units Dogs $ 180,000 = $10 x .6 yards x 30,000 units cDirect labor: Bears $ 112,000 = $ 8 x .7 hours x 20,000 units Cows $ 160,000 = $ 8 x 2 hours x 10,000 units Dogs $1,680,000 = $ 8 x 7 hours x 30,000 units dVariable overhead: Bears $ 28,000 = $ 2 x .7 hours x 20,000 units Cows $ 40,000 = $ 2 x 2 hours x 10,000 units Dogs $ 420,000 = $ 2 x 7 hours x 30,000 units eVariable marketing: Bears $ 30,000 = 10% x $300,000 revenue Cows $ 32,000 = 10% x $320,000 revenue Dogs $ 285,000 = 10% x $2,850,000 revenue fTotal contribution margin: $373,000 = $30,000 + $58,000 + $285,000 gTotal fixed costs: $ 37,000 = $18,000 + $4,000 + $15,000

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 15 451

15–31. (continued) b. Contribution margin per constrained resource, labor: Bears $2.143 = $30,000/20,000 units/.7 hours Cows $2.9 = $58,000/10,000 units/2 hours Dogs $1.357 = $285,000/30,000 units/7 hours The Cows would be the most profitable product line given the constrained resource, direct labor. c. The most profitable combination is to produce up to the demand of Cows with a contribution of $2.9, and the remaining hours spent on Bears with a contribution of $2.143. 10,000 Cows x 2 hours per Cow = 20,000 hours 10,000 hoursa/.7 hours per Bear = 14,285 Bears Therefore, Farside should produce 10,000 Cows and 14, 285 Bears.
a10,000

hours = 30,000 hours – 20,000 hours.

© The McGraw-Hill Companies, Inc., 1997 452 Cost Accounting, 5/e

15–31. (continued) d.

Bears Total ................................. $214,275 Less variable manufacturing costs: Direct materialsb ........................... 71,425 Direct laborc.................................. 79,996 Variable overheadd....................... 19,999 Variable marketinge ...................... 21,428 Total costs ................................ 192,848 Contribution margin ......................... $ 21,427 Total contribution marginf................. $ 79,427 Total fixed costsg ............................. 37,000 Total operating profit ........................ $ 42,427
revenuea

Cows $320,000
30,000 160,000 40,000 32,000 262,000 $ 58,000

aRevenue:

Bears $214,275 = $15 x 14,285 units Cows $320,000 = $32 x 10,000 units bDirect materials: Bears $71,425 = $10 x .5 yards x 14,285 units Cows $30,000 = $10 x .3 yards x 10,000 units cDirect labor: Bears $ 79,996 = $ 8 x .7 hours x 14,285 units Cows $160,000 = $ 8 x 2 hours x 10,000 units dVariable overhead: Bears $19,999 = $ 2 x .7 hours x 14,285 units Cows $40,000 = $ 2 x 2 hours x 10,000 units eVariable marketing: Bears $ 21,428 = 10% x $214,275 revenue Cows $ 32,000 = 10% x $320,000 revenue fTotal contribution margin: $ 79,427 = $21,427 + $58,000 gTotal fixed costs: $ 37,000 = $18,000 + $4,000 + $15,000

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 15 453

15–31. (continued) e. At an increase in the cost of labor from $8 to $9.50, the contribution margins per constrained resource of labor (10,000 additional hours) would be as follows: Contribution margins before labor cost increase: Bears $1.50 = $30,000/20,000 units Cows $5.80 = $58,000/10,000 units Dogs $9.50 = $285,000/30,000 units Additional labor costs would change contribution margins as follows: Bears $ .45 = $1.50 – (.7 hours x $1.50 additional labor cost/hour) Cows $ 2.80 = $5.80 – (2 hours x $1.50 additional labor cost/hour) Dogs $(1.00) = $9.50 – (7 hours x $1.50 additional labor cost/hour) The contribution per unit of constrained resource would be as follows: Bears $.643 = $.45/.7 hours Cows $1.40 = $2.80/2 hours Dogs $(.14) = $(1.00)/7 hours Since Farside would already be producing as many Cows as demand allows, the additional production would be Bears. Farside could produce an additional 5,715 Bears (20,000 annual demand minus 14,285 already being produced). Farside should not produce Dogs because the contribution from Dogs is negative. The addition to profit would be $2,571.75 (5,715 Bears x $.45).

© The McGraw-Hill Companies, Inc., 1997 454 Cost Accounting, 5/e

15–32. (45 min.)

Theory of constraints: University Hospital.

a Revenues ...................... $60,000 Variable costs................ 30,000a Contribution margin ....... 30,000 Fixed costs .................... –0– Operating profit ............. $30,000
a$30,000 b$26,000

Alternatives b c $60,000 $60,000 b 26,000 18,000c 34,000 42,000 2,000 15,000 $32,000 $27,000

= ($300 x 30) + ($700 x 30) = ($300 x 40) + ($700 x 20) c$18,000 = $300 x 60 The most profitable alternative is to rebuild the recovery rooms so that some of the Phase II space could be used for Phase I recovery (as shown in (b) above). This approach would increase operating profit by $2,000 per day from $30,000 to $32,000.

15–33. (30 min.)

Interpreting computer output—one constraint.

a. Objective function: Maximize Contribution margin = $50.00X + $40.00Y + $25.00Z b. Optimal production level for Product X = 600 units c. Total contribution is $30,000 $30,000 = $50 x 600 units of Product X d. They would be willing to pay $166.67 since it is the opportunity cost of machining. e. If a decision to produce one unit of Product Y was made, the total contribution margin would decrease by $1.67. f. The optimal production level for Product Y would still be zero, since the increase of $1 ($41 – $40) is within the allowable increase range of the objective function coefficient.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 15 455

15–34. (30 min.)

Interpreting computer output–multiple constraints.

a. The optimal production level for P1 is 500 units. The optimal production level for P2 is 500 units. b. The total contribution margin obtained at the optimal production level is $38,500.00 ($41.50 x 500) + ($35.50 x 500) = $38,500.00 c. 250 of the 2,000 available machining hours are unused. None of the 3,000 available assembly hours are unused. d. Since the machining constraint is not binding, the company still has available machine hours and therefore would pay $0.00 for more machining hours. The company would be willing to pay $13.83 for an additional hour of assembly. From the printout, this is the opportunity cost for an hour of assembly.

© The McGraw-Hill Companies, Inc., 1997 456 Cost Accounting, 5/e

..40 $0........ $ 40. $212.......000 Plastic (in 000s) 250 200 150 100 (d) 50 (c) (a) 50 aComputation (b) 100 150 200 250 Paper (in 000s) of contributions: Paperboard Plastic Net sales .......000 $212..000 labor hours/100...04b Paper + 0.. Maximize: Total Contribution Margin = $0.... 1997 Solutions Manual. ......47 b............ a..750 Variable nonmfg...............40a Paper + $0... $0.000 labor hours/75...000 153.000 containers...... Inc.............. costs.) Product mix choice: Rupee Corporation..... Chapter 15 457 ..000 $ 35...15–35..... commissions ...................... © The McGraw-Hill Companies...........08 = 6............000 containers.47a Plastic Subject to: 0..250 Total contribution .08b Plastic ≤ 10..000 23....... (30 min.250 Variable mfg... inc. 19... costs (all except depreciation) .....04 = 4. 153....000 Plastic ≤ 60......250 Amount per unit .........

15–35.) versus plastic containers ($5.000 = 130.200 $28.000* $80.08 Plastic Plastic Solving simultaneously: 0.000) Paper bTotal a0. The optimal product mix is calculated given two constraints: (1) maximum labor hours available of 10.000 units of paper containers and 0 units of plastic containers.88 per labor hour = $35.08(60.000.000 = 10. Paper containers provide the highest contribution margin per scarce resource of $10 per labor hour ($40.000 Contribution Margin = $0.04 Paper + 0. Inc.250 ÷ 6.000 hrs.200 Paper + 0.000 60.000 ÷ 4. 1997 458 Cost Accounting. (continued) Critical Points (a) (b) ( c) (d) *Optimal Solution Produce & Sell Paper Plastic –0– –0– 250.000 Total Contribution Marginb –0– $100.000 containers).40 Paper + $0.000 hrs. and (2) limited direct materials to produce plastic containers (enough for 60.04 = 10. Thus.). 5/e ..000 –0– a 130. © The McGraw-Hill Companies. the optimal product mix is to produce 250.000 = 60.000a –0– 60.47 Plastic b.

The answer is (4).000 34. The answer is (5).6X2 ≤ 6. Gamma is X2..000 14.000 18.2X1 + . The answer is (3). a.000 4.000 gallons c.000 22.000 6. Constraint: .000 30.000 18.15–36. Inc. The total use of K must be less than 6.000 2.000 26.000 b c a 2.000 gallons. Constraint: .000 10. Alpha is X1.8X1 + . Chapter 15 459 . The total use of D must be less than 16. The company wants to maximize its total contribution margin.000 6.000 8.000 16.000 © The McGraw-Hill Companies. (25 min.4X2 ≤ 16. 24.000 14.000 22. Maximize $5X1 + $4X2 = Total contribution margin b. 1997 Solutions Manual.) Multiple choice.000 12. The answer is (5).000 d 10.000 gallons.000 gallons d.000 20.

000 –0– 10.000b –0– X2 –0– –0– 4.4X2 .000 8X1 = 14. Since the constraints do not change. (continued) Produce Point a b c d X1 –0– 20.000 –0– 18. the possible optimal solutions remain the same.000* $40. 5/e .000* $90.000 Total Contribution Margin –0– $140.2X1 + 0 . (continued) d.400 X1 = 18..000 *Optimal solution © The McGraw-Hill Companies.000 = 6.000 = 4.000 $106.15–36.6 X2 –2X2 X2 = 16. Inc.000) = –8.4(4.000 e.000) = 16.000 Total Contribution Margina –0– $100.000 *Optimal Solution a5X + 4X = Total contribution margin 1 2 b .000b 10. 1997 460 Cost Accounting.000 18.000 $162. The answer is (4).8X1 + –(4)(.000 Substitute X2 back into equation 8X1 + . The calculation of total contribution margin changes to: 7X1 + 9X2 = Total contribution margin Point a b c d Produce X2 X1 –0– –0– 20.000 4.

000/800. © The McGraw-Hill Companies.... Contribution per unit is first computed: Average Deluxea Revenues .800 Average Deluxe ≤ 1...000/800 units... $ 83 $110 Problem formulation: Maximize: Total Contribution Margin = $83 Average + $110 Deluxe Subject to: 10 Average + 15 Deluxe ≤ 22.......000 ≤ 1...000/800..... $50 = $40.. (35 min... $40 = $32. Chapter 15 461 .000 Deluxe = $50........ (27) (40) Contribution Margin ..) Analyze alternative actions with multiple products: Essen Corporation......... $135 $200 Variable Costs: Manufacturing .....200 Avoidable fixed costs: Average = $45...15–37. Inc.. 1997 Solutions Manual..... (25) (50) Marketing .000 a$200 = $160.

. (continued) Deluxe 2400 2000 1600 1200 (e) (d) 800 400 (c) (a) 400 800 1200 1600 (b) 2000 2400 Average © The McGraw-Hill Companies. Inc. 5/e .15–37. 1997 462 Cost Accounting.

200 $132.200 $37.200) Average cTotal d contribution margin = $83 Average + $110 Deluxe Relevant Unavoidable Profit = Total Contribution – Administrative – Margin Fixed Costs Fixed Costs © The McGraw-Hill Companies. Inc.000 = 1.800 –0– a 1. (continued) Critical Point a b c d e Produce & Sell Average Deluxe –0– –0– 1.000 = 1.15–37.000 = 400 Average + 15 Deluxe Deluxe 10 Average + 15(1.800) + 15 Deluxe Deluxe b10 a10 = 22.400* $38.800 267a 400b 1. 1997 Solutions Manual.400 $178.200 = 22.200 Total Contribution Margin c –0– $149.000 Profitd –$45..770 $165.800 = 22.000 = 267 = 22.000 $59.770 $25. Chapter 15 463 .200b –0– 1.000 *Optimal Solution Average + 15 Deluxe Average Solving simultaneously: 10(1.

.....400 a$35. Model Mountaineering Selling Price.800.800b $ 9.. $35....000 = $422..600 b$422.200a $326.20(12.600..400 c$27. Production Alternatives: Produce & Sell Mountaineering Touring 6.600d Edmonton will choose to produce the Mountaineering model.000) Touring $80......20X – $369.20X – $27. $35.000) = $326.400 – $316.200 – $369. Let X be the break-even number of units.00X X = = = = $27..400 d$326.400 d$326. 52.400 – $369.000 –0– –0– 12.600 – $316. © The McGraw-Hill Companies. Inc..800 $369.400)b $ 9..600 Edmonton will choose to produce the Touring model.800 $52..20X – $316.600 = –$158.800 6..400 – $316.. 1997 464 Cost Accounting.20 Contribution Margin $422.800 c$27. 5/e .000) Contribution Margin $211.... b... earning an operating profit of $9.....600 units. $88.600 units Edmonton will be indifferent at 6.20(12....80 $27..80 Contribution Margin ..600 d = $211. (30 min.20 Production Alternatives: Produce & Sell Mountaineering Touring 12.600 = $52..00 Variable Costs ....800 = $9...15–38.000 –0– –0– 12.20(6..20X $8.400a $326..400c Operating Profit $52.800 = $9.) a.. Analyze alternative products with differential fixed costs: Edmonton Company..00 52.400c Operating Profit ($158..20(12..000) = $326.000 a$35...200 b$211. earning an operating profit of $52.600 $35.. c.

50 50.. 4 lb @ $12 Direct labor Department 1 .. Let A = number of units of X-10.. a. The objective function should relate to the maximization of profit (that is....00 = = = 4. 1997 Solutions Manual.. The constraint on the machine time in the two departments was not recognized.15–39.. 2/3 hr @ $6 Department 2 .50 $16.. Objective function: Maximize: $16.9167 hr @ $6 Contribution margin ..... Direct material ...00 11.) Formulate and solve linear program: Baxter. The errors in the formulation of the linear programming equations are: 1... Chapter 15 465 ..00 $35.. not the full cost of each product. Inc. Let B = number of units of Y-12. $90. contribution to profit) not the minimization of costs.00 73..00 8... The coefficients for X-10 (variable A) and Y-12 (variable B) in the objective function should be the contribution margin of the two products (sales price less variable costs).00 = $48.5A + $35. 1 1/4 hr @ $8 Variable overhead ... 2. Inc.. (35 min. 1.800 pounds Direct Labor–Department 1 2/3A + B ≤ 400 hours Direct Labor–Department 2 1 1/4A + B ≤ 600 hours Machine Time–Department 1 1/2A + 1/2B ≤ 250 hours Machine Time–Department 2 B ≤ 300 hours Supporting Calculations X-10 Unit sales price..50 2 lb @ $12 = $24. Variable costs...00 12.0B Subject to: Direct Material 4A + 2B ≤ 1. 3...00 10....00 Y-12 $85..00 1 hr @ $6 = 1 hr @ $8 = 2 hr @ $6 = 6. b.00 © The McGraw-Hill Companies.

.. 1.... 0.... 0..0004 — Optimal Value of Solution is $12.15–39....2501 Constraints Material Labor (1) Labor (2) Machine (1) Machine (2) 600...... + + + + 2.. 1997 466 Cost Accounting..66667A Labor (2) .9993 — 300.00B 1.. Initial Table Objective function: Maximize $16...50A + $35.5009 25..0030 — 112. 5/e ....00B 1.... Variables A B Summary of Problem Value Reduced Value 149.....50A Machine (2) ...00B 0........00B < 1..0000 — Shadow Price — $24.83 Infinity Allowable Decrease 16.7499 — — 10.....00B Constraints: Material .25A Machine (1) .. Inc.50B 1..800 < 400 < 600 < 250 < 300 Note: The following answers may differ due to rounding of the constraint Labor (1) for variable A... (continued) c..00A Labor (1) .5 35 © The McGraw-Hill Companies. 4.975 Objective Function Coefficient Ranges Variable A B Allowable Increase 6...5 10.25 Current Coefficient 16..

50 – 0 = $4.800 400 600 250 300 Looking at the ranges of objective function coefficients. Machine (2) 100 Allowable Increase 600 100 112. The required materials price change would be: $35.00 – $24. 1997 Solutions Manual. (continued) Right Hand Side Ranges Allowable Constraint Decrease Material Inf. 4 lbs. we find that if the contribution margin of A drops to $0.75. then the optimal product mix will change. The increase in the price of direct materials that would be required to change the product mix is: $16.125/lb.. © The McGraw-Hill Companies. 2 lbs. Chapter 15 467 . then the mix will change.5 25 100 Current RHS 1. For Product B.125/lb.15–39. (continued) c. Labor (1) 33 Labor (2) Inf. Machine (1) Inf. if the contribution margin drops to $24. Inc.75 = $5.

.

knowledge of salespeople. The quality-based view holds that if quality is established prior to inspections. See text or glossary at the end of the book. The two costs of failing to control quality are: internal failure costs (costs incurred when nonconforming products and services are detected before being delivered to customers) and external failure costs (costs incurred when nonconforming products and services are detected after being delivered to customers). 3) Cost: The company’s ability to efficiently use resources to obtain its objectives—and to provide a competitive price to its customers. Quality refers to the company’s ability to meet or exceed customer expectations of the product’s features. repeat customers. and number of on-time deliveries. Service refers to the product’s features (both tangible and intangible) including performance. 16–6. 2) Quality: The organization’s ability to deliver on its service commitments (i. 16–3. functionality. 16–7. 1) Service: A product’s tangible features (performance. thus maximizing long-run profits. 1997 Solutions Manual. The traditional view is that product inspections are the only way to ensure quality.Chapter 16 Managing Quality and Time Solutions to Review Questions 16–1. functionality. The three factors that relate to meeting customer requirements are defined below. to meet or exceed customer expectations).. 16–4. Inc.). on-time deliveries. © The McGraw-Hill Companies. 16–2. then there is no need to inspect defect-free goods. etc. The quality-based view holds that high quality leads to loyal. etc. The two costs of controlling quality are: prevention costs (costs incurred to prevent defects in the products or services being produced) and appraisal costs (costs incurred to detect individual units of products that do not conform to specifications). 16–5. Chapter 16 469 .) and intangible features (courtesy of salespeople.e.

when machining a valve for an automobile engine. Service refers to the product’s features (both tangible and intangible) including performance. functionality. Another problem might exist if demand suddenly surges for a company’s product. then their expectations have likely been met and the appropriate amount of service has been provided. One example follows. 5/e . It may be difficult to meet customer demand if inventories are relatively low and production capacity is inadequate. Any time variations exceed some predetermined level.. 16–12. © The McGraw-Hill Companies. Inc. so assistance (“intangible” service) may not be required. Answers will vary. 16–10. For instance. if the part size falls outside of a specified range. etc. The color is visible through the bottle. For example. and are just as satisfied without certain features. and the supplier is unable to supply the part (employees go on strike. A control chart shows the results of a statistical process control measure designed to provide warning signals that something is wrong. Total quality management (TQM) seeks to continuously improve the production process. The result would be fewer product defects and more efficient operations.e. thorough inspections throughout the production process are necessary to ensure minimal defects. like fingernail polish. Answers will vary but may include any of the following. cash bonuses) for production employees to make recommendations about how the production process can be improved. downtime of production machinery. JIT is very difficult to implement without TQM since both approaches to quality have the same goal—to make the production process as efficient as possible while producing the best product possible.). 16–9. If customers’ do not expect a specific product feature. These features are ultimately defined by customers’ expectations. 1997 470 Cost Accounting. Just-in-time (JIT) requires the highly efficient coordination of purchasing and production processes.Solutions to Critical Analysis and Discussion Questions 16–8. 16–14. 16–11. the traditional view would assume that defective products are a natural part of the production process and are very difficult to eliminate. and number of on-time deliveries. Thus. 16–13. Cause-and-effect analysis and Pareto charts are used to provide diagnostic signals. Answer will vary. a warning signal is sent that something may be wrong. The quality-based view would encourage continuous improvement of the production process and might offer incentives (i. when purchasing a low cost item. service may not be important. If a company only has one supplier and inventory of the supplied parts is relatively low (as is the goal of JIT). but should address the monitoring of a production process. the control chart would send a warning signal that a problem exists with the production process. knowledge of salespeople. Conversely. Answers will vary but should include reasons why the elements are not important. then the company is unable to continue production until another supplier can be found.

The only way to do this is to improve the efficiency of both the design phase and production processes. Answers will vary but should include how being compensated by accounting performance may not create goal congruence for quality management. As a result. the incentive system does not promote TQM). total quality management would not likely be their primary concern (i. often reflecting local conditions and personalities.) 16–20. (There were other reasons. © The McGraw-Hill Companies. 16–19. This improves the reputation of the airline which encourages repeat business and attracts new customers. Companies that are not able to quickly respond to customer needs and wants will have a difficult time competing in today’s highly competitive global market. if managers’ are evaluated strictly on minimizing costs. 16–16. Time is important because success in competitive markets is increasingly based on shorter new product development time and more rapid response to customers. 16–18. Course evaluations were introduced to help assess teaching performance and to provide feedback to teachers and administrators. They were introduced in the 1960s partly because it was a period of student activism. 16–17. not only for the passengers on the on-time flight. Major improvements in response time will likely require making improvements in the production process.e. the industry has shortened the time it takes to develop and produce automobiles.. Chapter 16 471 . course evaluations were part of the response to protests by students. the automobile industry is beginning to realize the need to quickly respond to customer demands. On-time arrivals also reduce costs because delays increase personnel overtime and other costs. The company is measuring customer satisfaction and providing incentives for its claims adjusters and processors to provide quality service. too. For example. 1997 Solutions Manual. Inc.16–15. which in turn will typically improve productivity and quality.. but also for the passengers on subsequent flights who would otherwise be delayed. For example. Improving on-time arrivals increases customer satisfaction.

and comprehensiveness. © The McGraw-Hill Companies.) Quality according to the customer. and clarity of sound. (b) safety. and cost. and energy efficiency. (c) quality of professor.. quietness. 16–22. Inc. (15 min. 1997 472 Cost Accounting. honesty of driver. (e) cost. (e) cost. Answers will vary but may include: (a) style. and activities offered. (15 min. (d) accuracy. timeliness. and atmosphere. friendly wait-persons. looks.) Quality according to the customer. destination. 5/e . and number of keys.Solutions to Exercises 16–21. and size. and attachment capabilities. cost. and size.) Quality according to the customer. (c) accuracy. and time offered. Answers will vary but may include: (a) fit. interest rate. (b) life span. personable professor. (d) quality of car. design. channel capacity. 16–23. (b) size. and fit. and accessibility. and driver competence. stitch capabilities. disc capacity. cost. (15 min. (e) taste. Answers will vary but may include: (a) brand compatibility. (d) length. (c) taste. cost. and cost.

.200.... Chapter 16 473 ...7% 8..000 ....450.....16–24..450....000/$2.... $291.000 .450.. warranty repairs.. testing equipment.000 .... $82...... (20 min..000 . $194... quality training.. Prevention $414........ Year 1 16. Internal failure: Scrap.. Internal failure $188. External failure $71.000 ... materials inspection. Prevention: Preventive maintenance.450.500/$2...... Appraisal $164. External failure: Customer complaints... rework..8% 7.) Costs of quality: Vedral Industries.....000 .7% © The McGraw-Hill Companies..500/$2.000 ....200....200......3% 2.000/$2..000 .. process inspection....... Appraisal: Field testing...000/$2.9% Year 2 13. 1997 Solutions Manual.800/$2. Inc.. $204.300/$2...000/$2...200..3% 6.7% 9. a.9% 3. b.

000/$1...000 ..000 ..000/$1. preventive maintenance.7% $163. materials inspection. 5/e ...3% Appraisal $131. rework.. Internal failure: Scrap.. (20 min....800/$1. Year 1 Year 2 b. 16. field testing......760..000 ... Prevention: Process inspection..200/$1....000 .200/$1...960.. 3....960. customer complaints. 13.. Inc.760.9% $65..000 .760.500/$1. 2.....7% $155... 6.. quality training.960...000 .000 . External failure: Warranty repairs... Prevention $331.... 7.000/$1.. Appraisal: Testing equipment.. 1997 474 Cost Accounting.16–25...) Costs of quality: Owenborrogh Corporation.960...7% © The McGraw-Hill Companies...8% Internal failure $150. a. 8......500/$1.760.9% $234...000 . 9.3% External failure $56..

000 .000 .920... Year 1 Prevention $656. 6..000 .... 2. Prevention: Process inspection.. quality training. 7..200/$3. 1997 Solutions Manual. Internal failure: Rework.. preventive maintenance.000 . External failure: Customer complaints.) Costs of quality: Ramirez Corporation. warranty repairs.8% $315.....9% 6. Scrap. Year 2 13.920.400/$3..100/$3. Appraisal: Testing equipment.000/$3.. b.920......000/$3.000 ... Chapter 16 475 ..520... External failure $114.500/$3.9% $129...7% $477... Appraisal $265... 16.520.000/$3.6% 8.. Inc. (15 min. a......920.800/$3...000 .16–26....7% $225. Internal failure $300......... materials inspection.000 ...7% © The McGraw-Hill Companies... field testing..520.000 .520...4% 3.

000 % Year 2 $2....200..300 185.......................100 % 16.............1% © The McGraw-Hill Companies... 65.......... 1997 476 Cost Accounting.....450...............000 Internal failure costs: Scrap .............................. 18....7 9......800 124...000 82......000 95........000 Testing equipment....... 170.......................7 8.............................................. 43...000 Prevention costs: Preventive maintenance...... $2...000 Process inspection ......000 $ 772......000 70.. $ 838.............................8 7.............................. 198..................................000 48... Inc..500 Appraisal costs: Field testing ..............000 Total prevention costs.. 188................ 5/e ...............000 Warranty repairs........ (15 min....... 16......800 130..500 External failure costs: Customer complaints .000 19............. 70...000 Total internal failure costs .......9 34........................000 291..9% 13......3 2.............................16–27...............000 Total Costs of Quality ..000 194...........000 Materials inspection ................................000 Total external failure costs: ...... 94... 164...000 204....... 28..300 34.. VEDRAL INDUSTRIES Cost of Quality Report Year 1 Sales ................000 48....500 Quality training ...... 71....000 18.....................500 Rework .........7 35............ 414....3% 6........2% 3...... 135.......................) Trading off costs of quality: Vedral Industries..........000 Total appraisal costs .....

..... 14...................................500 % Year 2 $1....7 35..... $ 669....................2% 3.......960.... 56...........000 99..7 9. 108.000 Materials inspection ... Chapter 16 477 .................. 13.............. 150......000 163..000 38...... 56.......9% 13.......7 8......500 148......8 7.........000 15..800 External failure: Warranty repairs ...000 Quality training...............000 Total internal failure costs ...000 Testing equipment ........... (15 min....000 27..000 56............3% 6..000 Total appraisal costs ....500 Total Costs of Quality ..................................500 38.....................000 105.200 $ 617....500 Total external failure costs ..000 234....200 Preventive maintenance ........700 % 16......................... 136.000 Internal failure: Scrap .......16–28. 131..... 331........... 75...800 Rework ....................200 Appraisal: Field testing ...000 Total prevention costs .....000 15... 1997 Solutions Manual.................. OWENBORROGH CORPORATION Cost of Quality Report Year 1 Sales ....................................................000 Customer complaints .........................................1% © The McGraw-Hill Companies........200 65...... 158....................000 Prevention: Process inspection........................... Inc.........) Trading off costs of quality: Owenborrogh Corp........................................................................... 34... $1........................3 2...000 76... 22........ 52...........................760..000 155........................9 34........

..... 115....... Inc.......8 8...........000 Internal failure: Scrap ..000 200............400 Quality training .........000 Customer complaints ................. 44.500 Total external failure costs ................000 Total internal failure costs .....6% 6......... 272............000 225......000 Total appraisal costs ........000 152.. 5/e .. (15 min.........7 6...400 Appraisal: Testing equipment...........9 34.................000 Field testing .......... 305.............1% 3..............................................300 % 16..... 28...800 External failure: Warranty repairs..........................................................................4 2....500 Total Costs of Quality .. 265..............000 Materials inspection .... 26....000 30...........700 % Year 2 $3...............6% © The McGraw-Hill Companies.............100 195.......... 70......... 220...000 315..........................) Trading-off costs of quality: Ramirez Corporation...... 1997 478 Cost Accounting... $3..200 $1..920...................7 32........... 105..000 30...................................000 75.....000 Total prevention costs...9 7.............000 54...........200 129.100 75.336...... 656............... 300..............146......... $1....000 Preventive maintenance......000 220....................... 114. RAMIREZ CORPORATION Costs of Quality Report Year 1 Sales .............000 115.......................520............................000 Prevention: Process inspection .. 150......7% 13....000 477.........800 Rework .....16–29...............

..500 1..... 1997 Solutions Manual... Wages ........ 3................000 500 4.000 Costs: Waste . (20 min......500 Canadian is indifferent between maintaining the status quo and leasing the new mix regulator..... $8... Chapter 16 479 .500 Lease .........16–30................ 16–31...... © The McGraw-Hill Companies..000 $7.... $3..000 Lost business.......500 3.....500 $4..........) Quality versus costs: Hillman Industries. $5.... Inc.700 Costs: Waste . Wages ....) Quality versus costs: Canadian Seltzers...500 Lease ..... $5.. Total ...500 700 2.. Present New Mix Regulator $1..000 Lost business.500 3........500 Hillman should lease the new mix regulator since this approach is the least costly.......... Present New Mix Regulator $1.. Canadian would likely hire an additional employee to manually monitor the existing regulator since this approach is the least costly.........500 Additional Employee $2................................ (20 min..... 2......500 $6....... Total ......500 1.500 Additional Employee $1..000 $5.....

.... 1997 480 Cost Accounting.....500 Lease ..500 Additional Employee $ 500 500 3...... $3.) Quality versus costs: Carlson Corporation. = Investment + Time period from approval Annual discounted cash flow to providing product = $300 million + 3 years $125 million = 2... 16–33.... (10 min.. Present New Welder $1.......16–32...000 Costs: Waste ....000 $4...... 1..4 years © The McGraw-Hill Companies.... 5/e .. (20 min..... $4.500 500 3.....) Break-even time Break-even time: Dallas Oil Company................500 $5... Inc..4 years + 3 years = 5..........500 Carlson should hire an additional employee since this approach is the least costly..............000 Lost business . Total. Wages ......

Inc. 1997 Solutions Manual. = Investment + Time period from approval Annual discounted cash flow to providing product $8 million + 2 years $1.. Chapter 16 481 .000 + 2 years $200.5 years + 2 years = 4. (10 min.) Break-even time Break-even time: Peugeot Corporation.000 = 2. = Investment Time period from approval + Annual discounted cash flow to providing product $500.16–34.33 years = © The McGraw-Hill Companies.33 years + 2 years = 7. (10 min.5 million = 5.5 years = 16–35.) Break-even time Break-even time: Nugget Company.

but should recognize the difference between keeping a stock of items that are replenished as customers order them (perpetual approach) compared to looking at inventory from time to time to see what needs to be ordered (the supply cabinet approach). © The McGraw-Hill Companies. development. but the primary focus will likely be on reducing the research. questionnaires. evaluations by company employees posing as customers and measures of repeat business.) Break-even time: Nugget Company. and design time to get the product to the market as soon as possible. Recommendations as to how to use control charts.Solutions to Problems 16–36.) Just-in-time. 16–39. 16–38.) Break-even time: Dallas Oil Company. This might mean investing more in year 1 so the product can be introduced in year 2. 16–37. (25 min.. Look for questionnaires. Answers will vary. 16–40. Pareto charts. (90 min. management by walking about and measures of repeat business. This might mean investing more in years 1 and 2 so the product can be introduced in year 3. Answers will vary.) Total quality management. but the primary focus will likely be on reducing the research. (90 min. Answers will vary. Companies with computerized inventory systems are more likely to log in an order at the point of sale. and cause-and-effect analysis will vary. (90 min. development. logs of customer complaints. (25 min. Inc. logs of customer complaints. Look for management observation. 5/e . and design time to get the product to the market as soon as possible. Students should not assume a retail store uses just-in-time in a literal sense. 1997 482 Cost Accounting.) Theory of constraints.

The Sea Quill has one fuel usage above the upper control limit. Investigating the cause would be appropriate.) Break-even time. Gallons 180 170 160 N 150 S O 140 130 Trip 1 O O O O N S 2 S N 3 4 N O S O N S S N 5 6 7 8 9 10 Lower Control Limit S N S O N O S N N O S Upper Control Limit Average S = Sea Quill N = Neptune O = Orcas Answers are interpretational.16–41. With a maximum break-even time of four years the cash investment would be: Sales – Costs = Cash Inflow $5 million – $3 million = $2 million $2 million x 4 years = $8 million maximum investment. Inc. (25 min. working backward: Tiju Instruments. 1997 Solutions Manual. Tiju might make such a policy because of the short product life cycle. © The McGraw-Hill Companies. However. and the difficulty in identifying the cause of changes in costs (price per gallon and/or gallons per trip). The Orcas has three occurrences of fuel usage above the control limit. The disadvantages may include different people being responsible for usage and purchasing. Investigating the cause would be appropriate. The advantage of using dollar fuel costs is that it focuses on a primary concern of top managers (operating costs). b.) Quality control: Norsk Ferries. 16–42. Rapid technological changes might make the product obsolete after a four year period. Chapter 16 483 . b. a. some generalities may be: The Neptune appears to have random variation within the limits and should not be investigated. (50 min.. a.

.... 1997 484 Cost Accounting...000 220.000 $500.000 (higher) (lower) (higher) (higher) The benefit is the difference between the present and the alternative $300......000 (higher) Sales ($50 each) .....000 0 200... 85..000 units) Alternative (New material) Difference (100.. Present (90... 220..... © The McGraw-Hill Companies... $ 695...000 350.000 Inspection . (40 min. 3......000 on new materials as this would increase operating profits by $300..............000..........195.. Billington should consider other benefits of improving quality.000 Scrap ($35 each) . 350..... Inc....000 200.....000 350. b......... $2 increase in direct materials costs........16–43.........500..000 units) $5......... a.........000 (= $3.......) Quality improvement: Billington Corporation.....000..000 3.......... d.....000).. $4. Billington should spend the additional $200. Improved quality will enhance Billington’s reputation with customers and make the company more competitive with its industry counterparts............000 85.000 – $3..150.000 $ 995....... 5/e .000 $300.....500.000 New material ($2 each) .000 Manufacturing ($35 each) ................000 Costs: Design .....495.... 0 Operating profit ...... Yes.... c....

e. Cash receipts and disbursements often take place in different time periods from when items are recognized in the income statement and balance sheet. 17–4. The master budget would also include estimates of the levels of cash.. a company may have a goal of "Becoming the number 1 company in the industry. Trend analysis. d. © The McGraw-Hill Companies. Estimates from sales people and other knowledgeable personnel. More detail appears in the current budget because it is closer in time than the longer-range forecasts. 17–2. a company needs to prepare a cash budget to ensure that cash needs will be met. The budget plan is a blueprint for operations in the coming period. c. gaming may result. The disadvantage of this gaming is that the planning effectiveness may be reduced. middle management will find it easier to meet targets and to achieve bonus awards.Chapter 17 Planning and Budgeting Solutions to Review Questions 17–1. 17–5. and fixed assets needed to support the budgeted level of activity. 1997 Solutions Manual. Organization goals are broad-based statements of purpose. a. This bias arises because if the biased plans are adopted." The strategic plans would include such statements as: "Increase sales volume by 20% per year. It must be sufficiently detailed so that it provides adequate direction to the various people responsible for operations. Thus. Chapter 17 485 . Since middle management has better knowledge about operations at lower levels in the organization. and since budgets are usually used to evaluate performance or compute bonuses for middle management. b." The master budget would state the number of units that are needed to be produced and sold in the coming period to meet the 20% volume increase as well as the production and marketing costs necessary to attain that objective. For example. if upper management always "tightens" the budget plans suggested by middle management. Market research. inventories. 17–3. middle management may have a tendency to underestimate revenues and overestimate costs. Strategic plans take the broad-based statements and express them in terms of detailed steps needed to attain those goals. accounts receivable. Of course. Budgets are the shortterm plans used to implement the steps included in the strategic plans. Econometric methods. Delphi technique. Inc.

the budget process is used to make certain that adequate cash is on hand to finance company activities for the coming period. Inc. Therefore. in a governmental setting. Of course. 4/e . if the targets are set so tight that they cannot be reasonably achieved then there may be a problem for the entire incentive system. In addition. 17–12. They usually include targeted sales. Strategic plans are long-run targets for a company. employees throughout the organization generally are perceived to prefer some input into organization decisions. They are usually expressed in very highly aggregated levels. Indeed. Each one year budget plan may be viewed as a step in achieving the long-run strategic plans of the company. © The McGraw-Hill Companies. production and income levels. we would expect a strong incentive to overestimate costs to provide a cushion for future expenditures. there may be no problem with this executive’s approach. Guidelines are set for administrative and selling departments so that their costs are commensurate with the company’s income and output goals. However. It is expressed in a greater level of detail than the strategic plan. employees will be more likely to support a plan that they have participated in preparing. As long as the employees are willing to have all direction come down from above. In addition. Since inventories would be eliminated. managers at lower levels of the organization usually have more technical expertise about their specific organization subunit than the chief executive officer has. there may be a disincentive to increase sales if it means increasing costs. The budget plan represents next year’s operating plan. Zero-base budgeting requires that all expenditures be justified as if the company or division is new. 17–11. Budgeting aids in coordination in a number of ways. employees will have a strong incentive to create budget slack. work in process and finished goods. By relating sales forecasts to production activities it is possible to reduce the likelihood of over or under production. It coordinates production so that plants making subassemblies are making the appropriate number at the right time as needed by the plant making the final assemblies.. 17–10. Solutions to Critical Analysis and Discussion Questions 17–8. In addition.17–6. 1997 486 Cost Accounting. 17–9. inputs from the lower ranks may improve organization operations because plans will be based on better information. the timing of purchases would be closer to the time of production. Behavioral studies indicate that when the budget is an upper limit on expenditures. This would minimize the differences between the timing of cash outflows for materials purchases. First there is an incentive for members of various subunits to overestimate costs in order to achieve bonus awards. Thus. and the time when the related costs are recognized in the production budget. 17–7. Most other budgeting practices only require that incremental expenditures be justified.

Chapter 17 487 . 17–14. in many situations the cost of controlling these potentially adverse activities exceeds the benefits.17–13. (Managers have incentives to spend the money requested to maintain the credibility of their requests..) These activities are sometimes considered detrimental to the organization because they result in a waste of resources and improper timing of expenditures. Sometimes managers will use "excess" funds from one period to stock up on supplies and other items that would normally be a part of the next budget period’s costs. Inc. The budgeted income statement would normally be more useful to management to plan and control operations and to coordinate various activities. such as purchasing and planning production levels. Frequently managers will wait until near the end of the budget period to make discretionary expenditures. 1997 Solutions Manual. Nonetheless. © The McGraw-Hill Companies.

..20 = $12...500 units Sales revenue = 283... .125..000 units .117..000 $5.000 units = 1..500 units x $2.. (15 min..000 units = 1.600 17–16. Market size last year = 225.90 x 1...000 400..000 Commercial loans ..........) Estimate sales revenues: Orcutt & Daughter.90 = number of trades in the coming year (as a percent of last year) 1... (15 min...Solutions to Exercises 17–15.181.. Inc.... 17–17....210....10 per unit = $595.... 17 million Securities ...........125..) Estimate sales revenues: Reiser Co.85 x ..... 1997 488 Cost Accounting..) Estimate sales revenues: Jackson City Bank....350 © The McGraw-Hill Companies.181.000 2... (15 min.090....85 = market volume in the coming year (as a percent of last year) .250 units Company share = 24% x 1..720....... $19 million Consumer loans....2 Market size next year = 1... 5 million Total.... Portfolio Amount Interest Rate 11% 16 8 Income $2.250 units = 283....05 x 1..000 trades x $220 per trade x ..........20 = average commission per trade in the coming year (as a percent of last year) 60.. 4/e ...

..........000) 12 P = 960......000 + 160.................. Inc......... 960.000 – 52... 1997 Solutions Manual..........068....000 units Alternative method: BB + P = Sales + EB 52..000 Less: Beginning inventory of finished goods ..........................120.............. 1..) Estimate production levels: Cordelias Corporation........ Chapter 17 489 ....000 = 1....... ( Cordelias Corporation Production Budget For the Year Ended December 31 (in units) Expected Sales .000 Units to be produced .... 1.000 units Add: Desired ending inventory of finished goods 2 months x 960........................ (15 min..000 ) Total needs ..........068......17–18...000 + 2 (960...000 + P = 960...................... 52.000 12 months 160.........000 units ( ) © The McGraw-Hill Companies....................

..000 + 40....................................000 – 200......... 360......................000 ft.. 1997 490 Cost Accounting.........000 Direct materials needed per unit .............400......... Visions............... ( ) © The McGraw-Hill Companies......................000 Less: Beginning inventory of materials ........000 feet Add: Desired ending inventory 3 months x 320... 1........000 units at the end of this year): BB + P = Sales + EB 80..000 ( ) Total direct materials needs.. 1.............000 + P = (5)(280............................................ 4/e ..... 1.................. 320.000 units Materials Requirements: BB + P = Usage + EB 200. Direct Materials Requirements For the Year Ended December 31 (in units) Units to be produced........ Inc............000)(5 ft) 12 P = 1....... Inc.........800..................................... 280....600.....000 units Add: Desired ending inventory of finished goods................ 80..........000 Direct materials to be purchased ...400......................................600.....000) + 3 (320............000 = 1.................000 units Visions............... Production Budget For the Year Ended December 31 (in units) Expected Sales ...............) Estimate production and materials requirements: Visions...000 P = 280.000 Units to be produced.......000 feet Alternative Method Production (assumes finished goods in inventory reduced to 40.......... Inc........000 units) ..... 5 feet Total production needs (amount per unit times 280........ 40.000 x 5 12 months 400.......000 Total needs ..................................................... Inc...........000 + 400....000 + P = 320...........000 Less: Beginning inventory of finished goods........................... (25 min................17–19... 200............... 280...................................

..700 units July 8.......... 14..... 15.....390 Alternative method: June purchases: P = Sales + EB – BB = 6......900 18......360 = 4.. Inc......700 4...700 22.70 $3..800 $............200 Add: Estimated sales inventory... b...100 x $....70 $3....... Cash required: June: July: August: $5..700 Estimated cost per unit .500 Total merchandise needs ....900 13.... 6...............700 Less: Beginning inventory.000 Merchandise to be purchased ........17–20.. 1997 Solutions Manual.........970 = 7.) a..100 $..600 11..............800 = October production requirements...600 15..... Chapter 17 491 ..........000 = 7.. 21...70 Total estimated cost of merchandise ............... Lazarus Company Merchandise Purchases Budget For the Period Ended August 31 (in units) June Estimated sales...........390 = 7.. (25 min..360 July purchases = 7.100 = September production requirements August purchases = 4.600) – 14..200 + (8.500 7..900 + 6............. $5..800 x $.. $.970 August 6.70 © The McGraw-Hill Companies.70 $4.500 13.......... 7.....700 x $..70 $4.. Estimate purchases and cash disbursements: Lazarus Company.

.600 7...600 = February purchases 8.......000 $1...... = 60% x $290 x 7.........000 = 7.000 7........322.......600d February .400 P = (7.400 March .. Merchandise to be purchased ..... (25 min........ $2... Total merchandise needs .600 = 60% x $290 x 7.......400 7....000) + 7.000 – 7.600 units..... Less: Beginning inventory . Inc.400 P = 7..000 + P = 7.. 4/e .. Add: Estimated ending inventory...600 = 40% x $290 x 7......400 © The McGraw-Hill Companies..) a.. Payments for these purchases are made as follows: Month of Payment Total January Month of Delivery February $1.400 March: 7.169...000 = 15....000 15.600c March $1. d$1... 2.... 1997 492 Cost Accounting.492........600 – 8....600 units......000 + P = 8.000 7......600 + 7... Alternative method: Purchases are as follows: February: BB + P = Sales + EB 8.200 a$1.322.....600 8........000 + 7.400b 881..400 = March purchases = April sales b... b$1....160.17–21........ Estimate purchases and cash disbursements: Oleander Products.400 14.000 7.... Oleander Products Merchandise Purchase Budget For the Period Ended May 31 (in units) February Estimated sales .600 March 7..160. c$881....400 units......000 units.287..000a = 40% x $290 x 10....287..

..... 1997 Solutions Manual........................000 a$210... Chapter 17 493 ........................ $ 32............ The correct answer is (4): $342................. June 1.... 55.......000 x 70% = $400. $219..000b Total cash collections .....) Estimate cash disbursements: Walsh Company... $342.....................17–22..........000 April sales.......000a Total cash disbursements ...000 x 25% © The McGraw-Hill Companies.000 × 70% 17–23.................... Walsh Company Schedule of Cash Disbursements For the Period Ended May 31 Month May Beginning accounts receivable.... 154...... (15 min........................... Inc.000 = $220...........000 June sales ..000 47th Street Company Schedule of Cash Collections For the Month Ended July 31 Month July Beginning accounts receivable..............) Estimate cash collections: 47th Street Company.............000a July sales ..................000 b$100.... 100............000 May purchases ....000 a$154...........000 = $300......... April 1 .......... (15 min.. $210............... $ 10..

........000 = $90............................000 x 28% © The McGraw-Hill Companies...000 x 6% c$54....000 x 3% = $80....... July sales ......850a 4.......800b 54.......17–24....650 = $95..850 b$4.................... (20 min................... September sales ..000 x 60% d$28..000d $89. Inc.... a$2........ August sales ...000c 28...) Estimate cash collections: Kingstons Products...... 1997 494 Cost Accounting........ The correct answer is (3): $89.. Total cash collections .. Kingstons Products Schedule of Cash Collections For the Month Ended September 30 Month September June sales..000 = $100...................................... 4/e .........800 $ 2.650.

..920 $2... Revenues are as follows: January February March April May June $16...000 $35..880 a$4....800 $16.600 $6..800 11..200 = 5 weddings = 3 weddings = 2 weddings = 4 weddings = 5 weddings = 11 weddings x x x x x x $3...880 = 16....880 3........ 1997 Solutions Manual.920 6..... June sales..560 $ 1.200 2......200 $3.400 3..000 7.520 $8....... 4......800b March sales .....000 $9..680 6. Chapter 17 495 ...400 x 20% This pattern is repeated for subsequent months....) Estimate cash receipts: Bride To Be........... Cash receipts are as follows: Bride to Be Multiperiod Schedule of Cash Receipts Cash Receipts in Month of: January February March January sales.......800 7.200 $3.000 x 30% = $9...400 $12. Total cash collections $10. a... $ 4..280c April sales ... © The McGraw-Hill Companies.280 = $6.17–25..600 x 50% c$1....200 $3.800 b$4.. Inc.200 7..200 b. 1.... May sales.200 $3........200 $11.800 April Total Cash Receipts for Period $ 4....400 12.640 $ 3...040 $18.......840 8...200 $3.040 $49. (30 min...800a February sales ....

1997 496 Cost Accounting..... August sales ....800 6.000 c$4. May sales ....000 4.000 23.. a...600 Total Cash Receipts for Period $450 4...040 6........800 = = = = = = ...0 call 1.. June sales ....7 calls x x x x x x 100 subscribers 120 subscribers 260 subscribers 300 subscribers 300 subscribers 280 subscribers x x x x x x $50 $50 $50 $50 $50 $50 Collections of these revenues are expected according to the following schedule: Water Works Multiperiod Schedule of Cash Receipts May March sales ...........0 calls 1......... Inc.700 = 18% x $2.000 23..2 calls 2..940 18.. 4/e .162 $ 450a 3.760 $28.) Estimate cash receipts: Water Works................936 32.680 22...... Revenues are as follows: March April May June July August $2..000 4. © The McGraw-Hill Companies.212 19. (30 min................080 14.........600 = 60% x $6. a$450 Cash Receipts in Month of: June July August $ 1.680c $ 4....000 30...5 calls 1.680 = 20% x $23...012 $8.500 b$3...................730 $21.. Total cash collections..760 $89.......400 33...720 $ 5...500 6.... July sales..400 This pattern is repeated for subsequent months....000 $30......8 calls 2....600b 4.340 24... April sales .17–26..

.......80 x ..................7) x $50 Less manufacturing costs: Variable costs .............72a x $4................. $ 3.... $14........300) Total marketing and administrative costs ......72 © The McGraw-Hill Companies....080 aRatio of September to August volume: September: (90% x 280) x (80% x 1.. 1997 Solutions Manual....216 Total costs . Inc...........800 (...............72a x $2.500) Administrative (fixed) ..... Prepare budgeted financial statements: Water Works. 3..................136 (90% x 280) x (80% x 1........................... 9...... Chapter 17 497 ...056 Operating profit .............242 (1.........7 = 476 Ratio = ...416 (1... Water Works Budgeted Income Statement For the Month of September Calculations Revenues ............................................17–27....90 = ... 2.398 (.................. 1.......840 Marketing and administrative: Marketing (variable) . 4....05 x $2......................01 x $4.....................200 (no change) Total manufacturing costs .....................7) = 342........72 August: 280 x 1.720) Maintenance and repair .. 2......... 4..72/476 or Ratio = ............200) Depreciation ..... $17......72 = 342................

...... Prepare budgeted financial statements: Hampton.............000 x 1..... $15...............672 © The McGraw-Hill Companies..........325 (unchanged) Total manufacturing costs....... $5... Inc............. 4..............................640 x 1.........10) Depreciation (fixed) .......... $27.17–28............................. 675 (unchanged) Total marketing and administrative costs ........... 1. 1997 498 Cost Accounting.......................... Inc. 21...... Hampton.03) Depreciation (fixed) .390 x 1..... Year 2 Calculations Revenues (120 units @ $225/unit) ..829 ($4.......176 Less: Marketing and Administrative Fixed costs (cash) .......................... 5.............20 x . Inc..... 4......90) Less Manufacturing costs: Variable ...... 4/e ....20 x 1............... Budgeted Income Statement For the Year.................000 ($25..............824 Gross profit margin ..499 ($3....................................504 Operating profits .............

Clearly they are not doing this. By artificially reducing sales. one can surely excel when compared to the budget. are based on actual versus budgeted performance. Chapter 17 499 . and increasing costs. The use of a budget to motivate employees to top performance is limited if sales figures are lower and costs are higher than expected. Submitting a budget with lower sales and higher costs (reduced contribution margins) could have adverse effects on continued employment.17–29. 1997 Solutions Manual. This can be personally rewarding if reviews. etc. Maria and Barry have an ethical responsibility to prepare reports using relevant and reliable information. Barry and Maria will lose credibility in the eyes of upper management if they continuously present poor budgets. Inc. By submitting erroneous budgets they are subverting the legitimate goals of the company. but more importantly it is a method of allowing employees to exceed expectations. a. © The McGraw-Hill Companies. The budgets they are submitting were not prepared objectively. There is also a question of integrity since Maria and Barry hope to benefit from the use of budgetary slack. bonuses. promotions. (20 min.) Ethics and Budgeting: El Dorado Company. Their methods are a hedge against the uncertain. Furthermore. b. c.. management may use these budgets for important decisions such as determining staffing levels or the profitability of products or product lines.

............................ Depreciation (fixed) .479 Calculations $725........595 41......400 140....... Fixed cash costs .......... Other variable costs ....900 x 1....... 4/e .25 per unit) © The McGraw-Hill Companies.... 1997 500 Cost Accounting.Solutions to Problems 17–30....... a$812..700 320................... Marketing and administrative costs: Marketing (variable......) Prepare budgeted financial statements: Parker Products.725a 45............05 unchanged $105..98 x 1.030 18...........246 $ 69......508 124...600 x ............ Manufacturing costs: Materials............ Operating profits .........................................300 x 1...18 $81...000 units x (....750 422................. cash) ............ Administrative depreciation ..10 unchanged = 118. Total costs .............. Parker Products Budgeted Income Statement For Year 2 Revenues.....995 249......18 unchanged $127............................. Inc.... Marketing depreciation .....................92 x 1...18 x ..... (30 min..... Total manufacturing costs............000 x 1. Total marketing and administrative costs .............738 743.18 $35........................608 37...600 x 1........725 $812................................................000 x ............................95 x $7......................168 85........95 $42....... Administrative (fixed.... cash) ..........

...........725 Manufacturing costs: Materials .) Estimate cash receipts: Parker Products............ Chapter 17 501 ........ 172............. 140.................595 Other variable costs...... (10 min....... © The McGraw-Hill Companies................ which excludes depreciation........... $812.............. cash) ..... Parker Products Cash Basis Budgeted Income Statement For Year 2 Revenues ............. 437......................168 Fixed cash costs .................................030 Total marketing and administrative costs ..........................................995 Total manufacturing costs .... 264...............17–31. 85...... 1997 Solutions Manual....................................... cash) ..... Inc.. 41............396 Operating profits.........608 Administrative (fixed........................................... $375..758 Marketing and administrative costs: Marketing (variable. 45........329 Cash from operations would equal revenues less cash costs.638 Total costs ........... 124......................

700 + $14.93 Depreciation (fixed) ...... 234........ cash) ..........400 unchanged Total marketing and administrative costs .....................12 x 1.600 unchanged Administrative (fixed..... 163............000 x 1.... 97...................719 Total costs ................. $132................... cash) ... $885....... Inc...............400 $95................960 $72........900 x 1.......10 Variable cash costs .........96 Fixed cash costs .110 x 1......... 106...... 1997 502 Cost Accounting..........12 x 1.000 x 1. 4/e ..000 Total manufacturing costs.856 $133........................................... (30 min............17–32... 8.........651 $746.000 – $9..............300 $89.........................................12 x .................08 Administrative depreciation .............. 194.......................... 753.. $518...... 22.............................................000 x ...319 $90..........000 x 1... 93..06 Manufacturing costs: Materials..........620 Marketing and administrative costs: Marketing (variable...............312 © The McGraw-Hill Companies............ Quinn Electronics Budgeted Income Statement For Year Ended XXX Calculations Revenues.504 $180......12 Marketing depreciation .) Prepare budgeted financial statements: Quinn Electronics..... 66..............339 Operating profits .

.......17–33...... cash) ......................... 106............ (10 min..856 Variable cash costs.............................$256...................319 Total marketing and administrative costs ............ 163............. © The McGraw-Hill Companies............................ which excludes depreciation.$885.... Inc................ 425.............400 Administrative (fixed.................) Estimate cash receipts: Quinn Electronics........................................... 66.......960 Total manufacturing costs ........039 Operating profits...504 Fixed cash costs ........................... 194.........719 Total costs ..320 Marketing and administrative costs: Marketing (variable........ 203.............612 Cash from operations would equal revenues less cash costs........................ Quinn Electronics Cash Basis Budgeted Income Statement For the Year Ended XXX Revenues .........651 Manufacturing costs: Materials .......... Chapter 17 503 ... 97................... 629.................... 1997 Solutions Manual................ cash) ........

.... Total direct materials........................ x $8............000 x 2 lbs. Alternative method: First....400 36..... Production Budget For the Year Ended December 31 (in units) Expected Sales ........................360 $45...........12 ........ Total needs .800 Total overhead.............................. Units to be produced..... $8.. 21................60 ....... 7.000 x $.... Inc... $106... x $... Sevi......19 .......000 units Overhead: Indirect labor ........40 ....................07 .....000) = 18......... 630 Power ...............80 x 1.... 1............10...000 21...........520 Indirect materials.. 4/e ............000 x $.....03 ...17–34..000 + 3.......150 18........ Inc..................... Direct labor: 21.....000 = 21..... 20............................................ 2..000 – 4........ 21.) Prepare a production budget: Sevi.... compute the estimated production: P = Sales + EB – BB P = Sales + (7.........36 ..............130 © The McGraw-Hill Companies. 3.... Add: Desired ending inventory of finished goods........200 Building occupancy ............................000 units Next estimate the costs: Direct materials Z-A styrene 21...... Less: Beginning inventory of finished goods..000 25............. x $......000 4... Inc..... 21......000 x $........... Vasa finish 21. $15......000 x 1/4 hr........000 x $....620 Total budgeted manufacturing costs .....470 Equipment costs..............................000 units 7.....000 x 1 lb....... 1997 504 Cost Accounting.. (25 min... 20.....000 x $.........960 $45...

..12 Packaging & delivery. light & water .10 Sales staff salaries ..770 12.... © The McGraw-Hill Companies. 32..925 33.000 4. Item January Adjustments = = = = = = = = Budgeted Typical Month $155.000 $308. 4...371 20...690 35.. (25 min. Chapter 17 505 ...05 x 1.500 + ($1.... 20......... 12.... $135.05 Depreciation .......000 Total budgeted costs ........000 x 1..400 x 1. 27.......17–35.592 28......000 x 1.280 18.....08 x 1.100 x 1.. 16...05 Building lease payment .) Sales expense budget: Gemini Corporation.....000 none Heat.... 1997 Solutions Manual.........628 Sales commissions..200 x 1.04 Telephone & mailing . –0– x $35..900 x 1/10) Marketing consultants ......... Inc..

17–36. (30 min.)

Budgeted purchases and cash flows–multiple choice: Warner Corporation.

a. The correct answer is (3) $225,000 BB + TI (130% x 11,900) + TI 15,470 + TI TI = = = = = 11,250 x $20 = TO + EB 11,900 + (130% x 11,400) 11,900 + 14,820 11,900 + 14,820 – 15,470 11,250 units $225,000

b. The correct answer is (2) $243,600 BB + TI (130% x 11,400) + TI 14,820 + TI TI = = = = = 12,180 x $20 = TO + EB 11,400 + (130% x 12,000) 11,400 + 15,600 11,400 + 15,600 – 14,820 12,180 units $243,600

c. The correct answer is (4) $333,876 60% x $363,000 x 97% = $211,266 25% x $363,000 = 90,750 9% x $354,000 = 31,860 $333,876

© The McGraw-Hill Companies, Inc., 1997 506 Cost Accounting, 4/e

17–36. (continued) d. The correct answer is (1) $285,379 May purchases paid in June: $225,000* x 46% = $103,500 May selling general and administrative expenses paid in June: [($357,000 x 15%) – $2,000] x 46% = $23,713 June purchases paid in June: $243,600** x 54% = $131,544 June selling, general and administrative expenses paid in June: [($342,000 x 15%) – $2,000] x 54% = $26,622 $103,500 + $23,713 + $131,544 + $26,622 = $285,379 *From part a. of this problem **From part b. of this problem e. The correct answer is (3) 12,260 BB + TI = TO + EB (130% x 12,000) + TI = 12,000 + (130% x 12,200) TI = 12,000 + 15,860 –15,600 = 12,260 units

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 17 507

17–37. (40 min.) a. (1)

Comprehensive budget plan: Tipless, Inc.*

Tipless, Inc. Schedule Computing Production Budget (Units) For October, November, and December 19X0

October
Budgeted Sales—Units ........................................ Inventory Required at End of Montha ................... Total to Be Accounted for ..................................... Less Inventory on Hand at Beginning of Month.... Budgeted Production—Units ................................
a October:

November
90,000 24,000 114,000 18,000 96,000

December
120,000 24,000 144,000 24,000 120,000

120,000 18,000 138,000 24,000 114,000

90,000 x .2 = 18,000 November: 120,000 x .2 = 24,000 December: 120,000 x .2 = 24,000

(2) Schedule Computing Raw Materials Inventory Purchase Budget (Pounds) For October and November 19X0

October
Budgeted Production—Pounds (1/2 lb. per Unit)a ........... Inventory Required at End of Monthb ............................... Total to Be Accounted for................................................. Less Inventory on Hand at Beginning of Month ............... Balance Required by Purchase........................................ 57,000 19,200 76,200 22,800 53,400

November
48,000 24,000 72,000 40,800c 31,200 50,000

Budgeted Purchases—Pounds (Based on Minimum Shipments of 25,000 lbs. Each) ..... 75,000
a October:

November:
b October: c 22,800

114,000 x .5 = 57,000 96,000 x .5 = 48,000

96,000 x .4 x .5 = 19,200 November: 120,000 x .4 x .5 = 24,000 + 75,000 – 57,000 = 40,800

* CPA adapted.

© The McGraw-Hill Companies, Inc., 1997 508 Cost Accounting, 4/e

17–37. (continued) b. Tipless, Inc. Projected Income Statement For the Month of November 19X0 Sales (90,000 Units at $2) ............................................................... Less: Cash discounts on Sales .........................................................$ 1,800 Estimated Bad Debts (1/2 Percent of Gross Sales) .............. 900 Net Sales.......................................................................................... Cost of Sales: Variable Cost per Unit (= $110,000 x 90,000 Units) ....................$99,000 100,000 Fixed Cost .................................................................................... 10,000 Gross Profit on Sales ....................................................................... Expenses: Selling (10 Percent of Gross Sales) ............................................. $18,000 Administrative ($33,000 per Month) ............................................ 33,000 Interest Expense (.01 x $100,000) .............................................. 1,000 Operating Profit ................................................................................ $180,000 2,700 $177,300

109,000 $ 68,300

52,000 $ 16,300

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 17 509

17–38. (60 min.)

Comprehensive budget plan: Eagle Corporation.*

Eagle Corporation Budgeted Income Statement (in thousands) Actual For the Year Ended December 31, (Last Year) Revenue: Sales..................................................$450,000 Other income ..................................... 15,000 Total Revenue................................ Expenses: Cost of Goods Manufactured and Sold: Materials ............................................ 132,000 Direct Labor ................................... 135,000 Variable Overhead ......................... 81,000 Fixed Overhead ............................. 12,000 360,000 Beginning Inventory ....................... 48,000 408,000 Ending Inventory ............................ 48,000 Marketing: Salaries.............................................. 13,500 Commissions ..................................... 15,000 Promotions and Advertising............... 31,500 Administrative: Salaries.............................................. 14,000 Travel................................................. 2,000 Office Costs ....................................... 8,000 Income Taxes (credit) .......................... Total Expenses .................................. Operating Profit (Loss) .............................

Budgeted For the Year Ended December 31, (This Year)
$600,000 9,000

$465,000

$609,000

360,000

213,000 218,000 130,000 12,750 573,750 48,000 621,750 114,750 16,000 20,000 45,000 16,000 2,500 9,000

507,000

60,000

81,000

24,000 8,400 452,400 $ 12,600

27,500 (2,600) 612,900 $ (3,900)

*CMA adapted Note: Actual for December 31, Last Year not required but included for comparison.

© The McGraw-Hill Companies, Inc., 1997 510 Cost Accounting, 4/e

17–38. (continued) Eagle Corporation Budgeted Balance Sheet (in thousands)

Budgeted December 31, This Year
Cash .............................................................. $ 1,200 Accounts Receivable ..................................... 80,000 Inventory ........................................................ 114,750a Income Tax Receivable ................................. 2,600b Total Current Assets .................................. Plant and Equipment ......................................... 130,000 Less: Accumulated Depreciation ................... 41,000 Total Assets ............................................... Current Liabilities Accounts Payable .......................................... $45,000 Accrued Payable............................................ 23,250 Notes Payable ............................................... 50,000 Total Current Liabilities .............................. Shareholders’ Equity Common Stock .............................................. 70,000 Retained Earnings ......................................... 99,300 Total Shareholders’ Equity ......................... Total Liabilities and Shareholders’ Equity .. Additional computations: aInventory Units: Beginning inventory $48,000 ÷ $360,000,000 = 300,000,000 Added to inventory 450,000 – 400,000 = Ending inventory Cost: Manufacturing costs .......................................... $573,750 Units manufactured ........................................... 450,000 Cost per unit ($573,750 ÷ 450,000) .................. $1.275 Ending units....................................................... 90,000 Cost of ending inventory.................................... $114,750 Note: Footnote b appears on the next page.
© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 17 511

$198,550 89,000 $287,550

$118,250

169,300 $287,550

40,000 units 50,000 units 90,000 units

17–38. (continued)
bIncome

tax: Sales & other income ................................. $609,000 Cost of goods sold...................................... $507,000 Selling expense .......................................... 81,000 General & administrative expense.............. 27,500 Total cost ................................................ $615,500 Tax loss ......................................................$ (6,500) Tax rate ...................................................... 40% Tax receivable ............................................ $ 2,600

© The McGraw-Hill Companies, Inc., 1997 512 Cost Accounting, 4/e

Solutions to Integrative Cases
17–39. (40 min.) Prepare cash budget for service organization: Triple-F Health Club.

The income statement is on a cash basis, hence we start with a budgeted income statement. a. Triple-F Health Club Budgeted Statement of Income (Cash Basis) For the Year Ended October 31, 19X8

Cash revenue Annual membership fees $355,000 x 1.1 x 1.03 ............................................... $402,215 234 Lesson and class fees x $234,000 .................................................. 304,200 180 2.0 Miscellaneous x $2,000 ...................................................... 2,667 1.5 Total cash received ........................................................................................ $709,082 Cash costs Manager’s salary and benefits ($36,000 x 1.15) ............................................... $ 41,400 Regular employees’ wages and benefits ($190,000 x 1.15) .............................. 218,500 Lesson and class employee wages and benefits ............................................... 291,525 Towels and supplies ($16,000 x 1.25) ............................................................... 20,000 Utilities (heat and light) ($22,000 x 1.25) ........................................................... 27,500 Mortgage interest ($360,000 x .09)a ................................................................... 32,400 Miscellaneous ($2,000 x 1.25) ........................................................................... 2,500 Total cash expenses ....................................................................................... $633,825 Cash income .......................................................................................................... $ 75,257

( (

)

)

Additional Cash Flows Cash payments: Mortgage payment.............................................................................................. $ Accounts payable balance at 10/31/19X7 .......................................................... Accounts payable on equipment at 10/31/19X7 ................................................. Planned new equipment purchase ..................................................................... Total cash payments ....................................................................................... Cash inflows from income statement ..................................................................... Beginning cash balance ......................................................................................... Cash available for working capital and to acquire property.................................... $
aOn

30,000 2,500 15,000 25,000 72,500 75,257 7,300 10,057

November 1, 19X7, the unpaid balance after annual payment is $360,000, computed as follows: Balances after the $30,000 annual payment November 1, 19X4 = $450,000; November 1, 19X5 = $420,000; November 1, 19X6 = $390,000; November 1, 19X7 = $360,000.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 17 513

17–39. (continued) b. Operating problems which Triple-F Health Club could experience in 19X8 include: • The lessons and classes contribution to cash decreased because the projected wage increase for lesson and class employees is not made up by the increased volume of lessons and classes. Operating costs are increasing faster than revenues from membership fees. Triple-F seems to have a cash management problem. Although there appears to be enough cash generated for the club to meet its obligations, there are past due amounts on equipment and regular accounts. Perhaps the cash balance may not be large enough for day to day operating purposes.

• •

c. The manager’s concern with regard to the Board’s expansion goals are justified. The 19X8 budget projections show only a minimal increase in the cash balance. The total cash available is well short of the cash needed for the land purchase over and above the club’s working capital needs. However, it appears that the new equipment purchases can be made on an annual basis. If the Board desires to purchase the adjoining property, it is going to have to consider significant increases in fees or other methods of financing such as membership bonds, or additional mortgage debt.

© The McGraw-Hill Companies, Inc., 1997 514 Cost Accounting, 4/e

17–40. River Beverages Case. Note: It is important to understand the regional structure of the organization (Illustration 17.40A) as well as the production plant structure for the company’s NonCarbonated Drink plant in St. Louis (Illustration 17.40B). Instructors may want to present an overview of this case before assigning it to students. a. Sales projections are made at three levels: • Division managers submit a report to the vice president for the region that includes forecasts for capital, sales, and income. This report is used for strategic planning purposes. The strategic research team develops sales forecasts for each division while considering economic conditions and current market share for each region. The strategic research team reports directly to the vice president of each region (see Illustration 17.40A). This team is able to more accurately integrate division products and assess demand for complementary products than the individual division managers. Once the corporate forecast is completed (using the information from division managers and the strategic research team), district sales managers estimate sales for their district. The district sales managers report to the division sales managers for each division (see Illustration 17.40B). However, the district sales managers return their forecasts to the division managers rather than to the division sales manager. The strategic research team and division controller review the forecasts prior to sending the forecasts on to top management (probably to check for reasonableness—the strategic research team and controller likely know more about the division’s market than top management).

After the sales budget is approved by top management, it is separated into a sales budget for each plant. Since the sales budget is already established, plant managers are responsible for establishing the budget for costs and profit given specific predetermined sales projections. The plant budgets are established as follows: • Each department within the plant is required to develop cost standards and cost reduction targets. (The department personnel will likely know more about these costs than upper management. Thus, it is reasonable to have them be involved in the process.) A member of the strategy team and controller review the budget process with the plant manager to make sure the budget is reasonable. Final budgets are submitted by April 1.

• •

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 17 515

17–40. (continued) The final budgets are fine tuned by the vice presidents and CEO and submitted to the board of directors for approval in early June. (The vice presidents and CEO must be able to justify the budgets to the board, and thus, review it and make any necessary changes before submitting it.) b. The question is “should the plants be treated as profit centers (responsible for sales and costs), or as cost centers (responsible only for costs)?” The plant managers have very little control (if any) over sales projections. As shown in Illustration 17.40B, the division and district sales managers report separately to the division manager, and do not discuss the sales budget with the plant managers. It is very difficult to make a case that plant managers should be responsible for sales. However, plant managers are responsible for controlling costs and are directly involved in establishing budgeted costs. Thus, it is reasonable to treat the plant as a cost center and hold plant managers responsible for costs. If management wants to continue treating the plant as a profit center, plant managers should be involved in the sales budgeting process. c. The primary question is “what behavior is top management trying to promote with the budgeting process?” In general, River Beverages’ management wants its employees to maximize production efficiency (thus minimizing production costs), and maximize profits. Answers concerning the advantages and disadvantages of the budget process will vary. One example follows: • Plant managers are held responsible for sales and costs even though they only have control over costs. Sales departments can cut prices or offer promotional campaigns that negatively affect a plant manager’s profit. In this example, it is not advantageous to assign responsibility for sales to plant managers without control over pricing and promotional decisions.

© The McGraw-Hill Companies, Inc., 1997 516 Cost Accounting, 4/e

Chapter 18
Flexible Budgeting and Performance Evaluation

Solutions to Review Questions
18–1. A responsibility center is a subunit of an organization that has control over certain costs and/or revenues. The accounting system is designed to relate controllable costs and revenues to the appropriate responsibility center. 18–2. Some responsibility centers are responsible only for costs. The assembly unit of a manufacturing plant would be a good example. On the other hand, some responsibility centers, such as sales offices, are responsible for revenues. Other responsibility centers such as corporate divisions are responsible for both revenues and costs. Finally, some responsibility centers are responsible for revenues, costs, and investment in company assets. The chief executive officer is the prime example of this. The designation of responsibility centers depends on the specific organizational structure and management system in the organization. 18–3. For performance evaluation purposes, the costing format should identify the actual costs for comparison with expected costs during the relevant period. Under absorption costing, the manufacturing fixed costs are allocated on a per unit basis. An increase in production results in a lower per unit cost. If all of the production is sold, all of the fixed cost will be charged against profit. However, if some of the costs are assigned to inventory, the result can be a deferral of costs that should be evaluated at this time. This problem is highlighted by the suggestion that one can increase production in times of declining sales in order to “help the bottom line by spreading fixed costs over more units.” 18–4. Variable costs and revenues “flex” with changes in activity. Fixed costs are expected to remain the same when operations are in the relevant range. 18–5. Standard costing establishes standard costs—anticipated costs of producing and/or selling a unit of output, typically based on historical data adjusted for current trends. Target costing is a systematic approach to establishing product cost goals based on market-driven factors. Target costing begins with the customer and “backs in” to the target cost based on the target sales price minus the target margin (set by management). 18–6. Flexible budget—multiple choice question. (d) Master budget is based on a predicted level of activity and a flexible budget is based on the actual level of activity.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 18 517

18–7. Flexible budget—multiple choice question. (d) Appropriate for any level of activity.

Solutions to Critical Analysis and Discussion Questions
18–8. Responsibility is usually expressed in terms of standards for units of output. That is, an assembly line worker is expected to assemble a given number of units per hour, day or week. A college instructor is expected to teach a given number of courses and students. Hence, these workers do not avoid responsibility, but their responsibility is measured differently. 18–9. Government systems are usually not able to respond to changes in activity levels. For example, an unemployment commission is usually strapped for workers when the unemployment rate rises. By the time the needs are presented to legislators and the needs are met through increased funding, the unemployment rate may well have decreased leading to over-funding in a subsequent period. In part this problem is due to the elaborate controls that have been instituted over governmental units. 18–10. Preparation of the ex post budget allows management to compare actual results with the budget that would have been instituted if certain ex ante unknowns were known. The most significant of these is, typically, volume of activity. By controlling for the difference between ex ante expectations and the ex post volumes, comparisons between actual results and plans can be more meaningful. The controllable factors (i.e., costs per unit, efficiency, sales prices) can be isolated and evaluated. 18–11. The performance measurement system should not change with the differences in financial reporting methods. For performance evaluation and control, the important factor is costs incurred, not the accounting treatment of those costs. 18–12. The management at MiniScribe was trying to create the illusion of more sales than there really were. Invoices dated in the next fiscal year would not be included in the current fiscal year. Back dating invoices allows the company to record sales in the current year that occurred in the following year. This would tend to overstate revenues and make the company look more profitable than it really is. Shipping disk drives to customers who had not ordered them was a very expensive way of continuing the illusion of increased sales when true sales were much smaller. 18–13. A flexible budget indicates budgeted revenues, costs and profits for virtually all feasible levels of activity. So, managers can use the flexible budget to determine what costs should be assuming different levels of activity. Since changes in volume of production may not be within the particular manager’s control, the flexible budget allows supervisory managers to isolate the effect of changes in volume on the overall costs of a department in question. The flexible budget also separates fixed and variable costs. Generally, fixed costs are less controllable in the short run than variable costs.

© The McGraw-Hill Companies, Inc., 1997 518 Cost Accounting, 5/e

Solutions to Exercises
18–14. (20 min.)

Flexible budgeting: Davidson, Inc.

Calculations: Master budget dollar amount Sales revenue: 18,000 units x $12 per unit = $216,000 Variable costs: 18,000 units x $ 5 per unit = $ 90,000 Fixed costs: $ 54,000 Davidson, Inc. Flexible Budget Sales revenue ..................................... $220,800 (= $12 x 18,400) Less: Variable manufacturing costs .......... 92,000 (= $5 x 18,400) Contribution margin ............................. $128,800 Less: Fixed manufacturing costs............... 54,000 Operating profits.................................. $ 74,800

18–15. (30 min.)

Sales activity variance: Davidson, Inc. Flexible Budget (based on actual of 18,400 units) Sales Activity Variance
$4,800 F 2,000 U 2,800 F

Master Budget (based on budgeted 18,000 units)
$216,000 90,000 126,000 54,000 $ 72,000

Sales revenue ..................................... Less: Variable manufacturing costs .......... Contribution margin ............................. Less: Fixed costs ...................................... Operating profits..................................

$220,800 92,000 128,800 54,000 $ 74,800

$2,800 F

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 18 519

.....000e 128.000 Units) $216.400 Units) $220... Actual (18...... $ 61.000 a18...........000 Less: Fixed manufacturing costs .....000 units x $5 520 © The McGraw-Hill Companies.760 F $16..560 U $2...560a Less: Variable manufacturing costs ...800 F 2...... Inc. 1997 ..90 e18... 115.760 F $16.400 units x $5.000 Operating profits ..000f 126.760 F $2..18–16....15 units x $12 c18......800 54........800 Activity Variance $4.... 54.........000c 90.....560d Contribution margin .....560 U 16.800b 92..400 units x $5 f18.....000 $ 72... 108.000 54.400 2....560 U Manufacturing Variances Flexible Budget (18...800 F Master Budget (18.800 F units x $12...000 Sales revenue ..000 $ 74. (30 min. $223..000 U 2.400 Units) Sales Price Variance $2....) Profit variance analysis: Davidson....000 units x $12 d18..... Inc.400 b18.

.500 Department profit . $1... Fixed costs .392...............392.000 hrs.......000 $200.000 hrs.250.725..........000 Total costs. $ 332....000 300............000 hrs.... Other variable costs.000 hours) $1... Chapter 18 521 .000 Wright & Allen Flexible Budget Billable Hours Calculations Revenue ....000 1....... Total costs..000 x 23.000 x 23.. 230. 1997 Solutions Manual. 862... Costs: Professional salaries..725..................500 $750.... Fixed costs ... Actual 23.500. Department profit ....000 $1. 1.000 Revenue ..000 Budget 20.000 300.18–17. Inc...500 U 82.../20.....000 862..000 750.........) Flexible budgeting—Service organization: Wright & Allen.000 hrs.....500 F Master Budget (based on budgeted 20......./20........ 300..500..500 230.....000 200............. Costs: Professional salaries... $1.................. Other variable costs..500 $ 332..500 U 30.. (20 min.) Sales activity variance—Service organization: Wright & Allen..000 x 23......000 U 142...000 hrs....../20....500 © The McGraw-Hill Companies.000 F 112...... (45 min...................000 hours) Sales Activity Variance 225.....000 hrs... Flexible Budget (based on actual of 23.000 1..500 18–18.000 $ 250.

. Inc.000 F $35.......500.) Profit variance analysis: Wright & Allen...000 750..... 212.000 hrs.000 hrs...500 a $75.500 Fixed costs ....500 (5) Sales Activity Variance $225... $ 222...000 Department profit ..000 hrs..500 F 10..000 $ 332.000 hrs...000 hrs.000 U (4) Flexible Budget (23..000 20... $1.000 200.500 U 17.000 20..) $1. (1) Actual (23..000 F 112....... b c 522 © The McGraw-Hill Companies.000c 300......000 U 23..000a 862.000 hrs. x $750......000 hrs.000 300.... x 1.000 20.. 1997 ...) $1....000 Professional salaries ....650..500 F (6) Master Budget (20.000 U (3) Price Variances $75...000 U $ 82.........000 Revenue . 290.) (2) Cost Variances $62.000 hrs.. 925..000 $250..000 Other variable costs . 23.500. 23..18–19. x $200.500 U 30..725..500b 230. (30 min..000 hrs...

000 TC = F + VX = $2.400.000.000.000 TC = F + VX = $2.000 – $2. $8. Chapter 18 523 . $32 per unit Flexible budget. VC = (TC – FC)/X = ($6..000 + ($32 x 100.000 b.000 units) d. $2.000 units) © The McGraw-Hill Companies. $5.000. Inc.18–20.000 + ($32 x 200.000.) a.200. 1997 Solutions Manual.000 units c. (20 min.000.000)/125.

500 units (b) Fixed costs = $50.000 = $5.80X = $22.000 $58.000 units (b) $22.18–21.000 units) – $50. 1997 524 Cost Accounting.500 + $50.000 = (a)(10.000 $5. Inc..80 (a) Computations: (a) Profit = (P – V)X – FC $8.500 units $5.80X – $50. Flexible budget line Master budget operating profit = $8.000 X = $72.500 Fill in amounts on flexible budget graph.80 © The McGraw-Hill Companies. (25 min.000 Slope = contribution margin per unit = $5.500 = 12.000 0 Master budget activity level = 10.000 units Units sold Flexible budget activity level = 12.) $ Flexible budget operating profit = $22. 5/e .500 = $5.80 per unit a = 10.

.000 units $8 (b) $36.000 = 8. 1997 Solutions Manual.18–22.000 = $8X – $70.) $ Master budget operating profit = $36.000 Flexible budget 0 operating profit (loss) = ($6.000 + $70.000 = 13. (25 min.000 X = $64.000 Computations: (a) Profit = (P – V)X – FC –$6. Flexible budget line (a) (b) (b) = Master budget activity level = 13.000) Flexible budget.00 Fixed costs = $70. Chapter 18 525 .000 $8X = $36.250 units Units sold (a) = Flexible budget activity level = 8.000 = $8X – $70.250 units $8 © The McGraw-Hill Companies.000 + $70.000 $8X = –$6.000 X = $106.000 units Slope = contribution margin per unit = $8. Inc.

.... $4.... Variable marketing and administrative ......................... Contribution margin ......000 $1..................................... Total variable costs ...000 x 850/800 1..... Total fixed costs ....000 x x x x 850/800 850/800 850/800 850/800 Sales revenue .....000 400.....................500 552..250.........190..000 $ 510........................... 5/e .... Inc.000 280... Variable costs: Blank disks .................000 © The McGraw-Hill Companies..000 $2.................. Marketing ...................................500 425.....200. (35 min.....000 240...............000 $1................ Fixed costs: Manufacturing overhead .........700. Variable overhead ...................... Direct labor ......550.000 units) Calculations (000 omitted for units) $4.......) Prepare flexible budget: Graphix.................................000 297.. 1997 526 Cost Accounting.............000 $ 800....000 150.....................18–23..000 520............. Operating profits ........000 1.................... Administrative .........275... Inc..000......... Flexible Budget (based on actual of 850........

...............) Sales activity variance: Graphix..000 $1......000 F 75.......000 150.............. Flexible Budget (based on actual of 850........000 $ 800............600............400.........000 $150.000 240.............000 Sales Activity Variance $250...700. 1997 Solutions Manual.........000 $ 410........... Direct labor ........ Operating profits .275.........................000 — — — $100.....................000 297..000 © The McGraw-Hill Companies..... Variable overhead ....... Administrative ...................500 25.. Total fixed costs ..190....500 425...........500 32. Variable costs: Blank disks.....................000 $1. Inc.....000 240.........000 150..........................000 $ 510.500 552................18–24.. Variable marketing and administrative..250...000 F U U U U U F Sales revenue ...000 units) $4........ Chapter 18 527 ....000 $2............000 17.......... (45 min..000 units) Master Budget (based on budgeted 800.000 1........190...... $4.....000 $1... Marketing ..000 280.. Inc.........000................ Fixed costs: Manufacturing overhead ...000 $ 800.......... Contribution margin ....200..000 $100.... Total variable costs .......000 400.....000 1......000 520........550.......000 $1...........................000 $2...

.............000 F 24.000 1...418..000 $ 510..000 150...000 Variable Manufacturing ....000 800...442...000 U $1......000 F $15.000 240..400......000 units) $4......) Profit variance analysis: Graphix.000 F Actual (based on 850.500 552..700... 776...000 F 75.. $ 296..000 $2..000 -0$100. (30 min...000 F $117... Flexible Budget (based on 850...200. 1......146...000 U $150... Marketing...000 1. Administrative .................000 Blank disks .....000 F 32..500 425..190.000 $390. 1997 .. 1.. Inc....000 528 © The McGraw-Hill Companies....000 F $15....000 Direct labor ....000 F 20............. Inc...000 -0$390. $2..........000 F Total fixed costs.190.........550.000 U Sales Activity Variance $250.500 U 74. Variable Marketing and 410..000 $1.18–25.....000 F $35...000 F $141....000 330.....000 240. 478...000 Manufacturing Variances 75...... $3.000 400.000 units) Sales revenue .500 U 32....500 U 25..600..000 520...000 $2....000 297.....860.200..250.500 F Marketing and Administrative Variances Sales Price Variance $390.000 $ 410..275.000 280..000 F Master Budget (based on 800.000 Operating profits .000 Contribution margin.........000 F 24......000 $15.000 240......000 administrative ....000..000 F $117...000 U 17........000 U 1.....000 units) $4.000 U $100..000 150..000 130...000 1. Total variable costs .. $1.......000 F -020....000 Fixed costs: Manufacturing Overhead ..000 800..

However. (15 min.) Assigning responsibility. 18–27. This refusal cost the company $50. Hopefully this incident will not happen again and production managers will be given proper incentives to cooperate. Chapter 18 529 . The audit department should be charged for the error if the mistake was due to negligence on the part of the audit department to give them incentives to do the job right. (15 min..) Assigning responsibility: Berg & Jordan. This situation is a normal part of a tax department’s business and would probably be charged to the tax department.000 and much time and effort including the opportunity cost of lost profits due to stopped production. management is also to blame for giving the start station manager the wrong incentives. © The McGraw-Hill Companies. so the $50. 1997 Solutions Manual. It appears that the start station manager acted against the best interests of the company by refusing to shut down production temporarily. Inc. In future assignments it would be beneficial for the tax department to be able to rely on the audit department’s work with reasonable assurance.000 could be written off as an abnormal expense for the period.18–26.

.... Master Budget Sales volume ..... Variable costs: Manufacturing .................. $540......... Marketing and administrative ..000 units $380.000 units © The McGraw-Hill Companies....................000 – $54....... Fixed costs: Manufacturing ..000 units x $5 $540........000 10% x $540...... Marketing and administrative ...000 54... 5/e . Inc....000 units Sales revenue .....000 Computations 108......... Contribution margin ...Solutions to Problems 18–28..... (30 min.....000 216.......000 – $380............000 380....000 (given) $2 x 108................000 106..000 $108. 1997 530 Cost Accounting....000 $1 x 108...... Solve for master budget given actual results: Kentron Enterprises..... 108.....) a....000 56....000 – $216..000 – $108. Operating profit .

.000 dSolved after determining flexible budget sales revenue.222 F — — $42.... 1997 ..200 Marketing and administrative . and variable marketing and administrative.. Also.. $117... $672...000 $29...000 units 108.400 Contribution margin . Inc......000 106..........000 F units x $5 $380.. 113... $145.000 54....600 U $72.........000 216..000 x 120.000a 117............. contribution margin.. 463... 531 © The McGraw-Hill Companies.000 U 42....000 units/108. 61.200 U $58.000c 422..000 F Flexible Budget (120... (continued) b.400 U 72.000 F $ 1...400 Fixed costs: Manufacturing .778 = $106...000 Variable costs: Manufacturing .. 147.400 U 1.000 56...222b 216...000 F $18.200 a120..778d 60....200 Operating profit ..... Actual (120...18–28..422 U 57.222 Sales Activity Variance $60. 205....422 U 29.000 Units) $600..000 56..000 Units) Sales revenue ...000 Marketing and administrative ........000 units...000 x 120...222 F Master Budget (108.....000 F 11.000 $108.000 380..000 Units) $540...778 U 6.422 U 11............000 b Manufacturing Variances Marketing and Administrative Variances Sales Price Variance $72.000 $150.000 units c10% x $600....

......... $1................... 532 © The McGraw-Hill Companies...950 510 Variable manufacturing costs ....312 (m) $25 F Note: See computations on next page...) Find missing data for profit variance analysis..... (30 min........025 570 225 $1...18–29. Inc........ Marketing & Administrative Variance Flexible Budget ((a) 750 Units) (f) (i) (l) $60 F $25 F (n) $75 U (j) (o) $2....(e) Variable marketing and 200 administrative ................160 (g) 608 240 (q) $1..(h) Contribution margin......230 Actual (750 Units) Sales revenue . 1997 ..240 Manufacturing Variance $60 F Sales Price Variance (b) $75 U Sales Activity Variance (c) $135 U 38 F (k) (p) 15 F $82 U Master Budget (800 Units) (d) $2... $1..

(l). (e). costs that are part of the activity variance = $. (n). (h) Variable marketing and administrative costs = $1. (i). 1997 Solutions Manual. (f).950. (o).025). Master budget = $2. and (q) are column totals. (j).70 x 800 units = $2.025 – $1.70.76 x 800 units = $608 (g) (= $38/$135 x $2.30. (b) $75 U = $2. Budgeted variable manufacturing cost per unit = $38/(800 – 750 units) = Flexible budget variable manufacturing costs = $. © The McGraw-Hill Companies.76.30 x 750 units = $225 (j).025 = $135 U (c).76 x 750 units = $570 (f) (= $38/$135 x $2. (c). (d) Budgeted sales price per unit = $2. Chapter 18 533 .950 – $510 – $1. (k) Budgeted variable marketing and administrative costs per unit = $240/800 units = $. (m).025/750 units = $2.18–29. Actual variable manufacturing costs = $570 – $60 = $510 (e). (continued) Additional computations for Problem 18-29: (a) 750 units from actual column.. (p).30 x 50 units = $15 F (k) = $240 – $225.160). Inc. Variable marketing and admin.240 = $200. Activity variance = $2. Flexible budget marketing and administrative costs = $. (g) $. Marketing and administrative cost variance = $225 – $200 = $25 F (i).160 (d).160 – $2. Master budget variable manufacturing costs = $.

600 Contribution margin...000 Variable marketing and administrative costs ....000 (l) $10.. (r) Fixed marketing and administrative costs ......000 F (c) 20..000 Actual (based on actual sales volume) Units ...000 F 15...000 U 10..000 F (m) 25....000 $ 20.000 Sales Activity Variance 2.......000 2.000 $150......000 U $18.400 F (x) 18........000 F (e) 15.000 (u) $7...000 (h) $180.....000 U (s) 2. 534 © The McGraw-Hill Companies.400 (w) $ 600 U (f) $ 10.....000 (k) 4..400 F 9...400 Manufacturing Variance Marketing and Administrative Variance Sales Price Variance $18...... (40 min.....000 (d) 25... (g) $198.000 60... (t) $ 30...) Find data for profit variance analysis. (a) 12. 1997 .000 23... Master Budget (based on budgeted sales volume) 10....000 U (v) 3...... Inc. (q) Less: Fixed manufacturing costs ....000 F Flexible Budget (based on actual sales volume) (b) 12.000 18..000 Note: See computations on next page.000 Less: Variable manufacturing costs .......000 (j) 16....000 U 96..000 F 24.....000 (p) $2...000 Sales revenue ......... 21.... (n) 105.000 Operating profits ..000 50..............18–30....000 F (i) $30. 71...000 U 80.000 F (o) $9...

000 – $21. e.000 F j.000 units.000 Alternative computation: 2..000 – $15.000 Same as p.000 units Alternative computation: $96.000 – $20. b.18–30. m.) – $18.000 Same as m.000 U $2.000 U $3.) – $23.000 – $15. Inc. (continued) Calculations: a.000 + $60.000 g. Fixed costs in flexible budget are the same as the fixed costs in the master budget. $30.000 U $600 U $18.000 – $21. $10.000 U Same as k.000 F $18. 12.400 F $71.000 – $105. 10.000 F – $16.000 – $15.000 U – $4.000 units + 2. d.000 units $150.400 (q.000 $2.600 $198.000 + $24.000 $9. $10.000 $60. x.000 12. v. Chapter 18 535 . $71.) Total manufacturing variance on the contribution margin line $24.000 $25.000 Same as b.000 h. $20. u.000 F l. s. o.000 – $2. 1997 Solutions Manual.000 – $80.000 – $50.000 $9. $180.000 units.000 (r. r.000 – $50.000/10.000 + $9.400 F $30. $198.000 (from h. p.000 units x $15 $96. 12.000 – $150.600 $25.400 $7.000 $180.000 F $25.000 $15.000 U – $2.000 (from o. n.000 U k.000 $180.000 i. c.000 U Sales price variance f.) + $18.400 – $3.000 – $25. $10.000 units x $150. t. $16.000 – $80.000 $105.400 $23. w.000 $96.000 F © The McGraw-Hill Companies. $50.000 Alternative computation: $30. $60.000 $2. q.

She should meet with her superiors. Mary is trying to improve the profit on next year’s income statement. Revenues and expenses must be matched to the correct period to which they belong. she should communicate her performance truthfully. She must prepare reports in accordance with technical standards and generally accepted accounting principles. 5/e . She knows that a revised budget to reflect changes in product lines might make it harder to get a bonus next year. If this is not possible. Mary faces a conflict of interest between communicating information fairly and objectively and achieving high bonuses. © The McGraw-Hill Companies. and try to change the incentive system. 1997 536 Cost Accounting. Since she has reached a plateau on this year’s bonus. point out the conflict. This is an unethical practice.. anything she can do to increase next year’s profit will help her get a bonus next year. Inc.18–31. Mary must perform her professional duties with competence. (20 min.) Ethical issues in managing reported profits: Herald Co.

..........................000 2............500 500 1.. 1997 Solutions Manual................ (20 min.... Manufacturing overhead .................. Total variable costs .... Flexible Budgeta Sales revenue .. © The McGraw-Hill Companies... Manufacturing overhead ....500 $2.....000 600 500 x x x x x 90/100 90/100 90/100 90/100 90/100 $9..... Fixed costs: ...000 revenue and the variable costs are 90 percent (90 units ÷ 100 units x 100%) of the master budget amounts. Marketing ....................... aSales Calculations $10......400 1....... Administrative ........... Administrative ... Variable costs: Manufacturing direct labor .................................500 4.... Operating profit .. Chapter 18 537 .......... Contribution margin ....350 1...000 1.......260 900 540 450 4.....) Prepare flexible budget: Ishima Corporation......500 1..........000 x 90/100 1..........18–32................000 1... Marketing ................................................. Total fixed costs . Manufacturing materials ........... Inc..................

.000 150 F 140 F 100 F 60 F 50 F 500 U -0-0-0-0$ 500 U 1... Operating profits ....000 1.500 $ 2...500 500 1... Total variable costs ....... Total fixed costs .....500 © The McGraw-Hill Companies..............500 $2...000 1......... Marketing ... (45 min..... Administrative .....000 500 1............. Flexible Budget (based on actual of 90 units) Master Budget (based on budgeted 100 units) $10............ Less variable costs: Manufacturing costs: Direct labor ..........500 $4..........000 Sales Activity Variance $1.......000 $ 2....000 U Sales revenue ...... Inc........... Marketing ........ Less fixed costs: Manufacturing ..400 1..000 1......500 1.... Variable overhead ............350 1..000 $ 5... Administrative ......260 900 540 450 $4....000 600 500 $ 5..... $9.000 $2..) Sales activity variance: Ishima Corporation. Contribution margin ... 5/e ... 1997 538 Cost Accounting......18–33... Materials .........

....000 $2..000 U Master Budget (100 Units) $10..000 $2..000 150 F 140 F 100 F 60 F 50 F 500 U — — — $ 500 U 1. Marketing .500 $85 F 40 U 5F $75 U $200 F 539 © The McGraw-Hill Companies............000 600 500 5...) Profit variance analysis: Ishima Corporation............000 500 1.000 1...... Administrative ...500 500 1........200 Manufacturing Variance Sales Price Variance $200 F Sales Activity Variance $1.350 1......... Materials. Marketing .........500 1.210 $70 F 60 F 80 F $10 F 50 U 40 U 70 F 15 F 200 F 1. Marketing & Administrative Variance Flexible Budget (90 Units) $9.....730 485 1.......000 1..000 Actual (90 Units) Sales revenue . Variable costs: Manufacturing Direct labor .200 820 530 500 4............18–34..... Administrative .. Overhead ...400 1... $9.... 1997 ... Operating profit ...040 995 $2.420 1.. Inc... Contribution margin . (30 min.....000 1.....260 900 540 450 4.. Fixed costs: Manufacturing .

.200 $112.920 F Master Budget (based on a prediction of 14. (20 min..730 U $16. However.100.100 trips) Sales revenue .650a 43..000 trips) $151.930b $129. This illustrates the need to consider variance analysis even if bottom-line dollar amounts are similar to budget. which decreased profit by $21.100 trips Although the two months’ contribution margins are similar. Inc.7857 14...650 = $10....000 trips $173.18–35..500 $430 F $430 F $21.650....650 F 5.930 = $2.7286 x 16..100 trips bLast month unit variable cost = $38..200/14. The number of trips increased by 2. Hint: Use last month’s actual as master budget. Less: Variable costs .. Actual (based on actual activity of 16. Activity levels..000 38.000 trips = $2.500 $108...650 U Flexible Budget (based on actual activity of 16. there are significant variances..650 U Last month price = $151. 1997 . the average price per trip decreased by $1. a Variable Cost Variance Sales Price Variance $21.000 = $10. 540 © The McGraw-Hill Companies. Contribution margin ..441).3447 ($10.720 Sales Activity Variance $22.000 43.. which increased profit by $22..7286 $43.100 trips) $173.650.. but individually be significant.7857 less $9.) Derive amounts for profit variance analysis: Checker Cab Co. prices. and other factors may offset each other.800 $152.7857 x 16.

500 equal to budget The assumption is that. (20 min. Flexible budget is based on actual activity of 63. Assuming that insurance. within the relevant range.. (4) $3. Chapter 18 541 .) = $378 c. d.019./50.780 $20 over $3.500 + $2. (1) Decreased unit fixed costs.000 miles].000 actual miles. (4) $2.000 mi. the budgeted amount is $0. and depreciation are fixed costs. The actual amount is $0. a.) = $3. 1997 Solutions Manual. © The McGraw-Hill Companies. which is a drop of $0.000 miles for costs that vary per mile.1518. This is 83.) Flexible budget—multiple choice: The City of Dixon.085 per mile for 63.104 per mile [($500 + $2. (3) $378 $2 over $300 x (63.7% of the total decrease from $0.000 mi./50. Inc.1745 to $0.200)/50.000 mi. salaries and benefits.780 b. this is a fixed cost.000 x (63.000 mi.18–36.

..... b $600 x $1................ 36 Utilities ........ Hint for working the problem: Use sales revenue as the basis for measuring volume......200 Variable costs: Purchases .................... (40 min.....200 $60 U 720b 60c 36d 84e 900 300 100 50 30 30 210 $ 90 Activity Variance $200 F 120 U 10 U 6U 14 U 150 U 50 F Master Budget $1...000 c $50 x $1...) Analyze performance for a restaurant: Arbuckles.........000 © The McGraw-Hill Companies......... $1....................... 60 Franchise fee .....200 $1.200 $1....... Inc..... 248 Fixed costs: ......... $ 38 $1.........200 $1............ (in thousands) Marketing & Purchases Administrative Flexible Actual Variances Variances Budget Sales revenuea ..... 1997 ..... 30 Total fixed costs..... 50 Lease ....000 e $70 x $1........... 780 Hourly wages ..... Advertising ............................................... 100 Depreciation..................................... 30 Salaries .....000 600 50 30 70 750 250 100 50 30 30 210 $ 40 $8 F 60 U 8F $60 U $8 F $ 50 F aSales revenue is used as the basis of volume measurement because there are no price changes...............18–37...200 $1.... 952 Contribution margin ............... 76 Total variable costs..........000 d $30 x $1.. 210 Operating profit..........

) Analyze budget planning process–Behavioral issues: RV Industries. production and sales reports. 1997 Solutions Manual. Division and plant personnel biases which may be included in the submission of budget estimates include: • Budget sales estimates probably would tend to be lower than actually expected because of the high volatility in product demand and the current reward/penalty system for exceeding or missing the budget. • • b. (30 min. Sources of information that top management can use to monitor divisional budget estimates include: • • • • industry and trade association sales projections and performance data. prior year performance by reporting units as measured by their financial. performances of similar divisions and plants.Solutions to Integrative Cases 18–38. The reward/penalty system encourages this action. Plant and division management can incorporate “slack and padding” into the budget without the likelihood that it will be removed because corporate headquarters does not appear to get actively involved in the actual budget preparation.. © The McGraw-Hill Companies. regional and national leading economic indicators and trends in consumer preference and demand.* a. Chapter 18 543 . Inc. Budget cost estimates will be higher than actually expected in order to protect the divisions against the effects of down-side risk of business slumps and the possibility of higher costs. *CMA adapted.

Sponsor training programs for plant and divisional personnel on budgeting techniques and procedures. d. the effect on performance due to a potential reduction in bonuses. 1997 544 Cost Accounting. the effect on the communication channels between top management and divisional management. The benefits to be considered would include improved profits from: • • • • • • • • more accurate budget estimates which might reduce lost sales and/or reduce costs incurred. market share and net income. the possible negative effect on motivation and morale due to loss of authority and autonomy. lower profits due to an unfavorable change in division and plant management attitudes and motivation. © The McGraw-Hill Companies.. Provide economic forecasts with regard to expected inflationary trends and overall business cycles. Services which could be offered by corporate management in the development of budget estimates are as follows: • • • • Provide national and regional industry sales forecasts for products as developed by corporate management or obtained by management from other sources. the effect of restricting authority over the budget process at the divisional level. improved coordination and control of the budget process. Top management should weigh the costs and benefits and the resulting behavioral effects of its actions before getting more involved in the budgeting process. more effective management because of more realistic budgets. The behavioral variables to be considered would include: the effect on goal congruence. Inc. The costs to be evaluated would include: • • increased costs at the corporate level because more time and perhaps additional staff will be required.18–38. (continued) c. 5/e . Inform divisions of overall corporate goals in terms of sales.

.. 52 Facilitiesd .. 118 $1....170 aEach Flexible Budget $ 20 300 -0300 200 -0820 50 110 $980 Activity Variance -0-0100 F -0. costs are likely to be fixed.....000 Indirect costs: Administrationd . For the approved activity (master budget). Therefore. to separate these variances caused by no activity from the other cost variances. bPhase cThese dThese *CMA adapted © The McGraw-Hill Companies. they do not signal a favorable outcome for the year... nevertheless.000... 4) ...160 be multiplied by ($1.... 3)b .160 figure in the approved activity and actual cost columns in the problem include the pro rata share of the indirect costs.. It is important...170 – $170). Inc.. Chapter 18 545 ...F -0.... 440 (ph... costs are “favorable” only in the sense that they were not incurred. 1. the remaining part of the budget.. and all the actual costs must have been for an earlier phase..170 4 was budgeted for $100..18–39..... Analysis can then be carried out as follows: (in thousands) Cost Variances Actuala Direct costs: Project 4–1........ Activity achieved would be the equivalent of the flexible budget......$ 40 5–3 (ph..... (40 min..... Since the work was also not done.... each cost should $1.) Adapt budget control concepts to research organization: Argo Co.... -08–1 . 1997 Solutions Manual.U 180 U 2U 8U $190 U 20 300 100 300 200 80 1.160 – $160).... each cost should be multiplied by ($1.. -0Total direct costs .. These costs must be removed in order to evaluate the individual projects... but no work was performed..000 50 110 $1. 300 8–2 .. The approved activity may be considered the equivalent of master budget activity. 220 8–3 .........U 20 U -0...... For the actual column...... $1.F 80 F 180 F —F —F $180 F Master Budgeta $ c $ 20 U 140 U -0............

Analysis of differences between actual and master budget: Manufacturing Cost Variances $6.500 500 2.439 U 5...000) To start ending inventory.900 F $16.200 Direct materials.516 Activity Variance $9.. Equivalent unit computations: Actual Units 200 Master Budget Units 500 To complete beginning inventory .. 2.290c 26.....500 3...... 1997 546 Cost Accounting..100 $32..100 Total costs .. Equivalent units this period ......500 Less: beginning inventory.... 5/e . 2.200 400 3.......200 Fixed overhead....935 U 5... 24...600 Variable overhead ....900 a Flexible Budget 2.384 U Actual Equivalent units.... Inc.) Analyze activity variances—FIFO process costing: Fellite..065a 19........... (30 min......000) 1..100 units $14.. (1........000 b c ( ( ( $32...200 $23.. 16. $30....000 $100........500 27..500 26......435 F 7..000 14...... a.......200 x 2......100 units $27...000 3...000 Direct labor ..161b 10......200 © The McGraw-Hill Companies...18–40.... 3.210 F — $21.....200 (1.. Inc.. 24....200 2....839 F 4.200 x 2..500 3.. Started and completed: Completed .100 units ) ) ) x 2..484 F Master Budget 3. $94.000 $78.100 b..........910 U 1..

Capturing these variances can provide useful information regardless of whether inventories exist. 19–2. relate those exceptions to the manager responsible for them. The fixed cost variances differ from variable cost variances because fixed costs do not vary with the level of production activity. the fixed costs in the flexible budget will be the same as in the master budget (within the relevant range). price variances which arise because factor input prices differ from standards. efficiency variances which occur when the relationship between the usage of input factors (labor. The reported variances (and the analysis thereof) further isolates and identifies the cause of exceptions to budget plans. 19–5. and c. Chapter 19 547 . Responsibility reporting systems identify variances or exceptions to budget plans and. 19–3. there are no efficiency variances for fixed costs because there is no input-output relationship that can be applied. Additionally. Budgets focus on totals. The three primary sources of variances are: a. A standard is related to a cost per unit. Therefore. An actual cost is the transaction cost for an item.Chapter 19 Performance Evaluation: Cost Variances Solutions to Review Questions 19–1.. variable overhead) differs from that which would be expected to produce a given level of output. Inc. b. activity variances which represent differences between planned (master budget) output levels and the output levels actually attained during the period. Knowledge about differences between plans and actual outcomes can help managers improve planning or take steps to improve operations. 19–6. 19–4. A standard cost is a cost that management expects to incur in producing a product or supplying a service. Variances represent differences between plans and actual outcomes. © The McGraw-Hill Companies. 1997 Solutions Manual. further. materials.

The extra costs incurred in other departments as a direct result of the sales department's action should be chargeable back to the sales department.. 19–10. Variances are usually “expensed” as a period cost (e. 19–8. Inputs priced at standard are the costs that were expected to be incurred for the materials. The latter is generally more subject to management control. 1997 548 Cost Accounting. © The McGraw-Hill Companies.19–7. Finished Goods and Cost of Goods Sold according to the current year standard cost balances in those accounts. Also. Presumably. This problem arises more frequently than one would hope. sales) department. For example. That is. then unbudgeted overtime premiums could be the cause of price variances. 5/e . Solutions to Critical Analysis and Discussion Questions 19–9. Since costs are accumulated in responsibility centers usually according to where the cost is incurred. Work in Process. Inc.. a materials price variance recorded at the time of purchase would be prorated to Materials Inventory. charged to Cost of Goods Sold). By definition fixed costs do not change with changes in the level of outputs (in the relevant range). different departments may be responsible for each variance. the sales department would either have raised the selling price to compensate for the special delivery or undertaken the rush order to avoid losing a sale. In accepting the rush order..g. if a line manager uses workers that are more skilled (and thus higher paid) than the labor that was considered when preparing the budget. Materials Efficiency Variance. the flexible budget contains the costs that would have been budgeted if the actual output level had been known beforehand. the manager would do this only when the manager expected efficiency improvements at least equal to the unfavorable price variance. If overtime premiums are not accounted for separately. The flexible budget is generally based on output units. Hence. Variances may also be prorated to accounts according to the standard cost balances in each of the accounts. Hence. 19–12. However. labor and overhead used irrespective of the output attained from those inputs. purchasing may be responsible for the materials price variance and production for the materials efficiency variance. The action that management can take in response to price variances is probably quite different than the action that can be taken in response to efficiency variances. it is difficult to relate fixed costs to specific units of output. the labor price variances are relatively small since the rates are usually determined in advance through the union negotiation process. Typically. 19–11. an unfavorable price variance would arise that would be the responsibility of the line manager. it is quite likely that the production department will be charged with a cost that originated by the action of some other (e.g.

Inc. the effect of price changes may not be recognized until the materials are removed from the raw materials inventory and placed into work in process. Labor and material costs are entered into production as incurred. Overhead costs are applied to production on the basis of units of output. but rather only that we produced more or less than expected. The variances are also recorded as incurred. 19–14. the better the opportunities to react to the information. If decisions need to be made to compensate for the effect of materials price changes. If the price variance is not reflected until the time of use. Hence. 1997 Solutions Manual.. 19–16. 19–15. Since the sum is fixed. © The McGraw-Hill Companies. This could be a substantial time delay. Chapter 19 549 . The variances are computed at the end of the period when the applied costs are reconciled with actual costs. the production volume variance does not tell us whether we spent more or less. it would seem that the sooner the information comes to management's attention. The production volume variance arises because fixed overhead is applied over a greater or lesser number of units than were used in deriving the fixed overhead application rate. By recognizing the materials price variance at the time of purchase. the cash outflows associated with the fixed costs will be unchanged regardless of the amount or direction of the production volume variance. The production volume variance represents the result of allocating a fixed sum of costs over a different level of activity than was used in computing the allocation rate.19–13. management captures any difference between actual materials cost and the standard costs as reflected in the budget as those costs are incurred.

50 x (72.) Actual Costs $44.400 F $3. Inc.. (10 min.40 = $51.400 F $6. Price Variance Actual Inputs at Standard Prices $6.000 x $3. = $6.200 aStandard labor wage rate = (Actual Direct Labor – Direct Labor Price Variance)/ Actual hours worked ($88.400 $1.20a = $93.000 units = $46.600 F Efficiency Variance Flexible Budget (Standard Allowed) $6.000 hours x $3. (20 min.800 $1.) Actual Costs Variable cost variances: Nugget.50 x 6. 1997 550 Cost Accounting. x 1.900 units = $19. 5/e .000 Efficiency Variance Flexible Budget (Standard Allowed) $15.600 = $86.600) / 14. Price Variance Actual Inputs at Standard Prices $88.900 hours = $19.600 $3.) Actual Costs $18.600 U $14.000 Direct labor $88.500 $700 F $500 U Efficiency Variance Flexible Budget (Standard Allowed) $5 x 2 hrs.800 Variable cost variances.800 hours = $44.000 x $6.800 10) 19–18.40 = $47.400 Variable Overhead $44.500 $300 U Variable cost variances: Eagle Air Charters.200 F $15.400 – $1.Solutions to Exercises 19–17.200 $2. (15 min.000 hrs.20 © The McGraw-Hill Companies. Price Variance Actual Inputs at Standard Prices $5 x 3.000 19–19. Inc.

20 x 30.000 units of output) $1 x (2 min.000 0 0 $2 x 10. x 5. x 5. Price Variance Actual Inputs at Standard Prices $4.) Actual Costs Quality Testing $10.000 Efficiency Variance Flexible Budget (Standard allowed for 5.000 $200 U $1. Price Variance Actual Inputs at Standard Prices $1 x 10.000 F $1.400 Variable cost variances: Almay Corporation.400) and the use of more units than expected ($6.300).200 © The McGraw-Hill Companies.000 Energy $20.000 F $1 x (3 hrs.000 $2 x (2 hrs. x 5. 19–21.000) = $10..000 $1.19–20. This variance was caused by higher than expected prices ($5. (30 min.000) = $20.000) = $15.000 min.000 units = $126. (15 min.000 U $1 x 14.000 Variances from activity based costs: Crucible Company.400 U $6. 1997 Solutions Manual.700 Report to management: The total variance from the flexible budget is $11. Chapter 19 551 .700 unfavorable.000 Indirect Labor $14.500 hours = $21.300 U Efficiency Variance Flexible Budget (Standard Allowed) = $119.) Actual Costs $131.000 $5. Inc. = $10.000 hours = $14.

5/e .) Actual Costs $103..660 U 28. Price Variance Actual Inputs at Standard Prices $90 x 1. Price Variance Actual Inputs at Standard Cost $57. (20 min.100 ounces = $99.31 = $36.19–22.158 Efficiency Variance Flexible Budget (Standard Allowed) © The McGraw-Hill Companies. Inc.510 $648 U $38.000 units x $1. 1997 552 Cost Accounting. (15 min.000 19–23.680 Actual Cost of Purchases $58.340 $1.) Variable cost variances where materials purchased and used are not equal: Durango Company.200 ounces = $108.000 $5.000 Variable cost variances: Blarney Chemicals.000 U Efficiency Variance Flexible Budget (Standard Allowed) $90 x 1.000 F $9.

200 = 16.) Fixed cost variances: Cramden Co.000 $11.555 $1. (20 min.270 F $2. Inc.000 U Actual Costs $257.000 units x $2.20 © The McGraw-Hill Companies.000 U 19–25.) Actual Costs Fixed cost variances: Mahalo Corporation.000 $6.645 F a$35. Chapter 19 553 .. Price Variance Production Volume Variance Overhead Applied $240.200a $32. 1997 Solutions Manual.000 U $17. (20 min.375 F $1.000 Budget $246. Price Variance Production Volume Variance Budget $33.19–24.930 Applied $35.

540 F b..000 Efficiency Variance Flexible Production Budget (SP x SQ) $2 x 230.350 hours = $103.000 U *Fixed overhead rate = $950.000 $48. 5/e .000 $50.000 pounds = $432.80 x 240. Inc.000 = $380 per tire 2. Variable cost: Comprehensive cost variance analysis: Miller.000 $20. 1997 554 Cost Accounting.500 U $977.800 U $10 x 10.) a.000.000 $2.500 U Direct Labor $110.000 hours = $414.960 Total variable manufacturing cost variances $37.000 Overhead Budget $950. (45 min.000 Applied* = $380 x 2.000 hours = $404. Actual (AP x AQ) Direct Materials $1.800 hours = $108.300 tires = $874.000 F $10 x 10. Inc.000 U $76.500 $6.20 x 44.160 Variable Overhead $30.000 $9 x 44. Fixed overhead variances: Price Variance Production Volume Variance Actual Fixed $1.000 F $9.500 $4.500 tires © The McGraw-Hill Companies.000 pounds = $460.000 hours = $396.040 F $984.160 U $946.000 Price Variance Actual Inputs at Standard (SP x AQ) $2 x 240.000 U $9 x 46.000 pounds = $480.19–26.800 $8.000 $18.

) $ Fixed cost variances: Cramden Co.000 U Budgeted Costs 240. Chapter 19 555 . 1997 Solutions Manual.. (15 min.000 Actual Budgeted (Estimated) Activity Activity Monthly Activity © The McGraw-Hill Companies. 257. Inc.000 Application line 246.19–27.000 U Production Volume Variance $6.000 } } Price Variance $11.

000 $40. Inc.680.000 Efficiency Variance $225.000 hours = $1.000 U $150.000/90.000 exams (rounded) = 45/60 hours x 100.000 $555.500.000 aFixed overhead rate = $360.000 exams = $4 per exam © The McGraw-Hill Companies.050.000 $105.605. a.000 Price Variance Actual Inputs at Standard (SP x AQ) $36 x 75. Fixed overhead variances: Actual $374.000 F Total variable cost variances $4.000 $14.000 U Variable overhead and support $14 x 120. Variable cost variances: Flexible Production Budget (based on 50.000 $15 x 110.000 U $4.000 hoursb = $2.000 hours = $1.000 exams) (SP x SQ) $36 x 66.000 $120.650. Inc.000 U $15 x 120.000 U $4.700.000 U Budget $360.000 $300.000 F a Applied $4 x 100. 5/e .000 U a66.000 Actual (AP x AQ) Direct $39 optometrist x 75.000 hours = $1.) Comprehensive cost variance analysis: Bryce.925. (30 min.000 hoursb services = $2..000 (rounded) = 4/6 hours x 100.667 hoursa = $2.19–28.000 $450.667 b75.400.800.000 exams b.000 exams = $400. 1997 556 Cost Accounting.

000 F Actual Costs Efficiency Variance Flexible Budget (Standard allowed for 50. Price Variance Actual Inputs at Standard Prices $2.000 $8.2 x 50.000 pairs of lenses = $155.000 F $8.000 $10.000 Purchasing $100.6 x 50.000 Special Contact Lenses $145.000 U $80.000 $30.19–29. Chapter 19 557 .000 U $10.000) = $600.000 fittings = $520.000 $5.000 © The McGraw-Hill Companies.00 x 52.00 x (1.00 x 50.) Variances from activity based costs: Klien’s.000 purchases = $100.000 F $5.000 $10.000 purchases = $92.000 U $5. Inc. (30 min. 1997 Solutions Manual.000) = $150.00 x 31.000 exams) $2.00 x (0.000 Support Staff Labor $550.00 x 46..

.050.650.000 ($16.054.000 fixed) $106.000 F © The McGraw-Hill Companies.000 F c.19–30....) Two-way and three-way overhead variances (Appendix B):Bryce..000 variable $360.000 Budget $2.. Inc. a....650.....000 exams) Fixed ........000 variable + $360..054...... (20 min....00 x 100...000 $2.000 U $2... Actual Costs Spending Variance Production Volume Variance $4.. 5/e ..050......054.....000 Underapplied ..000 variable + $360... $2..000 U Efficiency Variance Budget $2.000 (= $1... $2... 1...010.50 x 100.....000 exams) Total overhead applied .......000 $44.160...000 fixed) Production Volume Variance Applied $2. Inc.000 Overhead applied: Variable.050.000 (= $1.. 400...000 F $150.........000 $40. Actual Costs Price Variance Actual Inputs at Standard Prices $2.....000 fixed) Applied $2.... b..650... Actual overhead ...000 $40...000 (= $1..800.000 ($4.010.... 1997 558 Cost Accounting.

800 $200 F © The McGraw-Hill Companies.200 F Efficiency Variance Flexible Budget (Standard Allowed) $6 x 3.19–31.300 hours = $19..) Overhead variances: Jasper Corporation. Chapter 19 559 .800 $800 F $1. Inc.600 Price Variance Budget $7.000 Variable Overhead $19.000 Fixed Overhead Actual Costs $7. Actual Costs Price Variance Actual Inputs at Standard Prices $6 x 3.500 hours = $21. (20 min. 1997 Solutions Manual.

.... 5/e ..600 $2..600 (= $19.300 F © The McGraw-Hill Companies....... $26..............500) Fixed ..800 fixed) Applied $26..60 = $7...000 ($6 x 3..200 F Actual Efficiency Variance Budget $28......100 $1.....800 (= $21..600 Overhead applied: Variable..........100 Overapplied ...60a x 3...000 budgeted hours b. $30.000 variable + $7.. (30 min.......100 ($2..800 budgeted cost 3. Actual overhead ... Spending Variance Production Volume Variance Actual Budget $28...600 $30..200 F $30.500 a $2....100 $1............300 F c.... Price Variance Actual Inputs at Standard Prices $27.800 fixed) Production Volume Variance Applied $26.800 fixed) $1..19–32..... 21.. 9.. $3.......... a.500 hours) Total applied ...) Two-way and three-way overhead variances (Appendix B): Jasper Corporation.. Inc..000 variable + $7.800 variable + $7...800 (= $21. 1997 560 Cost Accounting.000 F $1.....

.000 = "normal workload.....000) = $84..000) = $83..180 Overhead applied: Variable . (30 min.. 29.118 $4...963 $4..........70 x 2..... Actual overhead .150) Fixed ...) Two-way and three-way overhead variances (Appendix B): Indio Company. Inc..375 F Efficiency Variance Budget Production Volume Variance Applied $89.050) + ($27...75 x 2.........563 (= $13.118 Underapplied ...217 U $4... Two-way analysis Budgeted hours = 2... $89....118 © The McGraw-Hill Companies.180 $84.555 (= $27....70 x 2.........180 Budget $29.....70 x 2.. $89....75 x 2.. a.588 $5....155 F c...19–33........150) Total applied...963 Applied $89.155 F $89.... 59. 1997 Solutions Manual....." Spending Variance Production Volume Variance Actual $89.........592 U $1..563 + ($27. Actual Costs Price Variance Actual Inputs at Standard Prices ($13....... Chapter 19 561 .... $62 b.

................. To record the materials component of the sale of 60% of the finished units......... 4....... To record the requisition of 45................. 49.......920 29.......................920 62.... To record the purchase of direct materials at an actual cost of $70................... 70........000 Materials Inventory –0– 58.................................. 5/e .....480 Finished Goods Inv...........900 © The McGraw-Hill Companies..........000 units of material from Materials Inventory and to charge Work in Process Inventory with the standard usage of 48...............400 12................... To record the materials component of the transfer of 80% of the finished units from Work in Process to Finished Goods Inventory.500 3.....................................920 19...19–34............ Eff.........000 and to record the transfer to Materials Inventory at the standard cost of $1.....000 Materials Price Variance..................... 62...............500 Work in Process Inventory –0– 49....952 Finished Goods Inventory .............................................................000 units.952 Accounts Payable 70..... 1...........30 per unit................ Cost of Goods Sold .......... Finished Goods Inventory ..) Standard materials costs: Armadillo Corporation......................900 49.......000 58..500 65.................. Price Variance 5......968 Cost of Goods Sold 29................... 65... Materials Inventory ..952 Mat.920 Work in Process Inventory ...............400 Materials Inventory ......000 Accounts Payable ........ 1997 562 Cost Accounting.... 2...952 49.................. Work in Process Inventory.......... Inc....000 6...000 Mat........................ –0– 29........ 29......... 3...... Materials Efficiency Variance...................... (35 min....... 5.... Variance 3...

..200a) $ 840 F 1.. = 50..72 46.900 b$65.....504c Cost of Goods Sold .000 is a favorable variance...... 32... 21.... b$13..19–35..440b Finished Goods Inventory ...200 F = $3......344 F 2.2 30....256 = $29.480 + $960 c$21..000 U Materials efficiency variance ..000b (2) Percent of Total Cost 10 (6) 19.............952 + $2..200 a$4.... a$3..................... Inc...... Materials Efficiency Variance .968 29... Prorate variances: Armadillo Corporation Refer to 19–34. $13..536 d$32....900)a 12....304 U $5..952 $65...016 F $4..000) $ 500 U (300) F 960 U 1.....200 (2) Percent of Total Cost 20 32 48 100 (3) Variance to be Prorated (Column 2 x $4......480 19.............900 favorable variance before proration plus $300 materials price variance prorated to materials efficiency variance........ Prorate variances to Ending Inventory and Cost of Goods Sold: Variances: Materials price variance ...968 + $1.... Chapter 19 563 ...900 F Prorate variances: Materials price variance: (1) Cost in Account before Proration $ 6.......... $5..... Materials efficiency variance: (1) Cost in Account Account before Proration Work in Process ........ (The $300 increases the favorable variance).440 = $12...500 (3.. 1997 Solutions Manual. Finished Goods Inventory .256d $67.....30 standard price.... Cost of Goods Sold ...08 100 (3) Variance to be Prorated (Column 2 x $5..536 U 2.304 © The McGraw-Hill Companies......504 = $19...000 U Account Materials Inventory ..... Work in Process ...000 units x $1..... 3......

800 1. a. See credit to Standard Cost of Goods Sold for $5.000 Mat. Materials Variable OH Fixed OH Standard Cost of Goods Sold 39.202e 68. Standard Cost Variances Mat efficiency 540 2. price Var.) Standard costing in a just-in-time environment: Otter Co. 1997 564 Cost Accounting. 143. See following T-accounts and computations.131 Var.800 Fixed OH price 2. OH price 2.672b 148.O.19–36.960a 5.500 Mat. (30 min.202e Various Accounts 38.202.200 F. 5/e .O.000c Finished Goods 5.341 V. 69. © The McGraw-Hill Companies. Inc. b.H..000 Production volume Note: Variances and footnotes showing computations are on the next page.H. OH efficiency 1.

960 + $68.800 units) x ($39.800 actual units d$70.800 units x 2 units of material x $1.600 x 14.960 b$68.19–36.672 = 14.800 F $2.000) © The McGraw-Hill Companies.672 + $148.000 budgeted units c$148.200 Price Variance Budget $146.000 F a$39.500 SP x SQ $39.800 U Fixed Overhead Actual $143..35 = $69. 1997 Solutions Manual.500 F Variable Overhead $69. Inc.000 = $40.472 = $68.341 $1. Chapter 19 565 .202 = (300 units/14.672 b $1.000 Production Volume Variance Applied $148.131 F $70.000 SP & AQ $1. (continued) Variance Calculations: Price Variance Efficiency Variance AP & AQ Materials $38.672 x $1.000 c $2.800 actual units/15.800 eAdjustment from Cost of Goods Sold to Finished Goods Inventory for remaining 300 units: $5.960 a $2.472c $540 U $68.35 x 30.000 = $10 x 14.

000 – 45.000 – 45.500 WIP 12.30 x 50.900 = (48.30 d$5.480 e To WIP 19.000 = $1.968 f To FG Materials Inventory 6.480) © The McGraw-Hill Companies. 5/e . 1997 566 Cost Accounting.968 = 40% x ($62.480 Finished Goods 19.500 = $1. (30 min.000) c$3. 3.19–37.000 united purchased.400 – $12.968 Mat.. Inc. Eff.) Standard costing in a just-in-time environment: Armadillo Co.000 – $65. Var.000 a 6.480 = 20% x (48.) b$6.900 c Materials efficiency a$65.000 = $70.000 e$12.500b Materials 12. (Note: The materials price variance is already out of the materials debit to Cost of Goods Sold.000 x $1.900 Standard Cost Variances Expense Materials price 5.000) x $1.000d 3. Standard Cost of Goods Sold 65.30 x (50.30) f$19.

the production volume variance would be Budget $52. © The McGraw-Hill Companies.800 F a$3.500 Price (Spending) Variance $600 F Optional: If computed.000) = $52.) Nonmanufacturing cost variances: Seattle Financial.5 = 79 loans x $45 per loan. (30 min.555a Combined Price and Efficiency Variances $284 U Actual $23.839 Flexible Budget (Standard Allowed) $3. Salaries and the fixed office costs are all fixed.Solutions to Problems 19–38.000 + $20.900 Budget 0. 1997 Solutions Manual. Incidental office costs comprise the variable costs.800 + $28. Variance analysis for the two classes of overhead is as follows: Variable costs: Actual Costs $3.555 x 1.. Chapter 19 567 .555 b0.100 = $51.08 = $3. represents one-half year.5b x ($27.300 Production Volume Variance $2.500 x (79/75) = $55.000 + $58.500 Applied $52. Inc.

594 – $10.900 19–40.) Direct materials: Stanley Company. Actual Costs AP x 420 ounces $2.900 AP = $337. Inc.20 x AQ Labor Price Variance Actual Inputs at Standard Price $7.20 x 1471.300 Labor price variance = $294 U © The McGraw-Hill Companies.00 x AQ = $10.4 hours Solve for labor price variance: Labor price variance = ($7.98 $2.950 F 420 x AP = $144.) Solve for direct labor hours: Harrison Co.19–39..300/$7.00 x AQ Flexible Budget (Standard Allowed) Efficiency Variance $500 U $7.4 hours) – $10. 5/e .950 = $141. Solve for AQ: $7. (20 min.300 AQ = $10.400 hours = $9.300 = $10. (20 min.800 Solve for actual input at standard prices: $9. Set up variance model: Actual Inputs at Actual Prices $7.950 Actual Input at Standard Prices $345 x 420 ounces = $144. 1997 568 Cost Accounting.300.00 AQ = 1471.800 + $500 unfavorable efficiency variance = $10.00 x 1.

Actual Inputs at Standard Prices $3 x 3.19–41. 1997 Solutions Manual.900 = $14.500 Actual Fixed $4.800 Price Variance Efficiency Variance Flexible Budget (Standard Allowed) $3 x 3.700 – $9.320 a$4.900a Overhead $580 U Budget $4. Inc.300 hours = $9. Inc. Chapter 19 569 .900 $100 F $600 F Actual Variable Overhead $9.800 © The McGraw-Hill Companies.500 hours = $10. (20 min..) Overhead variances: Cyclaris.

500 $1. Actual Costs Price Variance Actual Inputs at Standard Prices $1 x 3.900 kilograms = $1.90 x 3.200 hours = $16. 1997 570 Cost Accounting.900 Efficiency Variance Flexible Budget (Standard Allowed) Direct Materials $.19–42.800 $2.400 F $4 x 2 hours x 1.900 units = $3.200 hours = $12.300 U $1 x 3.100 kilograms = $2.900 units = $15. 5/e .200 U $4 x 3.000 $300 F $1 x 2.700 Direct Labor $5 x 3.200 hours = $3. Inc.800 © The McGraw-Hill Companies. (40 min..200 Variable Overhead $4.) Manufacturing variances: Adiamo Co.100 $200 U $1 x 1.000 kilograms = $2.200 $600 F $1 x 2 hours x 1.000 kilograms = $3.000 $3.

800 hours = $5.800 hours = $3.544 U $1 x 3.000 $3.344 $1..200 hours = $16.500 $844 F $1.800 U Price Variance Flexible Budget (Standard Allowed) $4 x 2 hours x 1.40625a x 3.000 Variable Overhead $1.200 hours = $4.40625a x 3.40625 Actual direct hours 3.200 hours © The McGraw-Hill Companies. 1997 Solutions Manual.19–43. Chapter 19 571 .200 Direct Labor $5 x 3.800 aActual variable overhead = $4.500 = $1.000 F $3. (30 min.900 units = $15. Inc. Actual Costs Efficiency Variance Actual Prices at Standard Input Quantities $5 x 2 hours x 1.900 units = $19.) Alternative variance calculations (Appendix C): Adiamo Co.

5/e . (40 min.850 c$22.500b $500 U Price Variance Budget $22. a.500 = $54.100 $300 F b.800 Efficiency Variance Flexible Budget (Standard Allowed) $32.000 hours a © The McGraw-Hill Companies.600 hours x $3 per houra = $31.350 – $31. d $22. Actual Costs Variable Overhead $31.000 = $22.400 $600 U $3 = $32.000c Production Volume Variance Applied Fixed Overhead 10.500 – $500 U price variance.700 hours b$22.700 hours x $2 per hourd = $21. 1997 572 Cost Accounting. Actual Costs Fixed Overhead $22.850 $50 U Price Variance Actual Inputs at Standard Prices 10. Inc.000 $2 = 11.) Overhead cost and variance relationships: Sparkle Company.100 flexible budget 10..19–44.

19–45. The production manager fails to understand that by tightening the standards (all other things being equal) he will simply increase the negative variances. © The McGraw-Hill Companies.) Analysis of cost reports: Cifloxo Plant. (20 min. Inc. Assuming that the assembly department is working efficiently. Identify those elements of the report for which the production manager is directly responsible. (25 min. c. unless an actual reduction in processing time occurs on the shop floor.. Three possible changes that could make the cost information more meaningful are: a. More likely the assembly personnel will resent having the standards tightened without their input into the decision making process. As stated above the tightening of the standards will probably decrease morale and motivation resulting in an increased processing time. This will decrease productivity and increase the costs of production. Simply lowering the standard time allowed per operation does not reduce the cost of manufacturing the product. They currently view the standards as achievable since they do. Use standard costs. Tightening the standards will result in decreased motivation and morale as they strive for what they will view as an unrealistic standard. Currently the assembly personnel rarely complete the operations in less time than the standard allows. 19–46. although rarely.) Change of policy to improve productivity: Bichlor Bike Co. b. Use a flexible budget rather than a static master budget for measuring performance so that changed conditions. it is not likely that the tightening of the standards (reducing the allowed time per operation) will result in increased productivity. complete the operations in less than the standard time. and fixed versus variable costs are recognized in the reporting process. Improved profit margins will not be achieved. Chapter 19 573 . volume changes. 1997 Solutions Manual.

Inc. If they are too difficult then production workers become frustrated and ignore the standards. Larry's behavior is unethical. 19–48.. Standard costing may also motivate employees to operate more efficiently if they are allowed to participate in setting the standards. Inc. Standard costing allows for management by exception. standards that are set without production employee input may not be accepted as realistic by those employees. Also. If the standards are too easy then employees tend to reduce productivity. Timely reporting of variances allows management to take corrective action before costs get out of hand. 5/e . The standard cost system can have a negative impact on the motivation of employees if the standards are too easily attainable or too difficult to reach.19–47.) Behavioral impact of implementing standard cost system: Lavoy. © The McGraw-Hill Companies. (20 min. Larry has an obligation to communicate information fairly and objectively. 1997 574 Cost Accounting. (20 min. By misrepresenting the costs of the strawberries he is hoping to benefit his friend's strawberry farm at the expense of Jamestown Joe’s. and advise all parties of any potential conflicts. b.) Ethics and standard costs: Jamestown Joe’s. He should not be setting the standards and mandating from whom Joe’s should purchase the goods. a. The breakdown of variances into various components helps management trace the source of potential cost problems. He must prepare complete and clear reports and recommendations. Larry should avoid such conflicts of interest.

1997 Solutions Manual. Chapter 19 575 .10 = $12.000) 600 units x $5b = $3.100 hours x $6/hour = $12.200 $360 U 500 units x 20 meters/unit x $.600 $600 U 500 units x 4 hours x $6/hour = $12.100 hours x $3.875 + $3.92 = $16. Inc.00/unit = $20 times 1/4 (ratio of fixed costs to total overhead) © The McGraw-Hill Companies.90 = $8. The total overhead price variance = $225 U = $11.75a = $7.100 actual ($7.000 Variable Overhead ? 2.550 Direct Labor 2.560 Efficiency Variance Flexible Budget 9.875 $375 U 500 units x $15 = $7. (40 min.500 $500 U a$3.) Comprehensive variance problem: Soundex Manufacturing Company.000 $450 F Actual Costs Direct Materials 18.100 hours x $6.810 $210 U 2.000 Production Volume Variance Applied Fixed Overhead 500 units x $5 = $2.19–49.500 meters x $.000 meters x $.500 Fixed Overhead ? Budget The variable overhead price and fixed overhead price variances cannot be computed.000 meters x $..90 = $16.75/hour = $20 standard overhead per unit divided by 4 direct labor hours per unit multiplied by 3/4 (ratio of variable to fixed costs) b$5. Price Variance Actual Inputs at Standard Prices 18.90/meter = $9.

efficiency. and production volume variances) can be computed. 1997 576 Cost Accounting.) © The McGraw-Hill Companies. then the three-way overhead variance (price. (continued) Note: If Appendix B has been assigned.500 Production Volume Variance Applied $20 x 500 = $10.19–49.100 $500 U A good additional question to this problem is: "What additional information would you need to compute all overhead variances?" (Answer: A breakdown of actual overhead into fixed and variable components.000 fixed = $10..000 $11.875 $225 U $375 U Efficiency Variance Flexible Budget $7.000 fixed = $10. Inc. Three-way variance for overhead: Actual Costs Price Variance Actual Inputs at Standard Prices $7.500 variable + $3.875 variable + $3. 5/e .

000 units x $4 = $16.000 + $500 = $12.000 $800 = $15.500 $500 U Total Variance Applied Overhead 4.200 $800 F 4.000 +$1. Inc. Chapter 19 577 .000 © The McGraw-Hill Companies.300 $1. Overhead: Actual Costs $12.19–50.200 + $760 = $15.000 units x 6 kg x $1/kg = $24.000 Efficiency Variance Flexible Budget (Standard Allowed) (SP x SQ) $27. Actual Costs (AP x AQ) Direct Materials Price Variance Actual Inputs at Standard Prices (SP x AQ) 26..000 kilograms (kg) @ $1/kg = $26.300 U $24. 1997 Solutions Manual.) a.000 b.000 = $25.960 $760 U $16.000 units x $3 = $12.000 $1. (25 min. Find actual and budget amounts from variances: Nintendo.000 U 4.000 Direct Labor $15.

90 x 10.000 pounds = $168. 5/e .000 $9.800 F Variable Overhead $4. Note: The calculation of the fixed overhead budget amount makes this a challenging problem.700 Price Variance Efficiency Variance Flexible Budget (Standard Allowed) (SP x SQ) $1.380 U Actual Costs (AP x AQ) Direct Materials $1. Inc..000 units = $147.85a x 102.000 units = $173.000 units =$84.560 Price Variance Budget $80.65 x 5 pounds x 21.800 U $11.5 hours x 21.950 F $14 x .000 pounds = $188. Actual Inputs at Standard Prices (SP x AQ) $1.000 = $124.950 $2.000 units = $124.000 F (Footnotes on next page) © The McGraw-Hill Companies.330 Actual Fixed Overhead 39% x $204.440 $2. (40 min.300 $20.700 hours = $149.000c Production Volume Variance Applied $4d x 21.000 = $79.700 hours = $127.90 x .000 $440 F $4.800 61% x $204.084b x 10.250 $14 x 10. 1997 578 Cost Accounting.700 hours = $140.) Variance computations with missing data: Paramount Company.19–51.890 F $11.5 hours x 21.400 U Direct Labor $13.000 $2.65 x 102.

000 ÷ $7 = 20. 1997 Solutions Manual.85 = $188.000.25 = 20.65 x 5 pounds) = $165.084 = are 20.000 ÷ ($1.000 units..700 hours b $13. This means the master budget variable overhead amount is $119.000 units © The McGraw-Hill Companies.000 – $119.000 units.19–51. Chapter 19 579 .000 ÷ $8.000 = $199.90 x .000 ÷ ($14.5 hours x 20. Labor: $140.000 pounds $140.000 units.000 = $11.000 units in the master production budget.000 10.700 102. computed by dividing total master budget costs by standard unit cost as follows: Materials: $165. (continued) a $1. d cThere $4 = $80. Inc. So the fixed overhead budget is $80.000 budget 20.5 hours) = $140.00 x .

426 F $2.900 x $4 = $19. (50 min. Inc.150) x 1.100 x $1 = $3.170 b.000 $16.356/1. Actual Costs Direct Materials 3. 1997 580 Cost Accounting.) Comprehensive variance problem: Flintco Company. Price Variance Production Volume Variance Actual Fixed Overhead $20.19–52.000 $100 U 1.05 = $19.845 $245 U Variable Overhead 4.600 $400 F 1.90 = $2.900 x $4.900 x $3.100 x $.680 $490 U $320 F 4.100 Efficiency Variance Flexible Budget 1.000 Price Variance Actual Inputs at Standard Prices 3.000 x 5 x $3.440 $1.000 x 3 x $1 = $3. Florimene a.790 $310 F Direct Labor 4.930 Budget $22.20 = $16.356 Applied ($22.000 = $19.20 = $15.916 U © The McGraw-Hill Companies.000 x 5 x $4 = $20. 5/e ..

520 Production Volume Variance Applied ($26.480 $2.10 = $37. Actual Costs Direct Materials 4.400 x $5.15 = $5.10 = $5.200 x 6 x $5 = $36.400 x $3.234 $666 F 7.200 x 6 x $3. Chapter 19 581 .280 $110 F 1.700 x $1.900 $700 U 7.50 = $25.50 = $25. 1997 Solutions Manual.19–52.000 b.200 = $24.040 U © The McGraw-Hill Companies.170 Efficiency Variance Flexible Budget 1.740 $740 U Variable $25.700 x $1. Actual Fixed Overhead $26.200 x 4 x $1.400 x $5 = $37..405 $235 U Direct Labor 7. Inc.000 $1.10 = $5.000 U 1.520/1.200 Price Variance Actual Inputs at Standard Prices 4.400 $120 F Price Variance Budget $26.300) x 1. (continued) Glyoxide a.

. Florimene Two-way variance: Spending Variance Production Volume Variance Actual $16.20 + $3.000 variable + $22.19–53.256 F $2. three-way and four-way overhead variances (Appendix B): Flintco Co.440 $2.20 + $3.356 Production Volume Variance Applied $1. Note: Refer to Problem 19-52 for calculations.916 U Three-way variance: Price Variance Actual Inputs at Standard Prices $15.) Two-way.440 $1.100 Efficiency Variance Budget $16.356 fixed = $38.170 variable + $20.000 variable + $22.930 fixed = $37.000 x 5 x ($3.888) = $35.000 x 5 x ($3.100 Budget $16. Inc.356 Applied 1.888) = $35. 1997 582 Cost Accounting.170 variable + $20. 5/e .930 fixed = $37. (50 min.916 U © The McGraw-Hill Companies.356 fixed = $38.680 variable + $22.356 fixed = $38.036 $936 F $320 F Actual $16.

520) = $786 F.40) = $49. 1997 Solutions Manual.200 variable + $26.234 variable + $26.634 – ($25.040 U.040 U Three-way variance: Price variance = $51.440 $2. Efficiency variance = $700 U (see problem 19–52). Production volume variance = $2.520 fixed = $51.634 Budget $25.426 F $22.200 x 6 x ($3. Chapter 19 583 . (continued) Florimene Four-way variance: Price Variance Actual Inputs at Standard Prices $15.720 Applied 1.356 Glyoxide Two-way variance: Spending Variance Production Volume Variance Actual $25.930 $1.916 U Actual Variable $16.000 x 5 x $3.19–53.680 $86 F $2. © The McGraw-Hill Companies.400 fixed = $51.680 $490 U $320 F 1..50 + $3. Four-way variance: Same as three-way except price variance is divided into $666 F for variable overhead and $120 F for fixed overhead. Inc.170 Efficiency Variance Budget $16.900 + $26.888 = $19.000 Production Volume Variance Applied Fixed $20.

100.400 Price Variance Actual Inputs at Standard Prices (ignored) Efficiency Variance Flexible Budget 4.600 $2.000 x .000 $12.600 Activity Variance Master Production Budget 5.002a = $21.600 U Policy Maintenance $23.000 face amount of insurance 584 © The McGraw-Hill Companies.) Performance evaluation in service industries: Safe-City Insurance Co.002a = $24. Inc.400 F $10.200 $1.200 $300 U $22. 1997 .800 U $12.002 = $2 per $1.300 F $14. (30 min.000 x $72 = $360.900 a.800. Item New Policies Actual Costs $358..800 x $72 = $345.19–54.000 x .

000a kilograms x $10 = $100. Inc.500 U $17.000 kilograms x $10 = $110. Inc.300b units = $82. Chapter 19 585 .750 Footnotes on next page..000 $10.000 Efficiency Variance Flexible Budget (Standard Allowed) 10.Solutions to Integrative Cases 19–55.25 Materials = $123.000 hours = $100.750 $13.000 $5.400 Direct Labor $105.000 U $4 per hour x 2 hours x 10. Actual Costs 11.) Process costing variances: Cornwell. (35 min.575 Variable Overhead $30. © The McGraw-Hill Companies. 1997 Solutions Manual.25c per hour x 25.250 $900 F $5.600 U Price Variance Actual Inputs at Standard Prices 11.000 kilograms Direct x $11.575 U $1.350 $25. Note: Equivalent unit computations can be handed out in advance if students have not covered equivalent units.750 U $4 per hour x 25.000 hours = $31.

......... Inc....000 Ending inventory 2...500 EU 8.000 x 100 %..... 10..............................19–55...........................................000 units x 40% ........ 8.................. 5/e .000 EU units of direct labor and overhead: To complete beginning inventory 2.....300 EU cAssumes variable overhead is applied on the basis of direct labor hours (or dollars) because both are part of conversion costs.......... 1997 586 Cost Accounting...500 units x 60% .........................................000 800 10....000 Ending inventory............... Standard variable overhead per = $25....750 = direct labor hour is $1.................................................000) Started and completed .600 hours © The McGraw-Hill Companies............. bEquivalent 1................. (2...... 10....... Started and completed (from footnote a) ......300 units 20..........................750 $25.........000 Equivalent units of material .. Equivalent production .25 2 hours x 10............ 2.... (continued) aEquivalent units of work during the period with respect to materials: To complete beginning inventory 0 EU Units started ..... Ending inventory 2.......

..700 under full-absorption costing....... With full-absorption.. But that variance does not reflect a difference between actual and budget or standard costs when fixed manufacturing costs are not unitized.. 300 F Total ..... These differences account for the difference in the profit measurement.... Variable costing expenses fixed costs when they are incurred..... $772 U The overhead amount differs from the figure on the income statement....... because the income statement overhead variance includes a production volume variance of $470 (= $.. The other part of the difference between the two profit figures is explained by the difference in accounting methods.. in those months when production exceeds sales.. Under variable costing..... These variances are: Material.. the full-absorption method would expense less fixed costs than variable costing.....47 x 1.. Racketeer.... $490 U Labor .. while the profit graph is based on standard costs in a variable costing format.. Otto should have told him that they do not. 190 U Selling and administrative .. the only fixed cost to be expensed is the standard cost for the period of $3. one should remind him that... so it evens out in the long run....47..000). the fixed cost expense is $4.. the production volume variance of $470 is also expensed during this period....... Thus. Inc. and then expensed in the period in which the units are sold. the fixed costs are assigned to the units produced... Racketeer treats each racket as having a fixed cost of $........... The following solution is based on a report by Tom Terpstra. (Before Elmo starts to complain about the accountants' use of full-absorption. (Comprehensive overview of budgets and variances).. The income statement presents actual costs in a full-absorption costing format........ the use of different accounting methods results in a profit difference of $1... the profit it shows will be the actual profit only in those very rare cases when the variances net out to zero......................170 in fixed costs (aside from price variances) was deducted from income on the income statement....19–56... Because the profit graph is based on standard costs... Additionally. 1997 Solutions Manual.) © The McGraw-Hill Companies....... Racketeer has some significant variances listed on the income statement. Elmo's problem is that he thinks that the graph and the income statement measure the same thing. so Elmo should expect that the actual profit would differ from the profit on the graph..760 (also aside from price variances)............410. So. For the 10............ Chapter 19 587 .. 392 U Overhead...... Inc.. $5..000 rackets sold.

. © The McGraw-Hill Companies.758 Besides failing to explain the profit graph.. the manufacturing variances could be analyzed in greater detail.. 1997 588 Cost Accounting.................. Inc. $20..................... 5/e ......... as shown in Exhibits A and B on the following pages....... $18... 772 Additional fixed costs in full-absorption ..... the flexible budget......940 Less: Cost variances . Otto also failed to set up a format to take advantage of the standards he developed..... 1..... Additionally........410 Profit per Income Statement ........19–56.............. The company should set up a chart showing the actual results. (continued) Now the two results can be reconciled: Profit per chart ..... and the master budget.. This would provide information concerning the profit changes in relation to the change in sales volume.......

440 F Master Budget $72.000 F 7.......168 Activity Variance $18............440 F 589 © The McGraw-Hill Companies.392 Overhead ... Inc..... 3..........760 7.......800 U 260 U 6. $20..500 $14............. $90.200 1...072 U –0– –0– $300 F $300 F –0– $ 6..........000 Less Variable Costs: Materials .....040 25........178 Less Fixed Costs: Manufacturing .......... 1997 .......500 19.........19–56..022 U 50 U $1...... 31.300 32............ 7. 1.440 Contribution Margin ..200 Operating Profit ........ (continued) Exhibit A Comparison of Master Budget to Actual Results..........500 $20....000 15.......... 19..990 Labor ..000 1.000 37.........000 30.............. Manufacturing Variance Selling and Administrative Variance –0– Sales Price Variance –0– Flexible Budget $90..760 3......200 3..500 U 3.... 37...............940 Actual Sales ........810 Selling and Administrative ...500 $ 490 U 392 U 140 U 1.760 7..

365 -0Skilled Labor 900 x $9. 5/e .050 Actual Fixed Overhead $3.03 = $5. (continued) Exhibit B Manufacturing Cost Variances.80 = $8.03 = $4.400 Price Variance Actual Inputs at Standard Prices 175.000 x 20 x $.10 + $.050 Frames $1.47 x 8. 1997 590 Cost Accounting.80 = $4.290 $50 U $470 U © The McGraw-Hill Companies.60 = $4.15 = $22.640 $240 U .200 $1.03) = $910 900 x $9. Actual Costs String 175.820 $180 U Unskilled Labor 840 x $5.125 x 7..704 $196 F 7.100 x $3.000 x ($.15 = $22.250 Efficiency Variance Flexible Budget 7.000 = $3.100 x $3.872 $168 U Variable Overhead Total variable overhead variance $140 U 840 x $5.000 x $3. Inc.000 x $.900 7.47 x 7.000 x $5.375 $875 F 7.000 = $3.025 = $4.15 = $22.000 x $.125 x 7.365 $315 U .050 U 7.19–56.60 = $4.60 = $8.760 Production Volume Variance Applied $.60 = $8.810 Price Variance Budget $.000 x $9.

Why are the skilled workers spending more time than budgeted. One area involves the strings. because use of substandard materials may result in an unfavorable labor efficiency variance. (continued) The variance breakdown in Exhibits A and B highlights the areas that Elmo and Otto should research. Is there something in the production process which causes frames to break? Or are the standards unrealistic? A third area is the labor efficiency variances. © The McGraw-Hill Companies.19–56. Chapter 19 591 . 1997 Solutions Manual. These are the types of questions that should be raised as a result of this variance analysis.. Is the combination of a favorable price variance and unfavorable efficiency variance an indicator that low quality string was purchased? Another point for investigation is the apparent waste of 100 racket frames. Inc. the relationship between labor efficiency and materials efficiency variances is worth investigating. while the unskilled are spending less? Finally.

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. buy) may also be selected by management. 20–7.Chapter 20 Decentralization and Performance Evaluation Solutions to Review Questions 20–1. ROI measures scale the division accounting profit by the investment required. possibly. However. a division manager would have an incentive to avoid that project even though it would benefit the company as a whole. 20–6. This may be mitigated if ROI is based on gross book value. Middle managers are principals to their subordinates (e. In many cases managers are content to take a stated salary and perform optimally. 20–2. an executive manager elects the performance evaluation and incentive system that is best for the specific organization. Moreover.) 20–5. but this return is lower than the division’s average ROI. 20–3. Inc. The alternative chosen can have an impact on the reported accounting numbers and the reported investment base. Use of net book value will result in the ROI rising as the net asset is reduced through depreciation. the executive’s comments would make sense in the right organization setting.. 1997 Solutions Manual. If the return on a specific project is greater than the company’s cost of capital. of course. Top managers are viewed as agents of the Board of Directors. line managers. management may have a pecuniary incentive to choose a specific alternative even though such a choice may not be in the optimal long-run interest of the company. Chapter 20 593 . Lower level managers are also closer to their respective markets. © The McGraw-Hill Companies. financing decisions (e. There exists a number of accounting alternatives that can be chosen by management. If management compensation is dependent upon the income measure (and. there may be a conflict of interest for the agent-manager. By choosing both the measurement system and the operating decisions. in other organizations managers appear to perform better when given profit targets and other incentive devices. supervisors). 20–4. Hence. lease vs. However.. in conjunction with the investment base).g. The problem is most acute if all depreciable assets in the investment base are the same age. Managers would have incentives to maximize accounting measures of profit without regard to the investment required if only profits are evaluated. The Board of Directors is considered the agent of the shareholders. (Use of economic profits would not have this problem. With an incentive system these managers are more likely to take actions to respond to changes in their respective markets.g.

the capital charge is not the same as the cost of capital. 5/e .. Two problems usually arise here: (a) The division might be encouraged to produce in volumes in excess of sales. more likely to rank in the upper half. they are not typically identical. all other things being equal. Here the managers are encouraged to include slack in the budget by underestimating revenues and overestimating costs. the terms clearly have different meanings. Large divisions are. In this way. The greater the slack. 1997 594 Cost Accounting. Investment center assets can be equated to capital employed. the greater the division manager’s bonus. 20–10. with the described system sales people could sell at prices less than the company’s variable cost and still be paid a bonus. The approach used also does not take into account differences in capital charges that might be appropriate for different divisions. a large division manager would tend to receive a bonus with performance that is just barely above the cost of capital whereas a smaller division might need to earn a return far in excess of the cost of capital in order to earn a bonus. Different rates can yield different residual income rankings. 20–9. While it is possible that these percentages might be the same for a given company. 20–11. and the cost of capital is the weighted average cost of the company’s debt and equity. residual income measures will tend to favor large divisions over smaller ones since the measures are based on an absolute dollar value. © The McGraw-Hill Companies. Hence. • Residual Income (RI) is defined as follows: Investment center operating profits—(Capital charge × Investment center assets) The capital charge is the minimum acceptable rate of return which will likely be greater than the company’s cost of capital. • Economic value added (EVA) is defined as follows: After-tax operating profits—(Cost of capital × Capital employed) • Comparison: Investment center operating profits (in the RI formula) can be equated to after-tax operating profits (in the EVA formula). although the two methods—RI and EVA—have many similarities. the fixed production costs would be “deferred in inventory.” See Chapter 11 on variable costing for an elaboration on this phenomenon. Residual income measures depend upon the rate chosen for charging a division for its investments.Solutions to Critical Analysis and Discussion Questions 20–8. The problem with the system is that it depends on volume only and does not hold the sales managers responsible for any costs. Sales people might be encouraged to cut prices or to incur marketing costs in excess of that required for maximum profit. Indeed. However. 20–13. Therefore. Inc. 20–12. The capital charge is the company’s minimum acceptable rate of return. In addition. (b) There could be a great deal of game-playing over how costs are allocated since a manager’s performance will depend in part on how few costs get charged to the division.

it seems that lenders tend to ignore such changes while Boards of Directors tend to pay incentive bonuses based on revised income numbers. 20–17. In practice. If the division can rent and the rent does not have to be capitalized for inclusion in the investment base. 1997 Solutions Manual. There are a number of cases which can be used to illustrate both approaches in both types of situations. Since the two measures are not comparable. Chapter 20 595 . In both (a) and (b) there is a need to consider what role accounting is supposed to play in the settling of contracts–whether they be loan contracts or management incentive contracts. Managers will tend to focus on short-run performance. the FASB) should be limited in these situations.. It would seem reasonable that the influence of an outside party (e. Subsequent changes brought about by outsiders (or unilaterally by one party to the contract) are probably beyond the intent of the parties at the time the contracts were signed and. Quality tends to be sacrificed for quantity.. trying to relate the two will not be meaningful. 20–15. © The McGraw-Hill Companies. the residual income will increase so long as the income from the asset exceeds the lease payment. properly ignored. The parties to the contract apparently decided on a measurement system based on accounting rules in effect at the time the contract was entered into. while the cost of capital is a measure which does consider the time value of money. 20–16.20–14. the “jury” is out on the issue. Inc. Bleak Prospects could improve its situation by adopting a performance system that includes nonfinancial measures of performance such as requiring that a certain level of sales come from new products and that defective goods and rework rates be below a certain level. hence. Differences between ROI and the cost of capital are likely when assets have different lives or are purchased at different times.g. However. Using ROI as the sole performance measurement index will tend to discourage new investment and innovation. ROI does not take the time value of money into account.

000 = $68.000 50.000 5 Annual income = $140.14($2.000 216..Solutions to Exercises 20–18.000) = $264. 1997 596 Cost Accounting. (25 min.000 (a) ROI $68. $360. Inc.400.6% 31.000) 14.000 *Base decreases by annual depreciation of $72.000 20–19.000/Base 18.000 © The McGraw-Hill Companies.) a.) ROI versus residual income.4% (b) Residual Income $68.5% 47.000 – . Compute residual income and ROI: PlainsfieldDivision.000 – (25% x Base) ($22.400.000 72.000 144. 5/e . (10 min. $600.2% 94.000) (4.9% 23.000 = 25% $2. $600.000 b.000* 288.000 32.000 – Year 1 2 3 4 5 Investment Base $360.

Inc. *East: $35.000 + $46. (10 min. 1997 Solutions Manual.000 a $46.) Compare alternative measures of division performance.000 West: $195.000 – [ $225.6% $1.000 – (25% x $100. (10 min.000 *West: $195.. 20–21.500a = 28.000 6 ] © The McGraw-Hill Companies.000) = $45.000 – (25% x $750. ROI after: $390. Yes.300.500 *Indicates division with “better” performance.000 b.000 $100.000 = 35% West: $195.000 – (20% x $100.300.500 = $84. a. $390. ROI before: Impact of new project on performance measures.20–20.000 $750.000) = $10.000 = 30% $1.000 b. Chapter 20 597 .) a. Using return on investment measures: *East: $35.000 + $225.000 = 26% Using residual income: East: $35.000) = $7.000 – (20% x $750.000) = $15.

000 – .000) = $131.000 © The McGraw-Hill Companies.300.000 – $225.000 = 30.000 – $225.000 = $84. $130.500 c. With the lease.000 + $84..2($1.) Residual income measures and new project consideration.000) – . $130.8% $1.000 + $84.20–22.000 + $84.000 – $74. (10 min.500 6 or ( $390.000 – $74. 5/e . The new ROI is: $390.300.000 + $225.000) = $130.000 + $10. Inc. (15 min.000 b.) Impact of leasing on performance measures.000 + $84.000 6 ) – .2($1.000 20–23. $390. a.000) = $140.300. 1997 598 Cost Accounting.000) = $131.000 – $74.2($225.000 = $140.300. the incremental income is the operating cash flow minus the lease payment or $10.000 or ($390.2($1.000 – .000.

000.800. Chapter 20 599 .000 – (4 x $400.000. a Net Book Value b Gross Book Value ($1.000.7% $3.000 = 18.000.000.000.000 – (2 x $400.000)] = $600.000 Year 1 ($1.000.000 – $400.000 – $400.000 = $600.000.000 ($1.000 – $400.000 Year 4 ($1. Inc.000) = $600.000) [$4.000 = $600.000 = $600.000 © The McGraw-Hill Companies.000 – $400.000 Year 3 ($1.000 = $600.000) ($4.000.000.000 = 16.000.000)] = $600.000 ($1.200.000. net book value to gross book value: Oracle Division.000.000) $4.000 = 15% $4.000.000 = 21.000.000 = 15% $4.000 = 15% $4.000.8% $3.4% $2.000.000 = 25% $2.) Compare historical cost.000 – $400.000. 1997 Solutions Manual.000) [$4.000.000 Year 2 ($1.000) $4.400.000 ($1.000 – $400. (25 min.600.000 = 15% $4..20–24.000)] = $600.000) [$4.000 – $400.000.000) $4.000 – (3 x $400.000) $4.000 – $400.000 – $400.

8% $3.000.000 = 15% $4.000) $4.000 = $600.000.) Compare ROI using net book and gross book values: Oracle Division.000) = $600.000.000)] = $600.000 ($1.000 – $400. 1997 600 Cost Accounting.20–25.000 = 15% $4.000.000 = $600.000.000 ($1. Of course.000.000) $4.000.000.000.000 ($1. With the net method. (25 min.000. there is no change under the gross book value method.000.000) $4. This is to be expected. 5/e .000.000 – $400.000) [$4.000.000.000 – $400. both alternatives (using end-of-year asset values versus beginning-of-year values) show the same trend of rising ROIs as the assets depreciate.000) $4.000 = 15% $4.000 – $400.000. © The McGraw-Hill Companies.800.000 Year 1 ($1.000) [$4.000 Year 3 ($1.000 – (2 x $400.000 Year 4 ($1.000) ($4.000 = 18.000.000..000)] = $600.000 – $400.000) $4.000 = 16.000.000 Year 2 ($1.000 c.4% $2. a Net Book Value b Gross Book Value ($1.000 = $600. Inc.000 = 15% $4.000 – $400.000 – $400.000 = $600.000. The end-of-year value is the next year’s beginning-of-year value.000 = 15% $4.000.000 – $400.000.7% $3.600.000 = 21.200.000 = $600.000 – $400.000 – (3 x $400.

129.936.560 x 4/4 = $2.400.600 x 3/4 = $1.1 = $1. (30 min.000 x 1.400 $585.560 $1.000 $1.760. Parts c and d can be solved easier if one first sets up a table showing the change in value of the depreciable assets.936.600 x 1.000 x 1.1 = $2.597.1 = $2.000 $484.640 (3) Total Depreciation Years of life (1) times 4 years $1.600 $2.000.342.000 $1.342.000 x 1.600. Inc.129.760. 601 © The McGraw-Hill Companies.200 $2.20–26.000 – $2.000 salvage value = $1.560 with gross assets = $4.129.936.1 = $1.000 x 2/4 = $968.600. (1) Gross Depreciable Asset Value a Year 1 Year 2 Year 3 Year 4 aStart (2) Yearly Depreciation (1) x 25% $440..000 $2.000 $1.000.000 x 1/4 = $440.342.) Compare current cost to historical cost: Oracle Division.760.000 $532. 1997 .

3% $4.000) = $700.000.3% $3.000 = $700.000 = $1.000 – (3 x $400.000.000.000 = $810.000 © The McGraw-Hill Companies.000) $4. (continued) a Historical Cost Gross Book Value Year 1 ($1.000 – $400.000 Year 3 ($1.200.000) [$4.100 = 26.000 = 23.000)] = $931.331.000.000) ($4.000 = $931.000) [$4.000) = $810.3% $2.000 ($1.000 = 20.331.000) $4.6% $4.000 = 33. Inc.000 – $400.000 – (4 x $400.210.000..210.600.4% $3.000 = 17. Historical Cost Net Book Value ($1.000 = 19.464.5% $4.000.000) $4. 1997 602 Cost Accounting.800.000.400.000 – $400.000) $4.000 b.000.000 Year 4 ($1. 5/e .000 ($1.000 ($1.000.100.3% $4.000.100 – $400.000 – $400.000.000 = 25.3% $2.000)] = $1.100 – $400.100 = 44.464.000.000 – (2 x $400.100.064.000 Year 2 ($1.000 – $400.064.000) [$4.000 – $400.20–26.000 – $400.

464.400 © The McGraw-Hill Companies.000 = 15% $4.342.000 = 15% $4.400 – $2. Chapter 20 603 .856.840 Year 4 ($1.100.513.000 = $16.840.640) $5.000 = $798.100. 1997 Solutions Manual.210.000 = $660.464.000) $4.000 d.8% $3.460 = 15% $5.000) = $726.000 – $1.856.000 – $484.331.400 = $878.000 = 18.000 – $484.210.000 – $440.726.7% $3.800 ($1.460 = 25% $3..600 = 15% $5. Current Cost Net Book Value ($1.000) $4.000 ($1.000 – $532.000) ($4.600 = 21.640) ($5.400.000 Year 3 ($1.560) = $878.331.856.20–26.324.000 Year 2 ($1.400.4% $3.000 ($1.840.000 – $532.200) = $798.840.000 – $440.324.400.400) $5.597.000 ($4. (continued) c Current Cost Gross Book Value Year 1 ($1.000 – $968.400) ($5.872. Inc.324.100 – $585.000) = $660.960.000 – $440.100 – $585.000 = $726.

25 x $121.000 $40.25 x $100.9% $110. (25 min.000 = 5.000 – (.000 $34.000 = = 9.000 = = 5. Inc.000) $15.000 – (.000 b.25 x $100.000 $40.750 = 6.25 x $100.25 x $100.000 $100.000) $9.100) = $6.000 $38.000 = = 15.000 $34.25 x $133.000) = $7.000 $100.000 – (.000) = $6.000 = = 13. 5/e .000 $100.000) $13.000) = $5..000 $100.100 $133.000 $38.000) $5.000 $110.0% $100.0% $100.1% $133.000 – (.000 – (.0% $100.500 = 5.725 = 5.) Effects of current cost on performance measures: Otter Division. Year 1 Year 2 Year 3 Year 4 ROI $30.25 x $100.0% $100.000 – (. Year 1 Year 2 Year 3 Year 4 ROI $30.100 © The McGraw-Hill Companies. 1997 604 Cost Accounting. a.000 – (.000 $100.0% $100.000 – (.000 $121.20–27.4% $121.25 x $110.

.... (30 min....300. Inc..000 $1.000 – (2 x $250.....7% $800.000 b.. c.....000 – $300.....000 depreciation. 250.000 **Net income: ***$400.000 = ( $1.....Solutions to Problems 20–28..300..000 *Loss on old equipment equal to its $1 million cost less $300..... Chapter 20 605 . $3.000 – $700. $750.005..300.......000 (up 10%) Costs: Variable ..425.. 1.. 400.. $1.. Inc......000*** Revenues..000) + $1.000 – $250....000..000 – $400.000*** Other .000 – $100... 1997 Solutions Manual.... 440.000 + $1....8% $800.000 = 60% $800... Equipment replacement and performance measures: Juneau.000* = 2..520.000** = 83.000 (up 10%) Fixed...000 + $1..000 3 years ) © The McGraw-Hill Companies.005.000 (down 5%) Depreciation: Equipment ...000 – $250.. $750..) a..

The machine is going to result in a positive net benefit so you would want to acquire it as early in the year as possible so you could obtain a full year’s benefits. the ROI would be: $940.0% $800. (20 min.000 – $700.000) + $1. the relevant costs would be the 15% price increase versus any savings the company might realize on its capital costs if it waits until next year.000 = 3 years $700.000 – $465.. part a.000 = loss on disposal of the old equipment $940. For the coming year. However.15 $1.000 = $1.000 – (2 x $250.) Evaluate trade-offs in return measurement: Juneau. the relevant cost is the lost bonus this year if the machine is purchased this year versus the effect on the manager’s bonus that would arise from the increased depreciation charge. a. Inc. © The McGraw-Hill Companies. it is difficult to see how the division or company would be better off by waiting a few weeks and incurring an added 15% cost.000 $465. Where: $1.000 For the company.000 – $100. For the manager.000 = $240.495. then the return on investment for this year would be the 60% as indicated in Problem 20–28. 1997 606 Cost Accounting.495.000 $1. b.000 = 18.000 + $400.005. If the manager waits until next year.000 – $465.000 assuming that the new equipment is bought at the beginning of the year.300.20–29.495. Inc.000 x 1.330.000 = $1. 5/e .

) Analyze performance report for decentralized organization: Ashwood. 1997 Solutions Manual. Corporate policy dictates that division managers minimize their investment in inventories and maintain control over plant fixed assets. While these costs should have no effect on the performance of this division.M. A performance evaluation system should reflect the division manager’s (D.20-30. Year 3 would appear favorable if only the divisional residual income figure were considered. Ashwood’s divisional management is solely responsible for the production and distribution of corporate products.e. The actual residual income is well above the nine month budgeted figure.. closer examination of the report reveals that overall performance cannot be considered satisfactory for the following reasons: • • • Variable cost of sales (direct materials and labor) have increased significantly as a percentage of sales.M. In this respect.M. However. Budgeted additions to plant fixed assets have not been made.) responsibilities (i.’s control. Fixed divisional costs should be so identified and subtracted from a divisional contribution margin. and for which the D. An evaluation of the performance of Patric Anderson for the nine months ending September. Inc. The maintenance and repair costs implied in the budget and probably needed have not been incurred. In this instance. its inclusion in the report does affect the residual income figure. or to reduce the investment base. The decision to postpone obtaining these fixed assets at the division level could have been made for the purpose of reducing the investment base and the imputed interest charge. b. Specific features of the performance measurement reporting and evaluation system which should be revised are as follows: • • A flexible budget based upon production as well as sales should be used so that divisions can better reflect the actual level of activity achieved.* a.. is held accountable). Patric Anderson has not performed as well as expected for reasons described as follows: • • Inventories have increased significantly relative to sales volume and to divisional investment. © The McGraw-Hill Companies.M. (40 min. A good division performance measurement should present the performance of the manager unobscured by extraneous items that are not subject to the D. Chapter 20 607 . Allocated corporate fixed costs are below budget. those things that are specifically controllable by the D. *CMA adapted.

• • © The McGraw-Hill Companies. Inc.. Ideally. However. An average value would more accurately reflect the activities in these accounts over the time period being analyzed. The investment base used to compute residual income uses year-end values for receivables and inventories as opposed to some average-value method. 5/e . they should be relegated to a position as a final subtract item from divisional residual income. corporate level fixed costs should not be allocated. if corporate management feels it necessary to allocate corporate level fixed costs. thereby limiting the control at the divisional level. 1997 608 Cost Accounting.20–30. (continued) • Allocated corporate fixed costs obscure the division’s performance since such costs are not subject to division management control. Plant assets are under the joint authority of the division and the corporation.

but would not necessarily improve corporate ROI. However. Certain actions could be taken by a division which would improve its ROI. In addition. the managers are not likely to recommend projects which would improve division ROI in the long-run but would depress it in the short-run (start-up periods). Further. (40 min. improvement in sales volume and/or market share.* a. The emphasis on a single measure for performance evaluation should be eliminated. The company could consider the residual profits concept of divisional performance measurement. Factors other than ROI also should be included in the policy. Improving the division ROI does not automatically lead to improved corporate ROI. the postponement of capital investments makes the divisional asset base smaller for the calculation of division ROI. The long-run success of the company requires attention to such items as: • • • • new products and/or new markets. The emphasis on division ROI as the most important appraisal factor for salary changes does not provide the proper motivation because divisional executives are motivated to maximize division ROI without regard to the corporate ROI. cost efficiency. Additionally. Most of the specific actions that division managers can take which would result in increasing division ROI and decreasing corporate ROI relate to investment proposals. division managers are indifferent as to the amount and timing of cash flows because cash is not part of the division’s investment base. Inc. such as rejecting an investment below its ROI but above the corporation ROI. *CMA adapted © The McGraw-Hill Companies. The division managers have the responsibility to recommend investment opportunities for their divisions. c. Chapter 20 609 . The changes should be two-fold in character. The divisions would be charged “interest” cost of assets employed and performance would be measured on the basis of the division profits above the “interest” charges. the corporation is not indifferent to cash flow because it has to invest the cash. Thain’s corporate goals and goals for its divisions are not congruent. new manufacturing technology.20–31. The facts in the problem would suggest that they have been recommending only investments which are a “sure thing” to increase division ROI and screening out investments which would lower division ROI even though improving corporate ROI. 1997 Solutions Manual.. Additional factors important to division and corporate goals should be included. b. One approach would be to establish a target ROI which would include allowances for start-up costs of long-term projects.) ROI and management behavior: Thain Corporation.

20–32.

(30 min.) Impact of decisions to capitalize or expense on performance measurement: Lewison Drilling Company.

a.

ROI Base Year
Successful efforts (used in base year) Full-cost (used by new management) b. 10% x $820,000 = $82,000 c. The board should reject the request for a bonus. The purpose of the bonus is to provide an incentive to management to improve actual performance. However, management has just manipulated the figures by which performance is measured. If the accounting method had not been changed, both income and ROI would have shown decreases in the present year. $900,000 = 13.0% $6,900,000

This Year
($1,720,000 – $900,000) = 11.4% ($8,100,000 – $900,000) $1,720,000 = 21.2% $8,100,000

20–33. (30 min.)

Evaluate performance evaluation system–Behavioral issues: Drawem Co.*

a. An answer that assumed that managers should only be held responsible for what they control would make the following arguments: The financial reporting and performance evaluation program of Drawem Company is inappropriate as a measure of the responsibilities of the Bildem Division. Bildem is being evaluated as a profit or investment center when it has no control over pricing, production and investment decisions. In actuality, Bildem Division is a cost center and the performance report should only consider costs under the control of Bildem management. Additionally, the corporate general service costs should not be included on the performance report because these costs are not under the control of the division management. Moreover, the allocation basis is artificial in that corporate management determines Bildem Division sales volume. Bildem’s managers currently share some of the organization-wide risk because they are held responsible for things they do not control. Presumably, they must be compensated for sharing this risk if they are risk-averse. On the other hand, they may attain nonpecuniary rewards from being an “investment center” instead of a cost center. Despite the fact that Bildem’s managers are held responsible for things outside of their control, it is not clear that Bildem’s managers or the company would be better off by making Bildem a cost center, although it is a cost center, de facto. *CMA adapted.

© The McGraw-Hill Companies, Inc., 1997 610 Cost Accounting, 5/e

20–33. (continued) b. Following the notion that managers should be held responsible only for what they control, the answer to requirement b would be: The following revisions should be made to Drawem Company’s financial reporting and performance evaluation system. • • • Evaluate Bildem Division as a cost center and include in the analysis only those costs under the control of division management. Introduce a budget system possibly including a flexible budget format which would be used with costs classified as fixed and variable. The allocated corporate general services costs should not be included in the report. However, if management wants to include the corporate services, it should be identified separately and treated as the final addition to division costs. Corporate computer costs should be included on the report. The amount charged should be based upon actual usage and a predetermined standard rate. Provided a flexible budget is used for the actual level of production activity, a variance analysis can be included in the evaluation. The variances should be identified as price or efficiency related. The report could be expected to analyze noneconomic aspects of production other than costs. Performance measures to consider might include manpower levels, inventory levels, order backlogs, training programs, and new products or developments.

• •

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 20 611

20–34. (40 min.)

Divisional performance measurement—Behavioral issues: Lenco Incorporated.

a. The proposed Achievement of Objectives System (AOS) would be an improvement over the current measure of divisional performance for the following reasons: • • There appears to be greater participation in the establishment of objectives by divisional managers. The use of multiple criteria for performance measures should be a more equitable standard of evaluation. This performance measure tends to reduce over-emphasis on single measurement criteria and may also balance extremes in performance in one area versus another. Realistic planning encourages accurate budget estimations and promotes intermediate and long-range objectives, which enhances goal congruence. Static budgets established six months before the start of the year would be replaced by flexible budgets which would be subject to change as needed. The emphasis on performance is based upon factors controllable by and upon efforts actually directed by divisional managers.

• • •

b. Specific performance measures for the criterion “doing better than last year” could include total sales, contribution margin, controllable costs, net income, net income as a function of sales, return on investment, market share, and productivity. Measurement of these items should be compared in absolute terms or by percentages to the prior year. Specific performance measures for the criterion “planning realistically” could include an analysis of variance between actual and budget and the use of a flexible budget to determine sales, net income, net income as a function of sales, and return on investment. Specific performance measures for the criteria “managing current assets” could include accounts receivable turnover, inventory turnover, return on current assets, and year-to-year comparisons of current assets in total and by account classification.

*CMA adapted

© The McGraw-Hill Companies, Inc., 1997 612 Cost Accounting, 5/e

20–34. (continued) c. The motivational and behavioral aspects of the achievement-of-objectives-system depend upon the level of acceptance of the system by top management and the divisional managers. • • Divisional managers could have a sense of participation in the role of goal setting and budget development which could encourage goal congruence. Multiple criteria enhance a sense of equity or fairness, and remove pressures to pursue measured goals, the achievement of which may conflict with corporate longrun objectives (i.e., promotes goal congruence). Divisional managers should have an increased sense of responsibility and control over activities within their divisions once they are not held responsible for uncontrollable factors. Top management support along with timely and regular reviews of performance will promote division managers’ feelings of self-worth.

Programs which may be instituted to promote morale and give incentives to divisional managers in conjunction with the achievement-of-objectives system include the following. • • Intrinsic motivators can be provided by allowing the manager to assess his/her own achievements and his/her own worth. Extrinsic motivators can be developed through a manager’s competition against him/herself or with other divisions with recognition given to the successful participants in the form of awards or monetary incentives. Increased morale can result from participation in budget setting and management level decisions as well as having positive feedback.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 20 613

20–35. (35 min.)

ROI, residual income, different asset bases: Woodside Products Store.

a. and b. Income statements to summarize the alternatives are as follows: ($ in thousands)

Regular Merchandise
Revenue Cost of Sales Gross Margin Operating Expense Operating Profit Investment ROI $260,000 163,000 $ 97,000 26,000 $ 71,000 $187,500 37.87% a.

Furniture
$75,000 57,000 $18,000 8,500 $ 9,500 $55,000 17.27%

Total
$335,000 220,000 $115,000 34,500 $ 80,500 $242,500 33.20% b.

Although the furniture provides a return greater than the cost of capital, it lowers the status quo ROI. c. If the floor plan is used, the investment base will be $187,500. Operating profits will equal $80,500 minus the floor plan charge of $6,750 for a net profit of $73,750. The ROI will be 39.33% which is $73,750 ÷ $187,500. d. The manager would prefer the floor plan because it would raise the store’s ROI above the current ROI of 37.87%.

© The McGraw-Hill Companies, Inc., 1997 614 Cost Accounting, 5/e

Chapter 21
Transfer Pricing

Solutions to Review Questions
21–1. A transfer price may be based on costs, market prices, a negotiated amount or some combination of the three. 21–2. Transfer prices exist in centralized organizations to record the transfer of goods and services from one unit to another for the same reasons such organizations allocate costs (e.g., inventory valuation, crossdepartment monitoring). 21–3. Market-based transfer pricing is considered optimal under many circumstances because it preserves divisional autonomy, yet encourages division managers to make economically optimal decisions for the company if divisions operate at capacity and there are no market transaction costs. 21–4. The key limitation is that market prices are often not readily available. The limitations of market-based transfer prices exist when the market price does not reflect the opportunity cost of the goods and services, for example when idle capacity is present. Also, temporary short-run fluctuations in market prices could lead to suboptimal long-run decisions. 21–5. The advantage of direct intervention is it promotes short-run profits by ensuring proper action. The disadvantages of such a practice are that top management will become too involved in pricing disputes, and division managers will lose flexibility and autonomy in their decision making. The company also loses the other advantages of decentralization. 21–6. Companies often use prices other than market prices for interdivisional transfers because (1) market prices may not be available, (2) market prices can lead to suboptimal behavior when the supplier division has idle capacity, or (3) the company is not otherwise indifferent between internal and external buying. 21–7. When actual costs are used as a basis for the transfer, any variances or inefficiencies in the selling division are passed along to the buying division. To promote responsibility in the selling division and to isolate variances within divisions, standard costs are usually used as a basis for transfer pricing in cost based systems. (Note: Standard cost transfer pricing is only appropriate if standard costs are up to date and reflect reasonable estimates of cost.)

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 21 615

21–8. The disadvantages of a negotiated transfer price system are that a great deal of management effort may be wasted on the negotiating process and that the negotiated price may be based more upon the managers’ ability to negotiate rather than economic factors. 21–9. The two general transfer pricing rules are as follows: 1) If the selling division is operating at capacity, the transfer price should be the market price. 2) If the selling division has idle capacity that cannot be used for other purposes, the transfer price should be at least the variable costs incurred to produce the goods.

Solutions to Critical Analysis and Discussion Questions
21–10. Three goals of transfer pricing in a decentralized organization are (1) to coordinate the activities of various responsibility centers, (2) to motivate managers to perform in the company’s best interest and (3) to serve as a performance measure for responsibility centers. 21–11. A cost-based or negotiated cost-based transfer pricing method would be necessary. We recommend using differential standard costs to the supplier plus supplier’s opportunity costs of the internal transfer, if any. If a dual transfer pricing system is used, the supplier could be given a mark-up without charging it to the buyer. 21–12. The transfer price becomes revenue for the selling segment and a cost to the buying segment. An increase (decrease) in the transfer price increases (decreases) the selling segment’s operating profit and decreases (increases) the buying segment’s operating profit. 21–13. The IRS claimed the U.S. subsidiary’s low profits and losses were caused by a transfer price set below an arms-length market-based price. Also, the IRS claimed the Japanese parent company should bear some of the costs of the U.S. subsidiary’s high inventory levels. 21–14. Because transfer prices can affect the assignment of income from one jurisdiction to another, there is a tendency to set a cross-jurisdictional transfer price in such a manner that income is shifted to the jurisdiction with a lower tax burden. Of course, management may need to be aware of differences in tax laws, currency controls and other factors when establishing a transfer price. Moreover, taxing authorities may challenge a transfer price that is deemed unreasonable.

© The McGraw-Hill Companies, Inc., 1997 616 Cost Accounting, 5/e

Solutions to Exercises
21–15. (20 min.)

Apply economic transfer pricing rule: Beamer & Associates.

a. The minimum transfer price that the maintenance division should obtain is $70 per hour. b. The maximum transfer price that the leasing division should pay is $40 per hour. c. Answer (a) would be $36 per labor hour. Answer (b) would not be affected.

21–16. (15 min.)

Evaluate transfer pricing system: Paradym, Inc.

If Division X buys from outsiders because the transfer price is greater than $150, this would cost the company $10,000. The difference between the price paid for the units from an outside supplier ($150) and the differential costs of producing in Division Y ($140) times the 1,000 units in the order = $10,000.

21–17. (15 min.)

Evaluate transfer pricing system.

With the possibility of increased production Division X has an opportunity cost of transferring to Division Y of $4.50 per square foot which is the appropriate transfer price. However, the opportunity cost of acquiring the warehouse space is $3.00 per square foot for Division Y. Therefore, it would be in the company’s best interest if Division Y rented the space from the outside company. [This assumes no additional costs such as moving expenses to Division Y in using outside facilities.]

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 21 617

21–18. (20 min.) a.

Evaluate transfer pricing system. Buyer Pays $160.00 Seller Receives $150 Pays $55 Company Pays $10 Pays 55
Pays $65 $ 7.50 55 $62.50

Transfer internally

Transfer externally

Pays

$157.50

Receives Pays

$150 55

Pays Pays Pays

Optimal to transfer externally. b. Transfer internally

Buyer Pays $160.00

Seller Receives $150 Pays 55

Company Pays $ 10 Pays 55
Pays $ 65 $157.50

Transfer externally

Pays

$157.50

Receives and pays

–0–

Pays

Optimal to transfer internally.

21–19. (25 min.) a. Different prices:

Evaluate transfer pricing system: Seattle Transit Ltd.

(1) The opportunity cost might be considered the regular fare of $.80 less the $.10 fee collected. (2) The full cost is $2.00 less the $.10 fee collected. (3) One might suggest that if the transit vehicles are not running at capacity, the opportunity cost is zero because the senior citizens are riding in seats that would otherwise be empty. b. Seattle Transit would prefer to be reimbursed at the full cost of $2.00 because it would receive more revenue. c. The provisional government would prefer a rate of zero so it would pay no money to the transit authority. d. The difference is $380,000 per month, which equals 200,000 rides at $1.90 per ride. The $1.90 is the difference between the full cost less the $.10 fare collected.

© The McGraw-Hill Companies, Inc., 1997 618 Cost Accounting, 5/e

21–20. (25 min.)

Evaluate pricing system: Oracle Greenery. Mr. Peterson’s Share ($900) 300 ($600) Ms. Jefferies Share ($600) 900 $300

Total
Decrease in profits at Oracle Greenery......... ($1,500)a Increase in profits at Lively Landscape Co. .. 1,500a Net change in profits ..................................... $ 0
a$1,500

= $15 per plant x 10% x 1,000 plants.

21–21. (25 min.)

International transfer prices: Pyramid Corporation.

Analyze the tax liabilities in each jurisdiction using the alternative transfer prices. If the transfer price is $3 million, the tax liabilities are:

Canada Revenues..................................... $3,000,000 Third-party costs .......................... 2,000,000 Transferred goods costs .............. Total costs ................................... 2,000,000 Taxable income ........................... 1,000,000 Tax rate........................................ 60% Tax liability ................................... $ 600,000 Total tax liability ...........................

U.S. $15,000,000 6,000,000 3,000,000 9,000,000 6,000,000 40% $ 2,400,000
$3,000,000

If the transfer price is $4 million, the tax liabilities are computed as follows:

Canada Revenues..................................... $4,000,000 Third-party costs .......................... 2,000,000 Transferred goods costs .............. Total costs ................................... 2,000,000 Taxable income ........................... 2,000,000 Tax rate........................................ 60% Tax liability ................................... $1,200,000 Total tax liability ...........................

U.S. $15,000,000 6,000,000 4,000,000 10,000,000 5,000,000 40% $ 2,000,000
$3,200,000

The total tax liability is higher if profits are shifted to the country with the higher tax rate.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 21 619

21–22. (30 min.) ($ in millions)

Segment reporting: Lincoln Homes, Inc.

a. Using an $8 million transfer price:

Item
Outside revenue .......................... Transfer price .............................. Total revenue .............................. Less: Outside costs ........................... Transfer ................................... Total costs ................................... Operating profit before tax........... b. Using a $4 million transfer price:

Building Company
$68 68 52 8 60 $ 8

Finance Company
$16 8 24 14 14 $10

Item
Outside revenue .......................... Transfer price .............................. Total revenue .............................. Less: Outside costs ........................... Transfer ................................... Total costs ................................... Operating profit before tax...........

Building Company
$68 68 52 4 56 $12

Finance Company
$16 4 20 14 14 $ 6

© The McGraw-Hill Companies, Inc., 1997 620 Cost Accounting, 5/e

21–23. (30 min.)

Segment reporting: Sidney Corporation.

($ in thousands)

Item
Revenue: Outside revenue ....................... Transfer price ........................... Total revenue............................ Less: Outside costs ............................ Transfer .................................... Total costs ................................ Operating profit before tax ...........

Amusement Park
$11,200 1,600 $12,800 $6,200 600 $6,800 $6,000

Hotel
$7,400 600 $8,000 $5,000 1,600 $6,600 $1,400

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 21 621

Solutions to Problems
21–24. (30 min.)

Transfer pricing with imperfect markets—ROI evaluation, normal costing: LaZareth, Inc.

a. ROI for Division S. [90,000 x ($10 – $3)] – [$5 x 100,000] = $130,000 ROI = $130,000 = 21.67% $600,000 b. Note: Capacity is 100,000 units, so regular sales would be reduced to 80,000 units (100,000 units capacity – 20,000 units to Division T). (80,000 x $7) + [20,000 x ($6.20 – $3.00)] – $500,000 = $560,000 + $64,000 – $500,000 = $124,000. ROI = $124,000 = 20.67% $600,000 c. (80,000 x $7) + [20,000 x (TP – $3)] – $500,000 = $130,000 $560,000 + 20,000 TP – $60,000 – $500,000 = $130,000 20,000 TP = $130,000 TP = $130,000 = $6.50, 20,000 units

where TP = transfer price per unit. Proof $560,000 + [20,000 x ($6.50 – $3.00)] – $500,000 = $560,000 + $70,000 – $500,000 = $130,000 ROI = $130,000 = 21.67% $600,000

© The McGraw-Hill Companies, Inc., 1997 622 Cost Accounting, 5/e

21–25. (50 min.)

Evaluate profit impact of alternative transfer decisions: Stickney Products Co.*1

(000 omitted in all calculations) a. 1. The bottle division profits Revenue ................. $10,000 Cost ........................ 7,200 Profit ....................... $ 2,800 2. The cologne division profits Revenue .................$63,900 Cost ........................ 58,400 (= $48,400 + $10,000) Profit ....................... $ 5,500 3. The corporation profits Revenue .................$63,900 Cost ........................ 55,600 (= $48,400 + $7,200) $ 8,300 b. 1. Yes

Bottle Division Volumes Cases ................. 2,000 4,000 6,000 Revenue ............. $ 4,000 $ 7,000 $10,000 Cost .................... 3,200 5,200 7,200 Profit ................... $ 800 $ 1,800 $ 2,800
2. No

Cologne Division Volumes Cases ................. 2,000 4,000 6,000 Revenue ............. $25,000 $45,600 $63,900 2 Costa .................. 20,400 39,400 58,400 Profit ................... $ 4,600 $ 6,200 $ 5,500

*CMA adapted. aProduction

costs plus market price for the bottles.

© The McGraw-Hill Companies, Inc., 1997 Solutions Manual, Chapter 21 623

..600 $63. © The McGraw-Hill Companies....400 $ 8... 5/e .600 55. (continued) 3..600 Profit.... $25......000 volume...000 Revenue. the divisions achieve maximum profit for themselves at different levels of sales based on the market price at the various levels relative to the division costs at these various levels..000 volume and the cologne division is most profitable at the 4.600 37....000.000 4... $ 5.. 19.21–25.. Inc. The corporation achieves maximum profit based on the selling price to outsiders relative to the total cost of making the product... Based on a marketbased transfer price.. 2.000......300 The bottle division and the corporation are the most profitable at the 6.......000 $45.000 $ 8...........900 Cost. Yes Corporation Volumes Cases ... (continued) b..............000 6... 1997 624 Cost Accounting....

....................... Operating profit before tax (Revenues-costs) ...................75 $2..................... Income taxes. Transfer price.................000 which is $4................... Tax rate..... b..... Malaysian basis for transfer price: Item Revenue: Outside revenue ............ Tax rate..75 $ .........................................5 $4. Income taxes ........ Transfer price .....20 $ .......... Operating profit before tax (Revenue-costs) ............. Co-op (TMC).....20 $ 1...... Total revenue ...... Transfer ................ © The McGraw-Hill Companies..000............ Total taxes .... Total taxes ...................750................................... Total revenue ............. Transfer ...... Less: Outside costs....75 $ 4..................900........................... International transfer prices: Tilden Merchant...... $4 3 7 5 5 $2 x ........ 1997 Solutions Manual. Chapter 21 625 ........................................4 The difference in taxes is $2.......................21–26........... Great Britain basis for transfer price: Shipping Company $26 26 17 3 20 $ 6 x .................. a..... Less: Outside costs....... $ 4 8 12 5 $ 5 $ 7 x .15 Dock Service Co........................................... Inc.......................................150....... (40 min......... Total costs ............................000 minus $2..4 Item Outside revenue ..............) All $ in millions....9 Dock Service Co............................................. Shipping Company $26 26 17 8 $25 $ 1 x .......... Total costs ..........

000 x 2.000).000 Sales by N to outside (120......240..000 hrs.. If L sells to outside Contributions to L Outside sales 140... and d..... 864.. Units transferred 120....000 864....000. Leftover DLH 400.000 $8.000 b.. (100...........000 units were transferred to it would be $2.........000 Contribution margin $ 704...948.240... L’s total contribution would be $560...... 5/e ....000 $3.332...000...00 864.........000 units to N.00 $2. $ 704... 48.000 1.000 aThis is based on the optimal company policy........000 – 48..... Cost of units purchased from outside by N (120...000 1..244......... $2.........000 x $45) ..000 @ $18.000 units transferred @ $18..000 x 2)] ÷ 2......000 2..400...50 ...000 – (140...5 = 48.. Inc.....5) = 100............. © The McGraw-Hill Companies.000..000 960.........000 2..000 Labor costs 400.. @ $6 2... a.000 (= $5....840.a 3 $2..000 Division L Sales by L to outside ......... Company contributions would be only $2.000 864..400.000 $ 560.... 2...........400.....000 Company $2.. If L sold 120.....400...160..000 Sales by L to N .000 Cost of units transferred to N ......... Contribution .000 $2..000 Leftover DLH [400........000 5..400. Inc.000 hrs ÷ 2) x 16 Labor costs Contribution margin c... Conversion cost in N $8 x 120...........000 800... 1997 626 Cost Accounting..332.000) x $18....960.000 $2..000 960.) Analyze transfer pricing data: Notewon....000 – $960.000 Division N $5. Cost of labor in L .............000 864.504.280..000. N’s contribution if 120......240..400........000 @ $16.000 – (120... (60 min........000 – $2.....000.21–27......400. Total sales .......104......160.000 $2.

00 and the brake unit was sold for $49. it can pay Delaware (or a competitor) $7.00 plus mark-up from each brake unit sold by Jaydee. Delaware operates at capacity.) Transfer pricing—performance evaluation issues: Lillard Corporation * a. In order to make this happen.50 ($7. Inc. Lillard will have to overrule the decision of the Delaware management. The company is better served in the long run if Delaware is permitted to continue dealing with its regular customers at the market price. create problems with division managements. selling to Jaydee at $5. If such action were necessary on a regular basis the decentralized decision making inherent in the divisionalized organization would be a sham. Because it is not operating at capacity. In that case. the Lillard controller should recommend that each division should be free to act in accordance with its best interests.00.50.50 plus mark-up.00 per unit would adversely affect those performance measures.. In the short run there is an advantage to Lillard of transferring the fitting at the $5.50 better off. however. Then the organization structure is inappropriate for the situation. The management performance of Delaware is measured by return on investment and dollar profits. if Delaware supplied Jaydee the fitting for $5. Lillard would be $5. Therefore. 1997 Solutions Manual.00 per unit price.50 for the part and still arrive at a total cost of $49.00 per unit for fixed overhead and administration represents an allocation of cost Jaydee incurs regardless of the brake unit order. Lillard would lose $2. Assuming the $8. it should be willing to try this.50. b. if Lillard management requires that the fitting be transferred at $5. *CMA adapted. This certainly is not in keeping with the concept that a manager’s performance should be measured on the results achieved by the decisions he controls.00) for each fitting sold to Jaydee. Chapter 21 627 . In this case. Jaydee does not. Delaware is operating at capacity and would lose $2. (40 min. in the short run. © The McGraw-Hill Companies. This action would be counter to the purposes of decentralized decision making.50 per unit. it appears that Delaware and Jaydee serve different markets and do not represent closely related operating units. It may. If Jaydee is having difficulties.21–28. the result will be to enhance Jaydee’s operating results at the expense of Delaware. the intervention of corporate management will not indicate inadequate organization structure. Delaware should not supply Jaydee with fitting 1726 for the $5.50 – $5. On the other hand if this is an occurrence of relative infrequency. In the case at hand. the solution does not lie with temporary help at the expense of another division but with a more substantive course of action.50 in cash flow for each fitting sold to Jaydee but gain $8. c.00 price and thus selling the brake unit for $49. Note that Jaydee can still make the sale if it changes its allocation of fixed overhead and administration to $5. no mention is made of any other interdivisional business.

. Top management supports the continuation of the decentralized management concept. Both parties have access to market price information.* a. Raleigh division management performance is evaluated based on return on investment (ROI) and each of these prices exceed variable costs which will increase Raleigh’s ROI.21–29. No. © The McGraw-Hill Companies. b. In addition. Negotiation between the two divisions is the best method to settle on a transfer price. Raleigh division management would want the inter-company transfer price to generate the same amount of profit as outside business in order to maximize division ROI. the management of Tri-City should not become involved in this controversy. The company is organized on a highly decentralized basis which top management must believe will maximize long-term profits.) Evaluate transfer price system: Tri-City. is organized on a highly decentralized basis and each of the four conditions necessary for negotiated transfer prices exist. Tri-City. (40 min. Inc. These conditions are: • • • • An outside market exists that provides both parties with an alternative. 1997 628 Cost Accounting. Inc. Raleigh division management’s attitude at the present time should be positive to each of these prices in decreasing order because Raleigh apparently has unused capacity. the addition of corporate restrictions could have a negative impact on division management who are accustomed to an autonomous working environment. Inc. Imposing corporate restrictions will adversely affect the current management evaluation system because division management would no longer have complete control of profits. Both parties are free to buy and sell outside the corporation. *CMA adapted. 5/e . At the time when all existing capacity is being used. c.

Transfer Price Variable Cost Profit $25 25 $ 0 Div. Y. = $19.5 Total Profit after tax for Hellena Inc.S. Inc. and avoid the higher-tax rate of 70% in France. Chapter 21 629 . Profit after tax at the transfer price of $25/unit Div.. It would thus be advantageous to Hellena to charge as high a transfer price as possible so as to generate income in the U. Shipping costs Processing costs Tax @ 70% Profit after tax $115 $25 15 10 50 65 45. and France.S.5 $ 19. 1997 Solutions Manual.S. Shipping costs Processing costs Tax @ 70% Profit after tax $115 $60 15 10 85 30 21 $ 9 Total profit after tax for Hellena Inc. U.) Transfer prices and tax regulations: Hellena. As illustrated below this is due to the difference in tax rates between the U.21–30. Y. X. is $60 per unit. U. = $21 + $9 = $30/unit © The McGraw-Hill Companies.S. The transfer price economically optimal for Hellena Inc.X.S. Transfer Price Variable Cost Profit Tax @ 40% Profit after tax $60 25 35 14 $21 Div. France Selling Price Transfers from U. Inc.S. (25 min. France Selling Price Transfers from U.50/unit Profit after tax at the transfer price of $60/unit Div.

Operating profits (a) .......... Airline Outside revenue .......... Auto ............................... $157 Frequent stayer coupons................ $271 Outside costs........... 4 Hotel ................................. Inc......................... $181 Operating profits ............... Crew lodging ......................................... 1997 630 Cost Accounting......................................... Crew lodging ............. Total costs ........ Operating profits (b) .............................................. 5/e ................. Total revenues.................................................... Travel commissions: Airline .......... Adjust the operating profits in part (a........ $ 90 Hotel $106 Auto Rental $89 7 3 Travel Services $32 13 4 2 1 $39 $30 $119 $ 71 26 3 $99 $66 2 $102 $ 17 1 $67 $32 $30 $ 9 b..................... Auto coupons ......21–31........... Auto discounts (airline) ........ Airline $90 (21) 6 $75 Hotel $17 21 $38 Auto Rental $32 (6) $26 Travel Services $9 $9 © The McGraw-Hill Companies......................... Hotel ............ Frequent stayer ..........................................................................) for the changed transfer prices. 26 Auto discounts (airline) ........... (40 min.................... Auto discounts (hotel) ............................ $245 Frequent stayer coupons. 7 Auto discounts (hotel) .... Auto ...................... 13 Travel commissions: Airline ..) a... ($ millions) Segment reporting: Tyejon Corp..........

.. 13. 9................................. The transfer pricing method chosen does have an effect on the ROI-based rankings. Chapter 21 631 ....................... 7......21–31......) by division assets: For (a): Travel services ... 1997 Solutions Manual................................ 13.....................................42 For (b): Travel services ..... 9. (continued) c.... 4..... © The McGraw-Hill Companies......... 9....................85% Hotel ..........................) and (b........85% Auto rental ................. 8..........87 Auto rental ....97 Airline ........... Divide the operating profits in (a.....10 Airline ...42 Hotel ........ while the airline and auto rentals each drop in ranking....... Inc...85 = = = = = = = = $9/$65 $32/$321 $90/$955 $17/$385 $9/$65 $38/$385 $26/$321 $75/$955 The hotel moves from last place in the rankings to second....

........................ The Logistics Division should accept the bid from Forwarders Division... then the question arises as to the appropriate transfer price............ Inc................................................. Custom Freight Systems is $72 (= $185 – $113) better off if the Logistics division uses the Forwarders division for this contract.. $155 Variable Costs ... ($155 x 60%) ..21–32........... Forwarders Division $ 210 Logistics Division –0– 20 155 $ 35 ($113) $210 ($210) Option II: Purchase externally (United Systems) Total Company Cost = ($185) b............ $175 $175 + + $ 0 = $35 = ($210 selling price – $175 variable cost) $175 $210 © The McGraw-Hill Companies................. (Given) ................................................ If we assume it is optimal for the transfer to be made internally........ 5/e .....) ..... (From Forwarders Div.. 1997 632 Cost Accounting. Option I: Pruchase Internally Air Cargo Division Sales ............................. Differential + Opportunity Cost of = Transfer Outlay Cost Transferring Internally Price If the seller (the division supplying the goods or services) has idle capacity .....) Custom Freight Systems (A): Transfer Pricing.. Operating Profit (Cost) ..... a. $ 62 Total Company Cost...... 93 ($175 – $155) ................. See detail calculations below........ If the seller has no idle capacity.... The economic transfer pricing rule for making transfers to maximize a company’s profits is to transfer at the differential outlay cost to the selling division plus the opportunity cost to the company of making the internal transfers................ (60 min.......

. The reward system at Custom Freight Systems creates an environment that encourages managers to act in the best interests of their division rather than for the corporation. • • • d. © The McGraw-Hill Companies. However. Espinosa could reorganize the company combining the divisions into one operating company. Tell the Logistics and Forwarder divisions that the transfer price will be between differential cost ($113) and the lowest outside market price ($185) and allow them to negotiate the profit. Chapter 21 633 . 1997 Solutions Manual. it might be better to sub-optimize for this transaction and obtain more general benefits from decentralizing. Inc.21–32. Managers are rewarded on their return on assets and profits which discourages discounting to other divisions of Custom Freight Systems and ultimately costs the corporation more. This would not be in the best interests of Custom Freight Systems. Too much intervention by Espinosa will eliminate the benefits of decentralization. Espinosa could simply do nothing and let the managers maintain their autonomy. (continued) c. However. • Espinosa must trade-off the benefits of intervention on this particular transaction against the impact of intervention on decentralization as a policy. Espinosa has many alternatives to intervention or to forcing the manager of the Forwarders division to lower his price below $210. Each has advantages and disadvantages. Custom Freight Systems would lose all of the benefits of decentralization.

.... 5/e ............................. the Logistics Division should accept the bid from the Forwarders Division........ Total Company Cost........................... the bid from World should be accepted............ (From Forwarders Div... Variable Costs ...... Inc..................................21–33. the overall cost to Custom Freight Systems is lower because other divisions of Customer Freight Systems are included in the bid............. if we eliminate the Forwarders Division from the bidding process........... Variable Costs ......) Custom Freight Systems (B): Transfer Pricing........... (Given) .............. See detailed calculations below....... Total Company Cost............ Emphasize that even though World’s bid is $10 per hundred pounds higher than United’s... Similar to Case A.) .... ($155 x 60%) ............................. Air Cargo Division $155 93 $ 62 Forwarders Division –0– –0– ($133) Logistics Division –0– $195 ($195) © The McGraw-Hill Companies........ Option I: (from 21–32) Purchase internally Sales .................................... 1997 634 Cost Accounting.. ($175 – $155) ....................... Air Cargo Division $155 93 Forwarders Division $210 Logistics Division –0– 20 155 $ 62 $ 35 ($113) $210 ($210) Option II: (from 21–32) Purchase externally (United Systems) Total Company Cost = ($185) Option III: Purchase Externally (World Systems) Sales .......... However.......................... (30 min................................................................... Operating Profit (Cost) ..... Operating Profit/(Cost) ....

1997 Solutions Manual. its responsibilities to stakeholders. suppliers. People at different levels in the organization have different responsibilities. Performance measures are most effective when they relate to what people at different levels control. Benchmarking identifies an activity that needs to be improved. and implementation of. © The McGraw-Hill Companies. 22–6.Chapter 22 Nonfinancial Performance Measures Solutions to Review Questions 22–1. proprietary technology or established distribution channels. Nonfinancial performance measures direct employees’ attention to the organization’s objectives and focus on the measures that are controllable by each employee. 22–3. such as employees. Chapter 22 635 . An organization’s mission statement should communicate the organization’s values. customers. and then utlizes that process. the best way to do something as practiced in other organizations. Stakeholders are groups or individuals who have a stake in what an organization does. studies its process. and the community. 22–4. shareholders. and the major strategies the organization plans to use to meet its commitments. 22–5. 22–2. Inc. For example. 22–7. Critical success factors are the factors that are important to the organization’s success. finds an organization that is the most efficient at the activity. 22–8.. The balanced scorecard is a set of performance targets and results that show an organization’s performance in meeting its objectives relating to competing stockholder wants. Competitive benchmarking involves the search for.

3) Workers are able to use their skills and knowledge to further develop and to improve the organization’s performance. Worker involvement is important for three reasons: 1) Increased worker involvement often translates to an increased commitment to the organization. Customer satisfaction measures reflect the performance of the organization on several factors. including quality control and delivery performance. Poor delivery performance will likely negatively impact an organization’s profitability as repeat business declines. 1997 636 Cost Accounting. 22–11. 5/e .. See Illustration 22. Manufacturing cycle efficiency measures the efficiency of the total manufacturing cycle (the most efficient companies have a measure of 1). 2) Workers are able to be responsive at all levels if empowered with decision-making responsibilities. This measure is important to most companies because gains in efficiency generally improve company profitability. Delivery performance measures indicate how proficient the organization is at delivering goods or services when promised to the customer. 22–13. © The McGraw-Hill Companies. 22–10.22–9. 22–12. Inc.4.

. Quality control: 1) Number of customer complaints 2) Number of service calls 3) Number of returns Delivery performance: 1) Percentage of on-time deliveries 2) Percentage of deliveries damaged 3) Delivery service surveys 22–16. and regents.Solutions to Critical Analysis and Discussion Questions 22–14. Answers will vary. If awards are based on effective worker involvement and commitment (i. then this percentage measures the proportion of company employees who meet the criteria.e. © The McGraw-Hill Companies. authors. employees. publishers. but should include: Stakeholders—students. 22–18. Chapter 22 637 . Critics contend that traditional financial performance measures are obstacles to effective implementation of innovative management methods because many performance measures do not use financial data. Answers will vary. For instance. 1997 Solutions Manual. Critical success factors—sufficient inventory and accurate class/text information. this is the criteria for the awards). if positions are not filled internally it may be because the employees are not performing well enough to be promoted. Inc. The number of positions filled from within the company may indicate whether or not employees are committed enough to the company to want to advance and employee perception of advancement possibilities. 22–17. professors. It may also indicate employee commitment by the quality of employee performance. 22–15..

b. d. Supplier performance.) Benchmarks. c. © The McGraw-Hill Companies. 22–20. Percentage defective units. Product performance. c. Inc.. On-time delivery to customer. (20 min. d. 22–22. (20 min. Employee performance. 3. Answers will vary. 1. 2. The balanced scorecard should be used by upper mnagement to make trade-offs between competing wants.) Balanced scorecard. Supplier performance. Number of employee sick days. 3. They would not be able to relate the competing objectives to what they are doing on a daily basis. 1997 638 Cost Accounting. then establish objectives for production which are related to the production level employees and on which they can focus. (45 min.Solutions to Exercises 22–19. 4. Time to generate reports. On-time delivery of materials. b. Answers will vary. a. many of which are not under the control of production level employees. 22–21.) Benchmarks. (20 min. 2. Maintenance response time. but may include any of the performance measures listed in the illustrations. Support performance. Employee turnover. 1. 4. a. but should include the following: The balanced scorecard focuses on company-wide objectives. 5/e .) Performance measures. Employee performance. Percentage defective raw materials. Support performance. Product performance.

22–24.) Functional measures..5 days + 2 days + . (20 min. 6 hrs. 6 hrs. 2 days . 33 hrs. 22–26.) Manufacturing Cycle Time and Efficiency.75 days Manufacturing Cycle Efficiency = = = 26% © The McGraw-Hill Companies. 2 hrs. + 24 hrs. (30 min.25 days + 5 days 2 days 7. (20 min. Some possible examples are: • • • • • Accounting quality—Percent error in budget Clerical quality—Number of misfiled papers Forecasting quality—Number of forecasting assumption errors Procurement/purchasing quality—Percentage of incorrectly ordered materials Production control quality—Time that line is down due to untrained employee error 22–25. + 1 hr. Chapter 22 639 . Answers will vary. Percentage of workers acting as mentors—used to measure worker empowerment. Inc. + 6 hrs. Examples are as follows: Percentage of managers active in continuing education—used to measure worker development.22–23. (20 min) Manufacturing Cycle Time and Efficiency.) Worker involvement. Percentage of workers applying for promotions—used to measure worker recruitment. Manufacturing Cycle Efficiency = = = 18%. 1997 Solutions Manual. Answers will vary.

22–28. but this information is only useful if the other GM divisions are doing better than the Saturn Division. 1997 640 Cost Accounting. they would have a clear incentive to shorten the loan processing time. © The McGraw-Hill Companies. Dollar amount of warranty repairs for every car sold. (45 min) Mission statement.3. The following is one example. such as Chevrolet. Performance measures.) Benchmarks. (20 min. 22–30. It would be easier to get this information from other General Motors divisions. Answers will vary. Inc. This can be measured by the average number of days it takes to process a loan. If employees are evaluated based on this measure.) Answers will vary. but may include the following: • • • • Number of customer complaints for every 100 cars sold. 22–29. the bank would be sending a signal to its employees that this is important not only to the bank. likely candidates for comparison might be Honda or Toyota. Customer satisfaction on a scale of 1 to 10. and community) and state how the company intends to add value to each group. (45 min. 5/e . but should identify the stakeholders (patients. Number of defects for every car sold. doctors.) Functional measures. (20 min. By using this measure.Solutions to Problems 22–27. Answers will vary. but may include any of the functional measures shown in Illustration 22. Answers will vary.. staff. An important critical success factor for many banks is the efficiency in which the bank can process loans. but also to its customers. Although this information may be difficult to obtain from competitors.

Answers will vary. (45 min. in which case hiring more employees may alleviate the problem. However. However. b. There are several probable causes for this including: • • • Employees may be rushing to keep up with orders and unable to take the time to do a good job. The equipment being used is not designed to handle this level of production or may be out of adjustment. Recalibrating the machines may solve the problem. (40 min. Did employees have incentives to make these improvements? Were additional costs incurred to improve on all three measures?. but should address the following points: • • • Percentage of manufacturing cycle efficiency has improved steadily from 85% in week 1 to 90% in week 6. Answers may include: Production almost doubled from January to June. a. Inc. Chapter 22 641 . 22–33. as production increased. Employees may be so pushed that they have a bad attitude about work so they get sloppy. The number of late deliveries does not appear to be related to the increase in production. b. etc. © The McGraw-Hill Companies. you may want to know what caused the improvements shown by all three measures. As a manager of the company. the month of May should be investigated to determine the cause of the high number of late deliveries.) Operational performance measures. Percentage of on-time deliveries has improved steadily from 94% in week 1 to 99% in week 6..) Operational performance measures: Kenston Corporation. Performance measures. Number of customer complaints has decreased significantly from 40 in week 1 to 11 in week 6. (40 min. 22–32.) Answers will vary. a. the number of defective units produced and delivered increased in greater proportion than production. 1997 Solutions Manual.22–31.

.

the net present value of the capital investment is increased. and the tax deductibility of nominal interest rates may offset some of the tax disadvantages of historical cost depreciation. There is an opportunity cost and risk involved by having funds tied up in capital investment projects. 23–4. Inc. As a result.. The timing is important because cash received earlier has a greater economic value than cash received later. The cash flows from the depreciation tax deduction are discounted more because they are received in the future and are worth less than the dollars that were paid for the asset. Chapter 23 643 . The net present value of the project will usually be lower after adjusting for inflation. The relationship between the real return (r) and the inflation rate (i) that is used to discount nominal cash flows under conditions of inflation is: (1 + r)(1 + i) – 1 The equation serves to reduce the inflated future dollars to their value in terms of today’s dollars through the (1 + i) term. This effect may be reflected in lower asset prices.Chapter 23 Capital Investment Decisions Solutions to Review Questions 23–1. 23–5. unless future cash flows from the project are expected to increase more rapidly than the rate of inflation. The time value of money merely states that cash received earlier has a greater value than cash received later because the dollar received today can be earning interest between now and later. 23–3. Determining the amount is important in estimating the future cash flows. Tax policies provide additional incentive for capital investment by various accelerated depreciation methods (or investment tax credits when in effect) which result in a faster return of the company’s capital through quicker reductions in tax liabilities. The term (1 + r) operates to discount the dollars for the time value of money effects. The timing and amount together are used to determine the economic value of the project. © The McGraw-Hill Companies. This problem arises because the tax shield is based on the original cost of the assets. 23–2. 1997 Solutions Manual.

project should be approved. We consider them separately because each type of flow results from different activities and gives rise to different tax consequences. Any project with a positive net present value could be justified and the project with the greater net present value should be approved under normal circumstances. the tax shield which arises from depreciation deductions for tax purposes is a cash flow item and is included. 23–7. Once the timing and amount of cash flows has been determined. No.. 23–8. they should be discounted to the present by determining and applying appropriate discount rates. Audits often lead to more accurate cash flow analyses. the company will receive the tax shield from depreciation of the new equipment. If the equipment lasts for more than a few years. © The McGraw-Hill Companies. However. the net present value of each project should be determined. Audits identify what estimates were wrong and can create an environment in which planners will not be tempted to inflate their estimates of profits to get a project improved. Depreciation is not a cash flow item. To determine which. Inc. 5/e . A better investment might be to liquidate the division. 23–9. (2) periodic operating flows. it appears to be a good investment.Solutions to Critical Analysis and Discussion Questions 23–6. In addition. if either. The four types of cash flows are: (1) investment cash flows. (3) depreciation tax shield. and (4) disinvestment flows. 23–10. The $160.000 reduction in the operating loss is a cost savings. 1997 644 Cost Accounting.

The relevant costs for any decision are the differential costs.23–11. © The McGraw-Hill Companies.. Allocated costs should not be used for decision making. Deductions that can be taken sooner have a greater net present value in the presence of constant tax rates. If some portion of fixed costs are allocated to new projects then the new projects are subsidizing the existing operations. Therefore. The primary concern is not the amount of the deduction but the timing of the deduction. 23–12. an accelerated depreciation method will result in greater net present value simply because the deductions are taken sooner. Replacement costs of inventory are included as period cash outflows. Inc. Working capital requirements increase with the increased volume of nominal dollars because more dollars are required to support the same level of activity under inflation. Chapter 23 645 . 1997 Solutions Manual. Inventory values will not change if a given quantity was initially procured and the inventory level remains the same. 23–13.

..... 23–14.. (20 min..............400) 2 © The McGraw-Hill Companies......600) $(1...000) Initiation costs ..... 1. $(100........000) ...................950..........000) PV factor for 10%.....826 $(1..909 $(363. Construction costs ....Solutions to Exercises For purposes of presentation all PV factors have been rounded to three places.............000) .............800) 0 Engineering studies ..) Present value of cash flows......000) $(400... 1997 646 Cost Accounting.........486.000 Present values ........... $(100.000) $(1....000) Project net present value: $(1.800... Net cash flow .. Year 1 $(400... $(100..800... Inc.................... 5/e ...

.... At 12% 1 $20...250 © The McGraw-Hill Companies..000 .....000) PV factor (20%).000 ....000 .000) $17...) a.560) b..893 Present values .000 . ($200.567 $ 56.000 .560 5 $100. ($200..000) $20..712 $56..200 Time 0 1 2 $50.. 1... ($ 23. (20 min.700 Net cash flow . At 20% Present value of cash flows: Tribure City.700 Year 3 $80. ($200. Time 0 Net cash flow ..660 2 $50.320 4 $80..833 $16. Inc..000 Present values ..797 $39..402 $ 40.000 ..000 PV factor (12%)... 1997 Solutions Manual..694 $34.. 1.636 $50.....000 ..000 .880 5 $100. Chapter 23 647 . $ 22..579 $46..000) Net PV of project..860 Net PV of project.23–15.960 4 $80... ($200..000 .850 Year 3 $80.000 ..482 $38.

.480 . 5/e ...000) $22..12)(1 + . ($200. (15 min.052 ..2%) . Inc..812 Present values ..352 $ 56. b. The NPV of the project using the inflation adjusted discount rate is the same ($25 difference due to rounding the PV factor) as when inflation was not considered because inflation increases the value of cash flows in the future by the same amount as inflation reduces the PV factor..10) – 1 = 23. Inflation adjusted discount rate: (1 + r)(1 + i) –1 = d (1 + ...659 $39...434 $ 50.864 Net PV of project..2% Year 0 1 2 $60.000 .23–16..967 4 $117....225 aAssumes inflation affects cash flows at the rate of 10% per year.128 . ($200.... © The McGraw-Hill Companies. 1997 648 Cost Accounting.. a..500 ..870 3 $106.535 $ 56.834 5 $161.000) $17..) Effects of inflation: Tribure City.690 Net cash flowa ... 1. $ 22.000 PV factor (23.

.....23–17...200 ...482 . Total cash flows ....200 $1......658 $ 790 $1...000 Present values ... Total cash flows ..500) PV factor (20%). $(2... $(2......500) PV factor (15%).... $ b. $ 456 1 ($000 omitted) Year 2 3 4 5 $750 $850 $750 $850 ...500) Net PV of project. $(2...... 1. 133 1 ($000 omitted) Year 2 3 4 5 $750 $850 $750 $850 .500) Operating flows: Net cash flows ....200 $1...000 $600 $1.. 1......402 $ 482 $241 Time 0 Investment flows: Investment.497 $ 572 $298 © The McGraw-Hill Companies..500) Operating flows: Net cash flows ....000 $600 .870 .......000 $600 $1..756 $653 $643 $1.. Chapter 23 649 ... Present value of cash flows: Titantic Entertainment.......... $(2.200 ...... 1997 Solutions Manual......000 $600 ..) a.. $(2. $(2.....833 .........694 $625 $590 $1. (30 min.579 $ 695 $1..000 Present values . Inc.....500) Net PV of project.572 .. Time 0 Investment flows: Investment.......

5/e . Nominal rate = (1 + .. using the inflation adjusted discount rate..372 $ 572 $299 $795 = $750 x 1. Time 0 Year 3 1 2 4 5 Investment flows: Investment. Effects of inflation on cash flows: Titantic Entertainment.673 $652 $643 $1....23–18...06) – 1 = .... $(2....429 .000 Present values .429 $1. 1997 650 Cost Accounting..500) Operating flows: Net cash flows .... Total cash flows .263 $803 $1.. That would be the case here..06 2 $955 = $850 x (1. (Compare NPV in part b of 23–17 to NPV in 23-18 [$1 difference is due to rounding]........219 = 21.453 ..15) x (1 + ...06) etc...820 .) Effects of inflation on cash flows: Titantic Entertainment....500) PV factor (21..552 $ 789 $1....9%) .500) Net PV of project.....9% 23–19. 1. Inc. $(2.... $(2. is the same as when inflation is not considered if inflation increases the value of cash flows in the future at the same rate as inflation increases the discount rate. $ Calculations: 455 $795 $955 $795 $955 .263 $803 ...... (30 min. The net present value of the project..) © The McGraw-Hill Companies.

000 120.23–20.000 $600.000 36.000 48. © The McGraw-Hill Companies.000 210.437 Present Value $ 40.000 Tax Shield at 40% $ 48.000 $240.437 Present Value $ 40.516 .096.656 34.732 $157.000 48. 1997 Solutions Manual.847 .847 . Year 1 2 3 4 5 Depreciation $120. Note the total depreciation taken is the same under straight-line and accelerated.000 PV Factor (18%) . Compute present value of tax shield: Limbo Corporation.464 29.000 90.000 90.096 The present value of the tax shield is $150.312 21.000 36.576 15.000 84.000 120.000 $600.516 .000 Tax Shield at 40% $ 48. (25 min.718 .000 120.000 120..000 $240.609 . Chapter 23 651 .) a.656 60. but the timing under accelerated methods increase the present value of the tax shield over the straight-line method.000 48. Inc.000 90.768 20.200 The present value of the tax shield is $157.718 .976 $150.232 24.924 18.609 .000 48.000 PV Factor (18%) .200 b. Year 1 2 3 4 5 Depreciation $120.000 36.

428 13.384 15.000 PV Factor (31.76% Year 1 2 3 4 5 Depreciation $120.000 36. 5/e . © The McGraw-Hill Companies.14)(1.000 Tax Shield at 40% $ 48. Inc.000 84.512 43.517 . (25 min.000 90.072 $121.000 210.912 $107.000 36.76%) .332 .000 $600.372 .000 90.22) – 1 = 31.000 $600.576 .22) – 1 = 39.000 84.732 11.856 c.952 9. a.08)(1.000 36..000 Tax Shield at 40% $ 48.000 90.000 PV Factor . The net present value of the tax shield decreases as the inflation rate increases.719 . At 14% inflation: Nominal Interest Rate = (1.267 .612 6.759 .192 Present Value $ 34.08% Year 1 2 3 4 5 Depreciation $120.000 36.000 36.392 9.572 b.000 $240.000 36.000 90.437 .000 $240.000 210.000 90.23–21.252 Present Value $ 36. At 8% inflation: Nominal Interest Rate = (1. 1997 652 Cost Accounting.432 48.) Present value of depreciation tax shield under inflation: Limbo Corp.000 90.

23–22.750 15.000 $400.018 39.000 80.005 35. (20 min.000 28.000 150.424 16.000 80.000 $140.916 $93. Nominal Interest Rate = (1.000 $400.000 45. Inc.820 0. L.658 0.909 23–23.000 PV Factor (21.000 Year 1 2 3 4 5 Depreciation $115.000 80.016 13.000 $400.372 Present Value $33. Corporation.000 28.000 45.135 5. (30 min.453 0.870 0.500 15.756 0.690 10.000 PV Factor (15%) 0.497 Present Value $24.000 28.859 $90. Tax Shield at 35% $ 40.9% a.15) – 1 = 21.497 Present Value $ 35.750 15.) Present value of tax shield: C.750 $140.000 150.000 Tax Shield at 35% $ 40.828 $101. Corporation.552 0.500 15.750 $140.250 52.000 80.673 0.572 0. L. At 6% inflation: Year 1 2 3 4 5 Depreciation $115.000 45.250 52.000 28.000 PV Factor (15%) 0.572 0.694 7.000 45.750 15.360 21. 1997 Solutions Manual.756 0.658 0.000 45. L. Corporation.9%) 0. Chapter 23 653 .06)(1..) Present value of tax shield: C.168 18.884 23–24.000 Year 1 2 3 4 5 Depreciation $ 80.870 0.750 15.364 9.000 45. (30 min.) Present value of tax shield under inflation: C.026 © The McGraw-Hill Companies.333 8. Tax Shield at 35% $28.009 7.

000 x 21% x 40% b.000 x 15% x 40% $21. 14.692 20.12 or $43.160 $63. $(240.400 = $240.000) $62.360 ..160 $80..360 ..000) Operating flows: Cash flowsa .852 .2096 = 20..134 20.160 $63.160 $76.437 $60.360 .000) $48.565 $45.681 $67.386 $37.......148 8....000 b$14..000 . $ a$43.169 Present values Net PV of project a$43.857 $55. (30 min. 5/e ..200 20.12) etc.. 1.... $(240.160 = $240.400 $(240...926 Present values .570 $43.....23–25.200 Tax shield: Depreciationb..120 = $240.486 = (1 – 40%) x $72.160 $63..) a. $43. Inc.160 $96.000) $51.96%) 1 2 Year 3 4 5 $(240..200 x (1..... $(240. At 12% inflation Nominal Rate = (1 + ...631) $54.467 $41.400 Total cash flows ....136 .000) $57. Time 0 Year 3 1 2 4 5 Investment flows: New equipment .308 $43...200 $43..976 20.120 $75. Present value of cash flows under inflation: Kentron Products.000 ...827 $(240.12 2 $54.08) x (1 + .000 x 22% x 40% $20.384 14.310 ..784 1...200 20.384 = $43.200 x 1.294 .120 $64.200 20..681 $43.200 21..320 ...96% Time 0 Investment flows: New equipment Operating flows: a Cash flows Tax shield: Depreciation Total cash flows PV factor (20..794 $50..190 21.922 $ (12.160 $88.190 = $48...000) $53..683 $51..12) – 1 = ...600 PV factor (8%) .122 $43.338 Net PV of project. © The McGraw-Hill Companies..384 x 1. 1997 654 Cost Accounting.735 $46....

23–26.. 1.000) (200...000) (200...000..200.200 $ 680....000 $1.400. $(4.... (200..000 $1.. the hospital should buy the equipment.) Present value analysis in nonprofit organizations: Goldberg Research Organization....400.000 $1.452 Present value .657.600 $ 956.893 ...000..400 $ 854....000) (200..200.000) (200. $(4..000 $1...400.071...000 $1..000 $1..400 $ 608.400 $ 723..400 $ 763.712 ..600 Yes.797 ..400.200.600..636 . (30 min.000 $1.567 .507 ..000 $1.000 $1..000) $1...000) (200....400...400. Year 0 1 2 3 4 5 6 7 Investment flows . 1997 ...000 .. Net annual cash flow ...000 $1.000) $1..000. 655 © The McGraw-Hill Companies...000 PV factor 12% .. $1...000 $1.....000) Periodic operating flows: $1. 400...200...200.000 Annual cash savings ..000) Additional cash outflow .000) (200..200.200 Net present value .....400..000 Disinvestment flows ..... $(4.000 $1... Inc...

..000.. Net present value .. 1997 . Inc... aCash flows from Exercise 23–26 times (1...... where n is the year of the cash flow.. then the equipment should still be bought. $(4.. 1.96% Present value .. $1.656. 656 © The McGraw-Hill Companies.742..071..96% = (1.000 ..632.763...586 $1.....456 $ 723.....264 PV factor 20..981 $ 854....000) $1.250 $2.08)n..919 flowa .593 $ 607....118 b .680 $1.467 ..792 $ 955.23–27.000. (20 min.194 $1.. b20...000 $1.683 .565 ...386 .827 .399.904...296...000) $1.319 .08)(1.654 $1.. Year 0 1 2 3 4 5 6 7 Net annual cash $(4.418 $ 680.511.244 If inflation is considered...085 $ 762.12) – 1....) Impact of inflation on net present value in nonprofit organizations: Goldberg Research Organization..

© The McGraw-Hill Companies.16–4 + 1. Therefore.16–7) Under the expected scenario.16–5 + 1. The schedule of cash flows is ($000 omitted): Year 0 1 2 3 4 5 6 7 Net Present Value @ 16% Internal Rate of Return a$586 Best Case ($3. However.16–7) b($490) = ($3. Inc.400 x (1.000) + $600 x (1.16–6 + 1.000) + $1. Chapter 23 657 .000 2. the project does not meet the company’s hurdle rate.23–28.000 x (1.924)c (4%) = ($3.400 1.400 1.16–6 + 1.000) 0 0 0 2.000 $ 586a 20% Expected ($3.16–5 + 1.000) 0 0 0 600 600 600 600 ($1.400 ($ 490)b 12% Worst Case ($3. under the best case. which may be suitable if there are additional reasons to believe this scenario is more likely or if the company is willing to take the risk on the project for other reasons.) Sensitivity analysis in capital investment decisions: Hearld Manufacturing. it would probably be rejected.000) 0 0 0 1.000 2.16–5 + 1. (35 min.924) = ($3.16–4 + 1..000) + $2. the project’s internal rate of return is 20%.16–4 + 1.16–7) c($1.400 1.000 2.16–6 + 1. 1997 Solutions Manual.

....23–29... Inc........... 5/e .0% (= $10/$200) Project B Cash Flows..833 $ 42 $ 90 .........) Net present value index.... 1997 658 Cost Accounting....694 $ 62 Item 0 3 $100 . $ (350) Net Present Value ...481 $ 48 Project A Cash Flows..........e....... $ (200) 20% PV Factors .. 250/300 x $39) 0 $85 © The McGraw-Hill Companies. $ (200) Net Present Value .......... $ 39 $ 70 $ 58 $125 $ 87 $170 $ 98 $200 $ 96 Net Present Value Index 13% (= $39/$300) Rank 1 2 3 Project B C A Amount to Invest $350 250 0 $600 Net Present Value $52 33 (i................ — Present Value .... $ (300) Present Values @ 20% .. $ (300) Net Present Value ........579 $ 58 4 $100 .......... $ 52 $ 80 $ 67 $190 $132 $250 $145 $120 $ 58 Net Present Value Index 15% (= $52/$350) Project C Cash Flows ................. $ 10 Net Present Value Index 5................ Year (in thousands) 1 2 $ 50 .... (20 min............. $ (350) Present Values @ 20% .

..... Inc..................) ($000 omitted) Year 0 1 2 3 4 A. 1997 .... a.....000 0....... Sunset Mall ............) Net present value: Morris and Associates........... (Answers may differ somewhat due to rounding. Present values ...........23–30....... $405 Net present value index 45% = $405/$900 5 $1.870 $57 2 $65 0........................658 $43 4 $250 0...............376 $ 376 Year 0 B............432 $108 7 $250 0.756 0.... 0........ Calculate net present value index....870 0.......... $ 68 Net present value index 12% = $68/$550 1 $65 0...658 0..497 $ 497 6 $1.............. (550) Net present value........756 $49 3 $65 0............376 $94 659 © The McGraw-Hill Companies...........000 0........ $(900) $0 $0 $0 $0 PV factor (15%)......497 $124 6 $250 0........ (40 min.572 Present values ........572 $143 5 $250 0....... Software Designs......000 0...432 $ 432 7 $1........ $(550) PV factor (15%)................ (900) $0 $0 $0 $0 Net present value..

....432 $26 7 $60 0................. These are the first and second ranked in terms of net present value index..................................................6% (= $600...000 in Software Designs and would purchase 70..870 $226 2 $260 0..000 project investment) interest in Marvin Gardens.........376 $94 b............572 $34 5 $60 0..572 $143 5 $250 0.........000 = $405.........000 remaining ÷ $850... 1997 ....... Present values . ($650) PV factor (15%)..658 $164 4 $250 0...............706 x 189...... The net present value from this investment plan would be $538.............23–30............. 660 © The McGraw-Hill Companies. ($650) Net present value..000 + (...000)....376 $23 Year 0 D....432 $108 7 $250 0......756 $197 3 $260 0.......... (continued) Year 0 C.756 $189 3 $250 0. Inc. ($850) Net present value....497 $30 6 $60 0...... Marvin Gardens .870 $217 2 $250 0............. Present values ....... ($850) PV factor (15%).......... Nutri-care .......... $189 Net present value index 22% = $189/$850 1 $250 0. $57 Net present value index 9% = $57/$650 1 $260 0.497 $124 6 $250 0......... With no constraints....658 $171 4 $60 0. Morris and Associates would invest $900...............

600 b.125 years $4.000 23–32.000 – $4. (20 min. Chapter 23 661 ..4) 5 ] = $20.75 years Annual cash flow $80.) Alternative project evaluation measures: Farm Fresh Corporation.000 = 3.400 = 24% $10. 1997 Solutions Manual.000 © The McGraw-Hill Companies.000 = = 3. Investment cost Annual cash returns (after tax) + Depreciation tax shield = $20.23–31.000 + $8. Inc.000 (.000 x (1 – .125 = 32% c.000)(1 – . 1 3. (Cash flow – Depreciation)(1 – Tax rate) = ($8.40)] [ ] [ $20.800 + $1. a. Investment $300.000 = $2.) Alternative project evaluation measures: No discounting: Quintana Co. (15 min.40) Average investment 1/2 x $20.

..... Yes..... $(900.......000 = ....000 $ 550..... Payback period is less than two years.000 50...) Assess capital investment project with alternative measures: Baxter Co. Incremental rent (12.000 $480.. Tax on gain ... Inc..500 @ $4) ..............000 Balance (900.....75 $600...000 180... 1 $1..... 5/e ........000 $600................000) (450.....000) 150..000 $ 800.........000 $ 480.... After tax operating flows . Net cash flows ...40 ..000 120...000 120.......Solutions to Problems 23–33..75 years..000) 1 2 3 $330.....000 50..000 b...000 $400....000 350... Disinvestment: Salvage .... (45 min........ 1997 662 Cost Accounting......000 $ 330....600.. Year 0 1 2 Cash Flow 0 450. $(900...........000 $450..... Material... Year 0 Investment flows: Equipment...... labor & variable overhead..........000 $450......000 600..... © The McGraw-Hill Companies... Net before taxes .000 $240.....000) Annual operating flows (see schedule below) .000 Payback = 1.........................000.......000 (72...000 50..000 3 $800....... Tax shield ($900.........000) $468........000 120.000/3) x ......000 Sales ........000 400....000 $240...000 750......000 Year 2 $1........... a.

..............694 $416..........000 .500 = = 21. Yes..... (continued) c...500) = Average investment 1/2($900... $ 162..972 © The McGraw-Hill Companies. Average accounting income 1/3($103.... The calculation assumes rent and assigned overhead are allocated to this product according to the problem.. Inc.000 (If the calculation is based on initial investment instead of average investment....000 = 13.. 1997 Solutions Manual...500 / $900....1%).....000 . the result is $117.....23-33. Chapter 23 663 ..222 1 $450.. d...000 .850 2 $600..833 $374.500 + $232...500 + $16.....579 $270.....) ......8% $540.400 3 $468..000) Net present value.000 + $180... Present values ... Year 0 Net cash flows (see part a.. $(900.. $(900..000) PV factors @ 20% .000) $117..

.000..000 in Year 1........000 Tax on gain on sale of old machine ..0 Present values ... Net cash flows ....176 $208...000) = $32...000 = $320.... Fixed cost savings.000) 120.....000)..000) Net present value............ f Tax on gain ..... 20% x $1. 15% x $2.............000) 80.000 = 40% x $200. Old machine is being depreciated $320..000 240.176..... Inc......000) = 40% x ($1......000 (144..072 $416.000.000..000 in Year 3. $ (216.000 – 400..) New machine decision: TCY.....632...000.600...751 $ 833.. (2.000 ........000) 120.......000.000) 200....... e Tax on gain .000)a Operating cash flows: Variable cost savings .000 (= 20% x $1......... Forgone depreciation tax d shield on old machine ................... 20% x $2......000) Present value factors ...136) a b c d e f 1 Year 2 3 120...... Tax effects of cost b savings .....000 (80.... 5/e ..... 1..000........ © The McGraw-Hill Companies..... Depreciation tax shield c on new machine .. (32.....000) Sale of old machine.000 240.000..000.. 400.....000 – $500..632........000 240.000 ......000 x 40% = $160.000 x 40% = $200.000 in Years 2.. Inc. Cost savings times 40% tax rate....600..... based on the negative NPV.000.....909 $189..000) 160......000 (128.000 120.... ($80...000 1. Time 0 Investment: New machine ....23–34. $80.... Do not purchase the new machine........... 25% x $2. 1997 664 Cost Accounting.000 (144.....................000 – $300....616 Old machine has been depreciated to 20% of its original cost....000) in Year 1 (its 5th year).000 ..000 x 40% = $120........ $(1..000..... $(1... Tax on gain = 40% x ($400.......... (40 min...000 $1..000 = $128.000 (144....000) (200... Disinvestment cash flows: Salvage of new machine .....000 – $320. Tax shield = 40% x $320....826 $343. Forgone salvage of old machine ....

His conduct was definitely unethical. for example a peer. She needs to avoid conflicts of interest. Helen should resign and submit an informative memorandum to the appropriate official in the organization. She should take her problem to the next higher level of authority. (25 min. a. Chapter 23 665 .) Ethical Issues: Ishima Company. Inc. and advise all parties of such potential conflicts. Helen should refrain from discussing this with authorities or individuals not employed or engaged by the organization. that is to the vice president of finance.. Follow this policy if it does exist. If the situation still remains unresolved after exhausting all levels of internal review. is involved. as well as professional judgements and opinions. such as using realistic estimates in his net present value analysis.) © The McGraw-Hill Companies. Dodge’s superior. She should communicate information fairly and objectively. He has a duty to communicate both favorable and unfavorable information. Perhaps seeking the advice of a confidential objective advisor. (Note: The IMA has an 800 hotline for discussing ethical dilemmas. He must avoid conflicts of interest. 1997 Solutions Manual. If she fails to get a satisfactory solution she should take her problem to the Audit Committee or to the Board of Directors. since George Watson. Always investigate to see if there is an existing policy within the company for resolving ethical conflicts. Otherwise.23–35. and disclose fully all relevant information that would influence an intended user’s understanding. b. and to refrain from subverting the attainment of the organization’s legitimate and ethical objectives. Unless there is a legal obligation. Watson has the responsibility to perform his professional duties in accordance with relevant standards. it is not necessary to discuss this issue with him any further. c. will help to clarify the concepts of the issues at hand. which is not the case here. Helen Dodge’s first revision of the proposal was unethical if she did not also disclose that estimates were remote possibilities.

870 .500 13. Gain from salvage of new equipment: $33.756 .722 6.000 x (1 – 45%).000 70.497 Present Value $15. Equipment removal net of tax effects = $2.500 $90.000) – ($25.814 8.000 + $20.000 30.750 = $5..000 31. 1997 666 Cost Accounting. Tax benefit arising from loss on old equipment: $27.500 13.45 tax rate f.000 = ($100.000 Tax Shield at 45% $18.500 = $100.710 $62.000 salvage value) x .000 Present Value Factor (15%) . Differential cash flows (years 1 – 10): $18.000 x (1 – 45%) e. (1 hour) Compute net present value: Wright Corporation.000 book value – $40. Depreciation schedule: Year 1 2 3 4 5 Totals Depreciation $ 40.000 = $60. b.000 $200.883 7.660 23.000 x 45% 10 years d. Inc.000)] x (1 – 45%) © The McGraw-Hill Companies.658 .000 30. a.789 c.500 13.23–36.572 .000 30.150 = [($30. Forgone tax benefits: $4. 5/e .000 + $48.

150 $27..247 $11.....464 $ 3.500) (4......150 $18....870 ..150 $18...650 .494 $ 5... Total cash flows .000 Year 1 .....500) (4..500 13.. (continued) g..000 Tax benefit—sale 27.000 of old equipment Periodic operating $18.877 Present values .500) (4.. Inc..500 Years 3–5 ...150 flows .....000 (27.500) (4.000) $46....500) (4..376 ....150 $18.500) (4.500) (4...650 $13.150 (4.. 31.......150 $18...750) $27..865 $15...... Old equipment (4.150 $18. Tax on gain .750) $31..572 ....$ $18..150 $18.132 Net present value ..497 . 667 © The McGraw-Hill Companies.....650 $13..650 . 13.432 .523 3..500 Year 2 .....150 $13..$(135.658 .650 $13.... Tax shield from depreciation: New equipment: 18.......133 $17..23–36.750) Removal ....530 $13..150 $18.... 40... 0 1 2 3 4 Year 5 6 7 8 9 10 Investment flows: Equipment cost ...500) 60...150 $27.500) (forgone) ...000) (2...327 ...756 .536 $34..............500) (4..$(135..150 $27.500 13...284 PV factor at 15% ...... $4...............650 $45..150 $18.701 Note: Your answer may vary slightly due to rounding of PV factor.. 1997 ...... Salvage of old equipment ...897 $ 5.$(200. Disinvestment: Proceeds of disposal ..

.219 = 21. (see schedule in part c) = = $19.06) – 1 = .393 = $21. a.) Impact of inflation on net present values: Wright Corporation.062 3 $18.15 x 1.150 x 1. Annual operating flows under inflation Year Operating flow x inflation factor 1 $18.061 2 $18.9% b.239 = $20.063 etc.23–37. Inc. Nominal interest rate = (1. (45 min. 5/e .150 x 1. 1997 668 Cost Accounting.617 © The McGraw-Hill Companies.150 x 1.

.664 $32.239 $20...453 0.... Year 1 2 3 4 5 6 7 8 9 10 (2............. Year 2 ...504 18.138 $31..739 Discount factor (21.901 $14...000 27.....480 $ 5..... Tax shield–new: Year 1 . Inc...500) 13....846 Net present value .........500) (4...393 $21.500 (4..004 0...750) 40....000 $19......289 $21.500) (4.....007 $ 4..000 31.....396 $11...457 $12.....205 0......164 $83.. Total cash flows.000 0...............552 0....... Salvage of old equipment......246 $22..... Years 3–5 .............455 1...000 (45................ Taxshield—old equipment (forgone) ...... 669 © The McGraw-Hill Companies..698 $ 5.. Tax benefit—sale of old equipment ..820 Present value ..000) Removal ..305 0...... (continued) c........ Time 0 Investment flows: Equipment ...500 13.750) $26.291 $28..000) $47....$(200.......746 $27..500) 13..500) (4. 1997 ..500) (4..428 $26.250 0......791 $24.....500) (4.750) $32.372 0.. Tax on gain .. Periodic operating flows ...$(135......... $ (231) ) Note: Your answer may vary slightly due to rounding of PV factor..............500) 100.914 $24........928 $30....617 $22.168 0.. Disinvestment: Proceeds of disposal....500 (4..500 (4..500) (4....384 $ 6.9%)..........673 0...895 $16......617 $31.289 $25.23–37...393 $30........$(135.....500) (4.914 $33......

the new training should be purchased. 5/e . $ 627 Present value of $627 per year for 10 years at 12%: 5.650 x $627 = $3....) Assess net present value of training costs: Zigfield..000) Net present value of training $ 543 Thus...................................... $1......... Inc. Inc..23–38.. 275 Gross savings ......000 x (1 – ..40)] (3..... $ 770 Reduction in other expenses...045 After tax of 40%....... The new training should be purchased..... © The McGraw-Hill Companies......543 After tax training costs [$5. (25 min........ The support calculations follow: (000’s omitted) Cost savings due to training: Reduction in direct labor .... 1997 670 Cost Accounting..................

000 1.000 x (1.20–6 + 1. the alternative scenarios need to be considered when making the decision.000 3.000 $207b 21% Worst Case ($3.187) = ($3.500) + [$1.20–3 + 1.20–6 + 1.20–5 + 1.000 $1.500) (500) (500) 1.903a 33% Expected ($3. © The McGraw-Hill Companies.20–2)] + [$1. the company would be likely to invest in this project.500) + [$500 x (1. 1997 Solutions Manual.500) – [$500 x (1.000 1.20–3 + 1.000 2.500 x (1.000 1.23–39.187)c 2% = ($3.20–3 + 1.000 3.500) 0 0 1. (40 min. Inc.000 3.20–7)] b$207 = ($3.20–7)] Since the expected net present value is greater than zero.000 x (1.20–4 )] + [$2.20–5 + 1. The cash flows are scheduled as follows ($000 omitted): Year 0 1 2 3 4 5 6 7 Net Present Value @ 20% Internal Rate of Return a$1.500) 500 500 1.) Sensitivity analysis in capital investment decisions: Octagon.500 1.20–5] + [$3.000 1.20–1 + 1.20–4 + 1.20–7)] c($2.000 x (1.500 3.20–6 + 1. Corp.000 ($2. Chapter 23 671 .000 3.20–4)] + [$3.903 Best Case ($3.000 x (1.20–1 + 1.20–2 )] + [$1..000 1.000 x 1. However.

.96% 672 © The McGraw-Hill Companies..000 = 40% x $28...047 .000) Investment tax credit ..800 $37.000 – $10..958 Note: Your answer may vary slightly due to rounding of NPV factor.200 4.766 .. Annual operating flows 23.......800 rate = [(1. .346 $32.000 a ..467 $16.000) x (1 + i) n = $22.. Inc..044 $41...386 $14....737 Net present value .091 $41..376 c PV factor at 20...200 $37.444 $35..619 4.....000) $38...615 $25...229 $35..200 x (1.091 .....000 = 40% x $12. 0 1 2 3 Year 4 5 6 7 8 Investment flows: Machine ...894 11.000) $31......513 $30.......800 4.419 ...96% ...800 $32.........094 .......400 Total cash flows..264 $10.000 – $3......565 $18...683 $25.976 b .08) – 1] = 20.... 1997 .319 $11. $(80.08)n 1 2 3 4 5 cNominal Depreciation tax shield 40% x $16..12)(1....000 = 40% x $12.800 $35.........047 $38..........335 $27. (40 min.400 11.827 Present values..966 4.003 .000 = Tax shield $ 6. aAnnual bYear operating flows = (1 – 40%) x ($50.000 = 40% x $12....23–40.218 $ 8..203 4... Depreciation tax shield 6. $ 8.) Capital investment analysis under inflation with investment tax credit: Norton Company... $ 56. $(80...238 $38.229 ..800 4.. $(80.

24–3. Inc. Hourly fee for inventory audit b. 24–4. so long as the funds are tied up in inventory. If this assumption is seriously violated. at least. their areas of expertise do not extend to the evaluation of the differential costs for the inventory models. however. a.Chapter 24 Inventory Management Solutions to Review Questions 24–1. Fire insurance on inventory h. As with other investments. Generally. the inventory carrying cost would be the costs associated with the average quantity of inventory on hand. the opportunity to obtain earnings on other investments must be forgone.5). while at the end there are zero units on hand. Obsolescence costs on inventory j. Since the working inventory is assumed to behave in a sawtooth pattern (see Illustration 24. there is an opportunity cost involved in having resources invested in a specific asset. the division. be earning short-term interest rates if invested in market securities. some other cost function may be required. discussions of inventory models take the costs as given. Although the inventory models are developed by operations researchers. Chapter 24 673 . 24–2. At the start of the cycle there are Q units on hand. There is an assumption of steady usage rates in the EOQ model. Taxes on inventory e. Salary of purchasing supervisor c. Shipping costs per shipment (C) (N) (P) (C) (P) (C) (C) (N) (C) (P) © The McGraw-Hill Companies. Storage costs charged per unit in inventory g. 1997 Solutions Manual. statisticians and computer specialists. It is the role of the accountant to determine which costs are appropriate for inclusion in an inventory model. The average of these two numbers (Q + 0) is equal to Q/2. Fire insurance on warehouse i. Costs to audit purchase orders and invoices d. Therefore.. Stockout costs f. The economic order quantity model seeks to minimize the sum of carrying costs plus order costs for the working inventory. Funds that are invested in inventory could. It is more likely that these funds would be invested in more profitable assets. hence.

5/e .. 24–9. 24–8. If the constraint is irrelevant (that is. The latter term is determined by the frequency of ordering. Inc. so one would expect a stockout 50% of the time. Inspection of Illustration 24. 1997 674 Cost Accounting. the costs of a given stockout. An inspection of illustration 24. the differential costs may be those associated with the quantities of inventory that are maintained as a result of a given order quantity or with the number of orders placed in a given year. That is likely to happen equally as often as a demand over lead time of less than the expected value. For safety-stock determination. Stockout Solutions to Critical Analysis and Discussion Questions 24–7. Q* is still feasible) then Q* is the least cost solution. In the case of inventory policy. and in the absence of constraints. The stockout must usually be determined with data outside the accounting records and may range from rather low costs of special orders to extensive costs of a shutdown of company operations.1 shows that the carrying cost function is greater than the order cost function when the actual Q is greater than Q*.24–5. Recall that at Q* the two costs are equal (in simple cases) or generally close to equal. The expected stockout costs are affected by the probability of a stockout. Q* is. © The McGraw-Hill Companies. and the exposure to stockout. Any restriction other than those adjacent to Q* will necessarily be at a higher cost than the adjacent restrictions. Any cost which varies with either of these factors would be relevant to the economic lot size decision. Since the carrying costs exceed the order cost. Safety stock d. In the case of order quantities. Differential relevant costs are defined as those that change with a change in the decision variable.2 with the imposition of constraints at various values of Q will confirm this visually. This occurs because the total cost function is decreasing until it reaches Q* and then increasing after. Order quantity b. a. A stockout would occur any time the demand over lead time exceeded the expected value. If Q* is not feasible. then the next best solution will be at an adjacent constraint either greater than or lower than Q*. the optimal solution in the absence of constraints. by definition. 24–6. we can never obtain a lower cost solution than Q*. the decision variables are either order quantities or safety-stock levels. A symmetrical distribution implies equal probabilities on either side of the expected value. With constraints. Reorder point c. it would appear that the actual Q is in excess of Q*. the relevant costs are the carrying cost of the safety stock plus the expected annual stockout costs.

worker strikes) may cause an interruption in the receipt of materials and parts necessary to complete production. if a company has concluded that a . For example. with minimal setup time.. Also. Just-in-time eliminates inventory where spoiled goods and defects can be stored. the costs of avoiding the tax liability on LIFO inventory liquidation.. Companies that use just-in-time production might have a shortage of product if demand increases unexpectedly. In the first place. 24–11. but rather the minimization of the costs associated with maintaining inventories. However. Optimal inventory policy is related to expected future costs. Inc. The appropriate criterion for inventory policy is not avoidance of a stockout. with JIT it must correct the problem before the products are transferred to the next department. and it places two orders a year. Thus. there can be an additional cost to consider in management of LIFO inventories. © The McGraw-Hill Companies. This reduces the need for inventories. The method of accounting for financial reporting or tax purposes will not directly affect the optimal inventory policy. reducing the number of orders per year will reduce the expected frequency of a stockout. 1997 Solutions Manual.5 probability of a stockout is acceptable. as implied in the comment. If a department is making defective products. that problem is different from the material discussed here and usually relates to an aggregate inventory rather than to a specific item in inventory. 24–14. Safety stock will. However. Chapter 24 675 . if it places fifty orders a year then 25 stockouts can be expected.24–10. 24–13.000 units with 75 in stock and a demand over the lead time of 800 units will result in a stockout.e. supplier disruptions (for example. 24–12. since LIFO can result in a significant tax penalty if LIFO inventories are reduced in quantity. it can expect one stockout (i. Flexible manufacturing enables companies to change from production of product A to product B quickly. 2 x . large order sizes will not eliminate the exposure to a stockout. not the past costs on which LIFO or FIFO data are based. However. namely. However. ordering 5.5).

00 P = $480.60 + $14. 2 x 310. (15 min..000 = 1.60 + (18% x $80.600.40 = $24.075. 1997 676 Cost Accounting. (15 min.000 x $480.200 = 1.) Compute EOQ. 5/e .000 S = $9.00 = 1.00) = $9.) Compute EOQ: Sonoma Technology Inc.754 units © The McGraw-Hill Companies.265 units 24–16. A = 40.Solutions to Exercises 24–15.00 Q* = 2 x 40. Inc.00 $24.000 x $620 $125 EOQ = = 3.

50 42.875. This problem requires solving for an unknown in the EOQ equation.2I 2 x 3.250.000 x ($0.80 + . 1997 Solutions Manual. (35 min.80 + . and letting the unknown inventory cost be denoted “I” we obtain: 3.000 $0.70 $13.80 + ..000 $3. Q* = 2AP S substituting in the knowns from the exercise.250.500 x 20 x $306.2I 2 x 3.25 $0.875.500 x 20 x $306.80+ .250.50 $3.2I I = = = = = $42.80+ .25 $0.000 = and: 12.2I .000 / 12.24-17. Chapter 24 677 .80 + . Inc.2I © The McGraw-Hill Companies.2I) = $42.2I .875.250.50 – $0. Given the equation.500 = Squaring both sides: 12.2I $0.000 then $0.) Find missing data for EOQ: Errantos Corporation.000 = Collecting terms: 12.80 $2.

000 x $300 $400 b. 600 = 2 x 240. Fong should make 12 production runs per year: 12 c.000 = 2 x 48.60 Therefore. Inc. The answer is 3. The answer is 2. 1. (15 min.000 x $54 $12 48. The answer is 1.000 units per run © The McGraw-Hill Companies.000 units per year = –––––––––––––––––––– 4.. There are 4. 5/e .24–18. EOQ-multiple choice.) a.200 = 2 x 160.000 units in the optimal production run: 4. 1997 678 Cost Accounting.000 x $100 $.

000 units.633 Q 3.24–19.000 units: Carrying costs: QS 3. it is necessary to evaluate the costs at the adjacent order quantities of 2.) Orders in round lots: Loggins Corporation. Inc.000 x $25 = = $37. Chapter 24 679 .000 = 2.000 Total costs $56..472.000 units: Carrying costs: QS = 2.950 Q 2.115 units Given the restrictions. The optimal order quantity without regard to the order restrictions is: Q* = Q*= 2xAxP S 2 x 172.000 units and 3.000 x $325 = $18.000 units.500 2 2 Order costs: AP = 172.000 x $325 = $27.000 Total costs $52. (35 min. At 2.133 It is optimal to order 2.950 At 3. 1997 Solutions Manual.000 2 2 Order costs: AP = 172.000 x $325 $25 = 4. © The McGraw-Hill Companies.000 x $25 = $25.

24–20.) Impact of quantity discounts on order quantity: Folsom Company. (35 min.063 810 x $500 150 = $2.500 x (6% – 2%) = $48. First compute the EOQ without regard to the discount schedule: Q* = 2AP = S 2 x 810 x $500 $450 = 42 Then compute the total costs under the initial Q* and for the minimum quantity required to earn each of the next price breaks.450 © The McGraw-Hill Companies. Order Quantity 42 Carrying Cost 42 x $450 2 = $9.500 x (6% – 5%) = $12.213 Optimal 150 150 x $450 2 = $33. 1997 680 Cost Accounting.450 Order Cost 810 x $500 42 = $9. 5/e .. Inc.700 Foregone Discount 810 x $1.750 $36.643 810 x $500 80 = $5.600 810 x $1.000 $35.693 80 80 x $450 2 = $18.150 zero -0- Total Costs $67.

) Impact of constraints on optimal order: Folsom Company. (20 min. then the optimal order size would be 42 units..950 © The McGraw-Hill Companies.100 Foregone Discount 810 x $1. Carrying Cost 50 x $450 2 = $11. This may be found by comparing the total cost at 42 units given in exercise 24-20 as $67.600 Total Costs $67. not the 50 unit restriction.24–21.250 Order Cost 810 x $500 50 = $8. Inc. Chapter 24 681 . If there were a restriction on the storage capacity.500 x (6% x 2%) = $48. 1997 Solutions Manual.693 with the following costs at 50 units.

.700 .300 = $ 3.00 = $5.e. The carrying cost will be $32.000 Expected Stockout Costs a x $3. we prepare the following schedule: Safety Stock 0 100 175 250 Carrying Costs of Safety Stock 0 100 x $32. 39. bIt should be evident that at this level the carrying costs alone exceed the total costs at a safety stock of 175 units. a15 © The McGraw-Hill Companies.000/2.600 = 15).980 Additional computations: is the number of orders per year.300 = $29. With the given order size.300 = $ 1.24–22.6 x 15 ..00 = $3. Therefore.560 (optimal) 9.600 b 250 x $32.) Evaluate safety-stock policy: Rollins Corporation It is necessary to evaluate the total annual carrying costs and expected stockout costs at each safety-stock level. it is not possible for this or any safety-stock level larger than 250 to be less costly than 175 units. (25 min. Inc. 1997 682 Cost Accounting.08 x 15a x $3. there are 15 orders placed a year (i.00 for each unit in safety stock. Based on these computations.900 .04 x 15a x $3.200 175 x $32. 5/e .100 9.00 = $8.2 x 15a x $3.960 .700 13.300 = $ 9.980 Total Costs $29.

) a. Inc. Safety Stock 10 20 40 80 Carrying Cost 10 x $1 = $10 20 x $1 = $20 40 x $1 = $40 80 x $1 = $80 Expected Stockout Cost 40% x 5 x $300 = $600 20% x 5 x $300 = $300 10% x 5 x $300 = $150 5% x 5 x $300 = $ 75 Total Cost $610 $320 $190 $155 Optimal b. Safety stock–multiple choice. The answer is 1. 1997 Solutions Manual.. Chapter 24 683 . The answer is 4. Safety Stock 10 20 30 40 50 55 Carrying Cost $8 x 10 = $ 80 $8 x 20 = $160 $8 x 30 = $240 $8 x 40 = $320 $8 x 50 = $400 $8 x 55 = $440 Expected Stockout Cost 50% x 5 x $120 = $300 40% x 5 x $120 = $240 30% x 5 x $120 = $180 20% x 5 x $120 = $120 10% x 5 x $120 = $ 60 5% x 5 x $120 = $ 30 Total Cost $380 Optimal $400 $420 $440 $460 $470 © The McGraw-Hill Companies.24–23. (20 min.

60 Inventory tax .....................) Differential costs of inventory policy: Souds.....50 = $59 .... $9............................................$195 Insurance on shipment ................................. Inc....... Order costs: Shipping permit .......00 Total .. 3 Total ........20 Unloading ...... $862... 160........ 3............90 © The McGraw-Hill Companies. Inc...........40 Stockout costs ......50 per unit Total carrying cost = (25% x $198) cost of capital + $9.............24–24.......................... Costs that vary with the number of units purchased: Purchase price .30 Costs to arrange for the shipment ................. $5.$198 Costs that vary with the average number of units in inventory: Inventory insurance ........................ $403............................................. 5/e ........ 55.............. 1997 684 Cost Accounting........................... 244............. (30 min......................50 + $9.............90 (= $195 x 2%) Total .....50 = $49.......

130.40 = $75 + 20% x $317 = $138.40 = = $34.226.514 = 262 units $138.096. Chapter 24 685 .58 The company could save money by changing its order size to the optimal quantity.) Differential costs of inventory policy. 1997 Solutions Manual. © The McGraw-Hill Companies.964.400 x $878 = $18.18 Q 262 Total $36.40 2 2 Order costs: AP = 5.00 2 2 Order costs: AP = 5.24–25. Economic order quantity: Q* = 2 x 5.80 Q 250 Total $53.564.600. Order costs = Insurance + Other order costs P = $860 + $18 = $878 Carrying Out-of-pocket Cost of capital = + costs costs on inventory S a. Carrying costs: QS 500 x $138. (30 min.40 = = $18..40 Carrying costs: QS 262 x $138. Inc.80 b.400 x $878 = $18.400 x $878 = 68.

010 9 x {[. (40 min. 5/e .15 x (8 – 5)] + [.05 x (9 – 5 – 1)] + [.200 = 9 x (. Inc. 270 working days times 50 units per day all divided by the 1.400 Optimal © The McGraw-Hill Companies. Exposure to a stockout is based on the nine orders per year.400 $18.15 x (8 – 5 – 2)]} x $4.200 150 150 x $22 = $3.130 50 50 x $22 = $1.05 x (9 – 5 – 1)] + [.Solutions to Problems 24–26.200 = $11.05 x (9 – 5 – 3)] + $4.890 none -0- Total Costs $32. The key to this problem is computing the expected stockout costs in terms of dollars per day of stockout rather than in specific dollar amount.540 $ 5.200 = $17.2) x $4.20 x (6 – 5)]} x $4.130 9 x {[.190 200 $ 4. This latter amount is simply the safety stock divided by the usage rate (50 units per day)..340 9 x [. 1997 686 Cost Accounting.110 $13.05 x (9 – 5)] + [.300 200 x $22 = $4. The expected annual costs of alternate safety-stock policies may be illustrated in the following schedule: Safety Stock 0 Carrying Costs (@ $22/Unit) zero Expected Annual Stockout Costs 9 x {[.200 = $32. That is.) Determine optimal safety-stock levels: Estatic.500 units ordered at one time. Inc.200 = $ 1.15 x (8 – 5 – 1)]} x $4.2 + .45 + . A stockout will occur when the actual lead time exceeds the sum of the planned lead time (5 days) plus the number of days’ safety stock on hand.100 100 100 x $22 = $2.

.............................98 108........00 183....... $41............. Inc...... and the order cost from the data supplied in the problem..................................60 ($........... Inc.................... Rental of unloading equipment......5 kg) 1..... Liability insurance.......... Tax on each unit............................... Unloading operations .........00 $5.. Totals ..................... ..................80 2....................................65 (net of refund) 1...................92 x 3%) 4.......83 9. 1997 ...................92 1.........568...........60 Cost of capital...... Shipping charges.........................................35 .... Estimated obsolescence costs .....................15 ($41.....40 x 1.....00 $1.....60 ________________________ a Investment Cost $32.....00 415......... Processing order documents.94 ($32..........00a $1..........6 x 22%) $19....76 Carrying Cost Order Cost $ 640................... it is possible to answer the questions in the problem...92 ........... First it is necessary to compute the cost of each unit. Inventory tax........ a..... Inventory record maintenance.................................... Inventory insurance ......... Invoice price ......05 .................63 222..........00 $ 2........) Inventory policy cost evaluation: Wilson..............92 x 15%) $10.... Special packaging .00 1.................. (60 min........ Expected stockout costs................. Casualty insurance................400 x 2% With these data.........568... $41......... Sub-totals ............ the carrying cost..............24–27.......... 687 © The McGraw-Hill Companies..82 Inspect and count for annual inventory .......99 ($32...........................

170.000/4 orders per year)$19.98 = Working inventory QS = (350. Costs of optimal order policy: (1) Determine Q* ignoring restrictions on order size: Q* = Q*= 2 AP S 2 x 350.107 $6.125 $1.710 = 54.835 $289.272 $874. The costs of the current inventory policy include the carrying costs of the working inventory and safety stock..500 units x $19.934.000/300)]} x $19. (continued) b.568 $19.000 x $1.163. Inc.24–27.00 = Expected annual stockout costs (included in the order costs) Total costs c. 5/e . 568.935 = 7. the order costs and the expected annual stockout costs.000 units – [9 x (350.98 = [(reorder point) – (demand over lead time)] x carrying cost per unit = 14.98 $1.98 = 2 2 Total carrying costs Order costs: 4 orders per year x $1.412 © The McGraw-Hill Companies. These are as follow: Carrying costs: Safety stock = {25. 1997 688 Cost Accounting.

4..000 x $1.000 units) Order costs: (half that for 5.500 units 300 © The McGraw-Hill Companies.000 21.000 units) Total cost = $ 99.710 = $ 54. To carry 4.000 or more units of safety stock is greater than the stockout costs at no units of safety stock.98 = = $ 49.880 $154.470 = number of orders per year = 350. (continued) (2) Determine the lowest cost from the adjacent feasible order sizes: At 5.000 x $19.500 35a x .98).568 = = $109.02 x $5.729 x $19. thus the maximum cost-effective safety stock would be 4.720 419.1 x $5.780 Optimal Optimal safety stock level is found by evaluating the annual costs at each different safety stock amount.5 x $5.000 Usage over lead time + safety stock = ––––––– x 9 + 0 = 10.400 = $ 3.000/10.900 35a x .000 units: Carrying costs: (double that for 5.900 $159. Chapter 24 689 .860b 279. bIt should be evident that the cost of carrying 7.24–27.760 Q 5.400 = $18.000 Total costs At 10.000 14..01 x $5.400 = $ 1.e. Safety Stock 0 7.000 units: Carrying costs: QS 5.950 2 2 Order costs: AP 350.000 a35 Carrying Cost zero $139. Inc.500 $421.000 determined in (2) above. d. Reorder point: 350.400 = $94.500 (i.780 35a x . 1997 Solutions Manual.890 Total Costs $ 94.580 Expected Annual Stockout Cost 35a x .729 units would cost $94.760 $283.729 units and this would only be economic if the expected stockout costs were reduced to zero.500 Optimal $158.

And the total costs under this policy: Carrying costs: QS = $1.444 Total costs $89.000 x $808 $7 + (. The new Q* is computed: Q* = 2 AP = S 2 x 80.529 © The McGraw-Hill Companies. a. Inc.3 x $275) = 1444.24-28. 5/e .998 2 2 Order costs: AP = 80.777 Q 1.202 x [$7 + (. b.469 ..775 c.000 x $808 = $53.15 x $275)] = = $28.764 2 2 Order costs: AP = 80. 1997 690 Cost Accounting.765 Q 1.000 x $808 = $44.202 Total costs $82.2 x $275) = 2. Inc.444 x $62. = 1202 .085.00 = $44. Carrying costs: QS 1.000 x $808 $7 + (. (40 min.) Sensitivity of EOQ computations to changes in cost estimates: Wildridge.161 = 1444 . Q* = 2 AP = S 2 x 80.

It may help to narrow the choice of alternative order quantities to those at the price breaks or those suggested by the Committee (500 units and 2. However. This problem is likely to result in a significant amount of discussion..) Inventory cycle analysis–multiple choice: Retem & Company. the possibilities become unmanageable. alternative thoughts are likely to arise. (60 min. Otherwise. a 2. The answer is 4.500 units is the maximum order. The focus of the discussion should be on the alternative costs of each order policy as suggested by the problem.500 units. if one orders 2. (280 x . © The McGraw-Hill Companies. To study the problem. as in the real world. The two relevant costs are order costs (the $100. Since 2. It is important to look at the costs of different order sizes with the idea that information might be gathered after the first set of shirts go on sale. Chapter 24 691 . There is no single solution to the problem and.24–29 (20 min.500 shirt order policy would at least provide the Committee with some economic basis for a trade-off between the returns and risks.2) + (180 x . a. if one decides to order 500 shirts at a time and finds they are selling at a much greater rate.80 price for ordering 2. 420 = 200 x [(3 weeks x .8) = 200 units b.) Alternative order policy costs: Save the Whales.500 units). the Committee will have to make a decision based on very sketchy evidence.00 set-up charge) and the forgone discount. That is. the maximum discount would be based on the $3. Inc. the next order could be larger.1) + (2 weeks x . 1997 Solutions Manual. Knowing the cost of a 500 shirt order policy vs.9)] 24–30. The answer is 2. hence. there is no opportunity to avoid the loss that might arise from unsold shirts.500 shirts and finds they are not selling well.

500 Costs of 2.00 Differential Costs with Sales of 2. 1.600. There was no opportunity to gain from ordering more shirts. b2..00 Forgone discount: -0Unsold shirt costs: b 7.24–30.000 or 2. 5/e . 1997 692 Cost Accounting. incurring an incremental set-up cost of $100. © The McGraw-Hill Companies.000 units as indicated by the new information.00 -0$3. It may be best to order 500 units. (continued) Quantity Ordered 500 500 Shirts Set-up costs: $ 100.000. Based on the sales level for the 500 units.500 unit order policy The committee must.000 shirts at $3.500.80)] Costs of 500 unit order policy 2.00 Forgone discount: a -0Unsold shirt costs: -0$ 100.00 $7. there is no discount forgone. Inc. consider the tradeoff between the lost discounts and higher ordering costs of ordering 500 at a time versus the potential loss from unsold shirts. ___________ aIf only 500 were sold.00 Set-up costs: $ 100. therefore.00 (5 orders @ $100) [2. 750.00 $ 100. the next order (if there is one) could be for 500.700.00 to gain information on the rate of sales. even though full price was paid for the shirts.500 Shirts $ 500.00 -0-0$ 100.500 x ($5.80 each.00 3.00 – $3.

. • The net material cost of $150 is included because it represents the unsalvageable portion of the materials used for the set-up and not for the production of a saleable desk........75) ..00 $519............25 ............. • The variable overhead costs of the production department applied on the direct labor base are incurred as a function of the direct labor hours....... a full five hours of cost are assigned to the set-up cost... • All fixed overhead costs of the production department (those applied on the basis of direct labor and those applied on the basis of machine hours) are not included in the set-up cost because they are fixed costs and would be incurred regardless of the activity in the department.. 5.......... *CMA adapted © The McGraw-Hill Companies.. If the workers could have been assigned to other jobs during the changeover.. • The other costs of the maintenance department are not included in the estimate because they are fixed costs of the maintenance department and will be incurred regardless of the maintenance workers’ activities... • The salaries of the five production workers for the full five hours are included in the setup cost because they must be in attendance all the time though they are needed only part of the time..... An estimate of Commercial Furniture’s set-up is as follows: Maintenance department costs: Salaries (2 x 5 x $10........* a.. • The variable overhead costs of the production department applied on the machine-hour base are incurred as a function of the operation of the machinery............ therefore............Solution to Integrative Case 24–31.... therefore.............. Total .... 187...... (60 min. They are not relevant costs of this cost assignment.......75 Variable overhead—machine hour base (1 x $5) ..... Chapter 24 693 $108... one hour is assigned to set-up cost for the one hour the machinery is used in testing...50) . Inc........... then the full amount would not be charged to set-up.... 68......50 Variable overhead––labor base (5 x 5 x $2...80 incurred per man hour is incurred solely for the purpose of affecting the changeover.................00 261.00 Direct materials ($200 x $50) . Explanation of costs: • The full cost of the maintenance men’s salary and employee benefits is included because the $10.80) .............................) Overhead application and inventory management costs: Commercial Furniture Inc.... Production department costs: Salaries (5 x 5 x $7...... 1997 Solutions Manual.......25 150.........

Inc. The cost items which would be included in an estimate of Commercial Furniture’s cost of carrying desks in inventory include: • • all costs related to warehousing and handling the desks in inventory (i. © The McGraw-Hill Companies.. the opportunity cost for the funds committed to the investment in inventory.24–31. 5/e . 1997 694 Cost Accounting.. insurance and other costs which vary in amount by the number of items stored). (continued) b.e. warehouse wages.

Materiality is difficult to define in practice because it is hard to know what amount is important to a decision maker. While collusion can and does occur. and recognizing revenue before the sale has been made. Chapter 25 695 . Inc. Often. top management is able to use the excuse that they did not know about bribes made by lower level managers. Common examples of fraudulent financial reporting are failure to write down obsolete inventory. and (2) the misstatement must be material to the financial statements. 25–3. 1997 Solutions Manual.. 25–2. the magnitude of the misstatement must be large enough that it would likely affect the judgment of a reasonable person relying on the information. Simply stated. Separation of duties helps prevent financial fraud because it limits the opportunity to commit the fraud. refers to the magnitude of the misstatement. © The McGraw-Hill Companies. it increases the risk that someone will “blow the whistle” on the fraud. 25–5 Without internal control regulations. Internal auditors deter fraud by reviewing and testing controls and by assuring that controls are in place and working well. The tone is critical because top management’s actions have a great impact on ethics at lower levels of management. Fraudulent financial reporting is intentional conduct that results in materially misleading financial statements. “Tone at the top” refers to the tone that top management sets in dealing with ethical issues. To be material. Internal auditors detect fraud by employing special fraud examiners or investigators whose job is to identify fraud. in our setting. The increased risk of revealing fraud makes it less likely that fraud will occur. The internal controls requirement forces top management to be aware of the bribery or face charges that the controls were insufficient. 25–6. the physical presence of a watchful internal auditor can deter fraud. 25–7. The two key concepts in the definition of fraudulent financial reporting are (1) the conduct must be intentional or reckless.Chapter 25 Management Ethics and Financial Fraud Solutions to Review Questions 25–1. the misstatement must be important. When a separation of duties exists. two or more individuals must engage in collusion to commit fraud. 25–4. Materiality.

cost of goods sold. Accounting people have the responsibility to record assets and transactions properly. These managers probably expected the false numbers and the correct numbers to converge someday. particularly if the auditee went bankrupt. Answering this question requires some speculation. Early revenue recognition is an example of unethical behavior that sends a message that unethical behavior is normal practice. Financial fraud was not proved in these cases. See question 25-10. At December 31. 25–14. and control. only to have the bottom fall out in Year 2. sales. gross margin. Fraudulent financial reporting is not embezzlement or theft. For Year 2. 25–15. No. 25–11. gross margin and profit amounts are understated. © The McGraw-Hill Companies. it is not financial fraud. 25–16. accounting for the stolen items as spoilage would be financial fraud if the item is material and the cover-up is intentional. and profit amounts are overstated. so someone in accounting will eventually be held responsible if the inventory is not written off. assuming the revenue exceeded the cost of goods sold. Unintentional errors in preparing financial statements are not fraudulent financial reporting. Inc. though. the income statement shows the opposite effects of Year 1—sales. Also accounting firms are a source of funds where investors can collect for damages. early sales sometimes are fictitious when customers change their mind before the sale has been finalized. In addition. Early revenue recognition in Year 1 often leads to early revenue recognition in Year 2 and so on. Solutions to Critical Analysis and Discussion Questions 25–9. 5/e . 25–12. What about people who rely on the financial statements during the period of the fraud? Suppose someone buys stock in a company that shows a good. Public accounting firms are increasingly held accountable for their client’s fraudulent financial reporting because the users of the financial reports see the public accounting firms as the independent entity most likely to find fraud. 25–13. for example. cost of goods sold. performance in Year 1. 25–10. the individuals involved sign consent decrees in which they neither admit nor deny guilt. Generally. Generally. The error in recording is not intentional. 1997 696 Cost Accounting. but we suspect plant management at Ronson and the division manager at Doughtie’s Foods wanted to know the correct numbers for their own decision making. For Year 1. Year 1. The clerk’s actions could easily be unintentional if the clerk thought the inventory was not obsolete. accounts receivable is overstated and inventory is understated. but they agree not to commit certain acts or do certain things in the future.25–8. None of these cases went to trial. planning. if someone in operations told the clerk the inventory was not obsolete. but fictitious..

In decentralized and widely dispersed companies. and that they may be too zealous regarding the company’s profit potential. The “friend” was among those charged with the fraud because she knew about it and was suspected to be involved. 25–20.. 25–19. top management is usually not involved with the details of local operations. On the other hand. In the actual case. This incentive approach minimizes incentives to commit financial fraud. but not until after several years of defending herself against the charges. The situation in this question is based on an actual case. Combined. Alternatively. she says she would immediately inform the head of the accounting department. In this way. The Treadway Commission listed the pressures to achieve unrealistically high. Year 2 revenue “must” be overstated just to bring Year 2 back to actual. 25–18.25–17. The perpetrator of the fraud may be promoted before the negative consequences of the fraud are revealed. She was eventually cleared of wrongdoing. If her inquiries were ignored. 1997 Solutions Manual. Unwittingly. and Year 2 would be overstated even more to improve apparent earnings above the actual level. the two factors produce an environment that is highly conducive to fraud. however. The approach does not encourage or reward innovation and superior performance. Chapter 25 697 . so he or she has little to lose by committing fraud to meet the targets. Small “earnings management” often results in major fraud after a time because of the need to adjust each year to make up for prior year “adjustments. Two explanations for the existence of unrealistic profit objectives for division managers are that upper management may be uninformed about the division. © The McGraw-Hill Companies. it also minimizes incentives for superior performance. She lost her job. 25–22. Inc. If she were faced with similar circumstances again. she would avoid accusing someone of misbehavior before she had proof of wrongdoing. top management may expect more from a division than operating and market conditions allow. short-term financial results and incentive systems that focus on short-term financial results as examples of factors that may produce financial fraud.” Overstating revenue by early revenue recognition in Year 1 automatically understates revenue in Year 2. the perpetrator of fraud may believe he or she will be fired if the short-run targets are not met. and she spent a lot of time defending herself. 25–21. but would inquire as to the propriety of their actions in view of the company’s accounting and sales policies. Committing financial fraud in the current period may seem to outweigh future problems that the fraud may cause. and at least two other people in the organization who were higher than her boss. Her initial contact would not accuse the alleged perpetrators of committing fraud. top management may choose to knowingly expect unrealistic results. thinking that attempts to achieve the results will produce better results than if expectations were lower. Therefore. The problem gets larger and larger each year if managers or accountants continue the illusion. the fraudulent activities were discovered by people who worked in the accounting department who discovered the invoices and shipping documents tucked away in the desk drawer of the accountant who colluded to commit the fraud. she would begin looking for a new job.

Also. 2) Provide an ombudsman with whom employees can discuss questionable activities in confidence. Inc. 25–24. Fraudsters who end up in prison relish the opportunity to share their many illegal experiences. people with big egos may believe they would never get caught! © The McGraw-Hill Companies. People with big egos often want to make a big splash without concern for the consequences. 1997 698 Cost Accounting. Miniscribe’s management may have placed too much emphasis on the short run.. 3) Top management should convey a “tone at the top” regarding ethics that encourages excellence in ethics.25–23. thus reducing the opportunity to commit fraud. They appear to enjoy getting away with something in the short-run. 5/e . Both rewards and punishments were based on the achievement of unrealistically high profit objectives. Promote people with integrity to top management positions. 25–25. Four compensating factors may be of assistance: 1) The internal audit department should assume a “watch-dog” role. 4) Hire people who have good reputations. even if they eventually get caught.

..... Cost of Goods Sold would be overstated. Year 1 (actual) Revenue ....... Accounts Receivable and Revenue would be overstated....... 1997 Solutions Manual........ To find the errors.. Inc.......... try the following: • Confirm accounts receivable with customers.... 100 $ CGS . 50 Gross Profit ........ Count the inventory..) a.......... then the company’s records may be wrong..... Chapter 25 699 ...................... 50 $ b....... Analyze the accounts to see if Accounts Receivable are old.. 100 $ CGS . • • © The McGraw-Hill Companies.......... (25 min........... The physical count should reveal inventory on hand that has been reported to be sold as of the end of the year.. 50 Gross Profit ...Solutions to Problems 25–26.... which may indicate customers do not owe the money.... 50 $ Year 2 (actual) Year 1 (fraud) $120 60 $ 60 Year 2 (assuming no additional fraud) $ 80 40 $ 40 Revenue ..................... Inventory would be understated because goods that are still in inventory would be reported to be sold.. If customers say they did not owe the money or purchase the goods as of the end of the year......... Determine whether year-end Accounts Receivable are unusually high. Example Explain early revenue recognition........ physically..

See Illustration 25. Inventory may also be overstated by reporting inflated ending inventory values as at Doughties’ Foods. 1997 700 Cost Accounting. Inc.) Explain inventory overstatement. (25 min.g. a. obsolete and broken bottles were not written off. In the PepsiCo case. thus leaving on the books an asset that should be expensed. Analyze the inventory levels and the relation of inventory to cost of goods sold. Inventory is often overstated by not writing off obsolete inventory. engineers) check both the physical inventory and the records to find obsolete inventory (particularly important in high-tech fields)... for example. Have people who have technical expertise (e. 5/e . and make sure the inventory that is reported is actually on hand. b. thus overstating inventory and overstating profits.1.25–27. If the inventory turnover ratio (inventory turnover = cost of goods sold/inventory) goes down over time. Inventory overstatements can be found as follows: • • Count the inventory accurately (not like Doughties’ Foods). inventory may be overstated. • © The McGraw-Hill Companies. or is low compared to other similar divisions.

The independent auditors contributed to the fraud when they took inadequate steps to audit the level of inventory as an asset and did not recognize the weak internal controls. Hanley was responsible for both counting and reporting inventory levels. Chapter 25 701 . The auditors did not question or explore the irregular actions that Hanley committed during the audit. Inc.25–28. they did not want to know how it was achieved. The tone at the top appears to be one that neither encouraged nor discouraged fraudulent activities. a. © The McGraw-Hill Companies. d. Hanley was apparently trying to avoid the criticism of top management. By committing financial fraud. b. Top management had poor internal controls to monitor potential fraudulent activities and other division managers seemed to engage in financial fraud. such as separation of duties. c. Doughties’ Foods did not have proper internal controls. 1997 Solutions Manual. his reports were not sufficiently verified for accuracy. Further. It is possible that while top management demanded high performance. (30 min. he would also be helping his employment and promotion prospects if he could show better financial results.. There appeared to be no internal audit presence to monitor controls.) Causes of fraudulent financial reporting: Doughties’ Foods. A thorough examination of the inventories and irregularities may have identified the fraud earlier. Presumably.

5/e . which provided an incentive for division managers to commit financial fraud. but the collusion occurred such that the internal controls were inadequate to prevent financial fraud. a. there was opportunity for division managers to design the control system to their own ends. The company was relying on the division to provide the financial performance needed for corporate debt restructuring.. Internal auditors monitor internal controls and check to see if they are working. (30 min. (30 min.) Causes of fraudulent financial reporting: PepsiCo. While we do not know which specific controls were lacking. The movement of the unfinished jobs that were recorded as sales involved the help of workers on the floor of the plant. © The McGraw-Hill Companies. they lose the skepticism and element of surprise that helps find situations in which internal controls are not working. If they operate as consultants. the distance from headquarters. b. and the role of internal audit as “consultants” instead of watchdogs. The SEC did not file a complaint against the independent auditors. presumably because the auditors’ work complied with Generally Accepted Auditing Standards. Perhaps.) Causes of fraudulent financial reporting: Ronson Corp. suggesting they thought they had set an ethical tone in the company. c. Inc. PepsiCo rewarded aggressive. highly motivated managers who achieved superior levels of performance. Top managers were distressed to learn about the fraud. d. provided a lot of autonomy and trusted the division managers. Pressure was continually applied in order to make the division perform even better. c. d. but the fraud involved collusion of a variety of individuals. Problems with the rest of the company caused top management at Ronson to focus on the success of the aerospace division. The false sales and invoice documentation involved the help of individuals in sales and accounting. Top management focused on short-term performance. 25–30. 1997 702 Cost Accounting. b. a. and they too were misled by division managers. In this case. we know from the autonomy given to division managers. the language difference. internal controls may have been fairly good.25–29.

(25 min. a. and Cost of Goods Sold would be overstated. On the other hand. Inventory would be understated. the bonus plan adds fuel to a highly flammable mixture of factors that encourage fraud.) Effect of bonus plan on financial fraud: Leslie Fay. It could be argued that the CEO is responsible because he helped to create an environment that was conducive to financial fraud. The geographical distance between headquarters and the center of financial operations made it easier for someone to commit fraud for a variety of reasons. The CFO and the CFO’s staff were given considerable autonomy. 25–32.25-31. access by lower level financial employees to the CFO’s superior was reduced. c. The bonus plan provided a strong incentive for the CFO and COO to commit financial fraud.. encouraged unethical behavior.) Top management awareness of fraud: Leslie Fay. who had a strong motive to achieve specific short-run results. Third. the CEO apparently did not commit the fraud. If profits would fall just shy of $16 million. providing the opportunity for fraud. and are central to the internal control process. internal controls were weakened because the CFO was apparently not being supervised. b. The CEO apparently supported a compensation plan that was heavily weighted towards short-run performance. 1997 Solutions Manual. Second. Inc. (25 min. The CEO ignored financial results that were not consistent with the price markdowns which may have been interpreted as a sign that the CEO was willing to ignore the fraud. Chapter 25 703 . there would be a strong temptation for the CFO and COO to commit fraud or to apply a great deal of pressure to the divisional managers. This made “whistle blowing” far more difficult. © The McGraw-Hill Companies. It could be argued that the CEO neither intentionally. Given that these two individuals have a major role concerning the tone at the top. Profits would be overstated for the period to which the invoices were backdated. the tone at the top was strongly influenced by the CFO. Revenues. nor through reckless actions. Accounts Receivable. The profits would be understated in the following period unless the fraud was continued. First. The plan was an all or nothing plan.

however. the President’s tone is more likely to be conveyed to the rest of the organization. consequently I would be willing to help my friend through the transition. Two tones were set by the actions of the NBC News chief executive and the President of NBC. His statement implies that unethical behavior is acceptable as long as it cannot be detected. 25–34. A student responds as follows: The previous participation should not influence how my friend should act in the future. the previous participation in the fraud is similar to a sunk cost. I recommend he/she report the fraud. As such. but because he had failed to prevent the fraud. his/her concerns should be put in writing. As a result. I would recommend that my friend resign rather than continue to participate in the fraud. If no action is taken. The chief executive was willing to resign not because he participated in the fraud. The NBC News chief executive’s resignation suggested that NBC intended to uphold the highest of ethical standards.) Top management’s responsibility for fraud: NBC News. was followed by an opposite action by his superior. His action. (20 min.) Taking action in the face of fraud. proceed to a higher level. I understand that such an action would be difficult. Inc. 1997 704 Cost Accounting. the president of NBC. Given that the President of NBC remained at NBC while the news chief executive did not..25–33. 5/e . © The McGraw-Hill Companies. (25 min. The president of NBC set a tone that accepted unethical behavior. If a superior was involved. Additionally.

Inc... This kept both headquarters and the divisions content... Examples will vary. top management may not believe it should audit the results............... top management generally finds it difficult to determine whether income is being shifted or not....... By transferring income from period to period................Solution to Integrative Case 25–35.. Expenses .$100 CGS . Profit.. 1997 Solutions Manual. at the same time.......... financial fraud made life easier for everybody... For most examples a solution will include a recommendation for top management to gain a better understanding of the department or division while developing profit objectives.........$100 CGS . In effect.... a.... Profit..... The example should be similar to the following: Year 1 (actual) Revenue .... the divisions were able to gain greater control over achieving the profit objectives sent down by corporate headquarters. The communications gap and the us-versus-them attitude created an atmosphere in which the accuracy of reported financial data was not emphasized. (30 min... Without an understanding of divisional operations...$ 30 Year 2 (actual) Revenue . J. it should be indicated that participatory budgeting can help to mitigate the us-versus-them problem... Profit objectives originated at corporate headquarters with inadequate regard to the division’s ability to achieve them....$ 30 Year 1 (fraud) $100 50 30 $ 20 Year 2 (fraud) $100 50 10 $ 40 b...... © The McGraw-Hill Companies...... the profit objectives were not developed with an indepth understanding of the divisions’ operations.......) Motives and opportunities for fraud: H......... as long as the divisional profit objectives are met....... d. As in many decentralized companies............ 20 Optg... Heinz Co......... Further... 50 Optg. Chapter 25 705 ....... the divisions created an income cushion that would allow for future manipulation of profits.... c....... In a sense.......... Expenses .. 50 Optg. 20 Optg..... The divisions developed operating procedures which allowed them to report the numbers that headquarters wanted to see and........

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automobile industry was facing rising revenues and rising volumes but. The industry volume variance measures the impact of differences between actual and expected industry sales volume on the company’s sales activity variance.. We want to isolate the cause of the variance separately for price changes and cost changes. By holding the costs at standard when analyzing revenue variances.S. 26–4. Inc. 26–3. Examples include: • Steel mills which can process both new steel and recycled scrap • Oil refineries which can process different grades of crude oil • Distilleries producing blended whiskeys • Chemical companies © The McGraw-Hill Companies. 1997 Solutions Manual. Use of industry-wide data helps explain changes in volume in terms of what is happening to the industry. the company may need to change production and/or marketing strategies to meet the change in mix. Efficiencies can be realized for costs only.Chapter 26 Revenue. 26–5. It may be very useful to learn about the mix variance because if the mix is changing. a mix variance can arise even if the net effect of all variances is zero. and Yield Variances Solutions to Review Questions 26–1. there were falling profits because buyers were purchasing smaller cars that had lower profit margins for the manufacturers. The U. unfortunately. Mix. If a company has two or more products. 26–2. Chapter 26 707 . The costs are then analyzed separately. we can isolate the effect of price changes.

indeed. not producing at the level which marketing could handle then the matter could be turned around and production should be held responsible for the shortfall. However. 26–8.g. billing rates vary with the level of the professional person performing services. If. 26–9. on each engagement. 26–7. if production were operating inefficiently and. marketing was unable to sell the production then the production manager’s assertions have merit. the signal that the marketing manager has received is misleading– variable costs must be incurred to achieve the higher revenue levels. © The McGraw-Hill Companies.Solutions to Critical Analysis and Discussion Questions 26–6. a labor mix variance can be calculated to show if the appropriate personnel were used on that engagement.. Hence. Inc. most likely in profits as well). In a CPA firm.. as in other professional firms. If so. In this situation it is necessary to investigate the reasons why volume fell short of expectations. if the mix of staff to partner time is different there will be differences in revenues (and. An unfavorable mix variance would suggest that partners were doing work that juniors should have done. Salary rates vary according to the classification of the professionals in the firm (e. production) may arise due to activities in other departments. it is worthy of investigation when allegations arise such as those stated by the production manager. a staff accountant’s time is billed at a lower rate than a partner’s time. The point of the question is that variances in one department (e. In this situation the company is really selling just one product so a mix variance would not be meaningful. 26–10. Even though the volume of hours billed may be the same. Thus. It would be better to show the activity variance in terms of contribution margins. a firm will budget a certain amount of time for each classification. 1997 708 Cost Accounting. It could be that the variance the marketing manager refers to is a revenue variance alone and not a contribution margin variance.g. While this occurs infrequently. partners make more than junior accountants).. and. hence. 5e .

000 units x ($9.000 U Price variance 709 $176.95) = $891. Inc.65) = $921. Actual 190.000 x (8. Alternative 1 220.016.00 $3.000 units x ($8. Inc. (10 min.95) = $1.250 $220.000 Alternative 2 185.111.95) = $934.000 units x ($9.070. (10 min.500 Master Budget 200. 1997 .000 "Flexible Budget" 220.00 $3.750 F Activity variance © The McGraw-Hill Companies.500 Flexible Budget 190.000 $95.50 $3.000 U Price variance 26–12.65) = $1. Inc.000 x ($9 $3.000 x ($9 $3.65) = $1.500 U Activity variance Sales price and activity variances: Creative Towels.00 $3.Solutions to Exercises 26–11.) Sales price and activity variances: Creative Towels..) $53.

000 $12.26–13.750. 1997 . Inc. (20 min. (15 min.000 x $37 = $4.) Sales price and activity variances: Sakata.000 U Price variance $950.700. $3 x 20% x 120.000 x ($47 – $10) = 125. Inc.000 Master Budget 150.000 Flexible Budget 125.000 U Market share variance $6.625.) Industry volume and market share variances: Placer Hills Products.000 Actual 125.000 drums x ($48 – $10) = 150.000 = $72.000 x $38 = $5.000 F Industry volume variance (SP – SV) x SQ $3 x 20.000 $18.000 = $54.000 = $60..000 U Activity variance 26–14.000 U Activity variance 710 © The McGraw-Hill Companies. Standard contribution margin times budgeted market share percentage times actual industry volume Master Budget Flexible Budget (SP – SV) x AQ $3 x 18.000 x $38 = $4.000 $125.

.800.700.000 x $38 = $5.26–15.000 F Market share variance $950.500. Inc. Flexible Budget Standard contribution margin times budgeted market share percentage times actual industry volume Master Budget (SP – SV) x AQ 12.000 U Industry volume variance (SP – SV) x SQ 10% x 1.000 U Activity variance 10% x 1. (15 min.000.000.750.000 711 © The McGraw-Hill Companies.000 $950.000 x $38 = $4. Inc.) Industry volume and market share variances: Sakata. 1997 .000 x $38 = $3.5% x 1.900.000 $1.

Activity variance Sales mix and quantity variances: Fit-Right Gloves.000 $296.95 – $5.400 units e.000 units 26–17. 2.000 x ($10.000 x ($24. (20 min.000 U © The McGraw-Hill Companies.) Industry volume and market share variances–missing data.000 = 1. 5e .95 – $10.000 – (b)] x 10% = 1. Flexible Budget 300.95 – $10.00) = $5. [(d) – 10%] x 70.00) + 200.000 x ($24. [70. (20 min.400 + 1. 1997 712 Cost Accounting.00) + 180.000 x ($10.26–16. 60.) a. 70.400 units = 1.95 – $5.775. a..00) = 4. 10% d. 12%.000 Activity Variance Master Budget 400.071.000 units.000 units c. Inc.000 b.

000 x ($10.000 x ($24.000 x ($24.775.00) + 180. Inc. (continued) b.95 – $5.00) + 200.448 F $296.000 U Activity Variance $699.371.00) 580.95 – $10.00) 580.0000000000 500.000 $403.00000000. 1997 .000 x ––––––– x ($10.448 U 713 © The McGraw-Hill Companies.000 x ($10.000000000.552 400.071.95 – $5.000 x –––––– x ($24. = $4.00) Quantity Variance Master Budget (SP – SV) x SQ = $4.000 = $5. + 500.95 – $10.95 – $5.0000000000 300. Mix and quantity variances Flexible Budget (SP – SV) x AQ Mix Variance (SP – SV) x ASQ 400..95 – $10.26–17.00) 180.

000 units x $100 = $2.000. Materials mix and yield variances: Rosette Industries. (35 min) a.000 units x $152 = $5.000 U Total variances $56.000 units x $150 = $5.200.000 units x $94 = $2.000 $300.776.000 units x $150 = $6.000 Efficiency Variance Flexible Budget (Standard Allowed) 10 x 2.000 U 20 x 2.000 F $100.000 Price Variance Actual Inputs at Standard Prices 22.000 units x $100 = $2.000 F 714 © The McGraw-Hill Companies.000. Actual Costs Material A: 22.700. Inc.26–18.000 F 38.000 $132.000 $76.068.000 $200. 1997 .000 F Material B: 38..

700.000 units x $150 = $5.000.000 F $100.000 $300.000.000 + 38.000 units 715 © The McGraw-Hill Companies.000 Yield Variance Flexible Budget 10 x 2.26–18. (continued) b.000 $ –0– $ –0– 20 x 2.000 x $100 = $2. 1997 .000 $200.000 F $100.000 Material A: 10/(10 + 20) = 1/3 Material B: 20/(10 + 20) = 2/3 units used: 22.000b units x $150 = $6.000 U Material B 38.000 F aProportions: bTotal Mix Variance SP x ASQ 1/3a x 60.000.200.000 $ –0– 2/3a x 60..000. Actual Inputs at Standard Prices Material A 22. Inc.000 units x $100 = $2.000 x $150 = $6.000 = 60.000b units x $100 = $2.

716 © The McGraw-Hill Companies.650 = $1.110. which equals $2.000) = $1. Price Variance a Actual (AP – SV) x AQ $2.035.000 – ($130 x 8.000 Flexible Budget (SP – SV) x AQ ($275 – $130) x 8. 1997 .039.000) + $2.000 = $2.000 + $1.020.000 U a(AP $92. and Pollock.000 = $1.500 + $1. Krueger. Inc.26–19.000).) Sales price and activity variances: Chapman. (20 min.000 + ($65 – $35) x 34.232.000 $35.150.500 + ($65 – $35) x 34.000 Activity Variance Master Budget ($275 – $130) x 8.000 – ($130 x 8.000 + $1.272.500 = $2.000 U – SV) x AQ equals (AP x AQ) – (SV x AQ).225.000 – ($35 x 34.180..150.000 = $2.160.145.

000) 43.) Sales mix and quantity variances: Chapman.650 x $30) = $2.211.653534 8.000 (8.000 U Activity Variance $60.448* $31.150 = $2.000 x 145) + (34. Krueger.000 x $52.26–20.448 717 © The McGraw-Hill Companies. and Pollock. 1997 ..500 hrs.272.150 34.272.180.211.500 x $145) + (34. (25 min.448 U Mix Variance $92.6535 = $2.500 ($145 x –––––– x 42. 42.000) 43.650 + ($30 x –––––– x 42. (SP – SV) x ASQ 8.552U Quantity Variance Flexible Budget (SP – SV) x AQ Master Budget (SP – SV) x SQ (8. + 34.000 *Alternative calculation: Weighted-average contribution: $2. Inc.650 hrs.000 x $30) = $2.000 = $52.

600 $1.500 $2.040 F Unskilled Labor $33.50 x 5. 1997 .26–21.600 F $4.060 U $6.30 x 1.800 hours = $18.30 x 2. Actual Costs Skilled Labor $17. Labor mix and yield variances: Speedy Burrito.540 Efficiency Variance Flexible Budget (Standard Allowed) $10.000 hoursb = $32.660 F Note: See footnotes on page after part (b). (35 min.500 Price Variance Actual Inputs at Standard Prices $10.000 hoursa = $20.000 $3.900 $2.) a. 718 © The McGraw-Hill Companies.50 x 4.060 F $6.600 hours = $29. Inc.100 U $2..

Inc.552 F Mix Variance SP x ASQ $10.400 hoursc = $18. (continued) b.500 Note: See footnotes on next page.660 F $6.000 hours = $32.400 hoursc = $29.600 hours = $29.26–21.50 x 4.30 x 2.50 x 10/14 x 6.50 x 5.900 $186 U $108 F $4.714 $2.30 x 1. 719 © The McGraw-Hill Companies.834 Yield Variance Flexible Budget (Standard Allowed) $10..30 x 4/14 x 6.800 hours = $18.000 hours = $20.540 $294 F Unskilled Labor $6. 1997 .600 $1.786 F $4.766 F $6. Actual Inputs at Standard Prices Skilled Labor $10.

000 equivalent meals = $32.000 hours The alternative method: ( cTotal 10 minutes 60 minutes ) x $6.50 = $1. Proportions: Skilled: Unskilled: 4 min.000 minutes or 2. 5e . + 10 min.26–21.000 equivalent meals = 300.600 minutes per equivalent meal x 30. 14 10 min.500 hours: 1. = 10 4 min. 4 = 4 min.600 = 6. 14 © The McGraw-Hill Companies.000 equivalent meals = 120. (continued) aThe flexible budget hours are calculated as follows: 4 minutes per equivalent meal x 30.0833 per equivalent meal $1. Inc..0833 x 30.000 meals = $20.6867 x 30.000 hours An alternative method of calculation is to determine the cost per equivalent meal: ( b10 4 minutes per meal 60 minutes per hour ) x $10.000 minutes = 5. 1997 720 Cost Accounting.800 + 4.400 hours. + 10 min.6867 per equivalent meal $.30 per hour = $.

000 x $1.30 ) + (1. Chapter 26 721 . The examples in the text use the flexible budget amount.000 ] b.. However.Solutions to Problems 26–22.000 – $4. © The McGraw-Hill Companies.100 x $.000 ] [ + 1.235 b $6. whereas this problem has two products.600 = $1. those examples involve only one product.000 x $. (30 min.575 = $1. Flexible budget (SP – SV) x AQ (800 x $. Sales price and activity variances.) Revenue analysis using industry data and multiple product lines: In-n-Out Carpet Co.400 a Unit contribution margins calculated from master budget panel as follows: Unit margin = Contribution margin/Sales units. and therefore a mix issue is present. Both alternatives are given on the following page. Inc. depending upon the figure used for the left column. 1997 Solutions Manual.100 x $2.810 – $4. In this situation. another way to solve the problem would be to use the standard price times the actual quantities at the standard mix.375 $140 U Sales price variance $25 U Sales activity variance a a. Two solutions are possible when calculating the market share variance.600 1.40) + (2.000 ] [ + 2. b [ 800 x $700 1.35) = $1.300 2. (AP – SV) x AQ Master budget (SP – SV) x SQ $5.

375 $45 F Industry Effect $1.000 $700 3.000 ) = $1.000 –––––– x $1.900 x ––––– x ––––– 4. 3.26–22. (continued) b.400 Flexible Budget $1.400/4. 722 © The McGraw-Hill Companies.900 x ––––– x ––––– 4.000 $300 3.000 rolls) = $1.400 The $10 difference in the market share variance is explained by the difference in the mix.365 A shortcut is to multiply the actual number of rolls times the average contribution margin per roll in the master budget.330 $70 U Industry Variance $35 U Quantity Variance Master Budget $1.330 $70 U $25 U Activity Variance Master Budget $1.000 ) ( + 1. Inc.900 x ––––– x ––––– 4. 1997 .365a $35 F Market Share Variance Industry Effect 38.000 $400 3.000 ) ( + 2.000 2.000 1.900 rolls x ($1..000 = $1.000 1. a ( 1. (continued) Contribution margin variance Actual Quantities at Standard Mix and Standard Prices $1.400 40.365.

.35) = $1.30) + (1.375 Master Budget (SP – SV) x SQ (1.000 x $.100 x $.900 x 2.900 x 1.000 x $. Mix Variance (SP – SV) x ASQ Quantity Variance Flexible Budget (SP – SV) x AQ (800 x $.000 = $1.35 4.30) + (1.000 x $.35) = $1.000 3.400 + + ( ( ( 3.40) + (2.40) + (2.000 x $.) Sales mix and quantity variances: In-n-Out Carpet Co.40 4.900 x 1.365 ) ) ) $35 U $10 F $25 U Activity Variance 723 © The McGraw-Hill Companies. 1997 . (20 min.30 4.000 x $.000 3.000 x $. Inc.26–23.000 x $.

and mix variances: Sea Air Airlines.) Sales price.04 million F Market share variance $.560 million).560 million F Industry a variance $. Inc.729 million Flexible Budget 43 million x 20¢ = $8.6 million Industry Adjusted Budget (40 million x 20¢) x 1. Standard Variable Cost.26–24. industry volume.129 million F Price variance $. Actual Price. 724 © The McGraw-Hill Companies. (20 min. 1997 .56 million Master Budget 40 million x 20¢ = $8 million $.560 million favorable variances (7% x $8 million master budget = $.3¢ – 10¢) = $8.07 = $8.. Actual Quantity (AP – SV) x AQ 43 million x (30. the seven percent industry improvement translates into $.600 million F Activity variance a From another perspective.

000 .80 c + 8.80 b + 5.400 x 2..000 – 6. 8.000 $1.360 a Product ZR-7: + $11.760 – $5. (30 min.000 $6.000 ZR-7: ZR-7: .) Sales price.600. 6.600 = $5.25 x $1.000 x 5.000 AR-10: .600 x $1.000 = $9.080 c Quantity Variance Master Budget $1.400 x . 2.560 – $3.640 $280 U $560 F b $480F $1. 6.00 = $12.25 = .000 b Contribution margins: $6.400 x .600 Total: = $10.00 = $10.80 x 2.00 = $10.600 Product AR-10: $ 7.000 .000 + $1 x 6. Inc.000 © The McGraw-Hill Companies.75 = 6.80 = .800 = $3.360. 1997 725 .000 – 2.26–25.040 F Activity Variance a Standard variable cost per unit times actual volume: AR-10: ZR-7: $2.000 c Budgeted mix: 2.360 2. (AP – SV) x AQ Price Mix Variance Flexible Budget Variance a SP x ASQ 8.800 x $1. 2. 8.400 AR-10: $1.75 x $1. mix and quantity variances: Eccentric Inc.

000 gal.260 F $.75 x 24.20 U $1 x 52.80 U $. 1997 .540 gallons = $18.000b gallons = $18.000 gal.000 gal. = 8. = 8.960 $249.000 gal.400 U Efficiency Variance $799.40 Maxan $17.000c gallons = $18.20 F $91. Inc.200 + 18.40 U Salex $17. ÷ 500 gal. ÷ 500 gal. Price Variance Actual Inputs at Standard Prices (SP x AQ) Mix Variance Yield Variance Flexible Budget (SP x SQ) Actual Cost (AP x AQ) SP x ASQ $2 x 52.686 $1. = 24. ÷ 500 gal.480 + 25.220 gallons 225 x 625 = $18.60 U $2 x 8.799.480 gallons = $16.220 gal.220d gallons 100 x 625 = $16.) x 100 gal.000 $710.220 gallons 300 x 625 = $18.) x 225 gal. d 52.200 gallons = $18. c (40.26–26.20 $799.000a gallons = $16.690 F (40.75 x 25.75 x 52.799.640 $1.20 U $2.) x 300 gal.900 $100. (30 min.308.384 $424 U $2 x 8. (40..000 Total Variances $2. = 18.540 a b 726 © The McGraw-Hill Companies.540 $1 x 18.20 $259.80 U $.) Materials mix and yield variances: Duo Co.710.000 Cralyn $16.000 gal.20 U $2.000 gal.854 F $1 x 18.

000 Direct (550 x $8. 1997 .40) = $11.50) Labor + (650 x $7.) Labor mix and yield variances: Rock Solid Engineering..575 x 1/3 x $7 + 1.50) + (375 x $5.500 Yield Flexible Budget 500 x $8 + 500 x $7 + 500 x $5 = $10. Actual Price Actual Inputs at Standard Prices (550 x $8) + (650 x $7) + (375 x $5) = $10. Inc.825 $750 U $325 U Mix SP x ASQ 1.575 x 1/3 x $8 + 1.575 x 1/3 x $5 = $10.26–27.575 $500 U $825 U 727 © The McGraw-Hill Companies. (30 min.

000) + ($15 x 50.800 = .000 – 400.000.000/75. $64.000 x 80.000.000 (64.000 x 80.000) + ($5 x 25.000)].06 [($10 x 25. g $30.000/75.26–28. = $630. 1997 . $54.000 125.000 (52.000 = .000 d 100.000).500 F Quantity Variance $6.000 $3. Inc.000 – 250. c60. $55.00)].000/75.06 [($10 x 60.) Contribution margin variances: Paulette Division.000 – $200.200 F Price Variance g a (SP – SV) x ASQ Quantity Master Budget $100.000 revenue price variance for the Plastic Model minus six percent variable marketing costs.000 + $300. etc.000 $10.000) c $240.000 units x budgeted contribution margin of $5 = $375.200 $28.000 50.000) f Based on six percent of sales dollars.000 25.000/75. $300.. (30 min.000 x 80.06 ($630.000 (55.000 = ($2 x 50.000 x 80.500 U Activity Variance a b $500.000 budgeted units d20.500) $172.800) $194.000 b 100.000 = .000 budgeted units e $240. Revenue minus standard variable manufacturing costs by product: Flexible (AP – SV) x AQ Price Budget Mix Plastic Metal Variable Marketing f Costs: Contribution Margin $150.000 (54.000) + ($15 x 20.500 $120.000 – $480.000 units x budgeted contribution margin of $2 ( ( ( ( )) )) 728 © The McGraw-Hill Companies.000) e $166.000 U Mix Variance $176.

500a aFrom Problem 26-28. (20 min.1 = $189. © The McGraw-Hill Companies.750 U Market Share Variance $6.750 $23.26–29.500 x 1.000a $172. Budget adjusted for 10% industry increase $172. Chapter 26 729 .250 F Industry Variance Flexible Budget Master Budget $166.500 U Activity variance $17. 1997 Solutions Manual.) Analyze industry effects on contribution margins: Paulette Division. Inc..

000 x $1.15) $208.40) 12 oz (50.16) 12 oz (50.000 $985.000 $947.000 x $2.500 336.40) (60.100 $ 12.000 $250.000 x $2.000 126. analysis of differences between budget and actual: Sip-Fizz Bottling Co.80) Total Variable Manufacturing Costs: 48 oz (80.000 x $4. 1997 730 Cost Accounting. mix variances.500 $494.200 182.16) (60.400 44.800 © The McGraw-Hill Companies.000 x $0. a.125) 12 oz (50.23) Total Variable Marketing Costs: 48 oz (80.22) (110.000 20.000 x $0.000 308.) Comprehensive review of variances.200 (70.17) $ 11.200 $234.600 159.000 761.000 712.000 x $0.600 $535.000 x $3.000 x $2. 5e .000 x $2.000 x $5.000 x $2.35) 10 oz (120.300 $224.000 x $0.75) 10 oz (120.500 (70..200 13.000 x $4. (60 min. Inc.200 18.000 x $1.98) (60.000 x $0.000 137.22) 10 oz (120.700 43.000 261. Actual Revenues: 48 oz (80.000 x $0.65) (110.80) $378.100 (70.000 x $5.100 175.Solutions to Integrative Case 26–30.000 217.35) (110.17) Total Fixed Costs Total Costs Operating Profit Budget $432.800 11.500 147.

000 U $175.500 Price Variance Flexible Budget $985. Variance computations (analysis runs across this page and the next page) Revenues Actual 80. Inc.000 x ($2.. Chapter 26 731 .000 x ($3.000 x $4.75 + .23 + .200 22.800 © The McGraw-Hill Companies.80 = $985. 1997 Solutions Manual.000 Reconciliation Actual operating profit Plus: Unfavorable revenue mix variance Unfavorable price variance (variable costs) Unfavorable quantity variance (variable costs) Unfavorable price variance (fixed costs) Less: Favorable revenue quantity variance Favorable mix variance (variable costs) Budgeted operating profit $224.200 U 80.383 7.200 958 26.000 x $3.000 x $1.17) = $579.26–30.000 x $2.100 Fixed Costs $182.000 x ($1.16) + 50.40 + 50. (continued) b.000 (39.35 + 120.300 $26.000 $7.500 -0- Variable Costs 80.14 + 50.000 x $5.87 + 120.32 = $553.000 x $2.458) (6.22) + 120.483) $234.125 + .

80 = $947.40 x $4.35 x $2.000 Quantity Variance Master Budget 70..80 240.483 F a aDo not confuse this mix variance with the mix variance calculated for manufacturing costs. 5e .000 + 60.14 x $2.32 = $537. 1997 732 Cost Accounting.35 240.000 x ––––––– x $2.000 + 250.383 U $175.000 x ––––––– x $2.583 $22.87 x $1.000 70.000 x ––––––– x $1.000 +110.000 = $559. That variance measured the changes in costs incurred because of a change in the mix of inputs.000 + 250.000 +110.000 110.458 F 250.458 $958 U $6.000 60.000 + 60.87 240.000 $39.200 SP x ASQ 70.14 240. Inc.000 60. (continued) Mix Variance 250.000 = $986. such as substituting one labor class for another.000 x $5.32 240.000 x $3.000 70.40 240. © The McGraw-Hill Companies. such as increasing the number of 10 ounce bottles sold.000 110. (continued) b.26–30.000 x ––––––– x $3.000 x ––––––– x $5.000 + 250.000 + 250. This mix variance measures changes in costs incurred because of a change in the mix of outputs.000 x ––––––– x $4.

000 x $1.22) + (110. (continued) Revenue Variable Costs: Manufacturing Marketing and Administrative Total Variable Costs Contribution Margin Fixed Costs Operating Profit a Alternative Solution Sales Price Actual Variance $985.125) + (50. Chapter 26 733 .75) + (120.200 U 26.875 17.000 $257.000 x [( ( ( © The McGraw-Hill Companies.100e 43.000 x $2.000 h (70.000 110. 250.075 F –– $17.15) d 250.383 U Master Budget $947.787 F 696 F 6.000 ––––––– x $.000 [( ––––––– 70.796 U 22.525 F –– $5.65) + (110.16) + (60.000 x $2.000 x $2.65) + (120.000 x 240.483 F Actual Quantities at Standard Mix and Standard Price $986.17) i insufficient information is given to classify this as a manufacturing cost variance or a marketing and administrative variance.16 + ––––––– x $.000 240.100b 44.000 x $1.525 F 426.687d 44.875 175.075 F 409.000 $224.400 5.22) + (120.200 Manufacturing Cost Variance $26.400 175. Inc.15) (80.458 514.800 calculated the same way as in the primary solution to requirement b.000 x $3.17) g 70.000 x $2.000 $251.200 U 26.896g 559.23) c (80.500 508.100h 537.200 -0- -0-0a b 432.500 -0535.200 U i 7.65 ) ) + 240.000 x $1.300 406.000 x $2.98 ) ) + 240.15 )] )] e f (70.000 x $.200f 553.000 240.900c 44.100 Mix Variance $ 958 U 5.000 ( ––––––– 60.583 Quantity Variance $39.98) + (50.98) + (60.000 x $1.000 x $.22 + ––––––– x $.000 U $33.200 U -0-0- Marketing and Administrative Variance Flexible Budget $985..000 x $.000 x $2.000 x $.000 ( ––––––– 110.17 240.200f 579.000 x $2. (80.16) + (50.000 $234. 1997 Solutions Manual.26–30.000 x $.000 494. (continued) b.000 60.458 F 20.000 x $.587 U 1.200 182.800 175.

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